Celgene Corporation
CELGENE CORP /DE/ (Form: 10-Q, Received: 07/27/2017 16:09:57)


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, 2017
 
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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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
 
 
 
 
 
 
Emerging growth company
 
 
 
 
If an emerging growth company, indicated by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
 
 
No
X
 
 
As of July 21, 2017, 782,350,672 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, 2017 and 2016
 
 
 
 
Consolidated Statements of Comprehensive Income - Three-Month and Six-Month Periods Ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2017
 
2016
 
2017
 
2016
Revenue:
 
 
 
 
 
 
 
Net product sales
$
3,256

 
$
2,744

 
$
6,206

 
$
5,239

Other revenue
12

 
10

 
22

 
27

Total revenue
3,268

 
2,754

 
6,228

 
5,266

Expenses:
 

 
 

 
 

 
 

Cost of goods sold (excluding amortization of acquired intangible assets)
111

 
111

 
224

 
217

Research and development
835

 
949

 
1,830

 
1,682

Selling, general and administrative
939

 
732

 
1,559

 
1,275

Amortization of acquired intangible assets
88

 
175

 
170

 
267

Acquisition related (income) charges and restructuring, net
(13
)
 
(36
)
 
26

 

Total costs and expenses
1,960

 
1,931

 
3,809

 
3,441

Operating income
1,308

 
823

 
2,419

 
1,825

Other income and (expense):
 

 
 

 
 

 
 

Interest and investment income, net
24

 
7

 
39

 
14

Interest (expense)
(126
)
 
(123
)
 
(253
)
 
(245
)
Other (expense) income, net
(76
)
 
(12
)
 
(50
)
 
23

Income before income taxes
1,130

 
695

 
2,155

 
1,617

Income tax provision
69

 
97

 
153

 
218

Net income
$
1,061

 
$
598

 
$
2,002

 
$
1,399

Net income per common share:
 
 
 
 
 

 
 

Basic
$
1.36

 
$
0.77

 
$
2.57

 
$
1.80

Diluted
$
1.31

 
$
0.75

 
$
2.47

 
$
1.74

Weighted average shares:
 

 
 

 
 

 
 

Basic
780.4

 
775.6

 
779.7

 
778.1

Diluted
811.7

 
801.5

 
811.5

 
804.7

 
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,
 
2017
 
2016
 
2017
 
2016
Net income
$
1,061

 
$
598

 
$
2,002

 
$
1,399

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
31

 
(15
)
 
41

 
3

 
 
 
 
 
 
 
 
Net unrealized gains (losses) related to cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding (losses) gains
(153
)
 
31

 
(234
)
 
(190
)
Tax benefit (expense)
7

 
8

 
7

 
18

Unrealized holding (losses) gains, net of tax
(146
)
 
39

 
(227
)
 
(172
)
 
 
 
 
 
 
 
 
Reclassification adjustment for (gains) included in net income
(79
)
 
(60
)
 
(163
)
 
(147
)
Tax (benefit)
(1
)
 
(1
)
 
(2
)
 
(1
)
Reclassification adjustment for (gains) included in net income, net of tax
(80
)
 
(61
)
 
(165
)
 
(148
)
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on marketable securities available-for-sale:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
2

 
29

 
229

 
(353
)
Tax (expense) benefit
(1
)
 
(12
)
 
(81
)
 
127

Unrealized holding gains (losses), net of tax
1

 
17

 
148

 
(226
)
 
 
 
 
 
 
 
 
Reclassification adjustment for losses included in net income
34

 
30

 
34

 
40

Tax (benefit)
(13
)
 
(11
)
 
(13
)
 
(14
)
Reclassification adjustment for losses included in net income, net of tax
21

 
19

 
21

 
26

Total other comprehensive (loss)
(173
)
 
(1
)
 
(182
)
 
(517
)
Comprehensive income
$
888

 
$
597

 
$
1,820

 
$
882


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,
2017
 
December 31,
2016
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
6,660

 
$
6,170

Marketable securities available-for-sale
3,480

 
1,800

Accounts receivable, net of allowances of $35 and $31 at June 30, 2017 and December 31, 2016, respectively
1,729

 
1,621

Inventory
533

 
498

Other current assets
734

 
779

Total current assets
13,136

 
10,868

Property, plant and equipment, net
989

 
930

Intangible assets, net
10,218

 
10,392

Goodwill
4,866

 
4,866

Other non-current assets
1,097

 
1,030

Total assets
$
30,306

 
$
28,086

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
500

 
501

Accounts payable
272

 
247

Accrued expenses and other current liabilities
2,379

 
2,115

Income taxes payable
32

 
41

Current portion of deferred revenue
57

 
55

Total current liabilities
3,240

 
2,959

Deferred revenue, net of current portion
31

 
28

Income taxes payable
463

 
420

Other non-current tax liabilities
2,519

 
2,519

Other non-current liabilities
1,825

 
1,771

Long-term debt, net of discount
13,783

 
13,789

Total liabilities
21,861

 
21,486

Commitments and Contingencies (Note 15)


 


Stockholders’ Equity:
 

 
 

Preferred stock, $.01 par value per share, 5.0 million shares authorized; none outstanding at June 30, 2017 and December 31, 2016, respectively

 

Common stock, $.01 par value per share, 1,150.0 million shares authorized; issued 964.1 million and 954.1 million shares at June 30, 2017 and December 31, 2016, respectively
10

 
10

Common stock in treasury, at cost; 182.0 million and 175.5 million shares at June 30, 2017 and December 31, 2016, respectively
(17,069
)
 
(16,281
)
Additional paid-in capital
13,174

 
12,378

Retained earnings
12,093

 
10,074

Accumulated other comprehensive income
237

 
419

Total stockholders’ equity
8,445

 
6,600

Total liabilities and stockholders’ equity
$
30,306

 
$
28,086

 
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,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
2,002

 
$
1,399

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

 
 

Depreciation
66

 
58

Amortization
174

 
192

Impairment charges
50

 
133

Deferred income taxes
(186
)
 
(167
)
Change in value of contingent consideration
26

 
(11
)
(Gain) on sale of business

 
(38
)
Net (gain) on sale of investments
(15
)
 
(7
)
Share-based compensation expense
323

 
304

Share-based employee benefit plan expense
22

 
20

Derivative instruments
60

 
(14
)
Other, net
(15
)
 
2

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

 
 

Accounts receivable
(75
)
 
(81
)
Inventory
(32
)
 
(45
)
Other operating assets
(184
)
 
100

Accounts payable and other operating liabilities
219

 
55

Income tax payable
33

 
96

Deferred revenue
1

 
(3
)
Net cash provided by operating activities
2,469

 
1,993

Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities available-for-sale
2,070

 
428

Purchases of marketable securities available-for-sale
(3,482
)
 
(432
)
Capital expenditures
(132
)
 
(103
)
Proceeds from sales of investment securities
14

 
11

Purchases of investment securities
(85
)
 
(90
)
Net cash (used in) investing activities
(1,615
)
 
(186
)
Cash flows from financing activities:
 

 
 

Payment for treasury shares
(811
)
 
(1,706
)
Net proceeds from common equity put options

 
6

Net proceeds from share-based compensation arrangements
387

 
76

Net cash (used in) financing activities
(424
)
 
(1,624
)
Effect of currency rate changes on cash and cash equivalents
60

 

Net increase in cash and cash equivalents
490

 
183

Cash and cash equivalents at beginning of period
6,170

 
4,880

Cash and cash equivalents at end of period
$
6,660

 
$
5,063


 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,
 
2017
 
2016
Supplemental schedule of non-cash investing and financing activity:
 

 
 

Change in net unrealized (gain) loss on marketable securities available-for-sale
$
(229
)
 
$
353

Investment in Human Longevity, Inc. common stock
$

 
$
40

Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
262

 
$
265

Income taxes paid
$
333

 
$
227

  
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 ® , OTEZLA ® , ABRAXANE ® , VIDAZA ® , azacitidine for injection (generic version of VIDAZA ® ) and THALOMID ® (sold as THALOMID ® or Thalidomide Celgene ® outside of the U.S.). In addition, we earn revenue from other product sales and 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.

We operate in a single segment engaged in the discovery, development, manufacturing, marketing, distribution and sale of innovative therapies for the treatment of cancer and inflammatory diseases. Consistent with our operational structure, our Chief Executive Officer (CEO), as the chief operating decision maker, manages and allocates resources at the global corporate level. Our global research and development organization is responsible for discovery of new drug candidates and supports development and registration efforts for potential future products. Our global supply chain organization is responsible for the manufacturing and supply of products. Regional/therapeutic area commercial organizations market, distribute and sell our products. The business is also supported by global corporate staff functions. Managing and allocating resources at the global corporate level enables our CEO to assess both the overall level of resources available and how to best deploy these resources across functions, therapeutic areas, regional commercial organizations and research and development projects in line with our overarching long-term corporate-wide strategic goals, rather than on a product or franchise basis. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.

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, 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. Certain prior year amounts have been reclassified to conform to the current year's presentation.

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, 2016 (2016 Annual Report on Form 10-K).

2. New Accounting Standards
 
New accounting standards which have been adopted

In July 2015, the Financial Accounting Standards Board (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. ASU 2015-11 was effective for us beginning in the first quarter of 2017. The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures.

8

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. ASU 2016-07 was effective for us beginning in the first quarter of 2017. The adoption of this updated standard did not have a material impact 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). The new standard was effective for us on January 1, 2017. Among other provisions, the new standard requires that excess tax benefits and tax deficiencies that arise upon vesting or exercise of share-based payments be recognized as income tax benefits and expenses in the income statement. Previously, such amounts were recorded to additional paid-in-capital. This aspect of the new guidance was required to be adopted prospectively, and accordingly, the income tax provisions for the three- and six-month periods ended June 30, 2017 includes $95 million and $170 million , respectively, of excess tax benefits arising from share-based compensation awards that vested or were exercised during the periods. In addition, at January 1, 2017, the Company recorded a cumulative-effect adjustment to retained earnings, with a corresponding increase to net deferred tax assets, in the amount of $18 million related to previously unrecognized excess tax benefits outstanding in the Consolidated Balance Sheet. In addition, the adoption of the new standard increased the diluted share count for the three- and six-month periods ended June 30, 2017 by approximately 7.0 million and 7.3 million shares, respectively. The new standard also amends the presentation of employee share-based payment-related items in the statement of cash flows by requiring that excess income tax benefits and tax deficiencies be classified in Cash flows from operating activities (such amounts were previously included in Cash flows from financing activities). The Company elected to adopt this aspect of the new guidance retrospectively, and accordingly, to conform to the current year presentation, $82 million of excess tax benefits were reclassified from Net Cash Used in Financing Activities to Net Cash Provided by Operating Activities and included within the change in Income taxes payable in the Consolidated Statement of Cash Flows for the six-month period ended June 30, 2016. As a result, Net Cash Used in Financing Activities increased by $82 million with a corresponding increase in Net Cash Provided by Operating Activities in the Consolidated Statement of Cash Flows for the six-month period ended June 30, 2016.
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) and has subsequently issued a number of amendments to ASU 2014-09. The new standard, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

The new standard will be effective for us beginning January 1, 2018 and permits two methods of adoption: the full retrospective method, which requires the standard to be applied to each prior period presented, or the modified retrospective method, which requires the cumulative effect of adoption to be recognized as an adjustment to opening retained earnings in the period of adoption. We will adopt the standard using the modified retrospective method.

We have completed an analysis of existing contracts with our customers and assessed the differences in accounting for such contracts under ASU 2014-09 compared with current revenue accounting standards. Based on our review of current customer contracts, we do not expect the implementation of ASU 2014-09 to have a material quantitative impact on our consolidated financial statements as the timing of revenue recognition for product sales is not expected to significantly change. In limited instances, we may recognize revenue earlier than under the current standard. Currently, we defer certain revenue where the price pursuant to the underlying customer arrangement is not fixed and determinable. Under the new standard, such customer arrangements will be accounted for as variable consideration, which may result in revenue being recognized earlier provided we can reliably estimate the ultimate price expected to be realized from the customer. We will continue to assess new customer contracts throughout 2017. The new standard will result in additional revenue-related disclosures in the footnotes to our consolidated financial statements.

9

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


Adoption of this standard will require changes to our business processes, systems and controls to support the additional required disclosures. We are in the process of identifying and designing such changes to ensure our readiness.

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 (OCI). 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 to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in OCI. 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 as of June 30, 2017 with a fair value of approximately $1.2 billion in a net unrealized gain position of $482 million , and having an associated deferred tax liability of $171 million , as of June 30, 2017 . We will record a cumulative-effect adjustment to retained earnings for the amount of unrealized gains or losses, net of tax at the beginning of the fiscal year of adoption. The guidance related to equity investments without readily determinable fair values should be applied prospectively to equity investments that exist as of the date of adoption. The implementation of ASU 2016-01 is expected to increase volatility in our net income as the volatility currently recorded in OCI 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 an operating or finance lease. 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. We expect the implementation of this standard to have an impact on our consolidated financial statements and related disclosures as we had aggregate future minimum lease payments of approximately $213 million as of December 31, 2016 under our portfolio of non-cancelable leased office and research facilities at that time which had various expirations dates between 2017 and 2025 as included in our 2016 Annual Report on Form 10-K. We anticipate recognition of additional assets and corresponding liabilities related to these leases on our consolidated balance sheet.

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.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" (ASU 2016-15). ASU 2016-15 clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows where diversity in practice exists. ASU 2016-15 is effective for us in our first quarter of fiscal 2018 and earlier adoption is permitted. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, "Intra-Entity Transfers of Assets Other Than Inventory” (ASU 2016-16). ASU 2016-16 requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized as current period income tax expense or benefit and removes the requirement to defer and amortize the consolidated tax consequences of intra-entity transfers. The new standard will be effective for us on January 1, 2018 and will be

10

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


adopted using a modified retrospective approach which requires a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations” (ASU 2017-01). ASU 2017-01 provides guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance requires a set to be considered a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant could replace the missing elements. The new standard will be effective for us on January 1, 2018 and will be adopted on a prospective basis. Early adoption is permitted. We anticipate that the adoption of this standard will result in more acquisitions being accounted for as asset acquisitions.

3. Acquisitions and Divestitures

Acquisitions

Delinia, Inc. (Delinia): On February 3, 2017, we acquired all of the outstanding shares of Delinia, a privately held biotechnology company focused on developing novel therapeutics for the treatment of autoimmune diseases. The transaction expands our Inflammation and Immunology pipeline primarily through the acquisition of Delinia’s lead program, DEL-106, as well as related second generation programs. DEL-106 is a novel IL-2 mutein Fc fusion protein designed to preferentially upregulate regulatory T cells (Tregs), immune cells that are critical to maintaining natural self-tolerance and immune system homeostasis.

The consideration included an initial payment of $302 million . In addition, the sellers of Delinia are eligible to receive up to $475 million in contingent development, regulatory and commercial milestones. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The initial payment was allocated primarily to the DEL-106 program, resulting in a $300 million research and development asset acquisition expense and approximately $2 million of net assets acquired.

Other acquisitions: In addition, during the first quarter of 2017, we acquired all of the outstanding shares of a privately held biotechnology company for total initial consideration of $26 million . The sellers are also eligible to receive up to $210 million in contingent development and regulatory approval milestones. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The consideration transferred resulted in a $25 million research and development asset acquisition expense and $1 million of net assets acquired. 

Divestitures

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 $40 million as consideration in the transaction. The fair value of the shares of 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 shareholders. The transaction generated a $38 million gain that was recorded on our Consolidated Statement of Income in Other (expense) income, net . As of June 30, 2017, our total investment in HLI represents approximately 14% of HLI's outstanding capital stock.



11

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)
2017
 
2016
 
2017
 
2016
Net income
$
1,061

 
$
598

 
$
2,002

 
$
1,399

Weighted-average shares:
 
 
 
 
 
 
 
Basic
780.4

 
775.6

 
779.7

 
778.1

Effect of dilutive securities:
 
 
 
 
 
 
 
Options, restricted stock units, performance-based restricted stock units and other
31.3

 
25.9

 
31.8

 
26.6

Diluted
811.7

 
801.5

 
811.5

 
804.7

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.36

 
$
0.77

 
$
2.57

 
$
1.80

Diluted
$
1.31

 
$
0.75

 
$
2.47

 
$
1.74

 
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 21.4 million and 19.2 million shares for the three-month periods ended June 30, 2017 and 2016 , respectively, and 22.0 million and 19.7 million shares for the six-month periods ended June 30, 2017 and 2016 , respectively.

Share Repurchase Program: During the period of April 2009 through June 30, 2017, our Board of Directors approved repurchases of up to an aggregate of $20.5 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, 2017 and 2016 , we recorded put option activity on our Consolidated Statements of Income in Other (expense) income, net as follows:
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2017
 
2016
 
2017
 
2016
Gain from sale of put options
$

 
$
3

 
$

 
$
8


As of June 30, 2017 and December 31, 2016, we had no outstanding put options.

We have purchased 4.2 million and 6.8 million shares of common stock under the share repurchase program from all sources at a total cost of $507 million and $811 million during the three- and six-month periods ended June 30, 2017 , respectively. As of June 30, 2017 , we had a remaining share repurchase authorization of $3.9 billion .


12

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
Adjustment
 
Net Unrealized
Gains (Losses) On
Available-for-Sale Marketable Securities
 
Net Unrealized
Gains (Losses)
Related to Cash Flow Hedges
 
Foreign
Currency
Translation
Adjustments
 

Accumulated
Other
Comprehensive
Income (Loss)
Balance as of December 31, 2016
$
(38
)
 
$
144

 
$
415

 
$
(102
)
 
$
419

Other comprehensive income (loss) before reclassifications, net of tax

 
148

 
(227
)
 
41

 
(38
)
Reclassified losses (gains) from accumulated other comprehensive income, net of tax

 
21

 
(165
)
 

 
(144
)
Net current-period other comprehensive income (loss), net of tax

 
169


(392
)

41


(182
)
Balance as of June 30, 2017
$
(38
)
 
$
313


$
23


$
(61
)

$
237

 
 
 
 
 
 
 
 
 


Balance as of December 31, 2015
$
(14
)
 
$
272

 
$
586

 
$
(76
)
 
$
768

Other comprehensive (loss) income before reclassifications, net of tax

 
(226
)
 
(172
)
 
3

 
(395
)
Reclassified losses (gains) from accumulated other comprehensive income, net of tax

 
26

 
(148
)
 

 
(122
)
Net current-period other comprehensive (loss)
 income, net of tax

 
(200
)

(320
)

3

 
(517
)
Balance as of June 30, 2016
$
(14
)
 
$
72


$
266


$
(73
)
 
$
251

 
 
 
 
 
Gains (Losses) Reclassified Out of Accumulated
Other Comprehensive Income
Accumulated Other Comprehensive Income Components
 
Classification in the Consolidated Statements of Income
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
 
2017
 
2016
 
2017
 
2016
Gains (losses) from cash-flow hedges:
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net product sales
 
$
81

 
$
62

 
$
167

 
$
150

Treasury rate lock agreements
 
Interest (expense)
 
(2
)
 
(1
)
 
(3
)
 
(2
)
Interest rate swap agreements
 
Interest (expense)
 

 
(1
)
 
(1
)
 
(1
)
 
 
Income tax provision
 
1

 
1

 
2

 
1

 
 
 
 
 
 
 
 
 
 
 
Gains (losses) from available-for-sale marketable securities:
 
 
 
 
 
 
 
 
Realized (loss) on sales of marketable securities
 
Interest and investment income, net
 
(34
)
 
(30
)
 
(34
)
 
(40
)
 
 
Income tax provision
 
13

 
11

 
13

 
14

Total reclassification, net of tax
 
 
 
$
59

 
$
42

 
$
144

 
$
122




13

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, 2017 and December 31, 2016 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 2016 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 securities, U.S. government-sponsored agency mortgage-backed securities (MBS), global corporate debt securities, asset backed securities, ultra short income fund investments, time deposits and repurchase agreements with original maturities of greater than three months, foreign currency forward contracts, purchased foreign currency options and interest rate swap contracts. Our level 2 liabilities relate to written foreign currency options, foreign currency forward contracts and interest rate swap contracts.
Level 3 inputs utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity. We do not have any level 3 assets. Our level 3 liabilities consist of contingent consideration related to undeveloped product rights and technology platforms resulting from the acquisitions of Gloucester Pharmaceuticals, Inc. (Gloucester), Nogra Pharma Limited (Nogra), Avila Therapeutics, Inc. (Avila) and Quanticel Pharmaceuticals, Inc. (Quanticel).

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 (income) charges and restructuring, net in the Consolidated Statements of Income. The fair value of our contingent consideration as of June 30, 2017 and December 31, 2016 was calculated using the following significant unobservable inputs:
Inputs
Ranges (weighted average) utilized as of:
June 30, 2017
December 31, 2016
Discount rate
1.5% to 12.0% (8.8%)
1.5% to 12.0% (8.6%)
Probability of payment
0% to 95% (42.7%)
0% to 95% (42.0%)
Projected year of payment for development and regulatory milestones
2017 to 2029 (2020)
2017 to 2029 (2019)
Projected year of payment for sales-based milestones and other amounts calculated as a percentage of annual sales
2020 to 2032 (2025)
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 approximately $120 million , $475 million and $314 million , respectively and $1.9 billion plus other amounts calculated as a percentage of annual sales pursuant to the license agreement with Nogra.



14

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


 
Balance as of
June 30, 2017
 
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
$
3,480

 
$
1,214

 
$
2,266

 
$

Forward currency contracts
51

 

 
51

 

Purchased currency options
88

 

 
88

 

Interest rate swaps
18

 

 
18

 

Total assets
$
3,637

 
$
1,214

 
$
2,423

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(54
)
 
$
(54
)
 
$

 
$

Written currency options
(114
)
 

 
(114
)
 

Other acquisition related contingent consideration
(1,488
)
 

 

 
(1,488
)
Total liabilities
$
(1,656
)
 
$
(54
)
 
$
(114
)
 
$
(1,488
)
 
 
 
 
 
 
 
 
 
Balance as of December 31, 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
$
1,800

 
$
891

 
$
909

 
$

Forward currency contracts
379

 

 
379

 

Purchased currency options
140

 

 
140

 

Interest rate swaps
31

 

 
31

 

Total assets
$
2,350

 
$
891

 
$
1,459

 
$

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(44
)
 
$
(44
)
 
$

 
$

Written currency options
(54
)
 

 
(54
)
 

Other acquisition related contingent consideration
(1,490
)
 

 

 
(1,490
)
Total liabilities
$
(1,588
)
 
$
(44
)
 
$
(54
)
 
$
(1,490
)

There were no security transfers between levels 1, 2 and 3 during the three-month periods ended June 30, 2017 and 2016 . The following tables represent a roll-forward of the fair value of level 3 instruments: 

 
 
Three-Month Period Ended June 30, 2017
Liabilities:
 
Gloucester
 
Nogra
 
Avila
 
Quanticel
 
Total
Balance as of March 31, 2017
 
$
(22
)
 
$
(1,377
)
 
$
(8
)
 
$
(120
)
 
$
(1,527
)
Amounts acquired or issued, including measurement period adjustments
 

 

 

 

 

Net change in fair value
 

 
5

 
5

 
10

 
20

Settlements, including transfers to Accrued expenses and other current liabilities
 

 

 

 
19

 
19

  Balance as of June 30, 2017
 
$
(22
)
 
$
(1,372
)
 
$
(3
)
 
$
(91
)
 
$
(1,488
)


15

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


 
 
Three-Month Period Ended June 30, 2016
Liabilities:
 
Gloucester
 
Nogra
 
Avila
 
Quanticel
 
Total
Balance as of March 31, 2016
 
$
(19
)
 
$
(1,267
)
 
$
(96
)
 
$
(168
)
 
$
(1,550
)
Amounts acquired or issued, including measurement period adjustments
 

 

 

 

 

Net change in fair value
 
(1
)
 
(28
)
 
81

 
(2
)
 
50

Settlements, including transfers to Accrued expenses and other current liabilities
 

 

 

 
30

 
30

  Balance as of June 30, 2016
 
$
(20
)
 
$
(1,295
)
 
$
(15
)
 
$
(140
)
 
$
(1,470
)

There were no security transfers between levels 1, 2 and 3 during the six-month periods ended June 30, 2017 and 2016 . The following tables represent a roll-forward of the fair value of level 3 instruments: 

 
 
Six-Month Period Ended June 30, 2017
Liabilities:
 
Gloucester
 
Nogra
 
Avila
 
Quanticel
 
Total
Balance as of December 31, 2016
 
$
(21
)
 
$
(1,346
)
 
$
(8
)
 
$
(115
)
 
$
(1,490
)
Amounts acquired or issued, including measurement period adjustments
 

 

 

 

 

Net change in fair value
 
(1
)
 
(26
)
 
5

 
5

 
(17
)
Settlements, including transfers to Accrued expenses and other current liabilities
 

 

 

 
19

 
19

  Balance as of June 30, 2017
 
$
(22
)
 
$
(1,372
)
 
$
(3
)
 
$
(91
)
 
$
(1,488
)

 
 
Six-Month Period Ended June 30, 2016
Liabilities:
 
Gloucester
 
Nogra
 
Avila
 
Quanticel
 
Total
Balance as of December 31, 2015
 
$
(19
)
 
$
(1,239
)
 
$
(97
)
 
$
(167
)
 
$
(1,522
)
Amounts acquired or issued, including measurement period adjustments
 

 

 

 

 

Net change in fair value
 
(1
)
 
(56
)
 
82

 
(3
)
 
22

Settlements, including transfers to Accrued expenses and other current liabilities
 

 

 

 
30

 
30

  Balance as of June 30, 2016
 
$
(20
)
 
$
(1,295
)
 
$
(15
)
 
$
(140
)
 
$
(1,470
)

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

16

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


within the next three years, with a maximum of five years . We manage our anticipated transaction exposure principally with foreign currency forward contracts, a combination of foreign currency put and call options, and occasionally purchased foreign currency put options.
 
Foreign Currency Forward Contracts:  We use foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, manage exchange rate volatility in the translation of foreign earnings, and reduce exposures to foreign currency fluctuations of certain assets and liabilities denominated in foreign currencies.

We manage a portfolio of foreign currency forward contracts to protect against changes in anticipated foreign currency cash flows resulting from changes in foreign currency exchange rates, primarily associated with non-functional currency denominated revenues and expenses of foreign subsidiaries. The foreign currency forward hedging contracts outstanding as of June 30, 2017 and December 31, 2016 had settlement dates within 25 months and 31 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 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 (expense) income, 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 on the Consolidated Statements of Income in Other (expense) income, net .

Foreign currency forward contracts entered into to hedge forecasted revenue and expenses were as follows as of June 30, 2017 and December 31, 2016 :
 
 
Notional Amount
Foreign Currency
 
June 30, 2017
 
December 31, 2016
Australian Dollar
 
$
69

 
$
49

British Pound
 
161

 
199

Canadian Dollar
 
270

 
193

Euro
 
1,367

 
1,812

Japanese Yen
 
601

 
597

Total
 
$
2,468

 
$
2,850

 
  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, 2017 , 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 (expense) income, net in the current period. The aggregate notional amount of the foreign currency forward non-designated hedging contracts outstanding as of June 30, 2017 and December 31, 2016 were $1.1 billion and $934 million , respectively.
Foreign Currency Option Contracts: From time to time, we may hedge a portion of our future foreign currency exposure by utilizing a strategy that involves both a purchased local currency put option and a written local currency call option that are accounted for as hedges of future sales denominated in that local currency. Specifically, we sell (or write) a local currency call option and purchase a local currency put option with the same expiration dates and local currency notional amounts but with different strike prices. This combination of transactions is generally referred to as a “collar.” The expiration dates and notional amounts correspond to the amount and timing of forecasted foreign currency sales. The foreign currency option contracts outstanding as of June 30, 2017 and December 31, 2016 had settlement dates within 42 months and 48 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

17

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


foreign currency option contracts entered into to hedge forecasted revenue were as follows as of June 30, 2017 and December 31, 2016 :
 
Notional Amount 1
 
June 30, 2017
 
December 31, 2016
Foreign currency option contracts designated as hedging activity:
 
 
 
Purchased Put
$
3,181

 
$
1,790

Written Call
3,580

 
2,009

1 U.S. Dollar notional amounts are calculated as the hedged local currency amount multiplied by the strike value of the foreign currency option. The local currency notional amounts of our purchased put and written call that are designated as hedging activities are equal to each other.
We also have entered into foreign currency put option contracts to hedge forecasted revenue which were not part of a collar strategy. Such put option contracts had a notional value of $510 million and $387 million as of June 30, 2017 and December 31, 2016, respectively, and settlement dates within 18 months and 24 months , respectively.
Interest Rate Risk Management
Forward Starting Interest Rate Swaps and Treasury Rate Locks: In anticipation of issuing fixed-rate debt, we may use forward starting interest rate swaps (forward starting swaps) or treasury rate lock agreements (treasury rate locks) that are designated as cash flow hedges to hedge against changes in interest rates that could impact expected future issuances of debt. To the extent these hedges of cash flows related to anticipated debt are effective, any realized or unrealized gains or losses on the forward starting swaps or treasury rate locks are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.

As of June 30, 2017 and December 31, 2016 , 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, 2017
 
December 31, 2016
Forward starting interest rate swap contracts:
 
 
 
Forward starting swaps with effective dates in 2017
$
500

 
$
500

Forward starting swaps with effective dates in 2018
500

 
500


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 Sheet with no net impact recorded in income. Any net interest payments made or received on interest rate swap contracts are recognized as interest expense on the Consolidated Statements of Income. If a hedging relationship is terminated for an interest rate swap contract, accumulated gains or losses associated with the contract are measured and recorded as a reduction or increase of current and future interest expense associated with the previously hedged debt obligations.

The following table summarizes the notional amounts of our outstanding interest rate swap contracts as of June 30, 2017 and December 31, 2016: 
 
Notional Amount
 
June 30, 2017
 
December 31, 2016
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
 
 
 
3.875% senior notes due 2025
$
200

 
$
200


We have entered into swap contracts that were designated as hedges of certain of our fixed rate notes in 2017 and 2016 and also terminated the hedging relationship by settling certain of those swap contracts during 2017. The settlement of swap contracts resulted in the receipt of net proceeds which was not material during the three- and six-month periods ended June 30, 2017, which is 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.

18

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


The following tables summarize the fair value and presentation in the Consolidated Balance Sheets for derivative instruments as of June 30, 2017 and December 31, 2016 :
 
 
 
 
 
June 30, 2017
 
 
Consolidated
Balance Sheet
Classification
 
Fair Value
Instrument
 
 
Asset
Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
$
81

 
$
23

 
 
Accrued expenses and other current liabilities
 
8

 
13

 
 
Other non-current assets
 
33

 
26

 
 
Other non-current liabilities
 
53

 
100

Interest rate swap agreements
 
Other current assets
 
3

 

 
 
Other non-current assets
 
27

 
9

 
 
Other non-current liabilities
 

 
4

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
24

 
7

 
 
Accrued expenses and other current liabilities
 

 
5

Interest rate swap agreements
 
Other current assets
 
2

 
2

 
 
Other non-current assets
 
2

 
1

Total
 
 
 
$
233

 
$
190


1 Derivative instruments in this category are subject to master netting arrangements and are presented on a net basis in the Consolidated Balance Sheet in accordance with ASC 210-20.
     
 
 
 
 
December 31, 2016
 
 
Consolidated
Balance Sheet
Classification
 
Fair Value
Instrument
 
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
$
317

 
$
10

 
 
Other non-current assets
 
178

 
71

Interest rate swap agreements
 
Other current assets
 
1

 

 
 
Other non-current assets
 
38

 
7

 
 
Other non-current liabilities
 

 
2

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts 1
 
Other current assets
 
57

 
4

 
 
Accrued expenses and other current liabilities
 

 
2

Interest rate swap agreements
 
Other current assets
 
2

 
2

 
 
Other non-current assets
 
3

 
2

Total
 
 
 
$
596

 
$
100

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


19

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


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, 2017 and 2016 :
 
 
Three-Month Period Ended June 30, 2017
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
1
 
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Classification of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Foreign exchange contracts
$
(136
)
 
Net product sales
 
$
81

 
Other (expense) income, net
 
$
(43
)
 
2
Treasury rate lock agreements

 
Interest (expense)
 
(2
)
 
Other (expense) income, net
 

 
 
Interest rate swap agreements
(17
)
 
Interest (expense)
 

 
Other (expense) income, net
 

 
 
 
1 Net gains of $29 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
2 The amount of net losses recognized in income represents $43 million of losses related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts).

 
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
 
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Classification of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Foreign exchange contracts
$
53

 
Net product sales
 
$
62

 
Other (expense) income, net
 
$
9

 
1
Treasury rate lock agreements

 
Interest (expense)
 
(1
)
 
Other (expense) income, net
 

 
 
Interest rate swap agreements
(22
)
 
Interest (expense)
 
(1
)
 
Other (expense) income, net
 

 
 
 
1 The amount of net gains recognized in income represents $8 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $1 million of gains related to the ineffective portion of the hedging relationships.


20

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


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, 2017 and 2016 :
 
 
Six-Month Period Ended June 30, 2017
 
 
 
(Effective Portion)
 
(Ineffective Portion and Amount Excluded From Effectiveness Testing)
 
 
Instrument
Amount of
Gain/(Loss)
Recognized in OCI
on Derivative
1
 
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Classification of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Foreign exchange contracts
$
(217
)
 
Net product sales
 
$
167

 
Other (expense) income, net
 
$
(24
)
 
2
Treasury rate lock agreements

 
Interest (expense)
 
(3
)
 
Other (expense) income, net
 

 
 
Interest rate swap agreements
(17
)
 
Interest (expense)
 
(1
)
 
Other (expense) income, net
 

 
 
 
1 Net gains of $29 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.
2 The amount of net losses recognized in income represents $24 million of losses related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts).

 
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
 
Classification of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Amount of
Gain/(Loss)
Reclassified from
Accumulated OCI
into Income
 
Classification of
Gain/(Loss)
Recognized in
Income on
Derivative
 
Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 
 
Foreign exchange contracts
$
(142
)
 
Net product sales
 
$
150

 
Other (expense) income, net
 
$
23

 
1
Treasury rate lock agreements

 
Interest (expense)
 
(2
)
 
Other (expense) income, net
 

 
 
Interest rate swap agreements
(48
)
 
Interest (expense)
 
(1
)
 
Other (expense) income, net
 

 
 
 
1 The amount of net gains recognized in income represents $21 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts) and $2 million of gains related to the ineffective portion of the hedging relationships.

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, 2017 and 2016 :
 
 
 
 
Amount of Gain Recognized in
Income on Derivative
 
 
Classification of Gain Recognized in Income on Derivative
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended
June 30,
Instrument
 
 
2017
 
2016
 
2017
 
2016
Interest rate swap agreements
 
Interest (expense)
 
$
10

 
$
13

 
$
19

 
$
26

 

21

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 six-month periods ended June 30, 2017 and 2016 :
 
 
 
 
 
Amount of (Loss) Gain Recognized in
Income on Derivative
 
 
Classification of (Loss) Gain Recognized in Income on Derivative
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended
June 30,
Instrument
 
 
2017
 
2016
 
2017
 
2016
Foreign exchange contracts
 
Other (expense) income, net
 
$
(20
)
 
$

 
$
(42
)
 
$
(28
)
Put options on our common stock
 
Other (expense) income, net
 

 
3

 

 
8

 
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 (expense) income, 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
 
Time deposits, repurchase agreements, and commercial paper instruments with original maturities less than three months and money market funds are included in Cash and cash equivalents.  As of June 30, 2017 , the carrying value of our time deposits and repurchase agreements was $1.8 billion , commercial paper instruments was $161 million , and money market funds was $3.4 billion , all of which are included in Cash and cash equivalents. As of December 31, 2016 , the carrying value of our time deposits and repurchase agreements was $2.8 billion , commercial paper instruments was $65 million , and money market funds was $1.6 billion , all of which were included in Cash and cash equivalents.  The carrying values approximated fair value as of June 30, 2017 and December 31, 2016 .

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 as of June 30, 2017 and December 31, 2016 were as follows:
June 30, 2017
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
100

 
$

 
$
(1
)
 
$
99

U.S. government-sponsored agency securities
 
23

 

 

 
23

U.S. government-sponsored agency MBS
 
21

 

 
(1
)
 
20

Corporate debt - global
 
939

 

 

 
939

Asset backed securities
 
9

 

 

 
9

Ultra short income fund
 
350

 

 

 
350

Time deposits 1 and Repurchase agreements 1
 
826

 

 

 
826

Marketable equity securities
 
732

 
486

 
(4
)
 
1,214

Total available-for-sale marketable securities
 
$
3,000

 
$
486

 
$
(6
)

$
3,480

 
December 31, 2016
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
121

 
$

 
$
(1
)
 
$
120

U.S. government-sponsored agency MBS
 
31

 

 

 
31

Corporate debt - global
 
378

 

 
(1
)
 
377

Asset backed securities
 
17

 

 

 
17

Time deposits 1
 
364

 

 

 
364

Marketable equity securities
 
672

 
238

 
(19
)
 
891

Total available-for-sale marketable securities
 
$
1,583

 
$
238


$
(21
)

$
1,800


22

CELGENE CORPORATION AND SUBSIDIARIES