ALXN 3.31.15 10Q

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 March 31, 2015
or
¨
Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission file number: 0-27756
 
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.)
 
352 Knotter Drive, Cheshire Connecticut 06410
(Address of Principal Executive Offices) (Zip Code)
203-272-2596
(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Check One:
Large accelerated filer  x   Accelerated filer  ¨    Non-accelerated filer  ¨ (Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Common Stock, $0.0001 par value
199,576,769
Class
Outstanding as of April 21, 2015










 
Alexion Pharmaceuticals, Inc.
Contents

 
PART I.
FINANCIAL INFORMATION
Page
 
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 thousands, except per share amounts)
 
 
March 31,
 
December 31,
 
2015
 
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
916,814

 
$
943,999

Marketable securities
1,008,278

 
1,017,567

Trade accounts receivable, net
479,883

 
432,888

Inventories
174,498

 
176,441

Prepaid expenses and other current assets
273,514

 
225,134

Total current assets
2,852,987

 
2,796,029

Property, plant and equipment, net
440,487

 
392,248

Intangible assets, net
587,035

 
587,046

Goodwill
254,073

 
254,073

Other assets
280,343

 
172,566

Total assets
$
4,414,925

 
$
4,201,962

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
52,869

 
$
44,016

Accrued expenses
308,407

 
395,232

Deferred revenue
106,616

 
58,837

Current portion of long-term debt
45,500

 
48,000

Other current liabilities
67,047

 
60,655

Total current liabilities
580,439

 
606,740

Long-term debt, less current portion

 
9,500

Contingent consideration
126,862

 
116,425

Facility lease obligation
114,912

 
107,099

Other liabilities
75,810

 
60,180

Total liabilities
898,023

 
899,944

Commitments and contingencies (Note 17)

 

Stockholders' Equity:
 
 
 
Preferred stock, $.0001 par value; 5,000 shares authorized, no shares issued or outstanding

 

Common stock, $.0001 par value; 290,000 shares authorized; 202,876 and 201,944 shares issued at March 31, 2015 and December 31, 2014, respectively
20

 
20

Additional paid-in capital
2,713,050

 
2,592,167

Treasury stock, at cost, 3,222 and 2,888 shares at March 31, 2015 and December 31, 2014, respectively
(442,990
)
 
(382,964
)
Accumulated other comprehensive income
119,489

 
56,785

Retained earnings
1,127,333

 
1,036,010

Total stockholders' equity
3,516,902

 
3,302,018

Total liabilities and stockholders' equity
$
4,414,925

 
$
4,201,962


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 thousands, except per share amounts)
 
 
Three months ended March 31,
 
2015
 
2014
Net product sales
$
600,333

 
$
566,616

Cost of sales
69,399

 
32,939

Operating expenses:
 
 
 
Research and development
221,080

 
191,457

Selling, general and administrative
187,116

 
129,291

Impairment of intangible asset

 
3,464

Acquisition-related costs
11,979

 
(38
)
Restructuring expenses
7,052

 

Total operating expenses
427,227

 
324,174

Operating income
103,707

 
209,503

Other income and expense:
 
 
 
Investment income
2,884

 
2,213

Interest expense
(651
)
 
(1,063
)
Foreign currency gain
1,005

 
1,258

Income before income taxes
106,945

 
211,911

Income tax provision
15,622

 
52,557

Net income
$
91,323

 
$
159,354

Earnings per common share
 
 
 
Basic
$
0.46

 
$
0.81

Diluted
$
0.45

 
$
0.79

Shares used in computing earnings per common share
 
 
 
Basic
199,361

 
197,797

Diluted
202,034

 
201,804

 
 
 
 


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 thousands)

 
Three months ended March 31,
 
2015
 
2014
Net income
$
91,323

 
$
159,354

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation
(5,388
)
 
506

Unrealized gains on marketable securities
1,057

 
811

Unrealized losses on pension obligation
(252
)
 

Unrealized gains (losses) on hedging activities, net of tax of $38,175, and $(1,245), respectively
67,287

 
(4,895
)
Other comprehensive income (loss), net of tax
62,704

 
(3,578
)
Comprehensive income
$
154,027

 
$
155,776


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 thousands)
 
 
Three months ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
91,323

 
$
159,354

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
10,578

 
9,268

Impairment of intangible asset

 
3,464

Change in fair value of contingent consideration
11,979

 
(38
)
Share-based compensation expense
42,797

 
23,840

Premium amortization of available-for-sale securities
3,178

 
4,175

Deferred taxes
(24,823
)
 
(58,311
)
Reduction in taxes payable due to excess tax benefit from stock options
(52,521
)
 
(130,407
)
Other
3,027

 
597

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(58,918
)
 
63

Inventories
2,626

 
(20,900
)
Prepaid expenses and other assets
(38,980
)
 
33,633

Accounts payable, accrued expenses and other liabilities
(13,659
)
 
(60,680
)
Deferred revenue
46,427

 
4,887

Net cash provided by (used in) operating activities
23,034

 
(31,055
)
Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(166,319
)
 
(145,565
)
Proceeds from maturity or sale of available-for-sale securities
176,256

 
99,250

Purchases of trading securities
(2,236
)
 
(1,219
)
Purchases of other investments

 
(25,000
)
Purchases of property, plant and equipment
(57,075
)
 
(17,733
)
Other
951

 
70

Net cash used in investing activities
(48,423
)
 
(90,197
)
Cash flows from financing activities:
 
 
 
Payments on term loan
(12,000
)
 
(19,500
)
Excess tax benefit from stock options
52,521

 
130,407

Repurchase of common stock
(60,026
)
 
(22,057
)
Net proceeds from the exercise of stock options
24,882

 
30,404

Other
(303
)
 
(42
)
Net cash provided by financing activities
5,074

 
119,212

Effect of exchange rate changes on cash
(6,870
)
 
468

Net change in cash and cash equivalents
(27,185
)
 
(1,572
)
Cash and cash equivalents at beginning of period
943,999

 
529,857

Cash and cash equivalents at end of period
$
916,814

 
$
528,285

 
 
 
 
Supplemental cash flow disclosures from investing and financing activities:
 
 
 
Construction in process related to facility lease obligation
$
7,813

 
$
6,187

Accrued expenses for purchases of property, plant and equipment
$
11,436

 
$

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 thousands, except per share amounts)





1.
Business
Alexion Pharmaceuticals, Inc. (Alexion, the Company, we, our or us) is a biopharmaceutical company focused on serving patients with severe and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products. Our marketed product Soliris is the first and only therapeutic approved for patients with either of two severe and ultra-rare disorders resulting from chronic uncontrolled activation of the complement component of the immune system: paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, and atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. We are also evaluating additional potential indications for Soliris in other severe and devastating diseases in which uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional product candidates as potential treatments for patients with severe and life-threatening ultra-rare disorders. We were incorporated in 1992 and began commercial sale of Soliris in 2007.

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, 2014. 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, 2014 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, 2014 included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the results to be expected for the full year.
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, 2014.
New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (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. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2016 and allows for adoption using a full retrospective method, or a modified retrospective method. In April 2015, the FASB proposed a one year deferral of the effective date of this standard to annual periods ending after December 15, 2017, along with an option to permit companies to early adopt the standard for annual periods beginning after December 15, 2016. We are currently assessing the method of adoption and the expected impact the new standard has on our financial position and results of operations.


6

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




3.
Inventories
Inventories are stated at the lower of cost or estimated realizable value. We determine the cost of inventory using the weighted-average cost method.
The components of inventory are as follows:
 
March 31,
 
December 31,
 
2015
 
2014
Raw materials
$
14,425

 
$
14,570

Work-in-process
77,932

 
107,170

Finished goods
82,141

 
54,701

 
$
174,498

 
$
176,441

 

As of March 31, 2015 and December 31, 2014, we capitalized $23,377 and $22,005 of inventory produced for commercial sale for products awaiting regulatory approval, respectively. We recorded an expense of $24,352 in the first quarter of 2015 associated with a portion of a single manufacturing campaign at a third party manufacturer for Strensiq™ (asfotase alfa). The costs are comprised of raw materials, internal overhead and external production costs.


4.
Intangible Assets and Goodwill
The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated amortization:
 
March 31,
 
December 31,
 
2015
 
2014
Licenses, patents and purchased technology, net
$
35

 
$
46

Acquired in-process research and development
587,000

 
587,000

Intangible assets
$
587,035

 
$
587,046

Goodwill
$
254,073

 
$
254,073

    
5.
Debt
In February 2012, we entered into a credit agreement, as amended (the Credit Agreement) with a syndicate of banks that provides for a $240,000 senior secured term loan facility payable in equal quarterly installments of $12,000 starting June 30, 2012 and a $200,000 senior secured revolving credit facility through February 7, 2017. In addition to borrowings upon prior notice, the revolving credit facility includes borrowing capacity in the form of letters of credit up to $60,000 and borrowings on same-day notice, referred to as swingline loans, of up to $10,000. Borrowings can be used for working capital requirements, acquisitions and other general corporate purposes. With the consent of the lenders and the administrative agent and subject to satisfaction of certain conditions, we may increase the term loan facility and/or the revolving credit facility by an aggregate amount not to exceed $150,000.
As of March 31, 2015, we had $45,500 outstanding on the term loan. As of March 31, 2015, we had open letters of credit of $9,938, and our borrowing availability under the revolving facility was $190,062.
The fair value of our long term debt, which is measured using Level 2 inputs, approximates book value.

6.
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, unvested restricted stock units or other contracts to issue common stock were exercised or converted into common stock, using the treasury stock method.

7

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




The following table summarizes the calculation of basic and diluted EPS for the three months ended March 31, 2015 and 2014:
 
Three months ended
 
March 31,
 
2015
 
2014
Net income used for basic and diluted calculation
$
91,323

 
$
159,354

Shares used in computing earnings per common share—basic
199,361

 
197,797

Weighted-average effect of dilutive securities:
 
 
 
Stock awards
2,673

 
4,007

Shares used in computing earnings per common share—diluted
202,034

 
201,804

Earnings per common share:
 
 
 
Basic
$
0.46

 
$
0.81

Diluted
$
0.45

 
$
0.79

We exclude from EPS the weighted-average number of securities whose effect is anti-dilutive. Excluded from the calculation of EPS for the three months ended March 31, 2015 and 2014 were 2,248 and 1,641 shares of common stock, respectively, because their effect is anti-dilutive.

7.
Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and estimated fair value of available-for-sale investments by type of security at March 31, 2015 and December 31, 2014 were as follows:
 
 
March 31, 2015
 
 
Amortized Cost Basis
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Aggregate Fair Value
Commercial paper
 
$
181,764

 
$

 
$

 
$
181,764

Corporate bonds
 
539,271

 
1,071

 
(154
)
 
540,188

Municipal bonds
 
214,707

 
126

 
(66
)
 
214,767

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
141,810

 
43

 
(23
)
 
141,830

Foreign
 
225,566

 
330

 
(31
)
 
225,865

Bank certificates of deposit
 
59,002

 

 

 
59,002

 
 
$
1,362,120

 
$
1,570

 
$
(274
)
 
$
1,363,416


 
 
December 31, 2014
 
 
Amortized Cost Basis
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Aggregate Fair Value
Commercial paper
 
$
142,495

 
$

 
$

 
$
142,495

Corporate bonds
 
494,032

 
415

 
(581
)
 
493,866

Municipal bonds
 
174,759

 
132

 
(46
)
 
174,845

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
99,668

 
14

 
(71
)
 
99,611

Foreign
 
193,439

 
100

 
(174
)
 
193,365

Bank certificates of deposit
 
77,000

 

 

 
77,000

 
 
$
1,181,393

 
$
661

 
$
(872
)
 
$
1,181,182


The aggregate fair value of available-for-sale securities in an unrealized loss position as of March 31, 2015 and December 31, 2014 was $359,768 and $472,241, respectively. These investments have been in a continuous unrealized loss

8

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




position for less than 12 months. As of March 31, 2015, we believe that the cost basis of our available-for-sale investments is recoverable.
The fair values of available-for-sale securities by classification in the condensed consolidated balance sheet were as follows:
 
March 31, 2015
 
December 31, 2014
Cash and cash equivalents
$
361,685

 
$
167,892

Marketable securities
1,001,731

 
1,013,290

 
$
1,363,416

 
$
1,181,182


The fair values of available-for-sale debt securities at March 31, 2015, by contractual maturity, are summarized as follows:
 
March 31, 2015
Due in one year or less
$
782,688

Due after one year through three years
580,728

 
$
1,363,416


As of March 31, 2015 and December 31, 2014, the fair value of our trading securities was $6,547 and $4,277, respectively.
We utilize the specific identification method in computing realized gains and losses. Realized gains and losses on our available-for-sale and trading securities were not material for the three months ended March 31, 2015.

8.
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 manage our foreign currency transaction risk 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, that are denominated in currencies other than the U.S. dollar. The purpose of the hedges of revenue is to reduce the volatility of exchange rate fluctuations on our operating results and to increase the visibility of the foreign exchange impact on forecasted revenues. These hedges are designated as cash flow hedges upon contract inception. At March 31, 2015, we have open contracts with notional amounts totaling $1,728,774 that qualified for hedge accounting.
The impact on accumulated other comprehensive income (AOCI) and earnings from foreign exchange contracts that qualified as cash flow hedges, for the three months ended March 31, 2015 and 2014 were as follows:
 
Three months ended
 
March 31,
 
2015
 
2014
Gain (loss) recognized in AOCI, net of tax
$
93,809

 
$
(3,944
)
Gain reclassified from AOCI to net product sales (effective portion), net of tax
$
25,447

 
$
1,108

Gain (loss) reclassified from AOCI to other income and expense (ineffective portion), net of tax
$
1,075

 
$
(157
)
Assuming no change in foreign exchange rates from market rates at March 31, 2015, $112,908 of gain recognized in AOCI will be reclassified to revenue over the next 12 months.
We enter into foreign exchange forward contracts, with durations of approximately 30 days, 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

9

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




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 sheet exposures. As of March 31, 2015, the notional amount of foreign exchange contracts where hedge accounting is not applied was $187,976.
We recognized a gain of $6,423 and $2,289, in other income and expense, for the three months ended March 31, 2015 and 2014, respectively, associated with the foreign exchange contracts not designated as hedging instruments. These amounts were largely offset by gains or losses in monetary assets and liabilities.
The following tables summarize the fair value of outstanding derivatives at March 31, 2015 and December 31, 2014:

 
March 31, 2015
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
116,092

 
Other current liabilities
 
$
336

Foreign exchange forward contracts
Other non-current assets
 
125,374

 
Other non-current liabilities
 
66

Total fair value of derivative instruments
 
 
$
241,466

 
 
 
$
402



 
December 31, 2014
 
Asset Derivatives
 
Liability Derivatives
 
Balance Sheet
Location
 
Fair
Value
 
Balance Sheet
Location
 
Fair
Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
$
77,348

 
Other current liabilities
 
$
794

Foreign exchange forward contracts
Other non-current assets
 
58,698

 
Other non-current liabilities
 
86

Total fair value of derivative instruments
 
 
$
136,046

 
 
 
$
880


10

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




The fair value of our foreign exchange forward contracts that are not designated as hedging instruments was zero as of March 31, 2015 and December 31, 2014.

Although we do not offset derivative assets and liabilities within our condensed consolidated balance sheets, our International Swap and Derivatives Association (ISDA) 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 subject to such provisions:
 
 
March 31, 2015
 
 
 
 
 
 
 
 
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
 
$
241,466

 
$

 
$
241,466

 
$
(402
)
 
$

 
$
241,064

Derivative liabilities
 
(402
)
 

 
(402
)
 
402

 

 

 
 
December 31, 2014
 
 
 
 
 
 
 
 
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
 
$
136,046

 
$

 
$
136,046

 
$
(880
)
 
$

 
$
135,166

Derivative liabilities
 
(880
)
 

 
(880
)
 
880

 

 



9.    Other Investments
Other investments include our investment of $37,500 in the preferred stock of Moderna LLC. Our investment is recorded at cost within other assets in our condensed consolidated balance sheets. The carrying value of this investment was not impaired as of March 31, 2015.

10.
Stockholders' Equity
In November 2012, our Board of Directors authorized the repurchase of up to $400,000 of our common stock and in December of 2014 they authorized the repurchase of an additional $500,000 of our common stock. The repurchase program does not have an expiration date and we are not obligated to acquire a particular number of shares. The program may be discontinued at any time at the Company's discretion. Under the program, we repurchased 334 and 137 shares of our common stock at a cost of $60,026 and $22,057 during the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, there is a total of $459,686 remaining for repurchases under the repurchase program.
Subsequent to March 31, 2015, we repurchased 126 shares of our common stock under our repurchase program at a cost of $22,413.


11

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




11.
Other Comprehensive Income and Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI, by component, for the three months ended March 31, 2015 and 2014:
 
Defined Benefit Pension Plans
 
Unrealized Gains (Losses) from Marketable Securities
 
Unrealized Gains (Losses) from Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2014
$
(16,570
)
 
$
(234
)
 
$
87,308

 
$
(13,719
)
 
$
56,785

Other comprehensive income before reclassifications
(488
)
 
1,065

 
93,809

 
(5,388
)
 
88,998

Amounts reclassified from other comprehensive income
236

 
(8
)
 
(26,522
)
 

 
(26,294
)
Net other comprehensive income (loss)
(252
)
 
1,057

 
67,287

 
(5,388
)
 
62,704

Balances, March 31, 2015
$
(16,822
)
 
$
823

 
$
154,595

 
$
(19,107
)
 
$
119,489


 
Defined Benefit Pension Plan
 
Unrealized Gains (Losses) from Marketable Securities
 
Unrealized Gains (Losses) From Hedging Activities
 
Foreign Currency Translation Adjustment
 
Total Accumulated Other Comprehensive Income (Loss)
Balances, December 31, 2013
$
(11,502
)
 
(146
)
 
$
(3,827
)
 
$
(7,382
)
 
$
(22,857
)
Other comprehensive income before reclassifications
(72
)
 
812

 
(3,944
)
 
506

 
(2,698
)
Amounts reclassified from other comprehensive income
72

 
(1
)
 
(951
)
 

 
(880
)
Net other comprehensive income (loss)

 
811

 
(4,895
)
 
506

 
(3,578
)
Balances, March 31, 2014
$
(11,502
)
 
$
665

 
$
(8,722
)
 
$
(6,876
)
 
$
(26,435
)


12

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




The table below provides details regarding significant reclassifications from AOCI during the three months ended March 31, 2015 and 2014:
Details about Accumulated Other Comprehensive Income Components
 
Amount Reclassified From Accumulated Other Comprehensive Income during the three months ended March 31,
Affected Line Item in the Condensed Consolidated Statements of Operations
 
2015
2014
 
Unrealized Gains (Losses) from Hedging Activity
 
 
 
 
 
Effective portion of foreign exchange contracts
 
$
29,083

$
1,266

 
Net product sales
Ineffective portion of foreign exchange contracts
 
1,228

(179
)
 
Foreign currency gain
 
 
30,311

1,087

 
 
 
 
(3,789
)
(136
)
 
Income tax provision
 
 
$
26,522

$
951

 
 
Unrealized Gains (Losses) from Marketable Securities
 
 
 
 
 
Realized gains on sale of securities
 
$
13

$
2

 
Investment income
 
 
13

2

 
 
 
 
(5
)
(1
)
 
Income tax provision
 
 
$
8

$
1

 
 
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service costs and actuarial losses
 
$
(311
)
$
(79
)
 
(a)
 
 
(311
)
(79
)
 
 
 
 
75

7

 
Income tax provision
 
 
$
(236
)
$
(72
)
 
 
 
(a) This AOCI component is included in the computation of net periodic pension benefit cost (see Note 14 for additional details).

12.
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.

13

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




The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. 
 
 
Fair Value Measurement at
March 31, 2015
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
192,281

 
$

 
$
192,281

 
$

Cash equivalents
Commercial paper
$
151,879

 
$

 
$
151,879

 
$

Cash equivalents
Corporate bonds
$
39,088

 
$

 
$
39,088

 
$

Cash equivalents
Municipal bonds
$
51,750

 
$

 
$
51,750

 
$

Cash equivalents
Bank certificates of deposit
$
57,002

 
$

 
$
57,002

 
$

Cash equivalents
Other government-related obligations
$
61,966

 
$

 
$
61,966

 
$

Marketable securities
Mutual funds
$
6,547

 
$
6,547

 
$

 
$

Marketable securities
Commercial paper
$
29,885

 
$

 
$
29,885

 
$

Marketable securities
Corporate bonds
$
501,100

 
$

 
$
501,100

 
$

Marketable securities
Municipal bonds
$
163,017

 
$

 
$
163,017

 
$

Marketable securities
Other government-related obligations
$
305,729

 
$

 
$
305,729

 
$

Marketable securities
Bank certificates of deposit
$
2,000

 
$

 
$
2,000

 
$

Other current assets
Foreign exchange forward contracts
$
116,092

 
$

 
$
116,092

 
$

Other assets
Foreign exchange forward contracts
$
125,374

 
$

 
$
125,374

 
$

Other current liabilities
Foreign exchange forward contracts
$
336

 
$

 
$
336

 
$

Other liabilities
Foreign exchange forward contracts
$
66

 
$

 
$
66

 
$

Other current liabilities
Acquisition-related contingent consideration
$
48,088

 
$

 
$

 
$
48,088

Contingent consideration
Acquisition-related contingent consideration
$
126,862

 
$

 
$

 
$
126,862

 

14

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




 
 
Fair Value Measurement at
December 31, 2014
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
176,331

 
$

 
$
176,331

 
$

Cash equivalents
Commercial paper
$
117,529

 
$

 
$
117,529

 
$

Cash equivalents
Corporate bonds
$
9,315

 
$

 
$
9,315

 
$

Cash equivalents
Municipal bonds
$
12,050

 
$

 
$
12,050

 
$

Cash equivalents
Other government-related obligations
$
23,998

 
$

 
$
23,998

 
$

Cash equivalents
Bank certificates of deposit
$
5,000

 
$

 
$
5,000

 
$

Marketable securities
Mutual funds
$
4,277

 
$
4,277

 
$

 
$

Marketable securities
Commercial paper
$
24,966

 
$

 
$
24,966

 
$

Marketable securities
Corporate bonds
$
484,551

 
$

 
$
484,551

 
$

Marketable securities
Municipal bonds
$
162,795

 
$

 
$
162,795

 
$

Marketable securities
Other government-related obligations
$
268,978

 
$

 
$
268,978

 
$

Marketable securities
Bank certificates of deposit
$
72,000

 
$

 
$
72,000

 
$

Other current assets
Foreign exchange forward contracts
$
77,348

 
$

 
$
77,348

 
$

Other assets
Foreign exchange forward contracts
$
58,698

 
$

 
$
58,698

 
$

Other current liabilities
Foreign exchange forward contracts
$
794

 
$

 
$
794

 
$

Other liabilities
Foreign exchange forward contracts
$
86

 
$

 
$
86

 
$

Other current liabilities
Acquisition-related contingent consideration
$
46,546

 
$

 
$

 
$
46,546

Contingent consideration
Acquisition-related contingent consideration
$
116,425

 
$

 
$

 
$
116,425


There were no securities transferred between Level 1, 2 and 3 during the three months ended March 31, 2015.

Valuation Techniques
We classify mutual fund investments, 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 institutional money market funds, commercial paper, municipal bonds, 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 the same or 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 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.

15

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





As of March 31, 2015, 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 and reimbursement approvals or sales-based milestone events. We determine the fair value of these obligations on the acquisition date 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 4.8% for developmental milestones and a weighted average cost of capital ranging from 12% to 21% 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 as development work progresses towards the achievement of the milestones.
Estimated future contingent milestone payments related to prior business combinations range from zero if no milestone events are achieved, to a maximum of $876,000 if all development, regulatory and sales-based milestones are reached. As of March 31, 2015, the fair value of acquisition-related contingent consideration was $174,950. The following table represents a roll-forward of our acquisition-related contingent consideration:

March 31, 2015
Balance at beginning of period
$
(162,971
)
Changes in fair value
(11,979
)
Balance at end of period
$
(174,950
)
 
13.
Income Taxes
The following table provides a comparative summary of our income tax provision and effective tax rate for the three months ended March 31, 2015 and 2014:
 
Three months ended
 
March 31,
 
2015
 
2014
Provision for income taxes
15,622

 
52,557

Effective tax rate
14.6
%
 
24.8
%

The tax provision for the three months ended March 31, 2015 and 2014 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The tax provision for the three months ended March 31, 2014 also includes $2,652 attributable to our agreement with the French government that provided reimbursement for shipments of Soliris made prior to January 1, 2014. The remaining reduction in the effective tax rate for the three months ended March 31, 2015 as compared to the same period in the prior year is primarily attributable to an increase in our Federal Orphan Drug Credit and an increase in the amount of income taxed in jurisdictions with rates lower than the rate in the U.S.
We continue to maintain a valuation allowance against certain other deferred tax assets where realization is not certain.  

14.
Defined Benefit Plans
We maintain defined benefit plans for employees in certain countries outside the United States, including retirement benefit plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is calculated based on years of employment, expected salary increases, and pension adjustments.

16

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




The components of net periodic benefit cost are as follows: 
 
Three months ended
 
March 31,
 
2015
 
2014
Service cost
$
2,421

 
$
1,563

Interest cost
180

 
200

Expected return on plan assets
(243
)
 
(231
)
Employee contributions
(427
)
 
(395
)
Amortization
311

 
79

Total net periodic benefit cost
$
2,242

 
$
1,216


15.
Leases
In November 2012, we entered into a lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. The term of the new lease will commence upon the landlord's substantial completion of the building and will expire 12 years later, with a minimum renewal option of 7 years and a maximum renewal option of 20 years, provided that we expand our lease to include all rentable space in the building. Although we will not legally own the premises, we are deemed to be the owner of the building during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. Accordingly, the landlord's costs of constructing the facility are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our condensed consolidated balance sheet.
Construction of the new facility began in June 2013 and is expected to be completed in late 2015. As of March 31, 2015, we recorded a construction-in-process asset of $148,470, inclusive of the landlord's costs as well as costs incurred by Alexion, and an offsetting facility lease obligation of $114,912 associated with the new facility.

16.
License Agreements
In March 2015, we entered into an agreement with a third party that allowed us to exercise an option with another third party for exclusive, worldwide, perpetual license rights to a specialized technology and other intellectual property, and we simultaneously exercised the option. Due to the early stage of these assets, we recorded expense for the payments of $47,000 during the first quarter 2015.
In March 2015, we entered into a collaboration agreement with a third party that allows us to identify and optimize drug candidates. Alexion will have the exclusive worldwide rights to develop and commercialize products arising from the collaboration. Due to the early stage of the assets we are licensing in connection with the collaboration, we recorded expense for the upfront payment of $15,000 during the first quarter 2015. In addition, we could be required to pay up to an additional $252,500 if certain development, regulatory, and commercial milestones are met over time, as well as royalties on commercial sales.
In January 2015, we entered into a license agreement with a third party to obtain an exclusive research, development and commercial license for specific therapeutic molecules. Due to the early stage of these assets, we recorded expense for the upfront payment of $50,000 during the first quarter 2015. In addition, we could be required to pay up to an additional $830,000 if certain development, regulatory, and commercial milestones are met over time, as well as royalties on commercial sales.
In January 2014, we entered into an agreement with Moderna Therapeutics, Inc. (Moderna) that allows us to purchase ten product options to develop and commercialize treatments for rare diseases with Moderna's messenger RNA (mRNA) therapeutics platform. Alexion will lead the discovery, development and commercialization of the treatments produced through this broad, long-term strategic agreement, while Moderna will retain responsibility for the design and manufacture of the messenger RNA against selected targets. Due to the early stage of these assets, we recorded expense for an upfront payment of $100,000.  We will also be responsible for funding research activities under the program.  In addition, for each drug target, up to a maximum of ten targets, we could be required to make an option exercise payment of $15,000 and to pay up to an additional $120,000 with respect to a rare disease product and $400,000 with respect to a non-rare disease product in development and sales milestones if the specific milestones are met over time as well as royalties on commercial sales. 


17

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




17.
Commitments and Contingencies
Commitments
Lonza Agreement
We rely on Lonza Group AG and its affiliates (Lonza), a third party manufacturer, to produce a portion of commercial and clinical quantities of Soliris and for clinical and commercial quantities of Strensiq (asfotase alfa). We have various agreements with Lonza, with remaining total non-cancellable future commitments of approximately $413,150. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at Alexion Rhode Island Manufacturing Facility (ARIMF) and a payment with respect to sales of Soliris manufactured at Lonza facilities.

Contingent Liabilities
On an ongoing basis, we are involved in various claims and legal proceedings, none of which we deem material to our operations. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Because of uncertainties related to claims and litigation, accruals are based on our best estimates based on available information. On a periodic basis, as additional information becomes available, or based on specific events such as the outcome of litigation or settlement of claims, we may reassess the potential liability related to these matters and may revise these estimates, which could result in a material adverse adjustments to our operating results.
We have in the past received, and may in the future receive, notices from third parties claiming that their patents may be infringed by the development, manufacture or sale of Soliris. Under the guidance of ASC 450, Contingencies, we record a royalty accrual based on our best estimate of the fair value percent of net sales of Soliris that we could be required to pay the owners of patents for technology used in the manufacture and sale of Soliris. A costly license, or inability to obtain a necessary license, could have a material adverse effect on our financial results.
In March 2013, we received a Warning Letter (Warning Letter) from the U.S. Food and Drug Administration (FDA) regarding compliance with current Good Manufacturing Practices (cGMP) at ARIMF. The Warning Letter followed an FDA inspection which concluded in August 2012. At the conclusion of that inspection, the FDA issued a Form 483 Inspectional Observations, to which we responded in August 2012 and provided additional information to the FDA in September and December 2012. The observations relate to commercial and clinical manufacture of Soliris at ARIMF. We responded to the Warning Letter in a letter to the FDA dated in April 2013. At the conclusion of another inspection of ARIMF in August 2014, the FDA issued a Form 483 with three inspectional observations, none of which was designated as a repeat observation to the Warning Letter. The observations are inspectional and do not represent a final FDA determination of compliance. We continue to manufacture products, including Soliris, in this facility. While the resolution of the issues raised in the Warning Letter is difficult to predict, we do not currently believe a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonable estimated. To the extent that circumstances related to this matter change, the impact could have a material adverse effect on our financial operations.

18

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




18.
Restructuring
In the fourth quarter 2014, we announced plans to relocate our European headquarters from Lausanne to Zurich, Switzerland. The relocation of the European headquarters will support our operational needs based on growth in the European region. The activities primarily occurring at our Lausanne site will be relocated to our Zurich, Cheshire, Connecticut, and Dublin, Ireland locations. As a result of this action, we recorded restructuring expenses of $15,365 related to employee costs in the fourth quarter of 2014. During the three months ended March 31, 2015 we incurred additional restructuring costs of $7,052. The following table presents a reconciliation of the restructuring reserve for the three months ended March 31, 2015:
 
Employee Separation Costs
 
Contract Termination Costs
 
Other Costs
 
Total
Balance at 12/31/2014
$
15,365

 
$

 
$

 
$
15,365

Restructuring Charges
4,287



 
91

 
4,378

Cash Settlements

 

 

 

Adjustments to previous estimates
2,674

 

 

 
2,674

Balance at 3/31/2015
$
22,326

 
$

 
$
91

 
$
22,417

The restructuring reserve of $22,417 is recorded in accrued expenses on the Company's condensed consolidated balance sheet as of March 31, 2015.


19

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by our management, and may include, but are not limited to, statements regarding the potential benefits and commercial potential of Soliris® (eculizumab) for its approved indications and any expanded uses, timing and effect of sales of Soliris in various markets worldwide, pricing for Soliris, level of insurance coverage and reimbursement for Soliris, level of future Soliris sales and collections, timing regarding development and regulatory approvals for additional indications or in additional territories for Soliris, the medical and commercial potential of additional indications for Soliris, failure to satisfactorily address the issues raised by the U.S. Food and Drug Administration (FDA) in the March 2013 Warning Letter and Form 483 issued by the FDA in August 2014, costs, expenses and capital requirements, cash outflows, cash from operations, status of reimbursement, price approval and funding processes in various countries worldwide, progress in developing commercial infrastructure and interest about Soliris and our drug candidates in the patient, physician and payer communities, the safety and efficacy of Soliris and our product candidates, estimates of the potential markets and estimated commercialization dates for Soliris and our drug candidates around the world, sales and marketing plans, any changes in the current or anticipated market demand or medical need for Soliris or our drug candidates, status of our ongoing clinical trials for eculizumab, asfotase alfa and our other product candidates, commencement dates for new clinical trials, clinical trial results, evaluation of our clinical trial results by regulatory agencies, the adequacy of our pharmacovigilance and drug safety reporting processes, prospects for regulatory approval of Strensiq (asfotase alfa) and our other product candidates, need for additional research and testing, the uncertainties involved in the drug development process and manufacturing, performance and reliance on third party service providers, our future research and development activities, plans for acquired programs, our ability to develop and commercialize products with our collaborators, assessment of competitors and potential competitors, the outcome of challenges and opposition proceedings to our intellectual property, assertion or potential assertion by third parties that the manufacture, use or sale of Soliris infringes their intellectual property, estimates of the capacity of manufacturing and other service facilities to support Soliris and our product candidates, potential costs resulting from product liability or other third party claims, the sufficiency of our existing capital resources and projected cash needs, the possibility that expected tax benefits will not be realized, assessment of impact of recent accounting pronouncements, declines in sovereign credit ratings or sovereign defaults in countries where we sell Soliris, delay of collection or reduction in reimbursement due to adverse economic conditions or changes in government and private insurer regulations and approaches to reimbursement, the short and long term effects of other government healthcare measures, and the effect of shifting foreign exchange rates. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed later in this report under the section entitled “Risk Factors”. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether because of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in this and other reports or documents we file from time to time with the Securities and Exchange Commission.
Business
We are a biopharmaceutical company focused on serving patients with severe and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products. Our marketed product Soliris is the first and only therapeutic approved for patients with either of two severe and ultra-rare disorders resulting from chronic uncontrolled activation of the complement component of the immune system: paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, and atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. We are also evaluating additional potential indications for Soliris in severe and devastating diseases in which we believe that uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional biotechnology product candidates as treatments for patients with severe and life-threatening ultra-rare disorders. We were incorporated in 1992 and began commercial sale of Soliris in 2007.
Soliris is designed to inhibit a specific aspect of the complement component of the immune system and thereby treat inflammation associated with chronic disorders in several therapeutic areas, including hematology, nephrology, transplant rejection and neurology. Soliris is a humanized monoclonal antibody that effectively blocks terminal complement activity at the doses currently prescribed. The initial indication for which we received approval for Soliris is PNH. PNH is a debilitating and life-threatening, ultra-rare genetic blood disorder defined by chronic uncontrolled complement activation leading to the

20

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

destruction of red blood cells (hemolysis). The chronic hemolysis in patients with PNH may be associated with life-threatening thromboses, recurrent pain, kidney disease, disabling fatigue, impaired quality of life, severe anemia, pulmonary hypertension, shortness of breath and intermittent episodes of dark-colored urine (hemoglobinuria).
Soliris was approved for the treatment of PNH by the FDA and the European Commission (EC) in 2007 and by Japan’s Ministry of Health, Labour and Welfare (MHLW) in 2010, and has been approved in several other territories. Additionally, Soliris has been granted orphan drug designation for the treatment of PNH in the United States, Europe, Japan and several other territories.
In September and November 2011, Soliris was approved by the FDA and EC, respectively, for the treatment of pediatric and adult patients with aHUS in the United States and Europe. In September 2013, the MHLW approved Soliris for the treatment of pediatric and adult patients with aHUS in Japan. aHUS is a severe and life-threatening genetic ultra-rare disease characterized by chronic uncontrolled complement activation and thrombotic microangiopathy (TMA), the formation of blood clots in small blood vessels throughout the body, causing a reduction in platelet count (thrombocytopenia) and life-threatening damage to the kidney, brain, heart and other vital organs. In addition, the FDA and EC have granted Soliris orphan drug designation for the treatment of patients with aHUS.
 
Products and Development Programs
We focus our product development programs on life-transforming therapeutics for severe and life-threatening ultra-rare diseases for which we believe current treatments are either non-existent or inadequate.
Marketed Products
Our marketed products include the following:
Product
 
Development Area
 
Indication
 
Development Stage
Soliris (eculizumab)
 
Hematology
 
Paroxysmal Nocturnal Hemoglobinuria (PNH)
 
Commercial
 
 
 
 
PNH Registry
 
Phase IV
 
 
Hematology/Nephrology
 
Atypical Hemolytic Uremic Syndrome (aHUS)
 
Commercial
 
 
 
 
aHUS Registry
 
Phase IV
Paroxysmal Nocturnal Hemoglobinuria (PNH)
Soliris is the first and only therapy approved for the treatment of patients with PNH, a debilitating and life-threatening ultra-rare blood disorder in which an acquired genetic deficiency causes uncontrolled complement activation which leads to life-threatening complications. We continue to work with researchers to expand the base of knowledge in PNH and the utility of Soliris to treat patients with PNH. In 2013, the EC extended the Soliris label to include pediatric patients with PNH. The Committee for Medicinal Products for Human Use (CHMP) of the European Medicines Agency (EMA) recommends that the renewal be granted with unlimited validity.  We are sponsoring a multinational registry to gather information regarding the natural history of patients with PNH and the longer term outcomes during Soliris treatment. In April of 2014 the EC approved an update to the EU label that supports Soliris treatment for patients with PNH regardless of history of transfusion and additional updates to inform physicians to make treatment decisions based on elevated hemolysis and the presence of common symptoms associated with PNH.
Atypical Hemolytic Uremic Syndrome (aHUS)
aHUS is a chronic and life-threatening ultra-rare genetic disease in which uncontrolled complement activation causes blood clots in small blood vessels throughout the body or TMA leading to kidney failure, stroke, heart attack and death. Soliris is the first and only therapy approved for the treatment of pediatric and adult patients with aHUS. In May 2014, the FDA approved conversion of Soliris accelerated approval in aHUS to regular approval for the treatment of adult and pediatric patients with aHUS to inhibit complement-mediated TMA. In April of 2014 the EC approved an update to the EU label for Soliris treatment for patients with aHUS that included new efficacy data which specifies that longer-term treatment with Soliris is associated with a greater proportion of patients achieving clinically significant benefits, including complete TMA response and hematologic normalization, as well as the importance of sustained Soliris therapy.

21

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Clinical Development Programs
Our programs, including investigator sponsored clinical programs, include the following:
Product
  
Development Area
  
Indication
  
Development Stage
Soliris (eculizumab)
 
Neurology
 
Myasthenia Gravis (MG)
 
Phase III
 
 
 
 
Neuromyelitis Optica (NMO)
 
Phase III
 
 
Transplant
 
Delayed Kidney Transplant Graft Function
 
Phase III
 
 
 
 
Antibody Mediated Rejection (AMR) Presensitized Renal Transplant - Living Donor
 
Phase II
 
 
 
 
Antibody Mediated Rejection (AMR) Presensitized Renal Transplant - Deceased Donor
 
Phase II
 
 
 
 
Treatment of Antibody Mediated Rejection (AMR) Following Renal Transplantation*
 
Phase II
Strensiq (asfotase alfa)
 
Metabolic Disorders

 
Hypophosphatasia (HPP)
 
Phase II
cPMP (ALXN 1101)
 
Metabolic Disorders

 
MoCD Type A
 
Phase II
ALXN 1007
 
Inflammatory Disorders
 
GI Graft versus Host Disease
 
Phase II
 
 
 
 
Anti-phospholipid Syndrome
 
Phase II
ALXN 1210
 
Next Generation
 
 
 
Phase I
ALXN 5500
 
Next Generation
 
 
 
Phase I
*
Investigator sponsored clinical program

Soliris (eculizumab)
Neurology
Myasthenia Gravis (MG)
MG is an ultra-rare autoimmune syndrome characterized by complement activation leading to the failure of neuromuscular transmission. Enrollment of patients in a Phase III multinational, placebo-controlled registration trial of eculizumab in patients with refractory generalized MG is ongoing and expected to be completed in 2015. The FDA, EC and MHLW have granted orphan drug designation for eculizumab as a treatment for patients with MG.
Neuromyelitis Optica (NMO)
NMO is a severe and ultra-rare autoimmune disease of the central nervous system (CNS) that primarily affects the optic nerves and spinal cord. Enrollment and dosing are ongoing in a global, randomized, double-blind, placebo-controlled to evaluate eculizumab as a treatment for patients with relapsing NMO. The FDA, EC, and MHLW have each granted orphan designation for eculizumab as a treatment for patients with NMO.
Transplant
Delayed Kidney Transplant Graft Function (DGF)
DGF is the term used to describe the failure of a kidney or other organs to function immediately after transplantation due to ischemia-reperfusion and immunological injury. Enrollment is ongoing in a single, multinational, placebo-controlled DGF registration trial. Eculizumab has been granted orphan drug designation for DGF by the FDA and the EC granted orphan drug designation to eculizumab for prevention of DGF after solid organ transplantation.

22

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Antibody Mediated Rejection (AMR) in Presensitized Kidney Transplant Patients
AMR is the term used to describe a type of transplant rejection that occurs when the recipient has antibodies to the donor organ. Enrollment in a multi-national, multi-site controlled clinical trial of eculizumab in presensitized kidney transplant patients at elevated risk for AMR who received kidneys from deceased organ donors was completed in March 2013. The study was re-opened in October 2013 to enroll additional patients at the request of participating investigators. Enrollment and dosing in this expanded trial has been completed and patient follow-up in the trial is continuing. In September 2013, researchers presented positive preliminary data from the eculizumab deceased-donor AMR kidney transplant study at the European Society of Organ Transplant in Vienna, Austria.
 In January 2015, we reported results from a randomized, open-label, multicenter Phase II clinical trial of eculizumab presensitized kidney transplant patients at an elevated risk of AMR who received kidneys from living donors. The primary composite endpoint of the trial did not reach statistical significance. Patient follow-up and data analyses are ongoing and based on discussions with regulators, we are developing plans to commence a clinical trial with eculizumab as a treatment for patients with AMR.
The EC granted orphan drug designation to eculizumab for the prevention of graft rejection following solid organ transplantation.

Strensiq (asfotase alfa)
Hypophosphatasia (HPP)
HPP is an ultra-rare, genetic, and life-threatening metabolic disease characterized by impaired phosphate and calcium regulation, leading to progressive damage to multiple vital organs including destruction and deformity of bones, profound muscle weakness, seizures, impaired renal function, and respiratory failure.
Strensiq (asfotase alfa), a targeted enzyme replacement therapy in Phase II clinical trials for patients with HPP, is designed to directly address underlying causes of HPP by aiming to restore the genetically defective metabolic process, thereby preventing or reversing the severe and potentially life-threatening complications in patients with HPP. In 2013, Strensiq (asfotase alfa) received Breakthrough Therapy Designation from the FDA. In September 2014, the MHLW granted orphan drug designation to Strensiq (asfotase alfa) for the treatment of patients with HPP.
In 2014, we filed for regulatory approval with the FDA, EMA and MHLW. In July 2014, the European Medicines Agency (EMA) validated our Marketing Authorization Application (MAA) for Strensiq (asfotase alfa) for the treatment of HPP.  In March 2015, the FDA accepted for Priority Review our Biologics License Application (BLA) for Strensiq (asfotase alfa) for treatment of patients with infantile- and juvenile-onset HPP.

cPMP (ALXN 1101)
Molybdenum Cofactor Deficiency (MoCD) Disease Type A (MoCD Type A)
MoCD Type A is an ultra-rare metabolic disorder characterized by severe and rapidly progressive neurologic damage and death in newborns. MoCD Type A results from a genetic deficiency in cyclic Pyranopterin Monophosphate (cPMP), a molecule that enables the function of certain enzymes and the absence of which allows neurotoxic sulfite to accumulate in the brain. To date, there is no approved therapy available for MoCD Type A. There has been some early clinical experience with the recombinant cPMP replacement therapy in a small number of children with MoCD Type A, and we are conducting a natural history study in patients with MoCD Type A. In October 2013, cPMP received Breakthrough Therapy Designation from the FDA for the treatment of patients with MoCD Type A. Evaluation of our synthetic form of cPMP replacement therapy in a Phase I healthy volunteer study is complete. As a result, we are conducting a multi-center, multinational open-label clinical trial of synthetic cPMP in patients with MoCD Type A switched from treatment with recombinant cPMP.

ALXN 1007
ALXN 1007 is a novel humanized antibody designed to target rare and severe inflammatory disorders and is a product of our proprietary antibody discovery technologies. We have completed enrollment in both a Phase I single-dose, dose escalating safety and pharmacology study in healthy volunteers, as well as in a multi-dose, dose escalating safety and pharmacology study in healthy volunteers. A proof-of-concept study in patients with an ultra-rare disorder, gastrointestinal graft versus host disease (GI-GVHD), is ongoing. Patients with GI-GVHD following bone marrow or hematopoietic stem cell transplant experience engrafted hematopoietic cells that attack host gastrointestinal tissues in the first 100 days post-transplant causing damage to the GI tract, liver and skin. In addition, enrollment is ongoing in a Phase II proof-of-concept study in patients with non-criteria manifestations of anti-phospholipid syndrome (APS). APS is an ultra-rare autoimmune, hypercoagulable state caused by antiphospholipid antibodies.

23

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Manufacturing
We currently rely on two manufacturing facilities, Alexion's Rhode Island manufacturing facility (ARIMF) and a facility operated by Lonza Group AG and its affiliates (Lonza), to produce commercial and clinical bulk quantities of Soliris, and we rely on another facility operated by Lonza for clinical and commercial quantities of Strensiq (asfotase alfa). We produce our clinical and preclinical quantities of our other product candidates at ARIMF. We have entered into an agreement with Lonza to manufacture commercial and clinical supplies of Soliris and Strensiq (asfotase alfa) at an additional site. We also depend on a limited number of third party providers for other services with respect to our clinical and commercial requirements, including manufacturing services, product finishing, packaging, filling and labeling.
We have various agreements with Lonza through 2026, with remaining total non-cancellable commitments of approximately $413,150 through 2019. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangements. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at ARIMF and a payment with respect to sales of Soliris manufactured at Lonza facilities.
In March 2013, we received a Warning Letter (Warning Letter) from the FDA regarding compliance with current Good Manufacturing Practices (cGMP) at ARIMF. The Warning Letter followed an FDA inspection which concluded in August 2012. At the conclusion of that inspection, the FDA issued a Form 483 Inspectional Observations, to which we responded in August 2012 and provided additional information to the FDA in September and December 2012. The observations relate to commercial and clinical manufacture of Soliris at ARIMF. We responded to the Warning Letter in a letter to the FDA dated in April 2013. At the conclusion of another inspection of ARIMF in August 2014, the FDA issued a Form 483 with three inspectional observations, none of which were designated as a repeat observation to the Warning Letter. We continue to manufacture products, including Soliris at ARIMF. While the resolution of the issues raised in the Warning Letter is difficult to predict, we do not currently believe a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated. To the extent that circumstances related to this matter change, the impact could have a material adverse effect on our financial operations.
The EMA inspected ARIMF in January 2013, and issued a cGMP certificate in May 2013.
In April 2014, we purchased a fill/finish facility in Athlone, Ireland.  Following refurbishment of the facility, and after successful completion of the appropriate validation processes and regulatory approvals, the facility will become our first company-owned fill/finish facility for Soliris and other clinical and commercial products. We have also initiated the construction of office, laboratory and packaging facilities on property in Dublin, Ireland, which we purchased in April 2014.
Critical Accounting Policies and the Use of Estimates
The significant accounting policies and basis of preparation of our consolidated financial statements are described in Note 1, “Business Overview and Summary of Significant Accounting Policies” of the Consolidated Financial Statements included in our Form 10-K for the year ended December 31, 2014. Under accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities in our financial statements. Actual results could differ from those estimates.
We believe the judgments, estimates and assumptions associated with the following critical accounting policies have the greatest potential impact on our consolidated financial statements:
Revenue recognition;
Contingent liabilities;
Inventories;
Share-based compensation;
Valuation of goodwill, acquired intangible assets and in-process research and development (IPR&D);
Valuation of contingent consideration; and
Income taxes.

For a complete discussion of these critical accounting policies, refer to “Critical Accounting Policies and Use of Estimates” within “Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations” included within our Form 10-K for the year ended December 31, 2014.  We have reviewed our critical accounting policies as disclosed in our Form 10-K, and we have not noted any material changes.


24

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (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. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2016 and allows for adoption using a full retrospective method, or a modified retrospective method. In April 2015, the FASB proposed a one year deferral of the effective date of this standard to periods ending after December 15, 2017 along with an option to permit companies to early adopt the standard for annual periods beginning after December 15, 2016. We are currently assessing the method of adoption and the expected impact the new standard has on our financial position and results of operations.
Results of Operations

Net Product Sales
The following table summarizes net product sales for the three months ended March 31, 2015 and 2014:
 
Three months ended
 
 
 
March 31,
 
$
 
2015
 
2014
 
Variance
Net product sales
$
600,333

 
$
566,616

 
$
33,717


In March 2014, we entered into an agreement with the French government which positively impacts prospective reimbursement of Soliris and also provides for reimbursement for shipments in years prior to January 1, 2014. As a result of this agreement, in the first quarter of 2014, we reduced the rebate payable and recognized $87,830 of net product sales from Soliris in France relating to years prior to January 1, 2014.
Exclusive of the $87,830 recognized in 2014 related to prior years, net product revenues increased by $121,547 for the three months ended March 31, 2015 compared to the three months ended March 31, 2014. The components of this increase in revenues, are as follows:
Components of change:
 
   Price
1.0
 %
   Volume
31.0
 %
   Foreign exchange
(7.0
)%
Total change in net product sales
25.0
 %
The increase in net product sales for the three months ended March 31, 2015, as compared to the same period in 2014, was primarily due to an increase in unit volumes of 31.0%, due to increased physician demand globally for Soliris therapy for patients with PNH or aHUS during the respectively periods.
Price had a positive impact on net product sales of 1.0% for the three months ended March 31, 2015.
Foreign exchange had a negative impact of 7.0% for the three months ended March 31, 2015, as compared to the same period in 2014. The negative impact on foreign exchange of $31,400 or 7.0%, was due to changes in foreign currency exchange rates (inclusive of hedging activity) versus the U.S. dollar for the three months ended March 31, 2015. The negative impact was primarily due to the weakening of the Euro, Japanese Yen and Russian Ruble. Offsetting the impact of the stronger dollar, we recorded a gain in revenue of $29,082 and $1,266 related to our foreign currency cash flow hedging program for the three months ended March 31, 2015 and 2014, respectively. We expect the strong dollar compared to other currencies, especially the Euro, Japanese Yen and Russian Ruble, to continue to have a negative impact on revenue in 2015 compared to 2014.
Cost of Sales
Cost of sales includes manufacturing costs as well as actual and estimated royalty expenses associated with sales of Soliris.

25

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

The following table summarizes cost of sales for the three months ended March 31, 2015 and 2014:
 
Three months ended March 31,
 
 
 
2015
 
2014
 
Variance
Cost of sales
$
69,399

 
$
32,939

 
$
36,460

Cost of sales as a percentage of net product sales
11.6
%
 
5.8
%
 
5.8
%
We recorded an expense of $24,352 in the first quarter of 2015 associated with a portion of a single manufacturing campaign at a third party manufacturer for Strensiq (asfotase alfa). The costs are comprised of raw materials, internal overhead and external production costs. We do not expect this expense will not impact the clinical supply of inventory or the expected commercial launch of Strensiq (asfotase alfa) later in 2015, and we do not expect further material financial impact related to this campaign.
In the first quarter of 2014, we entered into a settlement agreement with a third party related to the calculation of royalties payable to such third party under a pre-existing license agreement. Based on this settlement agreement, we recorded a reversal of accrued royalties of $5,124 as a reduction of cost of sales. Also, in the first quarter of 2014, we recorded the incremental impact in cost of sales of $2,055 for additional royalties related to the $87,830 of net product sales from prior year shipments.
Exclusive of the items mentioned above, cost of sales as a percentage of net product sales were 7.5% for the three months ended March 31, 2015 and 2014.
Research and Development Expense
Our research and development expense includes personnel, facility and external costs associated with the research and development of our product candidates, as well as product development costs. We group our research and development expenses into two major categories: external direct expenses and all other research and development (R&D) expenses.
External direct expenses are comprised of costs paid to outside parties for clinical development, product development and discovery research, as well as costs associated with strategic licensing agreements we have entered into with third parties. Clinical development costs are comprised of costs to conduct and manage clinical trials related to eculizumab and other product candidates. Product development costs are those incurred in performing duties related to manufacturing development and regulatory functions, including manufacturing of material for clinical and research activities. Discovery research costs are incurred in conducting laboratory studies and performing preclinical research for other uses of eculizumab and other product candidates. Licensing agreement costs include upfront and milestone payments made in connection with strategic licensing arrangements we have entered into with third parties. Clinical development costs have been accumulated and allocated to each of our programs, while product development and discovery research costs have not been allocated.
All other R&D expenses consist of costs to compensate personnel, to maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs relate to efforts on our clinical and preclinical products, our product development and our discovery research efforts. These costs have not been allocated directly to each program.
The following table provides information regarding research and development expenses: 
 
Three months ended
 
 
 
March 31,
 
$
 
2015
 
2014
 
Variance
Clinical development
$
29,007

 
$
23,917

 
$
5,090

Product development
21,326

 
13,039

 
8,287

Licensing agreements
112,500

 
101,925

 
10,575

Discovery research
6,044

 
2,581

 
3,463

Total external direct expenses
168,877

 
141,462

 
27,415

Payroll and benefits
44,492

 
44,019

 
473

Operating and occupancy
3,090

 
2,876

 
214

Depreciation and amortization
4,621

 
3,100

 
1,521

Total other R&D expenses
52,203

 
49,995

 
2,208

Research and development expense
$
221,080

 
$
191,457

 
$
29,623



26

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

For the three months ended March 31, 2015, the increase of $29,623 in research and development expense, as compared to the same period in the prior year, was primarily related to the following:
Increase of $5,090 in external clinical development expenses related primarily to an expansion of clinical studies (see table below).
Increase of $8,287 in external product development expenses related primarily to an increase in costs associated with the manufacturing of material for increased clinical research activities and clinical studies as compared to the first quarter of 2014.
Increase of $10,575 in upfront licensing agreement costs primarily due to the upfront payments of $112,000 in the first quarter of 2015 as compared to $100,000 in the first quarter of 2014.
Increase of $3,463 in discovery research expenses primarily related to increases in external research expenses associated with our Moderna agreement.

The following table summarizes external direct expenses related to our clinical development programs. Please refer to "Clinical Development Programs" above for a description of each of these programs:
 
Three months ended
 
 
 
March 31,
 
$
 
2015
 
2014
 
Variance
External direct expenses
 
 
 
 
 
Eculizumab
$
17,909

 
$
15,496

 
$
2,413

Asfotase alfa
4,271

 
4,242

 
29

cPMP
1,554

 
1,553

 
1

Other programs
2,956

 
1,601

 
1,355

Unallocated
2,317

 
1,025

 
1,292

 
$
29,007

 
$
23,917

 
$
5,090

The successful development of our drug candidates is uncertain and subject to a number of risks. We cannot guarantee that results of clinical trials will be favorable or sufficient to support regulatory approvals for our other programs. We could decide to abandon development or be required to spend considerable resources not otherwise contemplated. For additional discussion regarding the risks and uncertainties regarding our development programs, please refer to Item 1A "Risk Factors" in this Form 10-Q.
Selling, General and Administrative Expense
Our selling, general and administrative expense includes commercial and administrative personnel, corporate facility and external costs required to support the marketing and sales of our commercialized products. These selling, general and administrative costs include: corporate facility operating expenses and depreciation; marketing and sales operations in support of Soliris; human resources; finance, legal, information technology and support personnel expenses; and other corporate costs such as telecommunications, insurance, audit, government affairs and our global corporate compliance program.
The table below provides information regarding selling, general and administrative expense:
 
Three months ended
 
 
 
March 31,
 
$
 
2015
 
2014
 
Variance
Salary, benefits and other labor expense
$
124,103

 
$
82,418

 
$
41,685

External selling, general and administrative expense
63,013

 
46,873

 
16,140

Total selling, general and administrative expense
$
187,116

 
$
129,291

 
$
57,825

For the three months ended March 31, 2015, the increase of $57,825 in selling, general and administrative expense, as compared to the same period in the prior year, was related to the following:
Increase in salary, benefits and other labor expenses of $41,685. The increase was a result of increased headcount related to commercial development activities, including increases in payroll and benefits costs of $11,400 related to our global commercial staff to support global expansion. This increase was also due to increases in payroll and benefits of $30,300 within our general and administrative functions to support our infrastructure growth as a global commercial entity including additional stock-based compensation of $15,300.

27

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Increase in external selling, general and administrative expenses of $16,140. The increase was primarily due to an increase in marketing costs to support the continued growth in global sales of Soliris, increased costs associated with new product candidates, and an increase in other administrative costs to support our infrastructure growth.
Acquisition-related Costs
For the three months ended March 31, 2015 and 2014, acquisition-related costs consisted of changes in the fair value of contingent consideration of $11,979 and $(38), respectively. The increase in the fair value of contingent consideration is primarily due to increases in the likelihood of payments for contingent consideration.
Restructuring Expenses
In the fourth quarter of 2014, we announced plans to relocate our European headquarters from Lausanne, Switzerland to Zurich, Switzerland. The relocation of the European headquarters will support our operational needs based on growth in the European region. For the three months ended March 31, 2015 we incurred additional employee separation costs resulting in restructuring expenses of $7,052. We expect to pay all accrued amounts related to this restructuring activity in 2015.
Other Income and Expense
The following table provides information regarding other income and expense:
 
Three months ended
 
 
 
March 31,
 
$
 
2015
 
2014
 
Variance
Investment income
$
2,884

 
$
2,213

 
$
671

Interest expense
(651
)
 
(1,063
)
 
412

Foreign currency gain
1,005

 
1,258

 
(253
)
Total other income and expense
$
3,238

 
$
2,408

 
$
830

Income Taxes
During the three months ended March 31, 2015, we recorded an income tax provision of $15,622 and an effective tax rate of 14.6%, compared to an income tax provision of $52,557 and an effective tax rate of 24.8% for the three months ended March 31, 2014.
The tax provision for the three months ended March 31, 2015 and 2014 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The tax provision for the three months ended March 31, 2014 also includes $2,652 attributable to our agreement with the French government that provided reimbursement for shipments of Soliris made prior to January 1, 2014. The remaining reduction in the effective tax rate for the three months ended March 31, 2015 as compared to the same period in the prior year is primarily attributable to an increase in our Federal Orphan Drug Credit and an increase in the amount of income earned in jurisdictions outside the U.S.
We continue to maintain a valuation allowance against certain other deferred tax assets where the realization is not certain. We periodically evaluate the likelihood of the realization of deferred tax assets and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe a portion will not be realized.

28

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Financial Condition, Liquidity and Capital Resources
The following table summarizes the components of our financial condition as of March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
December 31, 2014
 
$
Variance
Cash and cash equivalents
$
916,814

 
$
943,999

 
$
(27,185
)
Marketable securities
$
1,008,278

 
$
1,017,567

 
$
(9,289
)
Long-term debt (includes current portion)
$
45,500

 
$
57,500

 
$
(12,000
)
 
 
 
 
 
 
Current assets
$
2,852,987

 
$
2,796,029

 
$
56,958

Current liabilities
580,439

 
606,740

 
(26,301
)
Working capital
$
2,272,548

 
$
2,189,289

 
$
83,259

 
The decrease in cash and cash equivalents was primarily attributable to purchases of marketable securities, payments on our outstanding term loan, purchases of property, plant and equipment, and the repurchase of common stock, offset by cash generated from operations, proceeds from the maturity or sale of available-for-sale securities, net proceeds from the exercise of stock options and a reduction of income taxes payable due to excess tax benefits from stock options.
We expect continued growth in our expenditures, particularly those related to research and product development, clinical trials, regulatory approvals, international expansion, commercialization of products and capital investment. However, we anticipate that cash generated from operations and our existing available cash, cash equivalents and marketable securities should provide us adequate resources to fund our operations as currently planned.
We have financed our operations and capital expenditures primarily through positive cash flows from operations. We expect to continue to be able to fund our operations, including principal and interest payments on our credit facility and contingent payments from our acquisitions principally through our cash flows from operations. We may, from time to time, also seek additional funding through a combination of equity or debt financings or from other sources, if necessary for future acquisitions or other strategic purposes.
Financial Instruments
Until required for use in the business, we may invest our cash reserves in money market funds or high-quality marketable securities in accordance with our investment policy. The stated objectives of our investment policy is to preserve capital, provide liquidity consistent with forecasted cash flow requirements, maintain appropriate diversification and generate returns relative to these investment objectives and prevailing market conditions.
Financial instruments that potentially expose us to concentrations of credit risk are cash equivalents, marketable securities, accounts receivable and our foreign exchange derivative contracts. At March 31, 2015, four individual customers accounted for an aggregate of 55% of the accounts receivable balance, with individual customers ranging from 11% to 20% of the accounts receivable balance. At December 31, 2014, four individual customers accounted for an aggregate of 58% of the accounts receivable balance, with individual customers ranging from 10% to 23% of the accounts receivable balance. For the three months ended March 31, 2015, three customers accounted for an aggregate of 39% of our product sales, with individual customers ranging from 10% to 18% of our product sales. For the three months ended March 31, 2014 , one customer accounted for 16% of our product sales.
We continue to monitor economic conditions, including volatility associated with global economies and the associated impacts on the financial markets and our business. Substantially all of our accounts receivable due from these countries are due from or backed by sovereign or local governments, and the amount of non-sovereign accounts receivable is not material. Although collection of our accounts receivables from certain countries may extend beyond our standard credit terms, we do not expect any such delays to have a material impact on our financial condition or results of operations.
We manage our foreign currency exposure within specified guidelines through the use of derivatives. All of our derivative instruments are utilized for risk mitigation purposes, and we do not use derivatives for speculative trading purposes. As of March 31, 2015, we have foreign exchange forward contracts with notional amounts totaling $1,916,750. These outstanding foreign exchange forward contracts had a net fair value of $241,064, of which an unrealized gain of $241,466 is included in other assets, offset by an unrealized loss of $402 included in other liabilities. The counterparties to these foreign exchange forward contracts are large multinational commercial banks, and we believe the risk of nonperformance is not material.
At March 31, 2015, our financial assets and liabilities were recorded at fair value. We have classified our financial assets and liabilities as Level 1, 2 or 3 within the fair value hierarchy. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Our Level 1 assets consist of mutual fund investments. 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

29

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

through market corroboration, but substantially the full term of the financial instrument. Our Level 2 assets consist primarily of institutional money market funds, commercial paper, municipal bonds, U.S. and foreign government-related debt, corporate debt securities, certificates of deposit and foreign exchange forward contracts. Our Level 2 liabilities consist also of foreign exchange forward contracts. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. Our Level 3 liabilities consist of contingent consideration related to acquisitions.
Business Combinations and Contingent Consideration Obligations
 The purchase agreements for our business combinations include contingent payments totaling up to $876,000 that will become payable if and when certain development and commercial milestones are achieved.  Of these milestone amounts, $561,000 and $315,000 of the contingent payments relate to development and commercial milestones, respectively. We do not expect these amounts to have an impact on our liquidity in the near-term, and, during the next 12 months, we expect to make milestone payments totaling approximately $50,000. As additional future payments become probable, we will evaluate methods of funding payments, which could be made from available cash and marketable securities, cash generated from operations or proceeds from other financing.
Financing Lease Obligation
In November 2012, we entered into a lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. Although we will not legally own the premises, we are deemed to be the owner of the building during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. Accordingly, the landlord's costs of constructing the facility are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated balance sheet. As of March 31, 2015, we recorded a construction-in-process asset of $148,470, inclusive of the landlord's costs as well as costs incurred by Alexion, and an offsetting facility lease obligation of $114,912 associated with the new facility.
License Agreements
In March 2015, we entered into an agreement with a third party that allowed us to exercise an option with another third party for exclusive, worldwide, perpetual license rights to a specialized technology and other intellectual property and we simultaneously exercised the option. Due to the early stage of these assets, we recorded expense for the payments of $47,000 during the first quarter 2015.
In March 2015, we entered into a collaboration agreement with a third party that allows us to identify and optimize drug candidates. Alexion will have the exclusive worldwide rights to develop and commercialize products arising from the collaboration. Due to the early stage of the assets we are licensing in connection with the collaboration, we recorded expense for the upfront payment of $15,000 during the first quarter 2015. In addition, we could be required to pay up to an additional $252,500 if certain development, regulatory, and commercial milestones are met over time, as well as royalties on commercial sales.
In January 2015, we entered into a license agreement with a third party to obtain an exclusive research, development and commercial license for specific therapeutic molecules. Due to the early stage of these assets, we recorded expense for the upfront payment of $50,000 during the first quarter 2015. In addition, we could be required to pay up to an additional $830,000 if certain development, regulatory, and commercial milestones are met over time, as well as royalties on commercial sales.
In January 2014, we entered into an agreement with Moderna Therapeutics, Inc. (Moderna) that allows us to purchase ten product options to develop and commercialize treatments for rare diseases with Moderna's messenger RNA (mRNA) therapeutics platform. Alexion will lead the discovery, development and commercialization of the treatments produced through this broad, long-term strategic agreement, while Moderna will retain responsibility for the design and manufacture of the messenger RNA against selected targets. Due to the early stage of these assets, we recorded expense for an upfront payment of $100,000.  We will also be responsible for funding research activities under the program.  In addition, for each drug target, up to a maximum of ten targets, we could be required to make an option exercise payment of $15,000 and to pay up to an additional $120,000 with respect to a rare disease product and $400,000 with respect to a non-rare disease product in development and sales milestones if the specific milestones are met over time as well as royalties on commercial sales. 
Long-term Debt
In February 2012, we entered into a Credit Agreement (Credit Agreement) with a syndicate of lenders and other parties named in the Credit Agreement that provides for a $240,000 senior secured term loan facility payable in equal quarterly installments of $12,000 starting June 30, 2012 and a $200,000 senior secured revolving credit facility, which includes up to a $60,000 sublimit for letters of credit and a $10,000 sublimit for swingline loans. We may also use the facilities for working capital requirements, acquisitions and other general corporate purposes. Any of Alexion's wholly-owned foreign subsidiaries may borrow funds under the facilities upon satisfaction of certain conditions described in the Credit Agreement. As of

30

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

March 31, 2015, we had $45,500 outstanding on the term loan of which $12,000 was paid in April 2015. As of March 31, 2015, we had open letters of credit of $9,938, and our borrowing availability under the revolving facility was $190,062 at March 31, 2015. We expect that cash generated from operations will be sufficient to meet debt service obligations.  
Lonza Agreement
We have supply agreements with Lonza through 2026 relating to the manufacture of Soliris and Strensiq (asfotase alfa), which requires payments to Lonza at the inception of contract and upon the initiation and completion of product manufactured. On an ongoing basis, we evaluate our plans for future levels of manufacturing by Lonza, which depends upon our commercial requirements, the progress of our clinical development programs and the production levels of ARIMF.
We have various agreements with Lonza, with remaining total non-cancellable commitments of approximately $413,150 through 2019. Such commitments may be canceled only in limited circumstances. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at ARIMF and a payment with respect to sales of Soliris manufactured at Lonza facilities.
Taxes
We do not record U.S. tax expense on the undistributed earnings of our controlled foreign corporation (CFC) subsidiaries because these earnings are intended to be permanently reinvested offshore. At December 31, 2014, the cumulative amount of these earnings was approximately $359,000. During the fourth quarter of 2013, in connection with the centralization of our global supply chain and technical operations in Ireland, our U.S. parent company became a direct partner in a foreign partnership subsidiary. To the extent that our U.S. parent company receives its allocation of partnership taxable income, the amounts will be taxable in the U.S. and therefore the permanent reinvestment assertion will no longer apply.
We do not have any present or anticipated future need for cash held by our CFCs, as cash generated in the U.S., as well as borrowings, are expected to be sufficient to meet U.S. liquidity needs for the foreseeable future. At March 31, 2015, approximately $608,000 of our cash and cash equivalents was held by foreign subsidiaries, a significant portion of which is required for liquidity needs of our foreign subsidiaries. Due to the liability position of our foreign subsidiaries, these subsidiaries will repay any outstanding intercompany debt, prior to having excess cash available which could be used to repatriate to our entities in the United States. While our expectation is that all future undistributed earnings of our CFCs will be permanently reinvested, there could be certain unforeseen future events that could impact our permanent reinvestment assertion. Such events include acquisitions, corporate restructurings or tax law changes not currently contemplated.
Common Stock Repurchase Program
In November 2012, our Board of Directors authorized the repurchase of up to $400,000 of our common stock and in December 2014 they authorized the repurchase of an additional $500,000 of our common stock. 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 the Company's discretion. We expect that cash generated from operations and our existing available cash and cash equivalents are sufficient to fund any share repurchases.
Under the program, we repurchased 334 and 137 shares of our common stock at a cost of $60,026 and $22,057 during the three months ended March 31, 2015 and 2014, respectively. As of March 31, 2015, there is a total of $459,686 remaining for repurchases under the program.
Subsequent to December 31, 2014, we repurchased 126 shares of our common stock under our repurchase program at a cost of $22,413.


31

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Cash Flows
The following summarizes our net change in cash and cash equivalents:
 
Three months ended March 31,
 
 
 
2015
 
2014
 
$
Variance
Net cash provided by (used in) operating activities
$
23,034

 
$
(31,055
)
 
$
54,089

Net cash used in investing activities
(48,423
)
 
(90,197
)
 
41,774

Net cash provided by financing activities
5,074

 
119,212

 
(114,138
)
Effect of exchange rate changes on cash
(6,870
)
 
468

 
(7,338
)
Net change in cash and cash equivalents
$
(27,185
)
 
$
(1,572
)
 
$
(25,613
)
The decrease in cash and cash equivalents was primarily attributable to purchases of marketable securities, payments on our outstanding term loan, purchases of property, plant and equipment, and the repurchase of common stock, offset by cash generated from operations, proceeds from the maturity or sale of available-for-sale securities, net proceeds from the exercise of stock options and a reduction of income taxes payable due to excess tax benefits from stock options.

Operating Activities
The components of cash flows from operating activities, as reported in our Condensed Consolidated Statements of Cash Flows, are as follows:

Our net income was $91,323 and $159,354 for the three months ended March 31, 2015 and 2014, respectively. During the first quarter of 2015 we recorded expense of $112,000 for upfront payments associated with license agreements we entered into with a third parties. During the first quarter of 2014, we recorded expense of $100,000 for an upfront payment related to an option agreement we entered into with Moderna Therapeutics, Inc.
Non-cash items included depreciation and amortization, impairment of intangible assets, change in fair value of contingent consideration, share-based compensation expense, premium amortization of available-for-sale securities, and deferred taxes, and were increases (decreases) to reconcile net income to net cash flows from operating activities of $46,736 and $(17,005) for the three months ended March 31, 2015 and 2014, respectively.
Non-cash items also included $52,521 and $130,407 of windfall tax benefits for three months ended March 31, 2015 and 2014, respectively. The amount of the windfall tax benefit was significantly higher for the three months ended March 31, 2014 due to an increased level of stock option exercises.
Net cash outflow due to changes in operating assets and liabilities was $62,504 and $42,997 for the three months ended March 31, 2015 and 2014, respectively. The $62,504 change in operating assets and liabilities primarily relates to:
Increase in accounts receivable of $58,918 due primarily to increasing revenue.
Increase of $38,980 in prepaid expenses and other assets related to increases in prepaid manufacturing costs and prepaid taxes.
Decrease of $13,659 in accounts payable, accrued expenses and other liabilities primarily related to decreases in accrued compensation and accrued taxes, offset by increases in accrued distribution fees and trade accounts payable.
Increase in deferred revenue of $46,427 due to increased shipments in advance of recognizing revenue.

32

Alexion Pharmaceuticals, Inc.
(amounts in thousands except per share amounts)

Investing Activities
The components of cash flows from investing activities consisted of the following:
Purchases of available-for-sale marketable securities of $166,319 and $145,565 for the three months ended March 31, 2015 and 2014, respectively, offset by proceeds from the maturity or sale of available-for-sale marketable securities of $176,256 and $99,250 during the same periods.
Additions to property, plant and equipment of $57,075 and $17,733 for the three months ended March 31, 2015 and 2014, respectively.
Financing Activities
Net cash flows from financing activities reflect proceeds from the exercise of stock options of $24,882 and $30,404 for the three months ended March 31, 2015 and 2014, respectively. Net cash flows from financing activities for the three months ended March 31, 2015 and 2014 also include $52,521 and $130,407 respectively, of excess tax benefits from stock options attributable to the utilization of the excess tax benefit portion of federal and state net operating losses and tax credits.
During the three months ended March 31, 2015, we made payments of $12,000 against the term loan facility. The facility had $45,500 remaining outstanding as of March 31, 2015.
During the three months ended March 31, 2015 and 2014, we repurchased $60,026 and $22,057 worth of shares of our common stock under a repurchase program that was approved by our Board of Directors in November 2012. In December 2014, our Board of Directors approved an additional $500,000 for the repurchase of shares. As of March 31, 2015, there is a total of $459,686 remaining for repurchases under the repurchase program.
Contractual Obligations
The disclosure of payments we have committed to make under our contractual obligations are summarized in our Annual Report on Form 10-K for the twelve months ended December 31, 2014, in the section titled “Management's Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Contractual Obligations.”

Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest Rate Risk
As of March 31, 2015, we invested our cash in a variety of financial instruments, principally money market funds, corporate bonds, municipal bonds, commercial paper and government-related obligations. Most of our interest-bearing securities are subject to interest rate risk and could decline in value if interest rates increase. Our investment portfolio is comprised of marketable securities of highly rated financial institutions and investment-grade debt instruments, and we have guidelines to limit the length of time to maturity of our investments. If interest rates were to increase or decrease by 1%, the fair value of our investment portfolio would (decrease) increase by approximately $(11,230) and $7,723, respectively.
In February 2012, we entered into the Credit Agreement with a floating rate of interest based on LIBOR, Prime Rate, Federal Funds Rate or Eurodollar Rate, at our election, plus an applicable credit spread. We do not expect changes in interest rates related to the Credit Agreement to have a material effect on our financial statements. At March 31, 2015, we had approximately $45,500 of variable rate debt outstanding. If interest rates were to increase or decrease by 1% for the year, annual interest expense would increase or decrease by approximately $455.
Foreign Exchange Market Risk
Our operations include activities in many countries outside the United States, including countries in Europe, Latin America and Asia Pacific.  As a result, our financial results are impacted by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets where we operate.  We have exposure to movements in foreign currency exchange rates, the most significant of which are the Euro and Japanese Yen, against the U.S. dollar.  We are a net recipient of many foreign currencies, and our consolidated financial results benefit from a weaker U.S. dollar and are adversely impacted by a stronger U.S. dollar relative to foreign currencies in which we sell our product. 
Our monetary exposures on our balance sheet arise primarily from cash, accounts receivable, intercompany receivables and payables denominated in foreign currencies.  Approximately 54% of our product sales were denominated in foreign currencies during the three months ended March 31, 2015, and our revenues are also exposed to fluctuations in the foreign currency exchange rates over time.  In certain foreign countries, we may sell in U.S. Dollar, but our customers may be impacted adversely in fluctuations in foreign currency exchange rates which may also impact us in the future.

33


Both positive and negative impacts to our international product sales from movements in foreign currency exchange rates are only partially mitigated by the natural, opposite impact that foreign currency exchange rates have on our international operating expenses.  Additionally, we have operations based in Switzerland, and accordingly, our expenses are impacted by fluctuations in the value of the Swiss Franc against the U.S. dollar.
We currently have a derivative program in place to achieve the following: 1) mitigate the foreign currency exposure of our monetary assets and liabilities on our balance sheet, using forward contracts with durations of up to 30 days and 2) hedge a portion of our forecasted product sales (in some currencies), including intercompany sales, using contracts with durations of up to 60 months. The objectives of this program are to reduce the volatility of our operating results due to fluctuation of foreign exchange and to increase the visibility of the foreign exchange impact on forecasted revenues. This program utilizes foreign exchange forward contracts intended to reduce, not eliminate, the volatility of operating results due to fluctuations in foreign exchange rates.
As of March 31, 2015 and December 31, 2014, we held foreign exchange forward contracts with notional amounts totaling $1,916,750 and $1,748,931, respectively. The increase in outstanding foreign exchange forward contracts resulted primarily from increases in forecasted revenues and, for certain currencies, extended duration of hedges. As of March 31, 2015 and December 31, 2014, our outstanding foreign exchange forward contracts had a net fair value of $241,064 and $135,166, respectively. The increase in the net fair value of outstanding foreign exchange forward contracts is primarily due to the strengthening of the U.S. dollar in 2015.
We do not use derivative financial instruments for speculative trading purposes. The counterparties to these foreign exchange forward contracts are multinational commercial banks. We believe the risk of counterparty nonperformance is not material.
Based on our foreign currency exchange rate exposures at March 31, 2015, a hypothetical 10% adverse fluctuation in exchange rates would decrease the fair value of our foreign exchange forward contracts that are designated as cash flow hedges by approximately $147,794 at March 31, 2015. The resulting loss on these forward contracts would be offset by the gain on the underlying transactions and therefore would have minimal impact on future anticipated earnings and cash flows. Similarly, adverse fluctuations in exchange rates that would decrease the fair value of our foreign exchange forward contracts that are not designated as hedge instruments would be offset by a positive impact of the underlying monetary assets and liabilities.
Credit Risk
As a result of our foreign operations, we are exposed to changes in the general economic conditions in the countries in which we conduct business. Substantially all of our accounts receivable due from these countries are due from or backed by sovereign or local governments, and the amount of non-sovereign accounts receivable is not material. We continue to monitor economic conditions, including volatility associated with international economies and the associated impacts on the financial markets and our business. Although collection of our accounts receivables from certain countries may extend beyond our standard credit terms, we currently do not expect such delays to have a material impact on our financial condition or results of operations.

Item 4.
CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of March 31, 2015. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2015, our disclosure controls and procedures were effective to provide reasonable assurance that information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure, and ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
There has been no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

34



PART II. OTHER INFORMATION

Item 1.
LEGAL PROCEEDINGS.
None.
 
Item 1A.
Risk Factors.
(amounts in thousands, except percentages)
You should carefully consider the following risk factors before you decide to invest in Alexion and our business because these risk factors may have a significant impact on our business, operating results, financial condition, and cash flows. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially and adversely affected.
Risks Related to Our Products
We depend heavily on the success of our lead product, Soliris. If we are unable to increase sales of Soliris, or obtain approval or commercialize Soliris in new territories for the treatment of PNH, aHUS or for additional indications, or if we are significantly delayed or limited in doing so, our business may be materially harmed.
Our ability to generate revenues will continue to depend on commercial success of Soliris and whether physicians, patients and health care payers view Soliris as therapeutically effective and safe relative to cost. Since we launched Soliris in the United States in April 2007, essentially all of our revenue has been attributed to sales of Soliris, and we expect that Soliris product sales will continue to contribute to a significant percentage or almost all of our total revenue over the next several years.
In September and November 2011, we obtained marketing approval in the United States and the European Union, respectively, for Soliris for the treatment of a second indication, aHUS. In September 2013, the MHLW approved Soliris for the treatment of patients with aHUS in Japan.
We dedicate significant resources to the worldwide commercialization of Soliris. We have established sales and marketing capabilities in the United States and in many countries throughout the world. We cannot guarantee that any marketing application for Soliris for the treatment of PNH, aHUS or any other indication, will be approved or maintained in any country where we seek marketing authorization to sell Soliris. In certain countries, we continue discussions with authorities to finalize operational, reimbursement, price approval and funding processes so that we may, upon conclusion of such discussions, commence commercial sales of Soliris for the treatment of PNH in those countries. We have had and will continue to have similar discussions with authorities to facilitate the commercialization of Soliris for the treatment of aHUS in certain countries in the European Union. Our ability to complete such processes successfully is subject to the risks and uncertainties described in this Quarterly Report on Form 10-Q. We cannot guarantee that we will be able to obtain reimbursement for Soliris or successfully commercialize Soliris in any additional countries, or that we will be able to maintain coverage or reimbursement at anticipated levels in any country in which we have already received marketing approval, including the U.S., certain European countries, or Japan. As a result, sales in certain countries may be delayed or never occur, or may be subsequently reduced.
The commercial success of Soliris and our ability to generate and increase revenues will depend on several factors, including the following:
receipt of marketing approvals for Soliris for the treatment of PNH and aHUS in new territories, and the maintenance of marketing approvals in the United States, the European Union, Japan and other territories;
our ability to obtain sufficient coverage or reimbursement by government or third-party payers and our ability to maintain coverage or reimbursement at anticipated levels;
establishment and maintenance of our commercial manufacturing capabilities ourselves or through third-party manufacturers;
the number of patients with PNH and aHUS, and the number of those patients who are diagnosed with PNH and aHUS and identified to us;
the number of patients with PNH and aHUS that may be treated with Soliris;

35


successful continuation of commercial sales in the United States, Japan and in European countries where we are already selling Soliris for the treatment of PNH and aHUS, and successful launch in countries where we have not yet obtained, or only recently obtained, marketing approval or commenced sales;
acceptance of Soliris and maintenance of safety and efficacy in the medical community; and
our ability to develop, register and commercialize Soliris for indications other than PNH and aHUS.
 If we are not successful in increasing sales of Soliris in the United States, Europe and Japan and commercializing in the rest of the world, or are significantly delayed or limited in doing so, we may experience surplus inventory, our business may be materially harmed and we may need to significantly curtail operations.
If we are unable to obtain, or maintain at anticipated levels, reimbursement for Soliris from government health administration authorities, private health insurers and other organizations, our pricing may be affected or our product sales, results of operations or financial condition could be harmed.
We may not be able to sell Soliris on a profitable basis or our profitability may be reduced if we are required to sell our product at lower than anticipated prices or reimbursement is unavailable or limited in scope or amount. Soliris is significantly more expensive than traditional drug treatments and almost all patients require some form of third party coverage to afford its cost. Our future revenues and profitability will be adversely affected if we cannot depend on governmental payers, such as Medicare and Medicaid in the United States or country specific governmental organizations in foreign countries, and private third-party payers to defray the cost of Soliris to patients. These entities may refuse to provide coverage and reimbursement with respect to Soliris, determine to provide a lower level of coverage and reimbursement than anticipated, or reduce previously approved levels of coverage and reimbursement, including in the form of higher mandatory rebates or modified pricing terms. In any such case, our pricing or reimbursement for Soliris may be affected and our product sales, results of operations or financial condition could be harmed.
 In certain countries where we sell or are seeking or may seek to commercialize Soliris, including certain countries where we both sell Soliris for the treatment of PNH and sell or seek to commercialize Soliris for the treatment of aHUS, if approved by the appropriate regulatory authority, pricing, coverage and level of reimbursement of prescription drugs are subject to governmental control. We may be unable to timely or successfully negotiate coverage, pricing, and reimbursement on terms that are favorable to us, or such coverage, pricing, and reimbursement may differ in separate regions in the same country. In some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country, and we cannot guarantee that we will have the capabilities or resources to successfully conclude the necessary processes and commercialize Soliris in every, or even most countries in which we seek to sell Soliris.
Reimbursement sources are different in each country and in each country may include a combination of distinct potential payers, including private insurance and governmental payers. For example, the European Union member states' authorities may restrict the range of medicinal products for which their national health insurance systems provide reimbursement and adopt additional measures to control the prices of medicinal products for human use. This includes the use of reference pricing and Health Technology Assessment (HTA). HTA is the procedure according to which the assessment of the public health impact, therapeutic impact and the economic and societal impact of the use of a given medicinal product in the national healthcare systems of the individual country is conducted. HTA generally focuses on the clinical efficacy and effectiveness, safety, cost, and cost-effectiveness of individual medicinal products as well as their potential implications for the healthcare system. These elements of medicinal products are compared with other treatment options available on the market. The national authorities of some European Union member states may from time to time approve a specific price for the medicinal product. Others may adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the national market. Some countries have and others may seek to impose limits on the aggregate reimbursement for Soliris or for the use of Soliris for certain indications. In such cases, our commercial operations in such countries and our results of operations and our business are and may be adversely affected. Our results of operations may suffer if we are unable to successfully and timely conclude reimbursement, price approval or funding processes and market Soliris in such foreign countries or if coverage and reimbursement for Soliris is limited or reduced. If we are not able to obtain coverage, pricing or reimbursement on terms acceptable to us or at all, or if such terms should change in any foreign countries, we may not be able to or we may determine not to sell Soliris for one or more indications in such countries, or we could decide to sell Soliris at a lower than anticipated price in such countries, and our revenues may be adversely affected as a result.
The potential increase in the number of patients receiving Soliris may cause third-party payers to modify or limit coverage or reimbursement for Soliris for the treatment of PNH, aHUS, or both indications.
Changes in pricing or the amount of reimbursement in countries where we currently commercialize Soliris may also reduce our profitability and worsen our financial condition. In the United States, the European Union member states, and elsewhere, there have been, and we expect there will continue to be, efforts to control and reduce health care costs. Third party

36


payers decide which drugs they will pay for and establish reimbursement and co-payment levels. Government and other third-party payers in the United States and the European Union member states are increasingly challenging the prices charged for health care products, examining the cost effectiveness of drugs in addition to their safety and efficacy, and limiting or attempting to limit both coverage and the level of reimbursement for prescription drugs.
A significant reduction in the amount of reimbursement or pricing for Soliris in one or more countries may have a material adverse effect on our business. See additional discussion below under the headings "Changes in healthcare law and implementing regulations, including those based on recently enacted legislation, as well as changes in healthcare policy and Government initiatives that affect coverage and reimbursement of drug products may impact our business in ways that we cannot currently predict and these changes could adversely affect our business and financial condition" and "The credit and financial market conditions may aggravate certain risks affecting our business." In addition, certain countries establish pricing and reimbursement amounts by reference to the price of the same or similar products in other countries. If coverage or the level of reimbursement is limited in one or more countries, we may be unable to obtain or maintain anticipated pricing or reimbursement in current or new territories.
Many third-party payers cover only selected drugs, making drugs that are not preferred by such payer more expensive for patients, and require prior authorization or failure on another type of treatment before covering a particular drug. Third-party payers may be especially likely to impose these obstacles to coverage for higher-priced drugs such as Soliris.
Payers in the U.S. also are increasingly considering new metrics as the basis for reimbursement rates, such as average sales price (ASP), average manufacturer price, and actual acquisition cost. The existing data for reimbursement based on these metrics is relatively limited, although certain states have begun to survey acquisition cost data for the purpose of setting Medicaid reimbursement rates. The Centers for Medicare and Medicaid Services (CMS), the federal agency that administers Medicare and the Medicaid Drug Rebate Program, has begun posting drafts of this retail survey price information on at least a monthly basis in the form of draft National Average Drug Acquisition Cost (NADAC) files, which reflect retail community pharmacy invoice costs, and National Average Retail Price (NARP) files, which reflect retail community pharmacy prices to consumers. In July 2013, CMS suspended the publication of draft NARP data, pending funding decisions. In November 2013, CMS moved to publishing final rather than draft NADAC data and has since made updated NADAC data publicly available on a weekly basis. Therefore, it may be difficult to project the impact of these evolving reimbursement mechanics on the willingness of payers to cover Soliris.
Even in countries where patients have access to insurance, their insurance co-payment amounts or annual or lifetime caps on reimbursements may represent a barrier to obtaining or continuing Soliris. We have financially supported non-profit organizations which assist patients in accessing treatment for PNH and aHUS, including Soliris. Such organizations assist patients whose insurance coverage leaves them with prohibitive co-payment amounts or other expensive financial obligations. Such organizations' ability to provide assistance to patients is dependent on funding from external sources, and we cannot guarantee that such funding will be provided at adequate levels, if at all. We have also provided Soliris without charge to patients who have no insurance coverage for drugs through related charitable purposes. We are not able to predict the financial impact of the support we may provide for these and other charitable purposes; however, substantial support could have a material adverse effect on our profitability in the future.
We are also focusing development efforts on the use of eculizumab for the treatment of additional diseases. The success of these programs depends on many factors, including those described in this Quarterly Report on Form 10-Q. As Soliris is approved by regulatory agencies for indications other than PNH and aHUS, the potential increase in the number of patients receiving Soliris may cause third-party payers to refuse coverage or reimbursement for Soliris for the treatment of PNH, aHUS or for any other approved indication, or provide a lower level of coverage or reimbursement than anticipated or currently in effect.
We may not be able to maintain market acceptance of Soliris among the medical community or patients, or gain market acceptance of our products in the future, which could prevent us from maintaining profitability or growth.
We cannot be certain that Soliris will maintain market acceptance in a particular country among physicians, patients, health care payers, and others. Although we have received regulatory approval for Soliris in certain territories, including the United States, Japan and the European Union, such approvals do not guarantee future revenue. We cannot predict whether physicians, other health care providers, government agencies or private insurers will determine or continue to accept that Soliris is safe and therapeutically effective relative to its cost. Physicians' willingness to prescribe, and patients' willingness to accept, our products, such as Soliris, depends on many factors, including prevalence and severity of adverse side effects in both clinical trials and commercial use, the timing of the market introduction of competitive drugs, lower demonstrated clinical safety and efficacy compared to other drugs, perceived lack of cost-effectiveness, pricing and lack of availability of reimbursement from third-party payers, convenience and ease of administration, effectiveness of our marketing strategy, publicity concerning the product, our other product candidates or competing products, and availability of alternative treatments, including bone marrow transplant as an alternative treatment for PNH. The likelihood of physicians to prescribe Soliris for patients with aHUS may also depend on how quickly Soliris can be delivered to the hospital or clinic and our distribution methods may not be sufficient

37


to satisfy this need. In addition, we are aware that medical doctors have determined not to continue Soliris treatment for some patients with aHUS.
Health insurance programs may restrict coverage of some products by using payer formularies under which only selected drugs are covered, variable co-payments that make drugs that are not preferred by the payer more expensive for patients, and by using utilization management controls, such as requirements for prior authorization or failure on another type of treatment. Payers may especially impose these obstacles to coverage for higher-priced drugs, and consequently our drug products may be subject to payer-driven restrictions. In addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, European Union member states may restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices and/or re