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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020
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
 https://cdn.kscope.io/9bfeb894b98ae31ca00f31d2a6b89187-alexionlogoa70.jpg
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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock $0.0001 par value
ALXN
NASDAQ Stock Market LLC
 
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 every Interactive Data File required to be submitted 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 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.
Large accelerated filer  x   Accelerated filer  Non-accelerated filer  
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
220,827,431
Class
Outstanding as of May 4, 2020



 
Alexion Pharmaceuticals, Inc.
Table of Contents

 
 
 
 
Page
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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)
 
March 31,

December 31,
 
2020

2019
Assets



Current Assets:



Cash and cash equivalents
$
2,315.0


$
2,685.5

Marketable securities
47.8


64.0

Trade accounts receivable, net
1,345.2


1,243.2

Inventories
586.8


627.6

Prepaid expenses and other current assets
575.4


456.1

Total current assets
4,870.2


5,076.4

Property, plant and equipment, net
1,159.9


1,163.3

Intangible assets, net
4,187.6


3,344.3

Goodwill
5,072.1


5,037.4

Right of use operating assets
203.2


204.0

Deferred tax assets
2,223.5

 
2,290.2

Other assets
432.0


429.0

Total assets
$
18,148.5


$
17,544.6

Liabilities and Stockholders' Equity



Current Liabilities:



Accounts payable and accrued expenses
$
862.8


$
966.7

Current portion of long-term debt
126.7


126.7

Other current liabilities
130.4


100.9

Total current liabilities
1,119.9


1,194.3

Long-term debt, less current portion
2,343.3


2,375.0

Contingent consideration
358.9


192.4

Deferred tax liabilities
2,113.3


2,081.4

Noncurrent operating lease liabilities
162.8


164.1

Other liabilities
302.5


265.6

Total liabilities
6,400.7


6,272.8

Commitments and contingencies (Note 16)



Stockholders' Equity:



Common stock, $0.0001 par value; 290.0 shares authorized; 238.9 and 237.8 shares issued at March 31, 2020 and December 31, 2019, respectively



Additional paid-in capital
8,864.9


8,804.7

Treasury stock, at cost, 17.8 and 16.5 shares at March 31, 2020 and December 31, 2019, respectively
(2,213.0
)

(2,105.9
)
Accumulated other comprehensive loss
(101.5
)

(66.8
)
Retained earnings
5,197.4


4,639.8

Total stockholders' equity
11,747.8


11,271.8

Total liabilities and stockholders' equity
$
18,148.5


$
17,544.6


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 March 31,
 
2020

2019
Net product sales
$
1,444.6


$
1,140.2

Other revenue
0.2


0.2

Total revenues
1,444.8


1,140.4

Costs and expenses:



Cost of sales (exclusive of amortization of purchased intangible assets)
111.7

 
85.8

Research and development
200.9


195.9

Selling, general and administrative
319.9


281.5

Amortization of purchased intangible assets
73.7


80.0

Change in fair value of contingent consideration
5.8


(28.7
)
Acquisition-related costs
38.1

 

Restructuring expenses
(0.8
)

9.1

Total costs and expenses
749.3


623.6

Operating income
695.5


516.8

Other income and expense:



Investment (expense) income
(5.2
)

42.5

Interest expense
(25.8
)

(19.9
)
Other income and (expense)
(0.9
)

2.4

Income before income taxes
663.6


541.8

Income tax expense (benefit)
106.0


(46.1
)
Net income
$
557.6


$
587.9

Earnings per common share



Basic
$
2.52


$
2.63

Diluted
$
2.50


$
2.61

Shares used in computing earnings per common share



Basic
221.6


223.8

Diluted
222.6


225.5


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

3


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

 
Three months ended March 31,
 
2020
 
2019
Net income
$
557.6

 
$
587.9

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation
(8.0
)
 
(2.0
)
Unrealized (losses) gains on debt securities
(0.2
)
 
0.2

Unrealized losses on hedging activities, net of tax of $(8.2) and $(2.2), respectively
(26.5
)
 
(9.0
)
Other comprehensive income (loss), net of tax
(34.7
)
 
(10.8
)
Comprehensive income
$
522.9

 
$
577.1


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


4


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
(amounts in millions)
Three months ended March 31, 2020
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
at Cost
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
Shares Issued
 
Amount
 
Shares
 
Amount
 
Balances, December 31, 2019
237.8


$


$
8,804.7


16.5


$
(2,105.9
)

$
(66.8
)

$
4,639.8


$
11,271.8

Repurchase of common stock






1.3


(107.1
)





(107.1
)
Issuance of common stock under stock option and stock purchase plans
0.1




2.8










2.8

Issuance of restricted common stock
1.0















Share-based compensation expense




57.4










57.4

Net income












557.6


557.6

Other comprehensive loss










(34.7
)



(34.7
)
Balances, March 31, 2020
238.9


$


$
8,864.9


17.8


$
(2,213.0
)

$
(101.5
)

$
5,197.4


$
11,747.8


Three months ended March 31, 2019
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
at Cost
 
Accumulated Other
Comprehensive
Income (Loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
Shares Issued
 
Amount
 
Shares
 
Amount
 
Balances, December 31, 2018
236.2


$


$
8,539.1


12.7


$
(1,689.9
)

$
(9.7
)

$
2,325.8


$
9,165.3

Repurchase of common stock






0.1


(11.3
)





(11.3
)
Issuance of common stock under stock option and stock purchase plans
0.1




10.1










10.1

Issuance of restricted common stock
0.7















Share-based compensation expense




55.7










55.7

Net income












587.9


587.9

Other comprehensive loss










(10.8
)



(10.8
)
Adoption of new accounting standards












(90.3
)

(90.3
)
Balances, March 31, 2019
237.0


$


$
8,604.9


12.8


$
(1,701.2
)

$
(20.5
)

$
2,823.4


$
9,706.6






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


5


Alexion Pharmaceuticals, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(amounts in millions)
 
Three months ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
557.6

 
$
587.9

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
89.3

 
97.2

Change in fair value of contingent consideration
5.8

 
(28.7
)
Share-based compensation expense
57.6

 
56.7

Deferred taxes (benefit)
49.0

 
(81.1
)
Unrealized foreign currency loss
7.1

 
1.9

Unrealized (gain) loss on forward contracts
(15.0
)
 
5.5

Unrealized loss (gain) on strategic equity investments
9.2

 
(33.8
)
Other
13.7

 
(2.4
)
Changes in operating assets and liabilities, excluding the effect of acquisitions:
 
 
 
Accounts receivable
(120.9
)
 
(95.3
)
Inventories
37.3

 
(11.2
)
Prepaid expenses, right of use operating assets and other assets
(72.9
)
 
(58.6
)
Accounts payable, accrued expenses, lease liabilities and other liabilities
(68.2
)
 
(8.2
)
Net cash provided by operating activities
549.6

 
429.9

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale debt securities
(19.4
)
 

Proceeds from maturity or sale of available-for-sale debt securities
141.4

 
92.6

Purchases of mutual funds related to nonqualified deferred compensation plan
(6.9
)
 
(5.8
)
Proceeds from sale of mutual funds related to nonqualified deferred compensation plan
3.3

 
3.7

Purchases of property, plant and equipment
(12.2
)
 
(36.0
)
Payment for acquisition of business, net of cash acquired
(837.7
)
 

Purchases of strategic equity investments and options
(34.5
)
 
(43.8
)
Purchase of intangible assets

 
(8.0
)
Other

 
0.2

Net cash (used in) provided by investing activities
(766.0
)
 
2.9

Cash flows from financing activities:


 


Payments on term loan
(32.6
)
 

Payments on revolving credit facility

 
(250.0
)
Repurchases of common stock
(107.1
)
 
(11.3
)
Net proceeds from issuance of common stock under share-based compensation arrangements
2.8

 
10.2

Other
(1.3
)
 
(1.3
)
Net cash used in financing activities
(138.2
)
 
(252.4
)
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(13.2
)
 
(1.4
)
Net change in cash and cash equivalents and restricted cash
(367.8
)
 
179.0

Cash and cash equivalents and restricted cash at beginning of period
2,723.6

 
1,367.3

Cash and cash equivalents and restricted cash at end of period
$
2,355.8

 
$
1,546.3

 
 
 
 


6


 
Three months ended March 31,
 
2020
 
2019
 
 
 
 
Supplemental cash flow disclosures from investing and financing activities:
 
 
 
Contingent consideration issued in acquisitions
$
155.0

 
$

Fair value of strategic investment and purchase option
$

 
$
27.1

Operating ROU lease assets obtained in exchange for operating lease liabilities
$
3.7

 
$

Accounts payable and accrued expenses for purchases of property, plant and equipment and intangible assets
$
13.0

 
$
10.8

The following provides a reconciliation of cash and cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the total of such amounts shown in the condensed consolidated statement of cash flows:
 
Three months ended March 31,
 
2020
 
2019
 
 
 
 
Cash and cash equivalents
$
2,315.0

 
$
1,544.8

Restricted cash included in other current assets
40.7

 
0.1

Restricted cash included in other noncurrent assets
0.1

 
1.4

Total cash and cash equivalents and restricted cash reported in the condensed consolidated statement of cash flows
$
2,355.8

 
$
1,546.3

Amounts included in restricted cash primarily represent funds placed in escrow as a result of the judicial order issued by the Federal Court of Canada related to SOLIRIS pricing (Note 16, Commitments and Contingencies).

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


7

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 and devastating diseases through the discovery, development and commercialization of life-changing therapies.
As the global leader in complement biology and inhibition for more than 20 years, Alexion has developed and commercializes two approved complement inhibitors to treat patients with paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS), as well as the first and only approved complement inhibitor to treat anti-acetylcholine receptor (AChR) antibody-positive generalized myasthenia gravis (gMG) and neuromyelitis optica spectrum disorder (NMOSD) in patients who are anti-aquaporin-4 (AQP4) antibody positive. Alexion also has two highly innovative enzyme replacement therapies and the first and only approved therapies for patients with life-threatening and ultra-rare metabolic disorders, hypophosphatasia (HPP) and lysosomal acid lipase deficiency (LAL-D).
In addition to our marketed therapies, we have a diverse pipeline resulting from internal innovation and business development. 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, metabolic disorders and cardiology. 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, 2019. In our opinion, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of our financial statements for interim periods presented in accordance with accounting principles generally accepted in the United States. The condensed consolidated balance sheet as of December 31, 2019 was derived from audited annual 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, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full year or any other future periods.
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, 2019. Updates to our accounting policies, including impacts from the adoption of new accounting standards, are discussed below in this Note 2.
Reclassifications
Certain items in the prior period’s condensed consolidated financial statements have been reclassified to conform to the current presentation.
Use of Estimates

8

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





Preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent liabilities in our condensed consolidated financial statements.
Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, will depend on future developments that are highly uncertain. We are not aware of any specific event or circumstance that would require an update to our estimates, judgments and assumptions or a revision of the carrying value of our assets or liabilities as of May 6, 2020, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results may differ from these estimates under different assumptions or conditions and such differences may be material.
New Accounting Pronouncements
Accounting Standards Update (ASU) 2019-12, “Income Taxes: Simplifying the Accounting for Income Taxes”: In December 2019, the Financial Accounting Standards Board (FASB) issued a new standard intended to simplify the accounting for income taxes by eliminating certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for annual periods beginning after December 15, 2020 and interim periods within, with early adoption permitted. Adoption of the standard requires certain changes to be made prospectively, with some changes to be made retrospectively. We are currently assessing the impact of this standard on our financial condition and results of operations.
ASU 2020-01, “Investments - Equity Securities, Investments - Equity Method and Joint Ventures, and Derivatives and Hedging - Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815”: In January 2020, the FASB issued a new standard intended to clarify the interactions between ASC 321, ASC 323 and ASC 815. The new standard addresses accounting for the transition into and out of the equity method and measurement of certain purchased options and forward contracts to acquire investments. The standard is effective for annual and interim periods beginning after December 15, 2020, with early adoption permitted. Adoption of the standard requires changes to be made prospectively. We are currently assessing the impact of this standard on our financial condition and results of operations.
ASU 2020-04, “Reference Rate Reform, Facilitation of the Effects of Reference Rate Reform on Financial Reporting": In response to concerns about structural risks of interbank offered rates , and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR), regulators around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. In March 2020, the FASB issued a new standard that provides optional guidance for a limited time to ease the potential burden in accounting for the effects of reference rate reform, including optional expedients and exceptions for the accounting implications of contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.
The amendments in this new standard only apply to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the standard do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. We are currently reviewing our contracts impacted by reference rate reform and are assessing the impact of this standard on our financial condition and results of operations.
Recently Adopted Accounting Pronouncements
ASU 2018-15, "Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract": In August 2018, the FASB issued a new standard on a customer's accounting for implementation, set-up, and other upfront costs incurred in a cloud computing arrangement (CCA) that aligns the requirements for capitalizing implementation costs in a CCA service contract with existing internal-use software guidance. The standard also provides classification guidance on these implementation costs as well as additional quantitative and qualitative disclosures. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted, and can be adopted prospectively or retrospectively.

9

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





We adopted the new standard on January 1, 2020 on a prospective basis. The adoption of this standard had no impact on our financial statements at the date of adoption; however, we anticipate the adoption of this standard will result in an increase in capitalized assets related to qualifying CCA implementation costs in future periods.
Qualifying CCA implementation, set-up and other upfront costs incurred after January 1, 2020 are capitalized as other assets in our condensed consolidated balance sheets. These assets will be expensed over the term of the hosting arrangement and such expense will be presented within the same line item in our condensed consolidated statements of operations as the expense for fees for the associated hosting arrangement. These capitalized costs will be evaluated for impairment when events or changes in circumstances indicate that the carrying value of the capitalized implementation costs is not recoverable. For the period ended March 31, 2020, capitalized CCA implementation costs were not material.
ASU 2016-13, "Measurement of Credit Losses on Financial Instruments": 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 on financial assets measured at amortized cost be determined using an expected loss model, instead of the current incurred loss model, and requires that credit losses related to available-for-sale debt securities be recorded through an allowance for credit losses and limited to the amount by which carrying value exceeds fair value. The new standard also requires enhanced disclosure of credit risk associated with financial assets. The standard is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.
We adopted the new standard on January 1, 2020 and have completed our assessment of the standard based on the composition of our portfolio of financial instruments and current and forecasted economic conditions at that date. Our significant financial assets that are within the scope of the new standard consist of trade accounts receivable and available for sale debt securities. We have not historically experienced any material credit losses associated with our trade accounts receivable or available for debt securities.
We monitor economic conditions, including volatility associated with international economies and the associated impacts on the financial markets and our business. We disaggregate our trade accounts receivable population into pools of similar risk characteristics based on underlying customer type and geographical location. Current expected credit loss allowances are estimated for each risk pool based on available information, including i) historical credit loss experience, ii) current economic conditions and, iii) reasonable and supportable forecasts of future economic conditions that may affect the collectibility of the recorded amounts. Based on the relevant facts and economic conditions as of the date of adoption, we concluded that the expected credit losses on our trade accounts receivable were immaterial. Additionally, unrealized losses on our available for sale investment portfolio were immaterial.
As of March 31, 2020, we reassessed our estimated credit losses on our trade accounts receivable, including consideration of the potential impacts of the COVID-19 global pandemic. Based on the relevant facts and economic conditions as of March 31, 2020, we concluded that the expected credit losses on our trade accounts receivable continued to be immaterial. Additionally, unrealized losses on our available for sale investment portfolio were immaterial as of March 31, 2020.
3.
Acquisitions
Business Combinations
Achillion Pharmaceuticals, Inc.
In October 2019, Alexion entered into a definitive agreement to acquire Achillion Pharmaceuticals, Inc. (Achillion), a clinical-stage biopharmaceutical company focused on the development of oral Factor D inhibitors. Achillion was developing oral small molecule Factor D inhibitors to treat people with complement alternative pathway-mediated rare diseases, such as PNH and C3 glomerulopathy (C3G). Achillion had two clinical stage medicines in development, including danicopan (ACH-4471/ALXN2040) and ACH-5228 (ALXN2050).
The acquisition of Achillion closed on January 28, 2020. Under the terms of the agreement, we acquired all outstanding common stock of Achillion for $6.30 per share, or an aggregate of $926.2, inclusive of the settlement of Achillion's outstanding equity awards. The acquisition was funded with cash on hand. The transaction includes the potential for additional consideration in the form of non-tradeable contingent value rights (CVRs), which will be paid to Achillion shareholders if certain clinical and regulatory milestones are achieved within specified periods. These include $1.00 per share for the U.S. Food and Drug Administration (FDA) approval of danicopan and $1.00 per share for the initiation of a Phase III clinical trial in ACH-5228.

10

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





The transaction was accounted for as a business combination. The following table summarizes the total consideration transferred to acquire Achillion and the estimated fair value of the identified assets acquired and liabilities assumed at the acquisition date:
Consideration
 
Upfront payment to shareholders and option holders
$
926.2

Upfront payment, fair value of equity compensation attributable to the post-combination service period
(20.0
)
Upfront cash paid, net
906.2

 
 
Contingent consideration
160.7

Contingent consideration, fair value of equity compensation attributable to the post-combination service period
(5.7
)
Total consideration
$
1,061.2

 
 
Assets Acquired and Liabilities Assumed
 
Cash and cash equivalents
$
68.5

Marketable securities
106.1

In-process research & development assets (IPR&D)
918.0

Goodwill
34.7

Deferred tax liabilities, net
(59.8
)
Other assets and liabilities, net
(6.3
)
Total net assets acquired
$
1,061.2


Our accounting for this acquisition is preliminary. The fair value estimates for the assets acquired and liabilities assumed were based on preliminary calculations, and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period. The areas that rely on preliminary estimates that are not yet finalized relate to deferred tax liabilities, net, as a result of ongoing studies to determine the tax deductibility of certain acquisition-related costs and the valuation of historical net operating loss and income tax credit carryforwards.
The initial fair value estimate of the contingent consideration in the form of non-tradeable CVRs was $160.7, which was recorded as a noncurrent liability in our condensed consolidated balance sheet, including $5.7 related to compensation attributable to the post-combination service period. We determined the fair value of these milestone-related payment obligations using various estimates, including probabilities of success prior to expiration of the specified period, discount rates and the amount of time until the conditions of the milestone payments are expected to be met. This fair value measurement is based on significant inputs not observable in the market, representing Level 3 measurements within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a cost of debt rate ranging from 2.1% to 2.3%.The range of estimated milestone payments is from zero, if no milestones are achieved for any product, to $306.3 if certain development and regulatory milestones are achieved.
Subsequent to the acquisition date, we have adjusted 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 as development work progresses towards the potential achievement of the milestones. At March 31, 2020, the fair value of the contingent consideration for the Achillion acquisition was $162.4 based on the probability-weighted cash flows, discounted using a cost of debt ranging from 1.6% to 1.8%. Changes in fair value of the contingent consideration associated with the Achillion acquisition for the three months ended March 31, 2020 was $1.7.
The aggregate fair value of equity compensation attributable to the post-combination service period was $25.7. This amount was excluded from the total consideration transferred and was recognized as a charge to acquisition-related costs in our condensed consolidated statements of operations. These amounts were associated with the accelerated vesting of stock options previously granted to Achillion employees. Excluding the $5.7 of contingent consideration related to equity compensation attributable to the post-combination service period, such amounts were paid during the three months ended March 31, 2020.

11

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





Intangible assets associated with IPR&D relate to two development-stage programs, ACH-4471 (ALXN2040) and ACH-5228 (ALXN2050). The estimated fair value of $918.0 was determined using the excess earnings method, a variation of the income approach. The excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. Some of the more significant assumptions utilized in our asset valuations included the estimated net cash flows for each asset, including net revenues, cost of sales, research and development and other operating expenses, the potential regulatory and commercial success rates, competitive trends impacting the assets, and tax rates. The fair value using the excess earnings method was determined using an estimated weighted average cost of capital for Achillion of 11.5%, which represents a rate of return that a market participant would expect for these assets. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 fair value measurements.
The excess of purchase price over the fair value of the assets acquired and liabilities assumed represents the goodwill resulting from the acquisition. The goodwill, which is not tax-deductible, has been recorded as a noncurrent asset and is not amortized, but is subject to an annual review for impairment. The factors that contributed to the recognition of goodwill include the value of the acquired workforce, synergies that are specific to our business and not available to market participants, and early research in preclinical Factor D inhibitors, as well as the effects of the establishment of a deferred tax liability for the acquired IPR&D intangible assets, which have no tax basis.
We recorded a net deferred tax liability of $59.8. This amount was primarily comprised of $205.3 of deferred tax liabilities relating to the IPR&D acquired, offset by $145.5 of deferred tax assets related to net operating loss carryforwards (NOLs), income tax credits, and other temporary differences.
Achillion's results of operations are included in the condensed consolidated financial statements from the date of acquisition. For the three months ended March 31, 2020, we recorded $13.9 of pre-tax operating losses associated with the operations of Achillion in our condensed consolidated statements of operations. We also recorded acquisition-related costs in connection with the acquisition during the three months ended March 31, 2020 as presented below.
Pro forma financial information (unaudited)
The following unaudited pro forma information presents the combined results of Alexion and Achillion as if the acquisition of Achillion had been completed on January 1, 2019, with adjustments to give effect to pro forma events that are directly attributable to the acquisition. The unaudited pro forma results do not reflect operating efficiencies or potential cost savings that may have resulted from the consolidation of operations. Accordingly, the unaudited pro forma financial information is not necessarily indicative of the results of operations had we completed the transaction on January 1, 2019.
 
Three months ended March 31,
 
2020
 
2019
Pro forma revenue
$
1,444.8

 
$
1,140.4

Pro forma net income
574.9

 
515.7


The unaudited pro forma consolidated results include pro forma adjustments related to non-recurring activity. Alexion and Achillion acquisition-related costs of $53.3, net of tax, were excluded from income for the three months ended March 31, 2020. These expenses were included in net income for the three months ended March 31, 2019.
Acquisition-Related Costs
Acquisition-related costs recorded within the condensed consolidated statement of operations associated with our business combinations for the three months ended March 31, 2020 and 2019 include the following:

12

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





 
Three months ended March 31,
 
2020
 
2019
Transaction costs (1)
$
1.4

 
$

Integration costs
0.1

 

Fair value of equity compensation attributable to the post-combination service period
25.7

 

Restructuring-related costs (2)
10.9

 

 
$
38.1

 
$

(1) Transaction costs include legal fees and costs incurred to effectuate the settlement of the outstanding options
(2) Restructuring-related costs include severance payments and one-time short-term retention awards agreed to in connection with the acquisition
4.
Inventories
The components of inventory are as follows:
 
March 31,
 
December 31,
 
2020
 
2019
Raw materials
$
49.6

 
$
41.2

Work-in-process
108.8

 
180.8

Finished goods
428.4

 
405.6

 
$
586.8

 
$
627.6


As of March 31, 2020 and December 31, 2019, the carrying value of capitalized inventory manufactured at production facilities that have not yet received regulatory approval was $67.3 and $60.5, respectively.
5.Intangible Assets and Goodwill
The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated amortization: 
 
 
 
March 31, 2020
 
December 31, 2019
 
Estimated
Life (years)
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Licensing rights
3-8
 
$
57.0

 
$
(35.6
)
 
$
21.4

 
$
57.0

 
$
(34.7
)
 
$
22.3

Patents
7
 
10.5

 
(10.5
)
 

 
10.5

 
(10.5
)
 

Purchased technology
6-16
 
4,710.5

 
(1,462.4
)
 
3,248.1

 
4,710.5

 
(1,388.7
)
 
3,321.8

Other intangibles
5
 
0.4

 
(0.3
)
 
0.1

 
0.4

 
(0.2
)
 
0.2

Acquired IPR&D
Indefinite
 
918.0

 

 
918.0

 





Total
 
 
$
5,696.4

 
$
(1,508.8
)
 
$
4,187.6

 
$
4,778.4

 
$
(1,434.1
)
 
$
3,344.3

Goodwill
Indefinite
 
$
5,075.0

 
$
(2.9
)
 
$
5,072.1

 
$
5,040.3

 
$
(2.9
)
 
$
5,037.4

In connection with our acquisition of Achillion during the first quarter of 2020, we acquired IPR&D programs with a fair value of $918.0 and recorded goodwill of $34.7. For additional information on our acquisition of Achillion, please see Note 3, Acquisitions.
Amortization expense for the three months ended March 31, 2020 and 2019 was $74.7 and $80.5, respectively. As of March 31, 2020, assuming no changes in the gross cost basis of intangible assets, the total estimated amortization expense for finite-lived intangible assets is $224.0 for the nine months ending December 31, 2020, and approximately $298.0 for each of the years ending December 31, 2021 through December 31, 2025.
As of March 31, 2020, the net book value of our purchased technology includes $2,927.4 associated with the KANUMA intangible asset, which we acquired in the acquisition of Synageva BioPharma Corp. As part of our standard quarterly procedures, we reviewed the KANUMA asset as of March 31, 2020 and determined that there were no indicators of impairment. Cash flow models used in our assessments are based on our commercial experience to date with KANUMA and require the use of significant estimates, which include, but are not limited to, long-range pricing expectations

13

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





and patient-related assumptions, including patient identification, conversion and retention rates. We will continue to review the related valuation and accounting of this asset as new information becomes available to us.
The following summarizes the changes in the carrying amount of goodwill:
 
March 31, 2020
Balance at December 31, 2019
$
5,037.4

Goodwill resulting from the acquisition of Achillion
34.7

Balance at March 31, 2020
$
5,072.1


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 amended and restated 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. Beginning with the quarter ending June 30, 2019, we are required to make payments of 5.00% of the original principal amount of the term loan facility annually, payable in equal quarterly installments.
In connection with entering into the Credit Agreement and the Prior Credit Agreement, we paid an aggregate of $53.1 in financing costs in 2018. Financing costs are amortized as interest expense over the life of the debt. Amortization expense associated with deferred financing costs for each of the three months ended March 31, 2020 and 2019 was $1.2. Remaining unamortized deferred financing costs as of March 31, 2020 and December 31, 2019 were $14.6 and $15.8, respectively.
We made principal payments of $32.6 on the term loan during the three months ended March 31, 2020, and as of March 31, 2020, we had $2,481.9 outstanding on the term loan. We had no outstanding borrowings under the revolving credit facility as of March 31, 2020. As of March 31, 2020, we had open letters of credit of $1.0 that offset our availability in the revolving credit facility.
The amount outstanding under the term loan of $2,481.9 as of March 31, 2020 is subject to variable interest rates, which are based on current market rates, and as such, the Company believes the carrying amount of the obligation approximates fair value.
We were in compliance with all applicable covenants under the Credit Agreement as of March 31, 2020.
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. 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.

14

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





The following table summarizes the calculation of basic and diluted EPS for the three months ended March 31, 2020 and 2019:
 
Three months ended
 
March 31,
 
2020
 
2019
Net income used for basic and diluted calculation
$
557.6

 
$
587.9

Shares used in computing earnings per common share—basic
221.6

 
223.8

Weighted-average effect of dilutive securities:
 
 
 
Stock awards
1.0

 
1.7

Shares used in computing earnings per common share—diluted
222.6

 
225.5

Earnings per common share:
 
 
 
Basic
$
2.52

 
$
2.63

Diluted
$
2.50

 
$
2.61


We exclude from diluted EPS the weighted-average number of securities whose effect is anti-dilutive. Excluded from the calculation of diluted EPS for the three months ended March 31, 2020 and 2019 were 3.2 and 2.6 shares of common stock, respectively, because their effect is anti-dilutive.
8.
Marketable Securities
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 March 31, 2020 and December 31, 2019 were as follows:
 
 
March 31, 2020
 
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Commercial paper
 
$
134.2

 
$

 
$

 
$
134.2

Corporate bonds
 
3.6

 

 
(0.1
)
 
3.5

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
60.0

 

 

 
60.0

Bank certificates of deposit
 
6.5

 

 

 
6.5

Total available-for-sale debt securities
 
$
204.3

 
$

 
$
(0.1
)
 
$
204.2


 
 
December 31, 2019
 
 
Amortized Cost
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Fair Value
Commercial paper
 
$
246.9

 
$

 
$

 
$
246.9

Corporate bonds
 
24.3

 

 

 
24.3

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
70.4

 

 

 
70.4

Bank certificates of deposit
 
27.4

 

 

 
27.4

Total available-for-sale debt securities
 
$
369.0

 
$

 
$