Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
x
Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
or
¨
Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number: 0-27756
 http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12372163&doc=12
ALEXION PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
13-3648318
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
 
121 Seaport Boulevard, Boston Massachusetts 02210
(Address of Principal Executive Offices) (Zip Code)
475-230-2596
(Registrant’s telephone number, including area code)
N/A
(Former name, former address, and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check One:
Large accelerated filer  x   Accelerated filer  ¨    Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company  ¨ Emerging growth company  ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Common Stock, $0.0001 par value
222,859,148
Class
Outstanding as of July 23, 2018












 
Alexion Pharmaceuticals, Inc.
Contents

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



Alexion Pharmaceuticals, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
(amounts in millions, except per share amounts)
 
June 30,

December 31,
 
2018

2017
Assets



Current Assets:



Cash and cash equivalents
$
727.5


$
584.4

Marketable securities
449.5


889.7

Trade accounts receivable, net
853.7


726.5

Inventories
463.2


460.4

Prepaid expenses and other current assets
342.2


292.9

Total current assets
2,836.1


2,953.9

Property, plant and equipment, net
1,422.6


1,325.4

Intangible assets, net
3,793.8


3,954.4

Goodwill
5,037.4


5,037.4

Other assets
400.5


312.2

Total assets
$
13,490.4


$
13,583.3

Liabilities and Stockholders' Equity



Current Liabilities:



Accounts payable
$
58.8


$
70.8

Accrued expenses
605.2


639.4

Revolving credit facility
250.0

 

Current portion of long-term debt
28.5


167.4

Current portion of contingent consideration
70.3



Other current liabilities
31.6


74.9

Total current liabilities
1,044.4


952.5

Long-term debt, less current portion
2,564.9


2,720.7

Contingent consideration
156.0

 
168.9

Facility lease obligation
361.4

 
342.9

Deferred tax liabilities
464.0


365.0

Other liabilities
132.3


140.2

Total liabilities
4,723.0


4,690.2

Commitments and contingencies (Note 18)



Stockholders' Equity:



Common stock, $0.0001 par value; 290.0 shares authorized; 235.5 and 234.3 shares issued at June 30, 2018 and December 31, 2017, respectively



Additional paid-in capital
8,420.2


8,290.3

Treasury stock, at cost, 12.7 and 12.0 shares at June 30, 2018 and December 31, 2017, respectively
(1,689.9
)

(1,604.9
)
Accumulated other comprehensive loss
(2.9
)

(34.4
)
Retained earnings
2,040.0


2,242.1

Total stockholders' equity
8,767.4


8,893.1

Total liabilities and stockholders' equity
$
13,490.4


$
13,583.3


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

2


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
(amounts in millions, except per share amounts)

 
Three months ended June 30,

Six months ended June 30,
 
2018

2017

2018

2017
Net product sales
$
1,044.7


$
912.2


$
1,975.1


$
1,781.3

Other revenue
0.3


0.5


0.8


1.0

Total revenues
1,045.0


912.7


1,975.9


1,782.3

Cost of sales
95.3


83.6


186.9


152.6

Operating expenses:







Research and development
173.4


198.2


350.0


417.7

Selling, general and administrative
277.3


265.6


534.4


527.4

Acquired in-process research and development
803.7

 

 
803.7

 

Amortization of purchased intangible assets
80.1


80.1


160.1


160.1

Change in fair value of contingent consideration
4.7


24.6


57.4


28.1

Restructuring expenses
10.6


2.9


16.1


26.7

Impairment of intangible assets

 
31.0

 

 
31.0

Total operating expenses
1,349.8


602.4


1,921.7


1,191.0

Operating (loss) income
(400.1
)

226.7


(132.7
)

438.7

Other income and expense:







Investment income
7.7


4.5


113.5


8.4

Interest expense
(25.0
)

(24.8
)

(49.1
)

(48.3
)
Other income (expense)
(1.2
)

(0.1
)

1.3


1.5

(Loss) income before income taxes
(418.6
)

206.3


(67.0
)

400.3

Income tax expense
38.8


41.1


141.3


65.0

Net (loss) income
$
(457.4
)

$
165.2


$
(208.3
)

$
335.3

Earnings (loss) per common share







Basic
$
(2.05
)

$
0.74


$
(0.94
)

$
1.49

Diluted
$
(2.05
)

$
0.73


$
(0.94
)

$
1.49

Shares used in computing earnings (loss) per common share







Basic
222.6


224.4


222.3


224.5

Diluted
222.6


225.5


222.3


225.7


 
 
 
 
 
 
 

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

3


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(unaudited)
(amounts in millions)

 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
(457.4
)
 
$
165.2

 
$
(208.3
)
 
$
335.3

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation
(8.1
)
 
4.1

 
(4.3
)
 
6.8

Unrealized gains (losses) on debt securities

 
0.3

 
(0.4
)
 
0.9

Unrealized gains on pension obligation

 
0.3

 
0.7

 
0.3

Unrealized gains (losses) on hedging activities, net of tax of $15.4, $(30.0), $10.5 and $(45.3), respectively
50.9

 
(54.5
)
 
35.5

 
(82.3
)
Other comprehensive income (loss), net of tax
42.8

 
(49.8
)
 
31.5

 
(74.3
)
Comprehensive income (loss)
$
(414.6
)
 
$
115.4

 
$
(176.8
)
 
$
261.0


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


4


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in millions)
 
 
Six months ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(208.3
)
 
$
335.3

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
202.0

 
201.2

Impairment of intangible assets

 
31.0

Change in fair value of contingent consideration
57.4

 
28.1

Share-based compensation expense
105.2

 
114.9

Non-cash expense for acquired IPR&D
86.6

 

Deferred taxes
111.5

 
21.5

Unrealized foreign currency loss (gain)
12.7

 
(9.6
)
Unrealized loss (gain) on forward contracts
3.1

 
(8.0
)
Unrealized gain on equity investments
(100.5
)
 

Other
13.2

 
4.3

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(137.0
)
 
(46.4
)
Inventories
(4.1
)
 
(33.1
)
Prepaid expenses and other assets
(55.7
)
 
(89.8
)
Accounts payable, accrued expenses and other liabilities
(130.6
)
 
38.6

Net cash (used in) provided by operating activities
(44.5
)
 
588.0

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(612.8
)
 
(1,128.2
)
Proceeds from maturity or sale of available-for-sale debt securities
1,054.8

 
557.5

Purchases of mutual funds related to nonqualified deferred compensation plan
(7.5
)
 
(4.7
)
Proceeds from sale of mutual funds related to nonqualified deferred compensation plan
5.9

 
2.2

Purchases of property, plant and equipment
(129.4
)
 
(175.5
)
Other
2.6

 
0.2

Net cash provided by (used in) investing activities
313.6

 
(748.5
)
Cash flows from financing activities:
 
 
 
Debt issuance costs
(7.6
)
 

Proceeds from revolving credit facility
250.0

 

Payments on term loan
(293.8
)
 
(87.5
)
Repurchases of common stock
(85.0
)
 
(238.9
)
Net proceeds from issuance of common stock under share-based compensation arrangements
24.6

 
60.6

Other
(4.7
)
 
(9.9
)
Net cash used in financing activities
(116.5
)
 
(275.7
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(6.1
)
 
12.0

Net change in cash and cash equivalents and restricted cash
146.5

 
(424.2
)
Cash and cash equivalents and restricted cash at beginning of period
586.3

 
966.0

Cash and cash equivalents and restricted cash at end of period
$
732.8

 
$
541.8

 
 
 
 
Supplemental cash flow disclosures from investing and financing activities:
 
 
 
Capitalization of construction costs related to facility lease obligations
$
33.2

 
$
49.9

Accrued expenses for purchases of property, plant and equipment
$
15.8

 
$
35.4

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

5

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






1.
Business
Alexion Pharmaceuticals, Inc. (Alexion, the Company, we, our or us) is a global biopharmaceutical company focused on serving patients and families affected by rare diseases through the innovation, development and commercialization of life-changing therapies.
We are the global leader in complement inhibition and have developed and commercialize the first and only approved complement inhibitor to treat patients with paroxysmal nocturnal hemoglobinuria (PNH), atypical hemolytic uremic syndrome (aHUS), and anti-acetylcholine receptor (AChR) antibody-positive generalized myasthenia gravis (gMG).  In addition, Alexion has two highly innovative enzyme replacement therapies for patients with life-threatening and ultra-rare metabolic disorders, hypophosphatasia (HPP) and lysosomal acid lipase deficiency (LAL-D).
As the leader in complement biology for over 20 years, Alexion focuses its research efforts on novel molecules and targets in the complement cascade, and its development efforts on the core therapeutic areas of hematology, nephrology, neurology, and metabolic disorders. We were incorporated in 1992 under the laws of the State of Delaware.

2.
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. These accounting principles were applied on a basis consistent with those of the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. In our opinion, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States. The condensed consolidated balance sheet data as of December 31, 2017 was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. These interim financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2017 included in our Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results to be expected for the full year or any other future periods. In the current year, the Company’s rounding presentation of reported amounts have changed. The current year rounding presentation has been applied to all prior year amounts presented and, in certain circumstances, this change may adjust previously reported balances.
The financial statements of our subsidiaries with functional currencies other than the U.S. dollar are translated into U.S. dollars using period-end exchange rates for assets and liabilities, historical exchange rates for stockholders' equity and weighted average exchange rates for operating results. Translation gains and losses are included in accumulated other comprehensive income (loss), net of tax, in stockholders' equity. Foreign currency transaction gains and losses are included in the results of operations in other income and expense.
The accompanying unaudited condensed consolidated financial statements include the accounts of Alexion Pharmaceuticals, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. Updates to our accounting policies, including impacts from the adoption of new accounting standards, are discussed within Note 8, Marketable Securities, Note 9, Derivative Instruments and Hedging Activities, Note 10, Other Investments, and Note 14, Revenue Recognition.
Reclassifications
Certain items in the prior period’s condensed consolidated financial statements have been reclassified to conform to the current presentation.

6

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





New Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (FASB) issued a new standard requiring that the rights and obligations arising from leases be recognized on the balance sheet by recording a right-of-use (ROU) asset and corresponding lease liability. The new standard also requires qualitative and quantitative disclosures to understand the amount, timing, and uncertainty of cash flows arising from leases, as well as significant management estimates utilized. The standard is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption. We have substantially completed the process of collecting and analyzing the Company’s lease contracts and have selected a leasing software system. Our lease accounting software implementation efforts are ongoing. While our assessment of the standard remains open, the standard may have a material impact on the Company’s Condensed Consolidated Balance Sheets due to the requirement to recognize lease ROU assets and corresponding liabilities related to leases on the Company’s Condensed Consolidated Balance Sheets.
In June 2016, the FASB issued a new standard intended to improve reporting requirements specific to loans, receivables and other financial instruments. The new standard requires that credit losses be reported based on expected losses compared to the current incurred loss model. The new standard also requires enhanced disclosure of credit risk associated with respective assets. The standard is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted. We are currently assessing the impact of this standard on our financial condition and results of operations.
In February 2018, the FASB issued a new standard that would permit entities to make a one time reclassification from accumulated other comprehensive income (AOCI) to retained earnings for the stranded tax effects resulting from the newly enacted corporate tax rates under the Tax Cuts and Jobs Act (the Tax Act), effective for the year ended December 31, 2017. The amount of the reclassification is calculated on the basis of the difference between the historical tax rate and newly enacted tax rate. The standard is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We are currently assessing the impact of this standard on our financial condition.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new standard which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. The new standard provides a five-step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We adopted the new standard on January 1, 2018.
In January 2017, the FASB issued a new standard that clarifies the definition of a business and determines when an integrated set of assets and activities is not a business. This framework requires that if substantially all of the fair value of gross assets acquired or disposed of is concentrated in a single asset or group of similar identifiable assets, the assets would not represent a business. We adopted the new standard on January 1, 2018 and will apply the new guidance prospectively to transactions occurring after adoption. We anticipate that the adoption of this new standard will likely result in more transactions, to the extent that such transactions are undertaken by the Company, being accounted for as asset acquisitions.
In January 2016, the FASB issued a new standard that changes accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Equity investments with readily determinable fair values will be measured at fair value with changes in fair value recognized in net income. Companies have the option to either measure equity investments without readily determinable fair values at fair value, or at cost adjusted for changes in observable prices minus impairment. We adopted the new standard on January 1, 2018, and have elected to measure our current equity investments without readily determinable fair values at cost adjusted for changes in observable prices minus impairment. In connection with the adoption of the new standard, we reclassified an immaterial amount of unrealized gains on equity securities from other comprehensive income to retained earnings. The guidance related to equity investments without readily determinable fair values was applied prospectively to equity investments that existed as of the date of adoption. We will assess our equity investments without readily determinable fair values for observable price changes and impairment on a quarterly basis. Refer to Note 10, Other Investments, for further details.

7

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





In March 2017, the FASB issued a new standard that improves the presentation of net periodic pension cost and net periodic post retirement benefit cost by requiring the bifurcation of net benefit cost. Under the new standard, the service cost component of net benefit cost will be presented with other employee costs in operating expenses; while other components will be reported separately in other income and expense. We adopted the new standard on January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated statements of operations.
In November 2016, the FASB issued a new standard that clarifies how entities should present restricted cash in the statement of cash flows. Under the new standard, changes in total cash, inclusive of restricted cash, should be reflected in the statement of cash flows. As a result, transfers between cash and restricted cash will no longer be reflected as activity within the statement of cash flows. We adopted the new standard on January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated statements of cash flows.
In August 2017, the FASB issued a new standard intended to improve and simplify certain aspects of the accounting for hedges. The new standard is intended to more closely align hedge accounting with companies’ risk management strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of hedging programs. It also amends the presentation and disclosure requirements and changes how companies assess effectiveness. The standard is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted. We early adopted the new standard in the second quarter 2018 using the modified retrospective method. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Impacts of the New Revenue Standard
We adopted the new revenue standard by applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. We recorded a net increase to opening equity of $6.0 as of January 1, 2018 due to the cumulative impact of adopting this new standard.
The impact to revenues for the three and six months ended June 30, 2018 was an increase of $10.2 and $13.8, respectively, as a result of adopting the new standard. The resulting impact to net income for the three and six months ended June 30, 2018 was an increase of $8.6 and $11.8, respectively. The impact of adopting the new standard for the three and six months ended June 30, 2018 is due primarily to the earlier recognition of revenue associated with customer arrangements for which control of the product has transferred to the customer prior to the shipment clearing customs in the respective country. Under prior revenue guidance, these amounts would have been deferred until risk of loss had transferred to the customer following customs clearance.
The new standard also resulted in a decrease of $24.6 in deferred revenue and an increase of $17.8 in retained earnings as of June 30, 2018. The adoption of the new revenue standard did not have a material impact on any other balances within the condensed consolidated financial statements as of and for the three and six months ended June 30, 2018.

3.
Acquisitions
In April 2018, we announced our intent to acquire Wilson Therapeutics AB (publ), a biopharmaceutical company based in Stockholm, Sweden (Wilson Therapeutics) that develops novel therapies for patients with rare copper-mediated disorders, pursuant to a recommended public cash offer. The public cash offer was for SEK 232 for each share of stock of Wilson Therapeutics. On May 25, 2018, we completed the acquisition of Wilson Therapeutics, following the acceptance of our offer by more than 97% of shareholders. As a result of the acquisition, we added WTX101, a highly innovative drug candidate that is currently in the early stages of Phase III clinical trials for the treatment of patients with Wilson disease, to our clinical pipeline.
The acquisition of Wilson Therapeutics is accounted for as an asset acquisition, as substantially all of the fair value of the gross assets acquired is concentrated in a single asset, WTX101. As of June 30, 2018, Alexion had acquired 99.8% of the outstanding shares of Wilson Therapeutics.

8

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





The following table summarizes the total consideration for the acquisition and the value of assets acquired and liabilities assumed:
Consideration
 
Cash paid for acquisition of Wilson Therapeutics outstanding shares
$
749.3

Transaction costs
15.1

Total consideration
$
764.4

 
 
Assets Acquired and Liabilities Assumed
 
Cash
$
45.1

In-process research & development
803.7

Employee related liabilities
(71.4
)
Other assets and liabilities
(13.0
)
Total net assets acquired
$
764.4

The acquired in-process research and development asset relates to WTX101, which is in early Phase III development for the treatment of Wilson Disease. Due to the stage of development of this asset, significant risk remains and it is not yet probable that there is future economic benefit from this asset. Absent successful clinical results and regulatory approval for the asset, there is no alternative future use associated with WTX101. Accordingly, the value of this asset of $803.7 was expensed during the three and six months ended June 30, 2018.
Employee related liabilities include the value of outstanding employee equity incentive awards that were accelerated in connection with the Wilson Therapeutics acquisition that have been, or will be, settled in cash. Also included in this amount are employer tax obligations associated with the employee equity incentive awards.
In connection with rights to WTX101 that were previously acquired by Wilson Therapeutics from third parties, we could be required to pay up to approximately $19.0 if certain development, regulatory and commercial milestones are met over time, as well as royalties on commercial sales.

4.
Inventories
Inventories are stated at the lower of cost or estimated realizable value. We determine the cost of inventory on a standard cost basis, which approximates average costs.
The components of inventory are as follows:
 
June 30,
 
December 31,
 
2018
 
2017
Raw materials
$
5.4

 
$
4.7

Work-in-process
164.9

 
148.6

Finished goods
292.9

 
307.1

 
$
463.2

 
$
460.4



9

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





5.Intangible Assets and Goodwill
The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated amortization: 
 
 
 
June 30, 2018
 
December 31, 2017
 
Estimated
Life (years)
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Licensing rights
5-8
 
$
31.0

 
$
(28.9
)
 
$
2.1

 
$
31.0

 
$
(28.5
)
 
$
2.5

Patents
7
 
10.5

 
(10.5
)
 

 
10.5

 
(10.5
)
 

Purchased technology
6-16
 
4,710.5

 
(919.0
)
 
3,791.5

 
4,710.5

 
(758.9
)
 
3,951.6

Other intangibles
5
 
0.4

 
(0.2
)
 
0.2

 
0.4

 
(0.1
)
 
0.3

Total
 
 
$
4,752.4

 
$
(958.6
)
 
$
3,793.8

 
$
4,752.4

 
$
(798.0
)
 
$
3,954.4

Goodwill
Indefinite
 
$
5,040.3

 
$
(2.9
)
 
$
5,037.4

 
$
5,040.3

 
$
(2.9
)
 
$
5,037.4

Amortization expense for the three months ended June 30, 2018 and 2017 was $80.3 and $80.1. Amortization expense for the six months ended June 30, 2018 and 2017 was $160.6 and $160.1, respectively. Assuming no changes in the gross cost basis of intangible assets, the total estimated amortization expense for finite-lived intangible assets is 160.6 for the six months ending December 31, 2018, and approximately $320.0 for each of the years ending December 31, 2019 through December 31, 2023.
In the second quarter 2017, we recognized an impairment charge of $31.0 related to our SBC-103 acquired in-process research and development asset due to clinical results.

6.
Debt
On June 7, 2018, we entered into an Amended and Restated Credit Agreement (the Credit Agreement), with Bank of America, N.A. as Administrative Agent. The Credit Agreement amends and restates our credit agreement dated as of June 22, 2015 (the Prior Credit Agreement).
The Credit Agreement provides for a $1,000.0 revolving credit facility and a $2,612.5 term loan facility. The revolving credit facility and the term loan facility mature on June 7, 2023. Commencing on June 30, 2019, we are required to make amortization payments of 5.00% of the aggregate principal amount of the term loan facility annually, payable in equal quarterly installments.
Loans under the Credit Agreement bear interest, at our option, at either a base rate or a Eurodollar rate, in each case plus an applicable margin. Under the Credit Agreement, the applicable margins on base rate loans range from 0.25% to 1.00% and the applicable margins on Eurodollar loans range from 1.25% to 2.00%, in each case based on our consolidated net leverage ratio (as calculated in accordance with the Credit Agreement). Our obligations under the Credit Agreement are guaranteed by certain of Alexion Pharmaceuticals, Inc.'s foreign and domestic subsidiaries and secured by liens on certain of our subsidiaries’ equity interests, subject to certain exceptions. Under the terms of the Credit Agreement, we must maintain a ratio of total net debt to EBITDA of 3.50 to 1.00 (subject to certain limited adjustments) and EBITDA to cash interest expense ratio of at least 3.50 to 1.00, in each case as calculated in accordance with the Credit Agreement.
The Credit Agreement contains certain representations and warranties, affirmative and negative covenants and events of default. The negative covenants in the credit agreement restrict Alexion’s and its subsidiaries’ ability, subject to certain baskets and exceptions, to incur liens or indebtedness, make investments, enter into mergers and other fundamental changes, make dispositions or pay dividends. The restriction on dividend payments includes an exception that permits us to pay dividends and make other restricted payments regardless of dollar amount so long as, after giving pro forma effect thereto, we have a consolidated net leverage ratio, as defined in the Credit Agreement, within predefined ranges, subject to certain increases following designated material acquisitions.
In connection with entering into the Credit Agreement and Prior Credit Agreement, we paid $53.1 in financing costs. Financing costs are amortized as interest expense over the life of the debt. Amortization expense associated with deferred financing costs for the three months ended June 30, 2018 and 2017 was $3.2 and $2.3, respectively, and deferred financing costs for the six months ended June 30, 2018 and 2017 was $5.5 and $4.7 respectively. Remaining unamortized deferred financing costs as of June 30, 2018 and December 31, 2017 were $23.3 and $21.0, respectively.

10

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





As of June 30, 2018, we had $2,612.5 outstanding on the term loan and $250.0 of borrowings outstanding under the revolving credit facility. The $250.0 of proceeds on the revolving credit facility was used to refinance amounts outstanding under the Prior Credit Agreement. As of June 30, 2018, we had open letters of credit of $1.8 that offset our availability in the revolving facility.
The fair value of our long term debt, which is measured using Level 2 inputs, approximates book value.

7.
Earnings Per Common Share
Basic earnings per common share (EPS) is computed by dividing net income by the weighted-average number of shares of common stock outstanding during the applicable period. For purposes of calculating diluted EPS, the denominator reflects the potential dilution that could occur if stock options, unvested restricted stock units or other contracts to issue common stock were exercised or converted into common stock, using the treasury stock method.
The following table summarizes the calculation of basic and diluted EPS for the three and six months ended June 30, 2018 and 2017:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss) used for basic and diluted calculation
$
(457.4
)
 
$
165.2

 
$
(208.3
)
 
$
335.3

Shares used in computing earnings per common share—basic
222.6

 
224.4

 
222.3

 
224.5

Weighted-average effect of dilutive securities:
 
 
 
 
 
 
 
Stock awards

 
1.1

 

 
1.2

Shares used in computing earnings per common share—diluted
222.6

 
225.5

 
222.3

 
225.7

Earnings (loss) per common share:
 
 
 
 

 

Basic
$
(2.05
)
 
$
0.74

 
$
(0.94
)
 
$
1.49

Diluted
$
(2.05
)
 
$
0.73

 
$
(0.94
)
 
$
1.49

We exclude from EPS the weighted-average number of securities whose effect is anti-dilutive. Excluded from the calculation of EPS for the three and six months ended June 30, 2017 were 6.0 and 5.8 shares of common stock, respectively, because their effect was anti-dilutive. For the three and six months ended June 30, 2018, we reported a net loss; therefore, no outstanding stock awards were included in the computation of diluted net loss per share since such inclusion would have been anti-dilutive.
 
8.
Marketable Securities
We invest our excess cash balances in marketable securities of highly rated financial institutions and investment-grade debt instruments. We classify these marketable securities as available-for-sale and, accordingly, record such securities at fair value. Unrealized gains and losses that are deemed temporary are included in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity in the accompanying balance sheets.

11

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





The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of available-for-sale debt securities by type of security as of June 30, 2018 and December 31, 2017 were as follows:
 
 
June 30, 2018
 
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Commercial paper
 
$
138.9

 
$

 
$

 
$
138.9

Corporate bonds
 
218.8

 
0.1

 
(0.2
)
 
218.7

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
62.5

 

 

 
62.5

Foreign
 
79.0

 

 

 
79.0

Bank certificates of deposit
 
46.1

 

 

 
46.1

Total available-for-sale debt securities
 
$
545.3

 
$
0.1

 
$
(0.2
)
 
$
545.2

 
 
December 31, 2017
 
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Commercial paper
 
$
16.0

 
$

 
$

 
$
16.0

Repurchase agreements
 
27.0

 

 

 
27.0

Corporate bonds
 
432.2

 
0.5

 
(0.2
)
 
432.5

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 

 

 

 

Foreign
 
426.3

 
0.2

 
(0.2
)
 
426.3

Bank certificates of deposit
 
11.8

 

 

 
11.8

Total available-for-sale debt securities
 
$
913.3

 
$
0.7

 
$
(0.4
)
 
$
913.6


The aggregate fair value of available-for-sale debt securities in an unrealized loss position as of June 30, 2018 and December 31, 2017 was $188.2 and $436.2, respectively. Investments that have been in a continuous unrealized loss position for more than 12 months were $1.3 as of June 30, 2018 and $12.0 as of December 31, 2017. As of June 30, 2018, we believe that the cost basis of our available-for-sale debt securities is recoverable.
The fair values of available-for-sale debt securities by classification in the condensed consolidated balance sheet were as follows:
 
June 30, 2018
 
December 31, 2017
Cash and cash equivalents
$
115.9

 
$
42.7

Marketable securities
429.3

 
870.9

 
$
545.2

 
$
913.6


The fair values of available-for-sale debt securities at June 30, 2018, by contractual maturity, are summarized as follows:
 
June 30, 2018
Due in one year or less
$
431.2

Due after one year through three years
114.0

 
$
545.2



12

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





We hold a single equity investment that we record at fair value, with changes in fair value recognized in net income effective January 1, 2018, upon the adoption of the new financial instruments standard. Unrealized holding gains on this investment were previously recognized in accumulated other comprehensive income (loss). As of December 31, 2017, the fair value of this investment was not material.
We sponsor a nonqualified deferred compensation plan which allows certain highly-compensated employees to elect to defer income to future periods. Participants in the plan earn a return on their deferrals based on several investments options, which mirror returns on underlying mutual fund investments. We choose to invest in the underlying mutual fund investments to offset the liability associated with our nonqualified deferred compensation plan. These mutual fund investments are valued at net asset value per share and are carried at fair value with gains and losses included in investment income. The changes in the underlying liability to the employee are recorded in operating expenses. As of June 30, 2018 and December 31, 2017, the fair value of these investments was $20.2 and $18.5, respectively.
We utilize the specific identification method in computing realized gains and losses. Realized gains and losses on our marketable securities were not material for the three and six months ended June 30, 2018 and 2017.
9.
Derivative Instruments and Hedging Activities
We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates. The exposures result from portions of our revenues, as well as the related receivables, and expenses that are denominated in currencies other than the U.S. dollar, primarily the Euro and Japanese Yen. We are also exposed to fluctuations in interest rates on outstanding borrowings under our revolving credit facility and term loan facility. We manage these exposures within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes.
We enter into foreign exchange forward contracts, with durations of up to 60 months, to hedge exposures resulting from portions of our forecasted revenues, including intercompany revenues, and certain forecasted expenses that are denominated in currencies other than the U.S. dollar. The purpose of these hedges is to reduce the volatility of exchange rate fluctuations on our operating results. These hedges are designated as cash flow hedges upon contract inception. As of June 30, 2018, we had open revenue related foreign exchange forward contracts with notional amounts totaling $984.7 that qualified for hedge accounting. As of June 30, 2018, we had open expense related foreign exchange forward contracts with notional amounts totaling $23.7 that qualified for hedge accounting.
To achieve a desired mix of floating and fixed interest rates on our term loan, we enter into interest rate swap agreements that qualify for and are designated as cash flow hedges. These contracts convert the floating interest rate on a portion of our debt to a fixed rate, plus a borrowing spread.
The following tables summarize the total interest rate swap contracts executed as of June 30, 2018:
Type of Interest Rate Swap
 
Notional Amount
 
Effective Date
 
Termination Date
 
Fixed Interest Rate
Floating to Fixed
 
656.3
 
December 31, 2016
 
December 31, 2019
 
0.98%
Floating to Fixed
 
300.0
 
January 31, 2017
 
December 31, 2018
 
1.29%
Floating to Fixed
 
300.0
 
January 2, 2019
 
December 31, 2019
 
2.08%
Floating to Fixed
 
200.0
 
March 31, 2017
 
December 31, 2019
 
1.62%
Floating to Fixed
 
200.0
 
March 31, 2017
 
December 31, 2018
 
1.40%
Floating to Fixed
 
200.0
 
June 30, 2017
 
December 31, 2019
 
1.53%
Floating to Fixed
 
100.0
 
June 30, 2017
 
December 31, 2019
 
1.50%
Floating to Fixed
 
100.0
 
June 30, 2017
 
December 31, 2019
 
1.52%
Floating to Fixed
 
200.0
 
June 30, 2017
 
December 31, 2019
 
1.57%
Floating to Fixed
 
75.0
 
January 1, 2018
 
December 31, 2019
 
1.58%

13

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





During the second quarter 2018, we adopted the new standard for accounting for hedges that is designed to simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs. The updated guidance no longer requires the separate measurement and reporting of hedge ineffectiveness. Following adoption, all unrealized gains and losses on derivatives that are designated and qualify for hedge accounting are reported in other comprehensive income (loss) and recognized in our condensed consolidated statements of operations when the underlying hedged transaction affects earnings.
The amount of gains and losses recognized in the condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 from foreign exchange and interest rate swap contracts that qualified as cash flow hedges were as follows:
 
Three months ended
 
Three months ended
 
June 30, 2018
 
June 30, 2017
 
Net Product Sales
 
Interest Expense
 
Net Product Sales
 
Interest Expense
Financial Statement Line Item in which the Effects of Cash Flow Hedges are Recorded
$
1,044.7

 
$
(25.0
)
 
$
912.2

 
$
(24.8
)
Impact of cash flow hedging relationships:
 
 
 
 
 
 
 
Foreign Exchange Forward Contracts
$
(1.7
)
 
$

 
$
12.3

 
$

Interest Rate Swap Contracts
$

 
$
3.1

 
$

 
$
(0.8
)
 
Six months ended
 
Six months ended
 
June 30, 2018
 
June 30, 2017
 
Net Product Sales
 
Interest Expense
 
Net Product Sales
 
Interest Expense
Financial Statement Line Item in which the Effects of Cash Flow Hedges are Recorded
$
1,975.1

 
$
(49.1
)
 
$
1,781.3

 
$
(48.3
)
Impact of cash flow hedging relationships:
 
 
 
 
 
 
 
Foreign Exchange Forward Contracts
$
(14.8
)
 
$

 
$
32.0

 
$

Interest Rate Swap Contracts
$

 
$
4.5

 
$

 
$
(1.3
)
The impact on accumulated other comprehensive income (AOCI) from foreign exchange and interest rate swap contracts that qualified as cash flow hedges, for the three and six months ended June 30, 2018 and 2017 were as follows:
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Foreign Exchange Forward Contracts:
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI, net of tax
$
49.0

 
$
(45.7
)
 
$
16.5

 
$
(61.7
)
Gain (loss) reclassified from AOCI to net product sales, net of tax
$
(1.3
)
 
$
7.9

 
$
(11.4
)
 
$
20.6

Interest Rate Contracts:
 
 
 
 
 
 
 
Gain (loss) recognized in AOCI, net of tax
$
3.1

 
$
(1.4
)
 
$
11.2


$
(0.8
)
Gain (loss) reclassified from AOCI to interest expense, net of tax
$
2.5

 
$
(0.5
)
 
$
3.6


$
(0.8
)
Assuming no change in foreign exchange rates from market rates at June 30, 2018, $0.8 of gains recognized in AOCI will be reclassified to revenue over the next 12 months. The amount of gains recognized in AOCI that will be reclassified to interest expense over the next 12 months is $9.1. Amounts recognized in AOCI for expense related foreign exchange forward contracts was not material at June 30, 2018.
We enter into foreign exchange forward contracts, with durations up to six months, designed to limit the balance sheet exposure of monetary assets and liabilities. We enter into these hedges to reduce the impact of fluctuating exchange rates on our operating results. Hedge accounting is not applied to these derivative instruments as gains and losses on these hedge transactions are designed to offset gains and losses on underlying balance

14

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





sheet exposures. As of June 30, 2018, the notional amount of foreign exchange contracts where hedge accounting is not applied was $260.8.
We recognized a gain (loss) of $18.4 and $(0.5), in other income and expense, for the three months ended June 30, 2018 and 2017, associated with the foreign exchange contracts not designated as hedging instruments. We recognized a gain (loss) of $10.3 and $(9.2), for the six months ended June 30, 2018 and 2017, respectively, associated with the foreign exchange contracts not designated as hedging instruments. These amounts were partially offset by gains or losses on monetary assets and liabilities.
The following tables summarize the fair value of outstanding derivatives at June 30, 2018 and December 31, 2017: 

 
June 30, 2018
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
$
16.0

 
Other current liabilities
 
$
15.5

Foreign exchange forward contracts
Other assets
 
1.9

 
Other liabilities
 
9.9

Interest rate contracts
Prepaid expenses and other current assets
 
9.1

 
Other current liabilities
 

Interest rate contracts
Other assets
 
22.3

 
Other liabilities
 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
0.4

 
Other current liabilities
 
1.0

Total fair value of derivative instruments
 
 
$
49.7

 
 
 
$
26.4



 
December 31, 2017
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
$
12.9

 
Other current liabilities
 
$
34.8

Foreign exchange forward contracts
Other assets
 
4.1

 
Other liabilities
 
26.0

Interest rate contracts
Prepaid expenses and other current assets
 
9.3

 
Other current liabilities
 

Interest rate contracts
Other assets
 
12.5

 
Other liabilities
 

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expenses and other current assets
 
10.0

 
Other current liabilities
 
13.7

Total fair value of derivative instruments
 
 
$
48.8

 
 
 
$
74.5



15

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





Although we do not offset derivative assets and liabilities within our condensed consolidated balance sheets, our International Swap and Derivatives Association agreements provide for net settlement of transactions that are due to or from the same counterparty upon early termination of the agreement due to an event of default or other termination event. The following tables summarize the potential effect on our condensed consolidated balance sheets of offsetting our foreign exchange forward contracts and interest rate contracts subject to such provisions:
 
 
June 30, 2018
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Description
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Derivative Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
Derivative assets
 
$
49.7

 
$

 
$
49.7

 
$
(13.3
)
 
$

 
$
36.4

Derivative liabilities
 
(26.4
)
 

 
(26.4
)
 
13.3

 

 
(13.1
)
 
 
December 31, 2017
 
 
 
 
 
 
 
 
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
 
 
Description
 
Gross Amounts of Recognized Assets/Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheet
 
Net Amounts of Assets/Liabilities Presented in the Condensed Consolidated Balance Sheet
 
Derivative Financial Instruments
 
Cash Collateral Received (Pledged)
 
Net Amount
Derivative assets
 
$
48.8

 
$

 
$
48.8

 
$
(26.3
)
 
$

 
$
22.5

Derivative liabilities
 
(74.5
)
 

 
(74.5
)
 
26.3

 

 
(48.2
)

10.
Other Investments
We invest in companies with securities that are not publicly traded and where fair value is not readily available. Other investments include an investment in the preferred stock of the non-public entity Moderna Therapeutics, Inc. (Moderna). During 2014, we purchased $37.5 of preferred equity of Moderna. We have historically recorded this investment at cost, less impairments. In January 2016, the FASB issued a new standard that changes accounting for equity investments, including equity investments without a readily determinable fair value. We adopted the new standard on January 1, 2018. While results for reporting periods beginning after January 1, 2018 are presented under the new guidance, prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
In connection with our adoption of the new guidance for equity securities in the first quarter 2018, we elected the alternative measurement approach for our investment in Moderna. As a result, we will continue to record this investment at cost, less impairments; however, we will also adjust the investment for any changes resulting from an observable price change in an orderly transaction for identical or similar investments of the same issuer. We assess relevant transactions that occur on or before the balance sheet date to identify observable price changes, and we regularly monitor these investments to evaluate whether there is an indication that the investment is impaired, based on the implied value of recent company financings, public market prices of comparable companies, and general market conditions.

16

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





During the first quarter 2018, Moderna announced the completion of a new round of financing. We considered this transaction and the rights of the preferred shares issued in the new round, compared to the rights of the preferred equity that we hold, and concluded that Moderna's new round of financing represents an observable price change in an orderly transaction for a similar investment. We further concluded, based on the respective rights of the stock and consideration of potential liquidity events, that the value of our preferred stock is equivalent to the value of the newly issued preferred stock. As a result, we recognized an unrealized gain of $100.8 in investment income during the first quarter 2018 to adjust our investment in Moderna to fair value as of the date of the observable price change, based on the per share price in Moderna's new round of financing. The carrying value of this investment was $138.3 and $37.5 as of June 30, 2018 and December 31, 2017, respectively. The carrying value of this investment was not impaired as of June 30, 2018.


11.
Stockholders' Equity
In November 2012, our Board of Directors authorized a share repurchase program. The repurchase program does not have an expiration date, and we are not obligated to acquire a particular number of shares. The repurchase program may be discontinued at any time at our discretion. In February 2017, our Board of Directors authorized the future acquisition of shares with an aggregate value of up to $1,000.0 under the repurchase program, which superseded all prior repurchase programs. Under the program, for the three months ended June 30, 2017, we repurchased 1.6 shares at a cost of $170.8. During the six months ended June 30, 2018 and 2017, we repurchased 0.7 and 2.1 shares of our common stock at a cost of $85.0 and $238.9, respectively. The Company did not repurchase any shares during the three months ended June 30, 2018. As of July 26, 2018, there is a total of $451.5 remaining for repurchases under the repurchase program.

12.
Other Comprehensive Income and Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI, by component, for the six months ended June 30, 2018 and 2017:

 
Defined Benefit Pension Plans
 
Unrealized Gains (Losses) from Debt Securities
 
Unrealized Gains (Losses) from Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2017
$
(4.8
)
 
$
0.2

 
$
(13.9
)
 
$
(15.9
)
 
$
(34.4
)
Other comprehensive income (loss) before reclassifications
1.3

 
0.1

 
27.7

 
(4.3
)
 
24.8

Amounts reclassified from other comprehensive income
(0.6
)
 
(0.5
)
 
7.8

 

 
6.7

Net other comprehensive income (loss)
0.7

 
(0.4
)
 
35.5

 
(4.3
)
 
31.5

Balances, June 30, 2018
$
(4.1
)
 
$
(0.2
)
 
$
21.6

 
$
(20.2
)
 
$
(2.9
)

17

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






 
Defined Benefit Pension Plans
 
Unrealized Gains (Losses) from Debt Securities
 
Unrealized Gains (Losses) from Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2016
$
(6.7
)
 
$
(0.4
)
 
$
91.9

 
$
(24.3
)
 
$
60.5

Other comprehensive income (loss) before reclassifications
0.2

 

 
(62.5
)
 
6.8

 
(55.5
)
Amounts reclassified from other comprehensive income
0.1

 
0.9

 
(19.8
)
 

 
(18.8
)
Net other comprehensive income (loss)
0.3

 
0.9

 
(82.3
)
 
6.8

 
(74.3
)
Balances, June 30, 2017
$
(6.4
)
 
$
0.5

 
$
9.6

 
$
(17.5
)
 
$
(13.8
)

The table below provides details regarding significant reclassifications from AOCI during the three and six months ended June 30, 2018 and 2017:
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified From Accumulated Other Comprehensive Income during the three months ended June 30,
 
Amount Reclassified From Accumulated Other Comprehensive Income during the six months ended June 30,
 
Affected Line Item in the Condensed Consolidated Statements of Operations
 
2018
2017
 
2018
2017
 
Unrealized Gains (Losses) from Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
 
$
(1.7
)
$
12.3

 
$
(14.8
)
$
32.0

 
Net product sales
Interest rate swap contracts
 
3.1

(0.8
)
 
4.5

(1.3
)
 
Interest expense
 
 
1.4

11.5

 
(10.3
)
30.7

 
 
 
 
(0.2
)
(4.1
)
 
2.5

(10.9
)
 
Income tax expense
 
 
$
1.2

$
7.4

 
$
(7.8
)
$
19.8

 
 

13.
Fair Value Measurement
Authoritative guidance establishes a valuation hierarchy for disclosure of the inputs to the valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.
The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. 

18

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





 
 
Fair Value Measurement at
June 30, 2018
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Money market funds
$
5.4

 
$

 
$
5.4

 
$

Cash equivalents
Commercial paper
$
55.8

 
$

 
$
55.8

 
$

Cash equivalents
Corporate bonds
$
3.5

 
$

 
$
3.5

 
$

Cash equivalents
Bank certificates of deposit
$
7.1


$


$
7.1


$

Cash equivalents
Other government-related obligations
$
49.5

 
$

 
$
49.5

 
$

Marketable securities
Mutual funds
$
20.2

 
$
20.2

 
$

 
$

Marketable securities
Commercial paper
$
83.1

 
$

 
$
83.1

 
$

Marketable securities
Corporate bonds
$
215.2

 
$

 
$
215.2

 
$

Marketable securities
Other government-related obligations
$
92.0

 
$

 
$
92.0

 
$

Marketable securities
Bank certificates of deposit
$
39.0

 
$

 
$
39.0

 
$

Prepaid expenses and other current assets
Foreign exchange forward contracts
$
16.4

 
$

 
$
16.4

 
$

Other assets
Foreign exchange forward contracts
$
1.9

 
$

 
$
1.9

 
$

Other current liabilities
Foreign exchange forward contracts
$
16.5

 
$

 
$
16.5

 
$

Other liabilities
Foreign exchange forward contracts
$
9.9

 
$

 
$
9.9

 
$

Prepaid expenses and other current assets
Interest rate contracts
$
9.1

 
$

 
$
9.1

 
$

Other assets
Interest rate contracts
$
22.3

 
$

 
$
22.3

 
$

Current portion of contingent consideration
Acquisition-related contingent consideration
$
70.3

 
$

 
$

 
$
70.3

Contingent consideration
Acquisition-related contingent consideration
$
156.0

 
$

 
$

 
$
156.0

 

19

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





 
 
Fair Value Measurement at
December 31, 2017
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Commercial paper
$
9.5

 
$

 
$
9.5

 
$

Cash equivalents
Reverse repurchase agreements
$
27.0

 
$

 
$
27.0

 
$

Cash equivalents
Corporate bonds
$
1.2

 
$

 
$
1.2

 
$

Cash equivalents
Other government-related obligations
$
5.0

 
$

 
$
5.0

 
$

Marketable securities
Mutual funds
$
18.5

 
$
18.5

 
$

 
$

Marketable securities
Commercial paper
$
6.5

 
$

 
$
6.5

 
$

Marketable securities
Corporate bonds
$
431.3

 
$

 
$
431.3

 
$

Marketable securities
Other government-related obligations
$
421.3

 
$

 
$
421.3

 
$

Marketable securities
Bank certificates of deposit
$
11.8

 
$

 
$
11.8

 
$

Marketable securities
Equity securities
$
0.3

 
$
0.3

 
$

 
$

Prepaid expenses and other current assets
Foreign exchange forward contracts
$
22.9

 
$

 
$
22.9

 
$

Other assets
Foreign exchange forward contracts
$
4.1

 
$

 
$
4.1

 
$

Other current liabilities
Foreign exchange forward contracts
$
48.5

 
$

 
$
48.5

 
$

Other liabilities
Foreign exchange forward contracts
$
26.0

 
$

 
$
26.0

 
$

Prepaid expenses and other current assets
Interest rate contracts
$
9.3

 
$

 
$
9.3

 
$

Other assets
Interest rate contracts
$
12.5

 
$

 
$
12.5

 
$

Contingent consideration
Acquisition-related contingent consideration
$
168.9

 
$

 
$

 
$
168.9


There were no securities transferred between Level 1, 2 and 3 during the six months ended June 30, 2018.

Valuation Techniques
We classify mutual fund investments and equity securities, which are valued based on quoted market prices in active markets with no valuation adjustment, as Level 1 assets within the fair value hierarchy.
Cash equivalents and marketable securities classified as Level 2 within the valuation hierarchy consist of commercial paper, reverse repurchase agreements, U.S. and foreign government-related debt, corporate debt securities and certificates of deposit. We estimate the fair values of these marketable securities by taking into consideration valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for similar securities, issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.
Our derivative assets and liabilities include foreign exchange and interest rate derivatives that are measured at fair value using observable market inputs such as forward rates, interest rates, our own credit risk as well as an evaluation of our counterparties’ credit risks. Based on these inputs, the derivative assets and liabilities are classified within Level 2 of the valuation hierarchy.
Contingent consideration liabilities related to acquisitions are classified as Level 3 within the valuation hierarchy and are valued based on various estimates, including probability of success, discount rates and amount of time until the conditions of the milestone payments are met.

20

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





As of June 30, 2018, there has not been any impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

Contingent Consideration
In connection with prior acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. We determine the fair value of these obligations using various estimates that are not observable in the market and represent a Level 3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a cost of debt of 4.2% for developmental milestones and a weighted average cost of capital ranging from 9.0% to 21.0% for sales-based milestones.
Each reporting period, we adjust the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to the passage of time.
Estimated future contingent milestone payments related to prior business combinations range from zero if no milestone events are achieved, to a maximum of $741.0 if all development, regulatory and sales-based milestones are reached. As of June 30, 2018, the fair value of acquisition-related contingent consideration was $226.3. The following table represents a roll-forward of our acquisition-related contingent consideration:
 
Six months ended
 
June 30, 2018
Balance at December 31, 2017
$
168.9

Changes in fair value
57.4

Balance at June 30, 2018
$
226.3


14.
Revenue Recognition
In May 2014, the FASB issued a comprehensive new standard which amends revenue recognition principles. We adopted the new standard on January 1, 2018 by applying the modified retrospective method to all contracts that were not completed as of that date.  Under the new guidance, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration expected to be received in exchange for those goods or services.  Revenue is recognized through a five-step process: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied.  The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.  At contract inception, the Company assesses the goods or services promised within each contract, and determines those that are performance obligations.  Revenue is recognized for the applicable performance element when each distinct performance obligation is satisfied. 
While results for reporting periods beginning after January 1, 2018 are presented under the new guidance, prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The accounting policy for revenue recognition for periods prior to January 1, 2018 is described in Note 1 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Nature of Products
Our principal source of revenue is product sales. Our contracts with customers generally contain a single performance obligation and we recognize revenue from product sales when we have satisfied our performance obligation by transferring control of the product to our customers. Control of the product generally transfers to the customer upon delivery. In certain countries, we sell to distributors on a consignment basis and record revenue when control of the product transfers to the customer upon sale to the end user.

21

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





Our customers are primarily comprised of distributors, pharmacies, hospitals, hospital buying groups, and other healthcare providers. In some cases, we may also sell to governments and government agencies. In addition to sales in countries where our products are commercially available, we have also recorded revenue on sales for patients receiving treatment through named-patient programs. The relevant authorities or institutions in those countries have agreed to reimburse for product sold on a named-patient basis where our products have not received final approval for commercial sale.
Revenue is recognized at the amount to which we expect to be entitled in exchange for the sale of our products. This amount includes both fixed and variable consideration and excludes amounts that are collected from customers and remitted to governmental authorities, such as value-added taxes in foreign jurisdictions. Shipping and handling costs associated with outbound freight after control of a product has transferred to our customers are accounted for as a fulfilment cost and are included in operating expenses. The cost for any shipping and handling activities (including customs clearance activities) associated with transactions for which revenue has been recognized are accrued if not completed before the respective period end.
The timing between the recognition of revenue for product sales and the receipt of payment is not significant. Our standard credit terms, which vary based on the country of sale, range from 30 to 120 days and all arrangements are payable within one year of the transfer of the product. We do not assess whether a contract has a significant financing component if the expectation at contract inception is such that the period between the transfer of the promised good to the customer and receipt of payment will be one year or less.
We evaluate the creditworthiness of customers on a regular basis. In certain European countries, sales by us are subject to payment terms that are statutorily determined. This is primarily the case in countries where the payer is government-owned or government-funded, which we consider to be creditworthy. The length of time from sale to receipt of payment in certain countries exceeds our credit terms. In countries in which collections from customers extend beyond normal payment terms, we seek to collect interest. We record interest on customer receivables as interest income when collected. Subsequent adjustments for further declines in credit rating are recorded as bad debt expense as a component of selling, general and administrative expense. We also use judgments as to our ability to collect outstanding receivables and provide allowances for the portion of receivables if and when collection becomes doubtful, and we also assess on an ongoing basis whether collectibility is probable at the time of sale. As of June 30, 2018 and December 31, 2017, allowances on receivables were not material.
Variable Consideration
We pay distribution fees to our distributors and offer rebates and/or discounts, or enter into volume-based reimbursement arrangements with certain customers. We reduce the transaction price on our sales for these amounts. For variable amounts, we estimate the amount of consideration to which we expect to be entitled based on all available historic, current and forecast information. We use both the expected value and the most likely method to estimate variable payments based on the type of variable consideration and what method better predicts the amount of consideration we expect to be entitled to. Consideration that is received from a customer that we expect will need to be refunded in the future is recorded as a refund liability to the customer within accrued expenses. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect net product sales and earnings in the period such variances become know.
Variability in the transaction price for our products pursuant to our contracts with customers primarily arises from the following:
Discounts and Rebates: We offer discounts and rebates to certain customers under our arrangements. In many cases, these amounts are fixed at the time of sale and the transaction price is reduced accordingly. We also provide for rebates under certain governmental programs, including Medicaid in the U.S. and other programs outside the U.S. which are payable based on actual claim data. We estimate these rebates based on an analysis of historical claim patterns and estimates of customer mix to determine which sales will be subject to rebates and the amount of such rebates. We update our estimates and assumptions each period and record any necessary adjustments, which may have an impact on revenue in the period in which the adjustment is made. Generally, the length of time between product sale and the processing and reporting of the rebates is three to six months.
Volume-Based Arrangements: We have entered into volume-based arrangements with governments in certain countries and other customers in which reimbursement is limited to a contractual amount. Under this type of arrangement, amounts billed in excess of the contractual limitation are repaid to the customer as a rebate. We

22

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





estimate incremental discounts resulting from these contractual limitations, based on forecasted sales during the limitation period, and we apply the discount percentage to product shipments as a reduction of revenue. Our calculations related to these arrangements require estimation of sales during the limitation period, and adjustments in these estimates may have a material impact in the period in which these estimates change.
Distribution & Other Fees: We pay distribution and other fees to certain customers in connection with the sales of our products. We record distribution and other fees paid to our customers as a reduction of revenue, unless the payment is for a distinct good or service from the customer and we can reasonably estimate the fair value of the goods or services received. If both conditions are met, we record the consideration paid to the customer as an operating expense. These costs are typically known at the time of sale, resulting in minimal adjustments subsequent to the period of sale.
Product Returns: Our contracts with customers generally provide for returns only if the product is damaged or defective upon delivery. We assess our sales transactions and arrangements with customers and monitor inventory within our sales channels to determine whether a provision for returns is warranted and a resulting adjustment to the transaction price is necessary. This assessment is based on historical experience and assumptions as of the date of sale and changes in these estimates could have an impact in the period in which the change occurs. Because of factors such as the price of our products, the limited number of patients, the short period from product sale to patient infusion and limited contractual return rights, our customers often carry limited inventory.
The amount of variable consideration included in the transaction price is constrained by the amount that is probable will not result in a significant reversal of revenue. We consider our experience with similar transactions and expectations regarding the contract in estimating the amount of variable consideration to which we expect to be entitled, and determining whether the estimated variable consideration should be constrained. We do not have any material constraints on the variable consideration included within the transaction price of our current revenue arrangements.


23

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





Disaggregation of Revenue
The Company disaggregates revenue from contracts with customers into product and geographical regions as summarized below.

Three months ended June 30,
 
Six months ended June 30,

2018
 
2017
 
2018
 
2017
Soliris







United States
$
395.8


$
317.8


$
731.8


$
605.9

Europe
253.4


248.5


504.2


489.9

Asia Pacific
93.6


80.8


179.1


159.6

Rest of World
155.4


166.2


283.2


341.4

Total
$
898.2


$
813.3


$
1,698.3


$
1,596.8









Strensiq







United States
$
99.9


$
70.0


$
189.1


$
133.3

Europe
16.4


8.6


30.4


13.7

Asia Pacific
6.3


4.4


12.0


8.1

Rest of World
2.5


0.6


4.3


2.1

Total
$
125.1


$
83.6


$
235.8


$
157.2









Kanuma







United States
$
13.0


$
11.1


$
24.9


$
19.8

Europe
5.8


3.3


11.7


5.1

Asia Pacific
1.1


0.6


2.1


1.1

Rest of World
1.5


0.3


2.3


1.3

Total
$
21.4


$
15.3


$
41.0


$
27.3


Contract Balances and Receivables
Contract liabilities relate to consideration received and/or billed for goods that have not been delivered to the customer and for which the performance obligation has not yet been completed. These amounts are included within other current liabilities in the condensed consolidated statements of operations.
The following table provides information about receivables and contract liabilities from our contracts with customers.
 
June 30, 2018
 
December 31, 2017
Receivables, which are included in "Trade accounts receivable, net"
$
853.7

 
$
726.5

Contract liabilities, which are included in "Other current liabilities"
$
3.7

 
$
15.9

Upon adoption of the new standard, on January 1, 2018, we reduced our deferred revenue balance by $10.4, with an offsetting increase of $6.0 in retained earnings due to the cumulative impact of adopting this new standard. The adjusted deferred revenue balance, as of January 1, 2018, was $5.5. We recognized this amount in revenue in the first quarter of 2018.



24

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





15.
Income Taxes

The following table provides a comparative summary of our income tax expense and effective income tax rate