10-Q

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, 2016
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.)
 
100 College Street, New Haven, Connecticut 06510
(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
224,020,164
Class
Outstanding as of April 26, 2016










 
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,
 
2016
 
2015
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
710,198

 
$
1,010,111

Marketable securities
317,354

 
374,904

Trade accounts receivable, net
586,249

 
532,832

Inventories
293,962

 
289,874

Prepaid expenses and other current assets
219,746

 
208,993

Total current assets
2,127,509

 
2,416,714

Property, plant and equipment, net
749,295

 
697,025

Intangible assets, net
4,627,817

 
4,707,914

Goodwill
5,049,321

 
5,047,885

Other assets
248,503

 
228,343

Total assets
$
12,802,445

 
$
13,097,881

Liabilities and Stockholders' Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
42,897

 
$
57,360

Accrued expenses
359,077

 
403,348

Deferred revenue
78,416

 
20,504

Current portion of long-term debt
35,358

 
166,365

Other current liabilities
87,865

 
62,038

Total current liabilities
603,613

 
709,615

Long-term debt, less current portion
3,212,772

 
3,254,536

Contingent consideration
107,085

 
121,424

Facility lease obligation
172,970

 
151,307

Deferred tax liabilities
535,910

 
528,990

Other liabilities
107,818

 
73,393

Total liabilities
4,740,168

 
4,839,265

Commitments and contingencies (Note 17)

 

Stockholders' Equity:
 
 
 
Common stock, $.0001 par value; 290,000 shares authorized; 231,136 and 230,498 shares issued at March 31, 2016 and December 31, 2015, respectively
23

 
23

Additional paid-in capital
7,793,056

 
7,726,560

Treasury stock, at cost, 6,934 and 4,851 shares at March 31, 2016 and December 31, 2015, respectively
(1,007,178
)
 
(710,663
)
Accumulated other comprehensive income
3,815

 
62,301

Retained earnings
1,272,561

 
1,180,395

Total stockholders' equity
8,062,277

 
8,258,616

Total liabilities and stockholders' equity
$
12,802,445

 
$
13,097,881


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,
 
2016
 
2015
Net product sales
$
700,425

 
$
600,333

Other revenue
613

 

Total revenues
701,038

 
600,333

Cost of sales
58,986

 
69,399

Operating expenses:
 
 
 
Research and development
176,290

 
221,080

Selling, general and administrative
232,561

 
187,116

Amortization of purchased intangible assets
80,094



Change in fair value of contingent consideration
(14,800
)

11,979

Acquisition-related costs
1,339

 

Restructuring expenses
722

 
7,052

Total operating expenses
476,206

 
427,227

Operating income
165,846

 
103,707

Other income and expense:
 
 
 
Investment income
1,551

 
2,884

Interest expense
(23,890
)
 
(651
)
Foreign currency gain
91

 
1,005

Income before income taxes
143,598

 
106,945

Income tax provision
51,432

 
15,622

Net income
$
92,166

 
$
91,323

Earnings per common share
 
 
 
Basic
$
0.41

 
$
0.46

Diluted
$
0.41

 
$
0.45

Shares used in computing earnings per common share
 
 
 
Basic
225,060

 
199,361

Diluted
226,873

 
202,034

 
 
 
 


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,
 
2016
 
2015
Net income
$
92,166

 
$
91,323

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation
1,996

 
(5,388
)
Unrealized gains on marketable securities
1,498

 
1,057

Unrealized gains (losses) on pension obligation
2,121

 
(252
)
Unrealized (losses) gains on hedging activities, net of tax of $(35,650), and $38,175, respectively
(64,101
)
 
67,287

Other comprehensive (loss) income, net of tax
(58,486
)
 
62,704

Comprehensive income
$
33,680

 
$
154,027


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,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
92,166

 
$
91,323

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
96,783

 
10,578

Change in fair value of contingent consideration
(14,800
)
 
11,979

Share-based compensation expense
56,889

 
42,797

Premium amortization of available-for-sale securities
515

 
3,178

Deferred taxes
29,332

 
(24,823
)
Change in excess tax benefit from stock options
(5,917
)
 
(52,521
)
Unrealized foreign currency gain
(13,762
)
 
(3,916
)
Unrealized loss (gain) on forward contracts
17,098

 
(434
)
Other
609

 
7,377

Changes in operating assets and liabilities, excluding the effect of acquisitions:
 
 
 
Accounts receivable
(37,287
)
 
(58,918
)
Inventories
(3,838
)
 
2,626

Prepaid expenses and other assets
(65,216
)
 
(38,980
)
Accounts payable, accrued expenses and other liabilities
(42,460
)
 
(13,659
)
Deferred revenue
57,872

 
46,427

Net cash provided by operating activities
167,984

 
23,034

Cash flows from investing activities:
 
 
 
Purchases of available-for-sale securities
(207,996
)
 
(166,319
)
Proceeds from maturity or sale of available-for-sale securities
269,495

 
176,256

Purchases of trading securities
(3,042
)
 
(2,236
)
Purchases of property, plant and equipment
(64,204
)
 
(57,075
)
Other
82

 
951

Net cash used in investing activities
(5,665
)
 
(48,423
)
Cash flows from financing activities:
 
 
 
Payments on term loan
(175,000
)
 
(12,000
)
Change in excess tax benefit from stock options
5,917

 
52,521

Repurchase of common stock
(296,515
)
 
(60,026
)
Net proceeds from issuance of common stock under share-based compensation arrangements
3,433

 
24,882

Other
(4,092
)
 
(303
)
Net cash (used in) provided by financing activities
(466,257
)
 
5,074

Effect of exchange rate changes on cash
4,025

 
(6,870
)
Net change in cash and cash equivalents
(299,913
)
 
(27,185
)
Cash and cash equivalents at beginning of period
1,010,111

 
943,999

Cash and cash equivalents at end of period
$
710,198

 
$
916,814

 
 
 
 
Supplemental cash flow disclosures from investing and financing activities:
 
 
 
Capitalization of construction costs related to facility lease obligations
$
25,647

 
$
7,813

Accrued expenses for purchases of property, plant and equipment
$
24,840

 
$
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 devastating and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products.
In our complement franchise, Soliris® (eculizumab) is the first and only therapeutic approved for patients with either paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, or atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. PNH and aHUS are two severe and ultra-rare disorders resulting from chronic uncontrolled activation of the complement component of the immune system.
In our metabolic franchise, we market Strensiq® (asfotase alfa) for the treatment of patients with hypophosphatasia (HPP) and Kanuma® (sebelipase alfa) for the treatment of patients with lysosomal acid lipase deficiency (LAL-D). HPP is a genetic ultra-rare disease characterized by defective bone mineralization that can lead to deformity of bones and other skeletal abnormalities. LAL-D is a serious, life threatening ultra-rare disease in which genetic mutations result in decreased activity of the LAL enzyme leading to marked accumulation of lipids in vital organs, blood vessels and other tissues.
We are also evaluating additional potential indications for eculizumab 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 rare disorders.

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, 2015. 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, 2015 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, 2015 included in our Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2016 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, 2015.
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, 2017 and allows for adoption using a full retrospective method, or a modified retrospective method. Entities may elect 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)




In April 2015, the FASB issued a new standard simplifying the presentation of debt issuance costs. The new standard aligns the treatment of debt issuance costs with debt discounts and premiums and requires debt issuance costs be presented as a direct deduction from the carrying amount of the related debt. We have adopted the provisions of this standard in the first quarter 2016 and reclassified $8,635 of deferred financing costs from other current assets to the current portion of long term debt and $26,714 other non current assets to the long-term debt, less current portion in our consolidated balance sheets as of December 31, 2015.
In April 2015, the FASB issued a new standard clarifying the accounting for a customer's fees paid in a cloud computing arrangement. Under this standard, if a cloud computing arrangement includes a software license, the customer would account for the software license consistent with other software licenses. If a cloud computing arrangement does not include a software license, the customer would account for the arrangement as a service contract. We adopted the provisions of this standard in the first quarter 2016. The adoption did not have a material effect on our financial condition or results of operations.
In February 2016, the FASB issued a new standard requiring that the rights and obligations arising from leases be recognized on the balance sheet by recording a right-of-use asset and corresponding lease liability. The new standard also requires qualitative and quantitative disclosures to understand the amount, timing, and uncertainty of cash flows arising from leases as well as significant management estimates utilized. The standard is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption. We are currently assessing the impact of this standard on our financial condition and results of operations.
In March 2016, the FASB issued a new standard simplifying aspects of the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, statutory withholding requirements, and classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact of this standard on our financial condition and results of operations.

3.
Acquisitions
On May 6, 2015, we announced that we entered into a definitive agreement to acquire Synageva BioPharma Corp. (Synageva), a publicly-held clinical-stage biotechnology company based in Lexington, Massachusetts for per share consideration of $115 in cash and 0.6581 shares of Alexion stock. At this date, the announced purchase consideration was estimated at approximately $8,400,000, net of Synageva cash, based on the closing price of Alexion stock on May 5, 2015 of $168.55.
On June 22, 2015, we completed the acquisition of Synageva, in a transaction accounted for under the acquisition method of accounting for business combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed from Synageva were recorded as of the acquisition date at their respective fair values. Synageva's results of operations are included in the consolidated financial statements from the date of acquisition. The acquisition furthers our objective to develop and commercialize life-transforming therapies to an increasing number of patients with devastating and rare diseases. Synageva's lead product candidate, Kanuma.
We acquired all of the outstanding shares of common stock of Synageva for $4,565,524 in cash and 26,125 shares of common stock. At closing of the business combination on June 22, 2015, the purchase consideration was approximately $8,860,000, net of Synageva cash, based on Alexion's closing share price on the date of acquisition of $188.24. We financed the cash consideration with existing cash and proceeds from our new credit facility described further in Note 6.

The aggregate consideration to acquire Synageva consisted of:
Stock consideration
$
4,917,810

Cash consideration
4,565,524

Total purchase price
$
9,483,334


7

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




The following table summarizes the estimated fair values of assets acquired and liabilities assumed:
Cash
$
626,217

Inventory
23,880

In-process research and development (IPR&D)
4,236,000

Deferred tax liabilities, net
(171,638
)
Other assets and liabilities
(26,373
)
Net assets acquired
4,688,086

Goodwill
4,795,248

Total purchase price
$
9,483,334

Our accounting for this acquisition is preliminary. The fair value estimates for the assets acquired and liabilities assumed were based upon preliminary calculations, and our estimates and assumptions are subject to change as we obtain additional information for our estimates during the measurement period (up to one year from the acquisition date). The areas of these preliminary estimates that are not yet finalized relate primarily to tax-related items and potential contingent liabilities.
We acquired $23,880 of Kanuma inventory. The estimated fair value of work-in-process and finished goods inventory was determined utilizing the comparative sales method, based on the expected selling price of the inventory, adjusted for incremental costs to complete the manufacturing process and for direct selling efforts, as well as for a reasonable profit allowance. The estimated fair value of raw material inventory was valued at replacement cost, which is equal to the value a market participant would pay to acquire the inventory.
Intangible assets associated with IPR&D projects primarily relate to Synageva's lead product candidate, Kanuma. The estimated fair value of IPR&D assets of $4,236,000 was determined using the multi-period excess earnings method, a variation of the income approach. The multi-period excess earnings method estimates the value of an intangible asset equal to the present value of the incremental after-tax cash flows attributable to that intangible asset. The fair value using the multi-period excess earnings method was dependent on an estimated weighted average cost of capital for Synageva of 10%, which represents a rate of return that a market participant would expect for these assets.
The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill, which is not tax-deductible, has been recorded as a noncurrent asset and is not amortized, but is subject to an annual review for impairment. The goodwill represents future economic benefits arising from other assets acquired that could not be individually identified and separately recognized and expected synergies that are specific to our business and not available to market participants, including our unique ability to commercialize therapies for rare diseases, our existing relationships with specialty physicians who can identify patients with LAL-D, a global distribution network to facilitate drug delivery and other benefits that we believe will result from combining the operations of Synageva within our operations.
We recorded a net deferred tax liability of $171,638. This amount was primarily comprised of $602,887 of deferred tax liabilities related to the IPR&D and inventory acquired, offset by $431,249 of deferred tax assets related to net operating loss carryforwards (NOLs), tax credits, and other temporary differences, which we expect to utilize.
Acquisition-Related Costs
Acquisition-related costs associated with our business combinations for the years ended for the three months ended, March 31, 2016 and 2015 include the following:
 
Three months ended March 31,
 
2016
 
2015
Transaction costs (1)
$
375

 
$

Integration costs
964

 

 
$
1,339

 
$

 
 
 
 
(1) Transaction costs include investment advisory, legal, and accounting fees
 
 
 



8

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




4.
Inventories
Inventories are stated at the lower of cost or estimated realizable value. We determine the cost of inventory on a standard cost basis, which approximates average costs.
The components of inventory are as follows:
 
March 31,
 
December 31,
 
2016
 
2015
Raw materials
$
16,948

 
$
17,924

Work-in-process
162,979

 
180,324

Finished goods
114,035

 
91,626

 
$
293,962

 
$
289,874

 



5.
Intangible Assets and Goodwill
The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated amortization:

 
 
 
March 31, 2016
 
December 31, 2015
 
Estimated
Life (years)
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Licenses
6-8
 
$
28,507

 
$
(28,507
)
 
$

 
$
28,507

 
$
(28,504
)
 
$
3

Patents
7
 
10,517

 
(10,517
)
 

 
10,517

 
(10,517
)
 

Purchased technology
6-16
 
4,708,495

 
(196,678
)
 
4,511,817

 
4,708,495

 
(116,584
)
 
4,591,911

Acquired IPR&D
Indefinite
 
116,000

 

 
116,000

 
116,000

 

 
116,000

Total
 
 
$
4,863,519

 
$
(235,702
)
 
$
4,627,817

 
$
4,863,519

 
$
(155,605
)
 
$
4,707,914

Goodwill
Indefinite
 
$
5,052,222

 
$
(2,901
)
 
$
5,049,321

 
$
5,050,786

 
$
(2,901
)
 
$
5,047,885


Amortization expense was $80,097 and $11 for the three months ended March 31, 2016 and 2015, respectively. Total estimated amortization expense for finite-lived intangible assets is $240,106 for the nine months ending December 31, 2016, and $320,142 for each of the years ending December 31, 2017 through December 31, 2021.
The following table summarizes the changes in the carrying amount of goodwill:
Balance at December 31, 2015
$
5,047,885

Change in goodwill associated with prior acquisition
1,436

Balance at March 31, 2016
$
5,049,321

    
6.
Debt
In June 2015, Alexion entered into a credit agreement (Credit Agreement) with a syndicate of banks, which provides for a $3,500,000 term loan facility and a $500,000 revolving credit facility maturing in five years. Borrowings under the term loan are payable in quarterly installments equal to 1.25% of the original loan amount, beginning December 31, 2015. Final repayment of the term loan and revolving credit loans are due on June 22, 2020. In addition to borrowings in which prior notice is required, the revolving credit facility includes a sublimit of $100,000 in the form of letters of credit and borrowings on same-day notice, referred to as swingline loans, of up to $25,000. 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 in an amount that does not cause our consolidated net leverage ratio to exceed the maximum allowable amount.
In connection with entering into the Credit Agreement, we paid $45,492 in financing costs which are being amortized as interest expense over the life of the debt. Amortization expense associated with deferred financing costs for the three months ended March 31, 2016 was $2,513.

9

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




We made principle payments of $175,000 during the three months ended March 31, 2016. As of March 31, 2016, we had $3,281,250 outstanding on the term loan. As of March 31, 2016, we had open letters of credit of $12,970, and our borrowing availability under the revolving facility was $487,030.
The fair value of our long term debt, which is measured using Level 2 inputs, approximates book value.

7.
Earnings Per Common Share
Basic earnings per common share (EPS) is computed by dividing net income by the weighted-average number of shares of common stock outstanding. 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.
The following table summarizes the calculation of basic and diluted EPS for the three months ended March 31, 2016 and 2015:
 
Three months ended
 
March 31,
 
2016
 
2015
Net income used for basic and diluted calculation
$
92,166

 
$
91,323

Shares used in computing earnings per common share—basic
225,060

 
199,361

Weighted-average effect of dilutive securities:
 
 
 
Stock awards
1,813

 
2,673

Shares used in computing earnings per common share—diluted
226,873

 
202,034

Earnings per common share:
 
 
 
Basic
$
0.41

 
$
0.46

Diluted
$
0.41

 
$
0.45

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, 2016 and 2015 were 3,975 and 2,248 shares of common stock, respectively, because their effect was anti-dilutive.

8.
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, 2016 and December 31, 2015 were as follows:
 
 
March 31, 2016
 
 
Amortized Cost Basis
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Aggregate Fair Value
Commercial paper
 
$
3,999

 
$

 
$

 
$
3,999

Corporate bonds
 
136,009

 
553

 
(3
)
 
136,559

Municipal bonds
 
50,470

 
43

 
(2
)
 
50,511

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
13,643

 
43

 
(27
)
 
13,659

Foreign
 
141,593

 
244

 
(19
)
 
141,818

 
 
$
345,714

 
$
883

 
$
(51
)
 
$
346,546



10

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




 
 
December 31, 2015
 
 
Amortized Cost Basis
 
Gross Unrealized Holding Gains
 
Gross Unrealized Holding Losses
 
Aggregate Fair Value
Commercial paper
 
$
254,396

 
$

 
$

 
$
254,396

Corporate bonds
 
133,062

 
23

 
(336
)
 
132,749

Municipal bonds
 
87,173

 
1

 
(63
)
 
87,111

Other government-related obligations:
 
 
 
 
 
 
 
 
U.S.
 
25,244

 

 
(94
)
 
25,150

Foreign
 
163,403

 

 
(504
)
 
162,899

Bank certificates of deposit
 
27,000

 

 

 
27,000

 
 
$
690,278

 
$
24

 
$
(997
)
 
$
689,305


The aggregate fair value of available-for-sale securities in an unrealized loss position as of March 31, 2016 and December 31, 2015 was $62,496 and $293,947, respectively. Investments that have been in a continuous unrealized loss position for more than 12 months were not material. As of March 31, 2016, 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, 2016
 
December 31, 2015
Cash and cash equivalents
$
40,999

 
$
323,218

Marketable securities
305,547

 
366,087

 
$
346,546

 
$
689,305


The fair values of available-for-sale debt securities at March 31, 2016, by contractual maturity, are summarized as follows:
 
March 31, 2016
Due in one year or less
$
140,145

Due after one year through three years
206,401

 
$
346,546


As of March 31, 2016 and December 31, 2015, the fair value of our trading securities was $11,807 and $8,817, 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, 2016.

9.
Derivative Instruments and Hedging Activities
We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency exchange rates. The exposures result from portions of our revenues, as well as the related receivables, and expenses that are denominated in currencies other than the U.S. dollar, primarily the Euro and Japanese Yen. We 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 these hedges 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

11

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




upon contract inception. At March 31, 2016, we had open contracts with notional amounts totaling $2,088,952 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, 2016 and 2015 were as follows:
 
Three months ended
 
March 31,
 
2016
 
2015
Gain (loss) recognized in AOCI, net of tax
$
(49,442
)
 
$
93,809

Gain reclassified from AOCI to net product sales (effective portion), net of tax
$
14,659

 
$
25,447

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

 
$
1,075

Assuming no change in foreign exchange rates from market rates at March 31, 2016, $39,730 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 90 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 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, 2016, the notional amount of foreign exchange contracts where hedge accounting is not applied was $307,585.
We recognized a (loss) gain of $(12,969) and $6,423, in other income and expense, for the three months ended March 31, 2016 and 2015, respectively, associated with the foreign exchange contracts not designated as hedging instruments. These amounts were partially offset by gains or losses on monetary assets and liabilities.
The following tables summarize the fair value of outstanding derivatives at March 31, 2016 and December 31, 2015:

 
March 31, 2016
 
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
 
$
55,976

 
Other current liabilities
 
$
15,870

Foreign exchange forward contracts
Other non-current assets
 
35,019

 
Other non-current liabilities
 
30,740

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
2,594

 
Other current liabilities
 
16,186

Total fair value of derivative instruments
 
 
$
93,589

 
 
 
$
62,796



12

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





 
December 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
 
$
85,058

 
Other current liabilities
 
$
1,491

Foreign exchange forward contracts
Other non-current assets
 
66,309

 
Other non-current liabilities
 
4,773

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign exchange forward contracts
Other current assets
 
6,687

 
 
 
4,157

Total fair value of derivative instruments
 
 
$
158,054

 
 
 
$
10,421


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, 2016
 
 
 
 
 
 
 
 
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
 
$
93,589

 
$

 
$
93,589

 
$
(27,928
)
 
$

 
$
65,661

Derivative liabilities
 
(62,796
)
 

 
(62,796
)
 
27,928

 

 
(34,868
)
 
 
December 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
 
$
158,054

 
$

 
$
158,054

 
$
(10,421
)
 
$

 
$
147,633

Derivative liabilities
 
(10,421
)
 

 
(10,421
)
 
10,421

 

 


10.
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, 2016.


13

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




11.
Stockholders' Equity
In November 2012, our Board of Directors authorized a share repurchase program. The repurchase program does not have an expiration date, and we are not obligated to acquire a particular number of shares. The repurchase program may be discontinued at any time at the Company's discretion. In May 2015, our Board of Directors increased the authorization to acquire shares with an aggregate value of up to $1,000,000 for future purchases under the repurchase program, which superseded all prior repurchase programs. Under the program, we repurchased 2,083 and 334 shares of our common stock at a cost of $296,515 and $60,026 during the three months ended March 31, 2016 and 2015, respectively.
Subsequent to March 31, 2016, we repurchased 245 shares of our common stock under our repurchase program at a cost of $34,136. As of April 29, 2016, there is a total of $425,213 remaining for repurchases under the repurchase program.

12.
Other Comprehensive Income and Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI, by component, for the three months ended March 31, 2016 and 2015:
 
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, 2015
$
(9,589
)
 
$
(785
)
 
$
92,670

 
$
(19,995
)
 
$
62,301

Other comprehensive income before reclassifications
2,035

 
1,333

 
(49,442
)
 
1,996

 
(44,078
)
Amounts reclassified from other comprehensive income
86

 
165

 
(14,659
)
 

 
(14,408
)
Net other comprehensive income (loss)
2,121

 
1,498

 
(64,101
)
 
1,996

 
(58,486
)
Balances, March 31, 2016
$
(7,468
)
 
$
713

 
$
28,569

 
$
(17,999
)
 
$
3,815


 
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, 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



14

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, 2016 and 2015:
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
 
2016
2015
 
Unrealized Gains (Losses) from Hedging Activity
 
 
 
 
 
Effective portion of foreign exchange contracts
 
$
22,812

$
29,083

 
Net product sales
Ineffective portion of foreign exchange contracts
 

1,228

 
Foreign currency gain
 
 
22,812

30,311

 
 
 
 
(8,153
)
(3,789
)
 
Income tax provision
 
 
$
14,659

$
26,522

 
 
Unrealized Gains (Losses) from Marketable Securities
 
 
 
 
 
Realized (loss) gain on sale of securities
 
$
(262
)
$
13

 
Investment income
 
 
(262
)
13

 
 
 
 
97

(5
)
 
Income tax provision
 
 
$
(165
)
$
8

 
 
Defined Benefit Pension Plans
 
 
 
 
 
Amortization of prior service costs and actuarial losses
 
$
(114
)
$
(311
)
 
(a)
 
 
(114
)
(311
)
 
 
 
 
28

75

 
Income tax provision
 
 
$
(86
)
$
(236
)
 
 
 
(a) This AOCI component is included in the computation of net periodic pension benefit cost (see Note 15 for additional details).

13.
Fair Value Measurement
Authoritative guidance establishes a valuation hierarchy for disclosure of the inputs to the valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value.

15

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, 2016 and December 31, 2015, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. 
 
 
Fair Value Measurement at
March 31, 2016
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
82,416

 
$

 
$
82,416

 
$

Cash equivalents
Commercial paper
$
3,999

 
$

 
$
3,999

 
$

Cash equivalents
Corporate bonds
$
15,000

 
$

 
$
15,000

 
$

Cash equivalents
Municipal bonds
$
22,000

 
$

 
$
22,000

 
$

Marketable securities
Mutual funds
$
11,807

 
$
11,807

 
$

 
$

Marketable securities
Corporate bonds
$
121,559

 
$

 
$
121,559

 
$

Marketable securities
Municipal bonds
$
28,511

 
$

 
$
28,511

 
$

Marketable securities
Other government-related obligations
$
155,477

 
$

 
$
155,477

 
$

Other current assets
Foreign exchange forward contracts
$
58,570

 
$

 
$
58,570

 
$

Other assets
Foreign exchange forward contracts
$
35,019

 
$

 
$
35,019

 
$

Other current liabilities
Foreign exchange forward contracts
$
32,056

 
$

 
$
32,056

 
$

Other liabilities
Foreign exchange forward contracts
$
30,740

 
$

 
$
30,740

 
$

Other current liabilities
Acquisition-related contingent consideration
$
55,343

 
$

 
$

 
$
55,343

Contingent consideration
Acquisition-related contingent consideration
$
107,085

 
$

 
$

 
$
107,085

 

16

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




 
 
Fair Value Measurement at
December 31, 2015
Balance Sheet
Classification
Type of Instrument
Total
 
Level 1
 
Level 2
 
Level 3
Cash equivalents
Institutional money market funds
$
179,898

 
$

 
$
179,898

 
$

Cash equivalents
Commercial paper
$
192,418

 
$

 
$
192,418

 
$

Cash equivalents
Corporate bonds
$
12,250

 
$

 
$
12,250

 
$

Cash equivalents
Municipal bonds
$
60,001

 
$

 
$
60,001

 
$

Cash equivalents
Other government-related obligations
$
31,549

 
$

 
$
31,549

 
$

Cash equivalents
Bank certificates of deposit
$
27,000

 
$

 
$
27,000

 
$

Marketable securities
Mutual funds
$
8,817

 
$
8,817

 
$

 
$

Marketable securities
Commercial paper
$
61,978

 
$

 
$
61,978

 
$

Marketable securities
Corporate bonds
$
120,499

 
$

 
$
120,499

 
$

Marketable securities
Municipal bonds
$
27,110

 
$

 
$
27,110

 
$

Marketable securities
Other government-related obligations
$
156,500

 
$

 
$
156,500

 
$

Other current assets
Foreign exchange forward contracts
$
91,745

 
$

 
$
91,745

 
$

Other assets
Foreign exchange forward contracts
$
66,309

 
$

 
$
66,309

 
$

Other current liabilities
Foreign exchange forward contracts
$
5,648

 
$

 
$
5,648

 
$

Other liabilities
Foreign exchange forward contracts
$
4,773

 
$

 
$
4,773

 
$

Other current liabilities
Acquisition-related contingent consideration
$
55,804

 
$

 
$

 
$
55,804

Contingent consideration
Acquisition-related contingent consideration
$
121,424

 
$

 
$

 
$
121,424


There were no securities transferred between Level 1, 2 and 3 during the three months ended March 31, 2016.

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.

17

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




As of March 31, 2016, there has not been any impact to the fair value of our derivative liabilities due to our own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our evaluation of our counterparties’ credit risks.

Contingent Consideration
In connection with prior acquisitions, we may be required to pay future consideration that is contingent upon the achievement of specified development, regulatory approvals or sales-based milestone events. We determine the fair value of these obligations 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 5.5% for developmental milestones and a weighted average cost of capital ranging from 10% 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 $826,000 if all development, regulatory and sales-based milestones are reached. As of March 31, 2016, the fair value of acquisition-related contingent consideration was $162,428. The following table represents a roll-forward of our acquisition-related contingent consideration:
Balance at December 31, 2015
$
(177,228
)
Change in fair value
14,800

Balance at March 31, 2016
$
(162,428
)
 
14.
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, 2016 and 2015:
 
Three months ended
 
March 31,
 
2016
 
2015
Provision for income taxes
$
51,432

 
$
15,622

Effective tax rate
35.8
%
 
14.6
%
The tax provision for the three months ended March 31, 2016 and 2015 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The increase in the effective tax rate for the three months ended March 31, 2016 as compared to the same period in the prior year is primarily attributable to the deferred tax cost associated with the distribution of earnings from our captive foreign partnership. This non-cash deferred tax cost increased the effective tax rate by approximately 19%.
In the first quarter of 2016, we identified a correction to our 2015 tax provision of $8,955 due to a calculation error. This understated income tax expense and the deferred tax liability as of December 31, 2015 and was recorded as an out of period adjustment in the first quarter of 2016. The correction was determined to be immaterial to our consolidated financial statements for the periods ending December 31, 2015 and March 31, 2016 as well as our expected results for 2016.
Tax years 2013 and 2014 are currently under review by the Examination Division of the Internal Revenue Service (IRS). As of March 31, 2016, we have not been notified of any significant proposed adjustments by the IRS.
We continue to maintain a valuation allowance against certain deferred tax assets where realization is not certain.

15.
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

18

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




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.
The components of net periodic benefit cost are as follows: 
 
Three months ended
 
March 31,
 
2016
 
2015
Service cost
$
2,023

 
$
2,421

Interest cost
60

 
180

Expected return on plan assets
(163
)
 
(243
)
Employee contributions
(352
)
 
(427
)
Amortization
114

 
311

Total net periodic benefit cost
$
1,682

 
$
2,242


16.
Facility Lease Obligations
New Haven Facility Lease Obligation
In November 2012, we entered into a new lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. The term of the new lease commenced in 2015 and will expire in 2030, with a renewal option of ten years. 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 because of the substantial amount of tenant improvements we directly funded during the construction period. Due to the substantial tenant improvements directly funded during construction, we will continue to be deemed the owner of the building once construction is complete. Accordingly, the landlord's costs of constructing the facility during construction are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated balance sheet.
Construction of the new facility was completed and the building was placed into service in the first quarter 2016. As of March 31, 2016 and December 31, 2015, our facility lease obligation related to this facility was $134,211 and $132,866, respectively.
Lonza Facility Lease Obligation
During the third quarter 2015, we entered into a new agreement with Lonza Group AG and its affiliates (Lonza) whereby Lonza will construct a new manufacturing facility dedicated to Alexion at its existing Portsmouth, New Hampshire facility. The agreement requires us to make certain payments during the construction of the new manufacturing facility and annual payments for ten years thereafter. As a result of our contractual right to full capacity of the new manufacturing facility, a portion of the payments under the agreement are considered to be lease payments and a portion as payment for the supply of inventory. Although we will not legally own the premises, we are deemed to be the owner of the manufacturing facility during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. As of March 31, 2016 and December 31, 2015, we recorded a construction-in-process asset of $42,652 and $19,259 and an offsetting facility lease obligation of $35,632 and $15,229 associated with the manufacturing facility, respectively.
Payments made to Lonza under the agreement are allocated to the purchases of inventory and the repayment of the facility lease obligation on a relative fair value basis. In 2016, we made $23,000 of payments to Lonza under this agreement, of which $2,990 was applied against the outstanding facility lease obligation and $20,010 was recognized as a prepayment of inventory.

17.
Commitments and Contingencies
Commitments
Manufacturing Agreements
We have various manufacturing development agreements to support our clinical and commercial product needs. We rely on Lonza, a third party manufacturer, to produce a portion of commercial and clinical quantities of Soliris and Strensiq. We have various agreements with Lonza with remaining total non-cancellable future commitments of approximately $1,134,661. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for

19

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




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.
In addition to Lonza, we have non-cancellable commitments of $35,035 with other third party manufacturers.

Contingent Liabilities
We are currently involved in various claims, lawsuits and legal proceedings. 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 adjustment 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 May 2015, we received a subpoena in connection with an investigation by the Enforcement Division of the U.S. Securities and Exchange Commission (SEC) requesting information related to our grant-making activities and compliance with the Foreign Corrupt Practices Act (FCPA) in various countries. In addition, in October 2015, Alexion received a request from the U.S. Department of Justice (DOJ) for the voluntary production of documents and other information pertaining to Alexion's compliance with the FCPA. The SEC and DOJ also seek information related to Alexion’s recalls of specific lots of Soliris and related securities disclosures. Alexion is cooperating with these investigations. At this time, Alexion is unable to predict the duration, scope or outcome of these investigations. Given the ongoing nature of these investigations, management does not currently believe a loss related to these matters is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated.
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 receipt of a Form 483 Inspectional Observations by the FDA in connection with an FDA inspection that concluded in August 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. As previously announced, the FDA issued Form 483s in August 2014 and August 2015 relating to observations at ARIMF. The inspectional observations from the August 2015 letter have since been closed out by the FDA.
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 reasonably estimated.

18.
Restructuring
In connection with the acquisition and integration of Synageva in 2015, we recorded a restructuring benefit of $924 for the three months ended March 31, 2016 primarily related to changes in estimates associated with employee costs. We expect to pay all remaining accrued amounts related to this restructuring activity by the end of 2016.
In the fourth quarter 2014, we announced plans to move our European headquarters from Lausanne to Zurich, Switzerland. The relocation of our European headquarters supports our operational needs based on growth in the European region. During the three months ended March 31, 2016, we incurred additional restructuring costs of $1,646. We expect to pay all remaining accrued amounts related to this restructuring activity by the end of 2016.

20

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




The following table presents a reconciliation of the restructuring reserve recorded within accrued expenses on the Company's condensed consolidated balance sheet for the three months ended March 31, 2016:
 
Employee Separation Costs
 
Contract Termination Costs
 
Other Costs
 
Total
Liability, beginning of period
$
6,390

 
$
682

 
$
169

 
$
7,241

Restructuring expenses

 
35

 
417

 
452

Cash settlements
(3,806
)
 
(508
)
 
(570
)
 
(4,884
)
Adjustments to previous estimates
(1,148
)
 
1,418

 

 
270

Liability, end of period
$
1,436

 
$
1,627

 
$
16

 
$
3,079

The restructuring reserve of $3,079 is recorded in accrued expenses on the Company's condensed consolidated balance sheet as of March 31, 2016.


21

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®, Strensiq® and Kanuma® for approved indications and any expanded uses, timing and effect of sales of our products in various markets worldwide, pricing for our products, level of insurance coverage and reimbursement for our products, level of future product sales and collections, timing regarding development and regulatory approvals for our products in additional indications or in additional territories, 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 483s issued by the FDA, 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 our products and our product candidates in the patient, physician and payer communities, the safety and efficacy of our products and our product candidates, estimates of the potential markets and estimated commercialization dates for our products and our product candidates around the world, sales and marketing plans, any changes in the current or anticipated market demand or medical need for our products or our product candidates, status of our ongoing clinical trials for our 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 our 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 our products infringes their intellectual property, estimates of the capacity of manufacturing and other service facilities to support our products 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 our products, delay of collection or reduction in reimbursement due to adverse economic conditions or changes in government and private insurer regulations and approaches to reimbursement, uncertainties surrounding government investigations, including our Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) investigations, the short and long term effects of other government healthcare measures, the effect of interest rate increases, 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 SEC.
Business
We are a biopharmaceutical company focused on serving patients with devastating and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products.
In our complement franchise, Soliris (eculizumab)is the first and only therapeutic approved for patients with either PNH or aHUS. In our metabolic franchise, we market Strensiq (asfotase alfa) for the treatment of patients with HPP and Kanuma (sebelipase alfa) for the treatment of patients with LAL-D.
We are also evaluating additional potential indications for eculizumab 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 rare disorders.
 
Products and Development Programs
We focus our product development programs on life-transforming therapeutics for devastating and ultra-rare diseases for which current treatments are either non-existent or inadequate.

22

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

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
Strensiq (asfotase alfa)
 
Metabolic Disorders
 
Hypophosphatasia (HPP)
 
Commercial
 
 
 
 
HPP Registry
 
Phase IV
Kanuma (sebelipase alfa)
 
Metabolic Disorders
 
Lysosomal Acid Lipase Deficiency (LAL-D)
 
Commercial
 
 
 
 
LAL-D Registry
 
Phase IV

Soliris (eculizumab)
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.
Paroxysmal Nocturnal Hemoglobinuria (PNH)
PNH is a debilitating and life-threatening, ultra-rare genetic blood disorder defined by chronic uncontrolled complement activation leading to the 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). We continue to work with researchers to expand the base of knowledge in PNH and the utility of Soliris to treat patients with PNH. Soliris is approved for the treatment of PNH in the United States, Europe, Japan and in several other territories. 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 addition, Soliris has been granted orphan drug designation for the treatment of PNH in the United States, Europe, Japan and several other territories.
Atypical Hemolytic Uremic Syndrome (aHUS)
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. Soliris is approved for the treatment of pediatric and adult patients with aHUS in the United States, Europe and Japan. In addition, the FDA and EC have granted Soliris orphan drug designation for the treatment of patients with aHUS.
Strensiq (asfotase alfa)
Hypophosphatasia (HPP)
HPP is an ultra-rare genetic and progressive metabolic disease in which patients experience devastating effects on multiple systems of the body, leading to debilitating or life-threatening complications. HPP is characterized by defective bone mineralization that can lead to deformity of bones and other skeletal abnormalities, as well as systemic complications such as profound muscle weakness, seizures, pain, and respiratory failure leading to premature death in infants.
Strensiq, a targeted enzyme replacement therapy, is the first and only approved therapy for patients with HPP, and 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 2015, the FDA approved Strensiq for patients with perinatal-, infantile- and juvenile-onset HPP, the European Commission (EC) granted marketing authorization for Strensiq for the treatment of patients with pediatric-onset HPP, and Japan’s Ministry of Health. Labour and Welfare (MHLW) approved Strensiq for the treatment of patients with HPP.

23

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

In April 2016, new long-term data was presented showing clinically significant and sustained improvements in bone healing, respiratory support, and physical function in children with perinatal and infantile-onset HPP treated with Strensiq. In addition, adolescents and adult patients reduced or eliminated their need of ambulatory assistive devices and had improvements in physical function.
Kanuma (sebelipase alfa)
Lysosomal Acid Lipase Deficiency (LAL Deficiency or LAL-D)
LAL-D is a serious, life-threatening ultra-rare disease associated with premature mortality and significant morbidity. LAL-D is a chronic disease in which genetic mutations result in decreased activity of the LAL enzyme that leads to marked accumulation of lipids in vital organs, blood vessels, and other tissues, resulting in progressive and systemic organ damage including hepatic fibrosis, cirrhosis, liver failure, accelerated atherosclerosis, cardiovascular disease, and other devastating consequences.
Kanuma, a recombinant form of the human LAL enzyme, is the only enzyme-replacement therapy that is approved for the treatment for patients with LAL-D. In 2015, the FDA approved Kanuma for the treatment of patients with LAL-D and the EC granted marketing authorization of Kanuma for long-term enzyme replacement therapy in patients of all ages with LAL-D. On March 28, 2016, we announced that Japan's MHLW approved Kanuma for the treatment of patients of all ages in Japan with LAL-D.
In March 2016, researchers presented new two-year data from an ongoing, open-label Phase 2/3 trial of Kanuma in infants with LAL-D. Data from this study demonstrated a substantial survival benefit to beyond 2 years of age for patients with rapidly progressive LAL-D during infancy who were treated with Kanuma. Patients also had improvements in a number of key parameters, including weight gain, important markers of liver disease, gastrointestinal symptoms, anemia, and hepatosplenomegaly (enlargement of both the liver and spleen), and 4 out of 5 patients demonstrated normal development.




24

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
 
Generalized Myasthenia Gravis (gMG)
 
Phase III
 
 
 
 
Neuromyelitis Optica Spectrum Disorder (NMOSD)
 
Phase III
 
 
Transplant
 
Delayed Kidney Transplant Graft Function (DGF)
 
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
cPMP (ALXN 1101)
 
Metabolic Disorders

 
MoCD Type A
 
Phase II / III
ALXN 1007
 
Inflammatory Disorders
 
GI Graft versus Host Disease
 
Phase II
 
 
 
 
Anti-phospholipid Syndrome
 
Phase II
SBC-103
 
Metabolic Disorders
 
Mucopolysaccharidoses IIIB
(MPS IIIB)


 
Phase I / II
ALXN 1210
 
Next Generation Complement Inhibitor
 
Paroxysmal Nocturnal Hemoglobinuria (PNH)
 
Phase I / II
ALXN 5500
 
Next Generation Complement Inhibitor
 
 
 
Phase I
*
Investigator sponsored clinical program

Soliris (eculizumab)
Neurology
Generalized Myasthenia Gravis (gMG)
gMG is an ultra-rare autoimmune syndrome characterized by complement activation leading to the failure of neuromuscular transmission. We have completed enrollment of patients in a Phase III multinational, placebo-controlled registration trial of eculizumab in patients with refractory generalized gMG. The FDA, EC and MHLW have granted orphan drug designation for eculizumab as a treatment for patients with gMG.
Neuromyelitis Optica Spectrum Disorder (NMOSD)
NMOSD 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 NMOSD. The FDA, EC, and MHLW have each granted orphan designation for eculizumab as a treatment for patients with NMOSD.
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 complete in a single, multinational, placebo-controlled DGF registration trial and patient follow-up is ongoing. 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.

25

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-center 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 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. In May 2015, new data from the Phase II single-arm deceased-donor transplant trial of eculizumab in prevention of acute AMR was presented and was consistent with previous positive reports.
 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 for next steps for eculizumab in AMR.
The EC granted orphan drug designation to eculizumab for the prevention of graft rejection following solid organ transplantation.

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 have completed enrollment in 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. In addition, we completed enrollment in a multi-center, multinational open-label clinical trial of synthetic cPMP in patients with MoCD Type A switched from treatment with recombinant cPMP. Activities have commenced for the Phase II/III pivotal open-label, single-arm trial of ALXN1101 for treatment-naïve neonates with MoCD Type A.

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. Acute GI-GVHD is an immune-mediated disease and a complication of stem cell transplantation occurring in 10-12 percent of allogenic hematopoietic stem cell transplants. Patients with severe acute GI-GVHD have a 30-40 percent mortality rate within the first six months post-transplant. The study is evaluating 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 December 2015, we announced that interim data from a Phase II study showed an overall 28 day acute GI-GVHD response rate of 80 percent and a 28 day complete response rate of 70 percent compared to historical response rates of 56 percent and 49 percent, respectively, which supports the continued advancement of ALXN 1007 in GI-GVHD.
In addition, enrollment in a Phase II proof-of-concept study in patients with non-criteria manifestations of anti-phospholipid syndrome (APS) was discontinued early due to recruitment difficulties. The study is ongoing for initially enrolled patients. APS is an ultra-rare autoimmune, hypercoagulable state caused by antiphospholipid antibodies.

SBC-103
Mucopolysaccharidosis IIIB (MPS IIIB)
MPS IIIB is a rare, devastating and life-threatening disease which typically presents in children during the first few years of life. Genetic mutations result in decreased activity of the alpha-N-acetyl-glucosaminidase (NAGLU) enzyme, which leads to a buildup of abnormal amounts of heparan sulfate (HS) in the brain and throughout the body. Over time, this unrelenting systemic accumulation of HS causes progressive and severe cognitive decline, behavioral problems, speech loss, increasing loss of mobility, and premature death. Current treatments are palliative for the behavioral problems, sleep disturbances, seizures, and other complications, and these treatments do not address the root cause of MPS IIIB or stop disease progression.

26

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

SBC-103, a recombinant form of natural human NAGLU is designed to replace the missing (or deficient) NAGLU enzyme. SBC-103 was granted orphan drug designation by the FDA in April 2013 and by the European Medicines Agency (EMA) in June 2013. It received Fast Track designation by the FDA in January 2015. In June 2015, the first-in-human trial of patients with MPS IIIB reached its targeted enrollment of nine patients, and the trial is ongoing. In March 2016, researchers presented 24-week results from this study that showed a 26.2 percent mean reduction fin heparan sulfate in cerebrospinal fluid at the highest dose studied (3mg/kg every other week) in a Phase I/II study at six months. Further dose escalation of SBC-103 is now ongoing in this trial.
ALXN 1210
ALXN 1210 is a next-generation complement inhibitor in development for PNH and other indications. Phase I data from the first-in-human single-ascending dose study of ALXN 1210 was published in the journal Blood in December 2015. Results showed that ALXN 1210 was well-tolerated in healthy volunteers and the mean terminal half-life was extended to 32 days, compared to Soliris, which has a terminal half-life of 9 days. Based upon longer terminal half-life and healthy volunteer studies, ALXN 1210 is suitable for longer dosing intervals than Soliris. Enrollment has completed in a multiple-ascending dose study of ALXN 1210 to further evaluate the safety and efficacy of ALXN 1210. Preliminary data in a Phase I/II dose-escalating study showed a rapid reduction of lactate dehydrogenase (LDH) following the initial dose. Alexion also has initiated an open-label, multi-dose Phase II study of ALXN 1210 in patients with PNH that is designed to measure change in LDH levels and safety in several dosing cohorts and intervals evaluating monthly and longer dosing intervals.
Manufacturing
We currently rely on internal manufacturing facilities and third party contract manufacturers, including Lonza Group AG and its affiliates (Lonza) to supply clinical and commercial quantities of our commercial products and product candidates. Our internal manufacturing facilities include our Rhode Island manufacturing facility (ARIMF), and facilities in Massachusetts and Georgia. We also utilize third party contract manufacturers for other manufacturing services including purification, product filling, finishing, packaging, and labeling.
We have various agreements with Lonza through 2028, with remaining total non-cancellable commitments of approximately $1,134,661. 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. During 2015, we entered into a new supply agreement with Lonza whereby Lonza will construct a new manufacturing facility dedicated to Alexion manufacturing at its existing Portsmouth, New Hampshire facility.
In addition to Lonza, we have non-cancellable commitments of approximately $35,035 through 2019 with other third party manufacturers.
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 receipt of a Form 483 Inspectional Observations by the FDA in connection with an FDA inspection that concluded in August 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. As previously announced, the FDA issued Form 483s in August 2014 and August 2015 relating to observations at ARIMF. The inspectional observations from the August 2015 letter have since been closed out by the FDA. 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 reasonably estimated.
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 our commercial and clinical products. In November 2015, the construction of office, laboratory and packaging facilities in Dublin, Ireland was completed. In May 2015, we announced plans to construct a new biologics manufacturing facility on our existing property in Dublin, Ireland, which is expected to be completed by 2020.
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, 2015. 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.

27

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

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, 2015.  We have reviewed our critical accounting policies as disclosed in our Form 10-K, and we have not noted any material changes.

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, 2017 and allows for adoption using a full retrospective method, or a modified retrospective method. Entities may elect 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.
In April 2015, the FASB issued a new standard simplifying the presentation of debt issuance costs. The new standard aligns the treatment of debt issuance costs with debt discounts and premiums and requires debt issuance costs be presented as a direct deduction from the carrying amount of the related debt. We have adopted the provisions of this standard in the first quarter 2016 and reclassified $8,635 of deferred financing costs from other current assets to the current portion of long term debt and $26,714 other non current assets to the long-term debt, less current portion in our consolidated balance sheets as of December 31, 2015.
In April 2015, the FASB issued a new standard clarifying the accounting for a customer's fees paid in a cloud computing arrangement. Under this standard, if a cloud computing arrangement includes a software license, the customer would account for the software license consistent with other software licenses. If a cloud computing arrangement does not include a software license, the customer would account for the arrangement as a service contract. We adopted the provisions of this standard in the first quarter 2016. The adoption did not have a material effect on our financial condition or results of operations.
In February 2016, the FASB issued a new standard requiring that the rights and obligations arising from leases be recognized on the balance sheet by recording a right-of-use asset and corresponding lease liability. The new standard also requires qualitative and quantitative disclosures to understand the amount, timing, and uncertainty of cash flows arising from leases as well as significant management estimates utilized. The standard is effective for interim and annual periods beginning after December 15, 2018 and requires a modified retrospective adoption. We are currently assessing the impact of this standard on our financial condition and results of operations.
In March 2016, the FASB issued a new standard simplifying aspects of the accounting for employee share-based payments, including the accounting for income taxes, forfeitures, statutory withholding requirements, and classification on the statement of cash flows. The standard is effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. We are currently assessing the impact of this standard on our financial condition and results of operations.

28

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

Results of Operations

Net Product Sales

Net product sales by product are as follows for the three months ended March 31, 2016 and 2015:
 
Three months ended March 31,
 
2016
 
2015
 
% Change
Net product sales:
 
 
 
 
 
Soliris
$
664,655

 
$
600,333

 
11
%
Strensiq
33,242

 

 
N/A

Kanuma
2,528

 

 
N/A

 
$
700,425

 
$
600,333

 
17
%
The components of this increase in revenues are as follows:
Components of change:
 
   Price
(2.0
)%
   Volume
24.0
 %
   Foreign exchange
(5.0
)%
Total change in net product sales
17.0
 %
The increase in net product sales for the three months ended March 31, 2016, as compared to the same period in 2015, was primarily due to an increase in unit volumes of 24.0%, due to increased demand globally for Soliris therapy for patients with PNH or aHUS during the respective periods and sales of Strensiq during 2016.
Price had a negative impact on net product sales of 2.0% for the three months ended March 31, 2016 due to increases in estimated rebates.
Foreign exchange had a negative impact of 5.0% for the three months ended March 31, 2016, as compared to the same period in 2015. The negative impact on foreign exchange of $30,143 or 5.0%, 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, 2016. 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 $22,812 and $29,082 related to our foreign currency cash flow hedging program for the three months ended March 31, 2016 and 2015, respectively. We expect the strong dollar compared to other currencies to continue to have a negative impact on revenue into 2016 compared to 2015.
Cost of Sales
Cost of sales includes manufacturing costs as well as actual and estimated royalty expenses associated with sales of Soliris.
The following table summarizes cost of sales for the three months ended March 31, 2016 and 2015:
 
Three months ended March 31,
 
 
 
2016
 
2015
 
Variance
Cost of sales
$
58,986

 
$
69,399

 
$
(10,413
)
Cost of sales as a percentage of net product sales
8.4
%
 
11.6
%
 
(3.2
)%
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. The costs are comprised of raw materials, internal overhead and external production costs. This expense did not impact the clinical supply of inventory or the commercial launch of Strensiq.
Exclusive of the items mentioned above, cost of sales as a percentage of net product sales were 8.4% and 7.5% for the three months ended March 31, 2016 and 2015.
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.

29

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

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 our products 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 facilities, 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,
 
$
 
2016
 
2015
 
Variance
Clinical development
$
49,858

 
$
30,947

 
$
18,911

Product development
29,981

 
19,540

 
10,441

Licensing agreements
3,050

 
112,500

 
(109,450
)
Discovery research
12,867

 
6,044

 
6,823

Total external direct expenses
95,756

 
169,031

 
(73,275
)
Payroll and benefits
71,356

 
44,338

 
27,018

Facilities and other costs
9,178

 
7,711

 
1,467

Total other R&D expenses
80,534

 
52,049

 
28,485

Research and development expense
$
176,290

 
$
221,080

 
$
(44,790
)

For the three months ended March 31, 2016, the decrease of $44,790 in research and development expense, as compared to the same period in the prior year, was primarily related to the following:
Decrease of $109,450 in licensing agreement expenses primarily related to upfront payments made in the first quarter 2015.
Partially offset by the following:
Increase of $18,911 in external clinical development expenses related primarily to an expansion of clinical studies for eculizumab, sebelipase alfa, ALXN 1210, and other programs (see table below).
Increase of $10,441 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 2015.
Increase of $6,823 in discovery research expenses primarily related to increases in external research expenses associated with our license agreements.
Increase of $27,018 in payroll and benefits expense primarily related to the additional headcount acquired as part of the Synageva acquisition in the second quarter 2015 and the continued global expansion of staff supporting our increasing number of clinical and development programs.

30

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

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,
 
$
 
2016
 
2015
 
Variance
External direct expenses
 
 
 
 
 
Eculizumab
$
22,239

 
$
18,024

 
$
4,215

Asfotase alfa
4,927

 
4,851

 
76

cPMP
2,117

 
1,697

 
420

ALXN 1007
2,598

 
2,033

 
565

Sebelipase alfa
4,906

 

 
4,906

ALXN 1210
4,329

 
597

 
3,732

SBC-103
1,223

 

 
1,223

Other programs
2,966

 
606

 
2,360

Unallocated
4,553

 
3,139

 
1,414

 
$
49,858

 
$
30,947

 
$
18,911

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 our products; 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,
 
$
 
2016
 
2015
 
Variance
Salary, benefits and other labor expense
$
148,170

 
$
124,103

 
$
24,067

External selling, general and administrative expense
84,391

 
63,013

 
21,378

Total selling, general and administrative expense
$
232,561

 
$
187,116

 
$
45,445

For the three months ended March 31, 2016, the increase of $45,445 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 $24,067. The increase was a result of increased staff costs related to commercial development activities and increases in payroll and benefits within our general and administrative functions to support our infrastructure growth as a global commercial entity. The increase was also attributable to additional global commercial and general and administrative staff costs due to our acquisition of Synageva in the second quarter 2015.
Increase in external selling, general and administrative expenses of $21,378. The increase was primarily due to an increase in external marketing costs to support the global launches of Strensiq and Kanuma and additional facilities costs as a result of continuing growth of operations worldwide.
Amortization of Purchase Intangible Assets
For the three months ended March 31, 2016, we recorded amortization expense of $80,094 primarily associated with intangible assets related to Strensiq and Kanuma, for which we received regulatory approval in the third quarter 2015.

31

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

Acquisition-related Costs
For the three months ended March 31, 2016 and 2015, acquisition-related costs associated with our business combinations included the following:
 
Three months ended March 31,
 
2016
 
2015
Transaction costs (1)
$
375

 
$

Integration costs
964

 

 
$
1,339

 
$

 
 
 
 
(1) Transaction costs include investment advisory, legal, and accounting fees
 
 
 
Change in Fair Value of Contingent Consideration
For the three months ended March 31, 2016 and 2015, the change in fair value of contingent consideration expense associated with our prior business combinations was $(14,800) and $11,979, respectively. The decrease in the fair value of contingent consideration for the three months ended March 31, 2016 as compared the prior year was primarily due to decreases in the likelihood of payments for contingent consideration.
Restructuring Expenses
In connection with the acquisition and integration of Synageva in 2015 we recorded a benefit of $924 primarily related to changes in estimates for employee costs during the three months ended March 31, 2016. We expect to pay all remaining accrued amounts related to this restructuring activity by the end of 2016.
In the fourth quarter of 2014, we announced plans to relocate our European headquarters from Lausanne, Switzerland to Zurich, Switzerland. The relocation of our European headquarters supports our operational needs based on growth in the European region. For the three months ended March 31, 2016 we incurred additional restructuring costs of $1,646. We expect to pay all accrued amounts related to this restructuring activity in 2016.
Other Income and Expense
The following table provides information regarding other income and expense:
 
Three months ended
 
 
 
March 31,
 
$
 
2016
 
2015
 
Variance
Investment income
$
1,551

 
$
2,884

 
$
(1,333
)
Interest expense
(23,890
)
 
(651
)
 
(23,239
)
Foreign currency gain
91

 
1,005

 
(914
)
Total other income and expense
$
(22,248
)
 
$
3,238

 
$
(25,486
)
The increase in interest expense the three months ended March 31, 2016 as compared to the prior year was due to us borrowing $3,500,000 under a term loan facility in connection with the acquisition of Synageva in the second quarter of 2015.
Income Taxes
During the three months ended March 31, 2016, we recorded an income tax provision of $51,432 and an effective tax rate of 35.8%, compared to an income tax provision of $15,622 and an effective tax rate of 14.6% for the three months ended March 31, 2015.
The tax provision for the three months ended March 31, 2016 and 2015 is attributable to the U.S. federal, state and foreign income taxes on our profitable operations. The increase in the effective tax rate for the three months ended March 31, 2016 as compared to the same period in the prior year is primarily attributable to the deferred tax cost associated with the distribution of earnings from our captive foreign partnership.
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.

32

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, 2016 and December 31, 2015:
 
March 31, 2016
 
December 31, 2015
 
$
Variance
Cash and cash equivalents
$
710,198

 
$
1,010,111

 
$
(299,913
)
Marketable securities
$
317,354

 
$
374,904

 
$
(57,550
)
Long-term debt (includes current portion)
$
3,281,250

 
$
3,456,250

 
$
(175,000
)
 
 
 
 
 
 
Current assets
$
2,127,509

 
$
2,416,714

 
$
(289,205
)
Current liabilities
603,613

 
709,615

 
(106,002
)
Working capital
$
1,523,896

 
$
1,707,099

 
$
(183,203
)
 
The decrease in cash and cash equivalents was primarily attributable to cash utilized to repurchase shares, principal payments on our term loan, purchases of property, plant, and equipment, and purchases of available for sale securities. Offsetting these decreases in cash were cash generated through operations and proceeds from the maturity or sale of available for sale securities.
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, bank deposits, and 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, 2016, three customers accounted for an aggregate of 44% of the accounts receivable balance, with these individual customers ranging from 12% to 19% of the acc