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, 2015
 
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 24, 2015, 790,540,158 shares of Common Stock, par value $.01 per share, were outstanding.


CELGENE CORPORATION
 
FORM 10-Q TABLE OF CONTENTS
 
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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,
 
2015
 
2014
 
2015
 
2014
Revenue:
 
 
 
 
 
 
 
Net product sales
$
2,254.1

 
$
1,844.6

 
$
4,309.3

 
$
3,552.1

Other revenue
23.7

 
28.1

 
49.3

 
50.6

Total revenue
2,277.8

 
1,872.7

 
4,358.6

 
3,602.7

Expenses:
 

 
 

 
 

 
 

Cost of goods sold (excluding amortization of acquired intangible assets)
100.8

 
98.9

 
204.8

 
185.0

Research and development
1,110.0

 
456.9

 
1,616.0

 
1,170.6

Selling, general and administrative
616.8

 
491.8

 
1,146.0

 
985.9

Amortization of acquired intangible assets
63.7

 
65.3

 
127.3

 
131.0

Acquisition related (gains) charges, net
(29.3
)
 
0.9

 
(10.3
)
 
9.5

Total costs and expenses
1,862.0

 
1,113.8

 
3,083.8

 
2,482.0

Operating income
415.8

 
758.9

 
1,274.8

 
1,120.7

Other income and (expense):
 

 
 

 
 

 
 

Interest and investment income, net
8.8

 
7.3

 
17.8

 
13.7

Interest (expense)
(48.3
)
 
(41.6
)
 
(97.5
)
 
(70.9
)
Other income (expense), net
94.5

 
(17.8
)
 
102.8

 
(24.4
)
Income before income taxes
470.8

 
706.8

 
1,297.9

 
1,039.1

Income tax provision
114.6

 
109.0

 
222.8

 
161.6

Net income
$
356.2

 
$
597.8

 
$
1,075.1

 
$
877.5

Net income per common share:
 

 
 

 
 

 
 

Basic
$
0.45

 
$
0.75

 
$
1.35

 
$
1.09

Diluted
$
0.43

 
$
0.72

 
$
1.30

 
$
1.05

Weighted average shares:
 

 
 

 
 

 
 

Basic
793.0

 
799.6

 
796.0

 
805.5

Diluted
825.3

 
831.0

 
829.7

 
838.0

 
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,
 
2015
 
2014
 
2015
 
2014
Net income
$
356.2

 
$
597.8

 
$
1,075.1

 
$
877.5

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

 
1.1

 
(7.7
)
 
4.1

Pension liability adjustment
(1.7
)
 
—

 
(7.6
)
 
—

 
 
 
 
 
 
 
 
Net unrealized gains (losses) related to cash flow hedges:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
(62.8
)
 
(21.7
)
 
344.1

 
(40.3
)
Tax (expense) benefit
(31.5
)
 
8.9

 
(21.6
)
 
12.6

Unrealized holding gains (losses), net of tax
(94.3
)
 
(12.8
)
 
322.5

 
(27.7
)
 
 
 
 
 
 
 
 
Reclassification adjustment for (gains) losses included in net income
(89.0
)
 
3.0

 
(158.2
)
 
4.9

Tax (benefit)
(0.5
)
 
(0.4
)
 
(1.0
)
 
(0.7
)
Reclassification adjustment for (gains) losses included in net income, net of tax
(89.5
)
 
2.6

 
(159.2
)
 
4.2

 
 
 
 
 
 
 
 
Net unrealized gains (losses) on marketable securities available for sale:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
68.8

 
48.0

 
(8.3
)
 
132.3

Tax (expense) benefit
(23.4
)
 
(16.1
)
 
3.1

 
(45.1
)
Unrealized holding gains (losses), net of tax
45.4

 
31.9

 
(5.2
)
 
87.2

 
 
 
 
 
 
 
 
Reclassification adjustment for losses included in net income
1.3

 
1.6

 
0.7

 
3.0

Tax (benefit)
(0.4
)
 
(0.6
)
 
(0.2
)
 
(1.1
)
Reclassification adjustment for losses included in net income, net of tax
0.9

 
1.0

 
0.5

 
1.9

 
 
 
 
 
 
 
 
Total other comprehensive income
(123.7
)
 
23.8

 
143.3

 
69.7

Comprehensive income
$
232.5

 
$
621.6

 
$
1,218.4

 
$
947.2


See accompanying Notes to Unaudited Consolidated Financial Statements

4

CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In millions, except per share amounts)
 
 
June 30,
2015
 
December 31,
2014
Assets
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
4,530.8

 
$
4,121.6

Marketable securities available for sale
2,961.4

 
3,425.1

Accounts receivable, net of allowances of $32.1 and $32.1 at June 30, 2015 and December 31, 2014, respectively
1,273.4

 
1,166.7

Inventory
414.3

 
393.1

Deferred income taxes
11.2

 
11.7

Other current assets
692.4

 
594.4

Total current assets
9,883.5

 
9,712.6

Property, plant and equipment, net
675.2

 
642.6

Intangible assets, net
3,937.5

 
4,067.6

Goodwill
2,191.2

 
2,191.2

Other assets
1,058.3

 
726.1

Total assets
$
17,745.7

 
$
17,340.1

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Short-term borrowings and current portion of long-term debt
$
1,362.9

 
$
605.9

Accounts payable
204.9

 
198.2

Accrued expenses
1,007.4

 
991.1

Income taxes payable
11.0

 
12.7

Current portion of deferred revenue
58.2

 
28.5

Other current liabilities
315.1

 
275.8

Total current liabilities
2,959.5

 
2,112.2

Deferred revenue, net of current portion
29.7

 
27.8

Income taxes payable
306.8

 
272.9

Deferred income taxes
315.8

 
555.6

Other non-current liabilities
1,555.9

 
1,581.1

Long-term debt, net of discount
6,256.1

 
6,265.7

Total liabilities
11,423.8

 
10,815.3

Commitments and Contingencies (Note 15)


 


Stockholders’ Equity:
 

 
 

Preferred stock, $.01 par value per share, 5.0 million shares authorized; none outstanding at June 30, 2015 and December 31, 2014, respectively
—

 
—

Common stock, $.01 par value per share, 1,150.0 million shares authorized; issued 933.5 million and 924.8 million shares at June 30, 2015 and December 31, 2014, respectively
9.3

 
9.2

Common stock in treasury, at cost; 142.5 million and 124.6 million shares at June 30, 2015 and December 31, 2014, respectively
(12,788.7
)
 
(10,698.8
)
Additional paid-in capital
10,495.7

 
9,827.2

Retained earnings
7,547.5

 
6,472.4

Accumulated other comprehensive income
1,058.1

 
914.8

Total stockholders’ equity
6,321.9

 
6,524.8

Total liabilities and stockholders’ equity
$
17,745.7

 
$
17,340.1

 
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,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income
$
1,075.1

 
$
877.5

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

 
 

Depreciation
57.8

 
52.1

Amortization
131.3

 
136.4

Deferred income taxes
(252.6
)
 
(181.1
)
Change in value of contingent consideration
(10.3
)
 
9.5

Net (gain) loss on sale of investments
(85.6
)
 
3.2

Share-based compensation expense
276.5

 
207.8

Share-based employee benefit plan expense
17.1

 
17.6

Reclassification adjustment for cash flow hedges included in net income
(158.2
)
 
4.9

Unrealized change in value of derivative instruments
154.2

 
(16.5
)
Other, net
1.8

 
(2.4
)
Change in current assets and liabilities, excluding the effect of acquisitions:
 

 
 

Accounts receivable
(140.9
)
 
(61.8
)
Inventory
(19.2
)
 
(19.1
)
Other operating assets
(46.8
)
 
36.7

Accounts payable and other operating liabilities
76.8

 
(20.1
)
Income tax payable
32.8

 
24.8

Payment of contingent consideration
—

 
(5.0
)
Deferred revenue
31.1

 
8.3

Net cash provided by operating activities
1,140.9

 
1,072.8

Cash flows from investing activities:
 

 
 

Proceeds from sales of marketable securities available for sale
1,579.8

 
1,144.0

Purchases of marketable securities available for sale
(1,127.1
)
 
(1,556.3
)
Payments for acquisition of business
—

 
(710.0
)
Capital expenditures
(95.0
)
 
(61.4
)
Purchases and sales of investment securities, net
(115.0
)
 
(22.5
)
Other investing activities
(3.0
)
 
0.3

Net cash provided by (used in) investing activities
239.7

 
(1,205.9
)
Cash flows from financing activities:
 

 
 

Payment for treasury shares
(1,997.3
)
 
(2,182.2
)
Proceeds from short-term borrowing
970.9

 
2,235.4

Principal repayments on short-term borrowing
(209.7
)
 
(2,588.0
)
Proceeds from issuance of long-term debt
—

 
2,470.6

Proceeds from sale of common equity put options
6.4

 
5.2

Payment of contingent consideration
—

 
(15.0
)
Net proceeds from share-based compensation arrangements
104.2

 
94.0

Excess tax benefit from share-based compensation arrangements
174.2

 
90.0

Net cash provided by (used in) financing activities
(951.3
)
 
110.0

Effect of currency rate changes on cash and cash equivalents
(20.1
)
 
8.2

Net increase (decrease) in cash and cash equivalents
409.2

 
(14.9
)
Cash and cash equivalents at beginning of period
4,121.6

 
3,234.4

Cash and cash equivalents at end of period
$
4,530.8

 
$
3,219.5


 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,
 
2015
 
2014
Supplemental schedule of non-cash investing and financing activity:
 

 
 

Fair value of contingent consideration issued in business combinations
$
—

 
$
1,060.0

Change in net unrealized (gain) loss on marketable securities available for sale
$
8.3

 
$
(132.3
)
Investment in NantBioScience, Inc. preferred equity
$
—

 
$
90.0

Supplemental disclosure of cash flow information:
 

 
 

Interest paid
$
120.2

 
$
75.9

Income taxes paid
$
247.2

 
$
193.4

  
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 gene and protein regulation. We are dedicated to innovative research and development designed to bring new therapies to market and we are involved in research in several scientific areas designed to deliver proprietary next-generation therapies, targeting areas including intracellular signaling pathways, protein homeostasis and epigenetics in cancer and immune cells, immunomodulation in cancer and autoimmune diseases and therapeutic application of cell therapies.

Our primary commercial stage products include REVLIMID®, ABRAXANE®, POMALYST®/IMNOVID®, VIDAZA®, azacitidine for injection (generic version of VIDAZA®), THALOMID® (sold as THALOMID® or Thalidomide CelgeneTM outside of the U.S.), OTEZLA® and ISTODAX®. OTEZLA® was approved by the U.S. Food and Drug Administration (FDA) in March 2014 for the treatment of adult patients with active psoriatic arthritis and in September 2014 for the treatment of patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy. In January 2015, OTEZLA® was approved by the European Commission (EC) for the treatment of both psoriasis and psoriatic arthritis in certain adult patients. We began recognizing revenue related to OTEZLA® during the second quarter of 2014. Additional sources of revenue include royalties from Novartis Pharma AG (Novartis) on their sales of FOCALIN XR® and the entire RITALIN® family of drugs, the sale of products and services through our Celgene Cellular Therapeutics (CCT) subsidiary and other 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, 2014 (2014 Annual Report on Form 10-K).

New Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board (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 will have on our consolidated financial statements and related disclosures.

On April 7, 2015, the FASB issued Accounting Standards Update No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" (ASU 2015-03). ASU 2015-03 will more closely align 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

8
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

deduction from the carrying amount of the related debt liability, similar to the presentation of debt discounts or premiums. This accounting guidance is effective for us beginning in the first quarter of 2016. We do not expect this updated standard to have a material impact on our consolidated financial statements and related disclosures.

On April 15, 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 is effective for us beginning in the first quarter of 2016. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

3. Acquisitions

Nogra Pharma Limited (Nogra): On April 23, 2014, we entered into a license agreement with Nogra, pursuant to which Nogra granted us an exclusive, royalty-bearing license in its intellectual property relating to GED-0301, an antisense oligonucleotide targeting Smad7, to develop and commercialize products containing GED-0301 for the treatment of Crohn’s disease and other indications. Based on our evaluation of the license agreement, our level of control and decision making authority over the development and application of the intellectual property, the associated transfer of manufacturing agreements and knowhow, and access to employees of Nogra, we concluded that the acquired assets met the definition of a business and we have accounted for the GED-0301 license as in-process research and development (IPR&D) acquired in a business combination. The assets acquired and liabilities assumed of Nogra were recorded on our balance sheet as of May 14, 2014 (Effective Date), at their respective fair values. Nogra's results of operations are included in our consolidated financial statements from the Effective Date.
We made an upfront payment of $710.0 million and may make additional contingent developmental, regulatory and sales milestone payments as well as payments based on percentages of annual sales of licensed products. The maximum aggregate amount payable for development and regulatory milestones is approximately $815.0 million, which covers such milestones relating to Crohn’s disease and other indications. Starting from global annual net sales of $500.0 million, aggregate tiered sales milestone payments could total a maximum of $1.050 billion if global annual net sales reach $4.000 billion.
Subsequent to the Effective Date, we have measured the contingent consideration at fair value each period with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the IPR&D assets and the passage of time. At June 30, 2015, the balance of the contingent consideration was $1.186 billion, of which $24.9 million is included in other current liabilities and $1.161 billion included in other non-current liabilities.

Quanticel Pharmaceuticals, Inc. (Quanticel): In April 2015, we entered into a definitive share purchase agreement under which we would acquire Quanticel, a privately held biotechnology company focused on cancer drug discovery, for consideration consisting of $100.0 million in cash at closing plus contingent consideration consisting of payments for achieving specified discovery and development targets of up to $385.0 million. Celgene has had a research collaboration arrangement with Quanticel since 2011. Through this purchase, Quanticel will become our wholly-owned subsidiary, and we will gain full access to Quanticel’s proprietary platform for the single-cell genomic analysis of human cancer, as well as Quanticel’s lead programs that target specific epigenetic modifiers to advance Celgene’s pipeline of innovative cancer therapies. The purchase is subject to customary closing conditions and is expected to close in the fourth quarter of 2015.


9
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)
2015
 
2014
 
2015
 
2014
Net income
$
356.2

 
$
597.8

 
$
1,075.1

 
$
877.5

Weighted-average shares:
 
 
 
 
 
 
 
Basic
793.0

 
799.6

 
796.0

 
805.5

Effect of dilutive securities:
 
 
 
 
 
 
 
Options, restricted stock units and other incentives
32.3

 
31.4

 
33.7

 
32.5

Diluted
825.3

 
831.0

 
829.7

 
838.0

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.45

 
$
0.75

 
$
1.35

 
$
1.09

Diluted
$
0.43

 
$
0.72

 
$
1.30

 
$
1.05

 
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 9.0 million and 13.5 million for the three-month periods ended June 30, 2015 and 2014, 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 9.0 million and 14.2 million shares for the six-month periods ended June 30, 2015 and 2014, respectively.

Share Repurchase Program: In June 2015, our Board of Directors approved an increase of $4.000 billion to our authorized share repurchase program, bringing the total amount authorized since April 2009 to an aggregate of up to $17.500 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, 2015 and 2014, we recorded gains from premiums on put options 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,
 
2015
 
2014
 
2015
 
2014
Gain from sale of put options
$
5.0

 
$
4.0

 
$
8.9

 
$
6.4


At June 30, 2015, we had no outstanding put options.

We have purchased 7.9 million and 17.4 million shares of common stock under the share repurchase program from all sources at a total cost of $901.6 million and $2.028 billion during the three- and six-month periods ended June 30, 2015, respectively. As of June 30, 2015, we had a remaining share repurchase authorization of $5.112 billion.

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.


10
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, 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

 
 
 
 
 
 
 
 
 


Balance December 31, 2013
$
(6.9
)
 
$
137.3

 
$
(36.0
)
 
$
(0.4
)
 
$
94.0

Other comprehensive income (loss) before reclassifications
—

 
87.2

 
(27.7
)
 
4.1

 
63.6

Amounts reclassified from accumulated other comprehensive income
—

 
1.9

 
4.2

 
—

 
6.1

Net current-period other comprehensive income (loss)
—

 
89.1


(23.5
)

4.1

 
69.7

Balance June 30, 2014
$
(6.9
)
 
$
226.4


$
(59.5
)

$
3.7

 
$
163.7

 
 
 
 
 
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,
 
 
2015
 
2014
 
2015
 
2014
Gains (losses) from cash-flow hedges:
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Net product sales
 
$
90.2

 
$
(2.0
)
 
$
160.7

 
$
(3.0
)
Treasury rate lock agreements
 
Interest (expense)
 
(0.9
)
 
(0.8
)
 
(1.8
)
 
(1.7
)
Interest rate swap agreements
 
Interest (expense)
 
(0.3
)
 
(0.2
)
 
(0.7
)
 
(0.2
)
 
 
Income tax benefit
 
0.5

 
0.4

 
1.0

 
0.7

 
 
 
 
 
 
 
 
 
 
 
Gains (losses) from available-for-sale marketable securities:
 
 
 
 
 
 
 
 
Realized income (loss) on sales of marketable securities
 
Interest and investment income, net
 
(1.3
)
 
(1.6
)
 
(0.7
)
 
(3.0
)
 
 
Income tax benefit
 
0.4

 
0.6

 
0.2

 
1.1

Total reclassification, net of tax
 
 
 
$
88.6

 
$
(3.6
)
 
$
158.7

 
$
(6.1
)


6. Financial Instruments and Fair Value Measurement

The table below presents information about assets and liabilities that are measured at fair value on a recurring basis as of June 30, 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 2014 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 MBS, non-U.S. government, agency and supranational securities, global corporate debt securities, asset backed securities, foreign currency

11
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 resulting from the acquisitions of Gloucester Pharmaceuticals, Inc. (Gloucester) and Nogra in addition to contingent consideration related to the undeveloped product rights and technology platform acquired as part of the acquisition of Avila Therapeutics, Inc. (now known as Celgene Avilomics Research, Inc.) (Avila). The maximum remaining potential payments related to the contingent consideration from the acquisitions of Gloucester and Avila are estimated to be $120.0 million and $555.0 million, respectively, and $1.865 billion plus amounts based on sales pursuant to the license agreement with Nogra.
 
Balance at
June 30, 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
$
2,961.4

 
$
1,086.4

 
$
1,875.0

 
$
—

Forward currency contracts
660.9

 
—

 
660.9

 
—

Purchased currency options
27.5

 
—

 
27.5

 
—

Interest rate swaps
77.9

 
—

 
77.9

 
—

Total assets
$
3,727.7

 
$
1,086.4

 
$
2,641.3

 
$
—

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(90.0
)
 
$
(90.0
)
 
$
—

 
$
—

Written currency options
(10.9
)
 
—

 
(10.9
)
 
—

Other acquisition related contingent consideration
(1,315.0
)
 
—

 
—

 
(1,315.0
)
Total liabilities
$
(1,415.9
)
 
$
(90.0
)
 
$
(10.9
)
 
$
(1,315.0
)
 
 
 
 
 
 
 
 
 
Balance at
December 31, 2014
 
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
$
3,425.1

 
$
1,051.3

 
$
2,373.8

 
$
—

Forward currency contracts
550.7

 
—

 
550.7

 
—

Purchased currency options
9.8

 
—

 
9.8

 
—

Interest rate swaps
20.0

 
—

 
20.0

 
—

Total assets
$
4,005.6

 
$
1,051.3

 
$
2,954.3

 
$
—

Liabilities:
 

 
 

 
 

 
 

Contingent value rights
$
(136.3
)
 
$
(136.3
)
 
$
—

 
$
—

Written currency options
(4.6
)
 
—

 
(4.6
)
 
—

Other acquisition related contingent consideration
(1,279.0
)
 
—

 
—

 
(1,279.0
)
Total liabilities
$
(1,419.9
)
 
$
(136.3
)
 
$
(4.6
)
 
$
(1,279.0
)


12
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

There were no security transfers between Levels 1 and 2 during the six-month periods ended June 30, 2015 and 2014. The following table represents a roll-forward of the fair value of Level 3 instruments: 
 
Six-Month Periods Ended June 30,
 
2015
 
2014
Liabilities:
 

 
 

Balance at beginning of period
$
(1,279.0
)
 
$
(228.5
)
Amounts acquired or issued
—

 
(1,060.0
)
Net change in fair value
(36.0
)
 
(15.1
)
Settlements
—

 
20.0

Transfers in and/or out of Level 3
—

 
—

Balance at end of period
$
(1,315.0
)
 
$
(1,283.6
)
 
Level 3 liabilities outstanding as of June 30, 2015 primarily consisted of contingent consideration related to the acquisitions of Avila and Nogra. The $36.0 million net increase in the fair value of Level 3 liabilities in 2015 was related to 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, 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. 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 to 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, 2015 and December 31, 2014 had settlement dates within 36 months. 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

13
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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, 2015 and December 31, 2014:

 
 
Notional Amount
Foreign Currency
 
June 30, 2015
 
December 31, 2014
Australian Dollar
 
$
62.6

 
$
18.8

British Pound
 
387.6

 
304.8

Canadian Dollar
 
131.2

 
43.7

Euro
 
3,365.1

 
3,375.7

Japanese Yen
 
475.2

 
541.1

Total
 
$
4,421.7

 
$
4,284.1

 
 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, 2015, 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, 2015 and December 31, 2014 were $847.8 million and $835.5 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. 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, 2015 and December 31, 2014:
 
Notional Amount1
 
June 30, 2015
 
December 31, 2014
Foreign currency option contracts designated as hedging activity:
 
 
 
Purchased Put
$
331.6

 
$
152.6

Written Call
$
353.9

 
$
160.9

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
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 treasury rate locks or forward starting swaps are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.

Forward Starting Interest Rate Swaps and Treasury Rate Locks: We have entered into forward starting swaps, that were designated as cash flow hedges, with an aggregate notional value of $1.300 billion and effective dates in November 2015, with $800.0 million maturing in 10 years and $500.0 million maturing in 30 years to hedge against changes in interest rates that could impact an

14
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

anticipated issuance of debt in 2015. During July 2015, we also entered into treasury rate locks with effective dates in August 2015 and maturing in five, ten and thirty years.

In anticipation of issuing debt in 2014, we had entered into forward starting swaps that were designated as cash flow hedges. In April 2014 we accelerated our planned debt issuance date, which resulted in hedge ineffectiveness in the forward starting swaps and a $3.6 million charge to other income (expense), net due to differences between the effective date of the swaps and the accelerated debt issuance date.

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.

We have entered into swap contracts that were designated as hedges of certain of our fixed rate notes and also terminated the hedging relationship by settling certain of those swap contracts during 2014 and 2015. The settlement of swap contracts resulted in the receipt of net proceeds of $3.4 million and $12.4 million during the six-month periods ended June 30, 2015 and 2014, respectively, which are 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 table summarizes the notional amounts of our outstanding swap contracts at June 30, 2015 and December 31, 2014: 

 
 
 
Notional Amount
 
 
June 30, 2015
 
December 31, 2014
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
 
 

 
 

2.450% senior notes due 2015
 
$
300.0

 
$
300.0

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

 
750.0

4.000% senior notes due 2023
 
700.0

 
150.0

3.625% senior notes due 2024
 
150.0

 
—

Total
 
$
3,650.0

 
$
2,700.0

 


15
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, 2015 and December 31, 2014:
 
 
 
 
 
June 30, 2015
 
 
 
 
Fair Value
Instrument
 
Balance Sheet
Location
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
$
340.9

 
$
41.4

 
 
Other current liabilities
 
0.2

 
1.9

 
 
Other non-current assets
 
384.0

 
28.4

Interest rate swap agreements
 
Other current assets
 
30.1

 
—

 
 
Other non-current assets
 
57.4

 
—

 
 
Other non-current liabilities
 
—

 
10.9

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
38.4

 
12.6

 
 
Other current liabilities
 
0.2

 
1.9

Interest rate swap agreements
 
Other current assets
 
0.1

 
—

 
 
Other non-current assets
 
1.2

 
—

Total
 
 
 
$
852.5

 
$
97.1

   
 
 
 
 
December 31, 2014
 
 
 
 
Fair Value
Instrument
 
Balance Sheet
Location
 
Asset Derivatives
 
Liability Derivatives
Derivatives designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
$
264.9

 
$
44.9

 
 
Other current liabilities
 
0.1

 
1.7

 
 
Other non-current assets
 
322.3

 
17.5

Interest rate swap agreements
 
Other current assets
 
17.9

 
—

 
 
Other non-current assets
 
4.8

 
0.3

 
 
Other non-current liabilities
 
—

 
3.8

Derivatives not designated as hedging instruments:
 
Foreign exchange contracts1
 
Other current assets
 
39.7

 
6.0

 
 
Other current liabilities
 
0.1

 
1.1

Interest rate swap agreements
 
Other current assets
 
0.1

 
—

 
 
Other non-current assets
 
1.3

 
—

Total
 
 
 
$
651.2

 
$
75.3

 
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.


16
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, 2015 and 2014:
 
 
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 Derivative1
 
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, net
 
$
13.6

 
(2
)
Treasury rate lock agreements
$
—

 
Interest expense
 
$
(0.9
)
 
 
 
 

 
 
Interest rate swap agreements
$
81.9

 
Interest expense
 
$
(0.3
)
 
 
 
 
 
 
 
(1) Net gains of $322.9 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 $13.6 million of gains related to amounts excluded from the assessment of hedge effectiveness (fair value adjustments of forward point amounts).
 
Three-Month Period Ended June 30, 2014
 
 
 
(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
$
1.0

 
Net product sales
 
$
(2.0
)
 
Other income, net
 
$
0.7

 
(1
)
Treasury rate lock agreements
$
—

 
Interest expense
 
$
(0.8
)
 
 
 
 
 
 
Interest rate swap agreements
$
(22.7
)
 
Interest expense
 
$
(0.2
)
 
Other income, net
 
$
(3.6
)
 
(2
)
 
(1) The amount of net gains recognized in income represents $1.0 million in gains related to the ineffective portion of the hedging relationships and $0.3 million of losses related to amounts excluded from the assessment of hedge effectiveness.
(2) The amount of net loss recognized in income relates to the ineffective portion of the hedging relationships.

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, 2015 and 2014:
 
 
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 Derivative1
 
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, net
 
$
17.4

 
(2
)
Treasury rate lock agreements
$
—

 
Interest expense
 
$
(1.8
)
 
 
 
 

 
 
Interest rate swap agreements
$
56.2

 
Interest expense
 
$
(0.7
)
 
 
 
 
 
 
 
(1) Net gains of $322.9 million are expected to be reclassified from Accumulated OCI into income in the next 12 months.

17
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(2) 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.
 
Six-Month Period Ended June 30, 2014
 
 
 
(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
$
(7.9
)
 
Net product sales
 
$
(3.0
)
 
Other income, net
 
$
(2.8
)
 
(1
)
Treasury rate lock agreements
$
—

 
Interest expense
 
$
(1.7
)
 
 
 
 

 
 
Interest rate swap agreements
$
(32.4
)
 
Interest expense
 
$
(0.2
)
 
Other income, net
 
$
(3.6
)
 
(2
)
 
(1) The amount of net losses recognized in income represents $3.5 million of losses related to amounts excluded from the assessment of hedge effectiveness and $0.7 million in gains related to the ineffective portion of the hedging relationships.
(2) The amount of net loss recognized in income relates 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, 2015 and 2014:
 
 
 
 
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
 
 
2015
 
2014
 
2015
 
2014
Interest rate swap agreements
 
Interest expense
 
$
15.3

 
$
10.4

 
$
29.3

 
$
20.9

 
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, 2015 and 2014:
 
 
 
 
 
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
 
 
2015
 
2014
 
2015
 
2014
Foreign exchange contracts
 
Other income (expense), net
 
$
(19.6
)
 
$
(7.7
)
 
$
54.9

 
$
(11.1
)
Put options on our common stock
 
Other income (expense), net
 
$
5.0

 
$
4.0

 
$
8.9

 
$
6.4

 
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. 

18
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


8. Cash, Cash Equivalents and Marketable Securities Available-for-Sale
 
Money market funds of $715.1 million and $2.251 billion at June 30, 2015 and December 31, 2014, 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, 2015 and December 31, 2014 were as follows:
June 30, 2015
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
401.0

 
$
0.5

 
$
—

 
$
401.5

U.S. government-sponsored agency securities
 
85.0

 
0.2

 
—

 
85.2

U.S. government-sponsored agency MBS
 
371.2

 
0.8

 
(2.8
)
 
369.2

Non-U.S. government, agency and Supranational securities
 
22.8

 
—

 
—

 
22.8

Corporate debt - global
 
820.6

 
1.2

 
(1.1
)
 
820.7

Asset backed securities
 
175.7

 
—

 
(0.1
)
 
175.6

Marketable equity securities
 
379.7

 
711.5

 
(4.8
)
 
1,086.4

Total available-for-sale marketable securities
 
$
2,256.0

 
$
714.2

 
$
(8.8
)

$
2,961.4

 
December 31, 2014
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
U.S. Treasury securities
 
$
1,044.7

 
$
0.3

 
$
(0.8
)
 
$
1,044.2

U.S. government-sponsored agency securities
 
145.1

 
0.1

 
(0.1
)
 
145.1

U.S. government-sponsored agency MBS
 
531.1

 
1.0

 
(2.7
)
 
529.4

Non-U.S. government, agency and Supranational securities
 
32.4

 
—

 
(0.1
)
 
32.3

Corporate debt - global
 
446.3

 
0.6

 
(1.2
)
 
445.7

Asset backed securities
 
177.3

 
—

 
(0.2
)
 
177.1

Marketable equity securities
 
335.2

 
716.3

 
(0.2
)
 
1,051.3

Total available-for-sale marketable securities
 
$
2,712.1

 
$
718.3


$
(5.3
)

$
3,425.1

 
U.S. government-sponsored agency securities include general unsecured obligations either issued directly by or guaranteed by U.S. Government Sponsored Enterprises. U.S. government-sponsored agency MBS include mortgage-backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Non-U.S. government, agency and supranational securities consist of direct obligations of highly rated governments of nations other than the United States and obligations of sponsored agencies and other entities that are guaranteed or supported by highly rated governments of nations other than the United States. Corporate debt-global includes obligations issued by investment-grade corporations, including some issues that have been guaranteed by governments and government agencies. 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, 2015 primarily reflects the decrease in market value for certain equity investments subsequent to December 31, 2014.

Duration periods of available-for-sale debt securities at June 30, 2015 were as follows:
 
 
 
Amortized
Cost
 
Fair
Value
Duration of one year or less
 
$
313.5

 
$
313.8

Duration of one through three years
 
1,431.0

 
1,429.9

Duration of three through five years
 
131.8

 
131.3

Total
 
$
1,876.3

 
$
1,875.0

 

 

19
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. Inventory
 
A summary of inventories by major category at June 30, 2015 and December 31, 2014 follows:
 
June 30, 2015
 
December 31, 2014
Raw materials
$
136.8

 
$
200.0

Work in process
112.2

 
101.5

Finished goods
165.3

 
91.6

Total
$
414.3

 
$
393.1


The decrease in raw materials and increase in finished goods during the six-month period ended June 30, 2015 was primarily related to the production of ABRAXANE® to support recently launched new indications. Raw materials for ABRAXANE® had been at elevated levels at December 31, 2014 and during the six-month period ended June 30, 2015 many of those materials were converted into finished goods.
 
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) and Avila acquisitions. Our indefinite lived intangible assets consist of acquired IPR&D product rights from the Nogra and Gloucester acquisitions. The remaining weighted-average amortization period for finite-lived intangible assets not fully amortized is approximately 10.7 years.

Intangible assets outstanding as of June 30, 2015 and December 31, 2014 are summarized as follows:
June 30, 2015
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortizable intangible assets:
 
 

 
 

 
 

Acquired developed product rights
 
$
3,405.9

 
$
(1,336.1
)
 
$
2,069.8

Technology
 
333.7

 
(158.9
)
 
174.8

Licenses
 
66.9

 
(20.2
)
 
46.7

Other
 
42.6

 
(25.1
)
 
17.5

 
 
3,849.1

 
(1,540.3
)

2,308.8

Non-amortized intangible assets:
 


 


 
 

Acquired IPR&D product rights
 
1,628.7

 
—

 
1,628.7

Total intangible assets
 
$
5,477.8

 
$
(1,540.3
)

$
3,937.5

 
 
 
 
 
 
 
December 31, 2014
 
Gross Carrying Value
 
Accumulated Amortization
 
Intangible Assets, Net
Amortizable intangible assets:
 
 

 
 

 
 

Acquired developed product rights
 
$
3,405.9

 
$
(1,234.1
)
 
$
2,171.8

Technology
 
333.7

 
(135.1
)
 
198.6

Licenses
 
67.0

 
(18.1
)
 
48.9

Other
 
42.5

 
(22.9
)
 
19.6

 
 
3,849.1

 
(1,410.2
)
 
2,438.9

Non-amortized intangible assets:
 
 

 
 

 
 

Acquired IPR&D product rights
 
1,628.7

 
—

 
1,628.7

Total intangible assets
 
$
5,477.8

 
$
(1,410.2
)
 
$
4,067.6

 
Amortization expense related to intangible assets was $65.0 million and $66.7 million for the three-month periods ended June 30, 2015 and 2014, respectively, and $130.1 million and $133.8 million for the six-month periods ended June 30, 2015 and 2014, respectively. Assuming no changes in the gross carrying amount of intangible assets, the amortization of intangible assets for years 2015 through 2019 is estimated to be in the range of approximately $215.3 million to $260.1 million annually. 
 

20
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Goodwill: At June 30, 2015, our goodwill related to the 2014 acquisition of Nogra, the 2012 acquisition of Avila, the 2010 acquisitions of Abraxis and Gloucester, the 2008 acquisition of Pharmion and the 2004 acquisition of Penn T Limited.

The carrying value of goodwill was $2.191 billion as of June 30, 2015 and December 31, 2014.

11. Debt
 
Short-Term Borrowings and Current Portion of Long-Term Debt: The carrying value of short-term borrowings and current portion of long-term debt outstanding at June 30, 2015 and December 31, 2014 includes:
 
 
June 30, 2015
 
December 31, 2014
Commercial paper
 
$
860.6

 
$
99.6

2.450% senior notes due 2015
 
502.3

 
506.3

Total
 
$
1,362.9

 
$
605.9


Long-Term Debt: Summarized below are the carrying values of our senior notes at June 30, 2015 and December 31, 2014:
 
 
June 30, 2015
 
December 31, 2014
1.900% senior notes due 2017
$
502.1

 
$
501.0

2.300% senior notes due 2018
402.2

 
401.2

2.250% senior notes due 2019
505.3

 
502.5

3.950% senior notes due 2020
504.6

 
502.8

3.250% senior notes due 2022
1,003.2

 
1,010.2

4.000% senior notes due 2023
698.4

 
708.5

3.625% senior notes due 2024
997.5

 
996.8

5.700% senior notes due 2040
249.6

 
249.5

5.250% senior notes due 2043
396.7

 
396.7

4.625% senior notes due 2044
996.5

 
996.5

Total long-term debt
$
6,256.1

 
$
6,265.7

 
At June 30, 2015, the fair value of our outstanding Senior Notes was $6.825 billion and represented a Level 2 measurement within the fair value measurement hierarchy.

From time to time, we have used treasury rate locks and forward starting interest rate swap contracts to hedge against changes in interest rates in anticipation of issuing fixed-rate notes. As of June 30, 2015, a balance of $49.6 million in losses remained in accumulated OCI related to these derivative instruments and will be recognized as interest expense over the life of the notes.
 
At June 30, 2015, we were party to pay-floating, receive-fixed interest rate swap contracts designated as fair value hedges of fixed-rate notes as described in Note 7. Our swap contracts outstanding at June 30, 2015 effectively convert the hedged portion of our fixed-rate notes to floating rates. From time to time we terminate the hedging relationship on certain of our swap contracts by settling the contracts or by entering into offsetting contracts. Any net proceeds received or paid in these settlements are accounted for as a reduction or increase of current and future interest expense associated with the previously hedged notes. As of June 30, 2015, we had a balance of $34.8 million of unamortized gains recorded as a component of our debt as a result of past swap contract settlements, including $2.6 million related to the settlement of swap contracts during the six months ended June 30, 2015. As of December 31, 2014, we had a balance of $38.6 million of unamortized gains recorded as a component of our debt as a result of past swap contract settlements.

Please see Note 17 for information related to our July 2015 announcement of the proposed acquisition of Receptos, Inc. (Receptos) and our planned issuance of senior notes.


21
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Commercial Paper: The carrying value of Commercial Paper as of June 30, 2015 and December 31, 2014 was $860.6 million and $99.6 million, respectively, and approximated its fair value. The effective interest rate on our outstanding Commercial Paper at June 30, 2015 was 0.5%.
 
Senior Unsecured Credit Facility: We maintain a senior unsecured revolving credit facility (Credit Facility) that provides revolving credit in the aggregate amount of $1.750 billion, which was increased from $1.500 billion in April 2015. In April 2015, the term of the Credit Facility was also extended from April 18, 2018 to April 17, 2020. Subject to certain conditions, we have the right to increase the amount of the Credit Facility (but in no event more than one time per annum) up to a maximum aggregate amount of $2.000 billion. Amounts may be borrowed in U.S. dollars for general corporate purposes. The Credit Facility currently serves as backup liquidity for our Commercial Paper borrowings. At June 30, 2015, there was no outstanding borrowing against the Credit Facility.

The Credit Facility contains affirmative and negative covenants, including certain customary financial covenants. We were in compliance with all financial covenants as of June 30, 2015. 

12. Share-Based Compensation
 
We have a stockholder-approved stock incentive plan, the 2008 Stock Incentive Plan (Amended and Restated as of April 15, 2015) (Plan) that provides for the granting of options, restricted stock units (RSUs), performance stock units (PSUs) and other share-based awards to our employees and officers. The Management Compensation and Development Committee of the Board of Directors (Compensation Committee) may determine the type, amount and terms, including vesting, of any awards made under the Plan.

During 2015 we increased our usage of PSUs and began issuing PSUs to certain executive officers that are payable in shares of our common stock at the end of a three-year performance measurement period. The number of shares to be issued at the end of the measurement period will vary, based on performance, from 0% to 200% of the target number of PSUs granted, depending on the achievement of specified performance and market targets for revenue (37.5% weighting), earnings per share (37.5% weighting), and relative total shareholder return (25% weighting). All shares delivered upon PSU vesting are restricted from trading for one year and one day from the vesting date.

The grant date fair value for the portion of the PSUs related to revenue and earnings per share was estimated using the fair market value of our common stock on the grant date. The grant date fair value for the portion of the PSUs related to relative total shareholder return was estimated using the Monte Carlo valuation model. The weighted average grant date fair value per share of the PSUs granted to certain executive officers during the six-month period ended June 30, 2015 was $122.90.

The following table summarizes the components of share-based compensation expense in the Consolidated Statements of Income for the three- and six-month periods ended June 30, 2015 and 2014:
 
 
Three-Month Periods Ended June 30,
 
Six-Month Periods Ended June 30,
 
2015
 
2014
 
2015
 
2014
Cost of goods sold (excluding amortization of acquired intangible assets)
$
8.1

 
$
5.9

 
$
14.8

 
$
12.0

Research and development
63.6

 
45.8

 
119.8

 
92.8

Selling, general and administrative
76.0

 
51.7

 
141.9

 
103.0

Total share-based compensation expense
147.7

 
103.4

 
276.5

 
207.8

Tax benefit related to share-based compensation expense
44.8

 
31.0

 
81.2

 
61.0

Reduction in income
$
102.9

 
$
72.4

 
$
195.3

 
$
146.8











22
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




The following table summarizes the activity for stock options, RSUs and PSUs for the six-month period ended June 30, 2015 (in millions unless otherwise noted):
 
Stock
Options
 
Restricted Stock
Units
 
Performance-
Based Restricted
Stock Units
(in thousands)
Outstanding at December 31, 2014
77.2

 
9.4

 
133

Changes during the Year:
 

 
 

 
 

Granted
5.8

 
1.6

 
211

Exercised / Released
(5.9
)
 
(2.8
)
 
—

Forfeited
(0.9
)
 
(0.2
)
 
(7
)
Outstanding at June 30, 2015
76.2

 
8.0


337

 


Total compensation cost related to unvested awards not yet recognized and the weighted-average periods over which the awards are expected to be recognized at June 30, 2015 were as follows (dollars in millions):
 
Stock
Options
 
Restricted Stock
Units
 
Performance-
Based Restricted
Stock Units
Unrecognized compensation cost
$
587.8

 
$
345.1

 
$
24.0

Expected weighted-average period in years of compensation cost to be recognized
2.1

 
1.7

 
1.5

 
 
13. Income Taxes
 
We regularly evaluate the likelihood of the realization of our deferred tax assets and reduce the carrying amount of those deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carryforward periods available to us for tax reporting purposes and other relevant factors. Significant judgment is required in making this assessment.

Our tax returns are under routine examination in many taxing jurisdictions. The scope of these examinations includes, but is not limited to, the review of our taxable presence in a jurisdiction, our deduction of certain items, our claims for research and development credits, our compliance with transfer pricing rules and regulations and the inclusion or exclusion of amounts from our tax returns as filed. Our U.S. federal income tax returns have been audited by the Internal Revenue Service (IRS) through the year ended December 31, 2008. Tax returns for the years ended December 31, 2009, 2010 and 2011 are currently under examination by the IRS, which may conclude within the next twelve months. We are also subject to audits by various state and foreign taxing authorities, including, but not limited to, most U.S. states and major European and Asian countries where we have operations.
 
We regularly reevaluate our tax positions and the associated interest and penalties, if applicable, resulting from audits of federal, state and foreign income tax filings, as well as changes in tax law (including regulations, administrative pronouncements, judicial precedents, etc.) that would reduce the technical merits of the position to below more likely than not. We believe that our accruals for tax liabilities are adequate for all open years. Many factors are considered in making these evaluations, including past history, recent interpretations of tax law and the specifics of each matter. Because tax regulations are subject to interpretation and tax litigation is inherently uncertain, these evaluations can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. We apply a variety of methodologies in making these estimates and assumptions, which include studies performed by independent economists, advice from industry and subject experts, evaluation of public actions taken by the IRS and other taxing authorities, as well as our industry experience. These evaluations are based on estimates and assumptions that have been deemed reasonable by management. However, if management’s estimates are not representative of actual outcomes, our results of operations could be materially impacted.
 

23
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Unrecognized tax benefits, generally represented by liabilities on the consolidated balance sheet and all subject to tax examinations, arise when the estimated benefit recorded in the financial statements differs from the amounts taken or expected to be taken in a tax return because of the uncertainties described above. These unrecognized tax benefits relate primarily to issues common among multinational corporations. Virtually all of these unrecognized tax benefits, if recognized, would impact the effective income tax rate. We account for interest and potential penalties related to uncertain tax positions as part of our provision for income taxes. For the six-month period ended June 30, 2015 gross unrecognized tax benefits increased by $34.0 million, primarily from unrecognized tax benefits related to current year operations of $28.9 million and accrued interest of $5.1 million. The liability for unrecognized tax benefits is expected to increase in the next 12 months relating to operations occurring in that period. Any settlements of examinations with taxing authorities or statute of limitations expirations would likely result in a decrease in our liability for unrecognized tax benefits and a corresponding increase in taxes paid or payable and/or a decrease in income tax expense. Certain examinations may conclude within the next twelve months. It is reasonably possible that the amount of the liability for unrecognized tax benefits could change by a significant amount during the next twelve-month period as a result of settlements or statute of limitations expirations. Finalizing examinations with the relevant taxing authorities can include formal administrative and legal proceedings and, as a result, it is difficult to estimate the timing and range of possible change related to the Company’s unrecognized tax benefits. An estimate of the range of possible change cannot be made until issues are further developed or examinations close. Our estimates of tax benefits and potential tax benefits may not be representative of actual outcomes and variation from such estimates could materially affect our financial statements in the period of settlement or when the statutes of limitations expire. 

14. Collaboration Agreements

We enter into collaborative arrangements for the research and development, license, manufacture and/or commercialization of products and/or product candidates. In addition, we also acquire product and research and development technology rights and establish research and development collaborations with third parties to enhance our strategic position within our industry by strengthening and diversifying our research and development capabilities, product pipeline and marketed product base. These arrangements may include non-refundable, upfront payments, payments for options to purchase licenses of additional rights, as well as potential development, regulatory and commercial performance milestone payments, cost sharing arrangements, royalty payments, profit sharing and equity investments. Certain of these arrangements obligate us to make additional equity investments in the event of an initial public offering of equity by our partners. The activities under these collaboration agreements are performed with no guarantee of either technological or commercial success. Although we do not consider any individual alliance to be material, certain of the more notable alliances are described below. See Note 17 of Notes to Consolidated Financial Statements included in our 2014 Annual Report on Form 10-K for a description of certain other collaboration agreements entered into prior to January 1, 2015. The following is a brief description of significant developments in the relationships between Celgene and our collaboration partners during the six months ended June 30, 2015:

Agios Pharmaceuticals, Inc. (Agios):  During 2010, we entered into a discovery and development collaboration and license agreement with Agios that focuses on cancer metabolism targets and the discovery, development and commercialization of associated therapeutics. We have an exclusive option to license any potential products that result from the Agios cancer metabolism research platform through the end of phase I clinical trials.

With respect to each product that we choose to license, Agios could receive up to approximately $120.0 million upon achievement of certain milestones and other payments plus royalties on worldwide sales, and Agios may also participate in the development and commercialization of certain products in the United States. In December 2014, we elected to extend the collaboration and license agreement for an additional year for a payment of $20.0 million. Our option to license products will terminate on April 14, 2016.

In June 2014, we exercised our option to license AG-221 from Agios on an exclusive worldwide basis, with Agios retaining the right to conduct a portion of commercialization activities for AG-221 in the United States. AG-221 is currently in a phase I study in patients that present an isocitrate dehydrogenase-2 (IDH2) mutation with advanced hematologic malignancies, including acute myeloid leukemia (AML).

In January 2015, we exercised our option, subject to applicable regulatory approvals which were subsequently achieved, to an exclusive license from Agios to AG-120 outside the United States, with Agios retaining the right to conduct development and commercialization within the United States. AG-120 is an orally available, selective inhibitor of the mutated isocitrate dehydrogenase-1 (IDH1) protein for the treatment of patients with cancers that harbor an IDH1 mutation. AG-120 is currently being evaluated in two phase I dose escalation trials, one in advanced hematological malignancies and the other in advanced solid tumors.

24
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


In April 2015, we and Agios entered into a new joint worldwide development and profit share collaboration for AG-881. AG-881 is a small molecule that has shown in preclinical studies to fully penetrate the blood brain barrier and inhibit IDH1 and IDH2 mutant cancer cells. Under the terms of the AG-881 collaboration, Agios received an initial payment of $10.0 million and is eligible to receive contingent payments of up to $70.0 million based on the attainment of specified regulatory goals. The upfront payment to Agios was accounted for as $9.0 million of upfront research and development collaboration expense and $1.0 million of prepaid manufacturing rights recorded on the balance sheet. We and Agios will jointly collaborate on the worldwide development program for AG-881, sharing development costs with an equal share worldwide. The two companies will share worldwide profits with equal shares, with Celgene recording commercial sales worldwide. Agios will lead commercialization in the U.S. with both companies sharing equally in field-based commercial activities, and we will lead commercialization ex-U.S. with Agios providing one third of field-based commercial activities in the major EU markets.

Epizyme Inc. (Epizyme): In July 2015 we entered into an amendment and restatement of the collaboration and license agreement dated April 2, 2012 with Epizyme (the Amended Agreement). Under the original agreement, we had an exclusive license, for all countries other than the United States, to small molecule HMT inhibitors targeting DOT1L, including pinometostat (EPZ-5676), and an option, on a target-by-target basis, to exclusively license, for all countries other than the United States, rights to small molecule HMT inhibitors targeting any other HMT targets. Under the Amended Agreement:

•
We retain our exclusive license to small molecule HMT inhibitors targeting DOT1L outside of the United States, including pinometostat (EPZ-5676),
•
We have narrowed our option rights to HMT inhibitors targeting three predefined targets (the “Option Targets”),
•
The exclusive licenses to HMT inhibitors targeting two of the Option Targets that we may acquire have been expanded to include the United States, with the exclusive license to the third Option Target continuing to be for all countries other than the United States,
•
Our option period has been extended for each of the Option Targets and is exercisable at the time of Epizyme's IND filing for an HMT inhibitor targeting the applicable Option Target,
•
Epizyme may complete phase 1 clinical trials as to each Option Target following our exercise of our option at IND filing. If Epizyme chooses not to complete phase 1 clinical trials to an Optioned Target, future milestones and royalties on products developed for such Option Targets will be reduced.

Under the terms of the Amended Agreement, we made a $10.0 million payment to Epizyme. In addition, Epizyme may earn up to $75.0 million in development milestone payments, up to $365.0 million in regulatory milestone payments and up to $170.0 million in sales milestone payments related to the Option Targets. For the DOT1L program, Epizyme remains eligible to earn $35.0 million in clinical development milestone payments and up to $100.0 million in regulatory milestone payments. Epizyme is also entitled to tiered royalties ranging from the mid-single digits to the mid-teens on annual net product sales in our territory, subject to reductions in specified circumstances.
 
The Amended Agreement extends the research and development collaboration for at least an additional three years until July 8, 2018, subject to our exercise of our options at IND filing. The Amended Agreement will expire on a product-by-product and country-by-country basis on the date of the expiration of the applicable royalty term with respect to each licensed product in each country and in its entirety upon the expiration of all applicable royalty terms for all licensed products in all countries. We have the right to terminate the Amended Agreement in its entirety or with respect to one or more Optioned Targets upon 120 days’ notice. Upon the expiration of the royalty term of a particular license product, we will have a fully paid-up, royalty-free license to use Epizyme intellectual property to manufacture, market, use and sell such licensed products in our territory.

bluebird bio, Inc. (bluebird):  In June 2015, we amended and restated the March 2013 collaboration agreement with bluebird. The amended and restated collaboration will focus on the discovery, development and commercialization of novel disease-altering gene therapy product candidates targeting B-cell maturation antigen (BCMA). BCMA is a cell surface protein that is expressed in normal plasma cells and in most multiple myeloma cells, but is absent from other normal tissues. The collaboration applies gene therapy technology to modify a patient’s own T-cells, known as chimeric antigen receptor (CAR) T-cells, to target and destroy cancer cells that express BCMA. We have an option to license any anti-BCMA products resulting from the collaboration after the completion of a phase I clinical study by bluebird.

Under the amended and restated collaboration agreement we made an additional $25.0 million payment for bluebird to develop the lead anti-BCMA product candidate (bb2121) through a phase I clinical study and to develop next-generation anti-BCMA product candidates. The payment was recorded as prepaid research and development on the balance sheet and is being recognized as expense as development work is performed. Upon exercising our option to license a product and achievement of certain

25
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

milestones, we may be obligated to pay up to $230.0 million per licensed product in aggregate potential option fees and clinical and regulatory milestone payments. bluebird also has the option to participate in the development and commercialization of any licensed products resulting from the collaboration through a 50/50 co-development and profit share in the United States in exchange for a reduction of milestone payments. Royalties would also be paid to bluebird in regions where there is no profit share, including in the United States, if bluebird declines to exercise their co-development and profit sharing rights.

We have the ability to terminate the collaboration at our discretion upon 90 days written notice to bluebird.  If a product is optioned, the parties will enter into a pre-negotiated license agreement and potentially a co-development agreement should bluebird exercise its option to participate in the development and commercialization in the United States.  The license agreement, if not terminated sooner, would expire upon the expiration of all applicable royalty terms under the agreement with respect to the particular product, and the co-development agreement, if not terminated sooner, would expire when the product is no longer being developed or commercialized in the United States.  Upon the expiration of a particular license agreement, we will have a fully paid-up, royalty-free license to use bluebird intellectual property to manufacture, market, use and sell such licensed product.

FORMA Therapeutics Holdings, LLC (FORMA): In April 2013, we entered into a collaboration agreement with FORMA to discover, develop and commercialize drug candidates to regulate protein homeostasis targets. Protein homeostasis, which is important in oncology, neurodegenerative and other disorders, involves a tightly regulated network of pathways controlling the biogenesis, folding, transport and degradation of proteins.

The collaboration was launched with an upfront payment that enables us to evaluate selected targets and lead assets in protein homeostasis pathways during the pre-clinical phase. Based on such evaluation, we have the right to obtain exclusive licenses with respect to the development and commercialization of multiple drug candidates outside of the United States, in exchange for research and early development payments of up to approximately $200.0 million to FORMA. Under the terms of the collaboration agreement, FORMA is incentivized to advance the full complement of drug candidates through phase I, while Celgene is responsible for all further global clinical development for each licensed candidate. FORMA is eligible to receive up to an additional $315.0 million in potential payments based upon development, regulatory and sales objectives for the first ex-U.S. license. FORMA is also eligible to receive potential payments for successive licenses, which escalate for productivity, increasing up to a maximum of an additional $430.0 million per program. In addition, FORMA will receive royalties on ex-U.S. sales and additional payments if multiple drug candidates reach defined cumulative sales objectives. The collaboration agreement includes provisions for Celgene to obtain rights with respect to development and commercialization of drug candidates inside the United States in exchange for additional payments.

Under the collaboration, the parties perform initial research and development for a term of four years. If, during such research term, a drug candidate meets certain criteria, then the parties enter into a pre-negotiated license agreement and the collaboration continues until all license agreements have expired and all applicable royalty terms under the collaboration with respect to the particular products have expired. Each license agreement, if not terminated sooner, expires upon the expiration of all applicable royalty terms under such agreement. Upon the expiration of each license agreement, we will have an exclusive, fully-paid, royalty-free license to use the applicable FORMA intellectual property to manufacture, market, use and sell the product developed under such agreement outside of the United States. In October, 2013, we entered into the first ex-US license with FORMA and paid the applicable upfront payment under such license. In February, 2015, we entered into the second ex-US license with FORMA and made a $19.0 million upfront payment for the license.

On March 21, 2014, we entered into a second collaboration arrangement with FORMA, pursuant to which FORMA granted us an option, for an additional fee, to license the rights to select current and future FORMA drug candidates during a term of three and one half years. We agreed to pay an upfront payment of $225.0 million. In addition, with respect to each subsequently licensed drug candidate, we have the obligation to pay designated amounts when certain development, regulatory and sales milestone events occur, with such amounts being variable and contingent on various factors. With respect to each licensed drug candidate, we assume responsibility for all global development activities and costs after completion of phase I clinical trials. FORMA retains U.S. rights to all such licensed assets, including responsibility for manufacturing and commercialization.

Under this collaboration arrangement, we also have an option to enter into up to two additional collaborations with successive terms of two years each for additional payments totaling approximately $375.0 million. If we exercise our option to enter into both of these additional collaborations, we will receive an exclusive option to acquire FORMA, including the U.S. rights to all licensed drug candidates, and worldwide rights to other wholly owned assets within FORMA at that time. In April, 2015, we entered into the first license with FORMA under the second collaboration and made a $20.0 million upfront payment for the license.

MorphoSys AG (MorphoSys):  On March 26, 2015, we and MorphoSys agreed to terminate our collaboration, license and equity purchase agreement for the co-development and co-promotion of the anti-CD38 antibody, MOR202. As part of the termination,

26
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

we made a final payment of $8.1 million to settle all obligations. The termination of our agreement eliminates all potential future payments for development, regulatory and sales milestones. We have retained our equity interest in MorphoSys.

AstraZeneca PLC (AstraZeneca): In April 2015, we entered into a strategic collaboration agreement with MedImmune Limited (MedImmune), a subsidiary of AstraZeneca, to develop and commercialize MEDI4736, a novel anti-PD-L1 monoclonal antibody, for hematologic malignancies. The agreement provides for a negotiation period to expand the agreement for other immuno-therapeutics. Under the terms of the agreement, we made an upfront payment of $450.0 million to MedImmune. We lead clinical development across all new clinical trials within the collaboration and are responsible for all costs associated with such trials until December 31, 2016, after which we will be responsible for 75 percent of those costs. We also will be responsible for the global commercialization of approved MEDI4736 indications in hematology, and will receive royalty rates starting at 70 percent of worldwide sales from all uses in hematology. Royalty rates will decrease gradually to 50 percent over a period of 4 years after the start of commercial sales. The agreement may be terminated at our discretion upon nine months’ prior written notice to MedImmune, and by either party upon material breach of the other party, subject to cure periods. The agreement, if not terminated sooner, expires upon the expiration of all applicable royalty terms under such agreement.

Lycera Corp. (Lycera): In June 2015, we entered into a collaboration and option agreement with Lycera. Under the agreement, the parties will support the development of Lycera’s portfolio of immune modulator assets, including (1) oral agonists that target RORy, a master control switch of immune system activation, for the potential treatment of a broad range of cancers, and (2) LYC-30937, an oral gut-directed ATPase modulator currently in phase I clinical studies.

Lycera has developed orally bioavailable RORy agonists that have demonstrated single agent therapeutic activity in multiple animal models of cancer. Ex-vivo treatment with RORy agonist compounds has been shown to enhance the therapeutic benefit of adoptive T-cell therapy by improving both immune cell persistence and activation. Development of LYC-30937 is focused on the treatment of inflammatory bowel disease, with the goal of delivering significant disease improvement without global immune suppression. Under the collaboration, Lycera also will continue to advance its other programs, including a Rho-associated protein kinase 2 (ROCK2) inhibitor.

Under the terms of the agreement, we made an upfront payment of $82.5 million to Lycera. We received an exclusive option for an additional fee to license Lycera’s portfolio of ex-vivo RORy agonist compounds, a 7 percent equity interest and an exclusive right to acquire Lycera. If we exercise the acquisition right, Lycera shareholders will be also eligible to receive future success-based milestone payments of up to $190.0 million. The upfront payment to Lycera was accounted for as $69.5 million of upfront collaboration payment included in research and development expense and $13 million as non-current assets consisting of $10 million for an equity investment and $3 million for a warrant to acquire the remaining shares outstanding.

The agreement has an initial term of 3 years and may be terminated earlier at our discretion upon 6 months’ prior written notice to Lycera and by either party upon material breach of the other party, subject to cure periods.

Juno Therapeutics, Inc. (Juno): In June 2015, we entered into a collaboration and investment agreement with Juno for the development and commercialization of immunotherapies for cancer and autoimmune diseases. Under the terms of the agreement, we have the option to be the commercialization partner for Juno’s oncology and cell therapy auto-immune product candidates, including Juno’s CD19 and CD22 directed CAR T-cell product candidates. For Juno-originated programs co-developed under the collaboration, (a) Juno will be responsible for research and development in North America and will retain commercialization rights in those territories, (b) we will be responsible for development and commercialization in the rest of the world, and will pay Juno a royalty on sales in those territories, and (c) we have certain co-promotion options for global profit sharing arrangements under which the parties will share worldwide expenses and profits equally, except in China.

Juno will have the option to enter into co-development and co-commercialization arrangements on certain Celgene-originated development candidates that target T cells. For any such Celgene-originated programs co-developed under the collaboration, (a) the parties will share global costs and profits with 70 percent allocated to us and 30 percent allocated to Juno, and we will lead global development and commercialization, subject to a Juno co-promote option in the US and certain EU territories.

The collaboration and investment agreement is subject to the expiration or termination of applicable waiting periods under all applicable antitrust laws and satisfaction of other usual and customary closing conditions. Upon closing we will make a $1.000 billion payment to Juno and will receive 9.1 million shares of Juno common stock, which will amount to approximately 9 percent of Juno's outstanding common stock. The value of our investment in Juno common stock will be recorded as an available-for sale marketable security based on the market price of the stock on the date of closing and the remaining portion of the $1.000 billion

27
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

payment, which consists of both a $150 million upfront payment and a premium paid on our equity investment, will be recorded to research and development expense.

The collaboration agreement has an initial term of ten years. If the parties enter into any pre-negotiated license or co-commercialization agreement during the initial term, the collaboration agreement will continue until all such license and co-commercialization agreements have expired. The collaboration agreement may be terminated at our discretion upon 120 days’ prior written notice to Juno and by either party upon material breach of the other party, subject to cure periods.

In addition to the collaboration arrangements described above, we entered into new collaborative arrangements during the six months ended June 30, 2015. Our obligation to fund these efforts is contingent upon our continued involvement in the programs and/or the lack of any adverse events which could cause the discontinuance of the programs.
A financial summary of certain period activity related to our collaboration agreements is presented below1,2:
 
 
Three-Month Periods Ended June 30,
 
 
Research and Development Expense
 
 
 
 
Upfront Fees
 
Milestones
 
Termination of Agreements
 
Amortization of Prepaid Research and Development
 
Equity Investments Made During Period
Acceleron
2015
$—
 
$—
 
$—
 
$—
 
$—
 
2014
—
 
—
 
—
 
—
 
37.4
Agios
2015
9.0
 
—
 
—
 
—
 
—
 
2014
—
 
—
 
—
 
—
 
13.0
AstraZeneca
2015
450.0
 
—
 
—
 
—
 
—
bluebird
2015
—
 
—
 
—
 
0.7
 
—
 
2014
—
 
—
 
—
 
—
 
—
FORMA
2015
20.0
 
—
 
—
 
—
 
—
 
2014
—
 
—
 
—
 
—
 
—
Lycera
2015
69.5
 
—
 
—
 
—
 
10.0
Other Collaboration Arrangements
2015
21.0
 
8.0
 
—
 
6.6
 
50.0
 
2014
14.0
 
0.5
 
—
 
10.0
 
—
 
 
Six-Month Periods Ended June 30,
 
 
Research and Development Expense
 
 
 
 
Upfront Fees
 
Milestones
 
Termination of Agreements
 
Amortization of Prepaid Research and Development
 
Equity Investments Made During Period
Acceleron
2015
$—
 
$—
 
$—
 
$—
 
$—
 
2014
—
 
—
 
—
 
—
 
52.4
Agios
2015
9.0
 
—
 
—
 
—
 
—
 
2014
—
 
—
 
—
 
—
 
13.0
AstraZeneca
2015
450.0
 
—
 
—
 
—
 
—
bluebird
2015
—
 
—
 
—
 
0.7
 
—
 
2014
—
 
—
 
—
 
—
 
—
Epizyme
2015
—
 
—
 
—
 
—
 
—
 
2014
—
 
—
 
—
 
—
 
9.9
FORMA
2015
39.0
 
—
 
—
 
—
 
—
 
2014
225.0
 
—
 
—
 
0.1
 
—
Lycera
2015
69.5
 
—
 
—
 
—
 
10.0
MorphoSys
2015
—
 
—
 
8.1
 
—
 
—
 
2014
—
 
—
 
—
 
—
 
—
NantBioScience(3)
2015
—
 
—
 
—
 
—
 
—
 
2014
50.0
 
—
 
—
 
—
 
90.0
Other Collaboration Arrangements
2015
21.0
 
8.0
 
—
 
12.1
 
50.0
 
2014
48.0
 
0.5
 
—
 
13.8
 
20.9

28
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

A financial summary of the period-end balances related to our collaboration agreements is presented below:
 
Balances as of:
 
Intangible Asset Balance
 
Equity Investment Balance
 
Percentage of Outstanding Equity
Acceleron
June 30, 2015
 
$—
 
$145.9
 
14%
 
December 31, 2014
 
—
 
179.7
 
14%
Agios
June 30, 2015
 
1.0
 
582.7
 
14%
 
December 31, 2014
 
—
 
587.4
 
14%
bluebird
June 30, 2015
 
24.4
 
—
 
N/A
 
December 31, 2014
 
0.1
 
—
 
N/A
Epizyme
June 30, 2015
 
—
 
88.2
 
9%
 
December 31, 2014
 
—
 
69.3
 
11%
FORMA
June 30, 2015
 
0.1
 
—
 
N/A
 
December 31, 2014
 
0.1
 
—
 
N/A
Lycera
June 30, 2015
 
3.0
 
10.0
 
7%
MorphoSys
June 30, 2015
 
—
 
57.2
 
3%
 
December 31, 2014
 
—
 
73.9
 
3%
NantBioScience
June 30, 2015
 
—
 
90.0
 
13%
 
December 31, 2014
 
—
 
90.0
 
14%
Other Collaboration Arrangements
June 30, 2015
 
69.2
 
180.5
 
N/A
 
December 31, 2014
 
67.6
 
133.4
 
N/A
1 
Activity and balances are presented specifically for notable new collaborations and for those collaborations which we have described in detail in our 2014 Annual Report on Form 10-K if there has been new significant activity during the periods presented. Amounts related to collaborations that are not specifically described are presented in the aggregate as Other Collaboration Arrangements.
2 
In addition to the expenses noted in the tables above, we may also incur expenses for collaboration agreement related activities that are managed or funded by us.

3 
$25.0 million of expense related to the settlement of contingent matching contributions was also recognized at the inception of the collaboration agreement with NantBioScience and included in Selling, General and Administrative expense.

15. Commitments and Contingencies

Collaboration Arrangements: We have entered into certain research and development collaboration agreements with third parties that include the funding of certain development, manufacturing and commercialization efforts with the potential for future milestone and royalty payments upon the achievement of pre-established developmental, regulatory and/or commercial targets. Our obligation to fund these efforts is contingent upon continued involvement in the programs and/or the lack of any adverse events which could cause the discontinuance of the programs. Due to the nature and uncertainty of these arrangements and any future potential payments, no amounts have been recorded in our accompanying Consolidated Balance Sheets at June 30, 2015 and December 31, 2014. See Note 14 for additional details related to collaboration arrangements.
 
Contingencies: We believe we maintain insurance coverage adequate for our current needs. Our operations are subject to environmental laws and regulations, which impose limitations on the discharge of pollutants into the air and water and establish standards for the treatment, storage and disposal of solid and hazardous wastes. We review the effects of such laws and regulations on our operations and modify our operations as appropriate. We believe we are in substantial compliance with all applicable environmental laws and regulations.
We have ongoing customs, duties and VAT examinations in various countries that have yet to be settled. Based on our knowledge of the claims and facts and circumstances to date, none of these matters, individually or in the aggregate, are deemed to be material to our financial condition.

29
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

16. Legal Proceedings

Like many companies in our industry, we have from time to time received inquiries and subpoenas and other types of information requests from government authorities and others and we have been subject to claims and other actions related to our business activities. While the ultimate outcome of investigations, inquiries, information requests and legal proceedings is difficult to predict, adverse resolutions or settlements of those matters may result in, among other things, modification of our business practices, product recalls, costs and significant payments, which may have a material adverse effect on our results of operations, cash flows or financial condition.
 
Pending patent proceedings include challenges to the scope, validity and/or enforceability of our patents relating to certain of our products, uses of products or processes. Further, we are subject to claims of third parties that we infringe their patents covering products or processes. Although we believe we have substantial defenses to these challenges and claims, there can be no assurance as to the outcome of these matters and an adverse decision in these proceedings could result in one or more of the following: (i) a loss of patent protection, which could lead to a significant reduction of sales that could materially affect future results of operations, (ii) our inability to continue to engage in certain activities, and (iii) significant liabilities, including payment of damages, royalties and/or license fees to any such third party.
 
Among the principal matters pending are the following:

Patent Related Proceedings:

REVLIMID®: We received Notice Letters, dated August 30, 2010 and June 12, 2012 from Natco Pharma Limited of India (Natco) notifying us of Natco’s Abbreviated New Drug Application (ANDA), which contain Paragraph IV certifications against certain of Celgene’s patents that are listed in the FDA Approved Drug Products With Therapeutic Equivalence Evaluations (the “Orange Book”) for REVLIMID® (lenalidomide). Natco’s Notice Letters were sent in connection with its filing of an ANDA seeking permission from the FDA to market a generic version of 25mg, 15mg, 10mg and 5mg REVLIMID® capsules. We filed separate infringement actions (which were subsequently consolidated) in the United States District Court for the District of New Jersey against Natco, Natco’s U.S. partner, Arrow International Limited (Arrow), and Arrow’s parent company, Watson Laboratories, Inc. (Watson, a wholly-owned subsidiary of Allergan plc (formerly known as Actavis, Inc.) and formerly known as Watson Pharmaceuticals, Inc.) (Natco, Arrow and Watson are collectively referred to hereinafter as “Natco”). In its answer and counterclaim, Natco asserts that our patents are invalid, unenforceable and/or not infringed by Natco’s proposed generic products.

The patents in dispute include United States Patent Nos. 5,635,517; 6,045,501; 6,315,720; 6,555,554; 6,561,976; 6,561,977; 6,755,784; 7,119,106; 7,465,800; 6,281,230; 7,189,740; 7,968,569; 8,288,415; 8,315,886 and 8,404,717, plus three non-Orange Book listed patents, United States Patent Nos. 7,977,357; 8,193,219 and 8,431,598.

A claim construction decision was issued on May 27, 2014, and fact discovery closed on August 4, 2014. On November 18, 2014, the court granted-in-part Natco’s motion to amend its invalidity contentions, and denied Celgene’s appeal of that decision on July 9, 2015. Expert discovery has been extended and is set to close on November 20, 2015. No trial date has been set.

We received a third Notice Letter from Natco dated April 3, 2014, notifying us of Natco’s Paragraph IV certifications against five patents, including United States Patent Nos. 8,404,717 (already in suit), 8,530,498; 8,589,188; 8,626,531; and 8,648,095. On May 15, 2014, we filed an infringement action in the United States District Court for the District of New Jersey against Natco, Arrow and Watson. Natco filed its answer and counterclaim on June 13, 2014, and asserts that our patents are invalid, unenforceable and/or not infringed by Natco’s proposed generic products. Fact discovery is set to close on November 6, 2015. No trial date has been set.

We believe that Natco’s defenses and counterclaims in both cases are unlikely to be sustained and we intend to vigorously assert our patent rights. Although there can be no assurance as to the ultimate outcomes of these proceedings, we currently expect that they will not have a material adverse effect on our financial condition or results of operations. However, if Natco is successful in challenging all the patents in dispute or if the court rules that certain of our key patent claims are invalid or not infringed, such events could have a material adverse effect on our financial condition and results of operations.

ABRAXANE®: On December 14, 2011, Cephalon, Inc. and Acusphere, Inc. filed a complaint against us in the United States District Court for the District of Massachusetts, alleging, among other things, that the making, using, selling, offering to sell and importing of ABRAXANE® brand drug infringes claims of United States Patent No. RE40,493. The plaintiffs are seeking damages and injunctive relief. On December 3, 2013, the court issued an order construing certain claim terms. Based on that order, on March

30
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

18, 2014, the parties agreed to a judgment of noninfringement in Celgene’s favor. On April 15, 2014, the plaintiffs filed a Notice of Appeal to the United States Court of Appeals for the Federal Circuit seeking a review of the lower court’s construction of certain claim terms. On April 22, 2014 we filed a Notice of Cross-Appeal seeking review of certain terms defined in the lower court’s order.

On June 17, 2015, the Federal Circuit Court of Appeals issued its opinion affirming the district court's judgment of noninfringement.

THALOMID® and REVLIMID®: On October 2, 2013, Andrulis Pharmaceuticals Corporation (Andrulis) filed a lawsuit against us in the United States District Court for the District of Delaware claiming infringement of U.S. Patent No. 6,140,346 (“the ‘346 patent”). Andrulis alleges that we are liable for infringement of one or more claims of the ‘346 patent, which covers the use of THALOMID® (and, as asserted by Andrulis, REVLIMID®) in combination with an alkylating agent (e.g., melphalan) to treat cancers. Andrulis is seeking an unspecified amount of damages, attorneys’ fees and injunctive relief. We disagree with Andrulis’ allegations and intend to vigorously defend against this infringement suit. On January 30, 2014, we filed a motion to dismiss Andrulis’ amended complaint. On April 11, 2014, the court denied our motion in part and granted our motion in part, dismissing two of Andrulis' four infringement claims without leave to amend. We filed an answer to the remaining claims on April 25, 2014. In February 2015, we filed a partial summary judgment motion.

The court held hearings on claim construction and on the partial summary judgment motion on May 27, 2015 and May 28, 2015, respectively. On June 26, 2015, the court issued its claim construction ruling and held that certain claim terms were indefinite. On July 10, 2015, the parties jointly submitted a proposed order for entry of final judgment in favor of Celgene based on the court’s indefiniteness ruling.  

ISTODAX® (romidepsin): We received a Notice Letter dated March 17, 2014 from Fresenius Kabi USA, LLC (Fresenius) notifying us of Fresenius’s ANDA that seeks approval from the FDA to market a generic version of romidepsin for injection. The Notice Letter contains Paragraph IV certifications against U.S. Patent Nos. 7,608,280 and 7,611,724 (the ‘280 and ‘724 patents) that are listed in the Orange Book for ISTODAX®.

On April 30, 2014, Celgene and Astellas Pharma Inc. (Astellas), filed an infringement action in the United States District Court for the District of Delaware against Fresenius. In its answer and counterclaim, Fresenius asserts that the ‘280 and ‘724 patents are invalid and/or not infringed by its proposed generic products. As a result of the filing of our action, the FDA cannot grant final approval of Fresenius’s ANDA until the earlier of (i) a final decision that each of the patents is invalid and/or not infringed; or (ii) May 5, 2017.

On August 4, 2014, we received a Notice Letter from InnoPharma, Inc. (InnoPharma) notifying us of Innopharma's ANDA that seeks approval from the FDA to market a generic version of romidepsin for injection. The Notice Letter contains Paragraph IV certifications against the '280 and '724 patents.

On September 12, 2014, we and Astellas, filed an infringement action in the United States District Court for the District of Delaware against InnoPharma. In its answer and counterclaim, InnoPharma asserts that the ‘280 and ‘724 patents are invalid and/or not infringed by its proposed generic products. As a result of the filing of our action, the FDA cannot grant final approval of InnoPharma's ANDA until the earlier of (i) a final decision that each of the patents is invalid and/or not infringed; or (ii) May 5, 2017.

These two cases were consolidated in December 2014. Fact discovery is set to close in the consolidated cases on November 6, 2015. A claim construction hearing is scheduled for October 16, 2015. Expert discovery in the consolidated cases is set to close on July 13, 2016 and trial is scheduled to begin on September 19, 2016.

On May 28, 2015, we received a Notice Letter from Teva Pharmaceuticals USA, Inc. (Teva) notifying us of Teva’s ANDA that seeks approval from the FDA to market a generic version of romidepsin for injection. The Notice Letter contains Paragraph IV certifications against the '280 and '724 patents.

On July 10, 2015, we and Astellas filed an infringement action in the United States District Court for the District of Delaware against Teva. Teva has not yet responded. As a result of the filing of our action, the FDA cannot grant final approval of Teva’s ANDA until the earlier of (i) a final decision that each of the patents is invalid and/or not infringed; or (ii) November 28, 2017.

THALOMID® (thalidomide): We received a Notice Letter dated December 18, 2014 from Lannett Holdings, Inc. (Lannett) notifying us of Lannett’s ANDA which contains Paragraph IV certifications against U.S. Patent Nos. 5,629,327; 6,045,501; 6,315,720; 6,561,976; 6,561,977; 6,755,784; 6,869,399; 6,908,432; 7,141,018; 7,230,012; 7,435,745; 7,874,984; 7,959,566;

31
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8,204,763; 8,315,886; 8,589,188; and 8,626,531 that are listed in the Orange Book for THALOMID® (thalidomide). Lannett is seeking to market generic versions of 50mg, 100mg, 150mg and 200mg of THALOMID® capsules. On January 30, 2015, we filed an infringement action against Lannett in the United States District Court for the District of New Jersey. On March 27, 2015, Lannett filed a motion to dismiss our complaint for lack of personal jurisdiction. We filed a response to the motion to dismiss on April 20, 2015.

Other Proceedings:
 
In 2009, we received a Civil Investigative Demand (CID) from the U.S. Federal Trade Commission (FTC) seeking documents and other information relating to requests by manufacturers of generic drugs to purchase our patented REVLIMID® and THALOMID® brand drugs in order for the FTC to evaluate whether there may be reason to believe that we have engaged in unfair methods of competition. In 2010, the State of Connecticut issued a subpoena referring to the same issues raised by the 2009 CID. Also in 2010, we received a second CID from the FTC relating to this matter. We continue to cooperate with the FTC and State of Connecticut investigations.
 
On April 3, 2014, Mylan Pharmaceuticals Inc. (Mylan) filed a lawsuit against us in the United States District Court for the District of New Jersey alleging that we violated various federal and state antitrust and unfair competition laws by allegedly refusing to sell samples of our THALOMID® and REVLIMID® brand drugs so that Mylan can conduct the bioequivalence testing needed to submit ANDAs to the FDA for approval to market generic versions of these products. Mylan is seeking injunctive relief, damages and declaratory judgment. We filed a motion to dismiss Mylan’s complaint on May 25, 2014. Mylan filed its opposition to our motion to dismiss on June 16, 2014. The Federal Trade Commission filed an amicus curiae brief in opposition to our motion to dismiss on June 17, 2014. On December 22, 2014, the court granted Celgene’s motion to dismiss (i) Mylan’s claims based on Section 1 of the Sherman Act (without prejudice), and (ii) Mylan's claims arising under the New Jersey Antitrust Act. The court denied our motion to dismiss the rest of the claims which primarily relate to Section 2 of the Sherman Act. On January 6, 2015 we filed a motion to certify for interlocutory appeal the order denying our motion to dismiss with respect to the claims relating to Section 2 of the Sherman Act, which appeal was denied by the United State Court of Appeals for the Third Circuit on March 5, 2015. On January 20, 2015, we filed an answer to Mylan’s complaint. Fact discovery is set to close January 11, 2016 and expert discovery is set to be completed by July 31, 2016. No trial date has been set. We intend to vigorously defend against Mylan’s claims.

In 2011, the United States Attorney’s Office for the Central District of California informed us that they were investigating possible off-label marketing and improper payments to physicians in connection with the sales of THALOMID® and REVLIMID®. In 2012, we learned that two other United States Attorneys’ offices (the Northern District of Alabama and the Eastern District of Texas) and various state Attorneys General were conducting related investigations. In February 2014, three civil qui tam actions related to those investigations brought by three former Celgene employees on behalf of the federal and various state governments under the federal false claims act and similar state laws were unsealed after the United States Department of Justice (DOJ) declined to intervene in any of these actions. The DOJ retains the right to intervene in these actions at any time. Additionally, while several states have similarly declined to intervene in some of these actions, they also retain the right to intervene in the future. The plaintiffs in the Northern District of Alabama and Eastern District of Texas actions have voluntarily dismissed their cases. On April 25, 2014, we filed a motion to dismiss the complaint in the remaining (Central District of California) action, United States of America ex. rel. Beverly Brown V. Celgene Corp., unsealed February 5, 2014 (the Brown Action), which was denied except with respect to certain state claims. We filed our answer to the complaint on August 28, 2014. Fact discovery is set to close on July 24, 2015 and expert discovery is set to close on September 25, 2015. Summary judgment motions are due November 16, 2015. We intend to vigorously defend against the remaining claims in the Brown Action.

In a related matter, in July 2014, we received a letter purportedly on behalf of two stockholders that demands, primarily on the basis of the allegations in the Brown Action, that our board of directors take action on the Company’s behalf to correct alleged deficiencies in the Company’s internal controls and to recover from current and past directors and officers damages those stockholders allege to have resulted from breaches of fiduciary duties related to the matters alleged in the Brown Action. Our Board has formed a Demand Investigation Committee, and with the assistance of independent counsel retained by it, the Demand Investigation Committee is considering the issues raised in the stockholders’ letter.

In November 2014, we received another letter purportedly on behalf of a stockholder that demands access to certain books and records of the Company for the purpose of investigating matters pertaining to the Brown Action. The Company intends to comply with the demand to the extent it considers reasonable in view of the Demand Investigation Committee’s ongoing consideration of matters pertaining to the Brown Action.


32
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On June 7, 2013, Children's Medical Center Corporation (CMCC) filed a lawsuit against us in the Superior Court of the Commonwealth of Massachusetts alleging that our obligation to pay a 1% royalty on REVLIMID® net sales revenue and a 2.5% royalty on POMALYST®/IMNOVID® net sales revenue under a license agreement entered into in December 2002 extended beyond February 28, 2013 and that our failure to make royalty payments to CMCC subsequent to February 28, 2013 breached the license agreement. CMCC is seeking unspecified damages and a declaration that the license agreement remains in full force and effect. In July 2013, we removed these proceedings to the United States District Court for the District of Massachusetts. On August 5, 2013, we filed an answer to CMCC’s complaint and a counterclaim for declaratory judgment that our obligations to pay royalties have expired. On August 26, 2013, CMCC filed an answer to our counterclaim. Fact discovery closed on February 13, 2015. Expert discovery has been extended and is set to be completed by August 14, 2015. No trial date has as yet been set by the court.

On July 8, 2014, CR Rev Holdings, LLC (“CR Rev”) filed a complaint against Celgene in the same action. CR Rev alleges that CMCC sold and assigned a substantial portion of the royalty payments owed by Celgene on the sale of REVLIMID® to CR Rev. CR Rev has alleged causes of action with respect to REVLIMID® identical to those alleged by CMCC, and seeks unspecified damages and a declaration that the license agreement is still in effect. We intend to vigorously defend against CMCC's and CR Rev’s claims. As of June 30, 2015, we consider the range of reasonably possible loss relating to this lawsuit to be between zero and $112.3 million, with the high end of the range being the royalty payments on REVLIMID® we would have made to CMCC under the license agreement through June 30, 2015, if our obligation to pay royalties remained in effect. CMCC contends that our royalty obligation continues on net sales of REVLIMID®, as well as POMALYST®/IMNOVID®, at least until May 2016 and if CMCC prevails, we may be obligated to continue to pay royalties on sales for periods after June 30, 2015.

In the second quarter of 2014, we received a Health Insurance Portability and Accountability Act (HIPAA) subpoena from the United States Attorney’s Office for the District of Massachusetts requesting certain documents relating to an investigators meeting in 2011 with respect to a clinical study relating to ABRAXANE®. The Company is cooperating with the United States Attorney in connection with this subpoena.

On October 2, 2014, a complaint was filed in Delaware Chancery Court by a stockholder asserting derivative claims on behalf of the Company against the non-employee members of the Board of Directors. The complaint alleges that equity grants made to non-employee directors in 2012 and 2013 were excessive compared to the equity grants to directors of peer companies, and that the award of such allegedly excessive compensation constituted a breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint seeks equitable relief, disgorgement of the alleged excess compensation, modification of the Company’s compensation process to limit the equity awards that may be granted to non-employee directors, and attorneys’ fees and other costs. The Company is a nominal defendant in the case. Neither the Company nor the individual defendants have yet responded to the complaint. On March 30, 2015, plaintiff served on the Company plaintiff’s First Request for Production of Documents and Notice of Deposition of the Company.
 
On November 7, 2014, the International Union of Bricklayers and Allied Craft Workers Local 1 Health Fund (IUB) filed a putative class action lawsuit against us in the United States District Court for the District of New Jersey alleging that we violated various state antitrust, consumer protection, and unfair competition laws by (a) allegedly securing an exclusive supply contract with Seratec S.A.R.L. so that Barr Laboratories (“Barr” who at one time held an ANDA for THALOMID®) allegedly could not secure its own supply of thalidomide active pharmaceutical ingredient; (b) allegedly refusing to sell samples of our THALOMID® and REVLIMID® brand drugs to Mylan Pharmaceuticals, Lannett Company, and Dr. Reddy’s Laboratories so that those companies could conduct the bioequivalence testing needed to submit ANDAs to the FDA for approval to market generic versions of these products; and (c) allegedly bringing unjustified patent infringement lawsuits against Barr and Natco Pharma Limited in order to allegedly delay those companies from obtaining approval for proposed generic versions of THALOMID® and REVLIMID®. IUB, on behalf of itself and a putative class of third party payors, is seeking injunctive relief and damages. On February 6, 2015, we filed a motion to dismiss IUB’s complaint. On March 3, 2015, the City of Providence (“Providence”) filed a similar putative class action making similar allegations. Both IUB and Providence, on behalf of themselves and a putative class of third party payors, are seeking injunctive relief and damages. Providence agreed that the decision in the motion to dismiss IUB’s complaint would apply to the identical claims in Providence’s complaint as well. The Court has not yet issued a decision. A supplemental motion to dismiss Providence’s state law claims was filed on April 20, 2015.

On July 6, 2015, the Court entered an Order scheduling the production of certain discovery for the case through October 1, 2015. A discovery conference is scheduled for October 8, 2015. Dates for the completion of fact and expert discovery have not been set. We intend to vigorously defend against IUB’s claims.


33
CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


17. Subsequent Event

On July 14, 2015, we entered into an agreement to acquire all of the outstanding shares of Receptos, a biopharmaceutical company developing therapeutic candidates for the treatment of immune and metabolic diseases. 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. Receptos is also developing RPC4046, an anti-interleukin-13 (IL-13) antibody for eosinophilic esophagitis, an allergic/immune-mediated orphan disease, as well as other pipeline and pre-clinical stage compounds.

We will acquire all of the outstanding shares of common stock of Receptos through a tender offer, followed by a second-step merger (the Merger). In the tender offer, we will offer to purchase all of the outstanding shares of common stock of Receptos for $232.00 per share in cash, or approximately $7.817 billion, consisting of $7.332 billion for common stock outstanding and $0.288 billion for the portion of equity compensation attributable to the pre-combination period and $0.197 billion for the portion of equity compensation attributable to the post-combination service period. In connection with the proposed acquisition of Receptos, we have obtained a $5.000 billion committed syndicated bridge facility (the Bridge Facility). No amounts are anticipated to be drawn under the Bridge Facility prior to the closing of the acquisition. We expect to fund the transaction through a combination of existing cash and the issuance of approximately $5.000 billion of senior notes pursuant to a public offering. Upon closure of our senior notes offering, the Bridge Facility will be automatically terminated. In addition, we may issue up to an additional $3.000 billion of senior notes for general corporate purposes consistent with our normal financing activity. The debt covenants on our existing credit facility have been amended in order to accommodate our planned additional borrowing.

On July 20, 2015, a putative class action lawsuit, Scott v. Receptos, Inc., related to the merger agreement was commenced by the filing of a complaint in the Court of Chancery for the State of Delaware, Case No. 11316, against Receptos, members of the Receptos Board, Celgene and Celgene’s wholly-owned subsidiary, Strix Corporation, which is a party to the merger agreement. Three other complaints, Cacioppo v. Hasnain and Rosenberg v. Receptos, Inc. (Cases Nos. 11324 and 11325) filed on July 23, and Kadin v. Receptos, Inc., filed on July 27 (Case No. 11337) raise similar putative class claims in the Court of Chancery for the State of Delaware against some or all of Receptos, members of the Receptos Board, Celgene, and Strix Corporation. These complaints generally allege breaches of fiduciary duty by members of the Receptos Board in connection with the Merger Agreement. In the Scott, Rosenberg and Kadin actions, the plaintiffs also allege that Celgene and Strix Corporation aided and abetted the purported breaches of fiduciary duty. These complaints seek equitable and injunctive relief, including an order enjoining the defendants from completing the proposed Merger, rescission of any consummated transaction, unspecified damages and attorneys’ fees. Celgene and Strix Corporation believe these lawsuits are wholly without merit, and intend to vigorously defend against them.

The acquisition transaction has been approved by the boards of directors of both companies and is subject to customary closing conditions, including the tender of at least a majority of outstanding shares of Receptos common stock in the tender offer and expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is anticipated to close in 2015.



34

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Information
 
This report contains forward-looking statements that reflect the current views of our management with respect to future events, results of operations, economic performance and/or financial condition. Any statements contained in this report that are not statements of historical fact may be deemed forward-looking statements. Forward-looking statements generally are identified by the words “expects,” “anticipates,” “believes,” “intends,” “estimates,” “aims,” “plans,” “may,” “could,” “will,” “will continue,” “seeks,” “should,” “predicts,” “potential,” “outlook,” “guidance,” “target,” “forecast,” “probable,” “possible” or the negative of such terms and similar expressions. Forward-looking statements are based on current plans, estimates, assumptions and projections, which are subject to change and may be affected by risks and uncertainties, most of which are difficult to predict and are generally beyond our control. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update any forward-looking statement in light of new information or future events, although we intend to continue to meet our ongoing disclosure obligations under the U.S. securities laws and other applicable laws. We caution you that a number of important factors could cause actual results or outcomes to differ materially from those expressed in, or implied by, the forward-looking statements and therefore you should not place too much reliance on them. These factors include, among others, those described in the sections “Forward-Looking Statements” and “Risk Factors” contained in our 2014 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC) and in this report and our other public reports filed with the SEC. If these or other risks and uncertainties materialize, or if the assumptions underlying any of the forward-looking statements prove incorrect, our actual performance and future actions may be materially different from those expressed in, or implied by, such forward-looking statements. We can offer no assurance that our estimates or expectations will prove accurate or that we will be able to achieve our strategic and operational goals. 

Executive Summary
 
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 gene and protein regulation. We are dedicated to innovative research and development designed to bring new therapies to market and we are involved in research in several scientific areas designed to deliver proprietary next-generation therapies, targeting areas including intracellular signaling pathways, protein homeostasis and epigenetics in cancer and immune cells, immunomodulation in cancer and autoimmune diseases and therapeutic application of cell therapies.

Our primary commercial stage products include REVLIMID®, ABRAXANE®, POMALYST®/IMNOVID®, VIDAZA® , azacitidine for injection (generic version of VIDAZA®), THALOMID® (sold as THALOMID® or Thalidomide CelgeneTM outside of the U.S.), OTEZLA® and ISTODAX®. Additional sources of revenue include royalties from Novartis Pharma AG (Novartis) on their sales of FOCALIN XR® and the entire RITALIN® family of drugs, the sale of products and services through our Celgene Cellular Therapeutics (CCT) subsidiary and other licensing arrangements.

We continue to invest substantially in research and development in support of multiple ongoing proprietary clinical development programs which support our existing products and pipeline of new drug candidates. REVLIMID® is in several phase III trials across a range of hematological malignancies that include multiple myeloma, lymphomas, chronic lymphocytic leukemia (CLL) and myelodysplastic syndromes (MDS). POMALYST®/IMNOVID® was approved in the United States and the European Union (EU) for indications in multiple myeloma based on phase II and phase III trial results, respectively, and an additional phase III trial is underway with POMALYST®/IMNOVID® in relapsed and refractory multiple myeloma. Phase III trials are also underway for CC-486 in MDS and acute myeloid leukemia (AML) and ISTODAX® in first-line peripheral T-cell lymphoma (PTCL). In solid tumors, ABRAXANE® is currently in various stages of investigation for breast, pancreatic and non-small cell lung cancers. In inflammation and immunology, OTEZLA® is being evaluated in phase III trials for Behçet's disease and expanded indications in psoriatic arthritis and psoriasis. Also in the inflammation and immunology therapeutic area, we have acquired a global development and commercialization license to GED-0301 from Nogra Pharma Limited (Nogra) and have initiated a multi-trial clinical program that is designed to support global registrations of GED-0301 in Crohn's disease.

On July 14, 2015, we entered into an agreement to acquire all of the outstanding shares of Receptos, Inc. (Receptos), a biopharmaceutical company developing therapeutic candidates for the treatment of immune and metabolic diseases. 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. Receptos is also developing RPC4046, an anti-interleukin-13 (IL-13) antibody for eosinophilic esophagitis, an allergic/immune-mediated orphan

35

disease, as well as other pipeline and pre-clinical stage compounds. We expect the acquisition to be dilutive to our earnings through 2017, break-even in 2018, and accretive beginning in 2019. See Note 17 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this report for more information related to our proposed acquisition of Receptos.

Beyond our phase III programs, we have access to a growing early-to-mid-stage pipeline of novel potential therapies to address significant unmet medical needs that consists of new drug candidates and cell therapies developed in-house, licensed from other companies or able to be optioned from collaboration partners.

We believe that continued use of our primary commercial stage products, participation in research and development collaboration arrangements, depth of our product pipeline, regulatory approvals of new products and expanded use of existing products will provide the catalysts for future growth.

The diseases that our primary commercial stage products are approved to treat are described below for the major markets of the United States, the European Union and Japan. Approvals in other international markets are indicated in the aggregate for the disease indication that most closely represents the majority of the other international approvals.

REVLIMID® (lenalidomide): REVLIMID® is an oral immunomodulatory drug marketed in the United States and many international markets for the treatment of patients as indicated below:
Disease
Geographic Approvals
Multiple myeloma (MM)
 
Multiple myeloma in combination with dexamethasone, in patients who have received at least one prior therapy
- United States
- European Union
- Japan
- Other international markets
Multiple myeloma in combination with dexamethasone for newly diagnosed patients
- United States (Approved February 2015)
Adult patients with previously untreated multiple myeloma who are not eligible for transplant
- European Union (Approved February 2015)
Myelodysplastic syndromes (MDS)
 
Transfusion-dependent anemia due to low- or intermediate-1-risk MDS associated with a deletion 5q abnormality with or without additional cytogenetic abnormalities
- United States
- Other international markets
Transfusion-dependent anemia due to low- or intermediate-1-risk MDS in patients with isolated deletion 5q cytogenetic abnormality when other options are insufficient or inadequate
- European Union
MDS with a deletion 5q cytogenetic abnormality. The efficacy or safety of REVLIMID for International Prognostic Scoring System (IPSS) intermediate-2 or high risk MDS has not been established.
- Japan
Mantle cell lymphoma (MCL) in patients whose disease has relapsed or progressed after two prior therapies, one of which included bortezomib
- United States


36

ABRAXANE® (paclitaxel albumin-bound particles for injectable suspension): ABRAXANE® is a solvent-free chemotherapy product which was developed using our proprietary nab® technology platform. This protein-bound chemotherapy agent combines paclitaxel with albumin. ABRAXANE® is approved for the treatment of patients as indicated below:
Disease
Geographic Approvals
Breast Cancer
 
Metastatic breast cancer, after failure of combination chemotherapy for metastatic disease or relapse within six months of adjuvant chemotherapy. Prior therapy should have included an anthracycline unless clinically contraindicated.
- United States
- Other international markets

Metastatic breast cancer in adult patients who have failed first-line treatment for metastatic disease for whom standard, anthracycline containing therapy is not indicated
- European Union
Breast cancer
- Japan
Non-Small Cell Lung Cancer (NSCLC)
 
Locally advanced or metastatic NSCLC, as first-line treatment in combination with carboplatin, in patients who are not candidates for curative surgery or radiation therapy
- United States
- European Union (Approved March 2015)
- Other international markets
NSCLC
- Japan
Pancreatic Cancer
 
Metastatic adenocarcinoma of the pancreas, a form of pancreatic cancer, as first line treatment in combination with gemcitabine
- United States
- European Union
- Other international markets
Unresectable pancreatic cancer
- Japan
Gastric cancer
- Japan

POMALYST®/IMNOVID®-(pomalidomide)1: POMALYST®/IMNOVID® is a proprietary, distinct, small molecule that is administered orally and modulates the immune system and other biologically important targets. POMALYST®/IMNOVID® is approved for the treatment of patients as indicated below:
Disease
Geographic Approvals
Multiple myeloma, in combination with dexamethasone, for patients who have received at least two prior therapies, including lenalidomide and a proteasome inhibitor and have demonstrated disease progression on or within 60 days of completion of the last therapy
- United States
Relapsed and refractory multiple myeloma, in combination with dexamethasone, for adult patients who have received at least two prior therapies including both lenalidomide and bortezomib and have demonstrated disease progression on the last therapy
- European Union
Relapsed and refractory multiple myeloma for patients who have received REVLIMID or bortezomib
- Japan (Approved March 2015)
1 We received approval for pomalidomide under the trade name POMALYST® in the United States and Japan. We received approval for pomalidomide under the trade name IMNOVID® in the European Union.


37

VIDAZA® (azacitidine for injection): VIDAZA® is a pyrimidine nucleoside analog that has been shown to reverse the effects of DNA hypermethylation and promote subsequent gene re-expression. VIDAZA® is a Category 1 recommended treatment for patients with intermediate-2 and high-risk MDS, according to the National Comprehensive Cancer Network. The U.S. regulatory exclusivity for VIDAZA® expired in May 2011. After the launch of a generic version of VIDAZA® in the United States by a competitor in September 2013, we experienced a significant reduction in our U.S. sales of VIDAZA®. In 2013, we also contracted with Sandoz AG to sell a generic version of VIDAZA® in the United States, which we supply. We recognize net product sales from our sales of azacitidine for injection to Sandoz AG. Regulatory exclusivity for VIDAZA® is expected to continue in Europe through 2018. VIDAZA® is marketed in the United States and many international markets for the treatment of patients as indicated below:
Disease
Geographic Approvals
Myelodysplastic syndromes (MDS)
 
All French-American-British (FAB) subtypes
- United States
Intermediate-2 and high-risk MDS
- European Union
- Other international markets
MDS
- Japan
Chronic myelomonocytic leukemia with 10% to 29% marrow blasts without myeloproliferative disorder
- European Union
- Other international markets
Acute myeloid leukemia (AML) with 20% to 30% blasts and multi-lineage dysplasia
- European Union
- Other international markets
OTEZLA® (apremilast): OTEZLA® is an oral small-molecule inhibitor of phosphodiesterase 4 (PDE4) specific for cyclic adenosine monophosphate (cAMP). PDE4 inhibition results in increased intracellular cAMP levels. During 2014 and January 2015, OTEZLA® received initial approvals in the U.S. and EU as indicated below:
Disease
Geographic Approvals
Psoriatic arthritis
 
Adult patients with active psoriatic arthritis
- United States
Adult patients with active psoriatic arthritis who have had an inadequate response or who have been intolerant to a prior DMARD therapy
- European Union (Approved January 2015)
Psoriasis
 
Patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy
- United States
- Other international markets
Adult patients with moderate to severe chronic plaque psoriasis who failed to respond to or who have a contraindication to, or are intolerant to other systemic therapy including cyclosporine, methotrexate or psoralen and ultraviolet-A light
- European Union (Approved January 2015)

38

THALOMID® (thalidomide): THALOMID®, sold as THALOMID® or Thalidomide CelgeneTM outside of the United States, is administered orally for the treatment of diseases as indicated below:
Disease
Geographic Approvals
Multiple myeloma
 
Newly diagnosed multiple myeloma, in combination with dexamethasone
- United States
Thalomid in combination with dexamethasone is indicated for induction therapy prior to high dose chemotherapy with autologous stem cell rescue, for the treatment of patients with untreated multiple myeloma
- Other international markets
Multiple myeloma after failure of standard therapies (relapsed or refractory)
- Other international markets
Thalidomide CelgeneTM in combination with melphalan and prednisone as a first line treatment for patients with untreated multiple myeloma who are aged sixty-five years of age or older or ineligible for high dose chemotherapy
- European Union
- Other international markets
Erythema nodosum leprosum
 
Cutaneous manifestations of moderate to severe erythema nodosum leprosum (ENL), an inflammatory complication of leprosy
- United States
- Other international markets
Maintenance therapy for prevention and suppression of the cutaneous manifestation of ENL recurrence
- United States
- Other international markets
ISTODAX® (romidepsin): ISTODAX® is administered by intravenous infusion for the treatment of diseases as indicated below and has received orphan drug designation for the treatment of non-Hodgkin’s T-cell lymphomas, including CTCL and PTCL.
Disease
Geographic Approvals
Cutaneous T-cell lymphoma (CTCL) in patients who have received at least one prior systemic therapy
- United States
- Other international markets
Peripheral T-cell lymphoma (PTCL) in patients who have received at least one prior therapy
- United States
- Other international markets

The following table summarizes total revenue and earnings for the three-month periods ended June 30, 2015 and 2014 (dollar amounts in millions, except per share data):
 
Three-Month Periods Ended June 30,
 
Increase (Decrease)
 
Percent Change
 
2015
 
2014
 
 
Total revenue
$
2,277.8

 
$
1,872.7

 
$
405.1

 
21.6
 %
Net income
$
356.2

 
$
597.8

 
$
(241.6
)
 
(40.4
)%
Diluted earnings per share
$
0.43

 
$
0.72

 
$
(0.29
)
 
(40.3
)%

Revenue increased by $405.1 million in the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to the continued growth in sales of REVLIMID®, POMALYST®/IMNOVID® and OTEZLA®. OTEZLA® was approved by the Food and Drug Administration (FDA) in March 2014 for the treatment of adult patients with active psoriatic arthritis and in September 2014 for the treatment of patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy. In January 2015, OTEZLA® was approved by the European Commission (EC) for the treatment of both psoriasis and psoriatic arthritis in certain adult patients. We began recognizing revenue related to OTEZLA® during the second quarter of 2014. The $241.6 million decrease in net income and $0.29 decrease in diluted earnings per share in the current three-month period were primarily due to higher research and development collaboration related expenses as well as an increase in expenses associated with our growing organization, including selling and marketing efforts to support inflammation and immunology products and product candidates, partly offset by higher net product sales and a $85.9 million realized gain on the sale of our equity investment in Flexus Biosciences, Inc. in April 2015.




39

The following table summarizes total revenue and earnings for the six-month periods ended June 30, 2015 and 2014 (dollar amounts in millions, except per share data):
 
Six-Month Periods Ended June 30,
 
Increase
 
Percent Change
 
2015
 
2014
 
 
Total revenue
$
4,358.6

 
$
3,602.7

 
$
755.9

 
21.0
%
Net income
$
1,075.1

 
$
877.5

 
$
197.6

 
22.5
%
Diluted earnings per share
$
1.30

 
$
1.05

 
$
0.25

 
23.8
%
 
Revenue increased by $755.9 million in the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to the continued growth in sales of REVLIMID®, POMALYST®/IMNOVID® and OTEZLA®. OTEZLA® was approved by the FDA in March 2014 for the treatment of adult patients with active psoriatic arthritis and in September 2014 for the treatment of patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy. In January 2015, OTEZLA® was approved by the EC for the treatment of both psoriasis and psoriatic arthritis in certain adult patients. We began recognizing revenue related to OTEZLA® during the second quarter of 2014. The $197.6 million increase in net income and $0.25 increase in diluted earnings per share in the current six-month period were primarily due to higher net product sales as well as a $85.9 million realized gain on the sale of our equity investment in Flexus Biosciences, Inc. in April 2015, partly offset by an increase in research and development collaboration related expenses as well as increases in expenses associated with our growing organization, including selling and marketing efforts to support inflammation and immunology products and product candidates.

Results of Operations

Three-Month Periods Ended June 30, 2015 and 2014

Total Revenue: Total revenue and related percentages for the three-month periods ended June 30, 2015 and 2014 were as follows (dollar amounts in millions):

 
Three-Month Periods Ended June 30,
 
Increase (Decrease)
 
Percent Change
 
2015
 
2014
 
 
Net product sales:
 

 
 

 
 

 
 

REVLIMID®
$
1,444.0

 
$
1,213.7

 
$
230.3

 
19.0
 %
ABRAXANE®
244.2

 
215.3

 
28.9

 
13.4
 %
POMALYST®/IMNOVID®
234.5

 
160.9

 
73.6

 
45.7
 %
VIDAZA®
152.1

 
152.0

 
0.1

 
0.1
 %
azacitidine for injection
22.3

 
24.4

 
(2.1
)
 
(8.6
)%
OTEZLA®
89.7

 
4.6

 
85.1

 
N/M

THALOMID®
47.9

 
54.3

 
(6.4
)
 
(11.8
)%
ISTODAX®
17.9

 
17.1

 
0.8

 
4.7
 %
Other
1.5

 
2.3

 
(0.8
)
 
(34.8
)%
Total net product sales
$
2,254.1

 
$
1,844.6

 
$
409.5

 
22.2
 %
Other revenue
23.7

 
28.1

 
(4.4
)
 
(15.7
)%
Total revenue
$
2,277.8

 
$
1,872.7

 
$
405.1

 
21.6
 %
N/M - Not meaningful
 
Total revenue increased by $405.1 million, or 21.6%, to $2.278 billion for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, reflecting increases of $273.0 million, or 24.9%, in the United States and $132.1 million, or 17.0%, in international markets.
 
Net Product Sales: Total net product sales for the three-month period ended June 30, 2015 increased by $409.5 million, or 22.2%, to $2.254 billion compared to the three-month period ended June 30, 2014. The increase was comprised of net volume increases of $400.1 million and net price increases of $45.5 million, offset in part by a $36.1 million unfavorable foreign exchange impact, including the impact of foreign exchange hedging activity.
 

40

REVLIMID® net sales increased by $230.3 million, or 19.0%, to $1.444 billion for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to increased unit sales in both U.S. and international markets and price increases in the U.S. market. Increases in market penetration and treatment duration of patients using REVLIMID® in multiple myeloma contributed to the increase in U.S. unit sales. The growth in international markets resulted from volume increases, primarily driven by increased duration of use and market share gains. Launch activities in the U.S. and EU for the Newly Diagnosed Multiple Myeloma indication, which was approved in both the U.S. and the EU in February 2015, are in progress and are expected to continue through 2015.

ABRAXANE® net sales increased by $28.9 million, or 13.4%, to $244.2 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to increased unit volumes based on demand in both U.S. and international markets.

POMALYST®/IMNOVID® net sales increased by $73.6 million, or 45.7%, to $234.5 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, reflecting net sales of $143.6 million in the United States and $90.9 million in international markets. Increases in market share and treatment duration contributed to the increase in U.S. and international net sales of POMALYST®/IMNOVID®. The finalization of access, pricing and reimbursement in additional countries also continues to contribute to the growth of POMALYST®/IMNOVID® net sales in international markets.

VIDAZA® net sales were nearly unchanged in the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to volume increases in international markets offset by a decrease in U.S. sales.

Azacitidine for injection net sales decreased by $2.1 million, or 8.6%, to $22.3 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014 primarily due to price decreases in the United States. Azacitidine for injection is a generic version of VIDAZA® supplied by Celgene to Sandoz AG.

OTEZLA® net sales increased by $85.1 million to $89.7 million for the three-month period ended June 30, 2015 compared to the three- month period ended June 30, 2014 reflecting net sales of $84.7 million in the United States and $5.0 million in international markets. OTEZLA® was approved by the FDA in March 2014 for the treatment of adult patients with active psoriatic arthritis and in September 2014 for the treatment of patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy. OTEZLA® was approved for plaque psoriasis and psoriatic arthritis in the European Union in January 2015. Launch activities for OTEZLA® commenced in March 2014 and we began recognizing revenue related to OTEZLA® during the second quarter of 2014.

THALOMID® net sales decreased by $6.4 million, or 11.8%, to $47.9 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily resulting from lower unit volumes in both U.S. and international markets.

ISTODAX® net sales increased by $0.8 million, or 4.7%, to $17.9 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to an increase in unit volume.

Other Revenue: Other revenue decreased by $4.4 million to $23.7 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014 primarily due to a $3.9 million decrease in royalty revenue related to lower royalties earned from Novartis based upon its sales of both RITALIN® and FOCALIN XR®.

Gross to Net Sales Accruals: We record gross to net sales accruals for sales returns and allowances, sales discounts, government rebates, chargebacks and distributor service fees.

REVLIMID®, POMALYST® and THALOMID® are distributed in the United States primarily through contracted pharmacies under the REVLIMID® Risk Evaluation and Mitigation Strategy (REMS), POMALYST REMSTM and THALOMID REMSTM programs, respectively. These are proprietary risk-management distribution programs tailored specifically to provide for the safe and appropriate distribution and use of REVLIMID®, POMALYST® and THALOMID®. Internationally, REVLIMID®, THALOMID®/Thalidomide CelgeneTM and IMNOVID® are distributed under mandatory risk-management distribution programs tailored to meet local authorities’ specifications to provide for the product’s safe and appropriate distribution and use. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. VIDAZA®, ABRAXANE®, ISTODAX® and OTEZLA® are distributed through the more traditional pharmaceutical industry supply chain and are not subject to the same risk-management distribution programs as REVLIMID®, POMALYST®/IMNOVID® and THALOMID®/Thalidomide CelgeneTM.

41


We base our sales returns allowance on estimated on-hand retail/hospital inventories, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance. As noted above, REVLIMID®, POMALYST®/IMNOVID® and THALOMID®/Thalidomide CelgeneTM are distributed primarily through hospitals and contracted pharmacies, which are typically subject to tighter controls of inventory quantities within the supply channel and, thus, resulting in lower returns activity.
 
Sales discount accruals are based on payment terms extended to customers.
 
Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. The accrual of the rebates associated with Medicaid Managed Care Organizations is calculated based on estimated historical patient data related to Medicaid Managed Care Organizations. We also analyze actual billings received from the states to further support the accrual rates. Subsequent to implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the 2010 U.S. Health Care Reform Law), certain states have not completed their Medicaid Managed Care Organization billing for the years of 2010 through 2014. Our accruals for these Medicaid Managed Care Organization rebates had been at elevated levels given the delays in the receipt of complete invoices from certain states. Due to the receipt of more complete claims data during 2013 and 2014, the accruals for certain states were reduced from these elevated levels as a result of both payments being applied to the accrual during 2013 and 2014 and changes in estimate of the ultimate obligation during the fourth quarters of both 2013 and 2014. We will continue to adjust the rebate accruals as more information becomes available and to reflect actual claims experience. Effective January 1, 2011, manufacturers of pharmaceutical products are responsible for 50% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap. In order to estimate the cost to us of this coverage gap responsibility, we analyze data for eligible Medicare Part D patients against data for eligible Medicare Part D patients treated with our products as well as the historical invoices. This expense is recognized throughout the year as costs are incurred. In certain international markets government-sponsored programs require rebates to be paid based on program specific rules and, accordingly, the rebate accruals are determined primarily on estimated eligible sales.

Rebates or administrative fees are offered to certain wholesale customers, group purchasing organizations and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and fees may generally occur from one to 15 months from the date of sale. We record a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. We regularly review the information related to these estimates and adjust the provision accordingly.
 
Chargeback accruals are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Distributor service fee accruals are based on contractual fees to be paid to the wholesale distributor for services provided. TRICARE is a health care program of the U.S. Department of Defense Military Health System that provides civilian health benefits for military personnel, military retirees and their dependents. TRICARE rebate accruals are included in chargeback accruals and are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.
 
See Critical Accounting Estimates and Significant Accounting Policies in our 2014 Annual Report on Form 10-K for further discussion of gross to net sales accruals.





42

Gross to net sales accruals and the balance in the related allowance accounts for the three-month periods ended June 30, 2015 and 2014 were as follows (in millions):
 
Returns
and
Allowances
 
Discounts
 
Government
Rebates
 
Chargebacks
and Distributor
Service Fees
 
Total
Balance at March 31, 2015
$
10.3

 
$
12.7

 
$
190.5

 
$
100.5

 
$
314.0

Allowances for sales during prior periods
1.1

 
—

 
(2.5
)
 
(0.1
)
 
(1.5
)
Allowances for sales during 2015
3.2

 
27.4

 
88.9

 
138.1

 
257.6

Credits/deductions issued for prior year sales
(2.0
)
 
(0.1
)
 
(26.9
)
 
(8.8
)
 
(37.8
)
Credits/deductions issued for sales during 2015
(0.3
)
 
(27.6
)
 
(80.4
)
 
(110.0
)
 
(218.3
)
Balance at June 30, 2015
$
12.3

 
$
12.4

 
$
169.6

 
$
119.7

 
$
314.0

 
 
 
 
 
 
 
 
 
 
Balance at March 31, 2014
$
12.2

 
$
12.5

 
$
151.0

 
$
82.7

 
$
258.4

Allowances for sales during prior periods
(0.1
)
 
—

 
(1.0
)
 
(2.2
)
 
(3.3
)
Allowances for sales during 2014
2.6

 
21.6

 
69.8

 
94.0

 
188.0

Credits/deductions issued for prior year sales
(1.4
)
 
(1.8
)
 
(23.6
)
 
(9.3
)
 
(36.1
)
Credits/deductions issued for sales during 2014
(0.6
)
 
(20.4
)
 
(75.8
)
 
(78.4
)
 
(175.2
)
Balance at June 30, 2014
$
12.7

 
$
11.9

 
$
120.4

 
$
86.8

 
$
231.8

  
A comparison of provisions for allowances for sales within each of the four categories noted above for the three-month periods ended June 30, 2015 and 2014 follows:
 
Returns and allowances provisions increased by $1.8 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to higher net product sales volumes, and a $1.1 million expense recorded in the second quarter of 2015 relating to increased anticipated returns of product that have reached their expiration dates.

Discounts provisions increased by $5.8 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to increased sales volumes. The $5.8 million increase consisted of a $5.3 million increase in the United States, which included $2.0 million of cash discounts in the second quarter of 2015 relating to OTEZLA® and a $0.5 million increase related to international cash discounts.
 
Government rebates provisions increased by $17.6 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily due to a $20.1 million increase in international government rebates, due to higher sales volumes and increased rebate rates and a $1.7 million increase related to Medicaid rebates due to increased sales and Medicaid expansion. These increases were partially offset by a $4.4 million decrease in expense related to Medicare Part D Coverage Gap due to elevated rebate amounts in the three-month period ended June 30, 2014.

Chargebacks and distributor service fees provisions increased by $46.2 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014. Chargebacks increased by approximately $32.6 million and distributor service fees increased by approximately $13.6 million. The chargeback increases were primarily due to higher sales volumes and a greater portion of sales qualifying for chargeback rebates. The distributor service fee increase was primarily attributable to sales increases in the United States, including $10.4 million of service fees related to increased sales of OTEZLA® in the three-month period ended June 30, 2015.











43

Operating Costs and Expenses: Operating costs, expenses and related percentages for the three-month periods ended June 30, 2015 and 2014 were as follows (dollar amounts in millions):
 
Three-Month Periods Ended June 30,
 
Increase (Decrease)
 
Percent Change
 
2015
 
2014
 
 
Cost of goods sold (excluding amortization of acquired intangible assets)
$
100.8

 
$
98.9

 
$
1.9

 
1.9
 %
Percent of net product sales
4.5
%
 
5.4
%
 
 

 
 

Research and development
$
1,110.0

 
$
456.9

 
$
653.1

 
142.9
 %
Percent of total revenue
48.7
%
 
24.4
%
 
 

 
 

Selling, general and administrative
$
616.8

 
$
491.8

 
$
125.0

 
25.4
 %
Percent of total revenue
27.1
%
 
26.3
%
 
 

 
 

Amortization of acquired intangible assets
$
63.7

 
$
65.3

 
$
(1.6
)
 
(2.5
)%
Acquisition related (gains) charges, net
$
(29.3
)
 
$
0.9

 
$
(30.2
)
 
N/M

N/M - Not meaningful

Cost of goods sold (excluding amortization of acquired intangible assets): Cost of goods sold (excluding amortization of acquired intangible assets) increased by $1.9 million to $100.8 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014. The increase was primarily due to the higher level of net product sales. As a percent of net product sales, cost of goods sold (excluding amortization of acquired intangible assets) decreased to 4.5% for the three-month period ended June 30, 2015 compared to 5.4% for the three-month period ended June 30, 2014, primarily due to OTEZLA® and POMALYST®, which have lower cost, making up a higher percentage of net product sales, while sales of ABRAXANE® and azacitidine for injection, which have a lower gross margin, made up a lower percentage of net product sales.

Research and Development: Research and development expenses increased by $653.1 million to $1.110 billion for the three-month period ended June 30, 2015, compared to the three-month period ended June 30, 2014. The increase was primarily due to a $560.3 million increase in expenses related to collaboration arrangements, as well as an increase in activity in support of our early- to mid-stage product pipeline and general research activity.

The following table provides a breakdown of research and development expenses (in millions):
 
Three-Month Periods Ended June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Human pharmaceutical clinical programs
$
240.0

 
$
195.0

 
$
45.0

Other pharmaceutical programs
178.5

 
160.5

 
18.0

Drug discovery and development
100.2

 
69.1

 
31.1

Collaboration arrangements
584.8

 
24.5

 
560.3

Cellular therapy
6.5

 
7.8

 
(1.3
)
Total
$
1,110.0

 
$
456.9

 
$
653.1


During the three-month period ended June 30, 2015, there have been no new phase III clinical trials started or terminated and there have been no significant regulatory approval requests or approvals during the period.

Selling, General and Administrative: Selling, general and administrative expenses increased by $125.0 million to $616.8 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014. The increase was primarily due to a $50.3 million increase in donations to independent non-profit patient assistance organizations in the United States as well as increases in expenses associated with our growing organization to support inflammation and immunology products and product candidates, such as OTEZLA® and GED-0301, as well as increases in selling and marketing activities related to recently approved indications for OTEZLA®, POMALYST®/IMNOVID® and ABRAXANE®.


44

Amortization of Acquired Intangible Assets: Amortization of intangible assets acquired as a result of business combinations is summarized below for the three-month periods ended June 30, 2015 and 2014 (in millions):
 
 
Three-Month Periods Ended June 30,
Acquisitions
 
2015
 
2014
Abraxis
 
$
37.9

 
$
39.7

Avila
 
11.8

 
11.8

Gloucester
 
13.0

 
12.8

Pharmion
 
1.0

 
1.0

Total amortization
 
$
63.7

 
$
65.3

 
Acquisition Related (Gains) Charges, net: Acquisition related charges, net were a net credit of $29.3 million and a net expense of $0.9 million for the three-month periods ended June 30, 2015 and 2014, respectively. The $30.2 million reduction in the current year three-month period was primarily due to a $29.5 million reduction in the current year three-month period compared to the prior year three-month period for the fair value of our liability related to publicly traded contingent value rights (CVRs) that were issued as part of the acquisition of Abraxis, and a $18.8 million reduction for our contingent liabilities related to the Avila acquisition compared to the second quarter of 2014. The reduction related to the Avila acquisition was due to changes in the probability and timing of achieving milestones. These reductions were partly offset by an $18.0 million increase in expense related to our contingent liabilities related to the Nogra acquisition, which was acquired in the second quarter of 2014.

Interest and Investment Income, Net: Interest and investment income, net increased by $1.5 million to $8.8 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014 primarily due to lower losses on the sale of marketable securities in 2015, compared to the prior year.

Interest (Expense): Interest (expense) increased by $6.7 million to $48.3 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014 primarily due to interest expense associated with the issuance of $2.500 billion of senior notes in May 2014. We anticipate an increase in interest expense for the remainder of 2015 due to our planned issuance of senior notes in August 2015. We expect to fund the acquisition of Receptos through a combination of existing cash and the issuance of approximately $5.000 billion of senior notes pursuant to a public offering. We may issue up to an additional $3.000 billion of senior notes for general corporate purposes consistent with our normal financing activity before year-end. For more information related to our planned debt issuance, see Note 17 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this report.

Other Income (Expense), Net: Other income (expense), net is summarized below for the three-month periods ended June 30, 2015 and 2014 (in millions):
 
 
Three-Month Periods Ended June 30,
 
 
 
 
2015
 
2014
 
Change
Foreign exchange gains (losses) including foreign exchange derivative instruments not designated as hedging instruments
 
$
(3.6
)
 
$
(3.6
)
 
$
—

Premium paid on equity investment
 
—

 
(9.7
)
 
9.7

Fair value adjustments of forward point amounts
 
13.6

 
(0.3
)
 
13.9

Celgene puts sold
 
5.0

 
4.0

 
1.0

Impairment charges
 
(3.4
)
 
(2.0
)
 
(1.4
)
Gain on sale of equity investment in Flexus Bioscienses, Inc.

 
85.9

 
—

 
85.9

Other
 
(3.0
)
 
(6.2
)
 
3.2

Total other income (expense), net
 
$
94.5

 
$
(17.8
)
 
$
112.3


Other income (expense), net was a net income of $94.5 million for the three-month period ended June 30, 2015 and a net expense of $17.8 million for the three-month period ended June 30, 2014. The $112.3 million increase in income was primarily due to a gain on the sale of our equity investment in Flexus Biosciences, Inc. (Flexus) and currency fluctuations. In April 2015, Flexus was sold and we realized a gain of approximately $85.9 million on the sale of our equity investment.
Income Tax Provision: The income tax provision increased by $5.6 million to $114.6 million for the three-month period ended June 30, 2015 compared to the three-month period ended June 30, 2014, primarily as a result of an increase in the effective tax rate, partially offset by a decrease in income before taxes. The estimated full year 2015 underlying effective tax rate of 17.4%

45

reflects the impact of our global business footprint. The increase in the estimated underlying effective tax rate from the second quarter of 2014 reflects a projected increase in tax expense related to collaborations, primarily our collaboration with AstraZeneca (MedImmune Limited) that we entered into in the second quarter, partially offset by a non-recurring tax expense from the launch of new products. The effective tax rate for the second quarter of 2015 was increased by 6.9 percentage points primarily as a result of the impact of the increase in the estimated full year 2015 underlying effective tax from the first quarter applied to cumulative income before taxes. The income tax provision for the three-month period ended June 30, 2014 included an estimated full year 2014 underlying effective tax rate of 15.7% (which subsequently decreased to 14.3% when the actual 2014 full year results were achieved). The effective tax rate for the second quarter of 2014 was increased by 0.2 percentage points as a result of a net increase in unrecognized tax benefits primarily related to ongoing examinations of tax positions taken in prior years.

Six-Month Periods Ended June 30, 2015 and 2014

Total Revenue: Total revenue and related percentages for the six-month periods ended June 30, 2015 and 2014 were as follows (dollar amounts in millions):
 
Six-Month Periods Ended June 30,
 
Increase (Decrease)
 
Percent Change
 
2015
 
2014
 
 
Net product sales:
 

 
 

 
 

 
 

REVLIMID®
$
2,786.9

 
$
2,357.5

 
$
429.4

 
18.2
 %
ABRAXANE®
467.6

 
400.1

 
67.5

 
16.9
 %
POMALYST®/IMNOVID®
433.0

 
296.5

 
136.5

 
46.0
 %
VIDAZA®
295.7

 
300.4

 
(4.7
)
 
(1.6
)%
azacitidine for injection
42.9

 
42.8

 
0.1

 
0.2
 %
OTEZLA®
150.0

 
4.6

 
145.4

 
N/M

THALOMID®
94.8

 
112.3

 
(17.5
)
 
(15.6
)%
ISTODAX®
34.4

 
33.2

 
1.2

 
3.6
 %
Other
4.0

 
4.7

 
(0.7
)
 
(14.9
)%
Total net product sales
$
4,309.3

 
$
3,552.1

 
$
757.2

 
21.3
 %
Other revenue
49.3

 
50.6

 
(1.3
)
 
(2.6
)%
Total revenue
$
4,358.6

 
$
3,602.7

 
$
755.9

 
21.0
 %
N/M - Not meaningful
 
Total revenue increased by $755.9 million, or 21.0%, to $4.359 billion for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, reflecting increases of $548.0 million, or 26.4%, in the United States and $207.9 million, or 13.6%, in international markets.
 
Net Product Sales: Total net product sales for the six-month period ended June 30, 2015 increased by $757.2 million, or 21.3%, to $4.309 billion compared to the six-month period ended June 30, 2014. The increase was comprised of net volume increases of $729.2 million and net price increases of $90.8 million, offset in part by a $62.8 million unfavorable foreign exchange impact, including the impact of foreign exchange hedging activity.
 
REVLIMID® net sales increased by $429.4 million, or 18.2%, to $2.787 billion for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to increased unit sales in both U.S. and international markets and price increases in the U.S. market. Increases in market penetration and treatment duration of patients using REVLIMID® in multiple myeloma contributed to the increase in U.S. unit sales. The growth in international markets resulted from volume increases, primarily driven by increased duration of use and market share gains. Launch activities in the U.S. and EU for the Newly Diagnosed Multiple Myeloma indication, which was approved in both the U.S. and the EU in February 2015, are in progress and expected to continue through 2015.

ABRAXANE® net sales increased by $67.5 million, or 16.9%, to $467.6 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to increased unit volumes based on demand in both U.S. and international markets.

POMALYST®/IMNOVID® net sales increased by $136.5 million, or 46.0%, to $433.0 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, reflecting net sales of $272.0 million in the United States

46

and $161.0 million in international markets. Increases in market share and treatment duration contributed to the increase in U.S. and international net sales of POMALYST®/IMNOVID®. The finalization of access, pricing and reimbursement in additional countries also continues to contribute to the growth of POMALYST®/IMNOVID® net sales in international markets.

VIDAZA® net sales decreased by $4.7 million, or 1.6%, to $295.7 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to a $12.8 million decrease in U.S. sales which was partly offset by volume increases in international markets.

Azacitidine for injection net sales were nearly unchanged in the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014.

OTEZLA® net sales increased by $145.4 million to $150.0 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014 reflecting net sales of $144.1 million in the United States and $5.9 million in international markets. OTEZLA® was approved by the FDA in March 2014 for the treatment of adult patients with active psoriatic arthritis and in September 2014 for the treatment of patients with moderate to severe plaque psoriasis who are candidates for phototherapy or systemic therapy. OTEZLA® was approved for plaque psoriasis and psoriatic arthritis in the European Union in January 2015. Launch activities for OTEZLA® commenced in March 2014 and we began recognizing revenue related to OTEZLA® during the second quarter of 2014.

THALOMID® net sales decreased by $17.5 million, or 15.6%, to $94.8 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily resulting from lower unit volumes and prices decreases in both U.S. and international markets.

ISTODAX® net sales increased by $1.2 million, or 3.6%, to $34.4 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to an increase in unit volume.

Other Revenue: Other revenue decreased by $1.3 million to $49.3 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014 primarily due to a $1.1 million decrease in royalty revenue related to lower royalties earned from Novartis based upon its sales of both RITALIN® and FOCALIN XR®.


47

Gross to net sales accruals and the balance in the related allowance accounts for the six-month periods ended June 30, 2015 and 2014 were as follows (in millions):
 
Returns
and
Allowances
 
Discounts
 
Government
Rebates
 
Chargebacks
and Distributor
Service Fees
 
Total
Balance at December 31, 2014
$
10.2

 
$
11.5

 
$
138.5

 
$
94.4

 
$
254.6

Allowances for sales during prior periods
1.1

 
—

 
(7.4
)
 
(3.1
)
 
(9.4
)
Allowances for sales during 2015
4.8

 
53.5

 
205.0

 
256.2

 
519.5

Credits/deductions issued for prior year sales
(2.7
)
 
(8.2
)
 
(67.0
)
 
(50.5
)
 
(128.4
)
Credits/deductions issued for sales during 2015
(1.1
)
 
(44.4
)
 
(99.5
)
 
(177.3
)
 
(322.3
)
Balance at June 30, 2015
$
12.3

 
$
12.4

 
$
169.6

 
$
119.7

 
$
314.0

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
15.5

 
$
12.1

 
$
134.1

 
$
83.2

 
$
244.9

Allowances for sales during prior periods
(1.9
)
 
—

 
(5.1
)
 
(6.7
)
 
(13.7
)
Allowances for sales during 2014
4.4

 
40.7

 
146.7

 
176.4

 
368.2

Credits/deductions issued for prior year sales
(3.7
)
 
(7.9
)
 
(71.1
)
 
(41.8
)
 
(124.5
)
Credits/deductions issued for sales during 2014
(1.6
)
 
(33.0
)
 
(84.2
)
 
(124.3
)
 
(243.1
)
Balance at June 30, 2014
$
12.7

 
$
11.9

 
$
120.4

 
$
86.8

 
$
231.8

  
A comparison of provisions for allowances for sales within each of the four categories noted above for the six-month periods ended June 30, 2015 and 2014 follows:
 
Returns and allowances provisions increased by $3.4 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to higher net product sales volumes in both the U.S. and international markets and a $1.1 million expense recorded in the second quarter of 2015 relating to increased anticipated returns of product that have reached their expiration dates. In addition, a $1.6 million decrease in the returns allowance related to VIDAZA® inventory held by distributors was recorded in 2014 due to reductions in inventory levels resulting from competition from generic versions of VIDAZA®.

Discounts provisions increased by $12.8 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to increased sales volumes. The $12.8 million increase consisted of a $11.5 million increase in the United States, which included $3.4 million of cash discounts related to OTEZLA®, and a $1.3 million increase related to international cash discounts.
 
Government rebates provisions increased by $56.0 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily due to a $43.7 million increase in international government rebates, due to higher sales volumes and increased rebate rates, and a $12.5 million increase related to Medicaid rebates due to increased sales and Medicaid expansion. These increases were partially offset by a $0.3 million decrease in expense related to Medicare Part D Coverage Gap.

Chargebacks and distributor service fees provisions increased by $83.4 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014. Chargebacks increased by approximately $56.3 million and distributor service fees increased by approximately $27.1 million. The chargeback increases were primarily due to higher sales volumes and a greater portion of sales qualifying for chargeback rebates. The distributor service fee increase was primarily attributable to OTEZLA®, which launched in April 2014, resulting in service fees of $19.4 million for the six-month period ended June 30, 2015.


48

Operating Costs and Expenses: Operating costs, expenses and related percentages for the six-month periods ended June 30, 2015 and 2014 were as follows (dollar amounts in millions):
 
Six-Month Periods Ended June 30,
 
Increase (Decrease)
 
Percent Change
 
2015
 
2014
 
 
Cost of goods sold (excluding amortization of acquired intangible assets)
$
204.8

 
$
185.0

 
$
19.8

 
10.7
 %
Percent of net product sales
4.8
%
 
5.2
%
 
 

 
 

Research and development
$
1,616.0

 
$
1,170.6

 
$
445.4

 
38.0
 %
Percent of total revenue
37.1
%
 
32.5
%
 
 

 
 

Selling, general and administrative
$
1,146.0

 
$
985.9

 
$
160.1

 
16.2
 %
Percent of total revenue
26.3
%
 
27.4
%
 
 

 
 

Amortization of acquired intangible assets
$
127.3

 
$
131.0

 
$
(3.7
)
 
(2.8
)%
Acquisition related (gains) charges, net
$
(10.3
)
 
$
9.5

 
$
(19.8
)
 
(208.4
)%

Cost of goods sold (excluding amortization of acquired intangible assets): Cost of goods sold (excluding amortization of acquired intangible assets) increased by $19.8 million to $204.8 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014. The increase was primarily due to the higher level of net product sales. As a percent of net product sales, cost of goods sold (excluding amortization of acquired intangible assets) decreased to 4.8% for the six-month period ended June 30, 2015 compared to 5.2% for the six-month period ended June 30, 2014, primarily due to OTEZLA® and POMALYST®, which have lower cost, making up a higher percentage of net product sales, while sales of ABRAXANE® and azacitidine for injection, which have a lower gross margin, made up a lower percentage of net product sales.

Research and Development: Research and development expenses increased by $445.4 million to $1.616 billion for the six-month period ended June 30, 2015, compared to the six-month period ended June 30, 2014. The increase was primarily due to a $280.0 million increase in expenses related to collaboration arrangements as well as an increase in activity in support of our early- to mid-stage product pipeline and general research activity.

The following table provides a breakdown of research and development expenses (in millions):
 
Six-Month Periods Ended June 30,
 
Increase (Decrease)
 
2015
 
2014
 
Human pharmaceutical clinical programs
$
452.6

 
$
386.3

 
$
66.3

Other pharmaceutical programs
348.0

 
296.2

 
51.8

Drug discovery and development
184.8

 
136.5

 
48.3

Collaboration arrangements
617.4

 
337.4

 
280.0

Cellular therapy
13.2

 
14.2

 
(1.0
)
Total
$
1,616.0

 
$
1,170.6

 
$
445.4


Selling, General and Administrative: Selling, general and administrative expenses increased by $160.1 million to $1.146 billion for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014. The increase was primarily due to an increase in expenses associated with our growing organization to support inflammation and immunology products and product candidates, such as OTEZLA® and GED-0301, as well as increases in selling and marketing activities related to recently approved indications for OTEZLA®, POMALYST®/IMNOVID® and ABRAXANE®, as well as an increase in donations to independent non-profit patient assistance organizations in the United States.


49

Amortization of Acquired Intangible Assets: Amortization of intangible assets acquired as a result of business combinations is summarized below for the six-month periods ended June 30, 2015 and 2014 (in millions):
 
 
Six-Month Periods Ended June 30,
Acquisitions
 
2015
 
2014
Abraxis
 
$
75.9

 
$
79.7

Avila
 
23.6

 
23.6

Gloucester
 
25.8

 
25.7

Pharmion
 
2.0

 
2.0

Total amortization
 
$
127.3

 
$
131.0

 
Acquisition Related (Gains) Charges, net: Acquisition related charges, net were a net credit of $10.3 million and a net expense of $9.5 million for the six-month periods ended June 30, 2015 and 2014, respectively. The $19.8 million reduction in the current year six-month period was primarily due to a $40.7 million reduction in the current year six-month period compared to the prior year six-month period for the fair value of our liability related to publicly traded CVRs that were issued as part of the acquisition of Abraxis, and a $22.2 million reduction for our contingent liabilities related to the Avila acquisition compared to the six-month period in 2014. The reduction related to the Avila acquisition was due to changes in the probability and timing of achieving milestones. These reductions were partly offset by a $43.0 million increase in expense related to our contingent liabilities related to the Nogra acquisition, which was acquired in the second quarter of 2014. The six-month period ended June 30, 2014 included an expense of $7.8 million related to our contingent liabilities related to the Nogra acquisition compared to $50.8 million in 2015.

Interest and Investment Income, Net: Interest and investment income, net increased by $4.1 million to $17.8 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014 primarily due to lower losses on the sale of marketable securities in 2015, compared to the prior year.

Interest (Expense): Interest (expense) increased by $26.6 million to $97.5 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014 primarily due to interest expense associated with the issuance of $2.500 billion of senior notes in May 2014. We anticipate an increase in interest expense for the remainder of 2015 due to our planned issuance of senior notes in August 2015. For more information related to our planned debt issuance, see Note 17 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this report.

Other Income (Expense), Net: Other income (expense), net is summarized below for the six-month periods ended June 30, 2015 and 2014 (in millions):
 
 
Six-Month Periods Ended June 30,
 
 
 
 
2015
 
2014
 
Change
Foreign exchange gains (losses) including foreign exchange derivative instruments not designated as hedging instruments
 
$
(1.5
)
 
$
(6.8
)
 
$
5.3

Premium paid on equity investment
 
—

 
(9.7
)
 
9.7

Fair value adjustments of forward point amounts
 
20.8

 
(3.5
)
 
24.3

Celgene puts sold
 
8.9

 
6.4

 
2.5

Impairment charges
 
(5.5
)
 
(2.0
)
 
(3.5
)
Gain on sale of equity investment in Flexus Bioscienses, Inc.
 
85.9

 
—

 
85.9

Other
 
(5.8
)
 
(8.8
)
 
3.0

Total other income (expense), net
 
$
102.8

 
$
(24.4
)
 
$
127.2


Other income (expense), net was a net income of $102.8 million for the six-month period ended June 30, 2015 and a net expense of $24.4 million for the six-month period ended June 30, 2014. The $127.2 million increase in income was primarily due to a gain on the sale of our equity investment in Flexus and currency fluctuations.

Income Tax Provision: The income tax provision increased by $61.2 million to $222.8 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014, primarily as a result of an increase in income before taxes and an increase in the effective tax rate. The estimated full year 2015 underlying effective tax rate of 17.4% reflects the impact of our global business footprint. The increase in the estimated underlying effective tax rate from the second quarter of 2014 reflects a projected increase in tax expense related to collaborations, primarily our collaboration with AstraZeneca (MedImmune Limited)

50

that we entered into in the second quarter, partially offset by a non-recurring tax expense from the launch of new products. The effective tax rate for the six month period ended June 30, 2015 was reduced by 0.2 percentage points primarily as a result of certain tax benefits related to our 2014 income tax returns that are projected to be more favorable than originally estimated. The income tax provision for the six-month period ended June 30, 2014 included an estimated full year 2014 underlying effective tax rate of 15.7% (which subsequently decreased to 14.3% when the actual 2014 full year results were achieved). The effective tax rate for the six month period ended June 30, 2014 was reduced by 0.1 percentage points as a result of a net decrease in unrecognized tax benefits primarily related to ongoing examinations of tax positions taken in prior years.

Liquidity and Capital Resources
 
The following table summarizes the components of our financial condition (in millions):
 
June 30,
2015
 
December 31, 2014
 
Increase (Decrease)
Financial assets:
 
 
 

 
 

Cash and cash equivalents
$
4,530.8

 
$
4,121.6

 
$
409.2

Marketable securities available for sale
2,961.4

 
3,425.1

 
(463.7
)
Total financial assets
$
7,492.2

 
$
7,546.7

 
$
(54.5
)
Debt:
 

 
 

 
 

Short-term borrowings and current portion of long-term debt
$
1,362.9

 
$
605.9

 
$
757.0

Long-term debt, net of discount
6,256.1

 
6,265.7

 
(9.6
)
Total debt
$
7,619.0

 
$
6,871.6

 
$
747.4

 
 
 
 
 
 
Working capital(1)
$
6,971.0

 
$
7,617.2

 
$
(646.2
)
 
(1) 
Includes cash, cash equivalents and marketable securities available for sale, accounts receivable, net of allowances, inventory and other current assets, less short-term borrowings and current portion of long-term debt, accounts payable, accrued expenses, income taxes payable and other current liabilities.

We rely primarily on positive cash flows from operating activities, proceeds from sales of available-for-sale marketable securities and borrowings in the form of long-term notes payable and short-term commercial paper to provide for our liquidity requirements. We expect continued growth in our expenditures, particularly those related to research and development, clinical trials, commercialization of new products, international expansion and capital investments. However, we anticipate that existing cash and cash equivalent balances, marketable securities available for sale, cash generated from operations and existing sources of and access to financing are adequate to fund our operating needs, capital expenditures, debt service requirements and our plans to purchase our stock or pursue other strategic business initiatives for the foreseeable future.

On July 14, 2015, in connection with the proposed acquisition of Receptos Inc. for cash consideration of approximately $7.817 billion, we have obtained a $5.000 billion committed syndicated bridge facility (the Bridge Facility). No amounts are anticipated to be drawn under the Bridge Facility prior to the closing of the acquisition. We expect to fund the transaction through a combination of existing cash and the issuance of approximately $5.000 billion of senior notes pursuant to a public offering. Upon closure of our senior notes offering, the Bridge Facility will be automatically terminated. We may issue up to an additional $3.000 billion of senior notes for general corporate purposes consistent with our normal financing activity. The debt covenants on our existing credit facility have been amended in order to accommodate our planned additional borrowing.

The acquisition transaction has been approved by the boards of directors of both companies and is subject to customary closing conditions, including the tender of at least a majority of outstanding shares of Receptos common stock in the tender offer and expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The transaction is anticipated to close in 2015. For more information related to our proposed acquisition of Receptos and our planned debt issuance, see Note 17 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this report.

Many of our operations are conducted outside the United States and significant portions of our cash, cash equivalents and short-term investments are held internationally. As of June 30, 2015, we held approximately $6.652 billion of these short-term funds in foreign tax jurisdictions. The amount of funds held in U.S. tax jurisdictions can fluctuate due to the timing of receipts and payments in the ordinary course of business and due to other reasons, such as repurchases of our common stock and business-development activities. As part of our ongoing liquidity assessments, we regularly monitor the mix of domestic and international cash flows (both inflows and outflows). Repatriation of overseas funds can result in additional U.S. federal, state and local income tax payments. We record U.S. deferred tax liabilities for certain unremitted earnings, but when amounts earned overseas are expected to be permanently reinvested outside of the United States, no accrual for U.S. taxes is provided. Approximately $900.0 million of our

51

foreign earnings, included in the $6.652 billion of short-term funds in foreign tax jurisdictions, may not be required for use in offshore operations and may be available for use in the United States. These earnings are not treated as permanently reinvested and accordingly, our deferred tax liabilities as of June 30, 2015 and December 31, 2014 included $316.5 million for the estimated U.S. federal and state income taxes that may be incurred should these earnings be repatriated. The remaining foreign earnings are unremitted and expected to be permanently reinvested outside the United States. We do not rely on these earnings as a source of funds for our domestic business as we expect to have sufficient current cash resources combined with future cash flows in the United States to fund our U.S. operational and strategic needs.

Share Repurchase Program: From April 2009 through June 2015, our Board of Directors approved purchases of up to $17.500 billion of our common stock. During the three-month period ended June 30, 2015 we used $984.7 million for purchases of our common stock, measured on a settlement date basis. As of June 30, 2015, we had a remaining purchase authorization of $5.112 billion.

Components of Working Capital

Cash, Cash Equivalents and Marketable Securities Available for Sale:    We invest our excess cash primarily in money market funds, U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities, non-U.S. government agency and supranational securities, global corporate debt securities and asset backed securities. All liquid investments with maturities of three months or less from the date of purchase are classified as cash equivalents and all investments with maturities of greater than three months from the date of purchase are classified as marketable securities available for sale. We determine the appropriate classification of our investments in marketable debt and equity securities at the time of purchase. The $54.5 million decrease in cash, cash equivalents and marketable securities available for sale at June 30, 2015 compared to December 31, 2014 was primarily due to $1.997 billion of payments under our share repurchase program, $115 million of net purchases of equity investments and $95.0 million of capital expenditures, partially offset by $1.141 billion of net cash from operations, $761.2 million net proceeds of Commercial Paper and $278.4 million of net proceeds and tax benefits from share-based compensation arrangements.

Marketable securities available for sale are carried at fair value, held for an unspecified period of time and are intended for use in meeting our ongoing liquidity needs. Unrealized gains and losses on available-for-sale securities, which are deemed to be temporary, are reported as a separate component of stockholders' equity, net of tax. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses and other than temporary impairment charges, is included in interest and investment income, net. For more information related to the fair value and valuation of our marketable securities, see Note 6 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this report.
 
Accounts Receivable, Net: Accounts receivable, net increased by $106.7 million to $1.273 billion at June 30, 2015 compared to December 31, 2014 primarily due to increased sales of REVLIMID®, POMALYST®/IMNOVID®, and OTEZLA®. Sales made outside the United States typically have payment terms that are greater than 60 days, thereby extending collection periods beyond those in the United States. We expect our accounts receivable balance to continue to grow as our international sales continue to expand.

We continue to monitor economic conditions, including the volatility associated with international economies, the sovereign debt crisis in certain European countries and associated impacts on the financial markets and our business. Our current business model in these markets is typically to sell our products directly to principally government owned or controlled hospitals, which in turn directly deliver critical care to patients. Our products are used to treat life-threatening diseases and we believe this business model enables timely delivery and adequate supply of products. Many of the outstanding receivable balances are related to government-funded hospitals and we believe the receivable balances are ultimately collectible. Similarly, we believe that future sales to these customers will continue to be collectible.
 
The credit and economic conditions within Spain, Italy, Portugal and Greece, as well as increasing sales levels in those countries have in the past resulted in, and may continue to result in, an increase in the average length of time it takes to collect accounts receivable. Our total net receivables in Spain, Italy and Portugal are composed almost entirely of amounts receivable from government-owned or controlled hospitals and the public sector and amounted to $217.5 million at June 30, 2015 compared to $241.8 million at December 31, 2014. Approximately $38.4 million of the $217.5 million receivable balance at June 30, 2015 was greater than one year past due. Our exposure to the sovereign debt crisis in Greece is limited, as we do not have a material amount of receivables in Greece. We maintain timely and direct communication with hospital customers in Spain, Italy and Portugal regarding both the current and past due receivable balances. We continue to receive payments from these countries and closely monitor the plans for payment at the regional government level. Payments from customers in these countries are not received on

52

regular intervals and several months could elapse between significant payments. We also regularly request and receive positive confirmation of the validity of our receivables from most of the regional governmental authorities.

In determining the appropriate allowance for doubtful accounts for Spain, Italy and Portugal, we considered the balance of past due receivables related to sales made to government-owned or supported customers. We regularly monitor developments in Europe to assess whether the level of risk of default for any customers has increased and note the ongoing efforts by the European Union, European Monetary Union and International Monetary Fund to support countries with large public deficits and outstanding debt balances. We also monitor the efforts of individual countries to support their regions with large public deficits and outstanding debt balances. We have not experienced significant losses or write-offs with respect to the collection of our accounts receivable in these countries as a result of their economic difficulties and we do not expect to have write-offs or adjustments to accounts receivable that would have a material adverse impact on our financial position or results of operations.

Inventory: Inventory balances increased by $21.2 million to $414.3 million at June 30, 2015 compared to December 31, 2014. The increase was primarily due to increased demand and an initiative to increase ABRAXANE® safety stock globally.

Other Current Assets: Other current assets increased by $98.0 million to $692.4 million at June 30, 2015 compared to December 31, 2014 primarily due to an $83.8 million increase in the fair value of derivative instruments and a $9.8 million increase in prepaid taxes and other prepaid accounts.
 
Commercial Paper:  In September 2011, we entered into a commercial paper program (Program) under which we issue unsecured commercial paper notes (Commercial Paper) on a private placement basis, the proceeds of which are used for general corporate purposes. The maximum aggregate amount available under the Program is currently $1.750 billion. The maturities of the Commercial Paper may vary, but may not exceed 270 days from the date of issue. The Commercial Paper is sold under customary terms to a dealer or in the commercial paper market and is issued at a discount from par or, alternatively, is sold at par and bears varying interest rates on a fixed or floating basis. Borrowings under the Program are accounted for as short-term borrowings. As of June 30, 2015, $860.6 million of Commercial Paper was outstanding bearing an effective interest rate of 0.5%.
 
Senior Unsecured Credit Facility: We maintain a senior unsecured revolving credit facility (Credit Facility) that provides revolving credit in the aggregate amount of $1.750 billion which was increased from $1.500 billion in April 2015. In April 2015, the term of the Credit Facility was also extended from April 18, 2018 to April 17, 2020. Subject to certain conditions, we have the right to increase the amount of the Credit Facility (but in no event more than one time per annum) up to a maximum aggregate amount of $2.000 billion. Amounts may be borrowed in U.S. dollars for general corporate purposes. The Credit Facility currently serves as backup liquidity for our Commercial Paper borrowings. At June 30, 2015, there was no outstanding borrowing against the Credit Facility.

The Credit Facility contains affirmative and negative covenants, including certain customary financial covenants. We were in compliance with all financial covenants as of June 30, 2015. In July 2015, the debt covenants on our existing credit facility have been amended in order to accommodate planned additional borrowing. For more information related to our proposed acquisition of Receptos and our planned debt issuance, see Note 17 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this report.
 
Accounts Payable, Accrued Expenses and Other Current Liabilities: Accounts payable, accrued expenses and other current liabilities increased by $62.3 million to $1.527 billion at June 30, 2015 compared to December 31, 2014. The increase was primarily due to increases of $36.5 million for accrued share repurchases, $58.6 million for sales adjustment accruals, $6.8 million for contingent consideration, and $34.3 million for professional fee related accrued expenses and accounts payable. The increases were partly offset by a decrease of $58.9 million for compensation related accrued expenses and a net decrease of $11.5 million related to accrued collaboration agreement related amounts.

Income Taxes Payable (Current and Non-Current): Income taxes payable increased by $32.2 million to $317.8 million at June 30, 2015 compared to December 31, 2014, primarily from the current provision for income taxes of $475.4 million and net deferred intercompany credits of $8.7 million, partially offset by income tax payments of $247.2 million, a tax benefit of stock options of $174.5 million, and a decrease in refundable income taxes of $30.0 million.


53

Analysis of Cash Flows
Cash flows from operating, investing and financing activities for the six-month periods ended June 30, 2015 and 2014 were as follows (in millions):
 
Six-Month Periods Ended June 30,
 
 
 
2015
 
2014
 
Change
Net cash provided by operating activities
$
1,140.9

 
$
1,072.8

 
$
68.1

Net cash provided by (used in) investing activities
$
239.7

 
$
(1,205.9
)
 
$
1,445.6

Net cash provided by (used in) financing activities
$
(951.3
)
 
$
110.0

 
$
(1,061.3
)
 
Operating Activities: Net cash provided by operating activities increased by $68.1 million to $1,140.9 million for the six-month period ended June 30, 2015 compared to the six-month period ended June 30, 2014. The increase in net cash provided by operating activities was primarily attributable to an increase in net income of $197.6 million in 2015 compared to 2014, partially offset by $30.0 million related to changes in current assets and liabilities, excluding the effect of acquisitions.

Investing Activities: Net cash provided by investing activities for the six-month period ended June 30, 2015 amounted to $239.7 million compared to net cash used in investing activity of $1,205.9 million for the six-month period ended June 30, 2014. The increase in net cash provided by investing activities was primarily due to the net proceeds of $452.7 million from net sales of marketable securities available for sale during 2015 compared with $412.3 million of net purchases of marketable securities available for sale during 2014. In addition, $710.0 million was used for the acquisition of Nogra in 2014.

Financing Activities: Net cash used in financing activities amounted to $951.3 million for the six-month period ended June 30, 2015, compared to net cash provided by financing activities of $110.0 million for the six-month period ended June 30, 2014. The $1,061.3 million increase in net cash used in financing activities in the six-month period ended June 30, 2015 was primarily attributable to the $2,470.6 million decrease in proceeds from issuance of long-term debt partially offset by the $1,113.8 million increase in net proceeds from short-term borrowings and a $184.9 million decrease in cash used for purchases of common stock.

Contractual Obligations
 
For a discussion of our contractual obligations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2014 Annual Report on Form 10-K. There have not been any material changes to such contractual obligations or potential milestone payments since December 31, 2014 aside from those disclosed in Note 3, Note 14, and Note 17 of Notes to Unaudited Consolidated Financial Statements included elsewhere in this report.
 
Critical Accounting Estimates and Significant Accounting Policies
 
A critical accounting policy is one that is both important to the portrayal of our financial condition and results of operation and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting estimates are disclosed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2014 Annual Report on Form 10-K. There have not been any material changes to such critical accounting estimates since December 31, 2014.

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
 
The following discussion provides forward-looking quantitative and qualitative information about our potential exposure to market risk. Market risk represents the potential loss arising from adverse changes in the value of financial instruments. The risk of loss is assessed based on the likelihood of adverse changes in fair values, cash flows or future earnings.

We have established guidelines relative to the diversification and maturities of investments to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified depending on market conditions. Although investments may be subject to credit risk, our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure from any single issue, issuer or type of investment. At June 30, 2015, our market risk sensitive instruments consisted of marketable securities available for sale, our long-term debt and certain derivative contracts.

Marketable Securities Available for Sale: At June 30, 2015, our marketable securities available for sale consisted of U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed (MBS) securities,

54

non-U.S. government, agency and supranational securities, global corporate debt securities, asset backed securities and marketable equity securities. U.S. government-sponsored agency securities include general unsecured obligations either issued directly by or guaranteed by U.S. Government Sponsored Enterprises. U.S. government-sponsored agency MBS include mortgage backed securities issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. Non-U.S. government, agency and supranational securities consist of direct obligations of highly rated governments of nations other than the United States and obligations of sponsored agencies and other entities that are guaranteed or supported by highly rated governments of nations other than the United States. Corporate debt – global includes obligations issued by investment-grade corporations including some issues that have been guaranteed by governments and government agencies. Asset backed securities consist of triple-A rated securities with cash flows collateralized by credit card receivables and auto loans.

Our marketable securities available for sale are primarily debt securities that are carried at fair value, held for an unspecified period of time and are intended for use in meeting our ongoing liquidity needs. In addition, our marketable securities available for sale includes equity investments in the publicly traded common stock of companies, including common stock of companies with whom we have entered into collaboration agreements. Unrealized gains and losses on available-for-sale securities, which are deemed to be temporary, are reported as a separate component of stockholders' equity, net of tax. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses and other than temporary impairment charges, is included in interest and investment income, net.

As of June 30, 2015, the principal amounts, fair values and related weighted-average interest rates of our investments in debt securities classified as marketable securities available for sale were as follows (dollar amounts in millions):
 
Duration
 
Less Than
1 Year
 
1 to 3 Years
 
3 to 5 Years
 
Total
Principal amount
$
311.4

 
$
1,412.9

 
$
126.0

 
$
1,850.3

Fair value
$
313.8

 
$
1,429.9

 
$
131.3

 
$
1,875.0

Weighted average interest rate
0.8
%
 
1.3
%
 
2.1
%
 
1.3
%

Short-Term Borrowings and Current Portion of Long-Term Debt: The carrying value of short-term borrowings and current portion of long-term debt outstanding at June 30, 2015 and December 31, 2014 includes:
 
 
June 30, 2015
 
December 31, 2014
Commercial paper
 
$
860.6

 
$
99.6

2.450% senior notes due 2015
 
502.3

 
506.3

Total
 
$
1,362.9

 
$
605.9


Long-Term Debt: We have issued an aggregate $6.250 billion principal amount of senior notes at varying maturity dates and interest rates. The principal amounts and carrying values of these senior notes as of June 30, 2015 are summarized below (in millions):
 
Principal
Amount
 
Carrying
Value
1.900% senior notes due 2017
$
500.0

 
$
502.1

2.300% senior notes due 2018
400.0

 
402.2

2.250% senior notes due 2019
500.0

 
505.3

3.950% senior notes due 2020
500.0

 
504.6

3.250% senior notes due 2022
1,000.0

 
1,003.2

4.000% senior notes due 2023
700.0

 
698.4

3.625% senior notes due 2024
1,000.0

 
997.5

5.700% senior notes due 2040
250.0

 
249.6

5.250% senior notes due 2043
400.0

 
396.7

4.625% senior notes due 2044
1,000.0

 
996.5

Total long-term debt
$
6,250.0

 
$
6,256.1



55

At June 30, 2015, the fair value of our senior notes outstanding was $6.825 billion.

MARKET RISK MANAGEMENT
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. 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 to 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, 2015 and December 31, 2014 had settlement dates within 36 months. 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 transaction affects 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, 2015 and December 31, 2014:

 
 
Notional Amount
Foreign Currency
 
June 30, 2015
 
December 31, 2014
Australian Dollar
 
$
62.6

 
$
18.8

British Pound
 
387.6

 
304.8

Canadian Dollar
 
131.2

 
43.7

Euro
 
3,365.1

 
3,375.7

Japanese Yen
 
475.2

 
541.1

Total
 
$
4,421.7

 
$
4,284.1

 
 
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, 2015, credit risk did not materially change the fair value of our foreign currency forward contracts.
 

56

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, 2015 and December 31, 2014 were $847.8 million and $835.5 million, respectively.

Although not predictive in nature, we believe a hypothetical 10% threshold reflects a reasonably possible near-term change in foreign currency rates. Assuming that the June 30, 2015 exchange rates were to change by a hypothetical 10%, the fair value of the foreign currency forward contracts would change by approximately $522.4 million. However, since the contracts either hedge specific forecasted intercompany transactions denominated in foreign currencies or relate to assets and liabilities denominated in currencies other than the entities' functional currencies, any change in the fair value of the contract would be either reported in other comprehensive income and reclassified to earnings in the same periods during which the underlying hedged transactions affect earnings or re-measured through earnings each period along with the underlying asset or liability.

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. 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, 2015 and December 31, 2014:
 
Notional Amount1
 
June 30, 2015
 
December 31, 2014
Foreign currency option contracts designated as hedging activity:
 
 
 
Purchased Put
$
331.6

 
$
152.6

Written Call
$
353.9

 
$
160.9

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.

Assuming that the June 30, 2015 exchange rates were to change by a hypothetical 10%, the fair value of the foreign currency option contracts would increase by approximately $26.5 million if the US Dollar were to strengthen and decrease by approximately $26.0 million if the US Dollar were to weaken. However, since the contracts hedge specific forecasted intercompany transactions denominated in foreign currencies, any change in the fair value of the contract would be reported in other comprehensive income and reclassified to earnings in the same periods during which the underlying hedged transactions affect earnings.

Interest Rate Risk Management 

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 treasury rate locks or forward starting swaps are reported in OCI and are recognized in income over the life of the anticipated fixed-rate notes.

Forward Starting Interest Rate Swaps and Treasury Rate Locks: We have entered into forward starting swaps, that were designated as cash flow hedges, with an aggregate notional value of $1,300.0 million and effective dates in November 2015, with $800.0 million maturing in 10 years and $500.0 million maturing in 30 years to hedge against changes in interest rates that could impact an anticipated issuance of debt in 2015. During July 2015, we also entered into treasury rate locks with effective dates in August 2015 and maturing in five, ten and thirty years.


57

In anticipation of issuing debt in 2014, we had entered into forward starting swaps that were designated as cash flow hedges. In April 2014 we accelerated our planned debt issuance date, which resulted in hedge ineffectiveness in the forward starting swaps and a $3.6 million charge to other income (expense), net due to differences between the effective date of the swaps and the accelerated debt issuance date.

A sensitivity analysis to measure potential changes in the market value of our forward starting interest rate swap contracts from a change in interest rates indicated that a one percentage point increase in interest rates at June 30, 2015 would have increased the fair value of our contracts by $148.6 million. A one percentage point decrease at June 30, 2015 would have decreased the aggregate fair value of our contracts by $180.8 million.

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.
 
We have entered into swap contracts that were designated as hedges of certain of our fixed rate notes and also terminated the hedging relationship by settling certain of those swap contracts during 2014 and 2015. The settlement of swap contracts resulted in the receipt of net proceeds of $3.4 million and $12.4 million during the six-month periods ended June 30, 2015 and 2014, respectively, which are 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 table summarizes the notional amounts of our outstanding swap contracts at June 30, 2015 and December 31, 2014 (in millions): 
 
 
 
Notional Amount
 
 
June 30, 2015
 
December 31, 2014
Interest rate swap contracts entered into as fair value hedges of the following fixed-rate senior notes:
 
 

 
 

2.450% senior notes due 2015
 
$
300.0

 
$
300.0

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

 
750.0

4.000% senior notes due 2023
 
700.0

 
150.0

3.625% senior notes due 2024
 
150.0

 
—

Total
 
$
3,650.0

 
$
2,700.0


A sensitivity analysis to measure potential changes in the market value of our debt and interest rate swap contracts from a change in interest rates indicated that a one percentage point increase in interest rates at June 30, 2015 would have reduced the aggregate fair value of our net payable by $291.7 million. A one percentage point decrease at June 30, 2015 would have increased the aggregate fair value of our net payable by $352.3 million.

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e), or the Exchange Act). Based upon the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed

58

by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to our management (including our Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosures.
 
Changes in internal control over financial reporting
 
There were no changes in our internal control over financial reporting during the fiscal quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

59

PART II  -  OTHER INFORMATION
 
Item 1. Legal Proceedings
 
The information called for by this item is incorporated herein by reference to Note 16 of Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report.
 
Item 1A. Risk Factors
 
The following describes the major risks to our business and should be considered carefully. Any of these factors could significantly and negatively affect our business, prospects, financial condition, operating results or credit ratings, which could cause the trading prices of our equity securities to decline. The risks described below are not the only risks we may face. Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, could also negatively affect us.
 
Our operating results may be subject to significant fluctuations.
 
Our operating results may fluctuate from quarter to quarter and year to year for a number of reasons, including the risks discussed elsewhere in this “Risk Factors” section. Events such as a delay in product development or a revenue shortfall may cause financial results for a particular period to be below our expectations. In addition, we have experienced and may continue to experience fluctuations in our quarterly operating results due to the timing of charges that we may take. We have recorded, or may be required to record, charges that include development milestone and license payments under collaboration and license agreements, amortization of acquired intangibles and other acquisition related charges, and impairment charges.

Our revenues are also subject to foreign exchange rate fluctuations due to the global nature of our operations. We recognize foreign currency gains or losses arising from our operation in the period in which we incur those gains or losses. Although we utilize foreign currency forward contracts and occasionally foreign currency put and call options to manage foreign currency risk, our efforts to reduce currency exchange losses may not be successful. As a result, currency fluctuation among our reporting currency, the U.S. dollar, and the currencies in which we do business will affect our operating results. Our net income may also fluctuate due to the impact of charges we may be required to take with respect to foreign currency and other hedge transactions. In particular, we may incur higher than expected charges from hedge ineffectiveness or from the termination of a hedge arrangement.

We are dependent on the continued commercial success of our primary products, REVLIMID®, VIDAZA®, THALOMID®, ABRAXANE®, POMALYST®/IMNOVID® and OTEZLA®.
 
Currently, our business is largely dependent on the commercial success of REVLIMID®, VIDAZA®, THALOMID®, ABRAXANE®, POMALYST®/IMNOVID® and OTEZLA®. The success of these products depends on acceptance by regulators, key opinion leaders, physicians, and patients as effective drugs with certain advantages over other therapies. A number of factors, as discussed in greater detail below, may adversely impact the degree of acceptance of these products, including their efficacy, safety, price and benefits over competing products, as well as the reimbursement policies of third-party payers, such as government and private insurance plans.
 
If unexpected adverse events are reported in connection with the use of any of these products, physician and patient acceptance of the product could deteriorate and the commercial success of such product could be adversely affected. We are required to report to the FDA or similar bodies in other countries events associated with our products relating to death or serious injury. Adverse events could result in additional regulatory controls, such as for the imposition of costly post-approval clinical studies or revisions to our approved labeling which could limit the indications or patient population for a product or could even lead to the withdrawal of a product from the market. THALOMID® is known to be toxic to the human fetus and exposure to the drug during pregnancy could result in significant deformities. REVLIMID® and POMALYST®/IMNOVID® are also considered toxic to the human fetus and their respective labels contain warnings against use which could result in embryo-fetal exposure. While we have restricted distribution systems for THALOMID®, REVLIMID®, and POMALYST®/IMNOVID®, and endeavor to educate patients regarding the potential known adverse events, including pregnancy risks, we cannot ensure that all such warnings and recommendations will be complied with or that adverse events resulting from non-compliance will not occur.





60

Our future commercial success depends on gaining regulatory approval for products in development, and obtaining approvals for our current products for additional indications.
 
The testing, manufacturing and marketing of our products require regulatory approvals, including approval from the FDA and similar bodies in other countries. Certain of our pharmaceutical products, such as FOCALIN®, also require authorization by the U.S. Drug Enforcement Agency (DEA) of the U.S. Department of Justice. Our future growth would be negatively impacted if we fail to obtain timely, or at all, requisite regulatory approvals in the United States and internationally for products in development and approvals for our existing products for additional indications.

The principal risks to obtaining and maintaining regulatory approvals are as follows:

•
In general, preclinical tests and clinical trials can take many years and require the expenditure of substantial resources, and the data obtained from these tests and trials may not lead to regulatory approval;
•
Delays or rejections may be encountered during any stage of the regulatory process if the clinical or other data fails to demonstrate compliance with a regulatory agency’s requirements for safety, efficacy and quality;
•
Requirements for approval may become more stringent due to changes in regulatory agency policy or the adoption of new regulations or legislation;
•
Even if a product is approved, the scope of the approval may significantly limit the indicated uses or the patient population for which the product may be marketed and may impose significant limitations in the nature of warnings, precautions and contra-indications that could materially affect the sales and profitability of the product;
•
After a product is approved, the FDA or similar bodies in other countries may withdraw or modify an approval in a significant manner or request that we perform additional clinical trials or change the labeling of the product due to a number of reasons, including safety concerns, adverse events and side effects;
•
Products, such as REVLIMID® and POMALYST®/IMNOVID®, that receive accelerated approval can be subject to an expedited withdrawal if post-marketing restrictions are not adhered to or are shown to be inadequate to assure safe use, or if the drug is shown to be unsafe or ineffective under its conditions of use;
•
Guidelines and recommendations published by various governmental and non-governmental organizations can reduce the use of our approved products;
•
Approved products, as well as their manufacturers, are subject to continuing and ongoing review by regulatory agencies, and the discovery of previously unknown problems with these products or the failure to comply with manufacturing or quality control requirements may result in restrictions on the manufacture, sale or use of a product or its withdrawal from the market; and
•
Changes in regulatory agency policy or the adoption of new regulations or legislation could impose restrictions on the sale of our approved products.
If we fail to comply with laws or government regulations or policies our business could be adversely affected.

The discovery, preclinical development, clinical trials, manufacturing, risk evaluation and mitigation strategies (such as our REMSTM program), marketing and labeling of pharmaceuticals and biologics are all subject to extensive laws and government regulations and policies. In addition, individual states, acting through their attorneys general, are increasingly seeking to regulate the marketing of prescription drugs under state consumer protection and false advertising laws. If we fail to comply with the laws and regulations regarding the promotion and sale of our products, appropriate distribution of our products under our restricted distribution systems, off-label promotion and the promotion of unapproved products, government agencies may bring enforcement actions against us or private litigants may assert claims on behalf of the government against us that could inhibit our commercial capabilities and/or result in significant damage awards and penalties.
 
Other matters that may be the subject of governmental or regulatory action which could adversely affect our business include laws, regulations and policies governing:

•
protection of the environment, privacy, healthcare reimbursement programs, and competition;

61

•
parallel importation of prescription drugs from outside the United States at prices that are regulated by the governments of various foreign countries; and
•
mandated disclosures of clinical trial or other data, such as the EMA’s policy on publication of clinical data.
The FDA’s Center for Biologics Evaluation and Research currently regulates human tissue or cells intended for transplantation, implantation, infusion or transfer to a human, requiring, among other things, cell and tissue establishments to screen and test donors, prepare and follow written procedures for the prevention of the spread of communicable disease and register with FDA. Through our Celgene Cellular Therapeutics (CCT) subsidiary, we are licensed in certain states to operate our allogeneic and private stem cell banking businesses. If we are unable to maintain those licenses or are unable to obtain licenses in other states that may adopt similar licensing requirements, those businesses could be adversely affected.

Sales of our products will be significantly reduced if access to and reimbursement for our products by governmental and other third-party payers are reduced or terminated.

Sales of our current and future products depend, in large part, on the conditions under which our products are paid for by health maintenance, managed care, pharmacy benefit and similar health care management organizations (HCMOs), or reimbursed by government health administration authorities, private health coverage insurers and other third-party payers.

The influence of HCMOs has increased in recent years due to the growing number of patients receiving coverage through a few large HCMOs as a result of industry consolidation. One objective of HCMOs is to contain and, where possible, reduce healthcare expenditures. HCMOs typically use formularies (lists of approved medicines available to members of a particular HCMO), clinical protocols, volume purchasing, long-term contracts and other methods to negotiate prices with pharmaceutical providers. Due to their lower cost generally, generic medicines are typically placed in preferred tiers of HCMO formularies. Additionally, many formularies include alternative and competitive products for treatment of particular medical problems. Exclusion of our products from a formulary or HCMO-implemented restrictions imposed upon our products can significantly impact drug usage in the HCMO patient population, and consequently our revenues.

Generally, in Europe and other countries outside the United States, the government-sponsored healthcare system is the primary payer of patients’ healthcare costs. These health care management organizations and third-party payers are increasingly challenging the prices charged for medical products and services, seeking to implement cost-containment programs, including price controls, restrictions on reimbursement and requirements for substitution of generic products. Our products continue to be subject to increasing price and reimbursement pressure due to price controls imposed by governments in many countries; increased difficulty in obtaining and maintaining satisfactory drug reimbursement rates; and the tendency of governments and private health care providers to favor generic pharmaceuticals. In addition, governmental and private third-party payers and purchasers of our products may restrict access to formularies or otherwise discourage use of our products. Limitations on patient access to our drugs, adoption of price controls and cost-containment measures could adversely affect our business. In addition, our operating results may also be affected by distributors seeking to take advantage of price differences among various markets by buying our products in low cost markets for resale in higher cost markets.

The Affordable Care Act and other legislation may affect our pricing policies and government reimbursement of our products that may adversely impact our revenues and profitability.

In the U.S. there have been and may continue to be a number of legislative and regulatory proposals and enactments related to drug pricing and reimbursement that could impact our profitability. The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law on March 23, 2010 and March 30, 2010, respectively, and are referred to collectively as the Healthcare Reform Acts. Although these reforms have significantly impacted the pharmaceutical industry, the full effects of these provisions will become apparent over time as these laws are implemented and the Centers for Medicare & Medicaid Services and other agencies issue applicable regulations or guidance as required by the Healthcare Reform Acts. Moreover, in the coming years, additional changes could be made to governmental healthcare programs that could significantly impact the profitability of our products.

The Healthcare Reform Acts, among other things, made significant changes to the Medicaid rebate program by increasing the minimum rebates that manufacturers like us are required to pay. These changes also expanded the government’s 340B drug discount program by increasing the category of entities qualified to participate in the program and benefit from its deeply discounted drug pricing. We have received inquiries from the Health Resources and Services Administration of the Department of Health & Human Services (“HRSA”) regarding our compliance with the 340B program. We have responded to these inquiries and believe that we

62

have complied with applicable legal requirements. If, however, we are ultimately required to change our sales or pricing practices, there would be an adverse effect on our revenues and profitability.

Our ability to sell our products to hospitals in the United States depends in part on our relationships with group purchasing organizations.

Many existing and potential customers for our products become members of group purchasing organizations (GPOs). GPOs negotiate pricing arrangements and contracts, sometimes on an exclusive basis, with medical supply manufacturers and distributors and these negotiated prices are made available to a GPO’s affiliated hospitals and other members. If we are not one of the providers selected by a GPO, affiliated hospitals and other members may be less likely to purchase our products, and if the GPO has negotiated a strict sole source, market share compliance or bundling contract for another manufacturer’s products, we may be precluded from making sales to members of the GPO for the duration of that contractual arrangement. Our failure to enter into or renew contracts with GPOs may cause us to lose market share and could adversely affect our sales.
 
Our long-term success depends, in part, on intellectual property protection.
 
Our success depends, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties and to conduct our business without infringing upon the proprietary rights of others. The patent positions of pharmaceutical and biopharmaceutical companies, including ours, can be uncertain and involve complex legal and factual questions. There can be no assurance that if claims of any of our owned or licensed patents are challenged by one or more third parties (through, for example, litigation, post grant review in the USPTO or European Patent Office (EPO)), a court or patent authority ruling on such challenge will ultimately determine, after all opportunities for appeal have been exhausted, that our patent claims are valid and enforceable. If a third party is found to have rights covering products or processes used by us, we could be forced to cease using such products or processes, be subject to significant liabilities to such third party and/or be required to obtain license rights from such third party. Lawsuits involving patent claims are costly and could affect our results of operations, result in significant expense and divert the attention of managerial and scientific personnel. For more information on challenges to certain of our patents, see "Legal Proceedings" contained elsewhere in this report.

In addition, we do not know whether any of our owned or licensed pending patent applications will result in the issuance of patents or, if patents are issued, whether they will be dominated by third-party patent rights, provide significant proprietary protection or commercial advantage or be circumvented, opposed, invalidated, rendered unenforceable or infringed by others.
 
Our intellectual property rights may be affected in ways that are difficult to anticipate at this time under the provisions of the America Invents Act enacted in 2011. This law represents a significant change to the US patent system. Uncertainty exists in the application and interpretation of various aspects of the America Invents Act. For example, new post grant review procedures have been implemented that potentially represent a significant threat to any company’s patent portfolio. Any member of the public may seek to challenge an issued patent by petitioning the USPTO to institute a post grant review. Once instituted, the USPTO may find grounds to revoke the challenged patent. For example, on April 23, 2015, we were informed that a party filed an Inter Partes Review (IPR) challenging the validity of Celgene’s patent US 6,045,501 and US 6,315,720. In addition, on May 7, 2015 another IPR was filed against Celgene’s patent  US 5,635,517. We cannot predict whether any other Celgene patents will ever become the subject of a post grant review. A procedure similar to the IPR has existed in Europe for many years. Celgene has occasionally defended its European patents in such proceedings. For example the validity of Celgene’s patent EP 1 667 682 is currently the subject of an opposition proceeding before the EPO. If a significant product patent is successfully challenged in a post grant review proceeding it may be revoked, which would have a serious negative impact on our ability  to maintain exclusivity in the market place for our commercial products affected by such revocation.

On October 2, 2014, the EMA adopted its clinical transparency policy, "Policy on Publication of Clinical Data for Medicinal Products for Human Use" (the “Clinical Data Policy”), which became effective on January 1, 2015. In general, under the Clinical Data Policy, clinical data is not deemed to be commercially confidential data. Therefore, there is a risk that unpublished proprietary information, including trade secrets that are incorporated into a marketing application before the EMA may be made publicly available. While it is difficult to predict how the EMA will interpret and apply the Clinical Data Policy, any public disclosure of our trade secrets or other confidential and proprietary information may adversely impact our patent rights and our competitive advantage in the marketplace.

Also, different countries have different procedures for obtaining patents and patents issued by different countries provide different degrees of protection against the use of a patented invention by others. There can be no assurance that the issuance to us in one country of a patent covering an invention will be followed by the issuance in other countries of patents covering the same invention

63

or that any judicial interpretation of the validity, enforceability or scope of the claims in a patent issued in one country will be similar to or recognized by the judicial interpretation given to a corresponding patent issued in another country.

The United States Patent and Trademark Office and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction.

We also rely upon unpatented, proprietary and trade secret technology that we seek to protect, in part, by confidentiality agreements with our collaborative partners, employees, consultants, outside scientific collaborators, sponsored researchers and other advisors. Despite precautions taken by us, there can be no assurance that these agreements provide meaningful protection, that they will not be breached, that we would have adequate remedies for any such breach or that our proprietary and trade secret technologies will not otherwise become known to others or found to be non-proprietary.

We receive confidential and proprietary information from collaborators, prospective licensees and other third parties. In addition, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants or independent contractors have inadvertently or otherwise used or disclosed confidential information of these third parties or our employees’ former employers. Litigation may be necessary to defend against these claims, which can result in significant costs if we are found to have improperly used the confidential or proprietary information of others. Even if we are successful in defending against these claims, litigation could result in substantial costs and diversion of personnel and resources.

Our products may face competition from lower cost generic or follow-on products.
 
Manufacturers of generic drugs are seeking to compete with our drugs and present a significant challenge to us. Those manufacturers may challenge the scope, validity or enforceability of our patents in court, requiring us to engage in complex, lengthy and costly litigation. If any of our owned or licensed patents are infringed or challenged, we may not be successful in enforcing or defending those intellectual property rights and, as a result, may not be able to develop or market the relevant product exclusively, which would have a material adverse effect on our sales from that product. In addition, manufacturers of innovative drugs as well as generic drug manufacturers may be able to design their products around our owned or licensed patents and compete with us using the resulting alternative technology. For more information concerning certain pending proceedings relating to our intellectual property rights, see "Legal Proceedings" contained elsewhere in this report.
 
Upon the expiration or loss of patent protection for a product, or upon the “at-risk” launch (despite pending patent infringement litigation against the generic product) by a manufacturer of a generic version of one of our products, we can quickly lose a significant portion of our sales of that product. In addition, if generic versions of our competitors’ branded products lose their market exclusivity, our patented products may face increased competition or pricing pressure.

Our business operates in an extremely competitive environment.
 
The pharmaceutical and biotechnology industries in which we operate are highly competitive and subject to rapid and significant technological change. Our present and potential competitors include major pharmaceutical and biotechnology companies, as well as specialty pharmaceutical firms, including, but not limited to:

•
Hematology and Oncology: AbbVie, Amgen, AstraZeneca, Bristol-Myers-Squibb, Eisai, Gilead, Johnson & Johnson, Novartis, Roche/Genentech, Sanofi and Takeda.
•
Inflammation and Immunology: AbbVie, Amgen, Biogen, Eisai, Eli Lilly, Johnson & Johnson, Merck, Pfizer, Novartis and UCB S.A.
Some of these companies have considerably greater financial, technical and marketing resources than we have, enabling them, among other things, to make greater research and development investments. We also experience competition in drug development from universities and other research institutions, and we compete with others in acquiring technology from these sources. The pharmaceutical industry has undergone, and is expected to continue to undergo, rapid and significant technological change and we expect competition to intensify as technical advances are made and become more widely known. The development of products

64

or processes by our competitors with significant advantages over those that we are developing could adversely affect our future revenues and profitability.

A decline in general economic conditions would adversely affect our results of operations.
 
Sales of our products are dependent, in large part, on third-party payers. As a result of global credit and financial market conditions, these organizations may be unable to satisfy their reimbursement obligations or may delay payment. For information about amounts receivable from the government-owned or -controlled hospitals in Spain, Italy and Portugal, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

In addition, due to tightened global credit, there may be a disruption or delay in the performance of our third-party contractors, suppliers or collaborators. We rely on third parties for several important aspects of our business, including portions of our product manufacturing, clinical development of future collaboration products, conduct of clinical trials and supply of raw materials. If such third parties are unable to satisfy their commitments to us, our business could be adversely affected.
 
We may be required to modify our business practices, pay fines and significant expenses or experience other losses due to governmental investigations or other enforcement activities.
 
We may become subject to litigation or governmental investigations in the United States and foreign jurisdictions that may arise from the conduct of our business. Like many companies in our industry, we have from time to time received inquiries and subpoenas and other types of information requests from government authorities and we have been subject to claims and other actions related to our business activities. For more information relating to governmental investigations and other legal proceedings, see "Legal Proceedings" contained elsewhere in this report.

While the ultimate outcomes of investigations and legal proceedings are difficult to predict, adverse resolutions or settlements of those matters could result in, among other things:

•
significant damage awards, fines, penalties or other payments, and administrative remedies, such as exclusion and/or debarment from government programs, or other rulings that preclude us from operating our business in a certain manner;
•
changes and additional costs to our business operations to avoid risks associated with such litigation or investigations;
•
product recalls;
•
reputational damage and decreased demand for our products; and
•
expenditure of significant time and resources that would otherwise be available for operating our business.
The development of new biopharmaceutical products involves a lengthy and complex process and we may be unable to commercialize any of the products we are currently developing.
 
Many of our drug candidates are in the early or mid-stages of research and development and will require the commitment of substantial financial resources, extensive research, development, preclinical testing, clinical trials, manufacturing scale-up and regulatory approval prior to being ready for sale. This process takes many years of effort without any assurance of ultimate success. Our product development efforts with respect to a product candidate may fail for many reasons, including:

•
the failure of the product candidate in preclinical or clinical studies;

•
adverse patient reactions to the product candidate or indications of other safety concerns;

•
insufficient clinical trial data to support the effectiveness or superiority of the product candidate;

•
our inability to manufacture sufficient quantities of the product candidate for development or commercialization activities in a timely and cost-efficient manner;

•
our failure to obtain, or delays in obtaining, the required regulatory approvals for the product candidate, the facilities or the process used to manufacture the product candidate;


65

•
changes in the regulatory environment, including pricing and reimbursement, that make development of a new product or of an existing product for a new indication no longer attractive;

•
the failure to obtain or maintain satisfactory drug reimbursement rates by governmental or third-party payers; and

•
the development of a competitive product or therapy.

The stem cell products that we are developing through our CCT subsidiary may represent substantial departures from established treatment methods and will compete with a number of traditional products and therapies which are now, or may be in the future, manufactured and marketed by major pharmaceutical and biopharmaceutical companies. Furthermore, public attitudes may be influenced by claims that stem cell therapy is unsafe and stem cell therapy may not gain the acceptance of the public or the medical community.

If a product were to fail to be approved or if sales fail to materialize for a newly approved product, we may incur losses related to the write-down of inventory, impairment of property, plant and equipment dedicated to the product or expenses related to restructuring.

Disruptions of our manufacturing and distribution operations could significantly interrupt our production and distribution capabilities.

We have our own manufacturing facilities for many of our products and we have contracted with third parties to provide other manufacturing, finishing, and packaging services. Any of those manufacturing processes could be partially or completely disrupted by fire, contamination, natural disaster, terrorist attack or governmental action. A disruption could lead to substantial production delays and the need to establish alternative manufacturing sources for the affected products requiring additional regulatory approvals. In the interim, our finished goods inventories may be insufficient to satisfy customer orders on a timely basis. Further, our business interruption insurance may not adequately compensate us for any losses that may occur.
 
In all the countries where we sell our products, governmental regulations define standards for manufacturing, packaging, labeling, distributing and storing pharmaceutical products. Our failure to comply, or the failure of our contract manufacturers and distributors to comply with applicable regulations could result in sanctions being imposed on them or us, including fines, injunctions, civil penalties, disgorgement, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions.
 
We have contracted with distributors to distribute REVLIMID®, THALOMID®, VIDAZA®, ABRAXANE®, POMALYST®/IMNOVID®, ISTODAX® and OTEZLA®. If our distributors fail to perform and we cannot secure a replacement distributor within a reasonable period of time, our revenue could be adversely affected.

The consolidation of drug wholesalers and other wholesaler actions could increase competitive and pricing pressures.
 
We sell our pharmaceutical products in the United States primarily through wholesale distributors and contracted pharmacies. These wholesale customers comprise a significant part of our distribution network for pharmaceutical products in the United States. This distribution network is continuing to undergo significant consolidation. As a result, a smaller number of large wholesale distributors and pharmacy chains control a significant share of the market. We expect that consolidation of drug wholesalers and pharmacy chains will increase competitive and pricing pressures on pharmaceutical manufacturers, including us. In addition, wholesalers may apply pricing pressure through fee-for-service arrangements and their purchases may exceed customer demand, resulting in increased returns or reduced wholesaler purchases in later periods.

Risks from the improper conduct of employees, agents, contractors or collaborators could adversely affect our business or reputation.
 
We cannot ensure that our compliance controls, policies and procedures will in every instance protect us from acts committed by our employees, agents, contractors or collaborators that violate the laws or regulations of the jurisdictions in which we operate, including employment, anti-corruption, environmental, competition and privacy laws. Such improper actions, particularly with respect to foreign healthcare professionals and government officials, could subject us to civil or criminal investigations, monetary and injunctive penalties, adversely impact our ability to conduct business in certain markets, negatively affect our results of operations and damage our reputation.


66

We are subject to a variety of risks related to the conduct and expansion of our business internationally, particularly in emerging markets.

As our operations expand globally, we are subject to risks associated with conducting business in foreign markets, particularly in emerging markets. Those risks include:

•
increased management, travel, infrastructure and legal compliance costs;
•
longer payment and reimbursement cycles;
•
difficulties in enforcing contracts and collecting accounts receivable;
•
local marketing and promotional challenges;
•
lack of consistency, and unexpected changes, in foreign regulatory requirements and practices;
•
increased risk of governmental and regulatory scrutiny and investigations;
•
increased exposure to fluctuations in currency exchange rates;
•
the burdens of complying with a wide variety of foreign laws and legal standards;
•
operating in locations with a higher incidence of corruption and fraudulent business practices;
•
difficulties in staffing and managing foreign sales and development operations;
•
import and export requirements, tariffs, taxes and other trade barriers;
•
weak or no protection of intellectual property rights;
•
possible enactment of laws regarding the management of and access to data and public networks and websites;
•
possible future limitations on foreign-owned businesses;
•
increased financial accounting and reporting burdens and complexities; and
•
other factors beyond our control, including political, social and economic instability, popular uprisings, war, terrorist attacks and security concerns in general.
As we continue to expand our business into multiple international markets, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these risks could harm our international operations and reduce our sales, adversely affecting our business, results of operations, financial condition and growth prospects.

We may not realize the anticipated benefits of acquisitions and strategic initiatives.
 
We may face significant challenges in effectively integrating entities and businesses that we acquire and we may not realize the benefits anticipated from such acquisitions. Achieving the anticipated benefits of our acquired businesses will depend in part upon whether we can integrate our businesses in an efficient and effective manner. Our integration of acquired businesses involves a number of risks, including:
 
•
demands on management related to the increase in our size after an acquisition;
•
the diversion of management’s attention from daily operations to the integration of acquired businesses and personnel;
•
higher than anticipated integration costs;
•
failure to achieve expected synergies and costs savings;
•
difficulties in the assimilation and retention of employees;

67

•
difficulties in the assimilation of different cultures and practices, as well as in the assimilation of broad and geographically dispersed personnel and operations; and
•
difficulties in the integration of departments, systems, including accounting systems, technologies, books and records and procedures, as well as in maintaining uniform standards and controls, including internal control over financial reporting, and related procedures and policies.

In addition, we may not be able to realize the projected benefits of corporate strategic initiatives we may pursue in the future.

We may not be able to continue to attract and retain highly qualified managerial, scientific, manufacturing and commercial talent.
 
The success of our business depends, in large part, on our continued ability to attract and retain highly qualified managerial, scientific, medical, manufacturing, commercial and other professional personnel, and competition for these types of personnel is intense. We cannot be sure that we will be able to attract or retain skilled personnel or that the costs of doing so will not materially increase.
 
Risks associated with using hazardous materials in our business could subject us to significant liability.
 
We use certain hazardous materials in our research, development, manufacturing and other business activities. If an accident or environmental discharge occurs, or if we discover contamination caused by prior owners and operators of properties we acquire, we could be liable for remediation obligations, damages and fines that could exceed our insurance coverage and financial resources. Additionally, the cost of compliance with environmental and safety laws and regulations may increase in the future, requiring us to expend more financial resources either in compliance or in purchasing supplemental insurance coverage.

We are subject to various legal proceedings, claims and investigative demands in the ordinary course of our business, the ultimate outcome of which may result in significant expense, payments and penalties.

We and certain of our subsidiaries are involved in various legal proceedings that include patent, product liability, consumer, commercial, antitrust and other claims that arise from time to time in the ordinary course of our business. Litigation is inherently unpredictable. Although we believe we have substantial defenses in these matters, we could in the future be subject to adverse judgments, enter into settlements of claims or revise our expectations regarding the outcomes of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which such judgments are received or settlements occur.

Our activities relating to the sale and marketing and the pricing of our products are subject to extensive regulation under the U.S. Federal Food, Drug, and Cosmetic Act, the Medicaid Drug Rebate Program, the False Claims Act, the Foreign Corrupt Practices Act and other federal and state statutes, including those discussed elsewhere in this report, as well as anti-kickback and false claims laws, and similar laws in international jurisdictions. Like many companies in our industry, we have from time to time received inquiries and subpoenas and other types of information demands from government authorities, and been subject to claims and other actions related to our business activities brought by governmental authorities, as well as by consumers, payors, stockholders and others. There can be no assurance that existing or future proceedings will not result in significant expense, civil payments, fines or other adverse consequences.

Product liability claims could adversely affect our business, results of operations and financial condition.

Product liability claims could result in significant damage awards or settlements. Such claims can also be accompanied by consumer fraud claims or claims by third-party payers seeking reimbursement of the cost of our products. In addition, adverse determinations or settlements of product liability claims may result in suspension or withdrawal of a product marketing authorization or changes to our product labeling, including restrictions on therapeutic indications, inclusion of new contraindications, warnings or precautions. Although we purchase product liability coverage from third-party carriers, it is increasingly difficult and costly to obtain. There can be no assurance that we will be able to recover under any insurance policy or that such coverage will be adequate to fully cover all risks or damage awards or settlements. Product liability claims, regardless of their merits or ultimate outcome, are costly, divert management's attention, may harm our reputation and can impact the demand for our products.


68

Changes in our effective income tax rate could adversely affect our results of operations.
 
We are subject to income taxes in both the United States and various foreign jurisdictions and our domestic and international tax liabilities are largely dependent upon the distribution of income among these different jurisdictions. Various factors may have favorable or unfavorable effects on our effective income tax rate. These factors include interpretations of existing tax laws, the accounting for stock options and other share-based compensation, changes in tax laws and rates, future levels of research and development spending, changes in accounting standards, changes in the mix of earnings in the various tax jurisdictions in which we operate, the outcome of examinations by the U.S. Internal Revenue Service and other tax authorities, the accuracy of our estimates for unrecognized tax benefits and realization of deferred tax assets and changes in overall levels of pre-tax earnings. The impact on our income tax provision resulting from the above-mentioned factors and others could have a material impact on our results of operations.
 
Currency fluctuations and changes in exchange rates could adversely affect our revenue growth, increase our costs and cause our profitability to decline.
 
We collect and pay a substantial portion of our sales and expenditures in currencies other than the U.S. dollar. Therefore, fluctuations in foreign currency exchange rates affect our operating results. We utilize foreign currency forward contracts and occasionally foreign currency put and call options, all of which are derivative instruments, to manage foreign currency risk. We use these derivative instruments to hedge certain forecasted transactions, manage exchange rate volatility in the translation of foreign earnings and reduce exposures to foreign currency fluctuations of certain balance sheet items denominated in foreign currencies. The use of these derivative instruments is intended to mitigate a portion of the exposure of these risks with the intent to reduce our risk or cost, but generally would not fully offset any change in operating results as a consequence of fluctuations in foreign currencies. Any significant foreign exchange rate fluctuations could adversely affect our financial condition and results of operations. See Note 7 of Notes to Unaudited Consolidated Financial Statements and Item 3. “Quantitative and Qualitative Disclosures About Market Risk” contained elsewhere in this report.
 
We may experience an adverse market reaction if we are unable to meet our financial reporting obligations.
 
As we continue to expand at a rapid pace, the development of new and/or improved automated systems will remain an ongoing priority. During this expansion period, our internal control over financial reporting may not prevent or detect misstatements in our financial reporting. Such misstatements may result in litigation and/or negative publicity and possibly cause an adverse market reaction that may negatively impact our growth plans and the value of our common stock.
 
Impairment charges or write downs in our books and changes in accounting standards could have a significant adverse effect on our results of operations and financial condition.

New or revised accounting standards, rules and interpretations could result in changes to the recognition of income and expense that may materially and adversely affect our financial results. In addition, the value allocated to certain of our assets could be substantially impaired due to a number of factors beyond our control. Also, if any of our strategic equity investments decline in value, we may be required to write down such investment.

The price of our common stock may fluctuate significantly.
 
The market for our shares of common stock may fluctuate significantly. The following key factors may have an adverse impact on the market price of our common stock:

•
results of our clinical trials or adverse events associated with our marketed products;
•
fluctuations in our commercial and operating results;
•
announcements of technical or product developments by us or our competitors;
•
market conditions for pharmaceutical and biotechnology stocks in particular;
•
changes in laws and governmental regulations, including changes in tax, healthcare, environmental, competition and patent laws;
•
new accounting pronouncements or regulatory rulings;

69

•
public announcements regarding medical advances in the treatment of the disease states that we are targeting;
•
patent or proprietary rights developments;
•
changes in pricing and third-party reimbursement policies for our products;
•
the outcome of litigation involving our products, processes or intellectual property;
•
the existence and outcome of governmental investigations and proceedings;
•
regulatory actions that may impact our products or potential products;
•
disruptions in our manufacturing processes or supply chain;
•
failure of our collaboration partners to successfully develop potential drug candidates;
•
competition; and
•
investor reaction to announcements regarding business or product acquisitions.
In addition, a market downturn in general and/or in the biopharmaceutical sector in particular, may adversely affect the market price of our securities, which may not necessarily reflect the actual or perceived value of our Company.
 
Our business would be adversely affected if we are unable to service our debt obligations.
 
We have incurred various forms of indebtedness, including senior notes, commercial paper and a senior unsecured credit facility. Our ability to pay interest and principal amounts when due, comply with debt covenants or repurchase the senior notes if a change of control occurs, will depend upon, among other things, continued commercial success of our products and other factors that affect our future financial and operating performance, including prevailing economic conditions and financial, business and regulatory factors, many of which are beyond our control.
 
If we are unable to generate sufficient cash flow to service the debt service requirements under our debt instruments, we may be forced to take remedial actions such as:

•
restructuring or refinancing our debt;
•
seeking additional debt or equity capital;
•
reducing or delaying our business activities, acquisitions, investments or capital expenditures, including research and development expenditures; or
•
selling assets, businesses, products or other potential revenue streams.
Such measures might not be successful and might not enable us to service our debt obligations. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms, if at all.
 
A breakdown or breach of our information technology systems could subject us to liability or interrupt the operation of our business.

We rely upon our information technology systems and infrastructure for our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown and unauthorized intrusion. We could also experience a business interruption, theft of confidential information, or reputational damage from industrial espionage attacks, malware or other cyber attacks, which may compromise our system infrastructure or lead to data leakage, either internally or at our third-party providers.
Similarly, data privacy breaches by those who access our systems may pose a risk that sensitive data, including intellectual property, trade secrets or personal information belonging to us, our patients, employees, customers or other business partners, may be exposed to unauthorized persons or to the public. There can be no assurance that our efforts to protect our data and information technology systems will prevent breakdowns or breaches in our systems that could adversely affect our business and result in financial and reputational harm to us.


70

The illegal distribution and sale by third parties of counterfeit versions of our products or stolen products could have a negative impact on our reputation and business.

Third parties might illegally distribute and sell counterfeit or unfit versions of our products, which do not meet our rigorous manufacturing and testing standards. A patient who receives a counterfeit or unfit drug may be at risk for a number of dangerous health consequences. Our reputation and business could suffer harm as a result of counterfeit or unfit drugs sold under our brand name. In addition, thefts of inventory at warehouses, plants or while in-transit, which are not properly stored and which are sold through unauthorized channels, could adversely impact patient safety, our reputation and our business.

We have certain charter and by-law provisions that may deter a third-party from acquiring us and may impede the stockholders’ ability to remove and replace our management or board of directors.
 
Our board of directors has the authority to issue, at any time, without further stockholder approval, up to 5.0 million shares of preferred stock and to determine the price, rights, privileges and preferences of those shares. An issuance of preferred stock could discourage a third-party from acquiring a majority of our outstanding voting stock. Additionally, our by-laws contain provisions intended to strengthen the board’s position in the event of a hostile takeover attempt. These provisions could impede the stockholders’ ability to remove and replace our management and/or board of directors. Furthermore, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law, which may also dissuade a potential acquirer of our common stock.
 
In addition to the risks relating to our common stock, holders of our CVRs are subject to additional risks.
 
On October 15, 2010, we acquired all of the outstanding common stock of Abraxis BioScience, Inc. (Abraxis) and in connection with our acquisition, contingent value rights (CVRs) were issued entitling each holder of a CVR to a pro rata portion of certain milestone and net sales payments if certain specified conditions are satisfied. In addition to the risks relating to our common stock, CVR holders are subject to additional risks, including:

•
an active public market for the CVRs may not continue to exist or the CVRs may trade at low volumes, both of which could have an adverse effect on the market price of the CVRs;
•
if the clinical approval milestones or net sales targets specified in the CVR Agreement are not achieved within the time periods specified, no payment will be made and the CVRs will expire valueless;
•
since the U.S. federal income tax treatment of the CVRs is unclear, any part of a CVR payment could be treated as ordinary income and the tax thereon may be required to be paid prior to the receipt of the CVR payment;
•
any payments in respect of the CVRs are subordinated to the right of payment of certain of our other indebtedness;
•
we may under certain circumstances redeem the CVRs; and
•
upon expiration of our obligations under the CVR Agreement to continue to commercialize ABRAXANE® or any of the other Abraxis pipeline products, we may discontinue such efforts, which would have an adverse effect on the value of the CVRs.

71

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
(c)    Issuer Purchases of Equity Securities
 
From April 2009 through June 2015, our Board of Directors approved purchases of up to $17.500 billion of our common stock. Approved amounts exclude share purchase transaction fees.

The following table presents the number of shares purchased during the three-month period ended June 30, 2015, the average price paid per share, the number of shares that were purchased and the dollar value of shares that still could have been purchased, pursuant to our repurchase authorization:
Period
 
Total Number of
Shares Purchased
 
Average Price Paid
per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced Plans or Programs
 
Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs
April 1 - April 30
 
2,250,456

 
$
114.90

 
2,250,456

 
$
1,755,270,793

May 1 - May 31
 
2,685,104

 
$
113.33

 
2,685,104

 
$
1,450,965,687

June 1 - June 30
 
2,984,996

 
$
113.47

 
2,984,996

 
$
5,112,255,454

Total
 
7,920,556

 
$
113.83

 
7,920,556

 
 

 
During the three-month period ended June 30, 2015, we purchased 7.9 million shares of common stock under the share repurchase program at a cost of $901.6 million, excluding commissions. As of June 30, 2015, we had a remaining purchase authorization of $5.112 billion.

During the period covered by this report, we did not sell any of our securities that were not registered under the Securities Act of 1933, as amended.

72

Item 6. Exhibits
 
2.1

Agreement and Plan of Merger, dated as of July 14, 2015, among Celgene Corporation, Strix Corporation and Receptos, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on July 15, 2015).
 
 
10.27*

Letter agreement with Scott A. Smith.
 
 
10.5*

Celgene Corporation 2008 Stock Incentive Plan, as amended and restated as of April 15, 2015.
 
 
31.1*

Certification by the Company's Chief Executive Officer.
 

 
31.2*

Certification by the Company's Chief Financial Officer.
 

 
32.1*

Certification by the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
 

 
32.2*

Certification by the Company's Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
 

 
101*

The following materials from Celgene Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows and (v) Notes to Unaudited Consolidated Financial Statements.
 
 
 
* Filed herewith.

73

SIGNATURE
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
CELGENE CORPORATION
 
 
 
 
 
 
 
 
 
 
 
 
Date:
July 28, 2015
By:
/s/ Peter N. Kellogg
 
 
 
 
Peter N. Kellogg
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
(principal financial and accounting officer)

74


Exhibit 10.27

Summary of 2015 Compensation Package

Name
Scott A. Smith
 
Job Title
President, Inflammation & Immunology
 
Base Salary
$650,000
Effective March 1, 2015
Bonus Target
75%
Effective January 1, 2015
Annual Equity Award
Stock Options
Performance Stock Units
Restricted Stock Units
Effective February 17, 2015
Threshold
Target
Maximum
34,500
3,100
6,200
12,400
3,500
Severance Benefit
Lump sum 12 months of base salary
Lump sum 12 months of bonus at target
12 months COBRA benefit at active employee rates, less applicable taxes
In the event of involuntary termination for reasons other than cause
"Double Trigger" due to Change in Control
All severance benefits
Unvested RSUs and Options would fully vest
Change in control payments would be reduced to avoid 280G excise tax, if beneficial to employee
In the event of position elimination due to change in control
Financial Planning Benefit
Up to $15,000 per year
Reimbursement of reasonable and customary fees associated with financial planning and/or tax preparation/advice
Acknowledged and agreed:

 
On behalf of Celgene Corporation:
 
 
 
 
 
 
 
/s/Scott A. Smith
 
July 27, 2015
 
/s/Robert J. Hugin
 
July 27, 2015
Scott A. Smith
 
Date
 
Robert J. Hugin
 
Date







Celgene Corporation
2008 Stock Incentive Plan
(Amended and Restated as of April 15, 2015)

Article 1.
PURPOSE

The purpose of this Celgene Corporation 2008 Stock Incentive Plan (Amended and Restated as of April 15, 2015) (the “Plan”) (formerly known as the 1998 Stock Incentive Plan, and, prior to April 23, 2003, as the 1998 Long-Term Incentive Plan), with certain designated provisions being subject to stockholder approval at the 2015 annual meeting of stockholders on June 17, 2015, is to enhance the profitability and value of the Company and its Affiliates for the benefit of its stockholders by enabling the Company to offer selected management and other employees of the Company and its Affiliates and Non-Employee Directors of the Company, stock based incentives and other equity interests in the Company, thereby creating a means to raise the level of stock ownership by employees and directors in order to attract, retain and reward such individuals and strengthen the mutuality of interests between such individuals and the Company’s stockholders.

Article 2.
DEFINITIONS

For purposes of this Plan, the following terms shall have the following meanings:

2.1    “Affiliate” shall mean other than the Company, (i) any Subsidiary, (ii) any corporation in an unbroken chain of corporations ending with the Company which owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain, (iii) any corporation, trade or business (including, without limitation, a partnership or limited liability company) which is controlled 50% or more (whether by ownership of stock, assets or an equivalent ownership interest or voting interest) by the Company or one of its Affiliates, or (iv) any other entity, approved by the Committee as an Affiliate under the Plan, in which the Company or any of its Affiliates has a material equity interest and which is designated as an “Affiliate” by resolution of the Committee; provided that the Common Stock subject to any Award constitutes “service recipient stock” for purposes of Section 409A of the Code or otherwise does not subject the Award to Section 409A of the Code.

2.2    “Award” shall mean any award under this Plan of any Stock Option, Restricted Stock, Stock Appreciation Right, Other Stock-Based Award or Performance-Based Award. All Awards, shall be granted by, confirmed by, and subject to the terms of, a written agreement executed by the Company and the Participant.

2.3    “Board” or “Board of Directors” shall mean the Board of Directors of the Company.

2.4    “Cause” shall mean, with respect to a Participant’s Termination of Employment: (i) in the case where there is no employment agreement, consulting agreement, change in control agreement or similar agreement in effect between the Company or an Affiliate and the Participant at the time of the relevant grant or Award, or where there is an employment agreement, consulting agreement, change in control agreement or similar agreement in effect at the time of the relevant grant or Award but such agreement does not define “cause” (or words of like import), termination due to a Participant’s dishonesty, fraud, insubordination, willful misconduct, refusal to perform services (for any reason other than illness or incapacity) or materially unsatisfactory performance of his or her duties for the Company or an Affiliate or (ii) in the case where there is an employment agreement, consulting agreement, change in control agreement or similar agreement in effect between the Company or an Affiliate and the Participant at the time of the relevant grant or Award that defines “cause” (or words of like import) and a “cause” termination would be permitted under such agreement at that time, termination that is or would be deemed to be for “cause” (or words of like import) as defined under such agreement; provided, that with regard to any agreement that conditions “cause” on occurrence of a change in control, such definition of “cause” shall not apply until a change in control actually takes place and then only with regard to a termination thereafter. With respect to a Non-Employee Director’s Termination of Directorship, “Cause” shall mean (i) a Non-Employee Director’s conviction of, or plea of guilty or nolo contendere to, a felony or (ii) dishonesty, fraud or willful misconduct by the Non-Employee Director in fulfilling the Non-Employee Director’s duties to the Company.

2.5    “Change in Control” shall have the meaning set forth in Article 13.

2.6    “Code” shall mean the Internal Revenue Code of 1986, as amended.

2.7    “Committee” shall mean the Compensation Committee of the Board or such other committee or subcommittee appointed from time to time by the Board, which shall be intended to consist of two (2) or more non-employee directors, each of whom shall be, to the extent required by Rule 16b-3 (as defined herein), a “non-employee director” as defined in Rule 16b-3 and, to the extent




required by Section 162(m) of the Code and any regulations thereunder, an “outside director” as defined under Section 162(m) of the Code and to the extent required by Rule 5605(a)(2) of the Nasdaq Listing Rules or such other applicable stock exchange rule, an independent director. Notwithstanding the foregoing, if and to the extent that no Committee exists which has the authority to administer the Plan, the functions of the Committee shall be exercised by the Board. If for any reason the appointed Committee does not meet the requirements of Rule 16b-3 or Section 162(m) of the Code, such noncompliance with the requirements of Rule 16b-3 or Section 162(m) of the Code shall not affect the validity of the Awards, grants, interpretations or other actions of the Committee.

2.8    “Common Stock” shall mean the common stock, $.01 par value per share, of the Company.

2.9    “Company” shall mean Celgene Corporation, a Delaware corporation, and its successors by merger, consolidation or otherwise.

2.10    “Disability” shall mean, with respect to a Participant, a permanent and total disability as defined in Section 22(e)(3) of the Code. A Disability shall only be deemed to occur at the time of the determination by the Committee or the Board, as the case may be, of the Disability. Notwithstanding the foregoing, for Awards that are subject to Section 409A of the Code, Disability shall mean that a Participant is disabled under Section 409A(a)(2)(C)(i) or (ii) of the Code.

2.11    “Effective Date” shall mean April 15, 2015, subject to Article 17.

2.12    “Eligible Employees” shall mean the employees of the Company and its Affiliates who are eligible pursuant to Article 5 to be granted Awards under this Plan.

2.13    “Exchange Act” shall mean the Securities Exchange Act of 1934.

2.14    “Fair Market Value” for purposes of this Plan, unless otherwise required by any applicable provision of the Code or any regulations issued thereunder, shall mean, as of any date the last sales price reported for the Common Stock on the applicable date (i) as reported by the principal national securities exchange in the United States on which it is then traded, or (ii) if not traded on any such national securities exchange, as quoted on an automated quotation system sponsored by the Financial Industry Regulatory Authority. For purposes of the exercise of any Award, the applicable date shall be the date a notice of exercise is received by the Committee or, if not a day on which the applicable market is open, the next day that it is open.

2.15    “Family Member” shall mean, with respect to any Participant, any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in- law, including adoptive relationships, any person sharing the Participant’s household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than 50% of the voting interests.

2.16    “Incentive Stock Option” shall mean any Stock Option awarded under this Plan intended to be and designated as an “Incentive Stock Option” within the meaning of Section 422 of the Code.

2.17    “Limited Stock Appreciation Right” shall mean an Award made pursuant to Section 8.5 of the Plan which may be a Tandem Stock Appreciation Right or a Non-Tandem Stock Appreciation Right.

2.18    “Named Executive Officer” shall mean a “named executive officer” (as such term is defined under the Securities Act of 1933) of the Company listed in the Company’s most recent proxy statement for its annual meeting of stockholders.

2.19    “Non-Employee Director” shall mean a director of the Company who is not an active employee of the Company or an Affiliate.

2.20    “Non-Qualified Stock Option” shall mean any Stock Option awarded under this Plan that is not an Incentive Stock Option.

2.21    “Other Stock-Based Award” shall mean an Award under Article 9 of this Plan that is valued in whole or in part by reference to, or is payable in or otherwise based on, Common Stock, including, without limitation, a Restricted Stock Unit.

2.22    “Participant” shall mean an Eligible Employee or Non-Employee Director to whom an Award has been made pursuant to this Plan.





2.23    “Performance-Based Award” shall mean an Award made pursuant to Article 10 of this Plan of a right to receive awards of Common Stock and other Awards (including awards of cash) that are valued in whole or in part by reference to, or are payable in or otherwise based on, Common Stock or attainment of pre-established performance goals.

2.24    “Performance Criteria” has the meaning set forth in Exhibit A.

2.25    “Performance Goal” shall mean the objective performance goals established by the Committee and, if desirable for purposes of Section 162(m) of the Code, based on one or more Performance Criteria.

2.26    “Performance Period” shall mean three consecutive fiscal years of the Company, or such shorter period as determined by the Committee in its discretion.

2.27    “Restricted Stock” shall mean an award of shares of Common Stock under this Plan that is subject to restrictions under Article 7.

2.28    “Restricted Stock Unit” shall mean a type of Other Stock-Based Award granted under Article 9 which represents the right to receive cash, shares of Common Stock or a combination thereof as determined by the Committee in its sole discretion.

2.29    “Restriction Period” shall have the meaning set forth in Subsection 7.3(a) with respect to Restricted Stock for Eligible Employees.

2.30    “Retirement” shall mean, with respect to any Award granted on or after April 17. 2013, an Eligible Employee’s Termination of Employment due to a voluntary resignation at or after the earlier of: (1) the attainment of age fifty-five (55) and the completion of five (5) years of service, and (2) the attainment of an age plus completed years of service that equals sixty-five (65) and the completion of a minimum of two (2) years of service; provided, however, that unless otherwise determined by the Committee at the time of grant or thereafter, an Eligible Employee must provide the Committee or its designee with not less than six (6) months written notice of the Eligible Employee’s intent to terminate the Eligible Employee’s service with the Company and its Affiliates by reason of Retirement. Notwithstanding the foregoing, with respect to any Award granted on or after June 18, 2002 and prior April 17, 2013, “Retirement” shall mean an Eligible Employee’s Termination of Employment due to a voluntary resignation at or after the attainment of age fifty-five (55) and the completion of five (5) years of service. For purposes of determining a Participant’s eligibility for Retirement, “years of service” shall be determined by the Committee based on the Eligible Employee’s completed years of service from his or her hire date (after taking into account any breaks in service), or such other methodology as determined by the Committee in its sole discretion, provided that with respect to an Award that is subject to Section 16.15(b) of the Plan, such alternate methodology must be specified by the Committee in writing no later than the date of grant. With respect to a Non-Employee Director’s Termination of Directorship, Retirement means the Non-Employee Director’s failure to stand for reelection or the failure to be re-elected.

2.31    “Rule 16b-3” shall mean Rule 16b-3 under Section 16(b) of the Exchange Act as then in effect or any successor provisions.

2.32    “Section 162(m) of the Code” shall mean the exception for performance-based compensation under Section 162(m) of the Code and any Treasury regulations thereunder.

2.33    “Stock Appreciation Right” shall mean the right (pursuant to an Award granted under Article 8). A Tandem Stock Appreciation Right shall mean the right to surrender to the Company all (or a portion) of a Stock Option in exchange for an amount in Common Stock equal to the excess of (i) the Fair Market Value, on the date such Stock Option (or such portion thereof) is surrendered, of the Common Stock covered by such Stock Option (or such portion thereof), over (ii) the aggregate exercise price of such Stock Option (or such portion thereof). A Non-Tandem Stock Appreciation Right shall mean the right to receive an amount in Common Stock equal to the excess of (x) the Fair Market Value of a share of Common Stock on the date such right is exercised, over (y) the aggregate exercise price of such right, otherwise than on surrender of a Stock Option.

2.34    “Stock Option” or “Option” shall mean any option to purchase shares of Common Stock granted to Eligible Employees pursuant to Article 6 and to Non-Employee Directors pursuant to Article 11.

2.35    “Subsidiary” shall mean any subsidiary corporation of the Company within the meaning of Section 424(f) of the Code.

2.36    “Ten Percent Stockholder” shall mean a person owning stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its Subsidiaries or its parent corporations, as defined in Section 424(e) of the Code.





2.37    “Termination of Directorship” shall mean that the Non Employee Director has ceased to be a director of the Company. Notwithstanding the foregoing, the Committee may, in its sole discretion, otherwise define Termination of Directorship in the Award agreement or, if no rights of a Participant are reduced, may otherwise define Termination of Directorship thereafter.

2.38    “Termination of Employment” shall mean (i) a termination of service (for reasons other than a military or personal leave of absence granted by the Company) of a Participant from the Company and its Affiliates or (ii) when an entity which is employing a Participant ceases to be an Affiliate, unless the Participant thereupon becomes employed by the Company or another Affiliate.

2.39    “Transfer” or “Transferred” or “Transferable” shall mean anticipate, alienate, attach, sell, assign, pledge, encumber, charge, hypothecate or otherwise transfer.

Article 3.
ADMINISTRATION

3.1    The Committee. The Plan shall be administered and interpreted by the Committee.

3.2    Awards. The Committee shall have full authority to grant to Eligible Employees, pursuant to the terms of this Plan: (i) Stock Options, (ii) Restricted Stock, (iii) Stock Appreciation Rights, (iv) Other Stock-Based Awards and (v) Performance-Based Awards. In addition, the Committee shall have full authority to grant to Non-Employee Directors, pursuant to the terms of this Plan: (i) Non-Qualified Stock Options and (ii) Restricted Stock Units in accordance with Article 11. In particular, the Committee shall have the authority:

(a)    to select the Eligible Employees to whom Stock Options, Restricted Stock, Stock Appreciation Rights, Other Stock-Based Awards and Performance-Based Awards may from time to time be granted hereunder;

(b)    to determine whether and to what extent Stock Options, Restricted Stock, Stock Appreciation Rights, Other Stock-Based Awards and Performance-Based Awards or any combination thereof, are to be granted hereunder to one or more Eligible Employees;

(c)    to select the Non-Employee Directors to whom Non-Qualified Stock Options and Restricted Stock Units may from time to time be granted hereunder and determine whether and to what extent Non-Qualified Stock Options and Restricted Stock Units or any combination thereof, are to be granted hereunder to Non-Employee Directors;

(d)    to determine, in accordance with the terms of this Plan, the number of shares of Common Stock to be covered by each Award to an Eligible Employee or Non-Employee Director granted hereunder;

(e)    to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunder to an Eligible Employee or Non-Employee Director (including, but not limited to, the exercise or purchase price, any restriction or limitation, any vesting schedule or acceleration thereof, or any forfeiture restrictions or waiver thereof, regarding any Stock Option or other Award, and the shares of Common Stock relating thereto, based on such factors, if any, as the Committee shall determine, in its sole discretion);

(f)    to determine whether and under what circumstances a Stock Option may be settled in cash and/or Common Stock under Section 6.3(d);

(g)    to the extent permitted by applicable law, to determine whether, to what extent and under what circumstances to provide loans (which may be on a recourse basis and shall bear interest at the rate the Committee shall provide) to Eligible Employees in order to exercise Options under this Plan;

(h)    to determine whether to require an Eligible Employee or Non-Employee Director, as a condition of the granting of any Award, to not sell or otherwise dispose of shares acquired pursuant to the exercise of an Option or as an Award for a period of time as determined by the Committee, in its sole discretion, following the date of the acquisition of such Option or Award; and

(i)    to determine whether a Stock Appreciation Right is a Tandem Stock Appreciation Right or Non-Tandem Stock Appreciation Right.

3.3    Guidelines. Subject to Article 14 hereof, the Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing this Plan and perform all acts, including the delegation of its administrative




responsibilities, as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of this Plan and any Award issued under this Plan (and any agreements relating thereto); and to otherwise supervise the administration of this Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in this Plan or in any agreement relating thereto in the manner and to the extent it shall deem necessary to carry this Plan into effect but only to the extent any such action would be permitted under the applicable provisions of Rule 16b-3 and Section 162(m) of the Code. The Committee may adopt special guidelines and provisions for persons who are residing in, or subject to, the taxes of, countries other than the United States to comply with applicable tax and securities laws and may impose any limitations and restrictions that they deem necessary to comply with the applicable tax and securities laws of such countries other than the United States. Without limiting the generality of the foregoing, the French Addendum to the Plan previously adopted by the Committee for purposes of the grant of Stock Options to Participants who reside in, or are subject to taxation in, France, continues to be in full force and effect under the Plan as amended and restated herein. To the extent applicable, the Plan is intended to comply with the applicable requirements of Rule 16b-3 and the exception for performance-based compensation under Section 162(m) of the Code with regard to Options, Stock Appreciation Rights and certain awards of Other Stock-Based Awards and Performance-Based Awards and shall be limited, construed and interpreted in a manner so as to comply therewith.

3.4    Decisions Final. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Company, the Board, or the Committee (or any of its members) arising out of or in connection with the Plan shall be within the absolute discretion of all and each of them, as the case may be, and shall be final, binding and conclusive on the Company and all employees and Participants and their respective heirs, executors, administrators, successors and assigns.

3.5    Reliance on Counsel. The Company, the Board or the Committee may consult with legal counsel, who may be counsel for the Company or other counsel, with respect to its obligations or duties hereunder, or with respect to any action or proceeding or any question of law, and shall not be liable with respect to any action taken or omitted by it in good faith pursuant to the advice of such counsel.

3.6    Procedures. If the Committee is appointed, the Board shall designate one of the members of the Committee as chairman and the Committee shall hold meetings, subject to the By-Laws of the Company, at such times and places as it shall deem advisable. A majority of the Committee members shall constitute a quorum. All determinations of the Committee shall be made by a majority of the members present. Any decision or determination reduced to writing and signed by all the Committee members in accordance with the By-Laws of the Company, shall be fully as effective as if it had been made by a vote at a meeting duly called and held. The Committee shall keep minutes of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable.

3.7    Designation of Consultants/Liability.

(a)    To the extent permitted by applicable law and applicable exchange rules, the Committee may designate employees of the Company and professional advisors to assist the Committee in the administration of the Plan and may grant authority to employees to execute agreements or other documents on behalf of the Committee.

(b)    The Committee may employ such legal counsel, consultants, appraisers and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel, appraiser or consultant and any computation received from any such consultant, appraiser or agent. Expenses incurred by the Committee in the engagement of any such counsel, consultant, appraiser or agent shall be paid by the Company. The Board, the Committee, its members and any employee of the Company designated pursuant to paragraph (a) above shall not be liable for any action or determination made in good faith with respect to the Plan. To the maximum extent permitted by applicable law, no officer or employee of the Company or member or former member of the Committee or of the Board shall be liable for any action or determination made in good faith with respect to the Plan or any Award granted under it. To the maximum extent permitted by applicable law and the Certificate of Incorporation and By-Laws of the Company and to the extent not covered by insurance, each officer, employee of the Company and member or former member of the Committee or of the Board shall be indemnified and held harmless by the Company against any cost or expense (including reasonable fees of counsel reasonably acceptable to the Company) or liability (including any sum paid in settlement of a claim with the approval of the Company), and advanced amounts necessary to pay the foregoing at the earliest time and to the fullest extent permitted, arising out of any act or omission to act in connection with the Plan, except to the extent arising out of such officer’s, employee’s, member’s or former member’s own fraud or bad faith. Such indemnification shall be in addition to any rights of indemnification the officers, employees, directors or members or former officers, employees, directors or members may have under applicable law or under the Certificate of Incorporation or By-Laws of the Company or Affiliates. Notwithstanding anything else herein, this indemnification will not apply to the actions or determinations made by an individual with regard to Awards granted to him or her under this Plan.





Article 4.
SHARE AND OTHER LIMITATIONS

4.1    Shares.

(a)    General Limitation. The aggregate number of shares of Common Stock which may be issued or used for reference purposes under this Plan or with respect to which all Awards may be granted shall not exceed 247,763,282 shares effective upon, and subject to, stockholder approval at the Company’s 2015 annual meeting of stockholders (227,963,282 shares (adjusted to reflect the two-for-one stock split approved by stockholders on June 18, 2014) in the event such approval is not obtained), in each case, subject to any increase or decrease pursuant to Section 4.2. Any shares of Common Stock that are subject to Restricted Stock Awards or Other Stock-Based Awards or Performance-Based Awards denominated in shares of Common Stock granted on or after the date of the Company’s 2015 annual meeting of stockholders, shall be counted against this limit as 2.15 shares for every share granted. If any Option or Stock Appreciation Right granted under this Plan expires, terminates or is canceled for any reason without having been exercised in full, the number of shares of Common Stock underlying any unexercised Stock Appreciation Right or Option shall again be available for the purposes of Awards under the Plan. If a share of Restricted Stock or an Other Stock-Based Award or a Performance-Based Award denominated in shares of Common Stock granted under this Plan is forfeited for any reason on or after the date of the Company’s 2015 annual meeting of stockholders, 2.15 shares of Common Stock shall again be available for the purposes of Awards under the Plan. If a Tandem Stock Appreciation Right or a Limited Stock Appreciation Right is granted in tandem with an Option, such grant shall only apply once against the maximum number of shares of Common Stock which may be issued under this Plan. The number of shares of Common Stock available for the purpose of Awards under this Plan shall be reduced by (i) the total number of Options or Stock Appreciation Rights exercised, regardless of whether any of the shares of Common Stock underlying such Awards are not actually issued to the Participant as the result of a net settlement and (ii) any shares of Common Stock used to pay any exercise price or tax withholding obligation with respect to any Award. Shares of Common Stock repurchased by the Company on the open market with the proceeds of an Option exercise price shall not be added to the aggregate share reserve described herein.

(b)    Individual Participant Limitations.

(i)     The maximum number of shares of Common Stock subject to any Option or any Other Stock-Based Award or Performance-Based Award denominated in shares of Common Stock for any Performance Period which may be granted under this Plan during any fiscal year of the Company to each Eligible Employee shall be 3,000,000 shares (as adjusted to reflect the two-for-one stock split approved by stockholders on June 18, 2014, subject to any increase or decrease pursuant to Section 4.2); provided, however, that with respect to any Performance-Based Award or Other Stock-Based Award with a Performance Period that is less than three consecutive fiscal years, the maximum number of shares of Common Stock subject to any Other Stock-Based Award or Performance-Based Award shall be determined by multiplying 3,000,000 by a fraction, the numerator of which is the number of days in the Performance Period and the denominator of which is 1095.

(ii)    The maximum number of shares of Common Stock subject to any Stock Appreciation Right which may be granted under this Plan during any fiscal year of the Company to each Eligible Employee shall be 3,000,000 shares (as adjusted to reflect the two-for-one stock split approved by stockholders on June 18, 2014, subject to any increase or decrease pursuant to Section 4.2). If a Tandem Stock Appreciation Right or Limited Stock Appreciation Right is granted in tandem with an Option it shall apply against the Eligible Employee’s individual share limitations for both Stock Appreciation Rights and Options.

(iii)    The maximum payment under any Performance-Based Awards denominated in dollars under this Plan to each Eligible Employee for any Performance Period shall be $6,000,000, provided, however, that if the Performance Period is less than three consecutive fiscal years, the maximum value at grant of Performance-Based Awards under this subparagraph (iii) shall be determined by multiplying $6,000,000 by a fraction, the numerator of which is the number of days in the Performance Cycle and the denominator of which is 1095.

(iv)    There are no annual individual participant limitations on Restricted Stock or Other Stock-Based Awards that are not intended to comply with the requirements of Section 162(m) of the Code.

(v)    To the extent that shares of Common Stock for which Awards are permitted to be granted to a Participant pursuant to Section 4.1(b) during a fiscal year of the Company are not covered by an Award in the Company’s fiscal year, such shares of Common Stock shall not be available for grant or issuance to the Participant in any subsequent fiscal year during the term of this Plan.




4.2    Changes.

(a)    The existence of the Plan and the Awards granted hereunder shall not affect in any way the right or power of the Board or the stockholders of the Company to make or authorize any adjustment, recapitalization, reorganization or other change in the Company’s capital structure or its business, any merger or consolidation of the Company or its Affiliates, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting Common Stock, the dissolution or liquidation of the Company or its Affiliates, any sale or transfer of all or part of its assets or business or any other corporate act or proceeding.

(b)    In the event of any such change in the capital structure or business of the Company by reason of any stock dividend or distribution, stock split or reverse stock split, recapitalization, reorganization, merger, consolidation, split-up, combination or exchange of shares, distribution with respect to its outstanding Common Stock or capital stock other than Common Stock, reclassification of its capital stock, conversion of the Company’s preferred stock, issuance of warrants or options to purchase any Common Stock or securities convertible into Common Stock, any sale or Transfer of all or part of the Company’s assets or business, or any similar change affecting the Company’s capital structure or business, then the aggregate number and kind of shares which thereafter may be issued under this Plan, the number and kind of shares or other property (including cash) to be issued upon exercise of an outstanding Option or other Awards granted under this Plan and the purchase price thereof shall be appropriately adjusted consistent with such change in such manner as the Committee may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, Participants under this Plan, and any such adjustment determined by the Committee in good faith shall be binding and conclusive on the Company and all Participants and employees and their respective heirs, executors, administrators, successors and assigns.

(c)    Fractional shares of Common Stock resulting from any adjustment in Options or Awards pursuant to Section 4.2(a) or (b) shall be aggregated until, and eliminated at, the time of exercise by rounding-down for fractions less than one-half (1/2) and rounding-up for fractions equal to or greater than one-half (1/2). No fractional shares of Common Stock shall be issued under the Plan, and no cash settlements shall be made with respect to fractional shares eliminated by rounding. Notice of any adjustment shall be given by the Committee to each Participant whose Option or Award has been adjusted and such adjustment (whether or not such notice is given) shall be effective and binding for all purposes of the Plan.

(d)    In the event of a merger or consolidation in which the Company is not the surviving entity or in the event of any transaction that results in the acquisition of substantially all of the Company’s outstanding Common Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of all or substantially all of the Company’s assets (all of the foregoing being referred to as “Acquisition Events”), then the Committee may, in its sole discretion, terminate all outstanding Options, Stock Appreciation Rights and Other Stock-Based Awards requiring exercise or similar action by a Participant, effective as of the date of the Acquisition Event, by delivering notice of termination to each such Participant at least twenty (20) days prior to the date of consummation of the Acquisition Event; provided, that during the period from the date on which such notice of termination is delivered to the consummation of the Acquisition Event, each such Participant shall have the right to exercise in full all of his or her Options and Stock Appreciation Rights that are then outstanding (without regard to any limitations on exercisability otherwise contained in the Option or Award Agreements) but contingent on occurrence of the Acquisition Event, and, provided that, if the Acquisition Event does not take place within a specified period after giving such notice for any reason whatsoever, the notice and exercise shall be null and void.

If an Acquisition Event occurs, to the extent the Committee does not terminate the outstanding Options, Stock Appreciation Rights and Other Stock-Based Awards pursuant to this Section 4.2(d), then the provisions of Section 4.2(b) shall apply.

4.3    Purchase Price. Notwithstanding any provision of this Plan to the contrary, if authorized but previously unissued shares of Common Stock are issued under this Plan, such shares shall not be issued for a consideration which is less than as permitted under applicable law.

Article 5.
ELIGIBILITY

All management and other employees of the Company and its Affiliates are eligible to be granted Options, Restricted Stock, Stock Appreciation Rights, Other Stock-Based Awards and Performance-Based Awards under this Plan. Non-Employee




Directors of the Company are eligible to be granted Non-Qualified Stock Options and Restricted Stock Units to the extent provided in Article 11. Participation under this Plan shall be determined by the Committee in its sole and absolute discretion.

Article 6.
STOCK OPTIONS

6.1    Options. Each Stock Option granted hereunder shall be one of two types: (i) an Incentive Stock Option intended to satisfy the requirements of Section 422 of the Code or (ii) a Non-Qualified Stock Option.

6.2    Grants. The Committee shall have the authority to grant to any Eligible Employee one or more Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights). To the extent that any Stock Option does not qualify as an Incentive Stock Option (whether because of its provisions or the time or manner of its exercise or otherwise), such Stock Option or the portion thereof which does not qualify, shall constitute a separate Non-Qualified Stock Option. Notwithstanding any other provision of this Plan to the contrary or any provision in an agreement evidencing the grant of an Option to the contrary, any Option granted to an Eligible Employee of an Affiliate (other than one described in Section 2.1(i) or (ii)) shall be a Non-Qualified Stock Option.

6.3    Terms of Options. Options granted under Article 6 of this Plan shall be subject to Article 12 and the following terms and conditions, and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem desirable:

(a)    Option Price. The option price per share of Common Stock purchasable under an Incentive Stock Option or a Non-Qualified Stock Option shall be determined by the Committee at the time of grant but shall not be less than 100% of the Fair Market Value of the share of Common Stock at the time of grant; provided, however, if an Incentive Stock Option is granted to a Ten Percent Stockholder, the purchase price shall not be less than 110% of the Fair Market Value of the share of Common Stock at the time of grant.

(b)    Option Term. The term of each Stock Option shall be fixed by the Committee, but no Stock Option shall be exercisable more than ten (10) years after the date the Option is granted; provided, however, that the term of an Incentive Stock Option granted to a Ten Percent Stockholder may not exceed five (5) years.

(c)    Exercisability. Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at grant; provided, however, that Stock Options shall be subject to a minimum vesting schedule of at least one year, except that, with respect to a Participant other than a Named Executive Officer on the date of grant, unvested Stock Options may become vested prior to the completion of the one-year period upon a Change in Control or the Participant’s Retirement, Disability, death, layoff pursuant to a reduction in workforce or Termination of Employment pursuant to a business acquisition, in each case, to the extent provided in the applicable Award agreement. Notwithstanding the foregoing sentence, subject to the limitations set forth in Section 4, Awards with respect to up to five percent (5%) of the total number of shares of Common Stock reserved for Awards under the Plan may be granted to any Participant (including a Named Executive Officer) without regard to any limit on accelerated vesting. If the Committee provides, in its discretion, that any Stock Option is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Committee may waive such limitations on the exercisability at any time at or after grant in whole or in part (including, without limitation, that the Committee may waive the installment exercise provisions or accelerate the time at which Options may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion.

(d)    Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (c) above, Stock Options may be exercised in whole or in part at any time during the Option term, by giving written notice of exercise to the Company specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price as follows: (i) in cash or by check, bank draft or money order payable to the order of Company, (ii) if the Common Stock is traded on a national securities exchange, the Nasdaq Stock Market, Inc. or quoted on a national quotation system sponsored by the Financial Industry Regulatory Authority, through the delivery of irrevocable instructions to a broker to deliver promptly to the Company an amount equal to the purchase price to the extent permitted by law, (iii) by payment in full or part in the form of Common Stock owned by the Participant (and for which the Participant has good title free and clear of any liens and encumbrances) based on the Fair Market Value of the Common Stock on the payment date as determined by the Committee or the Board or (iv) on such other terms and conditions as may be acceptable to the Committee or the Board, as applicable. No shares of Common Stock shall be issued until payment therefor, as provided herein, has been made or provided for.





(e)    Incentive Stock Option Limitations. To the extent that the aggregate Fair Market Value (determined as of the time of grant) of the Common Stock with respect to which Incentive Stock Options are exercisable for the first time by an Eligible Employee during any calendar year under the Plan and/or any other stock option plan of the Company or any Subsidiary or parent corporation (within the meaning of Section 424(e) of the Code) exceeds $100,000, such Options shall be treated as Options which are not Incentive Stock Options. In addition, if an Eligible Employee does not remain employed by the Company, any Subsidiary or parent corporation (within the meaning of Section 424(e) of the Code) at all times from the time the Option is granted until three (3) months prior to the date of exercise (or such other period as required by applicable law), such Option shall be treated as an Option which is not an Incentive Stock Option.

Should the foregoing provision not be necessary in order for the Stock Options to qualify as Incentive Stock Options, or should any additional provisions be required, the Committee may amend the Plan accordingly, without the necessity of obtaining the approval of the stockholders of the Company.

Without the written consent of the Company, no Common Stock acquired by a Participant upon the exercise of an Incentive Stock Option granted hereunder may be disposed of by the Participant within two (2) years from the date such Incentive Stock Option was granted, nor within one (1) year after the transfer of such Common Stock to the Participant; provided, however, that a transfer to a trustee, receiver, or other fiduciary in any insolvency proceeding, as described in Section 422(c)(3) of the Code, shall not be deemed to be such a disposition.

(f)    Form of Options. Subject to the terms and conditions and within the limitations of the Plan, an Option shall be evidenced by such form of agreement or grant as is approved by the Committee.

(g)    Form of Settlement. In its sole discretion, the Committee may provide, at the time of grant, that the shares to be issued upon the exercise of a Stock Option shall be in the form of Restricted Stock, or may, in the Option agreement, reserve a right to so provide after the time of grant.

(h)    Other Terms and Conditions. Options may contain such other provisions, which shall not be inconsistent with any of the foregoing terms of the Plan, as the Committee shall deem appropriate. With regard to “reloads”, the Committee shall have the authority (but not an obligation) to include within any Option agreement a provision entitling the optionee to a further Option (a “Reload Option”) if the optionee exercises the Option evidenced by the Option agreement, in whole or in part, by surrendering other shares of the Company held by the optionee for at least six (6) months prior to such date of surrender in accordance with the Plan and the terms and conditions of the Option agreement. Any Reload Option shall not be an Incentive Stock Option, shall be for a number of shares equal to the number of surrendered shares, the exercise price thereof shall be equal to the Fair Market Value of the Common Stock on the date of exercise of such original Option, shall become exercisable if the purchased shares are held for a minimum period of time established by the Committee, and shall be subject to such other terms and conditions as the Committee may determine. Notwithstanding the foregoing, Stock Options granted on or after October 1, 2004 shall not permit reloads.

(i)    Repricing or Repurchase of Stock Options Prohibited. Notwithstanding any other provision of the Plan to the contrary, an outstanding Stock Option may not be (a) modified to reduce the exercise price thereof nor may a new Stock Option at a lower price be substituted for a surrendered Stock Option (other than adjustments or substitutions in accordance with Section 4.2), or (b) repurchased by the Company if the per share option price of the Stock Option is less than the Fair Market Value of a share of Common Stock (other than a cancellation for no value in accordance with Section 4.2(d)), unless such action is approved by the stockholders of the Company.

Article 7.
RESTRICTED STOCK AWARDS

7.1    Awards of Restricted Stock. Shares of Restricted Stock may be issued to Eligible Employees either alone or in addition to other Awards granted under the Plan. The Committee shall determine the eligible persons to whom, and the time or times at which, grants of Restricted Stock will be made, the number of shares to be awarded, the price (if any) to be paid by the recipient (subject to Section 7.2), the time or times within which such Awards may be subject to forfeiture, the vesting schedule and rights to acceleration thereof, and all other terms and conditions of the Awards. The Committee may condition the grant of Restricted Stock upon the attainment of specified performance goals or such other factors as the Committee may determine, in its sole discretion.

7.2    Awards and Certificates. An Eligible Employee selected to receive Restricted Stock shall not have any rights with respect to such Award, unless and until such Participant has delivered a fully executed copy of the Restricted Stock Award agreement




evidencing the Award to the Company and has otherwise complied with the applicable terms and conditions of such Award. Further, such Award shall be subject to the following conditions:

(a)    Purchase Price. The purchase price of Restricted Stock shall be fixed by the Committee. Subject to Section 4.3, the purchase price for shares of Restricted Stock may be the minimum permitted by applicable law.

(b)    Acceptance. Awards of Restricted Stock must be accepted within a period of ninety (90) days (or such shorter period as the Committee may specify at grant) after the Award date, by executing a Restricted Stock Award agreement and by paying whatever price (if any) the Committee has designated thereunder.

(c)    Legend. Each Participant receiving a Restricted Stock Award shall be issued a stock certificate in respect of such shares of Restricted Stock, unless the Committee elects to use another system, such as book entries by the transfer agent, as evidencing ownership of a Restricted Stock Award. Such certificate shall be registered in the name of such Participant, and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, substantially in the following form:

“The anticipation, alienation, attachment, sale, transfer, assignment, pledge, encumbrance or charge of the shares of stock represented hereby are subject to the terms and conditions (including forfeiture) of the Celgene Corporation (the “Company”) 2008 Stock Incentive Plan, as may be amended from time to time, and an Agreement entered into between the registered owner and the Company dated ___. Copies of such Plan and Agreement are on file at the principal office of the Company.”

(d)    Custody. The Committee may require that any stock certificates evidencing such shares be held in custody by the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock Award, the Participant shall have delivered a duly signed stock power, endorsed in blank, relating to the Common Stock covered by such Award.

7.3    Restrictions and Conditions on Restricted Stock Awards. The shares of Restricted Stock awarded pursuant to this Plan shall be subject to Article 12 and the following restrictions and conditions:

(a)    Restriction Period; Vesting and Acceleration of Vesting.

(i)     The Participant shall not be permitted to Transfer shares of Restricted Stock awarded under this Plan during a period set by the Committee (the “Restriction Period”) commencing with the date of such Award, as set forth in the Restricted Stock Award agreement and such agreement shall set forth a vesting schedule and any events which would accelerate vesting of the shares of Restricted Stock; provided, however, that shares of Restricted Stock shall be subject to a minimum vesting schedule of at least three years (with no more than one-third of the shares of Common Stock subject thereto vesting on each of the first three anniversaries of the date of grant), except that, with respect to a Participant other than a Named Executive Officer on the date of grant, unvested Restricted Stock may become vested prior to the completion of the three-year period upon a Change in Control or the Participant’s Retirement, Disability, death, layoff pursuant to a reduction in workforce or Termination of Employment pursuant to a business acquisition, in each case, to the extent provided in the applicable Award agreement. Notwithstanding the foregoing sentence, subject to the limitations set forth in Section 4, Awards with respect to up to five percent (5%) of the total number of shares of Common Stock reserved for Awards under the Plan may be granted to any Participant (including a Named Executive Officer) without regard to any limit on accelerated vesting.

(ii)    Performance Goals, Formulae or Standards. If the lapse of restrictions is based on the attainment of Performance Goals, the Committee shall establish the Performance Goals and the applicable vesting percentage of the Restricted Stock Award applicable to each Participant or class of Participants in writing prior to the beginning of the applicable fiscal year or at such later date as otherwise determined by the Committee and while the outcome of the Performance Goals is substantially uncertain. Such Performance Goals may incorporate provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances.

(b)    Rights as Stockholder. Except as provided in this subsection (b) and subsection (a) above and as otherwise determined by the Committee, the Participant shall have, with respect to the shares of Restricted Stock, all of the rights of a holder of shares of Common Stock of the Company including, without limitation, the right to receive any dividends, the right to vote such shares and, subject to and conditioned upon the full vesting of shares of Restricted Stock, the right




to tender such shares. Notwithstanding the foregoing, the payment of dividends shall be deferred until, and conditioned upon, the expiration of the applicable Restriction Period. Notwithstanding the foregoing, with respect to any Restricted Stock Award for which vesting is based on the attainment of Performance Goals, the payment of dividends shall be deferred until, and conditioned upon, the attainment of the Performance Goals.

(c)    Lapse of Restrictions. If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock subject to such Restriction Period, the certificates for such shares shall be delivered to the Participant. All legends shall be removed from said certificates at the time of delivery to the Participant except as otherwise required by applicable law.

Article 8.
STOCK APPRECIATION RIGHTS

8.1    Tandem Stock Appreciation Rights. Stock Appreciation Rights may be granted in conjunction with all or part of any Stock Option (a “Reference Stock Option”) granted under this Plan (“Tandem Stock Appreciation Rights”). In the case of a Non-Qualified Stock Option, such rights may be granted either at or after the time of the grant of such Reference Stock Option. In the case of an Incentive Stock Option, such rights may be granted only at the time of the grant of such Reference Stock Option.

8.2    Terms and Conditions of Tandem Stock Appreciation Rights. Tandem Stock Appreciation Rights granted hereunder shall be subject to such terms and conditions, not inconsistent with the provisions of this Plan, as shall be determined from time to time by the Committee, including Article 12 and the following:

(a)    Term. A Tandem Stock Appreciation Right or applicable portion thereof granted with respect to a Reference Stock Option shall terminate and no longer be exercisable upon the termination or exercise of the Reference Stock Option, except that, unless otherwise determined by the Committee, in its sole discretion, at the time of grant, a Tandem Stock Appreciation Right granted with respect to less than the full number of shares covered by the Reference Stock Option shall not be reduced until and then only to the extent the exercise or termination of the Reference Stock Option causes the number of shares covered by the Tandem Stock Appreciation Right to exceed the number of shares remaining available and unexercised under the Reference Stock Option.

(b)    Exercisability. Tandem Stock Appreciation Rights shall be exercisable only at such time or times and to the extent that the Reference Stock Options to which they relate shall be exercisable in accordance with the provisions of Article 6 and Article 8.

(c)    Method of Exercise. A Tandem Stock Appreciation Right may be exercised by an optionee by surrendering the applicable portion of the Reference Stock Option. Upon such exercise and surrender, the Participant shall be entitled to receive an amount determined in the manner prescribed in this Section 8.2. Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the related Tandem Stock Appreciation Rights have been exercised.

(d)    Payment. Upon the exercise of a Tandem Stock Appreciation Right a Participant shall be entitled to receive up to, but no more than, an amount in Common Stock equal in value to the excess of the Fair Market Value of one share of Common Stock over the Option price per share specified in the Reference Stock Option multiplied by the number of shares in respect of which the Tandem Stock Appreciation Right shall have been exercised, with the Committee having the right to determine the form of payment.

(e)    Deemed Exercise of Reference Stock Option. Upon the exercise of a Tandem Stock Appreciation Right, the Reference Stock Option or part thereof to which such Stock Appreciation Right is related shall be deemed to have been exercised for the purpose of the limitation set forth in Article 4 of the Plan on the number of shares of Common Stock to be issued under the Plan.

8.3    Non-Tandem Stock Appreciation Rights. Non-Tandem Stock Appreciation Rights may also be granted without reference to any Stock Options granted under this Plan.

8.4    Terms and Conditions of Non-Tandem Stock Appreciation Rights. Non-Tandem Stock Appreciation Rights granted hereunder shall be subject to such terms and conditions, not inconsistent with the provisions of this Plan, as shall be determined from time to time by the Committee, including Article 12 and the following:





(a)    Term. The term of each Non-Tandem Stock Appreciation Right shall be fixed by the Committee, but shall not be greater than ten (10) years after the date the right is granted.

(b)    Exercisability. Non-Tandem Stock Appreciation Rights shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee at grant; provided, however, that Stock Appreciation Rights shall be subject to a minimum vesting schedule of at least one year, except that, with respect to a Participant other than a Named Executive Officer on the date of grant, unvested Stock Appreciation Rights may become vested prior to completion of the one-year period upon a Change in Control or the Participant’s Retirement, Disability, death, layoff pursuant to a reduction in workforce or Termination of Employment pursuant to a business acquisition, in each case, to the extent provided in the applicable Award agreement. Notwithstanding the foregoing sentence, subject to the limitations set forth in Section 4, Awards with respect to up to five percent (5%) of the total number of shares of Common Stock reserved for Awards under the Plan may be granted to any Participant (including a Named Executive Officer) without regard to any limit on accelerated vesting. If the Committee provides, in its discretion, that any such right is exercisable subject to certain limitations (including, without limitation, that it is exercisable only in installments or within certain time periods), the Committee may waive such limitation on the exercisability at any time at or after grant in whole or in part (including, without limitation, that the Committee may waive the installment exercise provisions or accelerate the time at which rights may be exercised), based on such factors, if any, as the Committee shall determine, in its sole discretion.

(c)    Method of Exercise. Subject to whatever installment exercise and waiting period provisions apply under subsection (b) above, Non-Tandem Stock Appreciation Rights may be exercised in whole or in part at any time during the option term, by giving written notice of exercise to the Company specifying the number of Non-Tandem Stock Appreciation Rights to be exercised.

(d)    Payment. Upon the exercise of a Non-Tandem Stock Appreciation Right a Participant shall be entitled to receive, for each right exercised, up to, but no more than, an amount in Common Stock equal in value to the excess of the Fair Market Value of one share of Common Stock on the date the right is exercised over the Fair Market Value of one (1) share of Common Stock on the date the right was awarded to the Participant.

8.5    Limited Stock Appreciation Rights. The Committee may, in its sole discretion, grant Tandem and Non-Tandem Stock Appreciation Rights either as a general Stock Appreciation Right or as a Limited Stock Appreciation Right. Limited Stock Appreciation Rights may be exercised only upon the occurrence of a Change in Control or such other event as the Committee may, in its sole discretion, designate at the time of grant or thereafter. Upon the exercise of Limited Stock Appreciation Rights, except as otherwise provided in an Award agreement, the Participant shall receive in cash or Common Stock, as determined by the Committee, an amount equal to the amount (i) set forth in Section 8.2(d) with respect to Tandem Stock Appreciation Rights or (ii) set forth in Section 8.4(d) with respect to Non-Tandem Stock Appreciation Rights.

8.6    Repricing of Stock Appreciation Rights Prohibited. Notwithstanding any other provision of the Plan to the contrary, an outstanding Stock Appreciation Right may not be modified to reduce the exercise price thereof nor may a new Stock Appreciation Right at a lower price be substituted for a surrendered Stock Appreciation Right (other than adjustments or substitutions in accordance with Section 4.2), unless such action is approved by the stockholders of the Company.

Article 9.
OTHER STOCK-BASED AWARDS

9.1    Other Awards. The Committee, in its sole discretion, is authorized to grant to Eligible Employees Other Stock Based Awards that are payable in, valued in whole or in part by reference to, or otherwise based on or related to shares of Common Stock, including, but not limited to, shares of Common Stock awarded purely as a bonus and not subject to any restrictions or conditions, shares of Common Stock in payment of the amounts due under an incentive or performance plan sponsored or maintained by the Company or an Affiliate, performance units, dividend equivalent units, stock equivalent units, Restricted Stock Units and deferred stock units. To the extent permitted by law, the Committee may, in its sole discretion, permit Eligible Employees to defer all or a portion of their cash compensation in the form of Other Stock-Based Awards granted under this Plan, subject to the terms and conditions of any deferred compensation arrangement established by the Company, which shall be intended to comply with Section 409A of the Code. Other Stock-Based Awards may be granted either alone or in addition to or in tandem with other Awards granted under the Plan.

Subject to the provisions of this Plan, the Committee shall, in its sole discretion, have authority to determine the Eligible Employees to whom, and the time or times at which, such Awards shall be made, the number of shares of Common Stock to be




awarded pursuant to such Awards, and all other conditions of the Awards. The Committee may also provide for the grant of Common Stock under such Awards upon the completion of a specified Performance Period.

The Committee may condition the grant or vesting of Other Stock-Based Awards upon the attainment of specified Performance Goals as the Committee may determine, in its sole discretion; provided that to the extent that such Other Stock-Based Awards are intended to comply with Section 162(m) of the Code, the Committee shall establish the objective Performance Goals for the vesting of such Other Stock-Based Awards based on a Performance Period applicable to each Participant or class of Participants in writing prior to the beginning of the applicable Performance Period or at such later date as permitted under Section 162(m) of the Code and while the outcome of the Performance Goals are substantially uncertain. Such Performance Goals may incorporate, if and only to the extent permitted under Section 162(m) of the Code, provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. To the extent any such provision would create impermissible discretion under Section 162(m) of the Code or otherwise violate Section 162(m) of the Code, such provision shall be of no force or effect. The applicable Performance Goals shall be based on one or more of the Performance Criteria set forth in Exhibit A hereto.

9.2    Terms and Conditions. Other Stock-Based Awards made pursuant to this Article 9 shall be subject to the following terms and conditions:

(a)    Non-Transferability. Subject to the applicable provisions of the Award agreement and this Plan, shares of Common Stock subject to Awards made under this Article 9 may not be Transferred prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses.

(b)    Dividends. The recipient of an Award under this Article 9 shall not be entitled to receive, currently or on a deferred basis, dividends or dividend equivalents with respect to the number of shares of Common Stock covered by the Award.

(c)    Vesting. Any Award under this Article 9 and any Common Stock covered by any such Award shall vest or be forfeited to the extent so provided in the Award agreement, as determined by the Committee, in its sole discretion; provided, however, that Other Stock-Based Awards not granted upon completion of a Performance Period shall be subject to a minimum vesting schedule of at least three years (with no more than one-third of the shares of Common Stock subject thereto vesting on each of the first three anniversaries of the date of grant), except that, with respect to a Participant other than a Named Executive Officer on the date of grant, unvested Other Stock-Based Awards may become vested prior to the completion of the three-year period upon a Change in Control or the Participant’s Retirement, Disability, death, layoff pursuant to a reduction in workforce or Termination of Employment pursuant to a business acquisition, in each case, to the extent provided in the applicable Award agreement. Notwithstanding the foregoing sentence, subject to the limitations set forth in Section 4, Awards with respect to up to five percent (5%) of the total number of shares of Common Stock reserved for Awards under the Plan may be granted to any Participant (including a Named Executive Officer) without regard to any limit on accelerated vesting. In the event that a written employment agreement between the Company and a Participant provides for a vesting schedule that is more favorable than the vesting schedule provided in the form of Award agreement, the vesting schedule in such employment agreement shall govern, provided that such agreement is in effect on the date of grant and applicable to the specific Award.

(d)    Price. Common Stock issued on a bonus basis under this Article 9 may be issued for no cash consideration; Common Stock purchased pursuant to a purchase right awarded under this Article 9 shall be priced, as determined by the Committee in its sole discretion.

(e)    Payment. Form of payment for the Other Stock-Based Award shall be specified in the Award agreement, and may consist of cash, shares of Common Stock or a combination thereof as determined by the Committee in its sole discretion.

Article 10.
PERFORMANCE-BASED AWARDS

10.1    Performance-Based Awards. Performance-Based Awards may be granted either alone or in addition to or in tandem with Stock Options, Stock Appreciation Rights, or Restricted Stock. Subject to the provisions of this Plan, the Committee shall have authority to determine the persons to whom and the time or times at which such Awards shall be made, the number of shares of Common Stock or dollar amount to be awarded pursuant to such Awards, and all other conditions of the Awards. The Committee may also provide for the grant of Common Stock or payment of dollar amount under such Awards upon the completion of a specified Performance Period.





For each Participant, the Committee may specify a targeted performance award. The individual target award may be expressed, at the Committee’s discretion, as a fixed dollar amount, a percentage of base pay or total pay (excluding payments made under the Plan), or an amount determined pursuant to an objective formula or standard. Establishment of an individual target award for a Participant for a calendar year shall not imply or require that the same level individual target award (if any such award is established by the Committee for the relevant Participant) be set for any subsequent calendar year. At the time the Performance Goals are established, the Committee shall prescribe a formula to determine the percentages (which may be greater than one-hundred percent (100%)) of the individual target award which may be payable based upon the degree of attainment of the Performance Goals during the calendar year. Notwithstanding anything else herein, the Committee may, in its sole discretion, elect to pay a Participant an amount that is less than the Participant’s individual target award (or attained percentage thereof) regardless of the degree of attainment of the Performance Goals; provided that no such discretion to reduce an Award earned based on achievement of the applicable Performance Goals shall be permitted for the calendar year in which a Change in Control of the Company occurs, or during such calendar year with regard to the prior calendar year if the Awards for the prior calendar year have not been made by the time of the Change in Control of the Company, with regard to individuals who were Participants at the time of the Change in Control of the Company.

10.2    Terms and Conditions. Performance-Based Awards made pursuant to this Article 10 shall be subject to the following terms and conditions:

(a)    Dividends. Upon the expiration of the Performance Period and conditioned upon the attainment of the Performance Goals, the recipient of an Award under this Article 10 shall be entitled to receive dividends that are issued during the Performance Period, or dividend equivalents with respect thereto, with respect to the number of shares of Common Stock covered by the Award, unless the Committee determines that no dividends shall be paid.

(b)    Vesting. Any Award under this Article 10 and any Common Stock covered by any such Award shall vest or be forfeited to the extent so provided in the Award agreement, as determined by the Committee, in its sole discretion; provided, however, that such Awards of Common Stock not granted upon completion of a Performance Period shall be subject to a minimum vesting schedule of at least three years (with no more than one-third of the shares of Common Stock subject thereto vesting on each of the first three anniversaries of the date of grant), except that, with respect to a Participant other than a Named Executive Officer on the date of grant, unvested Performance-Based Awards may become vested prior to the completion of the three-year period upon a Change in Control or the Participant’s Retirement, Disability, death, layoff pursuant to a reduction in workforce or Termination of Employment pursuant to a business acquisition, in each case, to the extent provided in the applicable Award agreement. Notwithstanding the foregoing sentence, subject to the limitations set forth in Section 4, Awards with respect to up to five percent (5%) of the total number of shares of Common Stock reserved for Awards under the Plan may be granted to any Participant (including a Named Executive Officer) without regard to any limit on accelerated vesting.

(c)    Waiver of Limitation. Subject to the limitations of Section 10.2(b), in the event of a Change in Control or the Participant’s Retirement, Disability, death or involuntary termination without Cause, the Committee may, in its sole discretion, waive in whole or in part any or all of the limitations imposed hereunder (if any) with respect to any or all of an Award under this Article.

(d)    Purchase Price. Subject to Section 4.3, Common Stock issued on a bonus basis under this Article 10 may be issued for no cash consideration; Common Stock purchased pursuant to a purchase right awarded under this Article 10 shall be priced as determined by the Committee.

(e)    Performance Goals, Formulae or Standards.

(i)     The Committee shall establish the Performance Goals and the individual target award (if any) in writing prior to the beginning of the applicable Performance Period or at such later date as otherwise determined by the Committee and while the outcome of the Performance Goals is substantially uncertain. Such Performance Goals may incorporate provisions for disregarding (or adjusting for) changes in accounting methods, corporate transactions (including, without limitation, dispositions and acquisitions) and other similar type events or circumstances. To the extent any Performance-Based Award is intended to comply with the provisions of Section 162(m) of the Code, if any provision would create impermissible discretion under Section 162(m) of the Code or otherwise violate Section 162(m) of the Code, such provision shall be of no force or effect.

(ii)    The measurements used in Performance Goals set under the Plan shall be determined in accordance with Generally Accepted Accounting Principles (“GAAP”), except, to the extent that any objective Performance




Goals are used, if any measurements require deviation from GAAP, such deviation shall be at the discretion of the Committee at the time the Performance Goals are set or at such later time to the extent permitted under Section 162(m) of the Code.

(f)    Committee Certification. At the expiration of the Performance Period, the Committee shall determine and certify in writing the extent to which the Performance Goals have been achieved.

Article 11.
AWARDS FOR NON-EMPLOYEE DIRECTORS

The terms and conditions of this Article 11 shall apply to Awards granted to Non-Employee Directors under the Plan.

11.1    Grants to Non-Employee Directors. The Committee may grant Non-Qualified Stock Options and Restricted Stock Units to Non-Employee Directors from time to time as determined in its sole and absolute discretion.

11.2    Deferral Election.

(a)    General. A Non-Employee Director may elect to defer the payment of Restricted Stock Units (“Deferral Election”) in a manner specified by the Committee and in accordance with this Section 11.2. If a Deferral Election is not timely made in accordance with this Section 11.2, such Deferral Election shall be considered void and shall have no effect, and a Non-Employee Director’s Restricted Stock Units shall be paid in the form of shares of Common Stock on the earliest to occur: (i) a Non-Employee Director’s death; (ii) a Non-Employee Director’s Disability; (iii) a Non-Employee Director’s Retirement; (iv) a Non-Employee Director’s “separation from service” within the meaning of Code Section 409A; and (v) a Change in Control.

(b)    Deferral Election. Unless otherwise determined by the Committee, but subject to the requirements of Code Section 409A, any Deferral Election must be made on or prior to the date of grant of Restricted Stock Units and thereafter, such Deferral Election shall become irrevocable. Notwithstanding the foregoing, a Non-Employee Director may modify a Deferral Election provided that: (i) a subsequent Deferral Election does not take effect for at least twelve (12) months after the modification is made; (ii) the modification is made at least twelve (12) months prior to the date the Restricted Stock Units would otherwise have been paid pursuant to the initial Deferral Election; and (iii) the payment date of the Restricted Stock Units is at least five (5) years beyond the payment date specified in the initial Deferral Election.

(c)    Payment. Restricted Stock Units deferred in accordance with this Section 11.2 shall be paid in the form of shares of Common Stock on the earliest to occur: (i) the payment date specified in a Deferral Election; (ii) a Non-Employee Director’s death; (iii) a Non-Employee Director’s Disability; (iv) a Non-Employee Director’s Retirement; (v) a Non-Employee Director’s “separation from service” within the meaning of Code Section 409A; and (vi) a Change in Control. Any dividends or dividend equivalents payable that a Non-Employee may be entitled to receive pursuant to an Award of Restricted Stock Units shall be paid at the same time as the applicable Restricted Stock Units are paid to the Non-Employee Director.

11.3    Vesting.

(a)    Options. With respect to Non-Qualified Stock Options granted to a Non-Employee Director:
    
(i)    Any grant made to a Non-Employee Director upon the date of the Non-Employee Director’s initial election or appointment as a member of the Board (an “Initial Option Grant”) shall vest in four (4) equal annual installments, with the first (1st) installment vesting on the first (1st) anniversary of the date of grant and the remaining installments vesting on each of the next three (3) anniversaries of the date of grant; provided that the holder thereof has been a Non-Employee Director of the Company at all times through such date. Notwithstanding the forgoing, if a Non-Employee Director fails to stand for election at an annual meeting of the Company’s stockholders and such annual meeting occurs prior to the vesting date for the annual installment of such Initial Option Grant that otherwise would have vested in the year of such annual meeting, then such installment shall vest on the day preceding such annual meeting; provided that the holder thereof has been a Non-Employee Director of the Company at all times through such date.

(ii)    Any grants made on and after an annual meeting to the Non-Employee Directors who were elected at such annual meeting and are continuing as members of the Board as of the completion of such annual meeting (an “Annual Option Grant”) shall vest in full on the earlier of (A) the day preceding the date of the first (1st)




annual meeting held following the date of grant; and (B) the first (1st) anniversary of the date of grant of the Award, provided that, in each case, the holder thereof has been a Non-Employee Director of the Company at all times through such date.

(iii)    Notwithstanding the foregoing, any Initial Option Grant and Annual Option Grant made to a Non-Employee Director shall become fully vested and exercisable effective upon: (A) the Non-Employee Director’s Disability or death or, subject to the Committee’s approval (which it may give in its sole discretion), upon any other “separation from service” (within the meaning of Code Section 409A) of the Non-Employee Director; (B) solely with respect to any Initial Option Grant and Annual Option Grant made to a Non-Employee Director on or following the Effective Date, the Non-Employee Director’s Termination of Directorship, due to the failure to stand for reelection, failure to be reelected or removal or resignation at the request or instruction of a person or entity effecting the Change in Control, in each case occurring on or after the occurrence of a Change in Control; or (C) solely with respect to any Initial Option Grant and Annual Option Grant made to a Non-Employee Director prior the Effective Date, the occurrence of a Change in Control.    

(b)    Restricted Stock Units. One-third (1/3) of the Restricted Stock Units granted to Non-Employee Directors shall vest on each of the first (1st), second (2nd) and third (3rd) anniversaries of the date of grant, provided that the holder thereof has not had a Termination of Directorship at any time prior to each such date; provided, however, that unvested Restricted Stock Units shall become fully vested effective upon: (i) the Non-Employee Director’s Retirement, Disability or death or, subject to the Committee’s approval (which it may give in its sole discretion), upon any other “separation from service” (within the meaning of Code Section 409A) of the Non-Employee Director; (ii) solely with respect to any Restricted Stock Units granted to a Non-Employee Director on or following the Effective Date, the Non-Employee Director’s Termination of Directorship, due to the failure to stand for reelection, failure to be reelected or removal or resignation at the request or instruction of a person or entity effecting the Change in Control, in each case occurring on or after the occurrence of a Change in Control,; or (iii) solely with respect to any Restricted Stock Units granted made to a Non-Employee Director prior the Effective Date, the occurrence of a Change in Control. Notwithstanding the foregoing sentence, subject to the limitations set forth in Section 4, Awards with respect to up to five percent (5%) of the total number of shares of Common Stock reserved for Awards under the Plan may be granted to any Participant without regard to any limit on accelerated vesting.
  
(c)    Impact of Change in Control and Substitution of Awards. Solely with respect to Awards granted to Non-Employee Directors on or after the Effective Date, in the event of a Change in Control, such Awards, whether or not then vested, shall be continued, assumed, have new rights substituted therefor or be treated in accordance with Section 4.2(d) hereof, and to the extent such Awards are not so continued, assumed, substituted therefor or treated in accordance with Section 4.2(d), such Awards shall be purchased by the Company or an Affiliate of the Company for cash in accordance with Section 13.1(b)(ii). Solely with respect to Awards granted to Non-Employee Directors prior to the Effective Date, such Awards shall be treated in accordance with Section 13.1, subject to full vesting on a Change in Control in accordance with Section 11.3(a)(3)(C) and Section 11.3(b)(iii).

11.4    Exercisability; Method of Exercise.

(a)    Unless otherwise determined by the Committee at the time of grant, vested Stock Options shall be exercisable by the Non-Employee Director (or by the Non-Employee Director’s legal representative or the legal representative of the Non-Employee Director’s estate, as applicable) at any time following the applicable vesting date to the extent permitted in Section 12.3.

(b)    To the extent vested, a Stock Option may be exercised in whole or in part at any time during the Option term (subject to Section 12.3), by giving written notice of exercise to the Committee (or its designee) specifying the number of shares of Common Stock to be purchased. Such notice shall be in a form acceptable to the Committee and shall be accompanied by payment in full of the purchase price as follows: (i) in cash or by check, bank draft or money order payable to the order of the Company; (ii) solely to the extent permitted by applicable law and authorized by the Committee, if the Common Stock is traded on a national securities exchange or quoted on a national quotation system sponsored by the Financial Industry Regulatory Authority, through a procedure whereby the Non-Employee Director (or by the Non-Employee Director’s legal representative or the legal representative of the Non-Employee Director’s estate, as applicable, and as permitted by Section 12.3) delivers irrevocable instructions to a broker reasonably acceptable to the Committee to deliver promptly to the Company an amount equal to the purchase price; or (iii) on such other terms and conditions as may be acceptable to the Committee (including the relinquishment of Stock Options or by payment in full or in part in the form of Common Stock owned by the Non-Employee Director (for which the Non-Employee Director has good




title free and clear of any liens and encumbrances)). No shares of Common Stock shall be issued until payment therefor, as provided herein, has been made or provided for.

11.5    Terms. Except as otherwise provided in this Article 11, any Non-Qualified Stock Option granted under this Article 11 shall be subject to the terms and conditions set forth in Sections 6.3 and 12.3, and any Restricted Stock Unit granted under this Article 11 shall be subject to the terms and conditions set forth in Sections 9.2 and 12.3.
  
Article 12.
NON-TRANSFERABILITY AND TERMINATION PROVISIONS

The terms and conditions of this Article 12 shall apply to Awards under this Plan as follows:

12.1    Nontransferability. No Stock Option, Stock Appreciation Right or Performance-Based Award shall be Transferable by the Participant otherwise than by will or by the laws of descent and distribution. All Stock Options and all Stock Appreciation Rights shall be exercisable, during the Participant’s lifetime, only by the Participant or his or her legal guardian or representative. Tandem Stock Appreciation Rights shall be Transferable, solely to the extent permitted above, only with the underlying Stock Option. In addition, except as provided above, no Stock Option shall be Transferred (whether by operation of law or otherwise), and no Stock Option shall be subject to execution, attachment or similar process. Upon any attempt to Transfer any Stock Option, or in the event of any levy upon any Stock Option by reason of any execution, attachment or similar process contrary to the provisions hereof, such Stock Option shall immediately terminate and become null and void. Notwithstanding the foregoing, the Committee may determine at the time of grant or thereafter that a Non-Qualified Stock Option that is otherwise not Transferable pursuant to this Article 12 is Transferable to a Family Member in whole or in part and in such circumstances, and under such conditions, as specified by the Committee. A Non-Qualified Stock Option which is Transferred to a Family Member pursuant to the preceding sentence may not be subsequently Transferred by such Family Member. Shares of Restricted Stock under Article 7 may not be Transferred prior to the date on which shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses. No Award shall, except as otherwise specifically provided by law or herein, be Transferable in any manner, and any attempt to Transfer any such Award shall be void, and no such Award shall in any manner be liable for or subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such Award, nor shall it be subject to attachment or legal process for or against such person.

12.2    Termination of Employment. The following rules apply with regard to the Termination of Employment of a Participant:

(a)    Termination by Reason of Death. If a Participant’s Termination of Employment is by reason of death, any Stock Option or Stock Appreciation Right held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant’s estate are reduced, thereafter, may be exercised, to the extent exercisable at the Participant’s death, by the legal representative of the estate, at any time within a period of one (1) year from the date of such death, but in no event beyond the expiration of the stated term of such Stock Option or Stock Appreciation Right.

(b)    Termination by Reason of Retirement or Disability. If a Participant’s Termination of Employment is by reason of Retirement or Disability, any Stock Option or Stock Appreciation Right held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at the Participant’s termination (or solely with respect to Stock Options or Stock Appreciation Rights granted on or after September 1, 2007, to the extent exercisable at the Participant’s termination or thereafter if the Participant provides the Committee or its designee with not less than six (6) months written notice of the Participant’s intent to terminate the Participant’s service with the Company and its Affiliates by reason of Retirement, such Stock Options or Stock Appreciation Rights continue to become exercisable (vested) following the Participant’s Termination of Employment by reason of Retirement as if the Participant had remained an employee of the Company), by the Participant (or the Participant’s legal representative to the extent permitted under Section 16.11 or the legal representative of the Participant’s estate if the Participant dies after termination) at any time within a period (the “Retirement or Disability Period”) which is the shorter of (i) up to ten (10) years after the date of grant of such Stock Option or Stock Appreciation Right, such period to be set on a case by case basis by the Committee, or (ii) three (3) years from the date of such termination; provided, however, that, if the Participant dies within such Retirement or Disability Period, any unexercised Stock Option or Stock Appreciation Right held by such Participant shall thereafter be exercisable, to the extent to which it was exercisable at the time of death, for a period of one (1) year (or such other period as the Committee may specify at grant or, if no rights of the Participant’s estate are reduced, thereafter) from the date of such death, but in no event beyond the expiration of the stated term of such Stock Option or Stock Appreciation Right.

(c)    Voluntary Resignation or Involuntary Termination Without Cause. If a Participant’s Termination of Employment is due to a voluntary resignation or by involuntary termination without Cause and such termination occurs prior to, or




more than ninety (90) days after, the occurrence of an event which would be grounds for Termination of Employment by the Company for Cause (without regard to any notice or cure period requirements), any Stock Option or Stock Appreciation Right held by such Participant, unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, may be exercised, to the extent exercisable at termination, by the Participant at any time within a period of ninety (90) days from the date of such termination, but in no event beyond the expiration of the stated term of such Stock Option or Stock Appreciation Right.

(d)    Termination for Cause. Unless otherwise determined by the Committee at grant or, if no rights of the Participant are reduced, thereafter, if a Participant’s Termination of Employment is for Cause for any reason, any Stock Option or Stock Appreciation Right held by such Participant shall thereupon terminate and expire as of the date of termination. In the event the termination is an involuntary termination without Cause or is a voluntary resignation within ninety (90) days after occurrence of an event which would be grounds for Termination of Employment by the Company for Cause (without regard to any notice or cure period requirement), any Stock Option or Stock Appreciation Right held by the Participant at the time of occurrence of the event which would be grounds for Termination of Employment by the Company for Cause shall be deemed to have terminated and expired upon occurrence of the event which would be grounds for Termination of Employment by the Company for Cause.

(e)    Termination of Employment for Restricted Stock. Subject to the applicable provisions of the Restricted Stock Award agreement and this Plan, upon a Participant’s Termination of Employment for any reason during the relevant Restriction Period, all Restricted Stock still subject to restriction will vest or be forfeited in accordance with the terms and conditions established by the Committee at grant or thereafter.

(f)    Termination of Employment for Other Stock-Based Awards and Performance-Based Awards. Subject to the applicable provisions of the Award agreement and this Plan, upon a Participant’s Termination of Employment for any reason, the Other Stock-Based Award or Performance-Based Award in question will vest or be forfeited or be payable in accordance with the terms and conditions established by the Committee at grant or thereafter. Notwithstanding the foregoing, unless otherwise determined by the Committee at grant, or, if no rights of the Participant are reduced, thereafter, if the Participant’s Termination of Employment is by reason of Retirement and the Participant provides the Committee or its designee with not less than six months written notice of the Participant’s intent to terminate the Participant’s service with the Company, the unvested portion, if any, of the Participant’s Award of Restricted Stock Units shall be deemed to be vested in full on the date of the Participant’s Termination of Employment by reason of Retirement, provided, that payment of the Restricted Stock Unit shall not be made on such date, but shall be made in accordance with the payment schedule set forth in the applicable Award agreement.

12.3    Termination of Directorship.

(a)    Termination of Directorship other than for Cause. Unless otherwise determined by the Committee at grant, or if no rights of the Participant are reduced, thereafter, upon a Non-Employee Director’s Termination of Directorship for any reason, any unvested Stock Option or Restricted Stock Unit held by such Non-Employee Director shall thereupon terminate and expire as of the date of Termination of Directorship, except as expressly set forth in Article 11. Notwithstanding the foregoing, in the event of a Non-Employee Director’s Termination of Directorship for any reason other than due to a Termination of Directorship for Cause, a Non-Employee Director (or the Non-Employee Director’s legal representative to the extent permitted under Section 16.11 or the legal representative of the Non-Employee Director’s estate, as the case may be) may exercise any Stock Option that was exercisable on the date of such Termination of Directorship for a period of three (3) years from such Termination of Directorship, but in no event beyond the expiration of the stated term of such Stock Option.

(b)    Termination of Directorship for Cause. In the event of a Non-Employee Director’s Termination of Directorship for Cause, all outstanding Awards (whether vested or unvested) shall be forfeited and cancelled for no consideration.

Article 13.
CHANGE IN CONTROL PROVISIONS

13.1    Benefits. In the event of a Change in Control of the Company (as defined below), except as otherwise provided by the Committee upon the grant of an Award:

(a)    Awards granted to Participants prior to July 1, 2011, shall be treated in accordance with the terms of the Plan as in effect prior to such date; and





(b)    Awards granted to Participants on or after July 1, 2011, shall not vest upon a Change in Control and upon the Change in Control a Participant’s Awards shall be treated in accordance with one of the following methods as determined by the Committee in its sole discretion:

(i)    Awards, whether or not then vested, shall be continued, assumed, have new rights substituted therefor or be treated in accordance with Section 4.2(d) hereof, as determined by the Committee in its sole discretion, and restrictions to which any shares of Restricted Stock or any other Award granted prior to the Change in Control are subject shall not lapse upon a Change in Control and the Restricted Stock or other Award shall, where appropriate in the sole discretion of the Committee, receive the same distribution as other Common Stock on such terms as determined by the Committee; provided that, the Committee may, in its sole discretion, decide to award additional Restricted Stock or other Award in lieu of any cash distribution. Notwithstanding anything to the contrary herein, for purposes of Incentive Stock Options, any assumed or substituted Stock Option shall comply with the requirements of Treasury Regulation § 1.424-1 (and any amendments thereto).

(ii)    The Committee, in its sole discretion, may provide for the purchase of any Awards by the Company or an Affiliate for an amount of cash equal to the excess of the Change in Control Price (as defined below) of the shares of Common Stock covered by such Awards, over the aggregate exercise price of such Awards. For purposes of this Section 13.1(b)(ii), “Change in Control Price” shall mean the highest price per share of Common Stock paid in any transaction related to a Change in Control of the Company; provided, however, that such price shall not exceed the fair market value of the Common Stock at the time of purchase as determined in accordance Section 409A of the Code.

(iii)    The Committee may, in its sole discretion, provide for the cancellation of any Appreciation Awards (as defined below) without payment, if the Change in Control Price is less than the exercise price of such Appreciation Award. “Appreciation Award” shall mean any Award under this Plan of any Stock Option, Stock Appreciation Right or Other Stock-Based Award, provided that such Other Stock-Based Award is based on the appreciation in value of a share of Common Stock in excess of an amount equal to at least the Fair Market Value of the Common Stock on the date such Other Stock-Based Award is granted.

(iv)    Notwithstanding anything else herein, the Committee may, in its sole discretion, provide for accelerated vesting or lapse of restrictions, of an Award at any time.
 
(c)    Notwithstanding anything herein to the contrary, if a Participant has an involuntary Termination without Cause at any time during the two (2) year period commencing on a Change in Control, then all outstanding Awards of such Participant that were granted to the Participant on or after July 1, 2011 and prior to the Change in Control (including any Award granted to the Participant in substitution of any such Award pursuant to Section 13.1(b)(i) above) shall be fully vested on the date of such Termination and any such Awards that provide for Participant elected exercise (i.e. Stock Options) shall be immediately exercisable in their entirety on the date of such Termination.

13.2    Change in Control. A “Change in Control” shall mean the occurrence of any of the following:

(a)    any person (as defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any subsidiary of the Company and any employee benefit plan sponsored or maintained by the Company or any subsidiary of the Company (including any trustee of any such plan acting in his capacity as trustee), becoming the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing thirty percent (30%) of the total combined voting power of the Company’s then outstanding securities;

(b)    the merger, consolidation or other business combination of the Company (a “Transaction”), other than (A) a Transaction involving only the Company and one or more of its subsidiaries, or (B) a Transaction immediately following which the stockholders of the Company immediately prior to the Transaction continue to have a majority of the voting power in the resulting entity and no person (other than those covered by the exceptions in (a) above) becomes the beneficial owner of securities of the resulting entity representing more than twenty-five percent (25%) of the voting power in the resulting entity;

(c)    during any period of two (2) consecutive years beginning on or after the Effective Date, the persons who were members of the Board immediately before the beginning of such period (the “Incumbent Directors”) ceasing (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that, any director who was not a director as of the Effective Date shall be deemed to be an Incumbent Director if such director was elected to the board of directors by, or on the recommendation of or with the approval of,




at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of the foregoing unless such election, recommendation or approval occurs as a result of an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act or any successor provision) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than a member of the Board; or

(d)    the approval by the stockholders of the Company of any plan of complete liquidation of the Company or an agreement for the sale of all or substantially all of the Company’s assets other than the sale of all or substantially all of the assets of the Company to a person or persons who beneficially own, directly or indirectly, at least fifty percent (50%) or more of the combined voting power of the outstanding voting securities of the Company at the time of such sale.

Notwithstanding any other provision of the Plan to the contrary, to the extent that Awards under the Plan subject to Section 409A of the Code are payable upon a Change in Control, an event shall not be considered to be a Change in Control under the Plan with respect to such Awards unless such event is also a “change in ownership,” a “change in effective control” or a “change in the ownership of a substantial portion of the assets” of the Company within the meaning of Section 409A of the Code. Notwithstanding any other provision of the Plan to the contrary other than the foregoing sentence, for purposes of the payment of Restricted Stock Units under Sections 11.2(a) and 11.2(c), a Change in Control shall mean a “change in control” as such term is defined in the Celgene Corporation 2005 Deferred Compensation Plan, as amended.

Article 14.
TERMINATION OR AMENDMENT OF THE PLAN

Notwithstanding any other provision of this Plan, the Board may at any time, and from time to time, amend, in whole or in part, any or all of the provisions of the Plan, or suspend or terminate it entirely, retroactively or otherwise; provided, however, that, unless otherwise required by law or specifically provided herein, the rights of a Participant with respect to Awards granted prior to such amendment, suspension or termination, may not be impaired without the consent of such Participant and, provided further, without the approval of the stockholders of the Company in accordance with the laws of the State of Delaware and the exchange or system on which the Company’s securities are then listed or traded, to the extent required by the applicable provisions of Rule 16b-3 or Section 162(m) of the Code, or, with regard to Incentive Stock Options, Section 422 of the Code, no amendment may be made which would (i) increase the aggregate number of shares of Common Stock that may be issued under this Plan or the maximum individual Participant limitations under Section 4.1(b), (ii) change the classification of employees eligible to receive Awards under this Plan, (iii) decrease the minimum option price of any Stock Option, (iv) extend the maximum option period under Section 6.3, (v) require stockholder approval in order for the Plan to continue to comply with the applicable provisions of Rule 16b-3 or Section 162(m) of the Code, or, with regard to Incentive Stock Options, Section 422 of the Code or (vi) materially alter the Performance Criteria set forth in Exhibit A. In no event may the Plan be amended without the approval of the stockholders of the Company in accordance with the applicable laws or other requirements to increase the aggregate number of shares of Common Stock that may be issued under the Plan, other than adjustments or substitutions in accordance with Section 4.2, decrease the minimum option price of any Stock Option, or to make any other amendment that would require stockholder approval under the rules of any exchange or system on which the Company’s securities are listed or traded at the request of the Company.

The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but, subject to Article 4 above or as otherwise specifically provided herein, no such amendment or other action by the Committee shall impair the rights of any holder without the holder’s consent.

Article 15.
UNFUNDED STATUS OF PLAN

This Plan is intended to constitute an “unfunded” plan for incentive compensation. With respect to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company.

Article 16.
GENERAL PROVISIONS

16.1    Legend. The Committee may require each person receiving shares of Common Stock pursuant to an Award under the Plan to represent to and agree with the Company in writing that the Participant is acquiring the shares without a view to distribution thereof, and that any subsequent offer for sale or sale of any such shares of Common Stock shall be made either pursuant to (i) a registration statement on an appropriate form under the Securities Act of 1933, which registration statement shall have become effective and shall be current with respect to the shares of Common Stock being offered and sold, or (ii) a specific exemption from




the registration requirements of the Securities Act of 1933, and that in claiming such exemption the Participant will, prior to any offer for sale or sale of shares of Common Stock, obtain a favorable written opinion, satisfactory in form and substance to the Company, from counsel acceptable to the Company as to the availability of such exception. In addition to any legend required by this Plan, the certificates for such shares may include any legend which the Committee deems appropriate to reflect any restrictions on Transfer.

All certificates for shares of Common Stock delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed or any national securities association system upon whose system the Common Stock is then quoted, any applicable Federal or state securities law, and any applicable corporate law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

16.2    Other Plans. Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required; and, such arrangements may be either generally applicable or applicable only in specific cases.

16.3    No Right to Employment/Directorship. Neither this Plan nor the grant of any Award hereunder shall give any Participant or other employee or Non-Employee Director any right with respect to continuance of employment or directorship by the Company or any Affiliate, nor shall there be a limitation in any way on the right of the Company or any Affiliate by which a Participant is employed or retained to terminate his employment or directorship at any time.

16.4    Withholding of Taxes. The Company shall have the right to deduct from any payment to be made to a Participant, or to otherwise require, prior to the issuance or delivery of any shares of Common Stock or the payment of any cash hereunder, payment by the Participant of, any Federal, state or local taxes required by law to be withheld. Upon the vesting of Restricted Stock (or other Award that is taxable upon vesting), or upon making an election under Section 83(b) of the Code, a Participant shall pay all required withholding to the Company.

At the discretion of the Committee, any such statutorily required withholding obligation with regard to any Participant may be satisfied by reducing the number of shares of Common Stock otherwise deliverable or by delivering shares of Common Stock already owned. Any fraction of a share of Common Stock required to satisfy such tax obligations shall be disregarded and the amount due shall be paid instead in cash by the Participant.

16.5    Listing and Other Conditions.

(a)    As long as the Common Stock is listed on a national securities exchange or system sponsored by a national securities association, the issue of any shares of Common Stock pursuant to an Award shall be conditioned upon such shares being listed on such exchange or system. The Company shall have no obligation to issue such shares unless and until such shares are so listed, and the right to exercise any Option with respect to such shares shall be suspended until such listing has been effected.

(b)    If at any time counsel to the Company shall be of the opinion that any sale or delivery of shares of Common Stock pursuant to an Award is or may in the circumstances be unlawful or result in the imposition of excise taxes on the Company, in either case, under the statutes, rules, or regulations of any applicable jurisdiction, governmental authority or national securities exchange, the Company shall have no obligation to make such sale or delivery, or to make any application or to effect or to maintain any qualification or registration under the Securities Act of 1933, as amended, or otherwise with respect to shares of Common Stock or Awards, and the right to exercise any Option shall be suspended until, in the opinion of said counsel, such sale or delivery shall be lawful or will not result in the imposition of excise taxes on the Company.

(c)    Upon termination of any period of suspension under this Section 16.5, any Award affected by such suspension which shall not then have expired or terminated shall be reinstated as to all shares available before such suspension and as to shares which would otherwise have become available during the period of such suspension, but no such suspension shall extend the term of any Option.

(d)    A Participant shall be required to supply the Company with any certificates, representations and information that the Company requests and otherwise cooperate with the Company in obtaining any listing, registration, qualification, exemption, consent or approval the Company deems necessary or appropriate.





16.6    Governing Law. This Plan shall be governed and construed in accordance with the laws of the State of Delaware (regardless of the law that might otherwise govern under applicable Delaware principles of conflict of laws).

16.7    Construction. Wherever any words are used in this Plan in the masculine gender they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form they shall be construed as though they were also used in the plural form in all cases where they would so apply.

16.8    Other Benefits. No Award payment under this Plan shall be deemed compensation for purposes of computing benefits under any retirement plan of the Company or its Affiliates nor affect any benefits under any other benefit plan now or subsequently in effect under which the availability or amount of benefits is related to the level of compensation, except to the extent expressly set forth in any such retirement or other benefit plan.

16.9    Costs. The Company shall bear all expenses included in administering this Plan, including expenses of issuing Common Stock pursuant to any Awards hereunder.

16.10    No Right to Same Benefits. The provisions of Awards need not be the same with respect to each Participant, and such Awards to individual Participants need not be the same in subsequent years.

16.11    Death/Disability. The Committee may in its discretion require the transferee of a Participant to supply it with written notice of the Participant’s death or Disability and to supply it with a copy of the will (in the case of the Participant’s death) or such other evidence as the Committee deems necessary to establish the validity of the transfer of an Award. The Committee may also require the agreement of the transferee to be bound by all of the terms and conditions of the Plan. If the Committee shall find, without any obligation or responsibility of any kind to do so, that any person to whom payment is payable under this Plan is unable to care for his or her affairs because of disability, illness or accident, any payment due may be paid to such person’s duly appointed legal representative in such manner and proportions as the Committee may determine, in its sole discretion. Any such payment shall be a complete discharge of the liabilities of the Committee and the Board under this Plan.

16.12    Section 16(b) of the Exchange Act. All elections and transactions under the Plan by persons subject to Section 16 of the Exchange Act involving shares of Common Stock are intended to comply with any applicable exemptive condition under Rule 16b-3. The Committee may establish and adopt written administrative guidelines, designed to facilitate compliance with Section 16(b) of the Exchange Act, as it may deem necessary or proper for the administration and operation of the Plan and the transaction of business thereunder.

16.13    Severability of Provisions. If any provision of the Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such provisions had not been included.

16.14    Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan.

16.15    Section 409A of the Code.

(a)    Although the Company does not guarantee the particular tax treatment of an Award granted under the Plan, Awards made under the Plan are intended to comply with, or be exempt from, the applicable requirements of Section 409A of the Code, and the Plan and any Award agreement hereunder shall be limited, construed and interpreted in accordance with such intent. In no event whatsoever shall the Company or any of its Affiliates be liable for any additional tax, interest or penalties that may be imposed on a Participant by Section 409A of the Code or any damages for failing to comply with Section 409A of the Code.

(b)    Notwithstanding anything in the Plan or in an Award to the contrary, solely with respect to any Award granted under the Plan that constitutes “non-qualified deferred compensation” pursuant to Section 409A of the Code, the following provisions shall apply:

(i)    A termination of employment shall not be deemed to have occurred for purposes of any provision of the Award providing for payment upon or following a termination of the Participant’s employment unless such termination is also a “separation from service” within the meaning of Code Section 409A and, for purposes of any such provision of the Award, references to a “termination,” “termination of employment” or like terms shall mean a “separation from service” within the meaning of Code Section 409A. Notwithstanding any provision to the contrary in the Plan or the Award, if the Participant is deemed on the date of the Participant’s Termination




of Employment to be a “specified employee” within the meaning of that term under Section 409A(a)(2)(B) of the Code and using the identification methodology selected by the Company from time to time, or if none, the default methodology set forth in Code Section 409A, then with regard to any such payment under the Award, to the extent required to be delayed in compliance with Section 409A(a)(2)(B) of the Code, such payment shall not be made prior to the earlier of (i) the expiration of the six (6)-month period measured from the date of the Participant’s “separation from service” within the meaning of Code Section 409A, and (ii) the date of the Participant’s death. All payments delayed pursuant to this Section 16.15(b)(i) shall be paid to the Participant on the first day of the seventh month following the date of the Participant’s “separation from service” within the meaning of Code Section 409A or, if earlier, on the date of the Participant’s death.

(ii)    Whenever a payment under the Award specifies a payment period with reference to a number of days, the actual date of payment within the specified period shall be within the sole discretion of the Company.

16.16    Successor and Assigns. The Plan shall be binding on all successors and permitted assigns of a Participant, including, without limitation, the estate of such Participant and the executor, administrator or trustee of such estate.

16.17    Payments to Minors, Etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipt thereof shall be deemed paid when paid to such person’s guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Committee, the Board, the Company, its Affiliates and their employees, agents and representatives with respect thereto.

Article 17.
APPROVAL OF BOARD AND STOCKHOLDERS

The Plan shall not be effective unless and until approved by the Board and, solely to the extent required by any applicable law (including without limitation, approval required under Rule 16b-3, Section 162(m) of the Code or Section 422 of the Code) or registration or stock exchange rule, approved by the stockholders of the Company in the manner set forth in such law, regulation or rule.

Article 18.
TERM OF PLAN

No Award shall be granted pursuant to the Plan on or after April 17, 2024 (April 15, 2025 effective upon, and subject to, stockholder approval at the Company’s 2015 annual meeting of stockholders), but Awards granted prior to such date may, and the Committee’s authority to administer the terms of such Awards shall, extend beyond that date; provided, however, that no Award (other than a Stock Option or Stock Appreciation Right) that is intended to be “performance-based” under Section 162(m) of the Code shall be granted on or after the first meeting of the stockholders in the fifth year following the year in which the stockholders approve the Performance Goals set forth on Exhibit A unless the Performance Goals set forth on Exhibit A are reapproved (or other designated performance goals are approved) by the stockholders no later than the first stockholder meeting that occurs in the fifth year following the year in which stockholders approve the Performance Goals set forth on Exhibit A.


Article 19.
NAME OF PLAN

This Plan shall be known as the Celgene Corporation 2008 Stock Incentive Plan (Amended and Restated as of April 15, 2015) (formerly known as the 1998 Stock Incentive Plan, and, prior to April 23, 2003, as the 1998 Long-Term Incentive Plan).
 




EXHIBIT A

PERFORMANCE CRITERIA
--------------------

Performance Goals established for purposes of an Award of Other Stock-Based Awards or Performance-Based Awards intended to comply with Section 162(m) of the Code shall be based on one or more of the following performance criteria (“Performance Criteria”): (i) the attainment of certain target levels of, or a specified percentage increase in, revenues, earnings, income before taxes and extraordinary items, net income, operating income, earnings before income tax, earnings before interest, taxes, depreciation and amortization or a combination of any or all of the foregoing; (ii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax profits including, without limitation, that attributable to continuing and/or other operations; (iii) the attainment of certain target levels of, or a specified increase in, operational cash flow; (iv) the achievement of a certain level of, reduction of, or other specified objectives with regard to limiting the level of increase in, all or a portion of, the Company’s bank debt or other long-term or short-term public or private debt or other similar financial obligations of the Company, which may be calculated net of such cash balances and/or other offsets and adjustments as may be established by the Committee; (v) earnings per share or the attainment of a specified percentage increase in earnings per share or earnings per share from continuing operations; (vi) the attainment of certain target levels of, or a specified increase in return on capital employed or return on invested capital; (vii) the attainment of certain target levels of, or a percentage increase in, after-tax or pre-tax return on stockholders’ equity; (viii) the attainment of certain target levels of, or a specified increase in, economic value added targets based on a cash flow return on investment formula; (ix) the attainment of certain target levels in, or specified increases in, the fair market value of the shares of the Company’s common stock; (x) the growth in the value of an investment in the Company’s common stock assuming the reinvestment of dividends; (xi) the filing of a new drug application (“NDA”) or the approval of the NDA by the Food and Drug Administration; (xii) the achievement of a launch of a new drug; (xiii) research and development milestones; (xiv) the successful completion of clinical trial phases, (xv) the attainment of a certain level of, reduction of, or other specified objectives with regard to limiting the level in or increase in, all or a portion of controllable expenses or costs or other expenses or costs; (xvi) gross or net sales, revenue and growth of sales revenue (either before or after cost of goods, selling and general administrative expenses, research and development expenses and any other expenses or interest); (xvii) total stockholder return; (xviii) return on assets or net assets; (xix) return on sales; (xx) operating profit or net operating profit; (xxi) operating margin; (xxii) gross or net profit margin; (xxiii) cost reductions or savings; (xxiv) productivity; (xxv) operating efficiency; (xxvi) customer satisfaction; (xxvii) working capital; or (xxviii) market share. For purposes of item (i) above, “extraordinary items” shall mean all items of gain, loss or expense for the fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to a corporate transaction (including, without limitation, a disposition or acquisition) or related to a change in accounting principle, all as determined in accordance with standards established by Opinion No. 30 of the Accounting Principles Board.

In addition, such Performance Criteria may be based upon the attainment of specified levels of Company (or subsidiary, division or other operational unit of the Company) performance under one or more of the measures described above relative to the performance of other corporations. To the extent permitted under Section 162(m) of the Code, but only to the extent permitted under Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), the Committee may: (i) designate additional business criteria on which the Performance Criteria may be based or (ii) adjust, modify or amend the aforementioned business criteria.









Exhibit 31.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. Sec. 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Robert J. Hugin, certify that:
 
1.   I have reviewed this quarterly report on Form 10-Q of Celgene Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
 
a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 

 
Date: July 28, 2015
/s/Robert J. Hugin
 
 
Robert J. Hugin
 
Chief Executive Officer






Exhibit 31.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. Sec. 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Peter N. Kellogg, certify that:
 
1.   I have reviewed this quarterly report on Form 10-Q of Celgene Corporation;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
 
a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
 
a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
  
Date: July 28, 2015
/s/Peter N. Kellogg
 
 
Peter N. Kellogg
 
Executive Vice President
 
Chief Financial Officer
 
(principal financial and accounting officer)






Exhibit 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the accompanying Quarterly Report on Form 10-Q of Celgene Corporation (“the Company”) for the period ended June 30, 2015 (“the Periodic Report”), I, Robert J. Hugin, Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that the Periodic Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date:
July 28, 2015
 
 
/s/Robert J. Hugin
 
 
 
 
Robert J. Hugin
 
 
 
 
Chief Executive Officer






Exhibit 32.2
 
 CERTIFICATION PURSUANT TO
18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the accompanying Quarterly Report on Form 10-Q of Celgene Corporation (“the Company”) for the period ended June 30, 2015 (“the Periodic Report”),  I, Peter N. Kellogg, Executive Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that the Periodic Report fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934 and that the information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
 
Date:
July 28, 2015
 
 
/s/Peter N. Kellogg
 
 
 
 
Peter N. Kellogg
 
 
 
 
  Executive Vice President
  Chief Financial Officer
 
 
 
 
(principal financial and accounting officer)


Celgene (NASDAQ:CELG)
Historical Stock Chart
From Mar 2024 to Apr 2024 Click Here for more Celgene Charts.
Celgene (NASDAQ:CELG)
Historical Stock Chart
From Apr 2023 to Apr 2024 Click Here for more Celgene Charts.