alexion.com
ALEXION PHARMACEUTICALS, INC. 2018 ANNUAL REPORT
Every Day
Is An Inspiration
2 0 1 8 A N N U A L R E P O R T
RACHEL
LIVING WI TH gM G
AIRA
LIVING WI TH HPP
RUT HI E AND HER SON
LIVING WI TH PNH
S H A R E H O L D E R I N F O R M A T I O N
EXECUTIVE MANAGEMENT
DIRECTORS
David R. Brennan2, 3
Chairman of the Board,
Former Chief Executive Officer,
AstraZeneca PLC
Felix J. Baker, Ph.D.4, 3
Co-Managing Member,
Baker Brothers Advisors LP
Christopher J. Coughlin1, 2
Former Executive Vice
President and Chief Financial
Officer, Tyco
Deborah Dunsire, M.D.2, 4
President and Chief Executive
Officer, Lundbeck A/S
Paul A. Friedman, M.D.3, 4
Chief Executive Officer,
Madrigal Pharmaceuticals
Ludwig Hantson, Ph.D.
Chief Executive Officer
John T. Mollen1, 2
Former Executive Vice
President, Human Resources,
EMC Corporation
Francois Nader, M.D.1, 4
Former President and
Chief Executive Officer,
NPS Pharma
Judith Reinsdorf, J.D.1, 3
Former Executive Vice
President and General
Counsel, Johnson Controls
Andreas Rummelt, Ph.D.3, 4
Chief Executive Officer,
InterPharmaLink AG
Ludwig Hantson, Ph.D.
Chief Executive Officer
Paul Clancy
Executive Vice President,
Chief Financial Officer
Anne-Marie Law
Executive Vice President,
Chief Patient and Employee
Experience Officer
John Orloff, M.D.
Executive Vice President,
Head of Research &
Development
Ellen Chiniara, J.D.
Executive Vice President,
General Counsel and
Corporate Secretary
Brian Goff
Executive Vice President,
Chief Commercial Officer
Indrani Franchini, J.D.
Executive Vice President,
Chief Compliance Officer
Aradhana Sarin, M.D.
Executive Vice President,
Chief Strategy and
Business Officer
Rana Strellis
Senior Vice President,
Corporate Communications
and Culture
TOP ROW, LEFT TO RIGHT: Judith Reinsdorf, Christopher J. Coughlin, Francois Nader,
Andreas Rummelt, Paul A. Friedman, John T. Mollen, Felix J. Baker, Deborah Dunsire (INSET)
BOTTOM ROW, LEFT TO RIGHT: Chairman of the Board David Brennan and CEO Ludwig Hantson
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
250 Royall Street, Canton, MA 02021
INVESTOR RELATIONS
121 Seaport Boulevard, Boston, MA 02210
Email: InvestorRelations@alexion.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers, LLP, Boston, MA
TRADING SYMBOL
Listing for Alexion Pharmaceuticals, Inc.,
is found on the NASDAQ stock market
under the symbol ALXN.
ANNUAL SHAREHOLDERS MEETING
To be held on May 14, 2019, 5:30 p.m.
Seaport Hotel
1 Seaport Lane, Boston, MA 02210
Tel 617.385.4000
CORPORATE HEADQUARTERS
Alexion Pharmaceuticals, Inc.
121 Seaport Boulevard
Boston, MA 02210
Tel: 475-230-ALXN (2596)
Fax: 203-271-8198
alexion.com
1. Member of the Audit and Finance Committee
2. Member of the Leadership and
Compensation Committee
3. Member of the Nominating and
Corporate Governance Committee
4. Member of the Science and
Innovation Committee
@2019 Alexion Pharmaceuticals, Inc.
ALEXION, KANUMA, SOLIRIS, STRENSIQ,
ULTOMIRIS, and the Alexion logo are trademarks
of Alexion Pharmaceuticals, Inc., registered in the
United States, the European Union, and in other
countries worldwide.
Follow us on Social Media
MAUREEN (FAR LEF T ) AND L AUR EN (FAR R IGH T)
WIT H THEIR PARENTS AND BR OTHE R
LIVING WI TH L AL- D
ETHAN
LIVIN G WIT H aHU S
Every Day Builds A Tomorrow
People with rare and devastating diseases are our inspiration and our Guiding Star.
While their diseases are rare, their special life moments should not be. Together,
we help patients and their families live their lives fully so they can celebrate the
moments that matter most.
p.1
p.2
With your support, we are achieving our mission
to transform the lives of people affected by rare
T O O U R S H A R E H O L D E R S
and devastating diseases by developing and
delivering valued innovative therapies.
most importantly, for the patients we serve through our unwavering
I t’s a privilege to report on a year of tremendous progress for Alexion and,
mission to transform the lives of people living with rare and devastating
diseases by developing and delivering valued innovative therapies.
2018 was a year of transformation for Alexion. When I joined Alexion in 2017,
• Double-digit underlying volume growth in our base business, serving
more patients than ever before with paroxysmal nocturnal hemoglobinuria
(PNH), atypical hemolytic uremic syndrome (aHUS), gMG,
hypophosphatasia (HPP) and lysosomal acid lipase deficiency (LAL-D),
exceeding our financial ambitions; and
I saw a remarkable opportunity to create more value for patients and
• A new Boston headquarters with a strong talent base and a culture where
shareholders. We outlined ambitious goals for 2018, which we exceeded, and
employees feel empowered, valued and safe to speak up, and where new
in the majority of cases far surpassed, through the hard work of our more
and diverse ideas are welcome.
than 3,000 employees across the globe. In doing so, we built a foundation,
with integrity and compliance at the center, that positions us to continue
our momentum in 2019 and beyond.
We know we still have work to do, as only a small fraction of the more than
7,000 identified rare diseases have approved therapies. With 30 million
patients diagnosed with rare diseases in the U.S. alone, there is a clear unmet
As I reflect upon the past year, I am proud of the dedication and focus
need. With a growing portfolio and product pipeline, we are fully committed
of our teams, which helped deliver:
to advancing our mission of serving patients who suffer from rare and
• Extension of our complement leadership with ULTOMIRIS®
devastating diseases.
(ravulizumab-cwvz) following positive Phase 3 results comprising the
Our strong foundation positions us well to build four durable, potential
largest-ever PNH clinical trial program, regulatory filings, and approval
blockbuster franchises in hematology and nephrology, metabolics,
for the treatment of patients with PNH in the United States;
• The best Alexion launch to date with SOLIRIS® (eculizumab) in generalized
myasthenia gravis (gMG), a chronic and debilitating neuromuscular
disorder, bringing a much-needed therapy to patients who had not seen
a new treatment option in more than 60 years;
• A robust and diverse pipeline, resulting from disciplined and successful
business development that is helping to drive the change in Alexion’s
focus from ultra-rare to rare diseases with the addition of two clinical
stage assets, including one for Wilson disease and one for the neonatal
Fc receptor (FcRn), as well as two preclinical collaborations;
• Remarkable results from our Phase 3 study for SOLIRIS in neuromyelitis
optica spectrum disorder (NMOSD), a rare, devastating, complement-
mediated disorder of the central nervous system characterized by relapses.
neurology and FcRn. We will achieve these goals by establishing ULTOMIRIS
as the new standard of care for PNH, growing our neurology and metabolic
portfolios and continuing to expand our pipeline to drive long-term,
sustainable shareholder value.
Every day we have a clear purpose because people living with rare diseases
are waiting. The dedication of our employees enables us to stay focused on
what matters most – delivering for patients. We are motivated and energized
because we know lives are at stake. With a strong foundation in place,
we will continue to push ourselves to redefine what it means to live with
a rare disease.
Thank you to the patients and their families who inspire us, to our
employees for their passion and drive and to you, our shareholders, for
supporting our mission.
Each relapse results in stepwise accumulation of disability, including
Sincerely,
blindness and paralysis, and sometimes premature death. In this pivotal trial,
98% of patients receiving SOLIRIS were relapse free at 48 weeks. In late 2018,
we filed for regulatory approval in the U.S. and subsequently received priority
review. We are hopeful for a positive decision later this year, bringing the
Ludwig Hantson, Ph.D.
first-approved therapy to patients suffering from this debilitating disease;
Chief Executive Officer
p.3
p.4
Every Day
Strengthens Our
Foundation
A commitment to compliance...
Quality, ethics, integrity and compliance play a central role in our success. We all
share responsibility for building trust with patients, customers, shareholders and
the communities where we live and work.
Q U A L I T Y I S F O R E V E R Y O N E
We are committed to:
• Delivering safe and effective
therapies that meet or exceed
the requirements of our
patients and our customers
• Operating a Quality Manage-
ment System and improving
our systems and processes
• Ensuring the integrity of
our data
• Complying with all applicable
• Upholding our individual
regulatory requirements
and collective accountability
for quality
…while living our values.
Serve Patients
We put patients at the heart
of decisions we make
We seek to understand
patients’ journeys and with
our passion and persistence,
help each patient find answers
and deliver transformative
therapies that change lives
We collaborate and partner
with the world around us to
create value for patients
Act with Integrity
We embrace compliance and
quality as essential to every-
thing we do
We build trust and earn
credibility by doing things
the right way
We are all leaders and
accountable to each other,
patients, customers, stakehold-
ers and shareholders
Empower People
We trust, value, respect and
empower team members
We unlock value through
diversity of people, ideas,
cross-functional collaboration
and continuous learning
We celebrate success and
embrace failure as an opportunity
to learn and improve
Innovate for Solutions
We innovate with discipline and
focus to seek creative solutions in
all aspects of our work
We take balanced risks and
encourage experimentation
We actively listen with humility
to diverse internal and external
inputs, and harness new ideas
p.5
p.6
Dan
L I V I N G W I T H P N H
Dan recalls experiencing symptoms of PNH as early as when he was a young teenager. He would bruise
easily and fatigue was something he seemingly always lived with. After a period of rapid weight loss when he
was 19, and at the insistence of a cousin who was a doctor, Dan consulted a hematologist. He was told based
on his blood test results that he likely only had six months to a year to live. Dan remembers thinking he
was young, invulnerable, invincible; how could he be that sick? Fortunately, Dan surpassed those odds,
persevering despite years of countless blood tests, bone marrow biopsies, blood transfusions and
misdiagnoses. Finally, at age 30, Dan was diagnosed with PNH and was able to receive treatment with
SOLIRIS and get his disease under control.
Once I finally received a diagnosis and
worked with my doctor, it was the
first time that I felt my health and life
could become stable.
D A N
I appreciate all of the little things like
taking Justice to the store, or taking him
to the park, or going to parades. Every
day is a very big blessing for us.
L I V I N G W I T H P N H
D A N I E L L E , J U S T I C E ’ S M O M
When Justice was nine-months old, he woke one morning with facial swelling. His parents brought him to
Urgent Care where he was treated for pink eye and sent home. Later that day, his body became very limp and
his eyes could not focus. His parents rushed him to the local hospital, by which point Justice had begun to
have a seizure. Doctors at the hospital were unable to stop his seizure and he was transferred to a specialist
children’s hospital. Once there, the medical team discovered that Justice was experiencing kidney failure.
He was intubated and started on dialysis, followed by plasmapheresis, while doctors tried to determine a
diagnosis. Several days later, Justice was diagnosed with aHUS. His parents were devastated at first, but
Justice’s doctor explained that his aHUS could be managed with SOLIRIS. Today, Justice is an energetic
six-year old with a vibrant personality, bringing joy to everyone around him.
Justice
L I V I N G W I T H a H U S
p.9
p.10
Every Day
We Deliver On
Our Mission
2018 was a year focused on strengthening our foundation, establishing a culture of
high performance, with integrity and compliance at the center, and refocusing our
strategy to drive Alexion into its next chapter. The foundation for 2019 is solid. We
have a strong culture, clear business objectives, strong leadership, amazing teams
and a promising pipeline. We have a clear purpose. People living with rare diseases
are waiting. We are inspired and energized by our work together because we know
there still is so much yet to do.
4
TRANSFORMATIVE
THERAPIES ACROSS
5
RARE DISEASES
IN OUR GROWING
PORTFOLIO
TR ISTAN AND HIS MOM
LIVING WITH L AL-D
Grew
IN-LINE BUSINESS
DELIVERED
ON FINANCIAL AMBITIONS
EXTENDED
COMPLEMENT
LEADERSHIP
WITH
ULTOMIRIS®
SOLIRIS® IN
gMG
MOST SUCCESSFUL
U.S. LAUNCH IN
ALEXION HISTORY
~800
PATIENTS ON THERAPY
ADVANCED
AND
REBUILT
OUR PIPELINE
p.11
ROB ERTA AN D HER PARTNER
LIVIN G WIT H gMG
p.12
Jesse
L I V I N G W I T H g M G
I feel like tomorrow I can do something,
whereas before, I didn’t feel like
tomorrow was possible.
J E S S E
G rowing up, Jesse was very healthy, active and athletic with dreams of becoming
an EMT and a firefighter. In his early 30s, he decided to start training to pursue
these dreams more seriously. When he started feeling weaker at the gym and
experienced double vision and a droopy eyelid, he knew something was wrong. His
symptoms continued to worsen – his legs got weaker, he could no longer drive and wasn’t
able to carry out many of his usual activities of daily living without his wife’s assistance. He
met with a neurologist who diagnosed him with gMG. Unfortunately, Jesse subsequently
experienced a myasthenic crisis so severe that he almost did not survive. He spent a month
in the hospital rehabilitating and years being treated with a variety of medications to try
and stabilize his gMG. When SOLIRIS was approved for gMG in 2017, Jesse’s neurologist
recommended he begin treatment. Jesse remains on SOLIRIS today and feels as if he’s
able to do more of the things he once thought he would have to give up forever.
L
I
V
I
N
G
W
I
T
H
a
H
U
S
p.15
p.16
2 S T U D I E S
U L T O M I R I S ® I N P N H
400+ PATIENTS
11 PRIMARY & SECONDARY ENDPOINTS MET
>600 YEARS OF PATIENT EXPERIENCE
IMMEDIATE AND COMPLETE INHIBITION OF
THE COMPLEMENT C5 PROTEIN
THAT WAS SUSTAINED OVER THE ENTIRE 8-WEEK
DOSING INTERVAL
E V A L U A T I N G
U L T O M I R I S ® I N a H U S
P R I M A R Y
E N D P O I N T M E T
IN COMPLEMENT INHIBITOR-NAÏVE
PATIENTS WITH aHUS
Every Day
Is An Opportunity
To Improve
p.17
ULTOMIRIS APPROVED, ESTABLISHING A NEW STANDARD OF CARE
FOR PATIENTS WITH PNH
In December 2018, ULTOMIRIS received U.S. FDA approval as the first and only long-
acting C5 complement inhibitor administered every eight weeks for the treatment
of adult patients with PNH.
U.S. Regulatory Submission Filing
Alexion also announced plans to file a U.S. regulatory submission for ULTOMIRIS in
aHUS in the first half of 2019, followed by the EU and Japan.
We are proud to bring ULTOMIRIS to patients suffering from PNH less than a year after
reporting our positive Phase 3 data. Based on the totality of our compelling data from the
largest Phase 3 program ever conducted in PNH, we believe ULTOMIRIS has the potential to
become the new standard of care for patients with this devastating disease.
JOHN ORLOFF, M.D., EXECUTIVE VICE PRESIDENT AND
HEAD OF RESEARCH & DEVELOPMENT AT ALEXION
p.18
Every Day
We Innovate
A central goal of our 2018 innovation strategy was rebuilding our pipeline. We
completed four business development transactions, diversifying our portfolio into
new therapeutic areas of focus. As we look back and compare our pipeline from
2017 to our pipeline of today, the progress is clear, and we remain steadfast in our
pursuit of groundbreaking innovation, as we aim to redefine what it means to
live with a rare disease.
COMMITTED TO DELIVERING
POTENTIAL FIRST APPROVED TREATMENT
NMOSD
is a rare, devastating, complement-mediated disorder of the
central nervous system characterized by relapses. Each relapse
results in stepwise accumulation of disability, including blind-
ness and paralysis, and sometimes premature death.
IN PIVOTAL TRIAL
98%
OF PATIENTS
RECEIVING SOLIRIS®
WERE RELAPSE FREE
AT 48 WEEKS
F I L E D F O R R E G U L A T O R Y A P P R O V A L I N T H E U . S . A N D R E C E I V E D P R I O R I T Y R E V I E W
A Fresh Look at Our Pipeline | A Strong Foundation in 2019
ULTOMIRIS (PNH)
Approved in U.S., Filed in EU and Japan; Pediatric study ongoing
P R E C L I N I C A L
E A R L Y C L I N I C A L
A D V A N C E D
C L I N I C A L
R E G I S T R A T I O N
F I L I N G S
M A R K E T E D
SOLIRIS (PNH)
SOLIRIS (aHUS)
SOLIRIS (gMG)
STRENSIQ® (asfotase alfa)
For HPP
KANUMA® (sebelipase alfa)
For LAL-D
ULTOMIRIS (aHUS)
Anticipated sBLA filing in U.S. 1H19, EU and Japan 2H19; Pediatric study ongoing
ULTOMIRIS 100mg/ml
Plans to file manufacturing sBLA 2H19
ULTOMIRIS SC QW
Initiated Phase 3 study 2H18
ULTOMIRIS (gMG)
Initiated Phase 3 study 1Q19
SOLIRIS (NMOSD)
Filed in U.S., EU and Japan
ULTOMIRIS (NMOSD)
Plans to initiate Phase 3 study
ULTOMIRIS (ALS)
Plans to initiate Proof of Concept (POC) study
ULTOMIRIS (PPMS)
Plans to initiate POC study
ALXN1840 (WTX101)
Phase 3 study ongoing
ALXN1830 (SYNT001)
Plans to initiate Phase 3 in gMG in 2019
ALXN1830 (SYNT001)
Phase 1b/2a in Warm Autoimmune Hemolytic Anemia (WAIHA); plans to initiate Phase 3
ALXN1810 SC*
Phase 1 study ongoing
CAEL-101 (Caelum Biosciences)
Completed Phase 1b
CP010 (Complement Pharma)
Preclin dev’t
GalXC™ Collaboration (Dicema)
Preclin dev’t
ALXN1720
Preclin dev’t
Multiple Internal Programs
Preclin dev’t
HEMATOLOGY/NEPHROLOGY
METABOLIC
NEUROLOGY
FcRn
OTHER
*Phase 1 trial of ULTOMIRIS and Halozyme's PH20 co-administered; go-forward development expected with ALXN1810 co-formulation.
REBUILT PIPELINE THROUGH INTERNAL & EXTERNAL EFFORTS
Acquired a Phase 3
clinical stage asset with
ALXN1840 (WTX-101) for
Wilson Disease
Added clinical stage asset,
ALXN1830 (SYNT001), in the new
and innovative FcRn space
Completed successful pivotal
trial for SOLIRIS® in NMOSD
Announced two preclinical
collaborations with
Complement Pharma
and Dicerna
A Look Back at Our Pipeline | One Year Ago
P R E C L I N I C A L
E A R L Y C L I N I C A L
A D V A N C E D
C L I N I C A L
R E G I S T R A T I O N
F I L I N G S
M A R K E T E D
ULTOMIRIS (PNH)
SOLIRIS (PNH)
SOLIRIS (aHUS)
SOLIRIS (gMG)
STRENSIQ (HPP)
KANUMA (LAL-D)
ULTOMIRIS (aHUS)
ULTOMIRIS SC QW
ULTOMIRIS (gMG)
SOLIRIS (NMOSD)
ULTOMIRIS IgAN
ULTOMIRIS NEXT GEN
Advancing
Our Pipeline
p.21
Additional Complement
HEMATOLOGY/NEPHROLOGY
METABOLIC
NEUROLOGY
FcRn
OTHER
*Phase 1 trial of ALXN1210 and PH20 co-administered; go-forward development expected with ALXN1810 co-formulation.
p.22
Every Day
Builds A New
Chapter
2018 was an exciting new chapter for Alexion. We opened our new headquarters
in Boston, Massachusetts, providing us with access to a large biopharmaceutical
talent pool and a variety of life-sciences partners to further support future growth
initiatives. New Haven remains as Alexion’s Center of Excellence for its world-class
complement research and process development teams, which are dedicated to
advancing Alexion’s innovation engine. It is also home to OneSource, our U.S.
patient support program.
3,000 employees
SERVE PATIENTS IN MORE THAN
50 COUNTRIES
Vision 2025:
4 DURABLE POTENTIAL
BLOCKBUSTER FRANCHISES
IN
HEMATOLOGY/NEPHROLOGY,
NEUROLOGY, METABOLICS
AND FcRn
IN 2018, ALEXION’S SENIOR
LEADERSHIP CONTINUED TO
STRENGTHEN OUR PATIENT- AND
COMPLIANCE-FOCUSED CULTURE
We are building the most
rewarding place to work and
fostering a culture where
employees feel valued and safe
to speak up, and where new and
diverse ideas are welcomed.
1,000
NEW EMPLOYEES
HIRED
p.23
THE DIVERSITY OF OUR LEADERSHIP TEAM POSITIONS US FOR SUCCESS
BACK ROW LEFT TO RIGHT: Paul Clancy, Aradhana Sarin, Ludwig Hantson, Ellen Chiniara. FRONT
ROW LEFT TO RIGHT: John Orloff, Indrani Franchini, Rana Strellis, Brian Goff, Anne-Marie Law.
OUR 2019
KEY AREAS OF
FOCUS:
1.
ULTOMIRIS CONVERSION
IN PNH;
ULTOMIRIS aHUS FILING
2.
ACCELERATE OUR
NEUROLOGY PORTFOLIO
3.
GROW OUR METABOLIC
PORTFOLIO
4.
EXECUTE AND EXPAND
OUR PIPELINE
5.
DELIVER FINANCIAL
PERFORMANCE ALIGNED
TO OUR 2025 FINANCIAL
AMBITIONS
6.
ENHANCE CAPABILITIES
TO STRENGTHEN OUR
PATIENT-CENTRIC CULTURE
p.24
Trendy Brothers
L I V I N G W I T H L A L - D
When two-and-a-half-year-old Brendan was found to have elevated liver enzymes during routine
preoperative bloodwork, his parents never imagined it was the first sign that all four of their sons were
suffering from an ultra-rare devastating disease. Further test results on Brendan revealed he had Stage 1
liver disease. Soon thereafter, his brother, Dakota, became ill. Doctors began hunting for a genetic disease
that could potentially be affecting the whole family, but it took several years before all four boys were
diagnosed with LAL-D. The four brothers began treatment with KANUMA and continue to receive it today.
It wasn’t until we got the answer that I really
felt that relief. Now we knew what we were
up against, we knew we could fight.
Julia
R E B E C C A T R E N D Y , M O M T O
L I V I N G W I T H a H U S
B R E N D A N , D A K O T A , C H A R L E S A N D A L E C ,
W H O A L L L I V E W I T H L A L - D
This disease is only part of him –
it doesn’t define him. We view him as a
regular kid and, for the most part, he
does everything kids do.
Julia
K A R A , Q U I N N ’ S M O M
L I V I N G W I T H a H U S
Quinn was born a healthy, 11-pound baby boy. Shortly after birth, however, he began showing signs that
something might be wrong. At his first wellness visit, his pediatrician noticed the circumference of his head
was larger than normal and that his skull was asymmetrical. He didn’t stand up on his own until he was one-
and-a-half years old and did not take his first steps until he was two. He began losing baby teeth before they
had even finished growing in and by his third birthday he had lost six of them. His parents knew something
wasn’t right, and at the suggestion of a pediatric dentist, they had Quinn tested for metabolic disorders.
After a blood test showed his alkaline phosphatase levels were extremely low, he was diagnosed with HPP.
At age six, Quinn became the first U.S. patient approved for STRENSIQ and began treatment right away,
making a meaningful difference in his life.
Quinn
L I V I N G W I T H H P P
p.27
p.28
CSR is our comprehensive approach
to environmental, social and governance
topics that impact our business and
our stakeholders.
Corporate Social Responsibility (CSR) at Alexion supports our mission
to transform the lives of people affected by rare and devastating diseases
supports our mission to transform the lives of people affected by rare
and devastating disease while creating value for all our stakeholders.
while creating value for all our stakeholders.
PATIENT LIVES
COMMUNITIES AND
SUSTAIN OUR PLANET
We invest in our communities
and shared planet in support
of those who depend on us
today and for generations
that follow.
We invest in our
communities and shared
planet in support of those
who depend on us today
and for generations
that follow.
We urgently seek to
understand patient
We urgently seek to
journeys, find answers
understand patient journeys,
and collaborate
find answers, and collaborate
to deliver access to
to deliver access to therapies
therapies that
that change lives.
change lives.
ALEXION’S CSR STAKEHOLDER VALUE MAP
OUR PEOPLE AND
We aspire to become
OUR COMPANY
the most rewarding place
We aspire to become the
to work, embracing
most rewarding place to
diversity and governing
work, embracing diversity
and managing our
and governing and managing
business to return value
our business to return value
to our stakeholders.
to our stakeholders.
We pioneered
complement biology,
spurring new treatments
for devastating
disorders. We work to
advance healthcare
through innovative
diagnostics and proactive
transparency.
WHAT IT MEANS TO LIVE
WITH A RARE DISEASE
We pioneered complement
biology, spurring new treatments
for devastating disorders. We work
to advance healthcare through
innovative diagnostics and
proactive transparency.
We aspire to be a leader in this
space by viewing CSR though the lens
of Shared Value.
E THICS & COMPLIANCE: OUR FOUNDATION
We build trust when we make the right choices and act with integrity. Our unwavering commitment to ethics, quality
We build trust when we make the right choices and act with integrity. Our unwavering
and compliance improves our ability to serve patients and enhances our reputation and competitive advantage.
commitment to ethics, quality and compliance improves our ability to serve patients and enhances our
reputation and competitive advantage.
CSR-S.T.A.R SERVETRANSFORMADVANCEREDEFINE 2018 GLOBAL DAY
OF SERVICE
1,500+
EMPLOYEES
7,500+
HOURS
100+
PROJECTS
35+
CITIES
ALEXION BRAZIL
ALEXION UK
ALEXION JAPAN
ALEXION USA
Every Day
We Are Committed
To Responsible
Corporate
Citizenship
p.29
IRELAND EMPLOYEES GATHER AT A LOCAL SCHOOL
TO TEACH STEM-RELATED LESSONS
5
CSR AWARDS
CSR SPOTLIGHT:
COLLEGE PARK,
IRELAND
20
INITIATIVES
IMPLEMENTED
IN 2018
p.30
NET PRODUCT SALES
($ IN MILLIONS)
NET INCOME
($ IN MILLIONS)
EARNINGS PER
SHARE-DILUTED
CASH, CASH EQUIVALENTS
AND MARKETABLE SECURITIES
($ IN MILLIONS)
4200
3500
2800
2100
1400
700
0
1800
1500
1200
900
600
300
0
8
7
6
5
4
3
2
1
0
1600
1400
1200
1000
800
600
400
200
0
Financial Highlights
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
UNITED STATES
EUROPE
ASIA
REST OF WORLD
NON-GAAP
GAAP
NON-GAAP
GAAP
CASH AND CASH
EQUIVALENTS
MARKETABLE
SECURITIES
RECONCILIATION
OF GAAP TO NON-GAAP
FINANCIAL RESULTS
IN MILLIONS EXCEPT
PER SHARE AMOUNTS
GAAP net income
Share-based compensation
Fair value adjustment in inventory acquired
Upfront and milestone payments related to licenses and collaborations
Litigation charges
Gain on sale of asset
Acquired in-process research and development
Amortization of purchased intangible assets
Change in fair value of contingent consideration
Acquisition-related costs
Restructuring and related expenses
Impairment of intangible assets
Change in value of strategic equity investments
Adjustments to income tax expense
Non-GAAP net income
GAAP earnings per share - diluted
Non-GAAP earnings per share - diluted
2018
2017
2016
77.6
203.0
-
26.7
13.0
(3.5)
1,183.0
320.1
116.5
-
443.3
243.2
5.2
49.4
-
-
-
320.1
41.0
-
50.7
286.5
399.4
192.4
10.8
9.6
-
-
-
322.2
35.7
2.3
3.0
-
31.0
85.0
(43.1)
(145.4)
(82.2)
(6.0)
1,798.6
1,337.5
1,054.4
0.35
7.92
1.97
5.86
1.76
4.62
2018 Form 10-K
This Page Intentionally Left Blank
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
FORM 10-K
For the fiscal year ended December 31, 2018
or
Transition report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934
For the transition period from to
Commission file number: 0-27756
ALEXION PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
(State or Other Jurisdiction of Incorporation or Organization)
13-3648318
(I.R.S. Employer Identification No.)
121 Seaport Boulevard, Boston Massachusetts 02210
(Address of Principal Executive Offices) (Zip Code)
475-230-2596
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.0001
Name of each exchange on which registered: The Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter)
is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. Check One:
Large accelerated filer
Smaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Emerging growth company
Non-accelerated filer
Accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the last sale price of
the Common Stock reported on The Nasdaq Stock Market LLC on June 29, 2018, was $26,514,235,288.(1)
The number of shares of Common Stock outstanding as of January 31, 2019 was 223,469,381.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be used in connection with its 2019 Annual Meeting of Stockholders
currently anticipated to be held on May 14, 2019, are incorporated by reference into Part III of this report.
(1) Excludes 9,186,789 shares of common stock held by directors, executive officers and their respective affiliates at June
29, 2018. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power,
directly or indirectly, to direct or cause the direction of the management or policies of the registrant, or that such person is
controlled by or under common control with the registrant.
Alexion Pharmaceuticals, Inc.
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7.
Quantitative and Qualitative Disclosures About Market Risk
Item 7.A
Financial Statements and Supplementary Data
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Controls and Procedures
Item 9A.
Item 9A(T). Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principle Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
SIGNATURES
3
Page
6
30
57
57
57
57
58
60
62
86
87
87
87
88
88
89
89
89
89
89
90
92
93
PART I
Unless the context requires otherwise, references in this report to “Alexion,” the “Company,” “we,” “our” or
“us” refer to Alexion Pharmaceuticals, Inc. and its subsidiaries.
Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements. Words such as “anticipates,” “may,”
“forecasts,” “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. Forward-looking 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 statements. 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 UTLOMIRIS™, SOLIRIS®, STRENSIQ® and KANUMA® for
approved indications and any expanded uses, sales of our products in various markets worldwide, pricing for
our products, level of insurance coverage and reimbursement for our products, timing regarding development
and regulatory approvals for additional indications or in additional territories;
• plans for clinical trials (and proof of concept trials), status of our ongoing clinical trials for our product
candidates, commencement dates for new clinical trials, clinical trial results and evaluation of our clinical trial
results by regulatory agencies;
• potential benefits offered by product candidates, including improved dosing intervals;
• the medical and commercial potential of additional indications for our products;
• the expected timing for the completion and/or regulatory approval of our facilities and facilities of our third-
party manufacturers;
• future expansion of our commercial organization;
• future governmental and regulatory decisions regarding pricing (and discounts) and the adoption,
implementation and interpretation of healthcare laws and regulations (and the impact on our business);
• plans and prospects for future regulatory approval of products and product candidates;
• competitors, potential competitors and future competitive products (including biosimilars);
• plans to grow our product pipeline (and diversify our business, including through acquisitions) and anticipated
benefits to the Company;
• future objective to expand business and sales;
• future plans to retain earnings and not pay dividends;
• expected decisions to appeal certain litigation and intellectual property decisions;
• expectations to realize the carrying value of product inventory;
• impact of accounting standards;
• future costs, operating expenses (including research and development, sales, general and administrative and
restructuring expenses) and capital requirements, capital investment, sufficiency of cash to fund operations,
the sufficiency of our existing capital resources and projected cash needs, price approval and funding
processes in various countries;
• anticipated future milestone, contingent and royalty payments (and expected impact on liquidity);
• timing and anticipated amounts of future tax payments and benefits, as well as timing of conclusion of tax
audits;
• collection of accounts receivable;
• the safety and efficacy of our products and our product candidates;
• the adequacy of our pharmacovigilance and drug safety reporting processes;
• the uncertainties involved in the drug development process and manufacturing;
• performance and reliance on third party service providers;
4
• our future research and development activities, plans for acquired programs, our ability to develop and
commercialize products with our collaborators;
• periods of patent, regulatory and market exclusivity for our products;
• the scope of our intellectual property and the outcome of any challenges or opposition to our intellectual
property; and
• estimates of the capacity of manufacturing and other service facilities to support our business, operations,
products and product candidates.
Such risks and uncertainties include, but are not limited to, increased competition, actions by regulatory
agencies, product candidates not receiving regulatory approvals, the possibility that expected tax benefits will not be
realized, assessment of impact of recent accounting pronouncements, potential 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 legal proceedings, company investigations and government investigations,
including our Securities and Exchange Commission (SEC) and U.S. Department of Justice (DOJ) investigations, the
securities class action litigation filed in December 2016, the inquiry by the U.S. Attorney's Office for the District of
Massachusetts requesting documents relating generally to our support of patient assistance programs, the
investigation of our Brazilian operations by Brazilian authorities, the investigation by the MHLW in Japan, risks related
to the short and long-term effects of other government healthcare measures, and the effect of shifting foreign
exchange rates, as well as those risks and uncertainties 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.
Note Regarding Trademarks
We have proprietary rights to a number of registered and unregistered trademarks that we believe are
important to our business, including but not limited to: Alexion Pharmaceuticals, Inc., Alexion, ULTOMIRIS, SOLIRIS,
STRENSIQ and KANUMA. We have, in certain cases, omitted the ®, © and ™ designations for these and other
trademarks used in this Annual Report on Form 10-K. Nevertheless, all rights to such trademarks are reserved.
These and other trademarks referenced in this Annual Report on Form 10-K are the property of their respective
owners.
5
Item 1. BUSINESS.
(dollars and shares in millions)
Overview
Alexion is a global biopharmaceutical company focused on serving patients and families affected by rare diseases
through the innovation, development and commercialization of life-changing therapies.
We are the global leader in complement inhibition and have developed and commercialize the only two approved
complement inhibitors to treat patients with paroxysmal nocturnal hemoglobinuria (PNH), as well as the first and only
approved complement inhibitor to treat atypical hemolytic uremic syndrome (aHUS) and anti-acetylcholine receptor
(AchR) antibody-positive generalized myasthenia gravis (gMG). In addition, Alexion has two highly innovative enzyme
replacement therapies for patients with life-threatening and ultra-rare metabolic disorders, hypophosphatasia (HPP) and
lysosomal acid lipase deficiency (LAL-D).
As the leader in complement biology for over 20 years, Alexion focuses its research efforts on novel molecules
and targets in the complement cascade, and its development efforts on the core therapeutic areas of hematology,
nephrology, neurology, and metabolic disorders. We were incorporated in 1992 under the laws of the State of Delaware.
Products and Development Programs
We focus our products and development programs on life-transforming therapeutics for rare diseases for which
we believe the current treatments are either non-existent or inadequate. We have developed or are developing innovative
products for the following indications:
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). 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).
Atypical Hemolytic
Uremic Syndrome
(aHUS)
aHUS is a severe and life-threatening, ultra-rare genetic 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.
Generalized Myasthenia
Gravis (gMG)
Myasthenia Gravis (MG) is a debilitating, complement-mediated neuromuscular disease in which
patients suffer profound muscle weakness throughout the body, resulting in slurred speech, impaired
swallowing and choking, double vision, upper and lower extremity weakness, disabling fatigue, shortness
of breath due to respiratory muscle weakness and episodes of respiratory failure.
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.
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.
Relapsing Neuromyelitis
Optica Spectrum
Disorder (NMOSD)
Relapsing NMOSD is a severe and ultra-rare autoimmune disease of the central nervous system that
primarily affects the optic nerves and the spinal cord. Each relapse of the disorder results in a stepwise
accumulation of disability, including blindness and paralysis, and sometimes premature death.
Wilson Disease
Wilson disease is a rare disorder that can lead to severe liver disease, including cirrhosis and acute
liver failure, as well as debilitating neurological morbidities such as impaired movement, gait, speech,
swallowing, and psychiatric disorders.
6
Warm Autoimmune
Hemolytic Anemia
(WAIHA)
WAIHA is a rare autoimmune disorder caused by pathogenic Immunoglobulin G (IgG) antibodies that
react with and cause the premature destruction of red blood cells at normal body temperature. The
disease is often characterized by profound, and potentially life-threatening anemia and other acute
complications, including severe and life-threatening hemolysis, severe weakness, enlarged spleen and/
or liver, rapid heart rate (tachycardia), chest pain, heart failure and fainting (syncope).
Marketed Products
Our marketed products include the following:
Product
Therapeutic Area
Approved Indication
Hematology
Hematology
Hematology/Nephrology
Neurology
Metabolic Disorders
Metabolic Disorders
PNH
PNH
aHUS
gMG
HPP
LAL-D
ULTOMIRIS (ALXN1210/ravulizumab-cwvz)
ULTOMIRIS 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 and neurology. As of the date
hereof, ULTOMIRIS has only been approved as a therapy
in the US for adult patients with PNH. ULTOMIRIS is a
humanized monoclonal antibody that effectively blocks
terminal complement activity at the doses currently
prescribed. ULTOMIRIS is the first and only long-acting
C5 inhibitor that provides immediate and complete
inhibition for eight weeks.
In December 2018, ULTOMIRIS was approved by
the U.S. Food and Drug Administration (FDA) as a new
treatment option for adult patients living with PNH.
In June 2018, we submitted a Marketing
Authorization Application (MAA) to the European
Medicines Agency (EMA) for approval of ULTOMIRIS for
the treatment of patients with PNH and in July 2018 the
MAA was accepted for review in the European Union
(EU). In September 2018, we also filed an application
Japan Pharmaceuticals and Medical
with
Devices (PDMA) for the approval of ULTOMIRIS for
patients with PNH.
the
ULTOMIRIS has received Orphan Drug Designation
(ODD) for the treatment of patients with PNH in the U.S.,
EU and Japan.
7
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 and neurology. SOLIRIS is a
humanized monoclonal antibody that effectively blocks
terminal complement activity at the doses currently
prescribed.
SOLIRIS is approved for the treatment of PNH in
the U.S., Europe, Japan and in several other countries.
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 U.S.,
Europe, Japan and several other countries.
SOLIRIS is approved for the treatment of pediatric
and adult patients with aHUS in the U.S., Europe, Japan
and in several other countries. We are sponsoring a
multinational registry to gather information regarding
the natural history of patients with aHUS and the longer-
term outcomes during SOLIRIS treatment. In addition,
the FDA and European Commission (EC) have granted
SOLIRIS orphan drug designation for the treatment of
patients with aHUS.
receptor
In 2017, the FDA and EC approved SOLIRIS for the
treatment of refractory gMG in adults who are anti-
acetylcholine
(AChR) antibody-positive.
Additionally, in 2017 the Ministry of Health, Labour and
Welfare (MHLW) in Japan approved SOLIRIS as a
treatment for patients with gMG who are AChR antibody-
positive and whose symptoms are difficult to control
with high-dose intravenous immunoglobulin therapy or
plasmapheresis (PLEX). SOLIRIS has received orphan
drug designation for the treatment of patients with MG
in the U.S. and Europe, and for the treatment of patients
with refractory gMG, a subset of MG, in Japan.
STRENSIQ (asfotase alfa)
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-
in patients with HPP.
threatening complications
STRENSIQ is approved in the U.S. for patients with
perinatal-, infantile- and juvenile-onset HPP, Europe for
the treatment of patients with pediatric-onset HPP, and
Japan for the treatment of patients with HPP. We are
sponsoring a multinational registry to gather information
regarding the natural history of patients with HPP and
the longer-term outcomes during STRENSIQ treatment.
KANUMA (sebelipase alfa)
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.
KANUMA is approved in the U.S. for the treatment of
patients with LAL-D, Europe for long-term enzyme
replacement therapy in patients with LAL-D, and Japan
for the treatment of patients with LAL-D. We are
sponsoring a multinational registry to gather information
regarding the natural history of patients with LAL-D and
the longer-term outcomes during KANUMA treatment.
Clinical Development Programs
Our ongoing clinical development programs include the following:
Product
Development Area
Hematology/Nephrology
Neurology
Phase I
Phase II
Phase III
Filed
Indication
aHUS
gMG
ULTOMIRIS
(ALXN1210/
ravulizumab-cwvz)
(Intravenous)
ULTOMIRIS
(ALXN1210/
ravulizumab-cwvz)
(Subcutaneous)
ALXN1810
(Subcutaneous)
SOLIRIS
(eculizumab)
ALXN1840
(WTX101)
ALXN1830
(SYNT001)
Hematology/Nephrology
PNH/aHUS
Next Generation
Subcutaneous
Complement Inhibitor
Neurology
NMOSD
Metabolic Disorders
Wilson disease
Hematology
WAIHA
ULTOMIRIS (ALXN1210/ravulizumab-cwvz)
ALXN1210 (ravulizumab-cwvz) is an innovative,
long-acting C5 inhibitor discovered and developed by
Alexion that works by inhibiting the C5 protein in the
terminal complement cascade. In clinical studies,
rapid, complete, and
ALXN1210 demonstrated
sustained reduction of free C5 levels for eight weeks.
Intravenous (IV)
Enrollment was completed in late May 2018 in a
Phase III, single arm, multicenter study to evaluate the
safety and efficacy of ALXN1210 administered by IV
infusion every 8 weeks to adult patients with aHUS who
have never been treated with a complement inhibitor.
In January 2019, we announced the results of the Phase
III study with ALXN1210 meeting its primary objective
in complement inhibitor-naïve patients with aHUS. In the
initial 26 week treatment period in this study, 53.6
percent of patients demonstrated complete thrombotic
microangiopathy (TMA) response. A second Phase III,
single arm, multicenter study to evaluate the safety,
(PK), and pharmaco-
efficacy, pharmacokinetics
dynamics (PD) of ALXN1210 administered by IV infusion
every 8 weeks
(including
adolescents) with aHUS who have never been treated
with a complement inhibitor (inhibitor-naïve patients) is
ongoing.
in pediatric patients
Alexion plans to initiate a Phase III study with
ALXN1210 administered by IV infusion every 8 weeks
to adult patients for the treatment of gMG in 2019.
8
In addition to aHUS and gMG, Alexion plans to
initiate clinical studies of ALXN1210 in NMOSD. In
addition, in 2019 we also plan to initiate proof of concept
trials for ALXN1210 as a therapy for Amyotrophic Lateral
Sclerosis (ALS), and Primary Progressive Multiple
Sclerosis (PPMS).
Subcutaneous (SC) Delivery
In late 2018, Alexion initiated a single, PK-based
Phase III study of ALXN1210 delivered subcutaneously
once per week to PNH patients to support regulatory
approval submissions in both PNH and aHUS.
In October 2017, the FDA granted orphan drug
formulation of
designation to the subcutaneous
ALXN1210 for the treatment of aHUS.
ALXN1810 Subcutaneous (SC) Delivery
ALXN1810 combines ALXN1210 with recombinant
human hyaluronidase enzyme (rHuPH20) from Halozyme
Therapeutics, Inc. to potentially further extend the
dosing interval for ALXN1210 SC to once every two
weeks or once per month. A SC healthy volunteer study
with ALXN1810 was initiated in August 2018.
SOLIRIS (eculizumab)
In September 2018, we announced the results of
the Phase III global, randomized, double-blind, placebo-
controlled study to evaluate eculizumab as a treatment
for patients with relapsing NMOSD. The study met its
primary endpoint of time to first adjudicated on-trial
relapse, demonstrating that treatment with eculizumab
reduced the risk of NMOSD relapse by 94.2 percent
compared to placebo. At 48 weeks, 97.9 percent of
patients receiving eculizumab were free of relapse
compared to 63.2 percent of patients receiving placebo.
Eculizumab had a safety profile consistent with that
seen in previous clinical studies. The FDA, EC, and MHLW
have each granted orphan designation for eculizumab
as a treatment for patients with relapsing NMOSD.
In December 2018, we submitted our requests for
regulatory approval to the FDA and our MAA in the EU
for eculizumab for the potential treatment of NMOSD.
ALXN1840 (WTX101)
ALXN1840
(WTX101), an
innovative product
candidate that addresses the underlying cause of
Wilson disease, is a first-in-class oral copper-binding
agent with a unique mechanism of action and ability to
access and bind copper from serum and promote its
removal from the liver.
ALXN1840 is in Phase III development as a
treatment for Wilson disease. In addition, ALXN1840
has received Fast Track designation in the U.S. and
Orphan Drug Designation for the treatment of Wilson
disease in the U.S. and EU.
ALXN1830 (SYNT001)
ALXN1830 (SYNT001) is a humanized monoclonal
antibody that is designed to inhibit the interaction of the
neonatal Fc receptor (FcRn) with IgG and IgG immune
complexes and has the potential to improve treatment
in a number of rare IgG-mediated diseases. ALXN1830
(SYNT001) is currently being evaluated in Phase 1b/2a
studies in patients with warm autoimmune hemolytic
anemia (WAIHA) and in patients with pemphigus vulgaris
(PV) or pemphigus foliaceus (PF). In 2019, Alexion plans
to initiate two pivotal trials, one in WAIHA and one in
gMG.
Manufacturing
We utilize both internal manufacturing facilities and
third party contract manufacturers to supply clinical and
commercial quantities of our products and product
candidates. Our internal manufacturing capability
includes our Ireland facilities, a fill/finish facility in
Athlone and a packaging facility in Dublin, as well as
facilities in Massachusetts and Georgia. Third party
contract manufacturers, including Lonza Group AG and
its affiliates (Lonza), provide bulk drug substance as well
as other manufacturing services like purification,
product filling, finishing, packaging, and labeling.
total
We have various agreements with Lonza through
2029, with
remaining
non-cancellable
If we
commitments of approximately $1,084.6.
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, we pay Lonza a royalty on sales
of SOLIRIS that was previously manufactured at the
Alexion Rhode Island Manufacturing Facility (ARIMF) and
a payment with
to sales of SOLIRIS
manufactured at Lonza facilities. The ARIMF site was
sold in 2018. Lonza is in the process of qualifying a new
manufacturing facility dedicated to Alexion products and
commitments entered into under this arrangement are
included in the non-cancellable commitments amount
noted above.
respect
In addition, we have non-cancellable commitments
of approximately $104.1 through 2020 with other third
party manufacturers.
In April 2014, we purchased a fill/finish facility in
Athlone, Ireland, which has been refurbished to become
our first company-owned fill/finish facility. In July 2016,
we announced plans to construct a new biologics
manufacturing facility at this site, the construction of
this
is on-going and, based on current
expectations, we anticipate this facility will receive
regulatory approval in 2020.
facility
In May 2015, we announced plans to construct a
new biologics manufacturing facility on our existing
property in Dublin, Ireland, the construction of this
facility has commenced and, based on current
9
expectations, we anticipate this facility will receive
regulatory approval in 2020.
Sales and Marketing
We have established a commercial organization to
support current and future sales of our products in the
U.S., Europe, Japan, Latin America, Asia Pacific
countries, and other territories. Our sales force is small
compared to those for other pharmaceutical companies
with similar revenues; however, we believe that a
relatively smaller sales force is appropriate to effectively
market our products due to the incidence and prevalence
of rare diseases. If we receive regulatory approval in
new territories or for new products or indications, we
may expand our own commercial organizations in such
territories and market and sell our products through our
own sales force in these territories. However, we
evaluate each jurisdiction on a country-by-country basis,
and, in certain territories, we promote our products in
collaboration with marketing partners or rely on
relationships with one or more companies with
established distribution systems and direct sales forces
in certain countries. In addition, we have recently
announced that, in an effort to align the structure of our
commercial organization with our re-focused corporate
strategy and to realize operational efficiencies, certain
portions of our international commercial operations will
transition to a new operating model in which sales and
marketing efforts in the designated countries will rely to
a greater extent on third-party entities and alliances to
promote and sell our products, and our direct sales
presence will decrease in these regions (as we focus
our direct sales resources on those regions where it can
have a more cost-effective impact).
Customers
Our customers are primarily comprised of
distributors, pharmacies, hospitals, hospital buying
groups, and other healthcare providers. In some cases,
we may also sell our products to governments and
government agencies.
For the year ended December 31, 2018, four
customers accounted for 50.3% of our product sales,
with these individual customers ranging from 10.0% to
16.4% of product sales. For
the year ended
December 31, 2017, three customers accounted for
37.0% of our product sales, with these individual
customers ranging from 10.8% to 15.0% of product
sales. For the year ended December 31, 2016, three
customers accounted for 36.7% of our product sales,
with these individual customers ranging from 10.0% to
16.0% of product sales.
Because of factors such as the pricing of our
products, the limited number of patients, the short
period from product sale to patient use and the lack of
contractual return rights, customers often carry limited
inventory. We monitor inventory within our sales
channels
to determine whether deferrals are
appropriate based on factors such as inventory levels
compared to demand, contractual terms, financial
strength of distributors and our ability to estimate
returns.
Please also see “Management’s Discussion and
Analysis – Net Product Sales,” and Note 19 “Segment
Information” of the Consolidated Financial Statements
included in this Annual Report on Form 10-K, for financial
information by geographic areas.
Intellectual Property Rights and Market Exclusivity
Patents and other intellectual property rights
protect our investment in discovering, developing and
marketing our products, and are therefore important to
our business. We own or license rights to many patents
in the U.S. and foreign countries that cover our products
and investigational compounds. We also file and
prosecute many patent applications covering new
technologies and inventions that we believe are or may
become meaningful to our business. In addition to
patents, we rely on trade secrets, know-how, trademarks,
other forms of intellectual property and regulatory
exclusivity. Our intellectual property rights have material
value and we act to protect them.
Patent rights and regulatory protections are the two
principal considerations that determine the period of
market exclusivity for our products. It is during the period
of market exclusivity that our products have their
greatest commercial value.
Patents provide a right to exclude others from
practicing an invention for a defined period of time. In
our business, patents may cover the active ingredients,
uses, formulations, doses, administrations, delivery
mechanisms, manufacturing processes and other
aspects of a product. The period of patent protection
for any given product may depend on the expiration date
of various patents and may differ from country to country
according to the type of patents, the scope of coverage
and the remedies for infringement available in a country.
Because a significant portion of a biopharmaceutical
product’s patent protection can elapse during the course
of developing and obtaining regulatory approval of the
product, certain countries provide compensatory
mechanisms
the
biopharmaceutical products.
to extend patent
terms
for
Regulatory protections are another source of
exclusive rights that contribute toward market exclusivity
for our products. Many developed countries provide such
non-patent incentives to develop medicines. For
example, countries provide data protection for a period
of time after the approval of a new drug, during which
regulatory agencies may not rely on the innovator’s data
to approve a biosimilar or generic copy. Some countries
provide additional incentives to develop medicines for
rare diseases, or orphan drugs, and medicines for
pediatric patients. Regulatory protections can work in
10
conjunction with patents
to strengthen market
exclusivity, and in countries where patent protection has
expired or does not exist, regulatory protections can
extend a product’s market exclusivity period. Different
forms of regulatory protection are described in the
section of this Annual Report on Form 10-K titled
Government Regulation. For information regarding
lawsuits alleging that ULTOMIRIS infringes patents held
by a third party, see Note 11 “Commitments and
Contingencies” to the notes to the consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K.
SOLIRIS Exclusivity
With respect to SOLIRIS, we own an issued U.S.
patent that covers the eculizumab composition of matter
that will expire in 2021, taking into account patent term
extension. We also own other issued U.S. patents that
cover the composition, use and
formulation of
eculizumab, that expire in 2027. SOLIRIS is also
protected in the U.S. by regulatory data exclusivity that
will expire in March 2019. SOLIRIS also benefits from
orphan drug exclusivity for treating gMG until 2024
(orphan drug exclusivity for SOLIRIS for treating PNH and
aHUS previously expired).
In Europe we have
supplementary protection certificates that extend rights
associated with a composition of matter patent until
2020 in certain countries. SOLIRIS is also protected in
Europe by orphan drug exclusivity until 2019 for PNH,
through late 2023 for aHUS and until 2027 for gMG. In
Japan we own issued patents that cover the eculizumab
composition of matter and will expire in 2019 and 2027.
SOLIRIS is also protected in Japan by orphan drug
exclusivity until 2020 for PNH, until 2023 for aHUS and
until 2027 for gMG. In addition to the foregoing patent
and regulatory protections, we own other patents and
pending patent applications that are directed to various
aspects of eculizumab and which may provide additional
protection for SOLIRIS in the U.S., Europe, Japan and
other countries.
ULTOMIRIS Exclusivity
that
indication
With respect to ULTOMIRIS, we own issued U.S.
patents that cover the composition, use and formulation
of ravulizumab which will expire in 2035. ULTOMIRIS is
also protected in the U.S. by regulatory data exclusivity
until 2030 and we have applied for orphan drug
exclusivity for treating PNH, which, if granted, would
through 2025. Although
protect
ULTOMIRIS is not yet approved for any indication in
Europe or Japan, it is also protected in those regions by
patents that cover ravulizumab which will expire in 2035.
If ULTOMIRIS is approved in Europe or Japan, we also
expect regulatory protections to apply in those regions.
In addition to the foregoing patent and regulatory
protections, we own other patents and pending patent
applications that are directed to various aspects of
ravulizumab and which may provide additional protection
for ULTOMIRIS in the U.S., Europe, Japan and other
countries.
STRENSIQ Exclusivity
With respect to STRENSIQ, we own an issued U.S.
patent that covers the asfotase alfa composition of
matter that will expire in 2026. We have applied for an
extension of this U.S. patent term. STRENSIQ is also
protected in the U.S. by orphan drug exclusivity until
2022 and by regulatory data exclusivity until 2027. In
Europe, we own two issued patents that cover the
asfotase alfa composition of matter and will expire in
2025 and 2028. We have applied for supplementary
protection certificates in the European countries.
STRENSIQ is also protected in Europe by orphan drug
exclusivity and regulatory data exclusivity until 2025. In
other countries we own corresponding patents that will
expire between 2025 and 2028, not including possible
extensions.
KANUMA Exclusivity
With respect to KANUMA, we own issued patents
in the U.S., Europe and other countries that cover
methods of using the product to treat LAL-D and will
expire in 2031. We maintained the European patent in
an opposition proceeding that was favorably resolved in
2017. An exclusively licensed composition of matter
patent also protects KANUMA in certain European
countries until it expires in 2021, though we also applied
for supplementary protection certificates in those
countries. In the U.S., KANUMA also is protected by
orphan drug exclusivity until 2022 and by regulatory data
exclusivity until 2027. In Europe it is protected by orphan
drug exclusivity and regulatory data exclusivity until
2025.
Investigational Compounds
We also own U.S. and foreign patents and patent
applications that protect our investigational compounds
and product candidates. At present, we do not know
whether any such investigational compound or product
candidate will be approved for human use and sale.
License and Collaboration Agreements
From time to time, we enter into arrangements with
third parties, including collaboration and licensing
arrangements, for the development, manufacture and
commercialization of products and product candidates.
These strategic alliances are intended to strengthen and
advance our R&D capabilities and diversify our product
pipeline to support the growth of our marketed product
base. The arrangements, which generally provide
Alexion with rights to specialized technology and
intellectual property for the development of potential
product candidates, often require non-refundable,
upfront license fees, development, regulatory and
commercial milestones, as well as royalty payments on
commercial sales.
11
Importance of Intellectual Property Exclusivities and
Rights
The pharmaceutical industry places considerable
importance on obtaining and enforcing patent (including
licensed patents), trade secret and other intellectual
property protection for new therapies, technologies,
products, services and processes. Our success
therefore depends, in part, on our ability to obtain and
enforce our patents (including licensed patents) and
other intellectual property rights necessary to protect
our current and future products, to obtain and preserve
our trade secrets and other confidential intellectual
property and to avoid or neutralize intellectual property
threats from third parties. The existence of patents does
not guarantee our right to practice the patented
technology or commercialize the patented product.
Litigation, oppositions, inter partes reviews or other
proceedings are, have been and may in the future be
necessary in some instances to determine the validity
and scope of certain of our patents, regulatory
exclusivities or other proprietary rights, and in other
instances to determine the validity, scope or non-
infringement of certain patent rights claimed by third
parties to be pertinent to the manufacture, use or sale
of our products. We may also face challenges to our
patents, regulatory exclusivities and other proprietary
rights covering our products by manufacturers of
biosimilars. For additional information, see Item 1A
“Risk Factors - Risks Related to Intellectual Property”
elsewhere in this Annual Report on Form 10-K (including
a recent European Patent Office ruling to revoke a
previously issued patent relating to the formulation of
SOLIRIS).
Government Regulation
Drug Development and Approval in the United States
labeling, storage,
The preclinical studies and clinical testing,
manufacture,
record keeping,
advertising, promotion, pharmacovigilance reporting,
export, and marketing, among other things, of our
products and product candidates, including ULTOMIRIS,
SOLIRIS, STRENSIQ and KANUMA, are subject to
extensive regulation by governmental authorities in the
U.S., the EU, Japan and other territories. In the U.S.,
pharmaceutical products are regulated by the FDA under
the Federal Food, Drug, and Cosmetic Act and other laws,
including, in the case of biologics, the Public Health
Service Act. Our four approved products are regulated
by the FDA as biologics. Biologics require the
submission of a Biologics License Application (BLA) and
approval by the FDA prior to being marketed in the U.S.
In the case of KANUMA, which is derived from egg whites
from select hens, we also submitted a New Animal Drug
Application
the FDA.
Manufacturers of biologics and drugs derived from
animal origin may also be subject to state regulation.
Failure to comply with FDA and state requirements, both
before and after product approval, may subject us and/
for approval by
(NADA)
or our partners, contract manufacturers, and suppliers
to administrative or judicial sanctions, including FDA
refusal to approve applications, warning letters, product
recalls, product seizures, total or partial suspension of
production or distribution,
fines and/or criminal
prosecution.
The process for obtaining regulatory approval to
market a biologic is expensive, often takes many years,
and can vary substantially based on the type, complexity,
and novelty of the product candidates involved. The
steps required before a biologic may be approved for
marketing of an indication in the U.S. generally include:
(1) preclinical laboratory tests and animal tests;
(2) submission to the FDA of an investigational
new drug (IND) application for human clinical
testing, which must become effective before
human clinical trials may commence;
(3) adequate and well-controlled human clinical
trials to establish the safety and efficacy of
the product for its intended use;
(4) submission to the FDA of a BLA or
supplemental BLA;
(5) FDA pre-approval
the
manufacturing sites identified in the BLA; and
inspection of
(6) FDA review and approval of the BLA or
supplemental BLA.
tests
intended
Preclinical studies include laboratory evaluation of
product chemistry and
formulation, as well as
toxicological and pharmacological animal studies to
assess the potential safety and efficacy of the product
candidate. Preclinical safety
for
submission to FDA must be conducted in compliance
with FDA’s Good Laboratory Practice (GLP) regulations
and the U.S. Department of Agriculture’s Animal Welfare
Act. The results of the preclinical tests, together with
manufacturing information and analytical data, are
submitted to the FDA as part of an IND application which
must become effective before human clinical trials may
be commenced. The IND will automatically become
effective 30 days after receipt by the FDA, unless the
FDA, before that time, raises concerns about the drug
candidate or the conduct of the trials as outlined in the
IND. The IND sponsor and the FDA must resolve any
outstanding concerns before clinical trials can proceed.
We cannot assure you that submission of an IND will
result in FDA authorization to commence clinical trials
or that once commenced, other concerns will not arise
that will prevent the trials from moving forward. FDA may
stop the clinical trials by placing them on “clinical hold”
because of concerns about the safety of the product
being tested, or for other reasons.
Clinical trials involve the administration of the
investigational product to healthy volunteers or to
patients, under the supervision of qualified principal
investigators. The conduct of clinical trials is subject to
12
extensive regulation, including compliance with the
FDA’s bioresearch monitoring regulations and Good
Clinical Practice (GCP) requirements, which establish
standards for conducting, recording data from, and
reporting the results of clinical trials, and are intended
to assure that the data and reported results are credible
and accurate, and that the rights, safety, and well-being
of study participants are protected. Clinical trials must
be conducted in accordance with protocols that detail
the objectives of the study, the criteria for determining
subject eligibility, the dosing plan, patient monitoring
requirements, timely reporting of adverse events, and
other elements necessary to ensure patient safety, and
any efficacy criteria to be evaluated. Each protocol must
be submitted to FDA as part of the IND; further, each
clinical study at each clinical site must be reviewed and
approved by an independent institutional review board,
prior to the recruitment of subjects. The institutional
review board’s role is to protect the rights and welfare
of human subjects involved in clinical studies by
evaluating, among other things, the potential risks and
benefits to subjects, processes for obtaining informed
consent, monitoring of data to ensure subject safety,
and provisions to protect the subjects’ privacy. Foreign
studies conducted under an IND application must meet
the same requirements that apply to studies being
conducted in the U.S. Data from a foreign study not
conducted under an IND may be submitted in support
of a BLA if the study was conducted in accordance with
GCP and FDA is able to validate the data.
Clinical trials are typically conducted in three
sequential phases, but the phases may overlap and
different trials may be initiated with the same drug
candidate within the same phase of development in
similar or differing patient populations. Phase I studies
may be conducted in a limited number of patients, but
are usually conducted in healthy volunteer subjects. The
drug is usually tested for safety and, as appropriate, for
absorption, metabolism,
excretion,
pharmaco-dynamics and pharmaco-kinetics. Phase II
usually involves studies in a larger, but still limited
patient population to evaluate preliminarily the efficacy
of the drug candidate for specific, targeted indications;
to determine dosage tolerance and optimal dosage; and
to identify possible short-term adverse effects and
safety risks.
distribution,
Phase III trials are undertaken to gather additional
information to evaluate the product’s overall risk-benefit
profile, and to provide a basis for physician labeling.
Phase III trials evaluate clinical efficacy of a specific
endpoint and test further for safety within an expanded
patient population at geographically dispersed clinical
study sites. Phase I, Phase II or Phase III testing might
not be completed successfully within any specific time
period, if at all, with respect to any of our product
candidates. Results from one trial are not necessarily
predictive of results from later trials. Furthermore, the
FDA, sponsor or institutional review board may suspend
clinical trials at any time on various grounds, including
a finding that the subjects or patients are being exposed
to an unacceptable health risk.
(NIH)
Institutes of Health
We must register each controlled clinical trial,
other than Phase I trials, on a website administered by
National
(http://
clinicaltrials.gov). Registration must occur not later than
21 days after the first patient is enrolled, and the
submission must include descriptive information (e.g.,
a summary in lay terms of the study design, type and
desired outcome), recruitment information (e.g., target
number of participants and whether healthy volunteers
are accepted), location and contact information, and
other administrative data (e.g., FDA identification
numbers). Within one year of a trial’s completion,
information about the trial including characteristics of
the patient sample, primary and secondary outcomes,
trial results written in lay and technical terms, and the
full trial protocol must be submitted to the NIH. The
results information is posted to the website unless the
drug has not yet been approved, in which case the NIH
posts the information shortly after approval. A BLA, BLA
supplement, and certain other submissions to the FDA
require certification of compliance with these clinical
trials database requirements.
fees
The results of the preclinical studies and clinical
trials, together with other detailed information, including
information on the manufacture and composition of the
product and proposed labeling for the product, are
submitted to the FDA as part of a BLA requesting
approval to market the product candidate for a proposed
indication. Under the Prescription Drug User Fee Act, as
amended, the fees payable to the FDA for reviewing a
for commercial
BLA, as well as annual
manufacturing establishments and
for approved
products, can be substantial. The BLA review fee alone
can exceed $2.0 subject to certain limited deferrals,
waivers and reductions that may be available. Each BLA
submitted to the FDA for approval is typically reviewed
for administrative completeness and reviewability within
sixty days following submission of the application. If the
FDA finds the BLA sufficiently complete, the FDA will
“file” the BLA, thus triggering a full review of the
application. The FDA may refuse to file any BLA that it
deems incomplete or not properly reviewable at the time
of submission. FDA performance goals provide for action
on an application within 12 months of submission. The
FDA, however, may not approve a drug within these
established goals and its review goals are subject to
change from time to time because the review process
is often significantly extended by FDA requests for
additional information or clarification. As part of its
review, the FDA may refer the BLA to an advisory
committee composed of outside experts for evaluation
and a recommendation as to whether the application
should be approved. Although the FDA is not bound by
the recommendation of an advisory committee, the
agency usually has followed such recommendations.
13
Further, the outcome of the review, even if generally
favorable, may not be an actual approval but instead a
“complete response letter” communicating the FDA’s
decision not to approve the application, outlining the
deficiencies in the BLA, and identifying what information
and/or data (including additional pre-clinical or clinical
data) is required before the application can be approved.
Even if such additional information and data are
submitted, the FDA may decide that the BLA still does
not meet the standards for approval. Data from clinical
trials are not always conclusive and the FDA may
interpret data differently than we do.
the
the product
facilities at which
Before approving a BLA, the FDA typically will
inspect
is
manufactured and will not approve the product unless
the facilities comply with the FDA’s current Good
Manufacturer Practice (cGMP) requirements. The FDA
may deny approval of a BLA if applicable statutory or
regulatory criteria are not satisfied, or may require
additional testing or information, which can delay the
approval process. FDA approval of any BLA may include
many delays and requests for additional information or
never be granted. If a product is approved, the approval
will impose limitations on the indicated uses for which
the product may be marketed, may require that warning
statements be included in the product labeling, and may
require that additional studies be conducted following
approval as a condition of the approval. FDA also may
impose
restrictions and conditions on product
distribution, prescribing or dispensing in the form of a
Risk Evaluation and Mitigation Strategy (REMS), or
otherwise limit the scope of any approval. A REMS may
include various elements, ranging from a medication
guide to limitations on who may prescribe or dispense
the drug, depending on what the FDA considers
necessary for the safe use of the drug. To market a
product for other indicated uses, or to make certain
manufacturing or other changes, requires FDA review
and approval of a BLA supplement or new BLA and the
payment of applicable review fees. Further post-
marketing testing and surveillance to monitor the safety
or efficacy of a product may be required. In addition, new
government requirements may be established that could
delay or prevent regulatory approval of our product
candidates under development.
In 2010, the Biologics Price Competition and
Innovation Act (BPCIA) was enacted, creating a statutory
pathway for licensure, or approval, of biological products
that are biosimilar to, and possibly interchangeable with,
reference biological products licensed under the Public
Health Service Act. The objectives of the BPCIA are
conceptually similar to those of the Drug Price
Competition and Patent Term Restoration Act of 1984,
commonly referred to as the “Hatch-Waxman Act”, which
established abbreviated pathways for the approval of
small molecule drug products. Under the BPCIA,
innovator manufacturers of original reference biological
products are granted 12 years of exclusive use before
14
biosimilar versions of such products can be licensed for
marketing in the U.S. This means that the FDA may not
approve an application for a biosimilar version of a
reference biological product until 12 years after the date
of approval of the reference biological product (with a
potential six-month extension of exclusivity if certain
pediatric studies are conducted and the results reported
to FDA), although a biosimilar application may be
submitted four years after the date of licensure of the
reference biological product. Additionally, the BPCIA
establishes procedures by which
the biosimilar
applicant must provide information about its application
and product to the reference product sponsor, and by
which information about potentially relevant patents is
shared and litigation over patents may proceed in
advance of approval. The BPCIA also provides a period
of exclusivity for the first biosimilar to be determined by
the FDA to be interchangeable with the reference
product.
FDA has released numerous guidance documents
interpreting the BPCIA in recent years. These guidance
documents, among other things, elaborate on the
definition of a biosimilar as a biological product that is
highly similar to an already approved biological product,
notwithstanding minor differences in clinically inactive
components, and for which there are no clinically
meaningful differences between the biosimilar and the
approved biological product in terms of the safety, purity,
and potency. The FDA has also released final guidance
documents on the assignment of clearly distinguishable
nonproprietary product names for both biologic and
biosimilar products, labeling for biosimilar products, and
questions and answers on issues involving biosimilar
development, as well as draft guidance on
interchangeability and evaluation of analytical similarity.
The FDA approved the first biosimilar product
under the BPCIA in 2015, and as of December 2018,
sixteen (16) biosimilar products have been approved in
total. The agency continues to refine the procedures and
standards it will apply in implementing this approval
pathway. In July 2018, the FDA issued a Biosimilars
Action Plan, asserting its intent to take steps to facilitate
biosimilars competition. We anticipate that the contours
of the BPCIA will continue to be defined as the statute
is implemented over a period of years. This likely will be
accomplished by a variety of means, including FDA
issuance of guidance documents, proposed regulations,
and decisions in the course of considering specific
applications. The approval of a biologic product
biosimilar to one of our products, including SOLIRIS,
could have a material impact on our business because
it may be significantly less costly to bring to market and
may be priced significantly lower than our products.
Both before and after the FDA approves a product,
the manufacturer and the holder or holders of the BLA,
and in the case of KANUMA, the NADA, for the product
are subject to comprehensive regulatory oversight. If
ongoing regulatory requirements are not satisfied or if
safety problems occur after the product reaches the
market, the FDA may at any time withdraw its approval
or take actions that would suspend marketing. For
example, quality control and manufacturing procedures
must conform, on an ongoing basis, to cGMP
requirements, and the FDA periodically subjects
manufacturing facilities to unannounced inspections to
assess compliance with cGMP. Failure to comply with
applicable cGMP requirements and other conditions of
product approval may lead the FDA to take regulatory
action,
recalls, civil penalties,
injunctions, suspension of manufacturing operations,
operating restrictions, withdrawal of FDA approval,
seizure or recall of products, and criminal prosecution.
Accordingly, manufacturers must continue to spend
time, money, and effort to maintain cGMP compliance.
including
fines,
The FDA and other federal regulatory agencies also
closely regulate the promotion of drugs and biologics
through, among other things, standards and regulations
for direct-to-consumer advertising, communications
regarding unapproved uses,
industry-sponsored
scientific and educational activities, and promotional
activities involving the Internet and social media. A
product cannot be commercially promoted before it is
approved. After approval, product promotion can include
only those claims relating to safety and effectiveness
that are consistent with the labeling approved by the
FDA. Healthcare providers are permitted to prescribe
drugs and biologics for uses not approved by the FDA
and therefore not described in the product’s labeling -
because the FDA does not regulate the practice of
medicine. However, FDA regulations impose stringent
communications
restrictions on manufacturers’
regarding such uses. Broadly speaking, a manufacturer
may not promote a drug or biologic for an unapproved
use, but may engage in non-promotional, balanced
communication regarding such uses under certain
conditions. Failure to comply with applicable FDA
requirements and restrictions in this area may subject
a company to adverse publicity and enforcement action
by the FDA, the Department of Justice, or the Office of
the Inspector General (OIG) of the Department of Health
and Human Services (HHS), as well as state authorities.
Noncompliance could subject a company to a range of
penalties that could have a significant commercial
impact, including civil and criminal fines and agreements
that materially restrict the manner in which a company
promotes or distributes drug or biologic products.
Orphan Drug Designation in the U.S., the EU and Other
Foreign Jurisdictions
Under the Orphan Drug Act, the FDA may grant
orphan drug designation to drugs and biological
products intended to treat a “rare disease or condition,”
which generally is a disease or condition that affects
fewer than two hundred thousand individuals in the U.S.
Orphan drug designation must be requested before
submitting a BLA or supplemental BLA. If the FDA grants
15
orphan drug designation, the generic identity of the
therapeutic agent and its potential orphan use are
publicly disclosed by the FDA. Orphan drug designation
does not convey any advantage in, or shorten the
duration of, the regulatory review and approval process.
If a product which has an orphan drug designation
subsequently receives the first FDA approval for that
drug or biologic for the indication for which it has such
designation, the product is entitled to an orphan
exclusivity period, in which the FDA may not approve any
other applications to market the same drug or biologic
for the same indication for seven years, except in limited
circumstances, such as where the sponsor of a different
version of the product is able to demonstrate that its
product is clinically superior to the approved orphan drug
product. This exclusivity does not prevent a competitor
from obtaining approval to market a different product
that treats the same disease or condition or the same
product to treat a different disease or condition. The
FDA can revoke a product’s orphan drug exclusivity under
certain circumstances, including when the holder of the
approved orphan drug application is unable to assure
the availability of sufficient quantities of the drug to meet
patient needs. A sponsor of a product application that
has received an orphan drug designation is also granted
tax incentives for clinical research undertaken to
support the application. In addition, the FDA will typically
coordinate with the sponsor on research study design
for an orphan drug and may exercise its discretion to
grant marketing approval on the basis of more limited
product safety and efficacy data than would ordinarily
be required.
In the EU, medicinal products: (a) that are used to
treat or prevent life-threatening or chronically debilitating
conditions that affect no more than five in ten thousand
people in the EU when the application is made; or (b) that
are used to treat or prevent life-threatening or chronically
debilitating conditions and that, for economic reasons,
would be unlikely to be developed without incentives;
and (c) where no satisfactory method of diagnosis,
prevention or treatment of the condition concerned
exists, or, if such a method exists, the medicinal product
would be of significant benefit to those affected by the
condition, may be granted an orphan designation. The
application for orphan designation must be submitted
to the EMA and approved before an application is made
for marketing authorization for the product. Once
authorized, orphan medicinal products are entitled to up
to ten years of market exclusivity (which may be
extended for an additional two years if pediatric data
have been produced in accordance with an agreed
pediatric investigational plan). During this ten year
period, with a limited number of exceptions, neither the
competent authorities of the EU Member States, the
EMA, or the EC are permitted to accept applications or
grant marketing authorization for other similar medicinal
products with the same therapeutic indication. However,
marketing authorization may be granted to a similar
medicinal product with the same orphan indication
during the ten year period with the consent of the
marketing authorization holder for the original orphan
medicinal product or if the manufacturer of the original
orphan medicinal product is unable to supply sufficient
quantities. Marketing authorization may also be granted
to a similar medicinal product with the same orphan
indication if this latter product is safer, more efficacious
or otherwise clinically superior to the original orphan
medicinal product. The period of market exclusivity may,
in addition, be reduced to six years if it can be
demonstrated on the basis of available evidence that
the criteria for orphan designation are no longer met or
if the orphan medicinal product is sufficiently profitable
not to justify maintenance of market exclusivity.
ULTOMIRIS has received orphan drug designation
for the treatment of patients with PNH in the U.S., EU
and Japan, and for the subcutaneous treatment of
patients with aHUS in the U.S. SOLIRIS has received
orphan drug designation for (a) the treatment of PNH
and aHUS in the U.S., the EU, and in several other
territories; (b) the prevention of delayed graft function
in renal transplant patients in the U.S.; (c) the treatment
of patients with gMG in the U.S., Japan, and the EU; (d)
the prevention of graft rejection and delayed graft
rejection following solid organ transplantation in the EU
and (e) and for the treatment of NMOSD in the U.S., EU,
and Japan. In 2008, STRENSIQ received orphan drug
designation for the treatment of patients with HPP in the
U.S. and the EU, and in Japan in November 2014.
Furthermore, in 2010, KANUMA received orphan drug
designation for the treatment of LAL-D in the U.S. and
the EU. As noted above, orphan drug designation
provides certain regulatory and filing fee advantages,
including market exclusivity, except
limited
circumstances, for several years after approval.
in
Breakthrough Designation in the U.S.
that
indicates
Congress has created the Breakthrough Therapy
designation program under which the FDA may grant
Breakthrough Therapy status to a drug intended for the
treatment of a serious condition when preliminary
clinical evidence
the drug may
demonstrate substantial improvement on a clinically
significant endpoint over existing therapies. The
Breakthrough Therapy designation, which may be
requested by a sponsor when filing or amending an IND,
is intended to facilitate and expedite the development
and FDA review of a product candidate. Specifically, the
Breakthrough Therapy designation may entitle the
sponsor to more frequent meetings with FDA during drug
development, intensive guidance on clinical trial design,
and expedited FDA review by a cross-disciplinary team
comprised of senior managers. The designation does
not guarantee a faster development or review time as
compared to other drugs however, nor does it assure
that the drug will obtain ultimate marketing approval by
the FDA. Once granted, the FDA may withdraw this
designation at any time if subsequent data no longer
support the breakthrough therapy designation. We have
received Breakthrough Therapy designations
for
STRENSIQ for HPP in perinatal-, infant-, and juvenile-
onset patients; and for KANUMA in the treatment of LAL-
D presenting in infants. It is difficult for us to predict the
impact that these designations will have on the
development and FDA review of our products.
21st Century Cures Act (the Cures Act)
In December 2016, Congress passed the Cures
Act which included a number of provisions designed to
speed development of innovative therapies, provide
funding authorization to the NIH, and provide funding for
certain oncology-directed research. Because the FDA is
still working to implement many aspects of the Cures
Act, its potential effect on our business remains unclear
with the exception of a provision requiring that we post
our policies on the availability of expanded access
programs for individuals. In addition, the Cures Act
includes requiring the FDA to assess and publish
guidance on the use of novel clinical trial designs, the
use of real world evidence in applications, the availability
of summary level review for supplemental applications
for certain indications, and the qualification of drug
development tools. Because these provisions allow the
FDA to spend several years developing these policies,
the effect on us could be delayed. At this time, we cannot
anticipate what effect these future policies may have on
our business.
The Cures Act also authorizes $1,800.0 in funding
for the “Cancer Moonshot” initiative (the Initiative) to
be run by the NIH. The Initiative’s strategic goals
encourage inter-agency cooperation and fund research
and innovation to catalyze new scientific breakthroughs,
bring new therapies to patients, and strengthen
prevention and diagnosis. The Initiative aims to
stimulate drug development through the creation of a
public-private partnership with 20 to 30 pharmaceutical
and biotechnology companies to expedite cancer
researchers’ access to investigational agents and
approved drugs. This partnership is designed to permit
researchers to obtain drugs and other technologies from
a preapproved “formulary” list without having to
negotiate with each company for individual research
projects. We will monitor these developments but cannot
currently assess how the Initiative may impact our
business.
Foreign Regulation of Drug Development and Approval
In addition to regulations in the U.S., we are subject
to a variety of foreign regulatory requirements including
those governing human clinical trials, marketing
approval, and post-marketing regulation for drugs. The
foreign regulatory approval process includes all of the
risks associated with FDA approval set forth above, as
well as additional country-specific regulations. Whether
or not we obtain FDA approval for a product, we must
16
obtain approval of a product by the comparable
regulatory authorities of foreign countries before we can
commence clinical trials or marketing of the product in
those countries. Approval by one regulatory authority
does not ensure approval by regulatory authorities in
other jurisdictions. The approval process varies from
country to country, can involve additional testing beyond
that required by FDA, and may be longer or shorter than
that required for FDA approval. The requirements
governing the conduct of clinical trials, product licensing,
pricing, promotion, and reimbursement vary greatly from
country to country.
involves
Under the EU regulatory system, we may submit
applications for marketing authorizations either under a
centralized, decentralized, or mutual
recognition
marketing authorization procedure. The centralized
procedure provides for the grant of a single marketing
authorization for a medicinal product by the EC on the
basis of a positive opinion by the EMA and is mandatory
for certain categories of medicinal products, such as
orphan medicinal products. A centralized marketing
authorization is valid for all EU Member States and the
European Economic Area states. The decentralized
procedure and the mutual recognition procedure apply
between EU Member States. The decentralized
marketing authorization procedure
the
submission of an application for marketing authorization
to the competent authority of all EU member states in
which the product is to be marketed. One national
competent authority, selected by
the applicant,
assesses the application for marketing authorization.
The competent authorities of the other EU Member
States are subsequently required to grant marketing
authorization for their territory on the basis of this
assessment, except where grounds of potential serious
risk to public health require this authorization to be
refused. The mutual recognition procedure provides for
mutual
recognition of marketing authorizations
delivered by the national competent authorities of EU
Member States by the competent authorities of other
EU Member States. The holder of a national marketing
authorization may submit an application to the
competent authority of an EU member state requesting
that this authority recognize the marketing authorization
delivered by the competent authority of another EU
member state for the same medicinal product. The EC
may agree upon recommendation of the EMA to grant
for medicines designated as orphan medicines a
(i) conditional marketing authorization in the interest of
public health under certain conditions; namely that
unmet medical needs will be fulfilled, the benefit-risk
balance of the product is positive, the benefit to public
health of the medicinal product’s immediate availability
on the market outweighs the risks due to need for further
data and it is likely that the applicant will be able to
provide comprehensive data; or
(ii) marketing
authorization under “exceptional circumstances” when
the applicant can show that it is unable to provide
17
comprehensive data on the efficacy and safety under
normal conditions of use and subject to specific
procedures being introduced. This may arise in
particular when the intended indications are very rare,
in the present state of scientific knowledge, it is not
possible to provide comprehensive information, or when
generating data may be contrary to generally accepted
ethical principles.
Similarly to the U.S., both marketing authorization
holders and manufacturers of medicinal products are
subject to comprehensive regulatory oversight by the
EMA and the competent authorities of the individual EU
Member States both before and after grant of the
manufacturing and marketing authorizations. This
includes control of compliance by the companies within
the EU legal framework (i.e., GCP, GLP, cGMP and
pharmacovigilance rules, which govern quality control of
the manufacturing process and require documentation
policies and procedures). We and our third party
manufacturers are required under regulations to ensure
that all of our processes, methods, and equipment are
compliant with GCP, GLP, cGMP and pharmacovigilance
rules. The EMA and national competent authorities may
arrange inspections to ensure that we adhere to these
principles and regulations. Any adverse findings from
such inspections, depending on their severity, may result
in significant delays
in obtaining a marketing
authorization, may impose penalties or may result in
other action by regulatory authorities.
Failure by us or by any of our third party partners,
including suppliers, manufacturers, and distributors to
comply with EU laws and the related national laws of
individual EU Member States governing the conduct of
clinical
trials, manufacturing approval, marketing
authorization of medicinal products, pre-approval
promotion of products, reporting of adverse health
events, both before and after grant of marketing
authorization, and marketing/promotion of such
products following grant of authorization may result in
administrative, civil, or criminal penalties. These
penalties could include delays in or refusal to authorize
the conduct of clinical trials or to grant marketing
authorization, product withdrawals and recalls, product
seizures, suspension, or variation of the marketing
authorization, total or partial suspension of production,
distribution, manufacturing, or clinical trials, operating
restrictions, injunctions, suspension of licenses, fines,
and criminal penalties.
The EU has had an established regulatory pathway
for biosimilars since 2005 and has approved several
biosimilar products. In addition, in February 2017 the
EMA launched a pilot project with the aim of providing
scientific advice to companies for the development of
new biosimilar products.
The approval of a biosimilar of one of our products
marketed in the EU could have a material impact on our
business. The biosimilar may be less costly to bring to
market, may be priced significantly lower than our
products, and result in a reduction in the pricing and
reimbursement of our products.
Pharmaceutical Pricing and Reimbursement
Sales of pharmaceutical products depend in
significant part on the extent of coverage and
reimbursement from third party payers, including
government programs such as Medicare and Medicaid
in the U.S, as well as private health insurers. Third party
payers are sensitive to the cost of drugs and are
increasingly seeking to implement cost containment
measures to control, restrict access to, or influence the
purchase of drugs, biologics, and other health care
products and services. For example, governments may
regulate reimbursement, pricing, and coverage of
products in order to control costs or to affect utilization
levels of certain products. In addition, private health
insurance plans may restrict coverage of some products,
such as by using drug formularies under which only
select drugs or uses of select drugs are covered, through
the implementation of variable patient co-payment
obligations that make non-preferred drugs more
expensive for patients, and by employing utilization
management controls, such as requirements for prior
authorization or prior failure on another type of treatment
before the insurer will cover and reimburse a particular
therapy. Payers may especially impose these obstacles
to coverage for higher-priced drugs such as those we
sell. Consequently, all of our products may be subject
to payer-driven
rendering patients
responsible for a higher percentage of the total cost of
drugs in the outpatient setting. This can lower the
demand for our products if the increased patient cost-
sharing obligations are more than patients can afford.
restrictions,
Medicare is a U.S. federal government insurance
program that covers individuals aged 65 years or older,
as well as individuals of any age with certain disabilities,
and individuals with end-stage renal disease. Our
products are primarily reimbursed by Medicare under
Medicare Part B, which generally covers physician
services and outpatient care, including some outpatient
prescription drugs under limited conditions, and
Medicare Part D, which provides an outpatient
prescription drug benefit for Medicare beneficiaries.
Generally speaking, Medicare Part B provides
limited coverage of certain outpatient drugs and
biologics that are reasonable and necessary for
diagnosis or treatment of an illness or injury. Under Part
B, reimbursement for most drugs is based on a fixed
percentage above the applicable product’s average
sales price (ASP). Manufacturers calculate ASP based
on a statutory formula and must report ASP information
to the Centers for Medicare and Medicaid Services
(CMS), the federal agency within HHS that administers
Medicare and the Medicaid Drug Rebate Program, on a
quarterly basis. Under the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, Medicare
pays physicians and suppliers ASP + 6.0% for most Part
B-covered drugs and biologics (Medicare payments for
ULTOMIRIS will also be based on the ASP formula
commencing with the period two quarters after
approval). Medicare payment for separately payable Part
B drugs reimbursed through the hospital outpatient
prospective payment system is generally under the
discretion of CMS, meaning it can be changed without
legislative action
from Congress. The current
reimbursement rate for most separately payable Part B
drugs used in the hospital outpatient setting is ASP plus
6.0%. One exception, however, is that, effective January
1, 2018, Medicare pays 340B hospital covered entities
ASP minus 22.5% for separately payable Part-B covered
drugs and biologics that were purchased under the 340B
Program in an outpatient clinic setting, as discussed
further below. In addition, the sequester that is currently
in place through 2027, reduces payments providers
receive for Part B-Covered drugs by 1.6%, which results
in a net payment equivalent to ASP plus 4.3%. The
sequester affects other Medicare payments and is also
discussed in more detail below. In both settings (i.e.,
physician office and hospital outpatient), the amount of
reimbursement is updated quarterly based on the
manufacturer’s submission of new ASP information.
the
federal government. Similar
Medicare Part D is an outpatient prescription drug
benefit available to all Medicare beneficiaries. It is a
benefit that is implemented through private insurance
plans under contractual arrangements between the
plans and
to
pharmaceutical coverage
through private health
insurance, Part D plans develop formularies, impose
utilization controls (such as prior authorization, step
therapy, and quantity limits), and negotiate discounts
from drug manufacturers. Because of this, the list of
prescription drugs covered by Part D plans varies by
plan. However, with limited exceptions, individual plans
are required by statute to cover certain therapeutic
categories and classes of drugs or biologics and to have
at least two drugs in each unique therapeutic category
or class.
Our products can also be provided under Medicare
Parts A and C (Medicare Advantage). Medicare Part A
generally covers inpatient hospital benefits. Hospitals
typically receive a single payment for an inpatient stay
depending on the Medicare Severity Diagnosis Related
Group (MS-DRG) to which the inpatient stay is assigned.
The MS-DRG for a hospital inpatient stay varies based
on the patient’s condition. Hospitals generally do not
receive separate payment for drugs and biologics
administered to patients during an inpatient hospital
stay. As a result, hospitals may not have a financial
incentive to utilize our products for inpatients where
lower cost alternative therapies are available. Finally,
Medicare beneficiaries can receive their Part A, B, and
D benefits through a Medicare Advantage organization
plan that is administered by a private insurance company
pursuant to Medicare Part C. Similar to private health
18
insurance plan, Medicare Advantage organization plans
negotiate discounts with health care providers and
implement utilization controls, including, most notably,
step therapy for Part B drugs beginning January 1, 2019.
Beginning April 1, 2013, the Budget Control Act of
2011, Pub. L. No. 112-25, as amended, requires
Medicare payments for all items and services, including
drugs and biologics, to be reduced by up to 2.0% under
sequestration (i.e., automatic spending reductions,
calculated each year by the Office of Management and
Budget). Subsequent legislation extended the 2.0%
reduction, on average, to 2027. This 2.0% reduction in
Medicare payments affects all Parts of the Medicare
program and could impact sales of our products.
Additional sequestration orders could also be triggered,
potentially resulting in up to a 4% reduction in Medicare
payments.
Pursuant to the Medicaid Drug Rebate Statute (42
U.S.C. § 1396r-8(a)(1)), we are required to participate
in the Medicaid Drug Rebate Program in order for federal
payment to be available for our products under Medicaid
and Medicare Part B. Medicaid is a government health
insurance program for eligible low-income adults,
children, families, pregnant women, and people with
certain disabilities. It is jointly funded by the federal and
state governments, and it is administered by individual
states within parameters established by the federal
government. As a result, coverage and reimbursement
requirements for drugs and biologics vary by state. For
example, drugs and biologics may be covered under the
medical or pharmacy benefit, and state Medicaid
programs may impose different utilization management
controls, such as prior authorization, step therapy, or
quantity limits on drugs and biologics, subject to federal
limitations for such controls. But all states must
generally provide coverage and reimbursement for a
manufacturer’s covered outpatient drugs, as that term
is defined by applicable law, if a manufacturer
participates in the Medicaid Drug Rebate Program.
Under the Medicaid Drug Rebate Program, we are
required to, among other things, pay a rebate to each
state Medicaid program for quantities of our products
utilized on an outpatient basis (with some exceptions)
that are dispensed to Medicaid beneficiaries and paid
for by a state Medicaid program. Medicaid Drug Rebate
Program Rebates are calculated using a statutory
formula, state-reported utilization data, and pricing data
that are calculated and reported by us on a monthly and
quarterly basis to CMS. These data include the average
manufacturer price and, in the case of innovator
products, the best price for each drug. As further
described below under “U.S. Healthcare Reform and
Other U.S. Healthcare Laws,” the Patient Protection and
Affordable Care Act, as amended by the Health Care and
Education Reconciliation Act of 2010 (collectively, the
PPACA), made significant changes to the Medicaid Drug
Rebate Program that could negatively impact our results
of operations.
19
In addition to participating in the Medicaid Drug
Rebate Program, federal law requires manufacturers like
us to participate in the Public Health Service’s 340B
drug pricing program in order for federal funds to be
available for the manufacturer’s drugs under Medicaid
and Medicare Part B. The 340B drug pricing program
requires participating manufacturers to agree to charge
statutorily-defined covered entities no more than the
340B “ceiling price” for the manufacturer’s covered
outpatient drugs. These 340B covered entities only
include health care organizations that have certain
federal designations or receive funding from specific
federal programs, including Federally Qualified Health
Centers, Ryan White HIV/AIDS Program grantees, and
certain types of hospitals and specialized clinics, as well
as certain hospitals that serve a disproportionate share
of low-income patients. PPACA expanded the 340B
program to include additional types of covered entities:
certain children’s hospitals, certain free-standing cancer
hospitals, critical access hospitals, rural referral centers
and sole community hospitals, each as defined by
PPACA. However, “orphan drugs” i.e., those designated
under section 526 of the FDCA, such as each of our
products that have received market authorization are
exempted from the ceiling price requirements for these
newly-eligible entities when used for the rare disease or
condition for which they received an orphan designation.
The 340B ceiling price is calculated using a statutory
formula, which is based on the average manufacturer
price and rebate amount for the covered outpatient drug
as calculated under the Medicaid Drug Rebate Program,
and in general, products subject to the Medicaid Drug
Rebate Program are also subject to the 340B ceiling
price calculation and discount requirement. Any changes
to the definition of Medicaid average manufacturer price
and the Medicaid rebate amount also could affect our
340B ceiling price calculation for our products and could
negatively impact our results of operations. In addition,
after multiple delays, the final rule implementing civil
monetary penalties against manufacturers for instances
of overcharging 340B covered entities became effective
on January 1, 2019. Accordingly, we could be subject to
such penalties if the government finds that we knowingly
and intentionally overcharged a 340B covered entity.
Federal law requires that for a company to be
eligible to have its products paid for with federal funds
under the Medicaid and Medicare Part B programs as
well as to be purchased by certain federal agencies and
grantees, it also must participate in the Department of
Veterans Affairs (VA) Federal Supply Schedule (FSS)
pricing program. To participate, we are required to enter
into an FSS contract and other agreements with the VA
for our products, which qualify as “covered drugs.” Under
these agreements, we must make our products available
to the “Big Four” federal agencies the VA, the
Department of Defense (DoD), the Public Health Service
(including the Indian Health Service), and the Coast
Guard at pricing that is capped pursuant to a statutory
federal ceiling price, or FCP, formula set forth in
Section 603 of the Veterans Health Care Act of 1992
(VHCA). The FCP is based on a weighted average non-
federal average manufacturer price (Non-FAMP), which
manufacturers are required to report on a quarterly and
annual basis to the VA. Pursuant to the VHCA, knowing
provision of false information in connection with a Non-
FAMP filing can subject a manufacturer to a penalty for
each item of false information and could result in other
potential liability as well, including liability under the
False Claims Act (which is discussed in more detail
below).
FSS contracts are federal procurement contracts
that include standard government terms and conditions,
separate pricing for each product, and extensive
disclosure and certification requirements. All items on
FSS contracts are subject to a standard FSS contract
clause that requires FSS contract price reductions under
certain circumstances where pricing is reduced to an
agreed “tracking customer.” Further, in addition to the
“Big Four” agencies, all other federal agencies and some
non-federal entities are authorized to purchase off FSS
contracts. FSS contractors are permitted to charge FSS
purchasers other than the Big Four agencies “negotiated
pricing” for covered drugs that is not capped by the FCP;
instead, such pricing is negotiated based on a
mandatory disclosure of the contractor’s commercial
“most favored customer” pricing. We offer dual pricing
on our FSS contract.
In addition, pursuant to regulations issued by the
DoD to implement Section 703 of the National Defense
Authorization Act for Fiscal Year 2008, each of our
covered drugs is listed on an agreement with the
Defense Health Agency (DHA) under which we have
agreed to honor the “Big Four” pricing for our products
when they are dispensed to TRICARE beneficiaries by
TRICARE retail network pharmacies. More specifically,
we have agreed to provide rebates (or refunds) on such
utilization. Companies are required to enter into a DHA
Agreement for “covered drug” products in order for the
covered drug to be eligible for DoD formulary inclusion
and available
to TRICARE beneficiaries without
preauthorization. The formula for determining the rebate
is established in the regulations and our DHA agreement
and is based on the difference between the annual Non-
FAMP and the FCP (as described above, these price
points are required to be calculated by us under the
VHCA).
As noted in the foregoing, pricing and rebate
calculations vary among products and programs. The
calculations can be very complex and are often subject
to interpretation by us, governmental or regulatory
agencies and the courts. We cannot assure you that our
submissions will not be found by CMS or other
governmental agencies to be incomplete or incorrect.
Governmental agencies may also make changes in
program interpretations, requirements or conditions of
participation, some of which may have implications for
20
amounts previously estimated or paid. For example, if
we become aware that certain Medicaid Drug Rebate
Program price reporting for a prior quarter was incorrect,
or has changed as a result of recalculation of the pricing
data, we are obligated to resubmit the corrected data
for a period not to exceed twelve quarters from the
quarter in which the data originally were due, and CMS
may consider restatements for earlier periods as well
depending on the circumstance. Such restatements and
recalculations increase our costs for complying with the
laws and regulations governing the Medicaid Drug
Rebate Program. Any corrections to our Medicaid rebate
calculations could result in an increase or decrease in
our rebate liability for past quarters, depending on the
nature of the correction. Price recalculations also may
affect the ceiling price at which we are required to offer
our products to certain covered entities under the 340B
drug pricing program.
Any failure to comply with these price reporting and
rebate payment obligations could negatively impact our
financial results. Civil monetary penalties can be applied
if we are found to have knowingly submitted any false
price information to the government, if we are found to
have made a misrepresentation in the reporting of our
average sales price, or if we fail to submit the required
price data on a timely basis. Such conduct also could
be grounds for CMS to terminate our Medicaid drug
rebate agreement, in which case federal payments may
not be available under Medicaid or Medicare Part B for
our covered outpatient drugs, as well as provide a basis
for other potential liability under other federal laws such
as the False Claims Act.
Payers also are increasingly considering new
metrics as the basis for reimbursement rates, such as
ASP, average manufacturer price, and actual acquisition
cost. The existing data for reimbursement based on
these metrics is relatively limited, although certain
states have begun to survey acquisition cost data for
the purpose of setting Medicaid reimbursement rates.
CMS surveys and publishes retail community pharmacy
acquisition cost information in the form of National
Average Drug Acquisition Cost files to provide state
Medicaid agencies with a basis of comparison for their
own reimbursement and pricing methodologies and
rates. It may be difficult to project the impact of these
evolving reimbursement mechanics on the willingness
of payers to cover our products.
Further, in the U.S., there is increased focus on
drug pricing, and the President, policy officials (including
the FDA) and lawmakers have expressed a clear interest
in efforts to reduce prices for drugs and biologics, further
increase
transparency around prices and price
increases, lower out-of-pocket costs for consumers, and
decrease spending on drugs by government programs.
In addition, members of Congress have launched an
investigation
the
prescription drug industry (and hearings may be held in
2019 in connection with this investigation). We expect
the pricing practices of
into
regulatory changes and continued Congressional
investigations and negative media attention in the
coming months with respect to drugs reimbursed by
federal healthcare programs, like ours, which could have
a negative impact on our operations.
the
to ensure
In addition, in some foreign countries, the proposed
pricing for a drug must be approved before it may be
requirements
lawfully marketed. Moreover,
governing drug pricing and reimbursement vary widely
from country to country. For example, in the EU, the sole
legal instrument at the EU level governing the pricing
and reimbursement of medicinal products is Council
Directive 89/105/EEC
(the Price Transparency
Directive). The aim of the Price Transparency Directive
is
reimbursement
that pricing and
mechanisms established in EU Member States are
transparent and objective, do not hinder the free
movement and trade of medicinal products in the EU
and do not hinder, prevent or distort competition on the
market. The Price Transparency Directive does not,
however, provide any guidance concerning the specific
criteria on the basis of which pricing and reimbursement
decisions are to be made in individual EU Member
States. Neither does it have any direct consequence for
pricing or levels of reimbursement in individual EU
Member States. Pricing of prescription only medicinal
products is a national prerogative. Therefore the relevant
national authorities of the individual EU Member States
are free to restrict the range of medicinal products for
which their national health insurance systems provide
reimbursement and to control the prices and/or
reimbursement of medicinal products for human use.
Some individual EU Member States adopt policies
according to which a specific price or level of
reimbursement is approved for the medicinal product.
Other EU Member States adopt a system of reference
pricing, basing the price or reimbursement level in their
territory either, on the pricing and reimbursement levels
in other countries, or on the pricing and reimbursement
levels of medicinal products intended for the same
therapeutic indication. Furthermore, some EU Member
States impose direct or indirect controls on the
profitability of the company placing the medicinal
product on the market.
Health Technology Assessment (HTA) of medicinal
products is becoming an increasingly common part of
the pricing and reimbursement procedures in some EU
Member States. These countries include the United
Kingdom, France, Germany and Sweden. The HTA
process in the EU Member States is governed by the
national laws of these countries. HTA is the procedure
according to which the assessment of the public health
impact, therapeutic impact and the economic and
societal impact of the use of a given medicinal product
in the national healthcare systems of the individual
country is conducted. HTA generally focuses on the
clinical efficacy and effectiveness, safety, cost, and cost-
effectiveness of individual medicinal products as well
21
their potential
as
the national
implications
healthcare system. Those elements of medicinal
products are compared with other treatment options
available on the market.
for
The outcome of HTA may influence the pricing and
reimbursement status for specific medicinal products
within individual EU Member States. The extent to which
pricing and reimbursement decisions are influenced by
the HTA of a specific medicinal product vary between
the EU Member States.
In 2011, Directive 2011/24/EU was adopted at
the EU level. This Directive concerns the application of
patients’ rights in cross-border healthcare. The Directive
is intended to establish rules for facilitating access to
safe and high-quality cross-border healthcare in the EU.
Pursuant to Directive 2011/24/EU, a voluntary network
of national authorities or bodies responsible for HTA in
the individual EU Member States was established. The
purpose of the network is to facilitate and support the
exchange of scientific information concerning HTAs. This
could lead to harmonization of the criteria taken into
account in the conduct of HTA between EU Member
States in pricing and reimbursement decisions and
negatively impact price in at least some EU Member
States.
On a continuous basis, we engage with appropriate
authorities in individual countries on the operational,
reimbursement, price approval and funding processes
that are separately required in each country.
Fraud and Abuse
Pharmaceutical companies participating in federal
healthcare programs like Medicare or Medicaid are
subject to various U.S. federal and state laws pertaining
to healthcare “fraud and abuse,” including anti-kickback
and false claims laws. Violations of U.S. federal and
state fraud and abuse laws may be punishable by
criminal, civil and administrative sanctions, including
fines, damages, civil monetary penalties and exclusion
from participation in federal healthcare programs
(including Medicare and Medicaid). Applicable U.S.
statutes, include, but are not limited to, the following:
• The federal Anti-Kickback Statute prohibits,
among other things, knowingly and willfully
soliciting, offering, receiving, or paying any
remuneration, directly or indirectly, in cash or in
kind, to induce or reward purchasing, ordering or
arranging for or recommending the purchase or
order of any item or service for which payment
may be made, in whole or in part, under a federal
healthcare program such as Medicare and
Medicaid. Liability may be established without a
person or entity having actual knowledge of the
federal Anti-Kickback Statute or specific intent
to violate it. This statute has been interpreted
to apply broadly to arrangements between
pharmaceutical manufacturers on the one hand
and individuals such as prescribers, patients,
purchasers and formulary managers on the
other. In addition, PPACA amended the Social
Security Act to provide that the government may
assert that a claim including items or services
resulting from a violation of the federal Anti-
Kickback Statute constitutes a
false or
fraudulent claim for purposes of the federal civil
False Claims Act (which is discussed below). A
conviction for violation of the Anti-Kickback
Statute results in criminal fines and requires
in
mandatory exclusion
federal health care programs. Although there are
a number of statutory exceptions and regulatory
safe harbors to the federal Anti-Kickback Statute
that protect certain common, industry practices
from prosecution, the exceptions and safe
harbors are drawn narrowly, and arrangements
may be subject to scrutiny or penalty if they do
not fully satisfy all elements of an available
exception or safe harbor. The discount safe
harbor is currently the subject of possible reform.
Any changes to the discount safe harbor may
cause us to review our arrangements and pricing
strategies with payers.
from participation
• The federal civil False Claims Act (FCA) imposes
civil penalties against individuals or entities for,
among other things, knowingly presenting, or
causing to be presented, claims for payment to
the government that are false or fraudulent, or
knowingly making, using or causing to be made
or used a false record or statement material to
such a false or fraudulent claim, or knowingly
concealing or knowingly and improperly avoiding,
decreasing, or concealing an obligation to pay
money to the federal government. This statute
also permits a private individual acting as a
“whistleblower” to bring actions on behalf of the
federal government alleging violations of the FCA
and to share in any monetary recovery. FCA
liability is potentially significant in the healthcare
industry because the statute provides for treble
damages and mandatory penalties of eleven
thousand one hundred eighty-one to twenty-two
thousand three hundred sixty-three dollars per
false claim or statement for penalties assessed
after January 29, 2018, with respect to violations
occurring after November 2, 2015 (and penalties
of five thousand five hundred to eleven thousand
dollars with respect to violations occurring
before that date). Government enforcement
agencies and private whistleblowers have
investigated pharmaceutical companies for or
asserted liability under the FCA for a variety of
alleged inappropriate promotional and marketing
activities, including those involving the provision
of free product or other items of value to
customers, certain financial arrangements with
22
healthcare providers, misstated government
pricing information, and purported “off-label”
promotion of products, among other things.
• Under the federal criminal statute on false
statements relating to health care matters, it is
a crime to knowingly and willfully falsify, conceal,
or cover up a material fact, make any materially
false, fictitious, or fraudulent statements or
representations, or make or use any materially
false writing or document knowing the same to
contain any materially
fictitious, or
fraudulent statement or entry in connection with
the delivery of or payment for federally funded
healthcare benefits, items, or services.
false,
• Under the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) criminal
federal health care fraud statute, it is a crime to
knowingly and willfully execute, or attempt to
execute, a scheme or artifice to defraud any
health care benefit program or to obtain, by
means of
fraudulent pretenses,
representations, or promises, any of the money
or property owned by, or under the custody or
control of, any health care benefit program, in
connection with the delivery of or payment for
health care benefits, items, or services.
false or
• The federal Civil Monetary Penalties Law
authorizes the imposition of substantial civil
monetary penalties against an entity, such as a
pharmaceutical manufacturer, that engages in
activities including, among others (1) knowingly
presenting, or causing to be presented, a claim
for services not provided as claimed or that is
otherwise false or fraudulent in any way; (2)
arranging for or contracting with an individual or
entity that is excluded from participation in
federal healthcare programs to provide items or
services reimbursable by a federal healthcare
program; (3) violations of the federal Anti-
Kickback Statute; or (4) failing to report and
return a known overpayment.
• The majority of states also have statutes similar
to the federal Anti-Kickback Statute and FCA that
apply to items and services reimbursed under
Medicaid and other state health care programs,
or, in several states, apply regardless of the
payer.
“applicable manufacturers”
• The federal Physician Payments Sunshine Act
requires
of
products, including biologics, for which payment
is available under Medicare, Medicaid or the
State Children’s Health Insurance Program,
among others, to track and report annually to the
federal government (for disclosure to the public)
certain payments and other transfers of value
they make to ”covered recipients.” The term
covered recipients includes physicians, teaching
to
including
hospitals, and, for reports submitted on or after
January 1, 2022, physician assistances, nurse
practitioners, clinical nurse specialists, certified
nurse anesthetists, and certified nurse-
midwives. In addition, several U.S. states and
localities have enacted legislation requiring
pharmaceutical
establish
companies
marketing compliance programs, file periodic
reports, and/or make periodic public disclosures
on sales, marketing, pricing, clinical trials, and
other activities. Other state laws prohibit certain
the
marketing-related activities
provision of gifts, meals or other items to certain
healthcare providers, and restrict the ability of
manufacturers to offer co-pay support to patients
for certain prescription drugs. Some states and
cities require identification or licensing of state
representatives. In addition, several recently
passed state laws require disclosures related to
state agencies and/or commercial purchasers
with respect to certain price increases that
exceed a certain level as identified in the relevant
statutes. Many of these laws and regulations
contain
that
government officials have not yet clarified. Given
the lack of clarity in the laws and their
implementation, our reporting actions could be
subject to the penalty provisions of the pertinent
federal and state laws and regulations.
requirements
ambiguous
Sanctions under federal and state fraud and abuse
laws may include significant criminal, civil, and
administrative penalties, including damages, fines,
imprisonment, and exclusion of a manufacturer’s
products
reimbursement under government
programs. Any of the foregoing would be expected to
have a negative impact on our business which may be
material.
from
resources
reimbursement
Federal and state authorities are continuing to
devote significant attention and
to
enforcement of fraud and abuse laws within the
pharmaceutical industry, and private individuals have
been active in alleging violations of the law and bringing
suits on behalf of the government under the FCA. For
example, federal enforcement agencies recently have
investigated certain pharmaceutical companies’
product and patient assistance programs, including
manufacturer
services,
relationships with specialty pharmacies, and grants to
independent charitable foundations. If we, our vendors,
or donation recipients are deemed to fail to comply with
relevant laws, regulations or evolving government
guidance in the operation of these programs, we could
be subject to damages, fines, penalties or other criminal,
civil or administrative sanctions or enforcement actions.
We cannot ensure that our compliance controls, policies
and procedures will be sufficient to protect against acts
of our employees, business partners or vendors that
may violate the laws or regulations of the jurisdictions
support
in which we operate. In December 2016, we received a
subpoena from the U.S. Attorney’s Office (USAO) for the
District of Massachusetts relating generally to our
support of 501(c)(3) organizations that provide financial
assistance to Medicare patients, Alexion’s provision of
free drug to Medicare patients and Alexion’s related
compliance policies and training materials. Please see
the discussion below in the “Risk Factors” section and
Note 11 “Commitments and Contingencies” to the
consolidated financial statements included elsewhere
in this Annual Report on Form 10-K for additional details
regarding this investigation. Similar investigations of
other pharmaceutical companies have resulted in
significant civil and criminal settlements. Efforts to
ensure that our business arrangements continue to
comply with applicable healthcare laws and regulations
could be costly.
Outside the U.S., other countries have
implemented similar laws and regulations relating to
fraud and abuse in the sale of pharmaceutical
products and requirements for disclosure of financial
interactions with healthcare providers and additional
countries may consider or implement such laws.
U.S. Healthcare Reform and Other U.S. and
International Healthcare Laws
PPACA was adopted in the U.S. in March 2010.
This law substantially changes the way healthcare is
financed in the U.S. by both governmental and private
insurers, and significantly impacts the pharmaceutical
industry. PPACA contains a number of provisions that
have and are expected to impact our business and
operations. Changes that may affect our business
include those governing enrollment in federal healthcare
programs, reimbursement changes, rules regarding
prescription drug benefits under the health insurance
exchanges, expansion of the 340B program, expansion
of state Medicaid programs, and fraud and abuse and
enforcement. These changes will impact existing
government healthcare programs and will result in the
development of new programs, including Medicare
payment for performance initiatives and improvements
to the physician quality reporting system and feedback
program.
PPACA contains several provisions that have or
could potentially have an impact on our business. PPACA
made significant changes to the Medicaid Drug Rebate
Program. Effective March 23, 2010, rebate liability
expanded from fee-for-service Medicaid utilization to
include the utilization of Medicaid managed care
organizations as well. With regard to the amount of the
rebates owed, PPACA increased the minimum Medicaid
rebate percentage from 15.1% to 23.1% of the average
manufacturer price for most innovator products;
changed the calculation of the rebate for certain
innovator products that qualify as line extensions of
existing drugs; and capped the total rebate amount for
innovator drugs at 100.0% of the average manufacturer
23
price. In addition, PPACA and subsequent legislation
changed the definition of average manufacturer price.
Finally, PPACA requires pharmaceutical manufacturers
of branded prescription drugs to pay a branded
prescription drug fee to the federal government. Each
individual pharmaceutical manufacturer pays a prorated
share of the aggregate branded prescription drug fee
paid by all covered entities ($2,800 in 2019 and each
ensuing year), based on, among other things, its
applicable branded prescription drug sales to certain
federal programs identified in the law. Sales of “orphan
drugs” are excluded from this fee. “Orphan drugs” are
specifically defined for purposes of the fee. For each
indication approved by the FDA for the drug, such
indication must have been designated as orphan by the
FDA under section 526 of the FDCA, an orphan drug tax
credit under section 45C of the Internal Revenue Code
of 1986 (Internal Revenue Code) must have been
claimed with respect to such indication, and such tax
credit must not have been disallowed by the Internal
Revenue Service (IRS). Finally, the FDA must not have
approved the drug for any indication other than an
orphan indication for which a section 45C orphan drug
tax credit was claimed (and not disallowed). In early
2016, CMS issued a final regulation to implement the
changes to the Medicaid Drug Rebate Program under
PPACA, which became effective on April 1, 2016. The
issuance of the final regulation, as well as any other
regulations and coverage expansion by various
governmental agencies relating to the Medicaid Drug
Rebate Program, has increased and will continue to
increase our costs and the complexity of compliance,
has been and will continue to be time-consuming to
implement, and could have a material adverse effect on
our results of operations, particularly if CMS challenges
the approach we take in our implementation of the final
rule.
Additional provisions of PPACA may negatively
affect manufacturer’s revenues in the future. For
example, as part of PPACA’s provisions closing a
coverage gap that currently exists in the Medicare Part
D prescription drug program (commonly known as the
“donut hole”), manufacturers of branded prescription
drugs and biologics are required to provide a 50.0%
discount on branded prescription drugs and biologics
dispensed to beneficiaries within this donut hole. This
discount was recently increased to 70.0%, beginning
January 1, 2019, by the Bipartisan Budget Act of 2018.
As noted above, PPACA also expanded the Public
Health Service’s 340B drug pricing discount program by
including additional types of covered entities. The 340B
pricing program requires participating manufacturers to
agree to charge statutorily-defined covered entities no
more
the
manufacturer’s covered outpatient drugs. PPACA
expanded the 340B program to include additional types
of covered entities as described above. PPACA exempts
“orphan drugs” designated under section 526 of the
the 340B “ceiling price”
than
for
FDCA, such as our products, from the ceiling pricing
requirements for these newly-eligible covered entities.
Moreover, certain legislative changes to and
regulatory changes under PPACA have occurred under
the Trump Administration. For example, the Tax Cuts and
Jobs Act enacted in 2017 eliminated the shared
responsibility payment for individuals who fail to
maintain minimum essential coverage under section
5000A of the Internal Revenue Code, commonly referred
to as the “individual mandate,” beginning in 2019. In
December 2018, a federal district court in Texas ruled
the individual mandate was unconstitutional and could
not be severed from the PPACA. As a result, the court
ruled the remaining provisions of the PPACA were also
invalid, though the court declined to issue a preliminary
injunction with respect to the PPACA. However, it remains
unclear whether the court’s ruling will be upheld by
appellate courts. In addition, further legislative changes
to and regulatory changes under PPACA remain possible.
Privacy, Data Protection and Information Security
Numerous international, federal, and state laws,
including state security breach notification and
information security laws, state privacy laws, and federal
and state consumer protection laws govern the
collection, use, and disclosure of personal information.
In addition, most healthcare providers who prescribe
and dispense our products and research institutions
with whom we collaborate for our sponsored clinical
trials are subject to privacy and security requirements
under HIPAA, as amended by the Health Information
Technology for Economic and Clinical Health Act
(HITECH), and its implementing regulations. Although we
are not directly subject to HIPAA other than with respect
to providing certain employee benefits, we could be
potentially subject to criminal penalties if we, our
affiliates, or our agents knowingly obtain or disclose
individually identifiable health information maintained
by a HIPAA covered entity in a manner that is not
authorized or permitted by HIPAA. In addition, in
December 2018, HHS issued cybersecurity guidance for
all
addresses
organizations
organizations’ enterprise-level
information security
generally, including individually identifiable health
information. Failure to comply with current and future
laws and regulations could result in governmental
enforcement actions (including the imposition of
significant penalties), criminal and civil liability for our
Company and our officers and directors, and/or adverse
publicity that negatively affects our business. Further,
the EU’s General Data Protection Regulation (GDPR) and
implementing laws in the EU member states govern the
collection and processing of EU residents’ personal data
and, among other requirements, imposes certain
consent and data access rights. Such laws may impact
our ability to conduct clinical trials that involve EU
personal data and engage in other activities that require
the processing of EU personal data. Outside of the U.S.
healthcare
that
24
and the EU, there are numerous other jurisdictions that
have their own privacy and information security laws,
and new laws and regulations are being considered and/
or enacted globally, which may affect our ability to collect,
process, and store their residents’ personal data. Two
such examples are the California Consumer Privacy Act
of 2018 and the Brazilian Data Protection Law, which
both go into effect in early 2020, and may impact our
collection and use of personal information related to
their jurisdictions.
Moreover, we rely on our and third-party provided
information technology systems and applications to
support our operations and to maintain and process
company information including personal information,
confidential business information and proprietary
information. If these information technology systems
are subject to cybersecurity attacks, or are otherwise
compromised, due to cyberattacks, human error or
malfeasance, system errors or otherwise, it may
adversely impact our business, disrupt our operations,
or lead to the loss, theft, destruction, corruption or
compromise of company information and personal
information. Such information technology or security
events could also lead to legal liability, regulatory
investigations or actions, loss of business, negative
media coverage, and reputational damage. While we
maintain an information security program with technical
controls to mitigate these risks and training to educate
and prepare our employees, the healthcare sector
continues to see a high frequency of cyberattacks and
threat actors
to become more
sophisticated and better resourced, and our systems
and the information maintained within those systems
remain potentially vulnerable to data security incidents.
Moreover, losses from such events may not be
completely covered by insurance coverage. Finally, as
cyber threats continue to evolve and privacy and
cybersecurity laws and regulations continue to develop,
we may need to invest additional resources to implement
new compliance measures, strengthen our information
security posture, or respond to cyber threats and
incidents.
that continue
Other Regulations
We are also subject to the U.S. Foreign Corrupt
Practices Act (FCPA), the U.K. Bribery Act (U.K. Bribery
Act), and other anti-corruption laws and regulations
pertaining to our financial relationships and interactions
with foreign government officials. The FCPA prohibits
U.S. companies and their employees, officers, and
representatives from paying, offering to pay, promising,
or authorizing the payment of anything of value to any
foreign government official, government staff member,
political party, or political candidate to obtain or retain
business or to otherwise seek favorable treatment. In
many countries in which we operate or sell our products,
the healthcare professionals with whom we interact may
be deemed to be foreign government officials for
25
purposes of the FCPA. The U.K. Bribery Act, which
applies to any company incorporated or doing business
in the UK, prohibits giving, offering, or promising bribes
in the public and private sectors, bribing a foreign public
official or private person, and failing to have adequate
procedures to prevent bribery amongst employees and
other agents. Penalties under the U.K. Bribery Act
include potentially unlimited fines for companies and
criminal sanctions for corporate officers under certain
circumstances. Liability in relation to breaches of the
U.K. Bribery Act is strict. This means that it is not
necessary to demonstrate elements of a corrupt state
of mind. However, a defense of having in place adequate
procedures designed to prevent bribery is available.
Recent years have seen a substantial increase in
anti-bribery law enforcement activity by U.S. regulators,
with more frequent and aggressive investigations and
enforcement proceedings by both the DOJ and the SEC,
increased enforcement activity by non-U.S. regulators,
and increases in criminal and civil proceedings brought
against companies and individuals. In May 2015, we
received a subpoena in connection with an investigation
by the Enforcement Division of the SEC requesting
information related to our grant-making activities and
compliance with the FCPA in various countries. In
addition, in October 2015, Alexion received a request
from the DOJ for the voluntary production of documents
and other information pertaining to Alexion’s compliance
with the FCPA. For
information concerning this
investigation see Note 11 “Commitments and
Contingencies” to the consolidated financial statements
included elsewhere in this Annual Report on Form 10-K
and, with respect to the the risks associated with the
investigation, see our Risk Factors, including "Our
business and operations may be materially adversely
affected by government investigations."
The EU also imposes strict restrictions on the
promotion and marketing of drug products in the EU,
where a large portion of our non-U.S. business is
conducted, and other territories. Increasing regulatory
scrutiny of the promotional activities of pharmaceutical
companies also has been observed in a number of EU
Member States. Laws in the EU, including in the
individual EU Member States, require promotional
materials and advertising for drug products to comply
with the product’s Summary of Product Characteristics
(SmPC), which is approved by the competent authorities.
Promotion of a medicinal product which does not comply
with the SmPC is considered to constitute off-label
promotion. The off-label promotion of medicinal
products is prohibited in the EU and in other territories.
The promotion of medicinal products that are not subject
to a marketing authorization is also considered to
constitute off-label promotion and is prohibited in the
EU. Laws in the EU, including in the individual EU Member
States, also prohibit the direct-to-consumer advertising
of prescription-only medicinal products. Violations of the
rules governing the promotion of medicinal products in
the EU and in other territories could be penalized by
administrative measures, fines and imprisonment.
Under the new Clinical Trial Regulation there is an
obligation to publish clinical trial within a certain
timeframe. A breach of this obligation would constitute
non-compliance with an EU Regulation and may be met
with penalties set by each Member State, including civil
and criminal liability.
Japan and other countries in which we operate also
have strict regulations and requirements regarding the
promotion of pharmaceutical products.
Interactions between pharmaceutical companies
and physicians are also governed by strict laws,
regulations, industry self-regulation codes of conduct
and physicians’ codes of professional conduct in the
individual EU Member States. The provision of any
inducements to physicians to prescribe, recommend,
endorse, order, purchase, supply, use or administer a
medicinal product is prohibited. A number of EU Member
States have introduced additional rules requiring
pharmaceutical companies to publicly disclose their
interactions with physicians and to obtain approval from
and/or
employers,
competent authorities before entering into agreements
with physicians. These rules have been supplemented
by provisions of related industry codes, including the
EFPIA Disclosure Code on Disclosure of Transfers of
Value from Pharmaceutical Companies to Healthcare
Professionals and Healthcare Organizations and related
codes developed at national level in individual EU
Member States. Additional countries may consider or
implement similar laws and regulations. Violations of
these rules could lead to reputational risk, public
reprimands, and/or
fines or
imprisonment.
imposition of
organizations
professional
the
Our present and future business has been and will
continue to be subject to various other laws and
regulations. Laws, regulations and recommendations
relating to safe working conditions, laboratory practices,
the experimental use of animals, and the purchase,
storage, movement, import and export and use and
disposal of hazardous or potentially hazardous
substances, including radioactive compounds, used in
connection with our research work are or may be
applicable to our activities. We cannot predict the impact
of government regulation, which may result from future
legislation or administrative action, on our business.
Competition
ULTOMIRIS and SOLIRIS are currently the only
approved therapies for the treatment of PNH (although
several companies are currently evaluating other
complement inhibitors for the treatment of PNH in
clinical trials). SOLIRIS is currently the only approved
therapy for the treatment of aHUS, and the only approved
complement inhibitor therapy for the treatment of AChR
antibody-positive gMG (although similar to PNH, there
are companies evaluating other complement inhibitors
in both aHUS and gMG clinical trials). We have recently
announced the results of our SOLIRIS Phase III PREVENT
trial in patients with anti-aquaporin-4 (AQP4) auto
antibody-positive NMOSD. Based on these results, we
submitted applications for marketing authorization for
SOLIRIS as a treatment for NMOSD in the US and the
E.U. and expect additional marketing authorization
applications to be submitted in other jurisdictions in the
future. While we are unable to assess our competitive
position with respect to potential NMOSD competitors,
as we have not yet received regulatory approval in any
jurisdiction, we are aware that others companies are
also developing and testing therapies for NMOSD. We
are also in advanced clinical studies of ULTOMIRIS and
SOLIRIS for the treatment of other indications, and we
believe there are competitors for the patient segments
we target with respect to these products. STRENSIQ is
currently the only product approved for the treatment of
HPP and KANUMA is the only product approved for the
treatment of LAL-D. Many pharmaceutical and biotech
companies have publicly announced intention to
establish or develop rare disease programs that may be
competitive with ours. We also experience competition
in drug development from universities and other
research institutions, and pharmaceutical companies
compete with us to attract universities and academic
research institutions as drug development partners,
including for licensing their proprietary technology.
Some of these entities may have:
• greater financial and other resources;
• larger research and development staffs;
• lower labor costs; and/or
• more extensive marketing and manufacturing
organizations.
Many of these companies and organizations have
significant experience in preclinical testing, human
clinical trials, product manufacturing, marketing, sales
and distribution and other regulatory approval and
commercial procedures. They may also have a greater
number of significant patents and greater legal
resources to seek remedies for cases of alleged
infringement of their patents by us to block, delay or
compromise our own drug development process.
We compete with large pharmaceutical companies
that produce and market synthetic compounds and with
specialized biotechnology firms in the United States,
26
Europe and in other countries and regions, as well as a
growing number of large pharmaceutical companies that
are developing biotechnology products. A number of
biotechnology and pharmaceutical companies are
developing new products for the treatment of the same
diseases being targeted by us. Other companies have
initiated clinical studies for the treatment of PNH, aHUS,
MG and NMOSD, and we are aware of companies that
are planning to initiate studies for diseases we are also
targeting. In addition, we are aware that companies are
conducting clinical trials for biosimilars of SOLIRIS and
we expect to compete with biosimilars in the future.
Several biotechnology and pharmaceutical
companies have programs to develop complement
inhibitor therapies or have publicly announced their
the
to develop drugs which
intentions
inflammatory effects of complement in the immune
system or have had programs to develop complement
inhibitor therapies. SOLIRIS is the only therapy that has
demonstrated to be safe and effective in two clinical
indications by regulators in many jurisdictions around
the world.
target
Employees
As of December 31, 2018, we had 2,656 full-time,
world-wide employees, of which 954 were engaged in
research, product development, manufacturing, and
clinical development, 1,299 in sales and marketing, and
403 in administration, human resources, information
technology and finance. Our U.S. employees are not
represented by any collective bargaining unit, and we
regard the relationships with all our employees as
satisfactory.
The executive officers of the Company and their respective ages and positions as of February 6, 2019 are as
EXECUTIVE OFFICERS OF THE COMPANY
follows:
Name
Ludwig Hantson, Ph.D.
Paul J. Clancy
Ellen Chiniara, J.D.
Position with Alexion
Chief Executive Officer
Executive Vice President, Chief Financial Officer
Executive Vice President, General Counsel and Corporate Secretary
Indrani Franchini, J.D.
Executive Vice President, Chief Compliance Officer
Brian Goff
Anne-Marie Law
John Orloff, M.D.
Executive Vice President, Chief Commercial Officer
Executive Vice President, Chief Human Resources Officer
Executive Vice President, Head of Research and Development
Age
56
57
60
47
49
51
61
Ludwig N. Hantson, Ph.D., is Chief Executive Officer of Alexion. Dr. Hantson is an accomplished
healthcare executive with more than 30 years of experience in the biopharmaceutical industry.
Prior to joining Alexion in March 2017, Dr. Hantson was President and Chief Executive Officer of
Baxalta and also served on the company’s Board of Directors. He led Baxalta’s successful spin-
off as a public company from Baxter in July 2015 where he was President of Baxter BioScience.
Dr. Hantson joined Baxter in May 2010 and established the BioScience division as one of the
most innovative specialty and rare disease companies by building a robust pipeline of 25 new
product candidates, and launching 13 new products.
Dr. Hantson held several leadership roles during his decade-long tenure at Novartis from
2001-2010, including CEO of Pharma North America, CEO of Europe, and President of Pharma
Canada. Prior to Novartis, he spent 13 years with Johnson & Johnson in roles of increasing
responsibility in marketing, and research and development. Mr. Hantson serves on the Board of
Directors of Hologic Inc., which is a medical technology company.
Dr. Hantson received his Ph.D. in motor rehabilitation and physical therapy, master’s degree in
physical education, and a certification in high secondary education, all from the University of
Louvain in Belgium.
27
Paul J. Clancy is Executive Vice President, Chief Financial Officer of Alexion. Mr. Clancy is
responsible for global financial management, treasury, internal audit, corporate strategy, business
development, investor relations, information technology, and security activities.
Prior to joining Alexion in July 2017, Mr. Clancy served as the Executive Vice President, Finance
and Chief Financial Officer and a member of the Executive Committee of Biogen, where he led the
financial performance of the company. Prior to joining Biogen, Mr. Clancy spent 13 years at
PepsiCo, serving in a range of finance, strategy and general management positions. Mr. Clancy
serves on the Board of Directors of the biopharmaceutical companies Agios Pharmaceuticals,
Inc. and Incyte Corporation.
Mr. Clancy holds an MBA from Columbia University and a Bachelor of Science in Finance from
Babson College.
Ellen Chiniara is Executive Vice President, General Counsel and Corporate Secretary of Alexion. In
this role, she is responsible for overseeing all global legal matters for the Company.
Prior to joining Alexion in January 2018, Ms. Chiniara was Senior Vice President and General
Counsel of Alere Inc., a point-of-care diagnostics company, from October 2006 to October 2017
where she was responsible for all legal matters and, from June 2014 to October 2017 she had
oversight of compliance and government affairs matters. She managed the legal aspects of the
company’s numerous acquisitions and dispositions and was also the executive sponsor of Alere’s
corporate social responsibility efforts.
Prior to joining Alere, Ms. Chiniara served as Associate General Counsel for Serono’s Neurology
division from 2002 to 2006. Earlier in her career, Ms. Chiniara was a partner at the law firm Hale
and Dorr LLP (now Wilmer Cutler Pickering Hale and Dorr LLP).
Ms. Chiniara received her J.D. from Stanford University’s School of Law and her Bachelor's
Degree from Bryn Mawr College. She also was a graduate fellow at Yale University in Slavic
Languages.
Indrani Franchini, J.D., is Executive Vice President, Chief Compliance Officer of Alexion. Ms.
Franchini is responsible for leading Alexion’s global compliance program and co-leads the Global
Corporate Compliance Committee.
Ms. Franchini has extensive experience developing and building the infrastructure and company-
wide standards for global compliance programs. Prior to joining Alexion in June 2017, Ms.
Franchini served as Chief Compliance Officer at Hess Corporation (a leading independent energy
company) from June 2012 to July 2017. She previously spent nearly ten years with Pfizer
overseeing all compliance elements for the development, marketing, and promotion of its global
business. Earlier in her career, Ms. Franchini served as an attorney with Milbank, Tweed, Hadley &
McCloy in the firm’s New York and Tokyo offices.
Ms. Franchini earned her J.D. from the University of Michigan Law School and a Bachelor of Arts
from Princeton University. In addition, she spent a year as a Fulbright Fellow at the Kyushu
University Graduation School in Fukuoka, Japan.
Brian Goff is Executive Vice President, Chief Commercial Officer of Alexion. Mr. Goff leads
commercial operations globally with responsibility for country operations in each of Alexion’s
affiliates in North America, EMEA, Japan, Asia Pacific, and Latin America.
Mr. Goff is a proven global biopharmaceutical executive with a 25-year track record of consistently
delivering sustainable growth through multiple business cycles. He has deep expertise in
commercial operations across multiple therapeutic areas, as well as broad expertise managing
global cross-functional teams, including R&D, Medical Affairs, Manufacturing and Quality with a
number of industry-leading biopharmaceutical companies.
Prior to joining Alexion in June 2017, Mr. Goff was Chief Operating Officer and a Member of the
Board of Directors of Neurovance Inc. from December 2016 until its acquisition by Otsuka
Pharmaceuticals in March 2017. Prior to joining Neurovance, Mr. Goff served as Baxalta’s
Executive Vice President & President — Hematology Division from January 2015 to July 2016. He
previously served with Baxter Healthcare Corporation as Global Hemophilia Franchise Head from
June 2012 to December 2014. Earlier in his career, Mr. Goff held positions of increasing
responsibility in sales and marketing roles with Novartis Pharmaceuticals, and the
pharmaceutical division of Johnson & Johnson.
28
Anne-Marie Law is Executive Vice President, Chief Human Resources Officer of Alexion. She is
responsible for Human Resources on a global basis, with the goal of continuing to build the
organization capabilities to advance Alexion’s strategy.
Ms. Law brings more than 25 years of experience at global corporations to the organization. Prior
to joining Alexion in June 2017, she served as Chief Human Resources Officer at Hyatt Hotels
Corporation from October 2016 to May 2017, where she was responsible for building the strategy
to support the company’s 100,000 employees worldwide, and designing talent systems to create
world class leadership and customer connectivity capabilities. She previously served as Executive
Vice President and Head of Human Resources for Baxalta Incorporated from April 2009 to
December 2014, and held various senior human resources positions at McKesson Corporation,
including the Specialty Health Division, VeriSign, and Xilinx, Inc.
Ms. Law is a graduate of Leicester University with a degree in Art History in the United Kingdom
and the National College of Ireland, Dublin.
John Orloff, M.D., is Executive Vice President, Head of Research & Development of Alexion. Dr.
Orloff is focused on strengthening Alexion’s clinical pipeline and research programs, enhancing
research and development productivity, overseeing regulatory and medical affairs, and supporting
business development. Dr. Orloff has 20 years of experience in the biopharmaceutical industry
and deep expertise spanning various stages of clinical and non-clinical development, including
developing medicines for rare diseases.
Prior to joining Alexion in June 2017, Dr. Orloff served as Executive Vice President, Head of
Research & Development at Novelion from November 2016 to May 2017, where he currently sits
on the Board of Directors. From July 2015 to July 2016, he served with Baxalta as Global Head of
R&D and Chief Scientific Officer, where he advanced the company’s pipeline and oversaw
regulatory approval of 10 unique products and two devices. He also held executive R&D roles
with Baxter International from July 2014 to June 2015, Merck Serono from January 2014 to May
2014, Novartis from April 2003 to October 2013 and Merck Research Laboratories. Prior to
joining the biopharmaceutical industry in 1997, Dr. Orloff was with the Yale School of Medicine for
seven years.
Dr. Orloff received a Bachelor of Arts from Dartmouth College, and a M.D. from the University of
Vermont College of Medicine. He completed his medical training at the University of Pittsburgh
Medical Center and Yale University School of Medicine.
Available Information
Our internet website address is http://www.alexion.com. Through our website, we make available, free of
charge, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, any
amendments to those reports, proxy and registration statements, and all of our insider Section 16 reports, as soon
as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. These SEC reports
can be accessed through the “Investors” section of our website. The information found on our website (or that may
be accessed through links on our website) is not part of this or any other report we file with, or furnish to, the SEC.
Paper copies of our SEC reports are available free of charge upon request in writing to Investor Relations, Alexion
Pharmaceuticals, Inc., 121 Seaport Boulevard, Boston Massachusetts 02210. In addition, any document we file may
be viewed at the SEC’s internet address at http://www.sec.gov. (This website address is not intended to function as
a hyperlink, and the information contained in the SEC’s website is not intended to be a part of this filing).
The company intends to use its website http://www.alexion.com as a means of disclosing material non-public
information and for complying with its disclosure obligations under SEC Regulation FD. Such disclosures will be
included on the company’s website under the heading “Investors”. Accordingly, investors should monitor such
portions of the company’s website, in addition to following the company’s press releases, SEC filings and public
conference calls and webcasts.
29
Item 1A.
(amounts in millions, except percentages)
Risk Factors.
You should carefully consider the following risk
factors before you decide to invest in Alexion securities
and our business, because the risks described below may
have a material impact on our business, operating results,
financial condition, and cash flows. The risks and
uncertainties described below are not the only ones we
face. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may
also impair our business operations. If any of the following
risks actually occurs, our business, financial condition and
results of operations could be materially and adversely
affected.
Risks Related to Our Products and Product Candidates
We depend on the success of, and revenue from,
Soliris.
Since 2007, our revenue has depended primarily
on the sales of Soliris. Unless we are able to develop
or acquire new products and technologies, successfully
commercialize ULTOMIRIS as described in the following
risk factor, and/or materially increase sales of Strensiq
and Kanuma (two of our other currently approved
products), we will remain dependent on sales of Soliris
as a source of our revenue.
The commercial success of SOLIRIS and our ability
to generate revenue depends on several factors,
including: the safety and efficacy of SOLIRIS; coverage
or reimbursement by government or third-party payers
for SOLIRIS; pricing for SOLIRIS; the analysis by doctors
and patients of the cost of SOLIRIS relative to the
perceived benefits; manufacturing and uninterrupted
supply; the introduction of and success of competing
products by competitors (including novel products and
biosimilars to SOLIRIS); the size of patient populations
and the number of patients diagnosed who may be
treated with SOLIRIS; the impact of legal, administrative,
regulatory or legislative developments; and our ability
to develop, obtain
for and
commercialize SOLIRIS for new indications.
regulatory approval
While SOLIRIS has been studied for indications
beyond PNH, aHUS and gMG (which are the current
approved indications of SOLIRIS), there is no guarantee
that we can obtain regulatory approval or achieve any
commercial sales of SOLIRIS for other indications.
Despite positive topline results from the Phase 3
PREVENT study of SOLIRIS in patients with anti-
aquaporin-4 (AQP4) auto antibody-positive neuromyelitis
optica spectrum disorder (NMOSD), we may not be able
to obtain regulatory approval to sell SOLIRIS as a
treatment for NMOSD due to the failure to meet
applicable regulatory requirements. Additionally, even if
we obtain regulatory approval, physicians and patients
30
may not accept SOLIRIS as a treatment for NMOSD or
payers may not be willing to pay for or reimburse the
costs of SOLIRIS as a therapy for NMOSD.
If we are not able to maintain revenues from sales
of SOLIRIS, or our SOLIRIS revenues decrease, our
operating results would be negatively impacted and our
ability to fund research and development programs for
the discovery and commercialization or acquisition of
new products would be harmed, which would limit our
ability to diversify our revenue base and our stock price
could be adversely affected.
If PNH patients do not switch from SOLIRIS to ULTOMIRIS
or ULTOMIRIS does not gain market acceptance, our
future operating results may be adversely impacted.
In December 2018, ULTOMIRIS was approved by
the FDA for use in the U.S. for adult patients with PNH
(and applications for approval of ULTOMIRIS are under
review by the European Medicines Agency (EMA) and the
Ministry of Health, Labour and Welfare (MHLW) in Japan
for patients with PNH).
One of our principal business objectives is to
facilitate the conversion of PNH patients from SOLIRIS
to ULTOMIRIS. While clinical trials demonstrated that
ULTOMIRIS is non-inferior to SOLIRIS at an 8 week dosing
interval (compared to a 2 week dosing interval for
SOLIRIS), existing PNH patients taking SOLIRIS and their
physicians may decline to switch to ULTOMIRIS for many
reasons including: reluctance to try a new therapy, lack
of clinical evidence that ULTOMIRIS is superior to
SOLIRIS, no (or limited) reimbursement by government
or third-party payers (including as a result of SOLIRIS
being available as an alternative therapy), or our inability
to manufacture quantities necessary to meet demands.
If we achieve our goal of promptly facilitating the
conversion of current PNH patients from SOLIRIS to
ULTOMIRIS, we anticipate that revenue from SOLIRIS,
which accounted for approximately $3,563.0, or 86.3%,
of our revenues in 2018, will decline as we move patients
to ULTOMIRIS. We have established a price for
ULTOMIRIS in the U.S. that, on an annual basis,
represents an approximate 10% discount to the cost of
current labeled maintenance therapy for SOLIRIS for
adult PNH patients of average weight. However, this
represents an approximate 10% premium to the cost of
SOLIRIS in a patient’s first year of switching due to the
loading doses required.
We may not obtain marketing approval for ULTOMIRIS
as a treatment for PNH in any jurisdictions beyond the
U.S. or for any indications beyond PNH.
There is no guarantee that the EMA or the MHLW
(or any other regulatory authority) will promptly approve
the use of ULTOMIRIS in PNH patients or that they will
approve the use of ULTOMIRIS in PNH patients at all.
We believe that the EU and Japan may be important
potential markets for ULTOMIRIS and if we are not able
to sell ULTOMIRIS in these geographies, our business
may be adversely impacted.
Subject to successful completion of clinical trials,
we intend to pursue marketing approval for ULTOMIRIS
in the U.S., the EU, Japan and other jurisdictions for
indications in addition to PNH and, potentially, other
delivery mechanisms. The FDA, the EMA or the MHLW
could reject our applications for indications beyond PNH
(and the EMA and the MHLW could reject our application
for ULTOMIRIS for PNH) or for a subcutaneous delivery
mechanism for many reasons, including due to a finding
of inadequate safety, tolerability, potency or efficacy
profiles. Additionally, these and other regulatory
agencies may request that we provide additional safety
or efficacy data, which may require significant additional
time and expense to generate prior to a decision on
approval.
If ULTOMIRIS is not approved for use in PNH
patients in the EU or Japan (or other jurisdictions) or for
any other indications or for subcutaneous administration
in the U.S., the EU, Japan or elsewhere or if any such
approval is delayed, our future business and results of
operations may be harmed. In the event of any of the
foregoing, while we would continue to sell SOLIRIS in
the jurisdictions and for the indications authorized by
the appropriate authorities, certain of the patents and
regulatory exclusivities related to SOLIRIS expire earlier
than patents and regulatory exclusivities we hold on
ULTOMIRIS, which may allow competitors to enter those
markets at an earlier date utilizing SOLIRIS or biosimilar
technology.
Our future commercial success depends on gaining
regulatory approval for new products and obtaining
approvals for existing products for new indications.
We have invested, and continue to invest,
significant amounts in acquiring new products and
technologies and advancing our existing product
candidates and technologies. Our long-term success
and revenue growth will depend upon the successful
identification, acquisition (including licenses from third
parties), development and commercialization of new
products and technologies, and approval of additional
indications for our existing products and products under
development. Product development (including products
acquired in connection with acquisitions) is very
expensive, takes significant time to obtain regulatory
approval and involves a high degree of risk. Only a small
number of research and development programs result
in the commercialization of a product. The process for
obtaining regulatory approval to market a biologic is
expensive, often takes many years, and can vary
substantially based on the type, complexity, the novelty
of the product candidates involved and the indications
to be treated. Further, success in early clinical trials,
which may lead to further investment in a product
candidate by us, may not result in success in later stage
trials. In addition, our recent acquisitions have focused
on new technologies with which we have very limited
experience, including antibody therapeutics targeting
the neonatal Fc receptor, which may make the
development, approval and commercialization of such
potential products challenging.
Our ability to maintain or grow revenues may be
adversely affected if we are delayed or unable to
successfully develop the products in our pipeline, if we
are unable to gain approval for SOLIRIS and ULTOMIRIS
for additional indications and in new jurisdictions, obtain
marketing approval for STRENSIQ and KANUMA in
additional territories, obtain approval for additional
delivery systems
(such as
subcutaneous administration) or acquire or license
products and technologies from third parties.
therapies
for our
If we do not obtain regulatory approval of new
products or additional indications for existing products
or additional delivery systems, or are significantly
delayed or limited in doing so, our revenue may be
adversely affected, we may experience surplus inventory,
we may be required to write down certain assets, our
business may be materially harmed and we may need
to significantly curtail operations.
We develop therapies for rare diseases with limited
patient populations that have not been definitively
determined, and our success will depend on our ability
to identify patients in the disease areas we target.
The therapies that we have developed and that are
in our product pipeline target diseases that have a
limited number of patients and for which, in many cases,
there are either no or limited diagnostics tools. For
example, KANUMA and STRENSIQ are currently
approved to treat ultra-rare diseases with small patient
populations that have not been definitively determined.
Our development pipeline programs that may be the
basis for future revenue growth also focus on rare (and
ultra-rare) diseases for which there are a very limited
number of patients. The lack of diagnostic tools, coupled
with the fact that there is frequently limited awareness
among certain health care providers concerning the rare
diseases we treat, often means that a proper diagnosis
can, and frequently does, take years to identify (or an
appropriate diagnosis may never be made for certain
patients). As a result, we may not be able to grow our
revenues (even as we introduce new products or as
existing products are approved
for additional
indications). There can be no guarantee that any of our
programs will be effective at identifying patients, and
even if we can identify patients that our therapies can
help, the number of patients that our therapies treat may
turn out to be lower than we expect, may not be otherwise
amenable to treatment with our products (such as
KANUMA and STRENSIQ), or new patients may become
increasingly difficult to identify, all of which may
adversely affect our results of operations and our
business. In addition, even in instances where we do
31
add patients, the number may be less than the number
of patients that discontinue use of the applicable
product in a given period resulting in a net loss of
patients and potentially decreased revenue.
We may not be able to gain or maintain market
acceptance of our products among the medical
community, patients or payers, which could prevent us
from maintaining profitability or growth.
Our products may not gain or maintain market
acceptance among physicians, patients, healthcare
payers and others. Although we have received regulatory
approval for certain of our products in certain territories,
such approvals do not guarantee future revenue. We
cannot predict whether physicians, other healthcare
providers, government agencies or private insurers will
determine or continue to accept that our products are
safe and therapeutically effective and that the benefits
are meaningful relative to the cost. Nor can we predict
whether patients, physicians or payers will continue use
of SOLIRIS or elect to convert to ULTOMIRIS in the U.S.
(or other jurisdictions if and when approved for use by
the appropriate regulatory authorities) or alternative
treatments that may become available. Physicians’
willingness to prescribe, and patients’ willingness to
accept, our products, depends on many factors,
including:
• prevalence and severity of adverse side effects in
both clinical trials and commercial use;
• the timing of the market introduction of competitive
drugs and biosimilars;
• demonstrated clinical safety and efficacy
compared to other drugs;
• perceived cost-effectiveness and/or evaluations in
HTAs;
• pricing and availability of reimbursement from third-
party payers, including governmental entities;
• convenience and ease of administration;
• effectiveness of our marketing strategy;
• publicity concerning our products and our other
product candidates (and those of competitive
products); and
• availability of alternative treatments.
The likelihood of physicians to prescribe SOLIRIS
for patients with aHUS (and ULTOMIRIS, if approved for
use by aHUS patients) may also depend on how quickly
SOLIRIS can be delivered to the hospital or clinic and
our distribution methods may not be sufficient to satisfy
this need. In addition, we are aware that some
healthcare providers have determined not to continue
SOLIRIS treatment for some patients with aHUS. While
SOLIRIS as a treatment for aHUS is recommended by
some regulatory authorities to be used for the duration
of a patient’s lifetime, we are aware that some healthcare
providers prescribe SOLIRIS for aHUS for a shorter time
32
period and, in some cases, may prescribe SOLIRIS for
aHUS in emergency or acute situations only. Decisions
such as this by aHUS patients and healthcare providers
to use our products for a period that is less than the
remaining lifetime of the patient or in only acute
circumstances can cause our SOLIRIS revenues, and
revenues for our other products, to fluctuate and past
sales of our products may not be indicative of future
sales for such products.
If our products fail to achieve or maintain market
acceptance among the medical community or patients
in a particular country, we may not be able to market
and sell our products successfully in such country, which
may limit our ability to generate revenue and could harm
our overall business.
If our products harm patients, or are perceived to harm
patients even when such harm is unrelated to our
products, our regulatory approvals could be revoked or
otherwise negatively impacted and we could be subject
to costly and damaging product liability claims.
The testing, manufacturing, marketing and sale of
biologics for use in humans may cause harm to patients,
which exposes us to product liability risks and regulatory
penalties.
Our products and our product candidates treat
patients with rare diseases and, as a result, we generally
are able to test our products in only a small number of
patients. As more patients use our products, including
more children and adolescents, new risks and side
effects may be discovered, the rate of known risks or
side effects may increase, and risks previously viewed
as less significant could be determined to be significant.
Previously unknown risks and adverse effects may also
be discovered in connection with unapproved uses of
our products, which may include administration of our
products under acute emergency conditions, such as
the Enterohemorrhagic E. coli health crisis in Europe,
primarily Germany, which began in May 2011. Under
pharmacovigilance guidelines, we are required to timely
report any adverse events any patient using our products
experiences and any clinical evaluations of outcomes in
the post-marketing setting are required to be reported
to appropriate regulatory agencies in accordance with
relevant regulations, as a result any potential adverse
events will be promptly brought to the attention of
regulators that may likely require prompt remedial action
(and any failure to report these adverse events or report
such events in a timely manner may result in penalties
being imposed by regulators). In the event any new risks
or adverse effects discovered as new patients are
treated for approved indications, or as our products are
studied in or used by patients for other indications,
regulatory authorities may delay or revoke their
approvals, we may be required to conduct additional
clinical trials and safety studies, make changes in
labeling, reformulate our products or make changes and
obtain new approvals for our and our suppliers’
manufacturing facilities. If we experience any of the
foregoing actions, it may harm our reputation and,
particularly given that we rely on a very limited number
of products for our revenue, our business and results of
operations could be materially and adversely impacted.
Further, any investigation into the circumstances
surrounding an adverse event may be costly and time
consuming (even if it is ultimately determined that the
adverse event is not the result of the use of our product)
or the investigation may not be sufficiently conclusive
to prevent a regulatory authority from taking one of the
foregoing actions against us.
a
experiencing
In addition, many patients who use our products
are already very ill and may suffer adverse events,
including death, during treatment for reasons that may
or may not be related to our products. Also, there are
risks associated with our products; for example, use of
C5 Inhibitors, such as SOLIRIS and ULTOMIRIS, is
associated with an increased risk for certain types of
infection, including meningococcal infection. In certain
cases, a physician may not have the opportunity to timely
vaccinate a patient in the event of an acute emergency
episode, such as in a patient presenting with aHUS,
which could result in the patient using SOLIRIS or
ULTOMIRIS
life-threatening
meningococcal infection (and even in certain cases in
which a vaccination can be delivered to the patient, it
may not, eliminate all risk of meningococcal infection).
Patients using our products and product candidates
have died or suffered potentially
life-threatening
conditions either during or after ending their treatments,
and these include patients who have died while
participating in a clinical trial (for example, four patients
died during the ULTOMIRIS Phase III clinical trial for
aHUS, although none of these were considered related
to the treatment with ULTOMIRIS). We may be sued by
patients who are harmed during the course of using our
products, whether as a prescribed therapy, during a
clinical trial, during an investigator initiated study, or
otherwise. Any such product liability lawsuit or injury
claim, which could include class actions, could harm our
reputation among patients, physicians, payers and
others and require us to pay substantial amounts of
money to injured patients, and even if successfully
defended, could have a material adverse effect on our
business, financial condition or results of operations
due to the expense of defending any such claim. While
we do have product liability insurance, it may not cover
all potential types of liabilities or may not cover certain
liabilities completely. Moreover, we may not be able to
maintain our insurance on acceptable terms, or at all.
We anticipate that we may face increased competition
from companies that will enter into the markets we
currently serve and as our product pipeline expands into
markets that are currently served by other companies.
We expect that the business environment in which
we operate will become increasingly competitive.
33
Currently, certain of our products are the only approved
therapy for the indication they treat. For example,
SOLIRIS and ULTOMIRIS (in the U.S.) are the only
approved treatments of PNH. In the future, we expect
that SOLIRIS and ULTOMIRIS may compete with new,
novel drugs and pharmaceuticals currently
in
development. For example, several companies are
developing and engaged in clinical trials for therapies to
treat PNH, aHUS, and gMG. If SOLIRIS is approved for
treatment of NMOSD, we expect there may be
competition in that market as well. Since other
companies are also operating clinical trials in this
disease state. Additionally, other pharmaceutical
companies have publicly stated that they are developing
and intend to commercialize a SOLIRIS biosimilar and
these biosimilars may be commercially available in the
future. STRENSIQ and KANUMA may also experience
competition in the future. We are also aware of
companies that are planning to initiate studies for
diseases that we are also targeting with our product
pipeline. Our revenues could be negatively affected if
patients or potential patients enroll in our clinical trials
or clinical trials of other companies with respect to
diseases that we also target with approved therapies.
Other pharmaceutical companies have publicly
announced intentions to establish or develop rare
disease programs and may introduce products that
compete with ours (or products that are in our pipeline).
These and other companies, many of which have
significantly greater financial, technical and marketing
resources than us, may commercialize products that are
cheaper, more effective, safer, have less frequent dosing
schedules, or easier to administer than our products.
Our current and future competitors may develop
products that are more broadly accepted or may receive
patent protection that dominates, blocks or adversely
affects our product development or business. These
competitive products,
including any biosimilars
approved under alternative regulatory pathways, may
significantly reduce both the price that we receive for
such marketed products and the volume of products that
we sell, which may negatively impact our revenues and
profitability. Given that a significant portion of our 2018
revenue was attributable to SOLIRIS, one or more
competitive products or biosimilar could have a
significant impact on our entire business. In addition,
we experience competition in drug development from
universities and other research institutions, and
pharmaceutical companies compete with us to attract
universities and academic research institutions as drug
development partners, including for licensing their
proprietary technology. If our competitors successfully
into such arrangements with academic
enter
institutions, we may be precluded from pursuing those
unique opportunities and may not be able to find
equivalent opportunities elsewhere.
If a company announces successful clinical trial
results for a product that may be competitive with one
of our products or product candidates, receives
marketing approval of a competitive product, or gets to
the market before we do with a competitive product, our
business may be harmed or our stock price may decline.
Risks Related to Pricing and Reimbursement
Sales of our products depend on reimbursement by
government authorities, private health insurers and other
organizations, each of which are subject to pressures to
contain costs. If we are unable to obtain, or maintain at
anticipated levels, reimbursement for and access to our
products, or coverage is reduced, our pricing may be
adversely affected or our product sales, results of
operations or financial condition could be harmed.
Our products are significantly more expensive than
traditional drug treatments and almost all patients
require governmental payers, such as Medicare and
Medicaid in the U.S. or country specific governmental
organizations in foreign countries, and/or private third-
party payers to pay all or a portion of the cost of our
products. There is also a significant trend in the health
care industry by public and private payers to contain or
reduce their costs. As a result, payers have in the past
(i) decreased the portion of costs they will cover, (ii)
ceased providing adequate payment for our products or
(iii) not covered our products at all, each of which payers
may continue to do in the future (or other payers who
have not taken such actions in the past may do so in
the future). Any of the foregoing may have an adverse
impact on our revenue and results of operations.
pricing
negotiate
coverage,
Our ability to set the price for our products varies
significantly from country to country, including in those
countries where pricing, coverage, reimbursement or
funding of prescription drugs are subject
to
governmental control. We may be unable to timely or
successfully
and
reimbursement on terms that are favorable to us (or at
all), or such coverage, pricing and reimbursement may
differ in separate regions in the same country. In some
foreign countries, the proposed pricing for a drug must
be approved before it may be lawfully marketed, which
could delay market entry (or, if pricing is not approved,
we may be unable to sell at all in a country where we
have received regulatory approval for a product). In
addition, authorities
impose
additional obligations, such as HTAs, which assess how
well a pharmaceutical works in relation to its cost.
Additionally, U.S. payers are increasingly considering
new metrics as the basis for reimbursement rates. If
our products do not meet or surpass these metrics,
including any HTAs and other metrics imposed on our
products, these payers may not reimburse for use of our
products or may reduce the rate of reimbursement for
our products and as a result we expect revenue from
such product may decrease. We may also, in some
in some countries
cases, elect to reduce prices or reimbursement with third
parties which we believe provides value in the long term.
Further, certain countries establish pricing and
reimbursement amounts by reference to the price of the
same or similar products in other countries. Therefore,
if coverage or the level of reimbursement is limited in
one or more countries, we may be unable to obtain or
maintain anticipated pricing or reimbursement in other
countries or in new markets. In Canada, for example,
the Patented Medicine Prices Review Board (PMPRB)
issued a decision in an administrative pricing matter
that we had excessively priced SOLIRIS in a manner
inconsistent with the Canadian pricing rules and
guidelines and ordered that the price be decreased to
no higher than the lowest price in seven comparator
countries (we filed an application for judicial review of
the PMPRB’s decision in the Federal Court of Canada,
and a hearing on the matter was held in November 2018,
but we are unable to determine the outcome of this
review at this time since the court has not yet issued
its opinion). In addition, the current U.S. presidential
administration recently unveiled a number of proposals,
among these was a recommendation to move from the
current U.S. pricing and reimbursement regime to one
that would establish pharmaceutical pricing by reference
to a target price derived from the international price index
(such a change may be expected to result in significant
savings for the government for purchases of certain
pharmaceuticals). If the U.S., which accounted for a
significant portion of our revenue in 2018, were to move
to a pricing system based on the international price index
(or similar model) that were to apply to our products, we
expect that our revenues for sales in the U.S. (or any
other country adopting such a price index) may decrease,
and such decrease may be material in amount.
Due to the cost of our therapies, any potential
increase in the number of patients receiving our products
(for example, we expect there may be increases in sales
of SOLIRIS for patients with NMOSD, if approved by
regulatory authorities for that indication), may cause
third-party payers to modify, limit or eliminate coverage
or reimbursement for our products because they may
require an allocation of a greater percentage of the
potential financial resources of any public or private
payer for our products.
Further, health insurance programs may utilize
coverage incentives and obstacles to discourage
beneficiaries from using higher priced products such as
ours, including:
• establishing formularies under which only selected
drugs are covered;
• utilizing variable co-payments that make drugs that
are not preferred by the payer more expensive for
patients; and
34
• utilizing management
as
requirements for prior authorization or failure first
on another type of treatment.
controls,
such
Any of these actions may subject our products to
payer-driven restrictions.
In countries where patients have access to
insurance, their insurance co-payment amounts or other
benefit limits may represent a barrier to obtaining or
continuing use of our products or adoption of new
treatment options, such as ULTOMIRIS. The
continuation of the use of these types of limits or barriers
by insurers or the imposition of similar limitations or
barriers in the future may have an adverse impact on
our revenue and results of operations. In some cases,
we have financially supported non-profit organizations
that assist patients in accessing treatment for PNH and
aHUS, including SOLIRIS, among other therapies. Such
organizations assist patients whose insurance coverage
imposes prohibitive co-payment amounts or other
expensive financial obligations. Such organizations’
ability to provide assistance to patients is dependent
on funding from external sources, and we cannot
guarantee that such funding will be provided at adequate
levels, if at all. We have also provided our products
without charge to patients who have no insurance (or
limited insurance) coverage for drugs through related
charitable purposes. We are not able to predict the
financial impact of the support we may provide for these
and other charitable purposes; however, substantial
support could have a material adverse effect on our
profitability in the future. As third-party payers attempt
to contain health care costs they are demanding price
discounts or rebates and limiting both the types and
variety of drugs that they may cover and the amounts
that they will pay for drugs. As a result, they may not
cover or provide adequate payment to patients for our
products or they may demand discounts or rebates from
us, which may be material.
Our commercial success depends on obtaining and
maintaining pricing for our products, which is directly
tied to reimbursement for our products at anticipated
levels for our products. It is difficult to project the impact
of evolving reimbursement mechanics on the willingness
of payers to cover our products, but we expect
pharmaceutical pricing to continue to be subject to
intense payer, political and societal pressures on a
global basis. If we are unable to obtain or maintain
coverage for our products, or coverage is reduced or
eliminated in one or more countries or if the U.S. (or
other countries) were to move to an international price
index for our products, our pricing, product sales, results
of operations or financial condition could be harmed.
Risks Related to Business Operations
We rely on a limited number of facilities to produce our
products and manufacturing issues at our facilities or
the facilities of our third party service providers could
cause
delay
shortages,
commercialization of our products, disrupt or delay our
clinical trials or regulatory approvals, and adversely
affect our business.
product
stop
or
The majority of our products and product
candidates are biologics, which cannot be manufactured
synthetically and must be produced from biologic
sources. As a result, the production of biologic
therapeutics that meet all product specification and
regulatory requirements is particularly complex. Even
slight deviations at any point in the production process
may lead to production failures or recalls. For example,
in 2013 and 2014 we undertook a voluntary recall of
SOLIRIS due to the presence of visible particles in a
limited number of vials. In addition, because the
production process involves the use of materials that
are derived from biological sources, the process can be
affected by contaminants that could impact those
biological micro-organisms. Therefore, the manufacture
of our products and our product candidates is highly
regulated, complex and difficult, and, as noted above,
even minor technical problems or deviations could result
in significant defects or failures and regulatory action
against us. These manufacturing challenges are coupled
with the
limited experience
manufacturing commercial quantities of ULTOMIRIS,
STRENSIQ and KANUMA (so we may have limited
previous experience resolving any issues in connection
with the manufacture of these products and it may take
significant time to remediate or we may be unable to
solve any manufacturing problems) and we rely on a
limited number of facilities to manufacture our products
for our development, clinical and commercialization
needs, some of which we own and some of which are
owned by third parties.
fact that we have
If we and/or our third party suppliers fail to meet
the highly technical requirements of manufacturing our
biologic products and our strict quality and control
specifications, we
(or they) may be unable to
manufacture or supply our products. We depend on our
third party manufacturers to perform effectively on a
timely basis and to comply with regulatory requirements
and meet our product specifications. If they are unable
to do so, our contractual rights to address any failures
and right to recover damages are limited. Our failure or
the failure of our third-party manufacturers to produce
sufficient quantities of our products and product
candidates could result in lost revenue, diminish our
profitability, delay the development of our product
candidates, delay regulatory approval, result in the
rejection of our product candidates or result in supply
shortages for our patients, which may lead to lawsuits,
35
loss of revenue or could accelerate introduction of
competing products to the market.
As noted above, the manufacture of our products
and product candidates is at high risk of product loss
due to contamination, equipment malfunctions, human
error or raw material shortages, which may result in
reduced production yields, product defects and other
If microbial, viral or other
supply disruptions.
contaminations are discovered in our products or
manufacturing facilities, or the facilities of our third party
manufacturers, we or our third party manufacturers may
need to close our or their manufacturing facilities for an
extended period of time to investigate and remediate
the contaminant.
If we underestimate demand for ULTOMIRIS,
SOLIRIS or any of our products, or experience product
interruptions at Alexion’s
internal manufacturing
facilities or a facility of a third party provider, including
as a result of risks and uncertainties described in this
Annual Report on Form 10-K, we may not be able to
increase our revenues and alternative therapies may
gain greater market acceptance.
We also face external factors, many of which are
beyond our control, that could cause production
interruptions at our facilities or at the facilities of our
third party providers, including natural disasters, labor
disputes, acts of terrorism or war.
The risks to our business of any manufacturing
stops or interruptions (whether the result of internal or
external factors) are amplified because we rely on a
limited number of facilities to produce our products and
product candidates. For example, each of our products
is manufactured at only one to two facilities. Sales of
SOLIRIS, which accounted for 86.3% of our revenue for
the fiscal year ended December 31, 2018, in the U.S.,
the EU, Japan and certain other territories were
manufactured exclusively by Lonza at its facilities in
Singapore and Spain. Manufacturing SOLIRIS for
commercial sale in certain other territories may only be
performed at a single facility in some cases until such
time as we have received the required regulatory
approval for an additional facility, if ever. We expect that
we will continue to rely on a very limited number of
manufacturing facilities in the future for all of our
products, including ULTOMIRIS.
in other
We and our third party providers are required to
maintain compliance with cGMP and other stringent
operation and manufacturing requirements and are
subject to inspections by the FDA and comparable
agencies
jurisdictions to confirm such
compliance. Governmental authorities will generally not
permit products manufactured at a facility that is not
registered by the applicable government agency to enter
into the country and such products may be returned for
failure to comply with such regulation, which may
decrease or delay sales and result in the loss of
inventory. Any delay, interruption or other issues that
36
arise in the manufacture, fill-finish, packaging or storage
of our products as a result of a failure of our facilities
or the facilities or operations of third parties to pass any
regulatory agency inspection or comply with on-going
operating regulations could significantly impair our
ability to supply our products and product candidates.
Significant noncompliance could also result in the
imposition of monetary penalties or other civil or criminal
sanctions and damage our reputation.
Our efforts to bring more of our manufacturing
operations under our control present additional
challenges. We have completed the build-out of a fill-
finish facility in Ireland to support global drug product
manufacture or vial fill finish of SOLIRIS and certain of
our other clinical and commercial products. We also
completed construction of a facility in Dublin, Ireland in
the fourth quarter of 2015, which is comprised of
laboratories, packaging and warehousing operations
and we intend to make significant further investment in
this facility for the manufacture of our products. We are
also constructing new biologics manufacturing facilities
at both sites. Despite the significant investment we have
made in these facilities and operations, we cannot
guarantee that we will be able to successfully and timely
complete the construction of the biologics facilities or
the appropriate validation processes or obtain the
necessary regulatory approvals for these and other
facilities, or that we will be able to perform the intended
manufacturing and supply chain services at these
facilities for commercial or clinical use. Prior to such
time, we may continue to rely on third parties for these
services.
If we experience any manufacturing issues, we may
be unable to timely identify alternative manufacturers,
and if we are able to timely identify alternative
manufacturers, such alternative manufactures may not
be able to satisfy our requirements. No guarantee can
be made that regulators will approve additional third
party providers in a timely manner or at all, or that any
third party providers will be able to perform services for
sufficient product volumes for any country or territory.
Further, due to the nature of the current market for third-
party commercial manufacturing, many arrangements
require substantial penalty payments by the customer
for failure to use the manufacturing capacity for which
it contracted. The payment of a substantial penalty could
harm our financial condition and may restrict our ability
to transition to internal manufacturing or manufacturing
by other third parties. In addition, the terms and
conditions
third party
to engage an additional
manufacturer may not be as favorable to us as our
current arrangements and may likely reduce the profit
on the sales of any products to which they relate.
In addition, KANUMA is a transgenic product and
the facilities on which we rely to produce raw material
for KANUMA are the only animal facilities in the world
that produce the necessary egg whites from transgenic
chickens. Natural disasters, disease, such as exotic
Newcastle disease or avian
influenza, or other
catastrophic events could have a significant impact on
the supply of unpurified KANUMA, or destroy our animal
operations altogether. If our animal operations are
disrupted, it may be extremely difficult to set up another
animal facility to supply the unpurified KANUMA.
Any adverse developments affecting our
manufacturing operations or the operations of our third-
party providers could result in a product shortage of
clinical or commercial requirements, withdrawal of our
product candidates or any approved products, shipment
delays, lot failures or recalls. We may also have to write-
off inventory and incur other charges and expenses for
products that fail to meet specifications, undertake
costly remediation efforts or seek more costly
manufacturing alternatives. Each of these could have
an adverse material impact on our business individually
or in the aggregate. Such manufacturing issues could
increase our cost of goods, cause us to lose revenue,
reduce our profitability or damage our reputation.
We rely on a limited number of providers for our raw
materials and supply chain services, which could result
in our being unable to continue to successfully
commercialize our products and our product candidates
(if approved) and to advance our clinical pipeline.
Certain of the raw materials required in the
manufacture and the formulation of our products are
derived from biological sources. Such raw materials are
difficult to procure and may be subject to contamination
or recall. Access to and supply of sufficient quantities
of raw materials which meet the technical specifications
for the production process is challenging, and often
limited to single-source suppliers. Finding an alternative
supplier could take a significant amount of time and
involve significant expense due to the nature of the
products and the need to obtain regulatory approvals.
The failure of these single-source suppliers to supply
adequate quantities of raw materials for the production
process in a timely manner may impact our ability to
produce sufficient quantities of our products for clinical
or commercial requirements. A material shortage,
contamination, recall, or restriction on the use of certain
biologically derived substances or any raw material used
in the manufacture of our products could adversely
impact or disrupt manufacturing and materially limit our
ability to generate revenues.
We also depend on a very limited number of third
party providers for supply chain services with respect to
our clinical and commercial product requirements,
including product filling, finishing, packaging and
labeling.
These third party raw material providers and supply
chain service providers operate as independent entities
and we do not exercise control over any such third party
provider’s operations or their compliance with our
internal or external specifications or the rules and
37
regulations of regulatory agencies, including the FDA,
competent authorities of the EU Member States, or any
other applicable
regulations or standards. Any
contractual remedies we may have under agreements
with these parties may not protect us from the harm
suffered by our business or our patients if they fail to
provide material or perform services that meet our
specifications. Due to the highly specialized nature of
the services performed by
third parties,
particularly the supply of our raw materials, we do not
believe that we could quickly find replacement suppliers
or service providers and, even if we were able to identify
additional third parties, the terms of any such
arrangement may not be favorable to us. In either of
these cases, our revenue, results of operations,
business and reputation may be harmed and we may
not be able to provide the therapies that our patients
require.
these
The success of our business may also depend on
the security of our products while in the supply chain for
delivery to patients, which, as noted above, is dependent
on third-party providers. For example, if our products are
not fully and adequately secured from unauthorized
access by third parties, any of our products may be
tampered with or contaminated. If our products were
exposed to any tampering or contamination, or if they
are not transported in accordance with the required
specifications, our patients may be harmed through use
of our products, and such harm may be severe. In
addition, if the supply chain is not secure (or our
distributors do not exercise control over our products
while in their possession), we are also at risk for our
products to be diverted to patients other than those who
are the intended recipient or to patients who do not have
a prescription to receive our therapies (or it may be used
for treatment by physicians who have not completed the
necessary REMs protocols in order to treat patients) or
it may be sold by distributors, channels or other entities
that are not authorized by Alexion to sell our products.
In addition, an unauthorized distributor may not properly
store or ship our products, thereby exposing patients to
potential harm from use of the product that was not
handled in accordance with our standards. In any of the
foregoing were to happen, we could be subject to costly
litigation, significant monetary penalties, harm to our
reputation and investigation by regulatory authorities
(and potentially subject to regulatory action, including
recall, product withdrawals, suspensions and monetary
penalties).
The sale and use of counterfeit versions of our products
could result in significant harm to patients, reduced sales
of our products and harm to our reputation.
We are aware that counterfeit versions of our
products have been sold by entities that are not affiliated
with Alexion using product packaging suggesting that
the product was manufactured by Alexion.
If
unauthorized third parties illegally distribute and sell
handling
counterfeit versions of our products, those products may
not meet our very stringent product specifications (or
the manufacturing,
distribution
requirements for our products) and any patient that
takes any counterfeit product may suffer serious adverse
health consequences, including death. Our reputation
and business could suffer harm as a result of counterfeit
drugs sold under our brand name and could result in
lost sales for us and decreased revenues.
and
If we are unable to establish and maintain effective sales,
marketing and distribution capabilities or to enter into
agreements with third parties to do so, we may be unable
to successfully commercialize our products.
We currently market and sell our products in the
U.S., the EU Japan and several other territories through
a direct sales force. Most of our products are relatively
new to the market (ULTOMIRIS for the treatment of PNH
was approved by the FDA in December 2018, for
example), and we have recently hired several senior
members of our sales and commercial team. In addition,
in order to gain greater efficiencies in our operations,
we have begun to implement a plan pursuant to which
certain portions of our international commercial
operations will transition to a new operating model in
which sales and marketing efforts in the designated
countries will rely to a greater extent on third-parties to
promote and sell our products, and our direct sales
presence will decrease in these regions.
Due to the fact that many of our products are new
to the market, we do not have significant experience in
marketing and selling these productions to patients,
healthcare providers and payers (for example, we are
new to certain therapy areas, such as neurology (gMG),
and our sales force has had very limited exposure in
educating and targeting sales to patients and physicians
in neurology practices). This challenge is coupled with
the fact that many of our sales and marketing team are
new to Alexion and we are transitioning to third parties
to market and sell our product in certain countries. If we
are unable to successfully market and sell our new
products and to successfully sell our products in new
therapy areas, as well as successfully implement the
transition to third parties to distribute and market our
products in certain countries, our business and sales
may be harmed. One of our objectives is to expand our
business and sales in the future. If we are unable to
establish and/or expand our capabilities to sell, market
and distribute our products in those jurisdictions where
we will continue to rely on our direct sales force and, at
the same time, effectively transition from a direct sales
force model (or maintain such distributor capabilities in
countries where we have already commenced
commercial sales), we may not be able to successfully
sell our products. In that event, we may not be able to
maintain or increase revenues and achieve our goal of
expanding our business. We cannot guarantee that we
will be able to establish and maintain our own
38
capabilities or enter into and maintain any marketing or
distribution agreements with third-party providers on
acceptable terms, if at all, or that we will be able to
manage the transition to distributors in the relevant
jurisdictions that will not cause any interruption or
disruption in our business and sales of our products.
Even if we hire the qualified sales and marketing
personnel necessary to support our objectives, or enter
into marketing and distribution agreements with third
parties on acceptable terms, we may not hire such
employees or enter into such agreements in an efficient
manner or on a timely basis. We may not be able to
forecast accurately the size and experience of the sales
and marketing force and the scale of distribution
capabilities necessary to successfully market and sell
our products. Establishing and maintaining sales,
marketing and distribution capabilities are competitive,
expensive and time-consuming. In addition, as we
launch new products, such as ULTOMIRIS for the
treatment of PNH, and we move into new therapeutic
areas (such as neurology), and, if and when, the products
we acquire in connection with acquisitions and
development agreements with third parties move closer
to regulatory approval, we may have a larger product
portfolio and address more therapeutic areas and the
foregoing risks may continue to apply and may even
increase. Our expenses associated with building up and
maintaining the sales force and distribution capabilities
around the world, and in transitioning from direct sales
to third party marketers and distributors, may be
disproportionate compared to the revenues we may be
able to generate on sales or any savings or efficiencies
we gain through use of such third-parties. We cannot
guarantee that we will be successful in commercializing
any of our products for the above referenced or other
reasons.
Completion of proof of concept trials, preclinical studies
or clinical trials does not guarantee advancement to the
next phase of development or regulatory approval or
successful commercialization.
Completion of preclinical studies or clinical trials
does not guarantee that we will initiate additional
studies or trials for our product candidates, if further
studies or trials are initiated, what the scope and phase
of the trial will be or that they will be completed, or if
these further studies or trials are completed, that the
design or results may provide a sufficient basis to apply
for or receive regulatory approvals or to commercialize
products. Results of clinical trials could be inconclusive,
requiring additional or repeat trials. Data obtained from
preclinical studies and clinical trials are subject to
varying interpretations that could delay, limit or prevent
regulatory approval. If the design or results achieved in
our clinical trials are insufficient to proceed to further
trials or to regulatory approval of our product candidates,
we could be materially adversely affected. Failure of a
clinical trial to achieve its pre-specified primary endpoint
generally increases the likelihood that additional studies
or trials may be required if we determine to continue
development of the product candidate, reduces the
likelihood of timely development of and regulatory
approval to market the product candidate, and may
decrease the chances for successfully achieving the
primary endpoint in scientifically similar indications.
We are currently planning and conducting several
clinical trials of products and product candidates that
we anticipate may be important to our goal of expanding
our business and diversifying our product portfolio.
These trials may not yield the anticipated results for a
number of reasons. For example, the fact that we have
obtained marketing authorization in the U.S. for
ULTOMIRIS as a treatment for PNH does not mean that
ULTOMIRIS will be approved as a treatment for aHUS,
gMG and NMOSD or that any clinical trials may achieve
its designated endpoints and prove to be safe and
effective for use in patients with these indications. In
addition, we are also conducting clinical trials in
therapeutic areas with which we have limited experience
(for example, in 2018 we acquired ALXN1840 (WTX101),
a therapy for Wilson’s disease acquired from Wilson
Therapeutics and are currently in Phase III clinical trials)
and with technology platforms with which we also have
limited experience (for example, in 2018 we acquired
Syntimmune that develops humanized monoclonal
antibody that inhibits the interaction of FcRn with
Immunoglobulin G (IgG) and IgG immune complexes).
Each of these clinical trials is subject to the risks
highlighted in the preceding paragraph and the
investments we have made in these technologies may
not generate the expected returns if the clinical trials
do not produce results that will meet the requirements
of regulators and the needs of patients and their
healthcare providers.
In addition, we intend to further increase the
number of products in our preclinical and early-stage
clinical pipeline and the number of indications that our
products address. For example, in 2019 we plan to
initiate proof of concept clinical trials for ULTOMIRIS as
a treatment for Amyotrophic Lateral Sclerosis (ALS) and
Primary Progressive Multiple Sclerosis (PPMS). There is
no guarantee that any proof of concept trial will provide
sufficient evidence to advance our research beyond the
proof of concept stage, and we may expend significant
resources in an effort to establish proof of concept that
ULTOMIRIS is a potential therapy for ALS or PPMS or
that any other product in development will meet the
standard for proof of concept for other indications. In
the event that a product does satisfactorily establish
proof of concept, and it does advance into preclinical or
clinical trials, such product may face the risks and
challenges identified in the preceding paragraph.
Our clinical studies may be costly and lengthy, and there
are many reasons why drug testing could be delayed or
terminated.
For human trials, patients must be recruited and
each product candidate must be tested at various doses
and formulations for each clinical indication. In addition,
to ensure safety and effectiveness, the effects of drugs
often must be studied over a long period of time,
especially for the chronic diseases that we are studying.
Many of our programs focus on diseases with small
patient populations making patient enrollment difficult.
Insufficient patient enrollment in our clinical trials could
delay or cause us to abandon a product development
program. We may decide to abandon development of a
product candidate or a study at any time due to
unfavorable results or other reasons, including if there
are concerns about patient safety. We may have to spend
considerable resources repeating clinical trials or
conducting additional trials, either of which may increase
costs and delay revenue from those product candidates,
if any. We may open clinical sites and enroll patients in
countries where or for indications in which we have little
experience.
We rely on a small number of clinical research
organizations to carry out our clinical trial related
activities, and one contract research organization (CRO)
is responsible for many of our studies. We rely on such
parties to accurately report their results. Our reliance
on CROs may impact our ability to control the timing,
conduct, expense and quality of our clinical trials. In
addition, we may be responsible for any errors in clinical
trials by a CRO as a result of the performance of services
in connection with a clinical trial on our behalf. And
regulatory agencies, in connection with a potential
product or approval or as part of on-going monitoring,
regulatory
will
requirements relating to clinical trials and we may be
subject to findings and regulatory action (including
denial or delay of product approval) if a CRO fails to
comply with regulations.
review a CROs compliance with
Additional
that can cause delay,
impairment or termination of our clinical trials or our
product development efforts include:
factors
• delay or failure in obtaining institutional review
board (IRB) approval or the approval of other
reviewing entities to conduct a clinical trial at each
site;
• delay or failure in reaching agreement on
acceptable terms with prospective CROs, and
clinical trial sites, the terms of which can be subject
to extensive negotiation and may vary significantly
among different CROs and trial sites;
• withdrawal of clinical trial sites from our clinical
trials as a result of changing standards of care or
the ineligibility of a site to participate in our clinical
trials;
39
• clinical sites and investigators deviating from
trial protocol, failing to conduct the trial in
accordance with regulatory requirements, or
dropping out of a trial;
• delay or failure in having patients complete a
trial or return for post-treatment follow-up;
long treatment time required to demonstrate
•
effectiveness;
lack of sufficient supplies of the product
•
candidate;
• disruption of operations at the clinical trial
sites;
• adverse medical events or side effects in
treated patients;
failure of patients taking the placebo to continue
•
to participate in our clinical trials;
insufficient clinical trial data to support safety
•
and effectiveness of the product candidates;
lack of effectiveness or safety of the product
•
candidate being tested;
inability to meet required specifications or to
•
manufacture sufficient quantities of the product
candidate for development or commercialization
activities in a timely and cost-efficient manner;
• decisions by regulatory authorities, the IRB,
ethics committee, or us, or recommendation by a
data safety monitoring board, to suspend or
terminate clinical trials at any time for safety issues
or for any other reason;
•
failure to obtain the necessary regulatory
approvals for the product candidate or the
approvals for the facilities in which such product
candidate is manufactured; and
• decisions by competent authorities, IRBs or
ethics committees to demand variations in
protocols or conduct of clinical trials.
We may not accurately forecast demand for our products,
including our new products, or the conversion of PNH
patients to ULTOMIRIS, which may cause our operating
results to fluctuate,
Our quarterly revenues, expenses and net income
(loss) may fluctuate, even significantly, due to certain
risks, including those described in these “Risk Factors”
as well as the timing of charges and expenses that we
may take and acquisitions (such as the Wilson
Therapeutics and Syntimmune acquisitions). In the
future, we may not generate sufficient revenues or
control expenses to achieve our financial goals,
including continued profitability. We may not be able to
sustain or increase profitability on a quarterly or annual
basis. You should not consider our
financial
performance, including our revenue growth, in recent
periods as indicative of our future performance. Since
40
we have a limited sales and operating history with certain
of our products (such as ULTOMIRIS as a treatment for
PNH in the US) and for new indications of existing
products (such as SOLIRIS as a treatment for gMG), we
may not be able to accurately forecast demand for our
products. STRENSIQ and KANUMA, also relatively new
products, each received marketing approval in 2015,
and both products treat rare diseases for which there
was no existing therapy in a new therapeutic area. We
have recently filed for regulatory approval for SOLIRIS
as a treatment for NMOSD. Since approval of ULTOMIRIS
as a treatment for PNH in the U.S. in December 2018,
we have undertaken efforts to facilitate the conversion
of PNH patients in the U.S. from SOLIRIS to ULTOMIRIS.
Product demand and, in the case of conversion to
ULTOMIRIS, product preference and conversion, is
dependent on a number of factors, many of which are
beyond our control. For these reasons, we may not be
able to accurately forecast demand for our products.
We cannot guarantee that we will achieve our financial
goals, including our ability to maintain profitability on a
quarterly or annual basis in the future.
Our investors and investment analysts may have
widely varying expectations that may be materially higher
or lower than actual revenues and profits and if our
revenues and profits are different
these
expectations, our stock price may experience significant
volatility. Our revenues and profits are also subject to
foreign exchange rate fluctuations due to the global
nature of our operations and our results of operations
could be adversely affected due to unfavorable foreign
exchange rates. Although we use derivative instruments
to manage foreign currency risk, our efforts to reduce
currency exchange losses may not be successful.
from
In addition, we have in the past provided, and
expect to continue to provide, financial guidance for
future periods and if our actual operating results fail to
meet or exceed the guidance that we have previously
provided to our investors, our stock price could drop
suddenly and significantly.
As we attempt to expand our pipeline, obtain
regulatory approval for new products, facilitate the
conversion of PNH patients from SOLIRIS to ULTOMIRIS
in the U.S., seek regulatory approval for existing
products in new jurisdictions and approval of new
indications for existing products (such as SOLIRIS as a
treatment for NMOSD), we may have substantial
expenses as we continue our research and development
efforts, continue to conduct clinical trials and continue
to develop and expand manufacturing, sales, marketing
and distribution capabilities worldwide, some of which
could be delayed, scaled-back or eliminated to achieve
our financial objectives. These expenses may increase
and such increases may exceed analyst and investor
expectations.
If we fail to achieve the expected financial and operating
benefits of our corporate restructurings, our business and
financial results may be harmed.
We have undertaken corporate restructuring
activities to re-align our global organization with our re-
focused strategy, reduce costs, and realize operational
efficiencies. We estimate that our most recent
restructuring, which includes our transition in certain
jurisdictions from a direct sales model to increased use
of third parties, will result in a charge of up to $25.0 in
2019. These recent restructuring activities, including
work force reductions, closing certain operational sites
and our increased use of third parties in certain
countries to market and distribute products (and rely
less on a direct sales force), subject us to many risks,
including loss of business continuity, unanticipated
costs, and higher than usual employee turnover. In
addition, we will not exercise the same degree of control
over any third parties that we do over our direct sales
force and the ability to direct the third party or provide
incentives for such third party to sell our products may
not be as strong as in the case of a direct sales force.
The expected cost savings and operational efficiencies
restructuring activities are based on
from
assumptions and expectations that we believe were
reasonable in our judgment at the time made but may
not be achieved due to unforeseen difficulties and
challenges that are beyond our control. If these
assumptions and expectations are incorrect or if we
experience delays or unforeseen events in realizing the
benefits of the restructuring activities, our business
operations and financial results may be harmed.
the
As we implement any restructurings, we must
execute on our re-focused strategy, including growing
and maximizing our rare disease business and pursuing
disciplined business development to expand our
pipeline. If we are unable to effectively execute with
fewer human resources and/or attract, retain or
motivate key employees, our business may be adversely
affected.
If we fail to attract and retain highly qualified personnel,
we may not be able to successfully develop, manufacture
or commercialize our products or products candidates.
The success of our business is dependent in large
part on our continued ability to attract and retain our
senior management, and other highly qualified
personnel in our scientific, clinical, manufacturing and
commercial organizations. There is intense competition
in the biopharmaceutical industry for these types of
personnel. In March 2017, our Board appointed a new
Chief Executive Officer (CEO) and we have experienced
other recent significant management changes. In
addition, since 2017, we have moved our global
headquarters
company-wide
restructurings with the goal of re-aligning our global
organization with our re-focused strategy and to make
our international operations more efficient and effective.
undertaken
and
The relocation of our headquarters and restructurings
have the potential to adversely impact our ability to
recruit and/or retain key employees as well as to disrupt
our business operations, financial conditions, programs,
plans and strategies.
Our business is specialized and global and we must
attract and retain highly qualified individuals across
many geographies. We may not be able to continue to
attract and retain the highly qualified personnel
necessary to develop, manufacture and commercialize
our products and product candidates. If we are
unsuccessful in our recruitment and retention efforts,
or if our recruitment efforts take longer than anticipated,
our business may be harmed.
If we fail to satisfy our debt service obligations or obtain
the capital necessary to fund our operations, we may be
unable to commercialize our products or continue or
complete our product development.
In June 2018, we amended and restated our credit
facility to, among other things, increase the amount
available under the revolving credit facility from $500.0
to $1,000.0 and extend the maturity date of the revolving
credit facility and the term loan facility to June 7, 2023.
As a result, we have significant debt service obligations.
In addition to the obligations to make interest and
principal payments under the facility throughout the term
of the loans, any changes in interest rates related to
this debt could significantly increase our annual interest
expense and any hedging of this interest may not be
effective to control expenses.
In addition, we have substantial contingent
liabilities, including milestone and royalty obligations
under acquisitions and strategic transactions, and we
have been, and in the future may again be, engaged in
disputes with certain counterparties regarding potential
milestone and royalty obligations. Our increased
indebtedness, including increased interest expense,
together with our significant contingent liabilities, could,
among other things:
• make us more vulnerable to economic or
industry downturns and competitive pressures;
• make it difficult for us to make payments on our
credit facilities and require us to use cash flow from
operations to satisfy our debt obligations, which
may reduce the availability of our cash flow for other
purposes, including business development efforts,
research and development and mergers and
acquisitions;
• limit our ability to incur additional debt or access
the capital markets; and
• limit our flexibility in planning for, or reacting to
changes in, our business.
The Amended and Restated Credit Agreement
requires us to comply with certain financial covenants
and negative covenants, restricting or limiting our ability
41
and the ability of our subsidiaries to, among other things,
incur additional indebtedness, grant liens, and engage
in certain investment, acquisition and disposition
transactions, subject to limited exceptions. If an event
of default occurs, the interest rate may increase and the
administrative agent may be entitled to take various
actions, including the acceleration of amounts due under
the Amended and Restated Credit Agreement. If the
interest rate imposed under our Amended and Restated
Credit Agreement were to increase as a result of a
default, our expenses may increase and we may need
to allocate additional funds to this interest expense
(which may limit the use of these funds for other
purposes, including growing our business or responding
to changes in our business and industry). If some or all
of the amounts outstanding under the Amended and
Restated Credit Agreement were to be accelerated by
the lenders, we may not have sufficient cash on hand
to pay the amounts due, we may not be able to refinance
such debt on terms acceptable to us (or at all) and we
may be required to sell certain assets on terms that are
unfavorable to us.
Our ability to satisfy our obligations under the
Amended and Restated Credit Agreement and meet our
debt service obligations and our royalty and milestone
obligations will depend upon our future performance,
which will be subject to financial, business and other
factors affecting our operations, many of which are
beyond our control.
We may not be able to access the capital and credit
markets on terms that are favorable to us or at all.
We may need to raise additional capital to
supplement our existing funds and cash generated from
operations for working capital, capital expenditure and
debt service
requirements, and other business
activities. Funding needs may shift and the amount of
capital we may need depends on many factors, including,
the cost of any acquisition or any new collaborative,
licensing or other commercial relationships that we may
establish, the time and cost necessary to build our
manufacturing facilities or enhance our manufacturing
operations, amounts we may need to pay in connection
with the resolution of any government investigation or
litigation matter (including any securities class action
matter or any product liability claim), the cost of obtaining
and maintaining the necessary regulatory approvals for
our manufacturing facilities, and the progress, timing
and scope of our preclinical studies, clinical trials and
product development and commercialization efforts.
The capital and credit markets have experienced and
may continue to experience extreme volatility and
disruption. We may not receive additional funding when
we need it or funding may only be available on
unfavorable terms. If we cannot raise adequate funds
to satisfy our working capital, capital requirements and
debt repayment obligations (or royalty and milestone
obligations), we may have to delay, scale-back or
certain
eliminate
development,
manufacturing, acquisition or commercial activities or
sell certain assets and technologies.
research,
Our business involves environmental risks and potential
exposure to environmental liabilities.
As a biopharmaceutical company, our business
involves the use of certain hazardous materials in our
research, development, manufacturing and other
activities. We and our third party providers are subject
to various federal, state and local and foreign
environmental laws and regulations concerning the
handling and disposal of non-hazardous and hazardous
wastes, such as medical and biological wastes, and
emissions and discharges into the environment, such
as air, soils and water sources. We also are subject to
laws and regulations that impose liability and clean-up
responsibility for releases of hazardous substances into
the environment and a current or previous owner or
operator of property may be liable for the costs of
remediating its property or locations, without regard to
whether the owner or operator knew of or caused the
contamination. Although we believe that our safety
procedures for handling and disposing of hazardous
materials comply with the laws and regulations
established by state, federal and foreign regulations, the
risk of loss of, or accidental contamination or injury from,
these materials cannot be eliminated. If an accident or
environmental discharge occurs, or if we discover
contamination caused by prior owners and operators of
properties we acquire, we could be liable for remediation
obligations, damages and fines that could exceed our
insurance coverage and financial resources. Such
obligations and liabilities, which to date have not been
material, could have a material impact on our business
and financial condition. Additionally, the cost of
compliance with environmental and safety laws and
regulations may increase in the future, and we may be
required
including
substantial financial resources, to comply with such laws
and regulations or purchase supplemental insurance
coverage, which may not be available on acceptable
terms or at all.
to dedicate more
resources,
In order to meet one of our key business objectives of
advancing and rebuilding our product pipeline, we plan
to expand our business and product offerings through
acquisitions of businesses and technologies. Our efforts
to identify opportunities or complete transactions that
satisfy our strategic criteria may not be successful, and
we may not realize the anticipated benefits of any
completed acquisition or other strategic transaction.
As noted above, in 2018 a substantial portion of
our total revenue was derived from SOLIRIS. We expect
that there may be increased competition to SOLIRIS
from, among other products and therapies, biosimilars,
and we are still in the very early stages of the launch of
ULTOMIRIS in the U.S. for PNH and cannot guarantee
that our efforts to facilitate the conversion of patients
42
from SOLIRIS to ULTOMIRIS or to have new PNH patients
prescribed ULTOMIRIS will be successful (or that we will
obtain clearance for ULTOMIRIS for PNH in the EU, Japan
and other jurisdictions). As a result, we have identified
rebuilding our product pipeline as a key strategic
objective and, in order to achieve this objective, we
expect to purchase businesses and acquire, co-develop
or license technologies and products from third parties
in the future. For example, in 2018, among other
transactions, we completed acquisitions of Wilson
Therapeutics and Syntimmune, Inc. We anticipate that
we will regularly evaluate potential merger, acquisition,
partnering and in-license opportunities in an effort to
expand our pipeline or product offerings, and enhance
our research platforms. Acquisitions of new businesses
or products and in-licensing of new technologies and
products may involve numerous risks, including:
• substantial cash expenditures;
• potentially dilutive issuance of equity securities
and incurrence of debt;
• assumption of material liabilities in connection
with the target or purchased technology, some of
which may be difficult or impossible to identify at
the time of acquisition;
• difficulties in assimilating the operations of the
acquired companies;
• failure of any acquired businesses or products
or in-licensed products or technologies to achieve
the scientific, medical, commercial or other results
we anticipate;
• diverting our management’s attention away from
other business opportunities and concerns;
• the potential loss of our key employees or key
employees of the acquired companies; and
• risks of entering disease areas and indications
in which we have limited or no direct experience.
A substantial portion of our strategic efforts are
focused on opportunities for rare disorders, but the
availability of such opportunities is limited. We may not
be able to identify opportunities that satisfy our strategic
criteria or are acceptable to us or our stockholders.
Several companies have publicly announced intentions
to establish or develop rare disease programs and we
may compete with these companies for the same
opportunities. For these and other reasons, we may not
be able to acquire the rights to additional product
candidates or approved products on terms that we or
our stockholders find acceptable, or at all. In such event,
we may not be able to rebuild our pipeline and any future
revenue may remain largely dependent on our existing
products which, as noted above, may be subject to
increasing competition from biosimilars and other
competitive or novel therapies.
Even if we are able to successfully identify and
complete acquisitions and other strategic transactions,
43
we may not be able to integrate or take full advantage
of them. An acquisition or other strategic transaction
may not result in short-term or long-term benefits to us.
We may also incorrectly judge the value or worth of an
acquired company or business or an acquired or in-
licensed product, particularly if the acquired technology
is preclinical trials or early-stage clinical trials.
To effectively manage our current and future
potential growth, we must continue to effectively
enhance and develop our global employee base and our
operational and financial processes. Supporting our
require significant capital
growth strategy may
expenditures and management resources, including
investments in research, development, sales and
marketing, manufacturing and other areas of our
operations. The development or expansion of our
business, any acquired business or any acquired or in-
licensed products may require a substantial capital
investment by us and we may likely incur substantial
to
expenses
commercialization. We may not have the necessary
funds for these capital expenditures and expenses or
they might not be available to us on acceptable terms
or at all. We may also seek to raise funds by incurring
additional indebtedness and selling shares of our capital
stock, which could dilute current stockholders’
ownership interest in our company, or securities
convertible into our capital stock, which could dilute
current stockholders’ ownership interest in us upon
conversion.
in advancing acquired products
We may incur impairment charges in the future for
certain of our assets, including goodwill in connection
with acquisitions, and such amounts may be material.
If the purchase price of a business acquisition
exceeds the value of the assets (and liabilities) acquired,
the acquirer must recognize goodwill in such amount.
We may be required to recognize impairment charges
for our goodwill and other intangible assets, and such
charges may be material and have an adverse impact
on our financial results in the period such charges are
incurred.
As of December 31, 2018, the net carrying value
of our goodwill and other intangible assets, net totaled
$8,678.7. As required by GAAP, we periodically assess
these assets to determine if there are indicators of
impairment. We have recorded charges that include
inventory write-downs for failed quality specifications or
recalls, impairments with respect to investments and
acquisitions, fixed assets and long-lived assets,
outcomes of litigation and other legal or administrative
proceedings, regulatory matters and tax matters, and
payments in connection with acquisitions and other
business development activities, such as milestone
payments. The impairment of tangible and intangible
assets may be triggered by developments both within
and outside our control. Deteriorating economic
relating
conditions, technological changes, disruptions to our
business, inability to effectively integrate acquired
businesses, unexpected significant changes or planned
intensified
in the use of the assets,
changes
competition, divestitures, market capitalization declines
and other factors may impair our goodwill and other
intangible assets. Any charges
to such
impairments could adversely affect our results of
operations in the periods in which an impairment is
recognized. As part of our standard quarterly
procedures, we reviewed the KANUMA asset as of
December 31, 2018 and determined that there were no
indicators of impairment. We will continue to review the
related valuation and accounting of this asset in future
quarters as new information becomes available to us.
Changes to assumptions used in our net cash flow
projections may result in impairment charges in
subsequent periods. The net book value of the KANUMA
intangible asset as of December 31, 2018 is $3,252.6.
Our business could be adversely affected by litigation,
government investigations and enforcement actions.
liability,
product
limitation,
securities,
anti-bribery,
We operate in many jurisdictions in a highly
regulated industry and we could be subject to litigation,
government investigation and enforcement actions on a
variety of matters in the U.S. or foreign jurisdictions,
intellectual property,
including, without
regulatory,
environmental,
whistleblower, Qui Tam, false claims, privacy, anti-
kickback,
commercial,
employment and other claims and legal proceedings
which may arise from conducting our business. See Note
11 “Commitments and Contingencies” to the footnotes
to the consolidated financial statements included
elsewhere in this Annual Report on Form 10-K for
information on our material legal proceedings. For
example, in May 2015, we received a subpoena in
connection with an investigation by the Enforcement
Division of the SEC requesting information related to our
grant-making activities and compliance with the FCPA in
various countries. In addition, in October 2015, we
received a request from the DOJ for the voluntary
production of documents and other
information
pertaining to Alexion’s compliance with FCPA. The SEC
and DOJ also seek information related to Alexion’s
recalls of specific lots of Soliris and related securities
disclosures. Alexion
these
investigations. The investigations have focused on
operations
including Brazil,
Colombia, Japan, Russia and Turkey, and Alexion's
compliance with the FCPA and other applicable laws. Any
determination that our operations or activities are not
in compliance with existing laws or regulations, by the
SEC or DOJ in the above referenced matter for example,
could result in the imposition of fines, civil and criminal
penalties, equitable remedies, including disgorgement,
injunctive relief, exclusion from the federal healthcare
programs, healthcare debarment, product recalls,
reputational damage and modifications of our business
in various countries,
is cooperating with
practices and/or other sanctions against us, and
remediation of any such findings could have an adverse
effect on our business operations. Legal proceedings,
government investigations, including the SEC and DOJ
investigations, and enforcement actions have been and
we expect may continue to be expensive and time
consuming. Any future litigation or investigation may also
likely be expensive and time consuming.
The efficiency of our corporate structure depends on the
application of the tax laws and regulations in the
countries where we operate and we may have exposure
to additional tax liabilities or our effective tax rate could
increase, which could have a material impact on our
results of operations and financial position.
As a company with international operations, we are
subject to income taxes, as well as non-income based
taxes, in both the U.S. and various foreign jurisdictions.
Significant judgment is required in determining our
worldwide tax liabilities. Although we believe our
estimates are reasonable at the time made, the final
taxes we owe may differ from the amounts recorded in
our financial statements (and such differences may be
material). If the IRS, or other taxing authority, disagrees
with the positions we take, we could have additional tax
liability, and this could have a material impact on our
results of operations and financial position. Our effective
tax rate could be adversely affected by changes in the
mix of earnings in countries with different statutory tax
rates, changes in the valuation of deferred tax assets
and liabilities, changes in tax laws and regulations,
changes in interpretations of tax laws, including pending
tax law changes, changes in our manufacturing activities
and changes in our future levels of research and
development spending.
We have designed, and from time to time we modify,
our corporate structure, the manner in which we develop
and use our intellectual property, and our intercompany
transactions between our affiliates in a way that is
intended to enhance our operational and financial
efficiency and increase our overall profitability. The
application of the tax laws and regulations of various
countries in which we operate and to our global
operations is subject to interpretation. We also must
operate our business in a manner consistent with our
corporate structure to realize such efficiencies. The tax
authorities of the countries in which we operate may
challenge our methodologies for valuing developed
technology or for transfer pricing or other operations. If
tax authorities determine that the manner in which we
operate results in our business not achieving the
intended tax consequences, our effective tax rate could
increase (and such increase may be material) and harm
our financial position and results of operations. In
addition, certain governments are considering and may
adopt tax reform measures that significantly increase
our worldwide tax liabilities. The Organization for
Economic Co-operation and Development and other
44
government bodies have focused on issues related to
the taxation of multinational corporations, including, in
the area of “base erosion and profit shifting,” where
payments are made from affiliates in jurisdictions with
high tax rates to affiliates in jurisdictions with lower tax
rates. It is possible that these reform measures could
increase our effective tax rate (and such increase may
be material) and harm our financial position and results
of operations over the next several years.
Our sales and operations are subject to a variety of risks
relating to the conduct of our international business.
We have increased our international presence,
including in emerging markets. Our operations in foreign
countries subject us to a variety of risks, including:
• difficulties or the inability to obtain necessary
foreign regulatory or reimbursement approvals of
our products in a timely manner or at all;
• political or economic determinations that adversely
impact pricing or reimbursement policies;
• economic problems or political instability;
• fluctuations in currency exchange rates;
• difficulties or inability to obtain financing in
markets;
• unexpected changes in tariffs, trade barriers and
regulatory requirements;
• customs and tax officials in foreign jurisdictions
may disagree with the value we set when we or
others import our products (including products that
are donated for charitable purposes) and we may
be required to pay additional duties or fines and
such amounts may be substantial;
• difficulties
in establishing and enforcing
contractual and intellectual property rights;
• compliance with complex import and export control
laws;
• trade restrictions and restrictions on direct
investments by foreign entities;
• compliance with tax, employment and labor laws;
• costs and difficulties in recruiting and retaining
qualified managers and employees to manage and
operate the business in local jurisdictions;
• costs and difficulties in managing and monitoring
international operations; and
• longer payment cycles.
Additionally, our business and marketing methods
are subject to the laws and regulations of the countries
in which we operate, which may differ significantly from
country to country and may conflict with U.S. laws and
regulations. The FCPA and anti-bribery laws and
regulations in the locations in which we operate our
business are extensive and far-reaching, and we must
maintain accurate records and control over the activities
laws
remedies,
for actions
of our distributors and third party service providers in
countries where we operate. We have policies and
procedures, and we are currently implementing an
enhanced company-wide compliance program and effort,
designed to help ensure that we and our representatives,
including our employees and our vendors and
distributors, comply with such laws, however we cannot
guarantee that these policies and procedures will
protect us against liability under the FCPA or other anti-
bribery
taken by us or our
representatives. Any determination that our operations
or activities are not in compliance with existing laws or
regulations, including the FCPA and the UK Anti-Bribery
Act, could result in the imposition of fines, civil and
criminal penalties, equitable
including
disgorgement, injunctive relief, and/or other sanctions
against us, and remediation of such findings could have
a material and adverse effect on our business
operations. In addition, as our international operations
expand, we are likely to become subject to new anti-
corruption/anti-bribery laws or existing laws may govern
our activities in new jurisdictions in which we operate.
In addition, as we move from a direct sales force to third-
party distributors and marketers in certain countries and
regions, we may also have liability under the FCPA and
anti-bribery laws and regulations for their actions.
Although we can impose contractual restrictions on what
they are authorized to do on our behalf, we will exercise
only limited control over the actions of these third parties
but may still face the same liabilities for their actions.
Our failure, and the failure of others who we engage to
act on our behalf, to comply, with the laws and
regulations of the countries in which we operate, or will
operate in the future, could materially harm our
business.
Currency fluctuations and changes in exchange rates
could adversely affect our revenue, increase our costs
and negatively affect our profitability.
We conduct a substantial portion of our business
in currencies other than the U.S. dollar. We are exposed
to fluctuations in foreign currency exchange rates and
such fluctuations affect our operating results. 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,
including the Euro, Japanese Yen, British Pound,
Canadian dollar and Turkish Lira. As the U.S. dollar
strengthens against these foreign currencies, the
relative value of sales made in the respective foreign
currencies decrease. When the U.S. dollar weakens
against these currencies, the relative value of such sales
increase. We manage a portion of 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 to hedge
exposures resulting from portions of our forecasted
45
revenues, including intercompany revenues that are
denominated in currencies other than the U.S.
dollar. The purpose of the revenue 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.
Further, we enter into foreign exchange forward
contracts, with durations of approximately 30 days,
designed to limit the balance sheet exposure of
monetary assets and liabilities. We enter into these
hedges to reduce the impact of fluctuating exchange
rates on our operating results. Gains and losses on
these hedge transactions are designed to offset gains
and losses on underlying balance sheet exposures.
While we attempt to hedge certain currency risks,
currency fluctuations between the U.S. dollar and the
currencies in which we do business have, in the past,
caused foreign currency transaction gains and losses
and have also impacted the amounts of revenues and
expenses calculated in U.S. dollars and will do so in the
future. Likewise, past currency fluctuations have at
times resulted in foreign currency transaction gains, and
there can be no assurance that these gains can be
reproduced. Any significant foreign currency exchange
rate fluctuations could adversely affect our financial
condition and results of operations.
Risks Related to the Regulatory Environment
We operate in a highly regulated industry and if we or
our third party providers fail to comply with U.S. and
foreign regulations, we or our third party providers could
lose our approvals to market our products or our product
candidates, and our business may be seriously harmed.
We and our current and future third party vendors,
contract manufacturers, CROs, distributors and
suppliers and logistic providers are subject to rigorous
and extensive regulation by governmental authorities
around the world, including the FDA, EMA, the competent
authorities of the EU Member States and the MHLW.
These regulations, many of which are complex, relate to
almost all aspects of our business, including GCP, GLP,
cGMP and pharmacovigilance rules (for additional
information on the regulations relating to our business,
see “Business - Government Regulation” in Item 1 above
in this Annual Report on Form 10-K). If we or a regulatory
agency discover previously unknown problems with a
product, such as adverse events of unanticipated
severity or frequency, or problems with the facility where
the product
(such as product
contamination), or in the case of KANUMA, problems
with animal operations, a regulatory agency may impose
restrictions on that product, the manufacturing facility
or us. We have received a Warning Letter from the FDA
relating to compliance with FDA’s cGMP requirements at
one of our facilities, which was remediated. If we had
failed to address the FDA’s concerns or if we (or one of
our third party contract manufacturers) were to receive
is manufactured
another Warning Letter in the future relating to cGMP or
other applicable regulations, the FDA or other regulatory
authorities could take regulatory action, including fines,
civil penalties, recalls, seizure of product, suspension
of manufacturing operations, operating restrictions,
injunctions, suspension of clinical trials, withdrawal of
FDA approval and/or criminal prosecution.
If we or our third-party providers, including our
product fill-finish providers, packagers and labelers, fail
to comply fully with applicable regulations, then we may
be required to initiate a recall or withdrawal of our
products. In addition to our manufacturing operations
and those of contract manufacturers’ manufacturing
operations being subject to inspection and potential
regulatory action for failure to comply with (among other
regulations) cGMP, our animal operations may also be
subject to FDA and U.S. Department of Agriculture,
Animal and Plant Health Inspection Service (USDA
APHIS) inspection to evaluate whether our animal
husbandry, containment, personnel, and record keeping
practices are sufficient to ensure safety and security of
our transgenic chickens and animal products (e.g., eggs,
waste, etc.). Any failure to ensure safety and security of
our transgenic chickens and/or animal products could
result in regulatory action by the FDA or another
regulatory body, including USDA APHIS.
Failure to comply with the laws and requirements,
including statutes and regulations, administered by the
FDA, the EC, the competent authorities of the EU Member
States, the MHLW or other agencies, could result in:
• a product recall;
• a product withdrawal;
• significant administrative and judicial sanctions,
including, warning letters or untitled letters;
• significant fines and other civil penalties;
• suspension, variation or withdrawal of a previously
granted approval for our products;
• interruption of production;
• operating restrictions, such as a shutdown of
production facilities or production lines, or new
manufacturing requirements;
• suspension or termination of ongoing clinical trials;
• delays in approving or refusal to approve our
products
including pending BLAs or BLA
supplements for our products or a facility that
manufactures our products;
• seizing or detaining product;
• requiring us or our partners to enter into a consent
decree, which can include imposition of various
fines,
inspection costs,
required due dates for specific actions and
penalties for noncompliance;
reimbursements
for
• injunctions; and/or
46
• criminal prosecution.
In addition, we are subject to antitrust
regulations with respect to our acquisitions, as well as
our interactions with other participants in the markets
we serve. In addition, these antitrust laws are vigorously
enforced in the U.S. and in other jurisdictions in which
we operate.
Our product candidates require extensive clinical testing
and regulatory approval and failure of to satisfy
regulatory requirements to meet the appropriate safety
and efficacy thresholds may prevent us from being able
to market our products and limit our ability to grow our
business and diversify our revenue.
We believe our future success may depend on our
ability to develop and commercialize our product
candidates and, to this end, we have recently acquired
companies and technologies in an effort to expand our
product pipeline. Our product candidates are in various
stages of development and must satisfy the rigid safety
and efficacy requirements of the FDA and other foreign
regulatory agencies before they can be approved for sale
to patients. To satisfy these standards, we must ensure,
among other things, that we have appropriately
established our protocol designs, obtained
the
necessary IRB approval, provide adequate patient
enrollment rates, timely and appropriately report any
adverse events and serious adverse events to the
appropriate authorities and ensure compliance with
cGCP. If we or our third-party clinical trial providers or
third-party CROs do not successfully carry out these
clinical activities, our clinical trials or the potential
regulatory approval of a product candidate may be
delayed or be unsuccessful.
If we discover safety or safety reporting issues with any
of our approved products, or if we fail to comply with
continuing U.S. and applicable foreign regulations, our
revenue may decrease, an approved product could lose
its marketing approval or sales could be suspended and
our business could be materially harmed.
Following marketing approval of a pharmaceutical
product, the safety profile of such product continues to
be closely monitored by the FDA and other foreign
regulatory authorities. Regulations continue to apply
after product approval, and cover, among other things,
testing, manufacturing, quality control, finishing, filling,
labeling, advertising, promotion, risk mitigation, adverse
event reporting requirements and export of biologics.
For example, the REMS program for SOLIRIS, most
recently updated by the FDA in 2015, requires
prescribing information regarding the level of fever
needed to seek medical attention and reporting adverse
events. Future changes to the SOLIRIS REMS (or similar
requirements for other products) could be costly and
burdensome to implement.
We are required to report any serious and
unexpected adverse experiences and certain quality
47
problems with our products to the FDA, the EMA, the
MHLW and other health agencies. Adverse safety events
involving our products may have a negative impact on
our business. Discovery of safety issues with our
products could result in product liability claims and could
cause additional regulatory scrutiny and requirements
for additional labeling or safety monitoring, withdrawal
of products from the market and the imposition of fines
or criminal penalties.
In addition, governmental
authorities are making greater amounts of safety
information directly available to the public through
periodic safety update reports, patient registries and
other reporting requirements. The reporting of adverse
safety events may also damage physician, patient and/
or investor confidence in our products and our
reputation. Any adverse events in connection with the
use of our products could result in liabilities, loss of
revenues, material write-offs of inventory, material
impairments of intangible assets, goodwill and fixed
assets, material restructuring charges and other
adverse impacts on our results of operations.
Regulatory agencies periodically
inspect our
pharmacovigilance processes.
If these regulatory
agencies determine that we or other parties whom we
do not control that perform services on our behalf,
including clinical trial investigators, have not complied
with the applicable reporting or other pharmacovigilance
requirements, we may become subject to additional
inspections, warning letters or other enforcement
actions,
fines, marketing
including monetary
authorization withdrawal and other penalties.
As a condition of approval for marketing our
products, governmental authorities may require us to
conduct additional studies. In connection with the
approval of SOLIRIS in the U.S., EU and Japan, for the
treatment of PNH, we agreed to establish a PNH Registry,
monitor immunogenicity, monitor compliance with
vaccination requirements, and determine the effects of
anticoagulant withdrawal among PNH patients receiving
eculizumab, and, specifically in Japan, we agreed to
conduct a trial in a limited number of Japanese PNH
patients to evaluate the safety of a meningococcal
vaccine. In connection with the approval of SOLIRIS in
the U.S. for the treatment of aHUS, we agreed to
establish an aHUS Registry and complete additional
human clinical studies in adult and pediatric patients.
Furthermore, in connection with the approval of
STRENSIQ in the U.S., we agreed to conduct a
prospective observational study in treated patients to
assess the long-term safety of STRENSIQ therapy and
to develop complementary assays. Similarly,
in
connection with the approval of KANUMA in the U.S., we
agreed to conduct a long-term observational study of
treated patients, either as a standalone study or as a
component of the existing LAL Registry. In the EU, in
connection with the grant of authorization for STRENSIQ,
we agreed to conduct a multicenter, randomized, open-
label, Phase 2a study of STRENSIQ in patients with HPP
and to extend the studies ENB-008-10 and ENB-009-10
to provide efficacy data in patients 13 to 18 years of
age, which we have commenced.
In the U.S., the FDA can also propose to withdraw
approval for a product if it determines that such
additional studies are inadequate or if new clinical data
or information shows that a product is not safe for use
in an approved indication.
In addition, similar or more stringent post-approval
requirements and obligations may be imposed by the
FDA and/or other regulatory agencies with respect to
our future products (such as ULTOMIRIS or SOLIRIS for
the treatment of NMOSD, if approved for use by the FDA
and such agencies). Compliance with these post-
approval requirements could result in increased cost
and expense and decrease our operating margins and,
if we are unable to comply with these requirements, we
may be subject to regulatory action by the applicable
regulatory agency and the penalties may include fines
and product withdrawals or restrictions in the use of a
product.
If we fail to comply with applicable healthcare laws and
regulations, including those related to healthcare fraud
and abuse, we may be subject to investigations and civil
or criminal penalties and our business could be adversely
affected.
We are subject to healthcare “fraud and abuse”
laws, such as the FCA, the anti-kickback provisions of
the federal Social Security Act, laws prohibiting off-label
product promotion and other related federal and state
laws and regulations.
item or service
The federal Anti-Kickback Statute prohibits, among
other things, knowingly and willfully offering, paying,
soliciting or receiving any remuneration, directly or
indirectly, in cash or in kind to induce, or reward the
purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any
reimbursable under
healthcare
federal healthcare
Medicare, Medicaid, or other
programs. Liability may be established without a person
or entity having actual knowledge of the federal Anti-
Kickback Statute or specific intent to violate it. A
conviction for violation of the Anti-kickback Statute
requires mandatory exclusion from participation in
federal healthcare programs. The majority of states also
have statutes similar to the federal Anti-Kickback
Statute and false claims laws that apply to items and
services reimbursed under Medicaid and other state
programs, or, in several states, apply regardless of the
payer.
The FCA prohibits any person from knowingly
presenting, or causing to be presented, a false or
fraudulent claim for payment of government funds, or
knowingly making, using or causing to be made or used,
a false record or statement material to a false or
fraudulent claim. Pharmaceutical companies have been
48
investigated and have reached substantial financial
settlements with the Federal government under the FCA
for a variety of alleged promotional and marketing
activities, such as allegedly providing free product to
customers with the expectation that the customers
would bill federal programs for the product; providing
consulting fees and other benefits to physicians to
induce them to prescribe products; engaging in
promotion of pharmaceuticals for uses that the FDA has
not approved, or “off-label” uses; and submitting inflated
best price information to the Medicaid Rebate Program.
We seek to comply with the Anti-Kickback Statute
and FCA laws, including operating within any available
safe harbors, but we cannot assure that our compliance
program, policies and procedures will always protect us
from acts committed by its employees or third-party
distributors or service providers.
Other
related
federal and state
laws and
regulations that may affect our ability to operate include,
among others, the federal False Statements Statute, the
federal Civil Monetary Penalties Law, HIPAA, the federal
Open Payments program, state anti-kickback and false
claims acts, and state and local disclosure requirements
and marketing restrictions. Additional information about
the scope of these requirements and potential penalties
is provided under “Government Regulation - Fraud and
Abuse” included above in Item 1 in this Annual Report
on Form 10-K.
level
local
In recent years, legislation has been adopted at
the
requiring
federal, state and
pharmaceutical companies to establish marketing
compliance programs, file periodic reports or make
periodic public disclosures on sales, marketing, pricing,
clinical trials, health care provider payments and other
activities. For example, as part of the PPACA, the federal
government enacted the Open Payments (commonly
known as the Sunshine Act) provisions. Open Payments
requires pharmaceutical manufacturers
report
annually to CMS payments or other transfers of value
made by that entity to physicians and teaching hospitals.
We also now have similar reporting obligations
throughout the EU. Failure to comply with the reporting
requirements may result in significant civil monetary
penalties.
to
in
laws
laws
(and comparable
result
Violations of U.S. federal and state fraud and
foreign
abuse
jurisdictions) may
in criminal, civil and
administrative sanctions, including fines, damages, civil
monetary penalties (which may be material in amount)
and exclusion from federal healthcare programs
(including Medicare and Medicaid). Any action initiated
against us for violation of these laws, even if we
successfully defend against it, could require the
expenditure of significant resources and generate
negative publicity, which could materially adversely
affect our ability to operate our business and our
financial results.
Finally, the FDA, the EU and EU Member States and
the MHLW impose restrictions on the promotion and
marketing of drug products and prohibit pharmaceutical
manufacturers from promoting products for indications
other than those cleared or approved by regulatory
authorities or for use in manner that is not consistent
with the product label approved by regulatory agencies,
or off-label promotion. In certain instances, physicians
are, however, in their medical judgment permitted to use
products for unapproved purposes and we are aware of
such uses of SOLIRIS. For information regarding a recent
MHLW inquiry focused on our communication efforts
regarding the proper use of SOLIRIS in Japan for aHUS,
see Note 11 “Commitments and Contingencies” to our
consolidated financial statements included elsewhere
in this Annual Report on Form 10-K. Although we believe
our marketing materials and training programs for
physicians do not constitute improper promotion, the
FDA, the U.S. Department of Justice (DOJ), other federal
or state government agencies, the EU, EU Member
States or the MHLW may disagree. If any governmental
authority determines that our promotional materials,
training or other activities constitute improper promotion
of any of our products, it could request that we modify
our training or promotional materials or other activities
or subject us to regulatory enforcement actions,
including the issuance of a warning letter, product
withdrawal or recall, injunction, seizure, civil fine and
criminal penalties. It is also possible that other
enforcement authorities might take action if they believe
that the alleged improper promotion led to the
submission and payment of claims for an unapproved
use, which could result in significant fines or penalties
under other statutory authorities, such as laws
prohibiting false or fraudulent claims for payment of
government funds.
The sales and marketing practices of the
pharmaceutical industry have been the subject of
increased scrutiny from authorities such as the DOJ, and
we expect that this trend may continue and may
increase. If the government or the courts determine that
we breached any of these sales and marketing laws, we
may be subject to penalties identified above. Any action
against us for violation of these laws, even if we
successfully defend against them, also could cause us
to incur significant legal expenses, harm our reputation
and divert our management’s attention from the
operation of our business.
Our business and operations may be materially adversely
affected by government investigations.
We are subject to the FCPA, the U.K. Bribery Act
and other anti-corruption laws and regulations that
generally prohibit companies and their intermediaries
from making improper payments to government officials
and/or other persons for the purpose of obtaining or
retaining business and we operate in countries that are
for
recognized as having a greater potential
49
governmental and commercial corruption. While we have
enhanced our compliance and training programs, we
cannot assure that our compliance program, policies
and procedures will always protect us from acts
committed by employees or third-parties acting on our
behalf.
In May 2015, we received a subpoena in
connection with an investigation by the Enforcement
Division of the SEC requesting information related to our
grant-making activities and compliance with the FCPA in
various countries. In addition, in October 2015, we
received a request from the DOJ for the voluntary
production of documents and other
information
pertaining to our compliance with the FCPA. The SEC
and DOJ also sought information related to our recalls
of specific lots of SOLIRIS and related securities
disclosures. In December 2016, we received a
subpoena from the U.S. Attorney’s Office for the District
of Massachusetts requesting documents relating
to our support of certain 501(c)(3)
generally
organizations (as described below). We understand that
the U.S. Attorney's Office is coordinating its inquiry with
the Office of Inspector General (OIG) of the U.S.
Department of Health and Human Services. In May
2017, Brazilian authorities seized records and data from
our Sao Paulo, Brazil offices as part of an investigation
being conducted into our Brazilian operations. In October
2018, the MHLW conducted an inspection of our
Japanese operations. We are cooperating with these
investigations. At this time, we are unable to predict the
duration, scope or outcome of these investigations.
Any determination that our operations or activities
are not, or were not, in compliance with existing U.S. or
foreign laws or regulations, could result in the imposition
of a broad range of civil and criminal sanctions against
us and certain of our directors, officers and/or
employees, including injunctive relief, disgorgement,
substantial fines or penalties, imprisonment, and other
legal or equitable sanctions, including exclusion from
Medicare, Medicaid, and other governmental healthcare
programs. Any attempts to resolve some or all of these
matters may not be successful. If we were to engage
in settlement discussions with respect to any current or
future investigation or litigation (and we may accrue
amounts due to the nature of such discussions), but the
matter is not settled, the ultimate resolution may result
in monetary or other penalties materially stricter or
greater than the terms or amounts that we proposed in
discussions (or the amount that we accrued for such
matter during negotiations). For example, in connection
with the investigation by the U.S. Attorney's Office for
the District of Massachusetts relating generally to our
support of Patient Services, Inc. (PSI) and National
Organization for Rare Disorders (NORD), 501(c)(3)
organizations that provide financial assistance to
Medicare patients taking drugs sold by Alexion (among
other matters) we have accrued approximately $13.0 in
the fourth quarter of 2018 as a result of our agreement
in principle to settle this investigation (but there is no
guarantee that the steps necessary to conclusively
resolve this matter will be successful or that the
settlement terms will be finalized (and, if not completed,
our liability in connection with this matter may exceed
$13.0)). Additionally, remediation of any such findings
resulting from these and any future investigations could
have an adverse effect on our business operations, and
we could experience interruptions of business, harm to
our reputation, debarment from government contracts,
loss of supplier, vendor or other third-party relationships,
licenses and permits could be
and necessary
terminated. Other internal or government investigations
or legal or regulatory proceedings, including lawsuits
brought by private litigants, may also follow as a
consequence. Cooperating with and responding to
requests for information in connection with these
ongoing investigations, as well as responding to any
future U.S., state or foreign governmental investigation
or whistleblower lawsuit, has resulted and could
continue to result in substantial expenses, and could
divert management’s attention from other business
concerns and could have a material adverse effect on
our business and financial condition and growth
prospects.
laws and
in healthcare
Changes
implementing
regulations, as well as changes in healthcare policy, may
affect coverage and reimbursement of our products in
ways that we cannot currently predict and these changes
could adversely affect our business and financial
condition.
In the U.S., there have been a number of legislative
and regulatory initiatives focused on containing the cost
of healthcare. The PPACA substantially changed the way
healthcare is financed by both governmental and private
insurers in the U.S., and significantly impacts the
pharmaceutical industry. The PPACA contains a number
of provisions that are expected to impact our business
and operations, in some cases in ways we cannot
currently predict. Changes that may affect our business
include those governing enrollment in federal healthcare
programs, reimbursement changes, rules regarding
prescription drug benefits under health insurance
exchanges, expansion of the 340B program, expansion
fraud and abuse
of state Medicaid programs,
enforcement and rules governing the approval of
biosimilar products (and allowing biosimilars access to
the market in accordance with the FDA’s Biosimilars
Action Plan). These changes may impact existing
government healthcare programs and may result in the
development of new programs, including Medicare
payment for performance initiatives and improvements
to the physician quality reporting system and feedback
program. In 2016, CMS implemented changes to the
Medicaid Drug Rebate Program under the PPACA.
Moreover, in the future, Congress could enact legislation
that further increases Medicaid drug rebates or other
costs and charges associated with participating in the
50
Medicaid Drug Rebate Program. The issuance of
regulations and coverage expansion by various
governmental agencies relating to the Medicaid Drug
Rebate Program has and may continue to increase our
costs and the complexity of compliance, has been and
may be time-consuming, and could have a material
adverse effect on our results of operations.
Similar efforts to those in the United States,
and in some cases even more aggressive efforts, are
being taken by governments to control the costs of
pharmaceutical drugs in countries outside the U.S. In
these markets outside the U.S., the pricing and
reimbursement of pharmaceutical products is subject
to direct or indirect governmental control and such
government authorities are increasingly attempting to
limit or regulate the price of drug products and due to
their control over pricing are able to move quickly to
implement pricing changes.
We may face uncertainties as a result of federal
and administrative efforts to repeal, substantially modify
or invalidate some or all of the provisions of the PPACA.
There is no assurance that the PPACA, as currently
enacted or as amended in the future, will not adversely
affect our business and financial results, and we cannot
predict how future federal or state legislative or
administrative changes relating to healthcare reform
may affect our business.
The current presidential administration has also
indicated an intent to address prescription drug pricing
and recent Congressional hearings have brought
increased public attention to the costs of prescription
drugs. These actions and the uncertainty about the
future of the PPACA and healthcare laws may put
downward pressure on pharmaceutical pricing and
increase our regulatory burdens and operating costs.
rebates
State governments have sought to put in place
limits and caps on pharmaceutical prices and have also
requested
for certain pharmaceuticals.
Attempts to decrease prices of pharmaceuticals
products may lead to increased use of managed care
organizations by Medicaid programs which could lead to
managed care organizations influencing prescription
decisions
for beneficiaries and a corresponding
limitation on prices and reimbursement for our products.
Governments in countries where we operate have
adopted or have also shown significant interest in
pursuing legislative initiatives to reduce costs of
healthcare. We expect that the implementation of
current laws and policies, the amendment of those laws
and policies in the future, as well as the adoption of new
laws and policies, could have a material adverse effect
on our industry generally and on our ability to maintain
or
increase our product sales or successfully
commercialize our product candidates, or could limit or
eliminate our future spending on development projects.
The announcement or adoption of regulatory or
legislative proposals could delay or prevent our entry
into new markets, affect our reimbursement or sales in
the markets where we are already selling our products
and materially harm our business, financial condition
and results of operations.
If we fail to comply with our reporting and payment
obligations under the Medicaid Drug Rebate Program,
Medicare, or other governmental pricing programs, we
reimbursement
could be subject
requirements, penalties, sanctions and fines which could
have a material adverse effect on our business, financial
condition, results of operations and prospects.
to additional
We participate in and have certain price reporting
obligations to the Medicaid Drug Rebate Program and
we have obligations to report the average sales price
under the Medicare program. Under the Medicaid Drug
Rebate Program, we are required to pay a rebate to each
state Medicaid program for quantities of our products
that are dispensed to Medicaid beneficiaries and paid
for by a state Medicaid program as a condition of having
federal funds being made available to the states for our
products under Medicaid and Medicare Part B. Those
rebates are based on pricing data reported by us on a
monthly and quarterly basis to CMS. Any failure to
comply with these price reporting and rebate payment
obligations could negatively impact our financial results.
Pricing and rebate calculations vary among
products and programs. The calculations, including
those in connection with the Medicaid Drug Rebate
Program and 340B drug pricing program (as described
further below) are complex and are often subject to
interpretation by us, governmental or regulatory
agencies and the courts. We cannot assure you that our
submissions will not be found by CMS or other applicable
government authorities to be incomplete or incorrect.
Governmental agencies may also make changes in
program interpretations, requirements or conditions of
participation, some of which may have implications for
amounts previously estimated or paid. For example, if
we become aware that our reporting to CMS for a prior
quarter was incorrect, or has changed as a result of
recalculation of the pricing data, we are obligated to
resubmit the corrected data for a period not to exceed
twelve quarters from the quarter in which the data
originally were due, and CMS may request or require
restatements
for earlier periods as well. Such
restatements and recalculations increase our costs for
complying with the laws and regulations governing these
programs, including the Medicaid Drug Rebate Program.
Any corrections to our rebate calculations could result
in an overage or underage in our rebate liability for past
quarters, depending on the nature of the correction.
Price recalculations also may affect the ceiling price at
which we are required to offer our products to certain
covered entities under the 340B pricing program.
We are liable for errors associated with our
submission of pricing data. In addition to retroactive
rebates and the potential for 340B program refunds,
51
civil monetary penalties can be applied if we are found
to have knowingly submitted any
false pricing
information to the government, if we are found to have
made a misrepresentation in the reporting of our average
sales price, or if we fail to submit the required pricing
data on a timely basis. Such conduct also could be
grounds for CMS to terminate our Medicaid drug rebate
agreement, pursuant to which we participate in the
Medicaid program. In the event that CMS terminates our
rebate agreement, federal payments may not be
available under Medicaid or Medicare Part B for our
covered outpatient drugs. If a governmental authority,
such as CMS, were to take any of the foregoing actions,
our business and results of operations may be negatively
impacted.
The Public Health Service’s 340B drug pricing program,
and other comparable government and payer
regulations, may have a negative impact on the price we
can charge for our products and result in a decrease in
revenues.
to agree
Federal law requires that any company that
participates in the Medicaid Drug Rebate Program also
participate in the Public Health Service’s 340B drug
pricing program in order for federal funds to be available
for the manufacturer’s drugs under Medicaid and
Medicare Part B. The 340B pricing program requires
participating manufacturers
to charge
statutorily-defined covered entities no more than the
340B “ceiling price” for the manufacturer’s covered
outpatient drugs. The 340B pricing program is described
in Pharmaceutical Pricing and Reimbursement in Item 1
Business in this Annual Report on Form 10-K. The 340B
ceiling price is calculated using a statutory formula,
which is based on, among other prices, the average
manufacturer price and rebate amount for the covered
outpatient drug as calculated under the Medicaid Drug
Rebate Program. We are a participant in the 340B drug
pricing program and are, for the applicable covered
entities, subject to the price ceiling. Any changes to the
340B drug pricing program, including:
• the method of calculating the 340B ceiling price
for our products (such as the pricing regulations
that have been further delayed until July 2019);
• any expansion of the entities that qualify as
covered entities; and
• any requirement that participating manufacturers
agree to provide 340B discounted pricing on
drugs used in an inpatient settings;
could have a material and negative impact our
revenue and results of operations.
In addition, the agreement that manufacturers
must sign to participate in the 340B pricing program
obligates a manufacturer to offer the 340B price to
covered entities if the manufacturer makes the drug
available to any other purchaser at any price and to report
to the government the ceiling prices for its drugs.
Beyond the Public Health Service’s 340B drug
pricing program, federal law requires that a company
must participate in the Department of Veterans Affairs
Federal Supply Schedule (FFS) pricing program to be
eligible to have its products paid for with federal funds.
If we overcharge the government in connection with our
FSS contract or Section 703 Agreement, whether due to
a misstated FCP or otherwise, we are required to refund
the difference to the government. Failure to make
necessary disclosures and/or to identify contract
overcharges can result in allegations against us under
the FCA and other laws and regulations. Unexpected
refunds to the government, and responding to a
government investigation or enforcement action, may be
expensive, and could have a material adverse effect on
our business, financial condition, results of operations
and growth prospects.
We may be subject to numerous and varying privacy and
security laws, and our failure to comply could result in
penalties and reputational damage.
We are subject to laws and regulations covering
data privacy and the protection of personal information
including health information. The legislative and
regulatory landscape for privacy and data protection
continues to evolve, and there has been an increasing
focus on privacy and data protection issues which may
affect our business. In the U.S., numerous federal and
state laws and regulations, including state security
breach notification laws, state health information privacy
laws, and federal and state consumer protection laws,
govern the collection, use, disclosure, and protection of
personal information. Each of these laws is subject to
varying interpretations by courts and government
agencies, creating complex compliance issues for us. If
we fail to comply with applicable laws and regulations
we could be subject to penalties or sanctions, including
criminal penalties if we knowingly obtain or disclose
individually identifiable health information from a
covered entity in a manner that is not authorized or
permitted by HIPAA.
Numerous other countries have, or are developing,
laws governing the collection, use and transmission of
personal information as well. EU Member States and
other jurisdictions have adopted data protection laws
and regulations, which impose significant compliance
obligations. For example, the EC adopted the EU Data
Protection Directive, as implemented into national laws
by the EU Member States, which imposes strict
obligations and restrictions on the ability to collect,
analyze, and transfer personal data, including health
data from clinical trials and adverse event reporting.
Data protection authorities from different EU Member
States have interpreted the privacy laws differently,
which adds to the complexity of processing personal
data in the EU, and guidance on implementation and
52
compliance practices are often updated or otherwise
revised. Any failure to comply with the rules arising from
the EU Data Protection Directive and related national
laws of EU Member States could lead to government
enforcement actions and significant penalties against
us, and adversely impact our operating results.
In May 2016, the EU formally adopted the General
Data Protection Regulation, which applies in all EU
Member States and went into effect on May 25, 2018
and replaced the EU Data Protection Directive on that
date. The regulation introduces new data protection
requirements in the EU and substantial fines for
breaches of the data protection rules. It increases our
responsibility and liability in relation to personal data
that we process and we may be required to put in place
additional mechanisms ensuring compliance with the
new EU data protection rules.
Security breaches, cyber-attacks or other disruptions
could expose us to liability and affect our business and
reputation.
We are increasingly dependent on our information
technology systems and infrastructure for our business.
We collect, store and transmit sensitive information
including intellectual property, proprietary business
information and personal information in connection with
business operations. The secure maintenance of this
information is critical to our operations and business
strategy. Some of this information could be an attractive
target of criminal attack by third parties with a wide range
of motives and expertise, including organized criminal
groups, “hacktivists,” patient groups, disgruntled
current or former employees and others. Cyber-attacks
are of ever-increasing levels of sophistication, and
despite our security measures, our
information
technology and infrastructure may be vulnerable to such
attacks or may be breached, including due to employee
error or malfeasance. We have implemented information
security measures to protect patients’ personal
information against the risk of inappropriate and
unauthorized external use and disclosure. However,
despite these measures, and due to the ever changing
information cyber-threat landscape, we may be subject
to data breaches through cyber-attacks. Any such breach
could compromise our networks and the information
stored there could be accessed, publicly disclosed, lost
or stolen. If our systems become compromised, we may
not promptly discover the
intrusion. Like other
companies in our industry, we have experienced attacks
to our data and systems, including malware and
computer viruses. If our systems failed or were breached
or disrupted, we could lose product sales, and suffer
reputational damage and loss of customer confidence.
Such incidents may result in notification obligations to
affected individuals and government agencies, legal
claims or proceedings, and liability under foreign, federal
and state laws that protect the privacy and security of
personal information. Any one of these events could
cause our business to be materially harmed and our
results of operations may be adversely impacted.
Negative public opinion and increased regulatory
scrutiny of recombinant and transgenic products,
genetically modified products and genetically modified
animals generally may damage public perception of our
current and future products or adversely affect our ability
to conduct our business and obtain regulatory approvals
we may seek.
KANUMA is a transgenic product produced in the
egg whites of genetically modified chickens who receive
copies of the human lysosomal acid lipase gene to
produce recombinant human lysosomal acid lipase. The
success of KANUMA may depend in part on public
attitudes of the use of genetic engineering. Public
attitudes may be influenced by claims and perceptions
that these types of activities or products are unsafe, and
our products may not gain sufficient acceptance by, or
fall out of favor with, the public or the medical community.
Negative public attitudes to genetic engineering
activities in general could result in more restrictive
legislation or regulations and could impede our ability
to conduct our business, delay preclinical or clinical
studies, or otherwise prevent us from commercializing
our product.
Risks Related to Intellectual Property
If we cannot obtain new patents, maintain our existing
patents and protect the confidentiality and proprietary
nature of our trade secrets and other intellectual
property, our business and competitive position may be
harmed.
Our success depends in part on our ability to obtain
and maintain patent and regulatory protections for our
products and investigational compounds, to preserve
our trade secrets and other proprietary rights, to operate
without infringing the proprietary rights of third parties
and to prevent third parties from circumventing our
rights. Due to the time and expense of bringing new
products through development and regulatory approval
to the marketplace, there is particular importance in
obtaining patent and trade secret protection for
significant new technologies, products and processes.
We have and may in the future obtain patents or
the right to practice patents through ownership or
license. Our patent applications may not result in the
issue of patents in the U.S. or other countries. In
addition, a patent may be issued in one country, but a
counterpart patent may not be issued in another country.
For example, we have applied for a certain patent in the
EU that would provide protection for the composition of
matter for SOLIRIS through 2027, and while a similar
patent was granted in the U.S., the European patent
application remains under examination by the European
Patent Office and a hearing on it scheduled for February
2019 has been delayed until later in the year. Even if a
patent is issued, that is not conclusive as to
53
inventorship, scope, validity or enforceability and
therefore that patent may not afford adequate (or any)
protection for our products. Third parties may challenge
our patents, and have challenged our patents in the past
and, in some cases have been successful in such
challenges. For example, on January 21, 2019, the
Opposition Division of the European Patent Office
opposition
following multi-party
determined,
proceedings, to revoke our European patent No.
2359834, which relates to the formulation of SOLIRIS.
If any of our patents are narrowed, invalidated, revoked
or become unenforceable, competitors may develop and
market products similar to ours that do not conflict with
or infringe our patents rights, which could have a material
adverse effect on our financial condition. We may also
finance and collaborate in research conducted by
government organizations, hospitals, universities or
other educational or research
institutions. Such
research partners may be unwilling to grant us exclusive
rights to technology or products developed through such
collaborations. There is also a risk that disputes may
arise as to the rights to technology or products
developed in collaboration with other parties. Our
products and product candidates are expensive and
time-consuming to test and develop. Even if we obtain
and maintain patents, our business may be significantly
harmed if the patents are not broad enough to protect
our products from copycat products.
include
Significant legal questions exist concerning the
extent and scope of patent protection
for
biopharmaceutical products and processes in the U.S.
and elsewhere. Accordingly, there is no certainty that
patent applications owned or licensed by us will issue
as patents, or that our issued patents will afford
meaningful protection against competitors. Once
issued, patents are subject to challenge through both
administrative and judicial proceedings in the U.S. and
other countries. Such proceedings
re-
examinations, inter partes reviews, post-grant reviews
and interference proceedings before the U.S. Patent and
Trademark Office, as well as opposition proceedings
before the European Patent Office and other non-U.S.
patent offices. Certain countries have laws that provide
stronger bases for challenging third party patent rights
than are available to challenge patents in other
countries. Therefore, we may be able to defend our
patents against a third party claim in one country but
counterpart patents may be invalidated in other
countries and we may be able to invalidate a third-party
patent in one country but not invalidate its counterpart
patents in other countries. Litigation may be required to
enforce, defend or obtain our patent and other
rights. Any administrative
intellectual property
proceeding or litigation could require a significant
commitment of our resources and, depending on
outcome, could adversely affect the scope, validity or
enforceability of certain of our patent or other proprietary
rights.
In addition, our business requires using sensitive
technology, techniques and proprietary compounds that
we protect as trade secrets. However, we may also rely
heavily on collaboration with, or discuss the potential
for collaboration with, suppliers, outside scientists and
other biopharmaceutical companies,
in
connection with development efforts such as those with
Complement Pharma and Dicerna. Collaboration and
discussion of potential collaboration present a strong
risk of exposing our trade secrets. If our trade secrets
were exposed, we may lose the protection and potential
exclusive rights afforded by trade secret law, and such
exposure may likely help our competitors and allow them
to access technology without restriction and adversely
affect our business prospects.
including
If we are found to be infringing third party patents, we
may be forced to pay damages to the patent owner and/
or obtain a license to continue the manufacture, sale or
development of our products. If we cannot obtain a
license, we may be prevented from the manufacture, sale
or development of our products or product candidates,
which may adversely affect our business.
Parts of our technology, techniques, proprietary
compounds and potential product candidates, including
those which are or may be in-licensed, may be found to
infringe patents owned by or granted to others. We have
and may in the future receive notices claiming our
products infringe third party patents and third parties
have and may in the future file civil lawsuits against us
claiming infringement of their intellectual property rights.
Most recently, in late-2018, Chugai Pharmaceutical Co.,
Ltd. filed suits in the U.S. and Japan alleging that
ULTOMIRIS infringes a U.S. and two Japanese patents,
respectively, held by Chugai (these suits are still in the
early stages). Additional third parties may claim that the
manufacture, use or sale of our products or product
candidates infringes patents owned or granted to such
third parties. We are aware of patents owned by third
parties that might be claimed by such third parties to
be infringed by the development and commercialization
of our products or investigational compounds. In respect
to some of these patents, we have obtained licenses,
or expect to obtain licenses. However, with regard to
other patents, we have determined in our judgment that:
• our products and investigational compounds do
not infringe the patents;
• the patents are not valid or enforceable; and/or
• we have identified and are testing various
alternatives that should not infringe the patents
and which should permit continued development
and commercialization of our products and
investigational compounds.
Any holder of these patents or other patents
covering similar technology could sue us for damages
54
and seek to prevent us from manufacturing, selling or
developing our products. Intellectual property disputes,
such as those initiated by Chugai, can be costly and time
consuming to defend. Prior to launch of a new product
(or an existing product for a new indication), for various
reasons, a patent owner may not be able to assert its
patent rights so it is likely that any potential challenges
to our products may be made after a product has been
commercialized and not while the product is in
development, in clinical trials or during the regulatory
review process. If we cannot successfully defend against
any future actions or conflicts, if they arise, we may incur
substantial legal costs and may be liable for damages,
be required to obtain costly licenses or be forced to stop
manufacturing, using or selling our products, which may
adversely affect our business. We may seek to obtain a
license prior to or during legal actions in order to reduce
the risks in connection with product launches (or at a
later time) and to reduce further costs and the risk of a
court determination that our technology, techniques,
proprietary compounds or potential product candidates
infringe the third party’s patents. A required license may
be costly or may not be available on acceptable terms,
if at all. A costly license, or inability to obtain a necessary
license, could have a material adverse effect on our
business. In addition, even if we obtained a license, it
would likely be non-exclusive and any competitive
advantage resulting from the licensed technology may
be of limited value and the same technology could be
utilized by competitors.
In some instances, we believe we may prevail in a
patent infringement action. There can, however, be no
assurance that the court will agree with our position or
that they will decide this or any other infringement case
in our favor. Nor can we be certain that, if we do not
prevail in litigation, that we may be able to obtain a
license to any third-party patent on commercially
reasonable terms or at all; successfully develop non-
infringing alternatives on a timely basis (or at all); or
license alternative non-infringing technology, if any
exists, on commercially reasonable terms (or at all). Any
impediment to our ability to manufacture, use or sell
approved forms of our products or our product
candidates could have a material adverse effect on our
business and prospects.
It is possible that we could lose market exclusivity for a
product earlier than expected, which may harm our
competitive position.
In our industry, much of an innovative product’s
commercial value is realized while it has market
exclusivity. When market exclusivity expires and
biosimilar or generic versions of the product are
approved and marketed, there can be substantial
decline in the innovative product’s sales.
Market exclusivity for our products is based upon
patent rights and certain regulatory forms of protection.
The scope of our product patent rights vary from country
to country and is dependent on the availability of
meaningful legal remedies in each country. The failure
to obtain patent and other intellectual property rights,
or limitations on the use, or loss of such rights, could
be material to our business. In some countries, patent
protections for our products may not exist because
certain countries did not historically offer the right to
obtain specific types of patents or we did not file patents
in those markets. Also, the patent environment is
unpredictable and the validity and enforceability of
patents cannot be predicted with certainty. Absent
relevant patent protection for a product, once regulatory
exclusivity periods expire, biosimilar or generic versions
of the product can be approved and marketed. Even prior
to the expiration of regulatory exclusivity, a competitor
could seek to obtain marketing approval by submitting
its own clinical trial data.
The market exclusivity of our products may be
impacted by competitive products that are either
innovative or biosimilar or generic copies. In our industry,
the potential for biosimilar challenges has been an
increasing risk to product market exclusivity. U.S. law
includes an approval pathway for biosimilar versions of
innovative biological products. Under the pathway, the
FDA may approve products that are similar to (but not
generic copies of) innovative biologics on the basis of
less extensive data than is required for a full biologic
license application. After an innovator has marketed its
product for four years, other manufacturers may apply
for approval of a biosimilar version of the innovator
product. However, qualified
innovative biological
products will receive 12 years of regulatory market
exclusivity (i.e., the biosimilar product cannot be
approved before 12 years after the innovative biological
product). The law also provides a mechanism for
innovators to enforce their patents that protect their
products and for biosimilar applicants to challenge the
patents. Such litigation may begin as early as four years
after the innovative biological product is first approved
by the FDA. Pathways for biosimilar products also exist
in many other markets, including Europe, Japan and
Russia. Other companies are developing and advancing
SOLIRIS biosimilar programs, including conducting
clinical trials. Competition, including from biosimilars
approved for marketing, may likely result in a decrease
in prices, increased promotion efforts and lower margins
for our products. In addition, approval of a biosimilar
that is substitutable for one of our products may increase
the risk of accelerated market penetration by that
biosimilar. Further, if patients or healthcare providers do
not believe that ULTOMIRIS provides a compelling profile
for patient conversion from SOLIRIS, a SOLIRIS
biosimilar may not only be expected to have a material
and negative impact on our SOLIRIS revenues and
margins (which accounted for a significant percentage
of our revenue in 2018), it may also have a material
impact on ULTOMIRIS revenue and margins and the
ability of ULTOMIRIS to gain market acceptance.
Our other products are also at risk from biosimilars.
Other than SOLIRIS for the treatment of gMG and
SOLIRIS and ULTOMIRIS as a treatment for PNH, each
of our products is currently the only approved drug for
the disease(s) the product treats. If a competitive
product is approved for sale, including a biosimilar or
generic product, our market share and our revenues
could decline, particularly if the competitive product is
perceived to be more effective or is less expensive than
our product.
Risks Related to Our Common Stock
Our stock price is volatile.
The trading price of our common stock has been
volatile and may continue to be volatile in the future.
Many factors could have an impact on our stock price,
including fluctuations in our or our competitors’
operating results, clinical trial results or adverse events
associated with our products, product development by
us or our competitors, changes in laws, including
healthcare, tax or intellectual property laws, intellectual
property developments, changes in reimbursement or
drug pricing, the existence or outcome of litigation or
the SEC/DOJ
government proceedings,
investigation and the Chugai lawsuits alleging patent
infringement,
strategic
transactions, and the perceptions of our investors that
we are not performing or meeting expectations. The
trading price of
the common stock of many
biopharmaceutical companies, including ours, has
experienced price and volume fluctuations, which have
at times been unrelated to the operating performance
of the companies whose stocks were affected.
acquisitions
including
other
or
Anti-takeover provisions in our charter and bylaws and
under Delaware law could make a third-party acquisition
of us difficult and may frustrate any attempt to remove
or replace our current management.
Our corporate charter and by-law provisions may
discourage certain types of transactions involving an
actual or potential change of control that might be
beneficial to us or our stockholders. Our bylaws provide
that special meetings of our stockholders may be called
only by the Chairman of the Board of Directors, the
President, the Secretary, or a majority of the Board of
Directors, or upon the written request of stockholders
who together own of record 25.0% of the outstanding
stock of all classes entitled to vote at such meeting.
Our bylaws also specify that the authorized number of
directors may be changed only by resolution of the Board
of Directors. Our charter does not include a provision
for cumulative voting for directors, which may have
enabled a minority stockholder holding a sufficient
percentage of a class of shares to elect one or more
directors. Under our charter, our Board of Directors has
the authority, without further action by stockholders, to
designate up to five million shares of preferred stock in
one or more series. The rights of the holders of common
55
stock will be subject to, and may be adversely affected
by, the rights of the holders of any class or series of
preferred stock that may be issued in the future.
Because we are a Delaware corporation, the anti-
takeover provisions of Delaware law could make it
more difficult for a third party to acquire control of us,
even if the change in control may be beneficial to
stockholders. We are subject to the provisions of
Section 203 of the Delaware General Laws, which
prohibits a person who owns in excess of 15.0% of
our outstanding voting stock from merging or
combining with us for a period of three years after the
date of the transaction in which the person acquired
in excess of 15.0% of our outstanding voting stock,
unless the merger or combination is approved in a
prescribed manner.
56
Item 1B.
UNRESOLVED STAFF COMMENTS.
None.
Item 2.
PROPERTIES.
We conduct our primary operations at the owned and leased facilities described below.
Location
Boston, Massachusetts
New Haven, Connecticut
Dublin, Ireland
Athlone, Ireland
Bogart, Georgia
Operations Conducted
Corporate headquarters and executive, sales,
research and development offices
Research and process development laboratories,
clinical supply and quality, enterprise business
services
Global supply chain, distribution, and administration
offices
Commercial, research and development
manufacturing
Commercial, research and development
manufacturing
Zurich, Switzerland
Regional executive and sales offices
Approximate
Square Feet
150,000
Lease
Expiration
Dates
2031
263,000
2030
160,000
Owned
80,000
70,000
40,000
Owned
Owned
2025
We believe that our administrative office space is adequate to meet our needs for the foreseeable future. We also
believe that our research and development facilities and our manufacturing facilities, together with third party
manufacturing facilities, will be adequate for our on-going activities. In addition to the locations above, we also lease
space in other U.S. locations and in foreign countries to support our operations as a global organization.
In April 2014, we purchased a fill/finish facility in Athlone, Ireland, which has been refurbished to become our
first company-owned fill/finish facility. In July 2016, we announced plans to construct a new biologics manufacturing
facility at this site, the construction of this facility is on-going and, based on current expectations, we anticipate this
facility will receive regulatory approval in 2020.
In May 2015, we announced plans to construct a new biologics manufacturing facility on our existing property in
Dublin, Ireland, the construction of this facility has commenced and, based on current expectations, we anticipate this
facility will receive regulatory approval in 2020.
In the fourth quarter of 2018, we amended the New Haven lease agreement significantly reducing our rented
square footage in the building beginning in 2019 through the expiration of the lease.
Item 3.
LEGAL PROCEEDINGS.
For a discussion of legal matters as of December 31, 2018, see Note 11, “Commitments and Contingencies,”
Contingent Liabilities, within our notes to the consolidated financial statements included in this Annual Report on Form
10-K, which is incorporated into this item by reference.
Item 4.
MINE SAFETY DISCLOSURES.
Not applicable.
57
PART II
Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on The Nasdaq Stock Market, LLC under the symbol “ALXN.”
As of January 28, 2019, we had approximately 94 stockholders of record of our common stock and an estimated
210,846 beneficial owners. The closing sale price of our common stock on January 28, 2019 was $119.21 per share.
DIVIDEND POLICY
We have never paid cash dividends. We do not expect to declare or pay any cash dividends on our common stock
in the near future. We intend to retain all earnings, if any, to invest in our operations. The payment of future dividends
is within the discretion of our Board of Directors and will depend upon our future earnings, if any, our capital requirements,
financial condition and other relevant factors. In addition, restrictive covenants under our amended and restated credit
agreement prohibit or limit the payment of cash dividends if we are not in compliance with certain covenants.
ISSUER PURCHASES OF EQUITY SECURITIES (amounts in millions except per share amounts)
The following table summarizes our common stock repurchase activity during the fourth quarter of 2018:
Period
October 1-31, 2018
November 1-30, 2018
December 1-31, 2018
Total
Total Number of
Shares Purchased
Average Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced
Programs
Maximum Dollar
Value of Shares
that May Yet Be
Purchased Under
the Programs
— $
—
—
— $
—
—
—
—
—
—
—
—
451.5
451.5
451.5
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. In February 2017, our
Board of Directors increased the amount that we are authorized to expend on future repurchases to $1,000 under the
repurchase program, which superseded all prior repurchase programs. As of February 6, 2019, there is a total of $451.5
remaining for repurchases under the repurchase program.
EQUITY COMPENSATION PLAN INFORMATION (amounts in millions except per share amounts)
Plan Category
Equity compensation plans approved by
stockholders
Equity compensation plans not approved by
stockholders
Number of shares
of common stock
to be issued upon
exercise of
outstanding
options (1)
3.6
—
Weighted-
average
exercise price
of
outstanding
options
$119.68
$—
Weighted-
average
term to
expiration of
options
outstanding
(years)
4.74
—
Number of shares
of common stock
remaining available
for future issuance
under equity
compensation plans (2)
17.7
—
(1) Reflects number of shares of common stock to be issued upon exercise of outstanding options under all our
equity compensation plans, including our 2017 Incentive Plan. Does not include 3.7 of outstanding restricted
stock units, including performance-based restricted stock units, that were issued under the 2017 Incentive
plan and the previous Amended and Restated 2004 Incentive Plan.
(2) Of these shares, 17.0 remain available for future issuance under the 2017 Incentive Plan and 0.7 remain
available under the 2015 Employee Stock Purchase Plan.
The outstanding options and restricted stock units are not transferable for consideration and do not have dividend
equivalent rights attached.
58
THE COMPANY’S STOCK PERFORMANCE
The following graph compares cumulative total return of the Company’s common stock with the cumulative total
return of (i) the Nasdaq Stock Market-United States, and (ii) the Nasdaq Biotechnology Index. The graph assumes
(a) $100 was invested on December 31, 2013 in each of the Company’s common stock, the stocks comprising the
Nasdaq Stock Market-United States and the stocks comprising the Nasdaq Biotechnology Index, and (b) the reinvestment
of dividends. The comparisons shown in the graph are based on historical data and the stock price performance shown
in the graph is not necessarily indicative of, or intended to forecast, future performance of our stock.
CUMULATIVE TOTAL RETURN
Alexion Pharmaceuticals, Inc.
Nasdaq Composite
Nasdaq Biotechnology
12/13
100.00
100.00
100.00
12/14
139.24
114.62
131.71
12/15
143.55
122.81
140.56
12/16
92.07
133.19
112.25
12/17
90.00
172.11
133.67
12/18
73.27
165.84
121.24
59
Item 6.
(amounts in millions, except per share amounts)
SELECTED FINANCIAL DATA.
The following selected financial data is derived from, and should be read in conjunction with, the Consolidated
Financial Statements, including the notes thereto, and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
Consolidated Statements of Operations Data:
Year Ended December 31,
Net product sales (1)
Other revenue
Total revenues
Cost of sales (2)
Operating expenses:
Research and development
Selling, general and administrative
Acquired in-process research and development (3)
Amortization of purchased intangible assets (4)
Change in fair value of contingent consideration
Acquisition-related costs
Restructuring expenses (2)
Impairment of intangible assets
Total operating expenses
Operating income
Other (expense) income (5)
Income before income taxes
Income tax expense (6) (7) (8)
Net income
Earnings per common share
Basic
Diluted
2018
2017
2016
$ 4,130.1 $ 3,549.5 $ 3,081.7 $ 2,602.5 $ 2,233.7
—
2,233.7
173.9
1.5
2,604.0
233.1
1.6
3,551.1
454.2
1.1
4,131.2
374.3
2.4
3,084.1
258.3
2014
2015
730.4
1,111.8
1,183.0
320.1
116.5
—
25.5
—
3,487.3
269.6
878.4
1,094.4
—
320.1
41.0
—
104.6
31.0
2,469.5
627.4
(27.4)
242.2
(79.6)
547.8
757.2
953.0
—
322.2
35.7
2.3
3.0
709.5
862.6
—
116.6
64.2
39.2
42.1
85.0
2,158.4
667.4
(91.2)
576.2
—
1,834.2
536.7
(38.6)
498.1
513.8
630.2
—
—
20.3
—
15.3
11.5
1,191.1
868.7
3.4
872.1
164.6
215.2
176.8
77.6 $ 443.3 $ 399.4 $ 144.4 $ 656.9
353.7
104.5
0.35 $
0.35 $
1.98 $
1.97 $
1.78 $
1.76 $
0.68 $
0.67 $
3.32
3.26
$
$
$
Shares used in computing earnings per common
share
Basic
Diluted
222.7
224.5
223.9
225.4
224.3
226.3
213.4
215.9
198.1
201.6
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable
securities
Total assets (9)
Long-term debt (current and noncurrent)
(10)
Contingent consideration (current and
noncurrent)
Facility lease obligation (current and
noncurrent)
Total stockholders’ equity (11)
2018
2017
2016
2015
2014
As of December 31,
$
1,563.8 $
1,474.1 $
1,293.4 $
1,385.0 $
13,931.9
13,583.3
13,253.3
13,097.9
1,961.6
4,202.0
2,595.5
2,888.1
3,055.1
3,420.9
57.5
280.8
168.9
152.9
177.2
163.0
372.2
9,165.3
353.3
8,893.1
243.4
8,693.8
151.3
8,258.6
107.1
3,302.0
60
In addition to the following notes, see “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” and the Consolidated Financial Statements and accompanying notes and previously filed Annual Reports
on Form 10-K for further information regarding our consolidated results of operations and financial position for periods
reported therein.
(1) In March 2014, we entered into an agreement with the French government which positively impacted prospective
reimbursement of SOLIRIS and also provided for reimbursement for shipments made in years prior to January 1,
2014. As a result of the agreement, in 2014 we recognized $87.8 of net product sales from SOLIRIS in France relating
to years prior to January 1, 2014.
(2) In 2017, we committed to an operational plan to re-align the global organization with its refocused corporate strategy.
As a result of this re-alignment, in 2017, we recorded additional asset related charges of $152.1 associated with
the planned closure of the ARIMF facility to cost of sales (which facility was subsequently sold in 2018). These charges
primarily relate to accelerated depreciation and the impairment of manufacturing assets. Additionally, the re-alignment
in 2017 resulted in restructuring expenses of $104.6, primarily related to employee separation costs.
(3) In the second quarter 2018, we completed the acquisition of Wilson Therapeutics AB (publ). We acquired in-process
research and development related to WTX101, an early Phase III asset in development for the treatment of Wilson
Disease. Due to the stage of development of this asset, the value of this asset of $803.7 was expensed during 2018.
In the fourth quarter of 2018 we completed the acquisition of Syntimmune, Inc. We acquired in-process research and
development related to SYNT001, which is in Phase 1b/2a trials and in development for the treatment of
Immunoglobulin G and IgG-mediated autoimmune diseases. Due to the stage of development of this asset, the value
of this asset of $379.3 was expensed during 2018.
(4) In the third quarter 2015, we received regulatory approval for STRENSIQ and KANUMA. As a result, we began amortizing
intangible assets associated with STRENSIQ and KANUMA.
(5) We recognized an unrealized gain of $44.4 on our Moderna Therapeutics equity investment in 2018. Additionally, in
2016, we incurred a full year of interest expense on our credit facility entered into in 2015.
(6) We recognized tax (benefit) expense of $(56.5) and $45.8 in 2018 and 2017, respectively, as a result of the Tax
Cuts and Jobs Act. In 2017, we recorded certain impacts of the Tax Act on a provisional basis. As of December 22,
2018, our accounting for the impact of the Tax Act was complete. See Note 12, “Income Taxes” for additional information.
(7) In 2016, we recognized deferred tax expense of $119.3 associated with the distribution of earnings from our captive
foreign partnership.
(8) In connection with the integration of the Synageva business with and into the Alexion business, we incurred a one-
time tax expense of $315.6 in the third quarter 2015. This tax expense is attributable to the change in our deferred
tax liability for the outside basis difference resulting from the movement of assets into our captive foreign partnership.
(9) In 2015, in connection with the acquisition of Synageva, we acquired $4,236.0 of intangible assets and $4,783.4
of goodwill.
(10) In 2015, in connection with the acquisition of Synageva, we borrowed $3,500.0 under our term loan under a credit
facility. This credit facility was amended and restated in June 2018.
(11) In 2015, in connection with the acquisition of Synageva, we issued $4,917.8 of common stock to former Synageva
stockholders.
61
acquired Syntimmune for an upfront payment of $400.0,
with the potential for additional milestone-dependent
payments of up to $800.0, for a total value of up
to $1,200.0.
In December 2018 ULTOMIRIS™ was approved by
the FDA as a new treatment option for adult patients
living with paroxysmal nocturnal hemoglobinuria (PNH).
ULTOMIRIS is the first and only long-acting C5 inhibitor
that provides immediate and complete inhibition for
eight weeks.
In January 2019, we submitted our filings to the
FDA and the EU for marketing clearance for SOLIRIS as
a potential treatment of NMOSD.
On January 21, 2019, the Opposition Division of
the European Patent Office determined, following multi-
party opposition proceedings, to revoke our European
patent No. 2359834, which relates to the formulation
of SOLIRIS. Subject to our review of the final written
decision of the European Patent Office, we currently
expect that we will appeal this decision. While any
appeal is pending at the European Patent Office, the
claims in the originally granted patent remain in force.
In January 2019, we announced the results of the
Phase III study with ULTOMIRIS (ALXN1210) meeting its
primary objective in complement inhibitor-naïve patients
with aHUS. In the initial 26 week treatment period in
this study, 53.6 percent of patients demonstrated
complete thrombotic microangiopathy (TMA) response.
In January 2019, we entered into a collaboration
agreement with Caelum Biosciences (Caelum) to
develop CAEL101 for light chain (AL) amyloidosis. Under
the terms of the agreement, we acquired a minority
equity interest in Caelum and an exclusive option to
acquire the remaining equity in the company based on
Phase II data, for pre-negotiated economics. We made
an upfront payment of $30.0 and could be required to
pay up to an additional $30.0 in contingent milestone-
dependent option fees. The collaboration also provides
for potential additional payments, in the event Alexion
exercises the acquisition option, for up to $500.0, which
includes an upfront option exercise payment and
potential
regulatory and commercial milestone
payments.
Item 7.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
(amounts in millions, except percentages and per share
data)
In addition to historical information, this report
contains forward-looking statements that involve risks
and uncertainties which may cause our actual results to
differ materially from plans and results discussed in
forward-looking statements. We encourage you to review
the risks and uncertainties, discussed in the section
entitled item 1A “Risk Factors”, and the “Note Regarding
Forward-Looking Statements”, included at the beginning
of this Annual Report on Form 10-K. The risks and
uncertainties can cause actual results to differ
significantly from those forecast in forward-looking
statements or implied in historical results and trends.
The following discussion should be read in
conjunction with our consolidated financial statements
and related notes appearing elsewhere in this Annual
Report on Form 10-K.
Overview
Alexion is a global biopharmaceutical company
focused on serving patients and families affected by
rare diseases through the innovation, development and
commercialization of life-changing therapies.
We are the global leader in complement inhibition
and have developed and commercialize the only two
approved complement inhibitors to treat patients with
paroxysmal nocturnal hemoglobinuria (PNH), as well as
the first and only approved complement inhibitor to treat
atypical hemolytic uremic syndrome (aHUS) and anti-
acetylcholine
antibody-positive
generalized myasthenia gravis (gMG). In addition,
Alexion has two highly innovative enzyme replacement
therapies for patients with life-threatening and ultra-rare
metabolic disorders, hypophosphatasia (HPP) and
lysosomal acid lipase deficiency (LAL-D).
receptor
(AchR)
As the leader in complement biology for over 20
years, Alexion focuses its research efforts on novel
molecules and targets in the complement cascade, and
its development efforts on the core therapeutic areas
of hematology, nephrology, neurology, and metabolic
disorders.
Recent Developments
In the fourth quarter 2018, we completed the
acquisition of Syntimmune, Inc. (Syntimmune), a clinical-
stage biotechnology company developing an antibody
therapy targeting the neonatal Fc receptor (FcRn). The
lead candidate from this acquisition, ALXN1830
(SYNT001), is a monoclonal antibody that inhibits the
interaction of FcRn with Immunoglobulin G (IgG) and IgG
immune complexes, and is being studied in Phase 1b/
2a trials for the treatment of IgG-mediated autoimmune
diseases. Under the terms of the agreement, Alexion
62
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 this Annual Report on
Form 10-K. Under accounting principles generally
accepted in the U.S., we are required to make estimates,
judgments 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 and such differences may be material.
the
We believe
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.
Revenue Recognition
In May 2014, the Financial Accounting Standards
Board (FASB) issued a comprehensive new standard
which amends revenue recognition principles. We
adopted the new standard on January 1, 2018 by
applying the modified retrospective method to all
contracts that were not completed as of that date.
Under the new guidance, revenue is recognized when
a customer obtains control of promised goods or
services, in an amount that reflects the consideration
expected to be received in exchange for those goods or
services. Revenue is recognized through a five-step
process: (i) identify the contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the
transaction price to the performance obligations in the
contract; and (v) recognize revenue when (or as) a
performance obligation is satisfied. The Company only
applies the five-step model to contracts when it is
probable that the Company will collect the consideration
it is entitled to in exchange for the goods or services it
transfers to the customer. At contract inception, the
Company assesses the goods or services promised
within each contract, and determines those that are
performance obligations. Revenue is recognized for the
applicable performance element when each distinct
performance obligation is satisfied.
While results for reporting periods beginning after
January 1, 2018 are presented under the new guidance,
63
prior period amounts are not adjusted and continue to
be reported under the accounting standards in effect
for the prior period. The accounting policy for revenue
recognition for periods prior to January 1, 2018 is
described in Note 1 of the Notes to the Consolidated
Financial Statements included in our Annual Report on
Form 10-K for the year ended December 31, 2017.
Nature of Products
Our principal source of revenue is product sales.
Our contracts with customers generally contain a single
performance obligation and we recognize revenue from
product sales when we have satisfied our performance
obligation by transferring control of the product to our
customers. Control of the product generally transfers to
the customer upon delivery. In certain countries, we sell
to distributors on a consignment basis and record
revenue when control of the product transfers to the
customer upon sale to the end user.
Our customers are primarily comprised of
distributors, pharmacies, hospitals, hospital buying
groups, and other healthcare providers. In some cases,
we may also sell to governments and government
agencies. In addition to sales in countries where our
products are commercially available, we have also
recorded revenue on sales for patients receiving
treatment
through named-patient programs. The
relevant authorities or institutions in those countries
have agreed to reimburse for product sold on a named-
patient basis where our products have not received final
approval for commercial sale.
remitted
Revenue is recognized at the amount to which we
expect to be entitled in exchange for the sale of our
products. This amount includes both fixed and variable
consideration and excludes amounts that are collected
to governmental
from customers and
authorities, such as value-added taxes in foreign
jurisdictions. Shipping and handling costs associated
with outbound freight after control of a product has
transferred to our customers are accounted for as a
fulfillment cost and are included in operating expenses.
The cost for any shipping and handling activities
(including customs clearance activities) associated with
transactions for which revenue has been recognized are
accrued if not completed before the respective period
end.
The timing between the recognition of revenue for
product sales and the receipt of payment is not
significant. Our standard credit terms, which vary based
on the country of sale, generally range from 30 to 120
days and all arrangements generally are payable within
one year of the transfer of the product. We do not assess
financing
whether a contract has a significant
component if the expectation at contract inception is
such that the period between the transfer of the
promised good to the customer and receipt of payment
will be one year or less.
income when
We evaluate the creditworthiness of customers on
a regular basis. The length of time from sale to receipt
of payment in certain countries exceeds our credit
terms. In countries in which collections from customers
extend beyond normal payment terms, we seek to collect
interest. We record interest on customer receivables as
interest
collected. Subsequent
adjustments for further declines in credit rating are
recorded as bad debt expense as a component of
selling, general and administrative expense. We also
use judgments as to our ability to collect outstanding
receivables and provide allowances for the portion of
receivables if and when collection becomes doubtful,
and we also assess on an ongoing basis whether
collectibility is probable at the time of sale. As of
December 31, 2018 and December 31, 2017,
allowances on receivables were not material.
Variable Consideration
We pay distribution fees to our distributors and
offer rebates and/or discounts, or enter into volume-
based reimbursement arrangements with certain
customers. We reduce the transaction price on our sales
for these amounts. For variable amounts, we estimate
the amount of consideration to which we expect to be
entitled based on all available historic, current and
forecast information. We primarily use the expected
value method to estimate variable payments and, in
limited circumstances, will apply the most likely method
based on the type of variable consideration and what
method better predicts the amount of consideration we
expect to be entitled to. Consideration that is received
from a customer that we expect will need to be refunded
in the future is recorded as a refund liability to the
customer within accrued expenses. Actual amounts of
consideration ultimately received or refunded may differ
from our estimates, and such difference may be
material. If actual results in the future vary from our
estimates, we adjust these estimates, which would
affect net product sales and earnings in the period such
variances become known, and such variances may be
material.
Variability in the transaction price for our products
pursuant to our contracts with customers primarily
arises from the following:
Discounts and Rebates: We offer discounts and
rebates to certain distributors and customers under our
arrangements. In many cases, these amounts are fixed
at the time of sale and the transaction price is reduced
accordingly. We also provide for rebates under certain
governmental programs, including Medicaid in the U.S.
and other programs outside the U.S., which are payable
based on actual claim data. We estimate these rebates
based on an analysis of historical claim patterns and
estimates of customer mix to determine which sales will
be subject to rebates and the amount of such rebates.
We update our estimates and assumptions each period
and record any necessary adjustments, which may have
an impact on revenue in the period in which the
adjustment is made (and such impact may be material).
Generally, the length of time between product sale and
the processing and reporting of the rebates is three to
six months.
Volume-Based Arrangements: We have entered into
volume-based arrangements with governments in
certain countries and other customers in which
reimbursement is limited to a contractual amount.
Under this type of arrangement, amounts billed in
excess of the contractual limitation are repaid to the
customer as a rebate. We estimate incremental
discounts resulting from these contractual limitations,
based on forecasted sales during the limitation period,
and we apply the discount percentage to product
shipments as a reduction of revenue. Our calculations
related to these arrangements require estimation of
sales during the limitation period, and adjustments in
these estimates may have a material impact in the
period in which these estimates change.
We have provided balances and activity in the
the years ended
rebates payable account
December 31, 2018, 2017 and 2016 as follows:
for
Balances, December 31, 2015
Current provisions relating to sales in current year
Adjustments relating to prior years
Payments/credits relating to sales in current year
Payments/credits relating to sales in prior years
Rebates
Payable
$
55.6
114.6
(1.7)
(50.3)
(48.7)
Balances, December 31, 2016
$
69.5
Current provisions relating to sales in current year
Adjustments relating to prior years
Payments/credits relating to sales in current year
Payments/credits relating to sales in prior years
Balances, December 31, 2017
Current provisions relating to sales in current year
Adjustments relating to prior years
Payments/credits relating to sales in current year
Payments/credits relating to sales in prior years
Balances, December 31, 2018
193.8
(4.5)
(97.4)
(62.3)
$
99.1
235.4
(2.4)
(119.3)
(90.0)
$
122.8
Current provisions relating to sales in the current
year increased by $41.6 in 2018 compared to 2017 and
$79.2 in 2017 compared to 2016. The increase in 2018
was primarily due to increased unit volumes in the U.S.
which were subject to rebates as well as increases in
rebate rates in the U.S. on certain product sales. The
increase in 2017 was attributable to increased unit
volumes in the U.S. and Europe, which were subject to
rebates, as well as to increases in rebate rates in certain
geographical regions and on certain product sales as
compared to the prior year.
Distribution & Other Fees: We pay distribution and
other fees to certain customers in connection with the
sales of our products. We record distribution and other
64
fees paid to our customers as a reduction of revenue,
unless the payment is for a distinct good or service from
the customer and we can reasonably estimate the fair
value of the goods or services received. If both
conditions are met, we record the consideration paid to
the customer as an operating expense. These costs are
typically known at the time of sale, resulting in minimal
adjustments subsequent to the period of sale.
Product Returns: Our contracts with customers
generally provide for returns only if the product is
damaged or defective upon delivery. We assess our
sales transactions and arrangements with customers
and monitor inventory within our sales channels to
determine whether a provision for returns is warranted
and a resulting adjustment to the transaction price is
necessary. This assessment is based on historical
experience and assumptions as of the date of sale and
changes in these estimates could have an impact in the
period in which the change occurs (and such impact may
be material). Because of factors such as the price of
our products, the limited number of patients, the short
period from product sale to patient infusion and limited
contractual return rights, our customers often carry
limited inventory.
The amount of variable consideration included in
the transaction price is constrained by the amount that
is probable will not result in a significant reversal of
revenue. We consider our experience with similar
transactions and expectations regarding the contract in
estimating the amount of variable consideration to which
we expect to be entitled, and determining whether the
be
estimated
constrained. We do not have any material constraints
on the variable consideration included within the
transaction price of our current revenue arrangements.
consideration
variable
should
We continue to monitor economic conditions,
including volatility associated with
international
economies and the associated impacts on the financial
markets and our business. For additional information
related to our concentration of credit risk associated
with certain international accounts receivable balances,
refer to the “Financial Condition, Liquidity and Capital
Resources” and “Quantitative and Qualitative Disclosures
About Market Risk” sections below.
Contingent liabilities
We are currently involved in various claims 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 (and our offers of
settlement), we may reassess the potential liability
related to these matters and may revise these
estimates, which could result in a material adjustment
to our operating results and liquidity.
Inventories
Inventories are stated at the lower of cost or net
realizable value. Cost is determined in a manner that
approximates average costs.
We capitalize inventory produced for commercial
sale, which may include costs incurred for certain
products awaiting regulatory approval. We capitalize
inventory produced in preparation of product launches
sufficient to support estimated initial market demand.
Capitalization of such inventory begins when we have (i)
obtained positive results in clinical trials that we believe
are necessary to support regulatory approval, (ii)
concluded that uncertainties regarding regulatory
approval have been sufficiently reduced, and (iii)
determined that the inventory has probable future
economic benefit.
these
conditions have been met, we consider clinical trial
results for the underlying product candidate, results
from meetings with regulatory authorities, and the
compilation of the regulatory application. If we are aware
of any material risks or contingencies outside of the
standard regulatory review and approval process, or if
there are any specific negative issues identified relating
to the safety, efficacy, manufacturing, marketing or
labeling of the product that would have a significant
negative impact on its future economic benefits, the
related inventory would not be capitalized.
In evaluating whether
Products that have been approved by the FDA or
other regulatory authorities are also used in clinical
programs to assess the safety and efficacy of the
products for usage in diseases that have not been
approved by the FDA or other regulatory authorities. The
form of product utilized for both commercial and clinical
programs is identical and, as a result, the inventory has
an “alternative future use” as defined in authoritative
guidance. Raw materials and purchased drug product
associated with clinical development programs are
included in inventory and charged to research and
development expense when the product enters the
65
research and development process and no longer can
be used for commercial purposes and, therefore, does
not have an “alternative future use”.
For products which are under development and
have not yet been approved by regulatory authorities,
purchased drug product is charged to research and
development expense upon delivery. Delivery occurs
when the inventory passes quality inspection and
ownership transfers to us. Nonrefundable advance
payments for research and development activities,
including production of purchased drug product, are
deferred and capitalized until the goods are delivered.
We also recognize expense for raw materials purchased
for developmental purposes when the raw materials
pass quality inspection, and we have an obligation to
pay for the materials.
We analyze our inventory levels to identify inventory
that may expire prior to sale, inventory that has a cost
basis in excess of its estimated realizable value, or
inventory in excess of expected sales requirements.
Although the manufacturing of our product is subject to
strict quality control, certain batches or units of product
may no longer meet quality specifications or may expire,
which would require adjustments to our inventory values.
We also apply judgment related to the results of quality
tests that we perform throughout the production
process, as well as our understanding of regulatory
guidelines, to determine if it is probable that inventory
will be saleable. These quality tests are performed
throughout the pre- and post-production process, and
we continually gather information regarding product
quality for periods after the manufacturing date. Our
products currently have a maximum estimated life range
of 36 to 48 months and, based on our sales forecasts,
we expect to realize the carrying value of the product
inventory. In the future, reduced demand, quality issues
or excess supply beyond
those anticipated by
management may result in a material adjustment to
inventory levels, which would be recorded as an increase
to cost of sales.
The determination of whether or not inventory
costs will be realizable requires estimates by our
management. A critical input in this determination is
future expected inventory requirements based on
internal sales forecasts. We then compare these
requirements to the expiry dates of inventory on hand.
For inventories that are capitalized in preparation of
product launch, we also consider the expected approval
date in assessing realizability. To the extent that
inventory is expected to expire prior to being sold, we
will write down the value of inventory. If actual results
differ from those estimates, additional inventory write-
offs may be required, and such write-offs may be
material.
Share-Based Compensation
We have two share-based compensation plans
pursuant to which awards are currently being made: (i)
the 2017 Incentive Plan (2017 Plan) and (ii) the 2015
Employee Stock Purchase Plan (ESPP). The 2017 Plan
replaced the Amended & Restated 2004 Incentive Plan,
effective May 10, 2017. Under the 2017 Plan, restricted
stock, restricted stock units, stock options and other
stock-related awards may be granted to our directors,
officers, employees and consultants or advisors of the
Company or any subsidiary. Under the ESPP, eligible
employees can purchase shares of common stock at a
discount semi-annually through payroll deductions. To
date, share-based compensation issued under the plans
consists of incentive and non-qualified stock options,
restricted stock and restricted stock units, including
restricted stock units with market and non-market
performance conditions, and shares issued under our
ESPP.
Compensation expense for our share-based
awards is recognized based on the estimated fair value
of the awards on the grant date. Compensation expense
reflects an estimate of the number of awards expected
to vest and is primarily recognized on a straight-line
basis over the requisite service period of the individual
grants, which typically equals the vesting period.
Compensation expense for awards with performance
conditions is recognized using the graded-vesting
method.
Our estimates of employee stock option values
rely on estimates of factors we input into the Black-
Scholes model. The key factors involve an estimate of
future uncertain events. Significant assumptions
include the use of historical volatility to determine the
expected stock price volatility. We also estimate
expected term until exercise and the reduction in the
expense from expected forfeitures. We currently use
historical exercise and cancellation patterns as our best
estimate of future estimated life. Actual volatility and
lives of options may be significantly different from our
estimates.
future
targets,
financial
For our non-market performance-based awards, we
the
the anticipated achievement of
estimate
forecasting
the
including
performance
achievement of
targets. These
estimates are revised periodically based on the
probability of achieving the performance targets and
adjustments are made throughout the performance
period as necessary. We use payout simulation models
to estimate the grant date fair value of market
performance-based awards. The payout simulation
models assume volatility of our common stock and the
common stock of a comparator group of companies, as
well as correlations of returns of the price of our common
stock and the common stock prices of the comparator
group.
The purchase price of common stock under our
ESPP is equal to 85% of the lower of (i) the market value
per share of the common stock on the first business
day of an offering period or (ii) the market value per share
66
of the common stock on the purchase date. The fair
value of the discounted purchases made under our ESPP
is calculated using the Black-Scholes model. The fair
value of the look-back provision plus the 15% discount
is recognized as compensation expense over the 6
month purchase period.
If
factors change or we employ different
assumptions to value our stock-based awards, the
share-based compensation expense that we record in
future periods may differ materially from our prior
recorded amounts.
Valuation of Goodwill, Acquired Intangible Assets and In-
Process Research and Development (IPR&D)
IPR&D
related
We have recorded goodwill, acquired intangible
to our business
assets and
combinations. When identifiable intangible assets,
including IPR&D, are acquired, we determine the fair
values of the assets as of the acquisition date.
Discounted cash flow models are typically used in these
valuations if quoted market prices are not available, and
the models require the use of significant estimates and
assumptions including but not limited to:
•
•
timing and costs to complete the in-process
projects;
timing and probability of success of clinical
events or regulatory approvals;
• estimated future cash flows from product sales
resulting from completed products and in-
process projects; and
• discount rates.
We may also utilize a cost approach, which
estimates the costs that would be incurred to replace
the assets being purchased. Significant inputs into the
cost approach include estimated rates of return on
historical costs that a market participant would expect
to pay for these assets.
Intangible assets with definite useful lives are
amortized to their estimated residual values over their
estimated useful lives and reviewed for impairment if
certain events occur.
the associated
Intangible assets related to IPR&D projects are
considered to be indefinite-lived until the completion or
abandonment of
research and
development efforts. During the period the assets are
considered indefinite-lived, they will not be amortized
but will be tested for impairment. Impairment testing is
performed at least annually or when a triggering event
occurs that could indicate a potential impairment. If and
when development is complete, which generally occurs
when regulatory approval to market a product is
obtained, the associated assets are deemed finite-lived
and are amortized over a period that best reflects the
economic benefits provided by these assets.
67
If projects are not successfully developed, our
sales and profitability may be adversely affected in
future periods. Additionally, the value of the acquired
intangible assets, including IPR&D, may become
impaired if the underlying projects do not progress as
we initially estimated. We believe that the assumptions
used in developing our estimates of intangible asset
values were reasonable at the time of the respective
acquisitions. However, the underlying assumptions used
to estimate expected project sales, development costs,
profitability, or the events associated with such projects,
such as clinical results, may not occur as we estimated
at the acquisition date.
Goodwill represents the excess of purchase price
over fair value of net assets acquired in a business
combination and is not amortized. Goodwill is subject
to impairment testing at least annually or when a
triggering event occurs that could indicate a potential
impairment. We are organized and operate as a single
reporting unit and therefore the goodwill impairment test
is performed using our overall market value, as
determined by our traded share price, compared to our
book value of net assets.
Valuation of Contingent Consideration
We record contingent consideration resulting from
a business combination at its fair value on the
acquisition date. We determine the fair value of the
contingent consideration based primarily on the
following factors:
• timing and probability of success of clinical
events or regulatory approvals;
• timing and probability of success of meeting
commercial milestones, such as estimated
future sales levels of a specific compound; and
• discount rates.
to operating earnings. Changes
Our contingent consideration liabilities arose in
connection with our business combinations. On a
quarterly basis, we revalue these obligations and record
increases or decreases in their fair value as an
adjustment
to
contingent consideration obligations can result from
adjustments to discount rates, accretion of the discount
rates due to the passage of time, changes in our
estimates of the likelihood or timing of achieving
development or commercial milestones, changes in the
probability of certain clinical events or changes in the
regulatory
assumed probability associated with
approval.
The assumptions related to determining the value
of contingent consideration include a significant amount
of judgment, and any changes in the underlying
estimates could have a material impact on the amount
of contingent consideration expense recorded in any
given period.
Income Taxes
We utilize the asset and liability method of
accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based
on the difference between the financial statement
carrying amounts and tax basis of assets and liabilities
using enacted tax rates in effect for years in which the
temporary differences are expected to reverse.
On December 22, 2017, the Tax Cuts and Jobs Act
(Tax Act) was enacted into law. The Tax Act decreased
the U.S. statutory corporate tax rate for years beginning
after December 31, 2017, and included other domestic
and international tax provisions that affect the
measurement of our deferred tax assets and liabilities.
As a result, we revalued our deferred tax assets and
liabilities as of December 31, 2017 and recorded a
deferred tax benefit of $292.4. We recorded other
impacts of the Tax Act on a provisional basis in 2017.
As of December 22, 2018, our accounting for the impact
of the Tax Act was complete. See Note 12, “Income
Taxes” to our consolidated
financial statements
included elsewhere in this Annual Report on Form 10-K
for additional information.
If our estimate of the tax effect of reversing
temporary differences is not reflective of actual
outcomes, is modified to reflect new developments or
interpretations of the tax law, revised to incorporate new
accounting principles, or changes in the expected timing
or manner of the reversal our results of operations could
be materially impacted.
We follow the authoritative guidance regarding
accounting for uncertainty in income taxes, which
prescribes a recognition threshold and measurement
attribute for the financial statement recognition and
measurement of a tax position taken or expected to be
taken in a tax return. These unrecognized tax benefits
relate primarily to issues common among multinational
corporations in our industry. We apply a variety of
methodologies in making these estimates which include
studies performed by independent economists, advice
from industry and subject experts, evaluation of public
actions taken by the IRS and other taxing authorities,
as well as our own industry experience. We provide
estimates for unrecognized tax benefits which may be
subject to material adjustments until matters are
resolved with taxing authorities or statutes expire. If our
estimates are not representative of actual outcomes,
our results of operations could be materially impacted.
We continue to maintain a valuation allowance
against certain deferred tax assets where 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. We consider many factors when
assessing the likelihood of future realization of deferred
68
tax assets, including our recent cumulative earnings
experience by taxing jurisdiction, expectations of future
taxable income, carryforward periods available to us for
tax reporting purposes, various income tax strategies
and other relevant factors. Significant judgment is
required in making this assessment and, to the extent
future expectations change, we would assess the
recoverability of our deferred tax assets at that time. If
we determine that the deferred tax assets are not
realizable
future period, we would record
adjustments to income tax expense in that period, and
such adjustments may be material.
in a
New Accounting Pronouncements
In February 2016, the FASB issued a new standard
that requires lessees to recognize leases on-balance
sheet and disclose key information about leasing
arrangements. The new standard establishes a right-of-
use (ROU) model that requires a lessee to recognize a
ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases
will be classified as finance or operating, with
classification affecting the pattern and classification of
expense recognition in the income statement. The
standard is effective on January 1, 2019, with early
adoption permitted. We adopted the new standard on
January 1, 2019 and use the effective date as our date
of initial application. In July 2018, the FASB issued an
update that provided an additional transition option that
allows companies to continue applying the guidance
under the lease standard in effect at that time in the
comparative periods presented in the consolidated
financial statements. Companies that elect this option
would record a cumulative-effect adjustment to the
opening balance of retained earnings on the date of
adoption. We elected this optional transition method.
We also elected the “package of practical expedients”,
which permits us not to reassess under the new
standard our prior
lease
identification, lease classification and initial direct
to evaluate other practical
costs. We continue
expedients available under the standard.
conclusions about
We have substantially completed our assessment
of the standard as well as implementation of our leasing
software, including data upload and test procedures.
We continue to finalize our calculations, including our
discount rate assumptions, related to the new standard.
We are also continuing to establish new processes and
internal controls that may be required to comply with the
new lease accounting and disclosure requirements set
by the new standard. We expect the impact of the
standard adoption to decrease our assets, liabilities and
retained earnings within our consolidated balance
the
sheet. These decreases will
derecognition of our existing assets and financing
obligations related to our build to suit leases offset by
the recognition of new ROU assets and liabilities as a
result of the leasing standard.
result
from
In June 2016, the FASB issued a new standard
intended to improve reporting requirements specific to
loans, receivables and other financial instruments. The
new standard requires that credit losses be reported
based on expected losses compared to the current
incurred loss model. The new standard also requires
enhanced disclosure of credit risk associated with
respective assets. The standard is effective for interim
and annual periods beginning after December 15, 2019
with early adoption permitted. We are currently
assessing the impact of this standard on our financial
condition and results of operations.
In February 2018, the FASB issued a new standard
that would permit entities to make a one time
reclassification from accumulated other comprehensive
income (AOCI) to retained earnings for the stranded tax
effects resulting from the newly enacted corporate tax
rates under the Tax Act, that was effective for the year
ended December 31, 2017. The amount of the
reclassification is calculated on the basis of the
difference between the historical tax rate and newly
enacted tax rate. The standard is effective for interim
and annual periods beginning after December 15, 2018
with early adoption permitted. We are currently
assessing the impact of this standard on our financial
condition.
In August 2018, the FASB issued a new standard
on a customer's accounting for implementation, set-up,
and other upfront costs incurred in a cloud computing
arrangement (CCA). Under the new guidance, customers
will assess if a CCA includes a software license and if
a CCA does include a software license, implementation
and set-up costs will be accounted for consistent with
existing internal-use software implementation guidance.
Implementation costs associated with a CCA that does
not include a software license would be expensed to
operating expenses. The standard also provides
classification guidance on these implementation costs
as well as additional quantitative and qualitative
disclosures. The standard is effective for public
business entities for fiscal years beginning after
December 15, 2019, and interim periods within those
fiscal years. Early adoption is permitted, including
adoption in any interim periods. Entities can choose to
adopt the new guidance prospectively or retrospectively.
We are currently assessing the impact this standard will
have on our statement of financial condition and results
of operations.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued a comprehensive
new standard which amends revenue recognition
principles and provides a single set of criteria for revenue
recognition among all industries. The new standard
provides a five-step framework whereby revenue is
recognized when promised goods or services are
transferred to a customer at an amount that reflects the
consideration to which the entity expects to be entitled
in exchange for those goods or services. We adopted
the new standard on January 1, 2018.
In January 2017, the FASB issued a new standard
that clarifies the definition of a business and determines
when an integrated set of assets and activities is not a
business. This framework requires that if substantially
all of the fair value of gross assets acquired or disposed
of is concentrated in a single asset or group of similar
identifiable assets, the assets would not represent a
business. We adopted the new standard on January 1,
2018 and applied the new guidance prospectively to
transactions occurring after adoption. We anticipate that
the adoption of this new standard will likely result in
more transactions, to the extent that such transactions
are undertaken by the Company, being accounted for as
asset acquisitions.
resulting
tax assets
In January 2016, the FASB issued a new standard
that changes accounting for equity investments,
financial liabilities under the fair value option, and
presentation and disclosure requirements for financial
instruments. In addition, the FASB clarified guidance
related to the valuation allowance assessment when
from
recognizing deferred
unrealized losses on available-for-sale debt securities.
Equity investments with readily determinable fair values
will be measured at fair value with changes in fair value
recognized in net income. Companies have the option
to either measure equity investments without readily
determinable fair values at fair value, or at cost adjusted
for changes in observable prices minus impairment. We
adopted the new standard on January 1, 2018, and
elected to measure our existing equity investments
without readily determinable fair values at cost adjusted
for changes in observable prices minus impairment. In
connection with the adoption of the new standard, we
reclassified an immaterial amount of unrealized gains
on equity securities
from accumulated other
comprehensive income to retained earnings. The
guidance related to equity investments without readily
determinable fair values was applied prospectively to
equity investments that existed as of the date of
adoption. We will assess equity investments without
readily determinable fair values for observable price
changes and impairment on a quarterly basis. See Note
7, “Other Investments,” to our consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K for further details.
In March 2017, the FASB issued a new standard
that improves the presentation of net periodic pension
cost and net periodic post retirement benefit cost by
requiring the bifurcation of net benefit cost. Under the
new standard, the service cost component of net benefit
cost will be presented with other employee costs in
operating expenses, while other components will be
reported separately in other income and expense. We
adopted the new standard on January 1, 2018. The
69
adoption of this standard did not have a material impact
on our consolidated statements of operations.
In November 2016, the FASB issued a new
standard that clarifies how entities should present
restricted cash in the statement of cash flows. Under
the new standard, changes in total cash, inclusive of
restricted cash, should be reflected in the statement of
cash flows. As a result, transfers between cash and
restricted cash will no longer be reflected as activity
within the statement of cash flows. We adopted the new
standard on January 1, 2018. The adoption of this
standard did not have a material impact on our
consolidated statements of cash flows.
In August 2017, the FASB issued a new standard
intended to improve and simplify certain aspects of the
Results of Operations
accounting for hedges. The new standard is intended to
more closely align hedge accounting with companies’
risk management strategies, simplify the application of
hedge accounting, and increase transparency as to the
scope and results of hedging programs. It also amends
the presentation and disclosure requirements and
changes how companies assess effectiveness. The
standard is effective for interim and annual periods
beginning after December 15, 2018 with early adoption
permitted. We early adopted the new standard in the
second quarter 2018 using the modified retrospective
method. The adoption of this standard did not have a
material
financial
impact on our consolidated
statements.
The following table sets forth consolidated statements of operations data for the periods indicated. This
information has been derived from the consolidated financial statements included elsewhere in this Annual Report
on Form 10-K.
Net product sales
Other revenue
Total revenues
Cost of sales
Operating expenses:
Research and development
Selling, general and administrative
Acquired in-process research and development
Amortization of purchased intangible assets
Change in fair value of contingent consideration
Acquisition-related costs
Restructuring expenses
Impairment of intangible assets
Total operating expenses
Operating income
Other expense
Income before income taxes
Income tax expense
Net income
Earnings per common share:
Basic
Diluted
Year Ended December 31,
2018
4,130.1 $
1.1
4,131.2
374.3
2017
3,549.5 $
1.6
3,551.1
454.2
2016
3,081.7
2.4
3,084.1
258.3
730.4
1,111.8
1,183.0
320.1
116.5
—
25.5
—
3,487.3
269.6
(27.4)
242.2
164.6
77.6 $
0.35 $
0.35 $
878.4
1,094.4
—
320.1
41.0
—
104.6
31.0
2,469.5
627.4
(79.6)
547.8
104.5
443.3 $
757.2
953.0
—
322.2
35.7
2.3
3.0
85.0
2,158.4
667.4
(91.2)
576.2
176.8
399.4
1.98 $
1.97 $
1.78
1.76
$
$
$
$
70
Comparison of the Years Ended December 31, 2018, 2017, and 2016
Net Product Sales
Net product sales by product and significant geographic region are as follows:
Year Ended December 31,
% Change
2018
2017
2016
2018 compared to
2017
2017 compared to
2016
$
$
$
$
$
$
$
1,588.4 $
1,036.7
382.0
555.9
3,563.0 $
1,235.0 $
985.2
328.1
595.8
3,144.1 $
1,058.5
939.7
303.8
541.2
2,843.2
374.3 $
61.7
27.9
11.2
475.1 $
51.3 $
21.6
3.7
15.4
92.0 $
280.1 $
35.6
18.6
5.5
339.8 $
42.4 $
14.6
2.7
5.9
65.6 $
177.5
15.3
13.0
3.6
209.4
20.4
6.3
1.3
1.1
29.1
4,130.1 $
3,549.5 $
3,081.7
28.6 %
5.2 %
16.4 %
(6.7)%
13.3 %
33.6 %
73.3 %
50.0 %
103.6 %
39.8 %
21.0 %
47.9 %
37.0 %
**
40.2 %
16.4 %
16.7%
4.8%
8.0%
10.1%
10.6%
57.8%
132.7%
43.1%
52.8%
62.3%
107.8%
131.7%
107.7%
**
125.4%
15.2%
SOLIRIS
United States
Europe
Asia Pacific
Rest of World
STRENSIQ
United States
Europe
Asia Pacific
Rest of World
KANUMA
United States
Europe
Asia Pacific
Rest of World
Total Net Product Sales
** Percentages not meaningful
Net Product Sales (consolidated)
SOLIRIS net product sales
United States
Europe
Asia Pacific
Rest of World
United States
Europe
Asia Pacific
Rest of World
71
STRENSIQ net product sales
The components of the increase in net product
sales for December 31, 2018 as compared to 2017
are as follows:
United States
Europe
Asia Pacific
Rest of World
KANUMA net product sales
United States
Europe
Asia Pacific
Rest of World
The increase in net product sales for fiscal year
2018, as compared to fiscal year 2017, was primarily
due to an increase in unit volumes of 20.1%. This
increase in unit volumes is primarily due to increased
global demand for SOLIRIS therapy, including sales to
patients with gMG, which received regulatory approval
in the second half of 2017. Additional unit volume
increases were due to increased sales of STRENSIQ and
KANUMA during 2018 as a result of our continuing
efforts to identify and reach more patients with HPP and
LAL-D globally.
in Turkey
The increase in net product sales for fiscal year
2018, as compared to fiscal year 2017, was partially
offset by price decreases of 3.9% due, in part, to a price
change
formalized
resulting
reimbursement agreement, subsequent to marketing
authorization, in the third quarter of 2018. In addition,
rebates in the U.S. and reimbursement agreements
outside the U.S. for our metabolic products also
contributed to this decrease in net product sales.
from a
The components of the increase in revenues for
the year ended December 31, 2017 as compared to the
same period in 2016 are as follows:
The increase in net product sales for fiscal year
2017 as compared to fiscal year 2016 was primarily
due to an increase in unit volumes of 16.8% due to
increased demand globally for SOLIRIS therapy for
patients with PNH and aHUS and increased sales of
STRENSIQ and KANUMA during 2017.
72
Cost of Sales
Cost of sales includes manufacturing costs, actual
and estimated royalty expenses associated with sales
of our products, and amortization of licensing rights.
The following table summarizes cost of sales for
the years ended December 31, 2018, 2017 and 2016:
Cost of Sales
Cost of sales as a percentage of net product sales
Cost of sales for the year ended December 31,
2018 and December 31, 2017 included asset related
charges of $5.8 and $152.1, respectively, associated
with the closure of the ARIMF facility announced in the
third quarter of 2017 (this facility was sold in 2018).
These charges primarily
to accelerated
depreciation and the impairment of manufacturing
assets.
relate
Exclusive of the items mentioned above, cost of
sales as a percentage of net product sales were 8.9%,
8.5% and 8.4% for the years ended December 31, 2018,
2017 and 2016, respectively.
Research and Development Expense
Our research and development expense includes
personnel, facility and direct costs associated with the
research and development (R&D) of our product
candidates, as well as product development costs. For
additional information on our development programs,
please refer to Product and Development Programs in
Item I Business of this Annual Report on Form 10-K.
functions,
R&D expenses are comprised of costs paid for
clinical development, product development and
discovery research, as well as costs associated with
certain 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, ALXN1210 and other product
candidates. Product development costs are those
incurred in performing duties related to manufacturing
development and
including
regulatory
manufacturing of material for clinical and research
activities, milestone expenses related to our licensing
agreements and collaborations and other administrative
costs incurred during product development. Discovery
research costs are incurred in conducting laboratory
studies and performing preclinical research for other
uses of our products and other product candidates and
milestone expenses related to our licensing agreements
and collaborations in the discovery stage. Upfront
payments include upfront payments related to licenses
and collaborations. Clinical development costs have
been accumulated and allocated to each of our
programs, while product development and discovery
research costs have not been allocated.
Facilities and other R&D expenses consist of costs
to compensate personnel, to maintain our facilities and
equipment, and other occupancy costs associated with
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.
Research and Development Expense (R&D)
R&D as a % of net product sales
73
The following graph provides information regarding
research and development expenses:
facilities expenses primarily resulting from the
impact of the 2017 restructuring.
During the year ended December 31, 2017, we
incurred research and development expenses of
$878.4, an increase of $121.2, or 16.0%, versus the
$757.2 incurred during the year ended December 31,
2016. The increase was primarily related to the
following:
• Increase of $23.0 in direct clinical development
expenses related primarily to an expansion of
ALXN 1210 studies.
• Increase of $36.2 in direct product development
expenses related primarily to an increase in
costs associated with the manufacturing of
material for ALXN1210 and ALXN6000 clinical
research activities.
• Increase of $48.9 in upfront payments made in
the fourth quarter of 2017 related to a
license agreement with
collaboration and
Halozyme Therapeutics, Inc.
• Increase of $16.9 in payroll and benefits related
primarily to increased bonus performance and
stock compensation expense.
related primarily
• Increase of $17.4 in facilities and other
expenses
to accelerated
depreciation on assets that support R&D
activities associated with the 2017 restructuring
activities.
74
Clinical Development
Product Development
Upfront Payments
Discovery
Payroll and Benefits
Facilities and Other
During the year ended December 31, 2018, we
incurred R&D expenses of $730.4, a decrease of
$148.0, or 16.8%, versus the $878.4 incurred during
the year ended December 31, 2017. The decrease was
primarily related to the following:
• Decrease of $70.9 in direct clinical development
expenses related primarily to decreases in
various eculizamab clinical studies, offset by
expansion of studies for ALXN1210.
• Increase of $13.0 in direct product development
expenses related primarily to an increase in
costs associated with the manufacturing of
material for ALXN1210 offset by a decrease in
ALXN6000 clinical research activities
(the
ALXN6000 program has been discontinued).
• Decrease of $22.2 in upfront payments due to
the nature and
licensing and
collaborations agreements executed in 2018
compared to 2017.
timing of
• Decrease of $12.9 in discovery primarily related
to de-prioritized preclinical arrangements with
Moderna Therapeutics and Blueprint Medicines.
We no longer conduct development efforts with
these entities.
• Decrease of $26.0 in payroll and benefits
reductions
primarily
resulting from restructuring activities initiated in
2017.
to headcount
related
• Decrease of $29.0 in facilities and other related
to decreased
expenses primarily
related
The following graph summarizes expenses related
to our clinical development programs:
The following graph summarizes accumulated
direct expenses related to our clinical development
programs from January 1, 2006 to December 31, 2018:
(a) From 1992 through 2006, substantially all research and
development expenses were related to two products, eculizumab and
pexelizumab. We obtained approval in the U.S. for eculizumab for PNH
in 2007 and for aHUS in 2010, and we ceased development of
pexelizumab in 2006.
(b) Unallocated costs shared across various development programs.
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 any of our product development 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 Annual
Report on Form 10-K.
We expect our
research and development
expenses to remain consistent as a percentage of sales
in 2019 as compared to 2018.
2018
2017
2016
75
Selling, General and Administrative Expense
Selling General and Administrative Expense (SG&A)
SG&A as a % of net product sales
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
insurance, audit, government
telecommunications,
affairs and our global corporate compliance program.
The table below provides information regarding
selling, general and administrative expense:
• Increase
in external selling, general and
administrative expenses of $20.2. The increase
was primarily due to an increase in professional
services and asset related charges associated
with
restructuring
programs. These increases were partially offset
by decreased distribution expenses as
compared to the same period in 2017.
announced
previously
During the year ended December 31, 2017, we
incurred selling, general and administrative expenses
of $1,094.4, an increase of $141.4, or 14.8%, versus
year ended
the $953.0
December 31, 2016. The increase was primarily related
to the following:
incurred during
the
• Increase in salary, benefits and other labor
expenses of $81.5, primarily related to increase
of commercial activities to support the continued
global launches of STRENSIQ and KANUMA and
the launch of SOLIRIS for gMG. Employee related
costs associated with executive leadership
changes and incentive compensation also
increased.
• Increase
in external selling, general and
administrative expenses of $59.9. The increase
was primarily due to an increase in charitable
contributions and additional professional
services, offset
in
advertising and promotional cost as compared
to 2016. The increase was also due to asset
impairment charges that were recorded in 2017
related to restructuring activities.
in part by decreases
We expect our selling, general and administrative
expenses to decrease as a percentage of sales in 2019
as compared to 2018.
Acquired In-Process Research and Development
Salary, benefits and other labor expense
External selling, general and administrative
expense
During the year ended December 31, 2018, we
incurred selling, general and administrative expenses
of $1,111.8, an increase of $17.4, or 1.6%, versus the
$1,094.4 incurred during the year ended December 31,
2017. The increase was primarily related to the
following:
For the year ended December 31, 2018 we
recorded acquired in-process research and development
(IPR&D) expense of $1,183.0. The increase in acquired
IPR&D for the year ended December 31, 2018, as
compared to 2017 and 2016, is due to the Wilson
Therapeutics acquisition completed in the second
quarter of 2018 and the Syntimmune acquisition
76
completed in the fourth quarter of 2018. The IPR&D
assets associated with each of these acquisitions,
which were the principal assets acquired in each
transaction, had not reached technological feasibility
and had no alternative future use as of the acquisition
date and were therefore expensed in 2018.
Amortization of Purchased Intangible Assets
milestones. As a result of this agreement and the
probability of achieving the various sales milestones,
our contingent consideration liability increased by $48.7
in the third quarter 2018.
For the year ended December 31, 2018, changes
in the fair value of contingent consideration expense
primarily reflect the impact of the agreement with Enobia
to amend milestones and changes in the expected
timing of payments of contingent consideration, as well
as the interest component of contingent consideration
related to the passage of time.
Restructuring Expenses
Amortization expense associated with purchased
intangible assets was $320.1, $320.1 and $322.2 for
the years ended December 31, 2018, 2017 and 2016,
is primarily
respectively. Amortization expense
associated with intangible assets related to STRENSIQ
and KANUMA.
Change in Fair Value of Contingent Consideration
For the years ended December 31, 2018 and
2017, we recorded $25.5 and $104.6, respectively, in
restructuring expenses. The charges for the year ended
2018 were mainly attributable to the relocation of our
corporate headquarters from New Haven, Connecticut
to Boston, Massachusetts and other related costs and
the charges for the year ended 2017 were mainly
attributable to employee separation costs in connection
with the 2017 restructuring (as described below).
strategy.
re-alignment
In the first quarter of 2017, we initiated a company-
wide restructuring designed to help position the
Company for sustainable, long-term growth that we
believe will further allow us to fulfill our mission of
serving patients and families with rare diseases. The
initial restructuring activities primarily focused on a
reduction of the Company's global workforce. In
September 2017, we committed to an operational plan
to re-align the global organization with its refocused
focused
The
corporate
investments in priority growth areas to maximize
leadership in complement and grow the rare disease
business. The re-alignment also included the relocation
to Boston,
of
Massachusetts in 2018. Our New Haven, Connecticut
site continues to support employees working in the
research and process development laboratories, the
teams, nurse case
clinical supply and quality
management and a number of important enterprise
business services. The 2017 restructuring plan reduced
the Company's global workforce by approximately
20.0%. The restructuring achieved cost savings by
the development portfolio, simplifying
focusing
the Company's headquarters
For the years ended December 31, 2018, 2017
and 2016, the change in fair value of contingent
consideration expense associated with our prior
business combinations was $116.5, $41.0 and $35.7,
respectively. The change in the fair value of contingent
consideration will fluctuate based on the timing of
recognition of changes in the probability of achieving
and the expected timing of milestone payments in
connection with previous acquisitions.
In September 2018, we amended the terms of
certain contingent milestone payments due under our
prior merger agreement with Enobia Pharma Corp.
(Enobia), dated December 28, 2011. The agreement
removed our obligations with respect to a regulatory
milestone and redistributed the contingent payment
associated with this milestone to various sales
77
business structures and processes across
the
Company's global operations, and closing of multiple
Alexion sites, including ARIMF and certain regional and
country-based offices.
In the first quarter 2019, we have undertaken
corporate restructuring activities to re-align our global
organization with our re-focused strategy, reduce
costs, and realize operational efficiencies. We expect
to incur estimated expenses up to $25.0 associated
with this recent restructuring by the end of 2019. For
additional information on this 2019 corporate
restructuring activity, see Item 1. “Business - Sales
and Marketing” elsewhere in this Annual Report on
Form 10-K.
Impairment of Intangible Assets
As of December 31, 2018, we reviewed the
KANUMA asset for impairment and determined that
there were no indicators of impairment. We will continue
to review the related valuation and accounting of this
asset in future quarters as new information becomes
available to us. Changes to assumptions used in our
net cash flow projections may result in impairment
charges in subsequent periods. The net book value of
the KANUMA intangible asset as of December 31, 2018
is $3,252.6.
Other Income and (Expense)
The following table provides information regarding other
income and expense:
During the fourth quarter of 2016, we reviewed
SBC-103, an early stage clinical
indefinite-lived
intangible asset related to the Synageva acquisition as
part of our annual impairment testing. The estimated
fair value that can be obtained for this asset from a
market participant in an arm’s length transaction was
determined to be $31.0, which was lower than the
carrying amount of the asset. As a result, in the fourth
quarter 2016, we recognized an impairment charge of
$85.0 to write-down this asset to fair value. In the
second quarter 2017, due to clinical results, we
recognized an impairment charge of $31.0 related to
research and
our SBC-103 acquired
development asset to write-down the asset to fair value,
which was determined to be de minimis.
in-process
Investment Income
Interest Expense
Other Income (expense)
For the year ended December 31, 2018, we
experienced an increase in investment income primarily
due to the recognition of unrealized gains of $44.4 on
our Moderna Therapeutics equity investment.
78
Income Taxes
Tax Expense
Effective Tax Rate
the
The income tax expense for the years ended
December 31, 2018, 2017 and 2016 is attributable to
the U.S. federal, state and foreign income taxes on our
profitable operations. During
year ended
December 31, 2018, we recorded an income tax
expense of $164.6 and an effective tax rate of 68.0%,
compared to an income tax expense of $104.5 and
$176.8 and an effective tax rate of 19.1% and 30.7%
for the years ended December 31, 2017 and 2016,
respectively. The increase in the effective tax rate during
2018, from 19.1% for the year ended December 31,
2017 to 68.0% for the year ended December 31, 2018
was primarily attributable to the acquisitions of
Syntimmune and Wilson Therapeutics. Absent
successful clinical results and regulatory approval, there
is no alternative future use for the in-process research
assets we acquired in these acquisitions. Accordingly,
the value of the assets acquired of $1,183.0 were
expensed as acquired
research and
development, for which no tax benefit has been
recognized. The Syntimmune and Wilson Therapeutics
acquisitions resulted in an increase in the effective tax
rate of approximately 102.6%. This increase was
partially offset by the decrease to the U.S. statutory rate
and other related adjustments as a result of the Tax Act.
These items resulted in a decrease of approximately
45.7%.
in-process
In December 2017, the Tax Act was enacted into
law. The Tax Act decreased the U.S. federal corporate
tax rate to 21.0%, imposed a minimum tax on foreign
earnings and incorporated a one-time transition tax on
previously unremitted foreign earnings. We incorporated
the impact of the Tax Act in our results of operations or
calculated provisional amounts for the tax effects of the
Tax Act that could be reasonably estimated for the year
ended December 31, 2017. We recorded adjustments
to this provisional accounting during 2018, which
79
resulted in a decrease to tax expense of $56.5. We
completed our accounting for the Tax Act in the fourth
quarter 2018.
The Tax Act resulted in an increase to tax expense
for the year ended December 31, 2017 of $45.8. This
increase included a transition tax expense of $177.9
and deferred tax expense related to the new GILTI
minimum tax of $165.4, partially offset by the $297.5
benefit of re-measuring balance sheet taxes to the new
21.0% US federal tax rate. The re-measurement benefit
included $292.4 related to decreases to our net
deferred tax liability and $5.1 related to decreases to
income taxes payable. The deferred tax expense related
to the GILTI minimum tax included incremental deferred
tax of $236.9, net of a related $71.5 decrease for
uncertain tax positions.
The decrease in the effective tax rate during 2017,
from 30.7% for the year ended December 31, 2016 to
19.1% for the year ended December 31, 2017 was
primarily attributable to the net increase to tax expense
in 2017 of $45.8 attributable to the Tax Act, offset by
decreases attributable to the deferred tax cost of
$119.3 associated with the distribution of earnings from
our captive foreign partnership in 2016 and the
conclusion of the IRS examination of our 2013 and 2014
tax years in 2017. The impact of the enactment of the
Tax Act increased our effective tax rate in 2017 by 8.4%.
The 2016 distribution of earnings increased our 2016
effective tax rate by 20.7%. Conclusion of the IRS
examination resulted in a decrease to our 2017 effective
tax rate of approximately 3.6% for the year ended
December 31, 2017.
We continue to maintain a valuation allowance
against certain other deferred tax assets where
realization is not certain. We periodically evaluate the
likelihood of realizing 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.
Financial Condition, Liquidity and Capital Resources
The following table summarizes the components
of our financial condition as of December 31, 2018 and
2017:
Cash and cash
equivalents
Marketable securities
Long-term debt (includes
current portion &
revolving credit facility)
December 31,
2018
December 31,
2017
$ 1,365.5 $
198.3
584.4
889.7
2,862.5
2,906.3
Current assets
Current liabilities
Working capital
$ 3,385.0 $ 2,953.9
952.5
$ 2,211.0 $ 2,001.4
1,174.0
The aggregate increase in cash and cash
equivalents and marketable securities of $89.7 at
December 31, 2018 as compared to December 31,
2017 was primarily attributable to cash generated from
operations and net proceeds from the issuance of
common stock under share-based compensation
arrangements. Partially offsetting these increases was
cash utilized to repurchase shares of common stock,
principal payments on our term loan (in connection with
entering into our Amended and Restated Credit
Agreement in June 2018), and purchases of property,
plant, and equipment.
the
Excluding
impact of any
future asset
acquisitions, we expect our annual operating expenses
to decrease as a percentage of sales in 2019 as
compared to 2018. We also expect reduced capital
investment in 2019 as compared to 2018. 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 for at least the next
twelve months.
including principal and
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,
interest
payments on our Amended and Restated Credit
Agreement 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. New
sources of financing through equity and/or debt
financing(s) may not always be available on acceptable
terms, or at all, and we may be required to obtain certain
consents in connection with completing such financings.
Financial Instruments
Until required for use in the business, we may
invest our cash reserves in money market funds, bank
deposits, reverse repurchase agreements, and high-
quality marketable debt securities in accordance with
our investment policy. The stated objectives of our
investment policy are to preserve capital, provide
liquidity consistent with
flow
requirements, maintain appropriate diversification and
generate returns relative to these investment objectives
and prevailing market conditions.
forecasted cash
Financial instruments that potentially expose us to
concentrations of credit risk are cash equivalents,
marketable securities, accounts receivable and our
derivative contracts. At December 31, 2018, three
customers accounted for 48.7% of the accounts
receivable balance, with these individual customers
accounting for 14.0% to 19.1% of the accounts
80
receivable balance. At December 31, 2017, four
customers accounted for 57.7% of the accounts
receivable balance, with these individual customers
accounting for 10.2% to 18.9% of the accounts
receivable balance.
For the year ended December 31, 2018, four
customers accounted for 50.3% of our product sales,
with these individual customers ranging from 10.0% to
16.4% of product sales. For
the year ended
December 31, 2017, three customers accounted for
37.0% of our product sales, with these individual
customers ranging from 10.8% to 15.0% of product
sales. For the year ended December 31, 2016, three
customers accounted for 36.7% of our product sales,
with these individual customers ranging from 10.0% to
16.0% of product sales.
receivable are due
We continue to monitor economic conditions,
including volatility associated with
international
economies and the associated impacts on the financial
markets and our business. Substantially all of our
accounts
from wholesale
distributors, public hospitals and other government
entities. We monitor the financial performance of our
customers so that we can appropriately respond to
changes in their credit worthiness. We operate in certain
jurisdictions where weakness in economic conditions
can result in extended collection periods. We continue
to monitor these conditions and assess their possible
impact on our business. To date, we have not
experienced any significant losses with respect to
collection of our accounts receivable.
We manage our foreign currency transaction risk
and interest rate 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. As
of December 31, 2018, we had foreign exchange
forward contracts with notional amounts totaling
$2,523.0. These outstanding foreign exchange forward
contracts had a net fair value liability of $18.9, of which
$40.8 is included in other current assets and noncurrent
assets and $21.9 is included in other current liabilities
and noncurrent liabilities. As of December 31, 2018, we
had interest rate swap contracts with notional amounts
totaling $3,881.3. These outstanding interest rate swap
contracts had a net fair value of $2.0, of which $20.1
is included in other current assets and $18.1 is included
in other current liabilities and noncurrent liabilities. The
counterparties to these contracts are large domestic
and multinational commercial banks, and we believe the
risk of nonperformance is not material.
At December 31, 2018, our financial assets and
liabilities were recorded at fair value. We have classified
our financial assets and liabilities as Level 1, 2 or 3
within the fair value hierarchy. Level 1 inputs are quoted
prices (unadjusted) in active markets for identical
assets or liabilities. Our Level 1 assets consist of mutual
fund investments and equity securities. 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. Our Level 2 assets consist
funds, commercial
primarily of money market
repurchase
paper, municipal
agreements, U.S. and foreign government-related debt,
corporate debt securities, certificates of deposit, equity
securities subject to holding period restrictions and
derivative contracts. Our Level 2 liabilities consist also
of derivative contracts. Level 3 inputs are unobservable
inputs based on our own assumptions used to measure
assets and liabilities at fair value. Our Level 3 liabilities
to
consist of contingent consideration
acquisitions.
reverse
related
bonds,
Business Combinations and Contingent Consideration
Obligations
and
development
At December 31, 2018, the purchase agreements
for our business combinations include contingent
payments totaling up to $702.0 that will become payable
if and when certain development and commercial
milestones are achieved. Of these milestone amounts,
$367.0 and $335.0 of the contingent payments relate
to
commercial milestones,
respectively. We do not expect these amounts to have
an impact on our liquidity in the near-term, and, during
the next 12 months, we expect to make milestone
payments of approximately $100.0 associated with our
prior business combinations. As additional future
payments become probable, we will evaluate methods
of funding payments, which could be made from
available cash and marketable securities, cash
generated from operations or proceeds from the sale of
equity securities or debt.
payment of $37.0 for the exclusive licenses and the
equity investment. The market value of the equity
investment was $10.3 as of the date of acquisition,
which we recorded in other assets in our consolidated
balance sheets. Due to the early stage of the assets we
are licensing, we recorded expense for the upfront
license payment of $26.7 during the fourth quarter
2018. In addition, as of December 31, 2018, we could
also be required to pay up to approximately $625.0 for
option exercise fees and amounts due upon the
achievement of specified research, development,
regulatory and commercial milestones, as well as
royalties on commercial sales.
In December 2017, we entered into a collaboration
and license agreement with Halozyme Therapeutics, Inc.
that allows us to use drug-delivery technology in the
development of subcutaneous formulations for our
portfolio of products for up to four targets. Due to the
early stage of the assets we are licensing, we recorded
expense for the upfront payment of $40.0 during the
fourth quarter 2017. In addition, as of December 31,
2018, we could be required to pay an additional $160.0
for each target developed, subject to achievement of
specified development, regulatory and sales-based
milestones, as well as royalties on commercial sales.
In addition, we have entered into other license
agreements under which we may be required to pay up
to an additional $137.2 if certain development,
regulatory and commercial milestones are met.
We do not expect the payments associated with
milestones under our asset acquisitions and licensing
agreements to have a significant impact on our liquidity
in the near-term. During the next 12 months, we may
make milestone payments
these
arrangements of approximately $255.0.
related
to
Asset Acquisitions and License Agreements
In the fourth quarter 2018, Alexion acquired
Syntimmune, a clinical-stage biotechnology company
developing an antibody therapy targeting the neonatal
Fc receptor (FcRn), for an upfront payment of $400.0.
Under the terms of the agreement, we could also be
required to pay up to $800.0 upon the achievement of
specified
regulatory and
commercial milestones.
research, development,
In October 2018, we entered into a collaboration
agreement with Dicerna Pharmaceuticals, Inc. (Dicerna)
that provides us with exclusive worldwide licenses and
development and commercial rights for two preclinical
RNA interference (RNAi) subcutaneously delivered
molecules for complement-mediated diseases, as well
as an exclusive option for other preclinical RNAi
molecules for two additional targets within the
complement pathway. In addition to the collaboration
agreement, we made an equity investment in Dicerna.
Under the terms of the agreements, we made an upfront
81
Financing Lease Obligations
In November 2012, we entered into a lease
agreement for office and laboratory space to be
constructed in New Haven, Connecticut. The term of the
lease commenced in 2015 and will expire in 2030, with
a renewal option of ten years. Although we do not legally
own the premises, we are deemed to be the owner of
the building due to the substantial improvements
directly funded during the construction period based on
applicable accounting guidance for build-to-suit leases.
Accordingly, the landlord’s costs of constructing the
facility during the construction period are required to be
capitalized, as a non-cash transaction, offset by a
corresponding
in our
consolidated balance sheet. Construction of the new
facility was completed and the building was placed into
service in the first quarter 2016. Associated with this
arrangement we recognized interest expense of $13.3,
$14.2, and $14.0 for the years ended December 31,
2018, 2017, and 2016,
respectively. As of
December 31, 2018 and 2017, our total facility lease
lease obligation
facility
obligation was $133.5 and $134.6, respectively,
recorded within other current liabilities and facility lease
obligation in our consolidated balance sheets.
During the third quarter 2015, we entered into an
agreement with Lonza Group AG and its affiliates (Lonza)
whereby Lonza will construct a new manufacturing
facility dedicated to Alexion at one of its existing
facilities. 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. Accordingly, the landlord’s costs of
constructing the facility during the construction period
are required to be capitalized, as a non-cash transaction,
offset by a corresponding facility lease obligation in our
consolidated balance sheet. We expect the completion
of the facility, including obtaining regulatory approval, to
be in 2019. As of December 31, 2018 and 2017, we
recorded a construction-in-process asset of $203.9 and
$180.6, respectively, and an offsetting facility lease
obligation of $155.1 and $159.1, respectively, within
other current liabilities and facility lease obligation in
our consolidated balance sheets.
In September 2017, we entered into a lease
agreement for approximately 150,000 square feet of
in Boston,
office space
constructed
to be
facility was
Massachusetts. Construction of the
completed and the building was placed into service in
the second quarter 2018. The term of the lease
commenced upon the landlord's substantial completion
of the facility during the second quarter of 2018 and will
expire on the thirteenth anniversary of commencement,
with an option to renew for up to an additional 10 years.
Although we do not legally own the premises, due to our
involvement during the construction period, we are
deemed to be the owner of the portion of the building
that we will lease based on applicable accounting
guidance for build-to-suit leases. Accordingly, the
landlord's costs of constructing the facility during the
construction period are required to be capitalized, as a
non-cash transaction, offset by a corresponding facility
lease obligation in our consolidated balance sheet.
Interest expense recognized during 2018 was not
material. As of December 31, 2018 and 2017, our total
facility
lease obligation was $83.6 and $59.6,
respectively, recorded within facility lease obligation in
our consolidated balance sheets.
Our facility lease obligations will be derecognized
in 2019 upon adoption of the new lease accounting
standard and will be replaced by ROU liabilities going
forward. See Note 1 Business Overview and Summary
of Significant Accounting Policies to our Consolidated
Financial Statements included elsewhere in this Annual
Report on Form 10-K for more information.
Long-term Debt
On June 7, 2018, Alexion entered into an Amended
and Restated Credit Agreement (the Credit Agreement)
with Bank of America N.A. as administrative agent. The
Credit Agreement amends and restates our credit
agreement dated as of June 22, 2015 (the Prior Credit
Agreement). The Credit Agreement provides for a
$2,612.5 term loan facility and a $1,000.0 revolving
facility. Borrowings can be used for working capital
requirements, acquisitions and other general corporate
purposes. Beginning with the quarter ending June 30,
2019, we are required to make amortization payments
of 5.00% of the aggregate principal amount of the term
loan facility annually, payable in equal quarterly
installments.
As of December 31, 2018, we had $2,612.5
outstanding on the term loan and $250.0 of borrowings
outstanding under the revolving credit facility. The
$250.0 of proceeds on the revolving credit facility was
used to refinance amounts outstanding under the Prior
Credit Agreement. As of December 31, 2018, we had
open letters of credit of $1.7 that offset our borrowing
availability on the revolving facility. In January 2019 we
paid the outstanding revolving credit facility of $250.0
in full.
Manufacturing Obligations
We have supply agreements with Lonza relating to
the manufacture of SOLIRIS and STRENSIQ, which
requires payments to Lonza at the inception of contract
and upon the initiation and completion of product
manufactured. On an ongoing basis, we evaluate our
plans for future levels of manufacturing by Lonza, which
depends upon our commercial requirements and the
progress of our clinical development programs.
We have various agreements with Lonza, with
total non-cancellable commitments of
remaining
through 2029. Certain
approximately $1,084.6
limited
commitments may be canceled only
terminate certain supply
If we
circumstances.
agreements with Lonza without cause, we will be
required to pay for product scheduled for manufacture
under our arrangement. Under an existing arrangement
with Lonza, we also pay Lonza a royalty on sales of
SOLIRIS that was manufactured at ARIMF prior to its
sale and a payment with respect to sales of SOLIRIS
manufactured at Lonza facilities.
in
82
In addition to Lonza, we have non-cancellable
commitments of approximately $104.1 through 2020
with other third party manufacturers.
Taxes
We have recorded tax on the undistributed earnings
of our controlled foreign corporation (CFC) subsidiaries.
To the extent CFC earnings may not be repatriated to
the U.S. as a dividend distribution due to limitations
imposed by law, we have not recorded the related
potential withholding, foreign local, and U.S. state
income taxes.
Common Stock Repurchase Program
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 February 2017, our
Board of Directors increased the amount that we are
authorized to expend on future repurchases to $1,000
under the repurchase program, which superseded all
prior repurchase programs. Under the program, we
repurchased 0.7 and 4.0 shares of our common stock
at a cost of $85.0 and $463.6 during the years ended
December 31, 2018 and 2017, respectively. As of
December 31, 2018, there is a total of $451.5
remaining for repurchases under the program.
Cash Flows
The following summarizes our net change in cash and cash equivalents:
Net cash provided by operating activities
Net cash provided by (used in) investing activities
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents and restricted cash
Net change in cash and cash equivalents
Year Ended December 31,
2018
2017
$
Change
$ 426.0 $ 1,115.6 $ (689.6)
470.5
(918.3)
1,388.8
(102.4)
(11.2)
494.2
(28.9)
$ 782.9 $ (381.6) $ 1,164.5
(596.6)
17.7
in a net cash inflows of $690.8 in 2018 compared to a
net cash outflows of $(558.9) in 2017.
During 2018, we also had lower cash outlays
associated with the purchase of property, plant and
equipment of $213.0 as compared to $357.3 in 2017.
The significant spending on property, plant and
equipment in 2017 related primarily to the construction
of our new biologics manufacturing facilities in Ireland.
Financing Activities
Cash flows used in financing activities in 2018
were $102.4 compared to $596.6 in 2017. The
decrease in cash used for financing activities was
primarily due to repurchasing $378.6 less of our
common stock in 2018 than 2017. Additionally, cash
used for financing activities decreased as a result of
reduced net payments on our outstanding credit facility
of $43.8 in 2018,compared to $175.0 in 2017.
Operating Activities
in
to
by
cash
provided
$1,115.6
compared
Cash flows provided by operations in 2018 were
2017.
$426.0
The decrease in
operating
activities was primarily due to the acquisition of Wilson
Therapeutics and Syntimmune and higher cash
payments for restructuring and incentive compensation,
as well as the impact of the timing of cash receipts and
other payments for the year ended 2018 as compared
to the same period in the prior year. This decrease was
partially offset by an increase in operating income,
excluding the impact of the IPR&D charge associated
with
the Wilson Therapeutics and Syntimmune
acquisitions.
Investing Activities
Cash provided by (used in) investing activities in
2018 was $470.5 compared to $(918.3) in 2017. The
increase in cash provided by investing activities was
primarily attributable to proceeds and maturities of
available-for-sale marketable securities, which resulted
83
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2018 and the effect such obligations
and commercial commitments are expected to have on our liquidity and cash flow in future fiscal years. These do not
include potential milestone payments and assume non-termination of agreements.
These obligations, commitments and supporting arrangements represent payments based on current operating
forecasts at December 31, 2018, which are subject to change:
Total
Less than
1 Year
1-3 Years
3-5 Years
More than 5
Years
Contractual obligations:
Long-term debt (1)
Interest expense (2)
Facility lease obligations (3)
Operating leases
$ 2,862.5 $
348.0 $
407.2
197.6
48.0
81.8
13.7
14.1
261.2 $ 2,253.3 $
194.7
31.1
14.9
130.7
32.2
7.4
Total contractual obligations
$ 3,515.3 $
457.6 $
501.9 $ 2,423.6 $
Commercial commitments:
Clinical and manufacturing development (4) $ 1,188.7 $
$ 1,188.7 $
Total commercial commitments
271.8 $
271.8 $
317.5 $
317.5 $
227.4 $
227.4 $
—
—
120.6
11.6
132.2
372.0
372.0
(1) Includes our term loan and the $250.0 revolving credit facility balance. Our revolving credit facility is classified as
a current liability and has been included in payments to be made within one year. In January 2019, we paid the revolving
credit facility of $250.0 in full.
(2) Interest on variable rate debt is calculated based on interest rates at December 31, 2018. Interest that is fixed,
associated to our interest rate swaps, is calculated based on the fixed interest swap rate at December 31, 2018.
(3) Facility lease obligations include the lease agreement signed in November 2012, for office and laboratory space in
New Haven, Connecticut and the lease agreement signed in September 2017 for office space in Boston, Massachusetts.
In the fourth quarter of 2018 we amended the New Haven lease agreement significantly reducing our leased square
footage in the building beginning in 2019 through the expiration of the lease (in connection with this amendment, in
the fourth quarter of 2018, we made a payment of $53.0 to a third party as in incentive to lease the released square
footage). Although we do not legally own these premises, we were deemed to be the owner of the buildings during the
construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during
the construction period. Accordingly, the landlord’s costs of constructing the facility are required to be capitalized, as
a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated balance sheet.
(4) Clinical and manufacturing development commitments include only non-cancellable commitments, including all
Lonza agreements, at December 31, 2018.
The contractual obligations table above does not
include contingent royalties and other contingent
contractual payments we may owe to third parties in the
future because such payments are contingent on future
sales of our products and the existence and scope of
third party intellectual property rights and other factors
described in Item 1A “Risk Factors” and Note 11
“Commitments and Contingencies” to the Consolidated
Financial Statements included elsewhere in this Annual
Report on Form 10-K.
The liability for unrecognized tax benefits related
to various federal, state and foreign income tax matters
of $92.7 at December 31, 2018 was not included within
the table above. The timing of the settlement of these
amounts was
at
December 31, 2018. We do not expect payment of
amounts related to the unrecognized tax benefits within
the next twelve months.
reasonably
estimable
not
Contingent payments
to business
acquisitions, asset acquisitions or license agreements
related
at December 31,
are not included within the table above, as the
satisfaction of the contingent consideration obligations
is uncertain at December 31, 2018 and, if satisfied, the
timing of payment for these amounts was not reasonably
estimable
2018. Contingent
payments associated with these business combinations
total up to $702.0 which will become payable if and
when certain development and commercial milestones
are achieved. During the next 12 months, we expect to
make milestone payments of approximately $100.0
associated with our prior business combinations.
Commitments related to asset acquisitions and license
agreements include contingent payments that will
become payable if and when certain development,
regulatory and commercial milestones are achieved.
During the next 12 months, we may make milestone
payments related to our asset acquisitions and license
agreements of approximately $255.0.
84
Future obligations related to our defined benefit
plans are not included within the table above, as the
timing and amounts of these payments was not
reasonably estimable as of December 31, 2018. The
total unfunded obligation on our defined benefit plans
as of December 31, 2018 was $17.6. Our unfunded
obligation can be impacted by changes in the laws and
regulations, interest rates, investment returns, and
other variables.
Credit Facilities
On June 7, 2018, we entered into an Amended and
Restated Credit Agreement (the Credit Agreement), with
Bank of America N.A. as administrative agent. The Credit
Agreement amends and restates our agreement dated
as of June 22, 2015 (the Prior Agreement).
The Credit Agreement provides for a $1,000.0
revolving credit facility and a $2,612.5 term loan facility.
The revolving credit facility and term loan facility mature
on June 7, 2023. Beginning with the quarter ending June
30, 2019, we are required to make amortization
payments of 5.00% of the aggregate principal amount
of the term loan facility annually, payable in equal
quarterly installments.
Loans under the Credit Agreement bear interest,
at our option, at either the base rate or a Eurodollar rate,
in each case plus an applicable margin. Under the Credit
Agreement, the applicable margins on base rate loans
range from 0.25% to 1.00% and the applicable margins
on Eurodollar loans range from 1.25% to 2.00% in each
case based on our consolidated net leverage ratio (as
calculated in accordance with the Credit Agreement).
Our obligations under the Credit Agreement are
guaranteed by certain of our foreign and domestic
subsidiaries and secured by liens on certain of our
subsidiaries’ equity interests, subject to certain
exceptions. Under the terms of the Credit Agreement,
we must maintain a ratio of total net debt to EBITDA of
3.50 to 1.00 (subject to certain limited adjustments)
and EBITDA to cash interest expense ratio of at least
3.50 to 1.00, in each case as calculated in accordance
with the Credit Agreement.
to certain increases following designated material
acquisitions.
Operating Leases
Our operating leases are principally for facilities
and equipment. We currently lease office space in the
U.S. and foreign countries to support our operations as
a global organization.
We believe that our administrative office space is
adequate to meet our needs for the foreseeable future.
We also believe that our research and development
facilities and our manufacturing facilities, together with
third party manufacturing facilities, will be adequate for
our on-going activities.
In addition to the minimum rental commitments
on our operating leases we may also be required to pay
amounts for taxes, insurance, maintenance and other
operating expenses.
Commercial Commitments
Our commercial commitments consist of research
and development,
license, operational, clinical
development, and manufacturing cost commitments,
along with anticipated supporting arrangements,
subject to certain limitations and cancellation clauses.
The timing and
level of our commercial scale
manufacturing costs, which may or may not be realized,
are contingent upon the progress of our clinical
development programs and our commercialization
plans. Our commercial commitments are represented
principally by our supply agreements with Lonza
described above. Our commitments with Lonza do not
include amounts for estimated consumer price index, or
CPI, adjustments which we are obligated to pay to Lonza.
contains
The Credit
certain
Agreement
representations and warranties, affirmative and
negative covenants and events of default. The negative
covenants in the Credit Agreement restrict Alexion’s and
its subsidiaries’ ability, subject to certain baskets and
exceptions, to (among other things) incur liens or
indebtedness, make investments, enter into mergers
and other fundamental changes, make dispositions or
pay dividends. The restriction on dividend payments
includes an exception that permits us to pay dividends
and make other restricted payments regardless of dollar
amount so long as, after giving pro forma effect thereto,
we have consolidated net leverage ratio, as defined in
the Credit Agreement, within predefined ranges, subject
85
Item 7A.
DISCLOSURES ABOUT MARKET RISK.
(amounts in millions, except percentages)
QUANTITATIVE
AND
QUALITATIVE
Interest Rate Risk
funds,
bonds,
corporate
As of December 31, 2018, we invested our cash
in a variety of financial instruments, principally money
market
repurchase
agreements, municipal bonds, commercial paper and
government-related obligations. Most of our interest-
bearing securities are subject to interest rate risk and
could decline in value if interest rates fluctuate. Our
investment portfolio is comprised of marketable debt
securities of highly rated financial institutions and
investment-grade debt instruments, and we have
guidelines
term-to-maturity of our
investments. Based on the type of securities we hold,
we do not believe a change in interest rates would have
a material impact on our financial statements. If interest
rates were to increase or decrease by 1.00%, the fair
value of our investment portfolio would (decrease)
increase by approximately $(0.5) and $0.5, respectively.
limit
the
to
On June 7, 2018, we entered into an Amended and
Restated Credit Agreement (the Credit Agreement), with
Bank of America N.A. as administrative agent. The Credit
Agreement amends and restates our agreement dated
as of June 22, 2015 (the Prior Agreement). Loans under
the Credit Agreement bear interest, at our option, at
either the base rate or a Eurodollar rate, in each case
plus an applicable margin. Under the Credit Agreement,
the applicable margins on base rate loans range from
0.25% to 1.00% and the applicable margins on
Eurodollar loans range from 1.25% to 2.00% in each
case based on our consolidated net leverage ratio (as
calculated in accordance with the Credit Agreement).
Changes in interest rates related to the Credit
Agreement could have a material effect on our financial
statements.
To achieve a desired mix of floating and fixed
interest rates on our term loan, we entered into a number
of interest rate swap agreements that qualified for and
are designated as cash
flow hedges. As of
December 31, 2018, we had cash flow hedges with
aggregate amounts of approximately 87.0% of our
current outstanding term loan covering periods over the
next twelve months. If interest rates were to increase
or decrease by 1.00%, interest expense, over the next
year would increase or decrease by $3.0, based on the
unhedged portion of our outstanding term loan as of
December 31, 2018.
Foreign Exchange Market Risk
Our operations include activities in many countries
outside the U.S. As a result, our financial results are
impacted by factors such as changes in foreign currency
exchange rates or weak economic conditions in the
foreign markets where we operate. We have exposure
to movements in foreign currency exchange rates, the
most significant of which are the Euro and Japanese
Yen, against the U.S. dollar. We are a net receiver of
many foreign currencies, and our consolidated financial
results benefit from a weaker U.S. dollar and are
adversely impacted by a stronger U.S. dollar relative to
foreign currencies in which we sell our products.
in
foreign
denominated
Our monetary exposures on our balance sheet
arise primarily from cash, accounts receivable, and
currencies.
payables
Approximately 49.0% of our net product sales were
denominated in foreign currencies during 2018, and our
revenues are also exposed to fluctuations in the foreign
currency exchange rates over time. In certain foreign
countries, we may sell in U.S. dollar, but our customers
may be impacted adversely by fluctuations in foreign
currency exchange rates which may also impact the
timing and amount of our revenue.
Both positive and negative impacts to our
international product sales from movements in foreign
currency exchange rates are only partially mitigated by
the natural, opposite impact that foreign currency
exchange rates have on our international operating
expenses. Additionally, we have operations based in
Europe and accordingly, our expenses are impacted by
fluctuations in the value of the Euro against the U.S.
dollar.
(in some currencies),
We currently have a derivative program in place to
achieve the following: (1) limit the foreign currency
exposure of our monetary assets and liabilities on our
balance sheet, using contracts with durations up to 6
months and (2) hedge a portion of our forecasted
product sales
including
intercompany sales, and certain forecasted expenses
using contracts with durations of up to 60 months. The
objective of this program is to reduce the volatility of our
operating
foreign
to
exchange. This program utilizes foreign exchange
forward contracts intended to reduce, not eliminate, the
volatility of operating results due to fluctuations in
foreign exchange rates.
fluctuation of
results due
As of December 31, 2018 and 2017, we held
foreign exchange forward contracts with notional
amounts totaling $2,523.0 and $2,708.1, respectively.
As of December 31, 2018 and 2017, our outstanding
foreign exchange forward contracts had a net fair value
of $18.9 and $(47.5), respectively.
We do not use derivative financial instruments for
speculative trading purposes. The counterparties to
these foreign exchange forward contracts are large
domestic and multinational commercial banks. We
believe the risk of counterparty nonperformance is not
material.
86
Based on our foreign currency exchange rate
exposures at December 31, 2018, a hypothetical 10%
adverse fluctuation in exchange rates would decrease
the fair value of our foreign exchange forward contracts
that are designated as cash
flow hedges by
approximately $101.5 at December 31, 2018. The
resulting loss on these forward contracts would be offset
by the gain on the underlying transactions and therefore
would have minimal impact on future anticipated
earnings and cash flows. Similarly, adverse fluctuations
in exchange rates that would decrease the fair value of
our foreign exchange forward contracts that are not
designated as hedge instruments would be offset by a
positive impact of the underlying monetary assets and
liabilities.
Credit Risk
As a result of our foreign operations, we are
exposed to changes in the general economic conditions
in the countries in which we conduct business. The
majority of our receivables are due from wholesale
distributors, public hospitals and other government
entities. We monitor the financial performance and
creditworthiness of our large customers so that we can
properly assess and respond to changes in their credit
profile. We continue to monitor these conditions,
including the volatility associated with international
economies and the relevant financial markets, and
assess their possible impact on our business. Although
collection of our accounts receivables from certain
countries may extend beyond our standard credit terms,
we do not expect any such delays to have a material
impact on our financial condition or results of
operations.
Item 8.
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
The consolidated
financial statements and
supplementary data of the Company required in this item
are set forth beginning on page F-1.
Item 9.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
Item 9A.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
We have established disclosure controls and
procedures to provide reasonable assurance that
information is accumulated and communicated to our
management, including our principal executive officer
87
and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure, and
ensure that information required to be disclosed in the
reports we file or submit under the Securities Exchange
Act of 1934, as amended (Exchange Act) is recorded,
processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms.
Our management, with the participation of our
Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls
and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of December 31,
2018. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that as of
December 31, 2018, our disclosure controls and
procedures were effective at the reasonable assurance
level.
Management’s Report on Internal Control Over Financial
Reporting
Management of the Company is responsible for
establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act. Our internal
control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles. Because of
its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may
become inadequate because of changes in conditions,
or that the degree of compliance with the policies or
procedures may deteriorate.
Management conducted an evaluation of the
effectiveness of our internal control over financial
reporting as of December 31, 2018 based on the
framework in Internal Control-Integrated Framework
(2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Based on that evaluation, management has concluded
that the Company maintained an effective internal
control over financial reporting as of December 31,
2018.
The effectiveness of our internal control over
financial reporting as of December 31, 2018 has been
audited by PricewaterhouseCoopers LLP,
an
independent registered public accounting firm, as stated
in their report, which is included herein.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control
over financial reporting that occurred during the quarter
ended December 31, 2018 that has materially affected,
or is reasonably likely to materially affect, our internal
control over financial reporting.
Item 9A(T).
CONTROLS AND PROCEDURES.
Not applicable
Item 9B.
OTHER INFORMATION.
None.
88
PART III
Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this item with respect to our executive officers is provided under the caption entitled
“Executive Officers of the Company” in Part I of this Annual Report on Form 10-K and is incorporated by reference
herein. The information required by this item with respect to our directors and our audit committee and audit committee
financial expert will be set forth in our definitive Proxy Statement under the captions “General Information About the
Board of Directors” and “Election of Directors”, to be filed within 120 days after the end of the fiscal year covered by
this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 required by this
Item will be set forth in our definitive Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting
Compliance”, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K,
and is incorporated herein by reference to our Proxy Statement.
CODE OF ETHICS
We have adopted the Alexion Pharmaceuticals, Inc. Code of Ethics and Business Conduct, or code of ethics, that
applies to directors, officers and employees of Alexion and its subsidiaries and complies with the requirements of
Item 406 of Regulation S-K and the listing standards of the Nasdaq Global Select Market. Our code of ethics is located
on our website (http://ir.alexion.com/index.php/corporate-governance). We amended the code of ethics in September
2015 and any future amendments or waivers to our code of ethics will be promptly disclosed on our website and as
required by applicable laws, rules and regulations of the SEC and Nasdaq.
Item 11.
EXECUTIVE COMPENSATION.
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to
our Proxy Statement.
Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to
our Proxy Statement.
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days
after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to
our Proxy Statement.
Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item will be set forth in our definitive Proxy Statement under the caption
“Independent Registered Public Accounting Firm”, to be filed within 120 days after the end of the fiscal year covered
by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
89
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
PART IV
Item 15(a)
(1) Financial Statements
The financial statements required by this item are submitted in a separate section beginning on page F-1 of this
report.
(2) Financial Statement Schedules
Schedules have been omitted because of the absence of conditions under which they are required or because
the required information is included in the financial statements or notes thereto beginning on page F-1 of this report.
(3) Exhibits:
2.1 Agreement and Plan of Merger by and among Alexion, TPCA Corporation, Taligen Therapeutics, Inc., each
stockholder of Taligen that signed the Agreement as a seller of Series Bl Call Rights, and, only for the limited
purposes described therein as Stockholders’ Representatives (and not in their individual capacities), Nick
Galakatos, Ed Hurwitz and Timothy Mills, dated as of January 28, 2011.(1)+
2.2 Agreement and Plan of Merger by and among Alexion, EMRD Corporation, Enobia Pharma Corp., and the
Stockholder Representatives named therein, dated as of December 28, 2011.(2)+
2.3 Amendment No. 1 to the Agreement and Plan of Merger, dated December 28, 2011, by and among Alexion,
EMRD Corporation, Enobia Pharma Corp., and the Stockholder Representatives named therein, dated
February 1, 2012.(3)
2.4 Agreement, dated as of September 7, 2018, by and between Alexion Pharma Holding Unlimited Company,
Shareholder Representative Services LLC, Fonds de Solidarité des Travailleurs du Québec F.T.Q., Capital
Régional e Coopératif Desjardins, CTI Life Sciences Fund, L.P., OrbiMed Private Investments III, LP and OrbiMed
Associates III, LP (in connection with the Agreement and Plan of Merger, dated December 28, 2011 pursuant
to which Alexion acquired Enobia Pharma Corp.)(4)
2.5 Agreement and Plan of Reorganization, dated May 5, 2015, among Alexion Pharmaceuticals, Inc., Pulsar
Merger Sub Inc., Galaxy Merger Sub LLC and Synageva BioPharma Corp. (5)
2.6 Agreement and Plan of Merger, dated as of September 25, 2018, by and among Alexion Pharmaceuticals,
Inc., Syracuse Merger Sub, Inc., Syntimmune, Inc. and Shareholder Representative Services LLC,(4)+
3.1 Certificate of Incorporation, as amended.(6)
3.2 Certificate of Amendment of the Certificate of Incorporation.(7)
3.3 Bylaws, as amended.(8)
4.1 Specimen Common Stock Certificate.(9)
10.1 Employment Agreement, dated as of March 27, 2017, by and between Ludwig N. Hantson and Alexion
Pharmaceuticals, Inc. (23)**
10.2 Employment Agreement, dated as of June 11, 2017, by and between Paul J. Clancy and Alexion
Pharmaceuticals, Inc. (24)**
10.3 Employment Agreement, dated as of June 1, 2017, by and between Brian Goff and Alexion Pharmaceuticals,
Inc. (26)**
10.4 Form of Employment Agreement (Senior Vice Presidents).(10)**
10.5 Form of Amendment No. 1 to Employment Agreements (Senior Vice Presidents). (11)**
10.6 Form of Indemnification Agreement for Officers and Directors. (12)
10.7 Alexion’s 2000 Stock Option Plan, as amended.(13)**
10.8 Alexion’s 1992 Outside Directors Stock Option Plan, as amended.(14)**
10.9 Alexion’s Amended and Restated 2004 Incentive Plan.(15)**
10.10 License Agreement dated March 27, 1996 between Alexion and Medical Research Council.(16)+
90
10.11 Master Manufacturing and Supply Agreement, dated December 16, 2014 between Alexion Pharma
International Trading, Alexion Pharmaceuticals, Inc., Lonza Group AG, Lonza Biologics Tuas PTE LTD and Lonza
Sales AG. (22)+
10.12 Form of 2004 Incentive Plan Stock Option Agreement for Directors.(18)**
10.13 Form of 2004 Incentive Plan Stock Option Agreement for Executive Officers (Form A).(19)**
10.14 Form of 2004 Incentive Plan Stock Option Agreement for Executive Officers (Form B).(19)**
10.15 Form of 2004 Incentive Plan Restricted Stock Award Agreement for Executive Officers (Form A).(20)**
10.16 Form of 2004 Incentive Plan Stock Option Agreement (Incentive Stock Options).(17)
10.17 Form of 2004 Incentive Plan Stock Option Agreement (Nonqualified Stock Options).(17)
10.18 Form of 2004 Incentive Plan Restricted Stock Award Agreement.(17)
10.19 Form of 2004 Incentive Plan Restricted Stock Unit Award Agreement.(21)
10.20 Form of 2004 Incentive Plan Stock Option Agreement for Participants in France.(17)**
10.21 Form of 2004 Incentive Plan Restricted Stock Unit Agreement for Participants in France.(17)**
10.22 Amended and Restated Credit Agreement, dated as of June 7, 2018, by and among Alexion
Pharmaceuticals, Inc., as administrative borrower, the subsidiary borrowers party thereto, the lenders and
other financial institutions party thereto and Bank of America, N.A., as administrative agent.(27)
10.23 Alexion Pharmaceuticals, Inc. 2017 Incentive Plan (25)**
10.24 Form of 2017 Incentive Plan Restricted Stock Unit Agreement.(26)**
10.25 Form of 2017 Incentive Plan Nonqualified Stock Option Agreement.(26)**
10.26 Form of 2017 Incentive Plan Performance Stock Unit Agreement (TSR.)(26)**
10.27 Form of 2017 Incentive Plan Performance Stock Unit Agreement (R&D Units.)(26)**
10.28 Alexion Pharmaceuticals, Inc. 2017 Incentive Plan Rules for Awards Granted to Participants in France.
(26)**
10.29 Form of 2017 Incentive Plan Restricted Stock Unit Agreement for French Participants.(26)**
10.30 Form of 2017 Incentive Plan Global Stock Option Agreement.(26)**
10.31 Alexion Pharmaceuticals, Inc. Amended and Restated 2015 Employee Stock Purchase Plan.(4)**
10.32 Form of 2017 Incentive Plan Restricted Stock Unit Agreement for Non-U.S. Participants.(26)**
21.1 Subsidiaries of Alexion Pharmaceuticals, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, an Independent Registered Public Accounting Firm
31.1 Certificate of Chief Executive Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant
to Section 302 Sarbanes Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer pursuant to Exchange Act Rules 13a-14 and 15d-14, as adopted pursuant
to Section 302 of Sarbanes Oxley Act of 2002.
32.1 Certificate of Chief Executive Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act.
32.2 Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes Oxley Act.
101 The following materials from the Alexion Pharmaceuticals, Inc. Annual Report on Form 10-K for the year
ended December 31, 2018 formatted in eXtensible Business Reporting Language (XBRL): (i) the
Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Income, (iii)
the Consolidated Balance Sheets, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v)
the Consolidated Statements of Cash Flows and (vi) related notes, tagged as blocks of text.
_____________________
(1)
(2)
(3)
Incorporated by reference to our Report on Form 8-K, filed on February 3, 2011.
Incorporated by reference to our Report on Form 8-K, filed on January 4, 2012.
Incorporated by reference to our Report on Form 8-K, filed on February 7, 2012.
91
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
Incorporated by reference to our Quarterly Report on Form 10-Q, for the quarter ended September 30, 2018.
Incorporated by reference to our Report on Form 8-K, filed on May 6, 2015.
Incorporated by reference to our Registration Statement on Form S-3 (Reg. No. 333-128085), filed on September 2,
2005.
Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.
Incorporated by reference to our Report on Form 8-K, filed on January 8, 2016.
Incorporated by reference to our Registration Statement on Form S-1 (Reg. No. 333-00202).
Incorporated by reference to our Report on Form 8-K, filed on February 16, 2006.
Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Incorporated by reference to our Report on Form 8-K, filed on September 17, 2010.
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended January 31, 2004.
Incorporated by reference to our Registration Statement on Form S-8 (Reg. No. 333-71879) filed on February 5, 1999.
Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
Incorporated by reference to our Annual Report on Form 10-K/A for the fiscal year ended July 31, 1996.
Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
Incorporated by reference to our Report on Form 8-K, filed on December 16, 2004.
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended January 31, 2005.
Incorporated by reference to our Report on Form 8-K, filed on March 14, 2005.
Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
Incorporated by reference to our Report on Form 10-K for the fiscal year ended December 31, 2014.
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017.
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.
Incorporated by reference to our Registration Statement on Form S-8 (Reg. No. 333-217905) filed on May 5, 2017.
Incorporated by reference to our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Incorporated by reference to our Report on Form 8-K, filed on June 13, 2018.
+
Confidential treatment was granted for portions of such exhibit.
**
Form 10-K.
Indicates a management contract or compensatory plan or arrangement required to be filed pursuant to Item 15(b) of
Item 15(b) Exhibits
See (a) (3) above.
Item 15(c) Financial Statement Schedules
See (a) (2) above.
Item 16 Form 10-K Summary
Not applicable.
92
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 6, 2019
Date: February 6, 2019
By:
By:
ALEXION PHARMACEUTICALS, INC.
/s/ Ludwig N. Hantson, Ph.D.
Ludwig N. Hantson, Ph.D.
Chief Executive Officer
(principal executive officer)
/s/ Paul J. Clancy
Paul J. Clancy
Executive Vice President and Chief Financial Officer
(principal financial officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Ludwig N. Hantson
Ludwig N. Hantson
/s/ Paul J. Clancy
Paul J. Clancy
/s/ Daniel A. Bazarko
Daniel A. Bazarko, C.P.A.
Chief Executive Officer and Director (principal executive officer)
February 6, 2019
Executive Vice President and Chief Financial Officer (principal
financial officer)
February 6, 2019
Senior Vice President and Chief Accounting Officer (principal
accounting officer)
February 6, 2019
/s/ David R. Brennan
Chairman
David R. Brennan
/s/ Felix J. Baker
Felix J. Baker, Ph.D.
/s/ Christopher J.
Coughlin
Christopher J. Coughlin
/s/ Deborah Dunsire
Deborah Dunsire, M.D.
/s/ Paul A. Friedman
Paul A. Friedman, M.D.
Director
Director
Director
Director
/s/ John T. Mollen
John T. Mollen
Director
/s/ Francois Nader
Francois Nader, M.D.
/s/ Judith A. Reinsdorf
Judith A. Reinsdorf, J.D.
Director
Director
/s/ Andreas Rummelt
Andreas Rummelt, Ph.D.
Director
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
February 6, 2019
Alexion Pharmaceuticals, Inc.
Contents
For the Years Ended December 31, 2018, 2017 and 2016
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page(s)
F-2 to F-3
F-4
F-5
F-6
F-7
F-8 to F-9
F-10 to F-54
F-1
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Alexion Pharmaceuticals, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Alexion Pharmaceuticals, Inc. and its subsidiaries
(the “Company”) as of December 31, 2018 and December 31, 2017 and the related consolidated statements of
operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the
period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial
statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and December 31, 2017 and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting,
included in Management's Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to
express opinions on the Company’s consolidated financial statements and on the Company's internal control over
financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
F-2
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/PricewaterhouseCoopers LLP
Hartford, Connecticut
February 6, 2019
We have served as the Company’s auditor since 2002.
F-3
Alexion Pharmaceuticals, Inc.
Consolidated Balance Sheets
(amounts in millions, except per share amounts)
December 31,
2018
2017
Assets
Current Assets:
Cash and cash equivalents
Marketable securities
Trade accounts receivable, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses
Revolving credit facility
Current portion of long-term debt
Current portion of contingent consideration
Other current liabilities
Total current liabilities
Long-term debt, less current portion
Contingent consideration
Facility lease obligations
Deferred tax liabilities
Other liabilities
Total liabilities
Commitments and contingencies (Note 11)
Stockholders’ Equity:
$
$
$
1,365.5 $
198.3
922.3
472.5
426.4
3,385.0
1,471.5
3,641.3
5,037.4
396.7
13,931.9 $
698.2 $
250.0
93.8
97.6
34.4
1,174.0
2,501.7
183.2
361.0
391.1
155.6
4,766.6
Common stock, $.0001 par value; 290.0 shares authorized; 236.2 and 234.3
shares issued at 2018 and 2017, respectively
Additional paid-in capital
Treasury stock, at cost, 12.7 and 12.0 shares at 2018 and 2017, respectively
Accumulated other comprehensive loss
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
8,539.1
(1,689.9)
(9.7)
2,325.8
9,165.3
$
13,931.9 $
The accompanying notes are an integral part of these consolidated financial statements.
F-4
584.4
889.7
726.5
460.4
292.9
2,953.9
1,325.4
3,954.4
5,037.4
312.2
13,583.3
710.2
—
167.4
—
74.9
952.5
2,720.7
168.9
342.9
365.0
140.2
4,690.2
—
8,290.3
(1,604.9)
(34.4)
2,242.1
8,893.1
13,583.3
Alexion Pharmaceuticals, Inc.
Consolidated Statements of Operations
(amounts in millions, except per share amounts)
Net product sales
Other revenue
Total revenues
Cost of sales
Operating expenses:
Research and development
Selling, general and administrative
Acquired in-process research and development
Amortization of purchased intangible assets
Change in fair value of contingent consideration
Acquisition-related costs
Restructuring expenses
Impairment of intangible assets
Total operating expenses
Operating income
Other income and expense:
Investment income
Interest expense
Other income and (expense)
Income before income taxes
Income tax expense
Net income
Earnings per common share
Basic
Diluted
Shares used in computing earnings per common share
Basic
Diluted
Year Ended December 31,
2018
2017
2016
$
4,130.1 $
1.1
4,131.2
374.3
3,549.5 $
1.6
3,551.1
454.2
730.4
1,111.8
1,183.0
320.1
116.5
—
25.5
—
3,487.3
269.6
878.4
1,094.4
—
320.1
41.0
—
104.6
31.0
2,469.5
627.4
65.3
(98.2)
5.5
242.2
164.6
77.6 $
0.35 $
0.35 $
18.5
(98.4)
0.3
547.8
104.5
443.3 $
1.98 $
1.97 $
222.7
224.5
223.9
225.4
$
$
$
3,081.7
2.4
3,084.1
258.3
757.2
953.0
—
322.2
35.7
2.3
3.0
85.0
2,158.4
667.4
10.9
(96.9)
(5.2)
576.2
176.8
399.4
1.78
1.76
224.3
226.3
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Alexion Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive Income
(amounts in millions)
Net income
Other comprehensive income (loss), net of tax:
Foreign currency translation
Unrealized (losses) gains on debt securities
Unrealized gains on pension obligation
Unrealized gains (losses) on hedging activities, net of tax of
$7.3, $(59.0) and $(0.2), respectively
Other comprehensive income (loss), net of tax
Comprehensive income
$
102.3 $
Year Ended December 31,
2018
2017
2016
$
77.6 $
443.3 $
399.4
(0.5)
(0.5)
2.2
23.5
24.7
8.4
0.6
1.9
(105.8)
(94.9)
348.4 $
(4.3)
0.4
2.9
(0.8)
(1.8)
397.6
The accompanying notes are an integral part of these consolidated financial statements.
F-6
.
c
n
I
,
s
l
a
c
i
t
u
e
c
a
m
r
a
h
P
n
o
i
x
e
A
l
y
t
i
u
q
E
l
’
s
r
e
d
o
h
k
c
o
t
S
n
i
s
e
g
n
a
h
C
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C
)
s
n
o
i
l
l
i
m
n
i
s
t
n
u
o
m
a
(
6
.
8
5
2
,
8
$
4
.
0
8
1
,
1
$
3
.
2
6
$
)
7
.
0
1
7
(
$
)
6
.
0
3
4
(
—
1
.
7
3
3
.
3
9
1
4
.
9
9
3
)
8
.
1
(
8
.
7
3
2
—
—
—
—
—
4
.
9
9
3
8
.
7
3
2
—
—
—
—
—
)
8
.
1
(
—
—
—
—
—
—
—
)
6
.
0
3
4
(
)
6
.
3
6
4
(
—
9
.
5
8
4
.
7
4
2
3
.
3
4
4
)
9
.
4
9
(
)
8
.
8
1
(
—
—
—
—
—
)
8
.
8
1
(
3
.
3
4
4
—
—
—
—
—
—
)
9
.
4
9
(
—
—
—
—
—
—
)
6
.
3
6
4
(
8
.
3
9
6
,
8
$
6
.
7
1
8
,
1
$
5
.
0
6
$
)
3
.
1
4
1
,
1
(
$
9
.
4
1
.
3
—
—
—
—
—
—
0
.
8
0
.
4
—
—
—
—
—
—
l
a
t
o
T
l
’
s
r
e
d
o
h
k
c
o
t
S
y
t
i
u
q
E
i
d
e
n
a
t
e
R
i
s
g
n
n
r
a
E
l
d
e
t
a
u
m
u
c
c
A
r
e
h
t
O
e
v
i
s
n
e
h
e
r
p
m
o
C
)
s
s
o
L
(
e
m
o
c
n
I
k
c
o
t
S
y
r
u
s
a
e
r
T
t
s
o
C
t
a
t
n
u
o
m
A
s
e
r
a
h
S
l
a
n
o
i
t
i
d
d
A
n
I
-
i
d
a
P
l
a
t
i
p
a
C
.
6
6
2
7
,
7
$
—
—
1
.
7
3
3
.
3
9
1
—
—
—
0
.
7
5
9
7
,
$
—
—
9
.
5
8
4
.
7
4
2
—
—
—
)
0
.
5
8
(
)
3
.
0
(
6
.
7
4
5
.
1
0
2
6
.
7
7
7
.
4
2
1
.
6
—
—
—
—
1
.
6
6
.
7
7
—
—
—
—
—
—
7
.
4
2
)
0
.
5
8
(
7
.
0
—
—
—
—
—
—
—
—
—
—
—
—
—
)
3
0
.
(
6
.
7
4
5
.
1
0
2
—
—
—
1
.
3
9
8
,
8
$
1
.
2
4
2
,
2
$
)
4
.
4
3
(
$
)
9
.
4
0
6
,
1
(
$
0
.
2
1
3
.
0
9
2
8
,
$
3
.
5
6
1
,
9
$
8
.
5
2
3
,
2
$
)
7
.
9
(
$
)
9
.
9
8
6
,
1
(
$
7
.
2
1
.
1
9
3
5
,
8
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
k
c
o
t
S
n
o
m
m
o
C
t
n
u
o
m
A
d
e
u
s
s
I
s
e
r
a
h
S
$
.
5
0
3
2
—
6
0
.
8
.
0
—
—
—
—
$
9
.
1
3
2
—
3
1
.
1
.
1
—
—
—
—
$
3
.
4
3
2
—
6
0
.
3
1
.
—
—
—
—
$
.
2
6
3
2
s
n
a
p
l
e
s
a
h
c
r
u
p
k
c
o
t
s
d
n
a
n
o
i
t
p
o
k
c
o
t
s
r
e
d
n
u
k
c
o
t
s
n
o
m
m
o
c
f
o
e
c
n
a
u
s
s
I
k
c
o
t
s
n
o
m
m
o
c
f
o
e
s
a
h
c
r
u
p
e
R
5
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
s
e
c
n
a
a
B
l
k
c
o
t
s
n
o
m
m
o
c
d
e
t
c
i
r
t
s
e
r
f
o
e
c
n
a
u
s
s
I
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
e
r
a
h
S
-
s
s
o
l
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
e
m
o
c
n
i
t
e
N
s
n
a
p
l
e
s
a
h
c
r
u
p
k
c
o
t
s
d
n
a
n
o
i
t
p
o
k
c
o
t
s
r
e
d
n
u
k
c
o
t
s
n
o
m
m
o
c
f
o
e
c
n
a
u
s
s
I
e
c
n
a
d
u
g
i
n
o
i
t
a
s
n
e
p
m
o
c
-
d
e
s
a
b
e
r
a
h
s
w
e
n
f
o
n
o
i
t
p
o
d
A
k
c
o
t
s
n
o
m
m
o
c
f
o
e
s
a
h
c
r
u
p
e
R
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
s
e
c
n
a
a
B
l
k
c
o
t
s
n
o
m
m
o
c
d
e
t
c
i
r
t
s
e
r
f
o
e
c
n
a
u
s
s
I
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
e
r
a
h
S
-
s
s
o
l
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
e
m
o
c
n
i
t
e
N
s
n
a
p
l
e
s
a
h
c
r
u
p
k
c
o
t
s
d
n
a
n
o
i
t
p
o
k
c
o
t
s
r
e
d
n
u
k
c
o
t
s
n
o
m
m
o
c
f
o
e
c
n
a
u
s
s
I
k
c
o
t
s
n
o
m
m
o
c
f
o
e
s
a
h
c
r
u
p
e
R
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
s
e
c
n
a
a
B
l
k
c
o
t
s
n
o
m
m
o
c
d
e
t
c
i
r
t
s
e
r
f
o
e
c
n
a
u
s
s
I
e
s
n
e
p
x
e
n
o
i
t
a
s
n
e
p
m
o
c
d
e
s
a
b
e
r
a
h
S
-
e
m
o
c
n
i
t
e
N
s
d
r
a
d
n
a
t
s
g
n
i
t
n
u
o
c
c
a
w
e
n
f
o
n
o
i
t
p
o
d
A
e
m
o
c
n
i
e
v
i
s
n
e
h
e
r
p
m
o
c
r
e
h
t
O
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
s
e
c
n
a
a
B
l
e
c
n
a
d
u
g
i
x
a
t
y
t
i
t
n
e
a
r
t
n
-
i
w
e
n
f
o
n
o
i
t
p
o
d
A
.
s
t
n
e
m
e
t
a
t
s
l
a
i
c
n
a
n
i
f
d
e
t
a
d
i
l
o
s
n
o
c
e
s
e
h
t
f
o
t
r
a
p
l
a
r
g
e
t
n
i
n
a
e
r
a
s
e
t
o
n
g
n
i
y
n
a
p
m
o
c
c
a
e
h
T
7
F
-
Alexion Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(amounts in millions)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash flows from operating activities:
$
77.6 $
443.3 $
399.4
Year Ended December 31,
2018
2017
2016
Depreciation and amortization
Impairment of assets
Change in fair value of contingent consideration
Payments of contingent consideration
Share-based compensation expense
Non-cash expense for acquired IPR&D
Deferred taxes
Unrealized foreign currency loss (gain)
Unrealized (gain) loss on forward contracts
Unrealized gain on equity investments
Other
Changes in operating assets and liabilities, excluding the effect of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable, accrued expenses and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of available-for-sale debt securities
Proceeds from maturity or sale of available-for-sale debt securities
Purchases of mutual funds related to nonqualified deferred compensation plan
Proceeds from sale of mutual funds related to nonqualified deferred compensation
plan
Purchases of property, plant and equipment
Purchases of other investments
Other
Net cash provided by (used in) investing activities
Cash flows from financing activities:
405.3
13.5
116.5
—
203.0
64.6
32.9
4.8
(15.8)
(40.2)
(2.0)
(208.8)
(14.7)
(155.6)
(55.1)
426.0
496.7
118.8
41.0
(18.0)
243.1
—
(45.9)
(9.4)
11.1
—
5.4
396.4
85.0
35.7
—
192.3
—
104.3
6.9
(3.6)
—
6.5
(55.2)
(88.2)
(137.2)
110.1
1,115.6
(122.1)
(83.8)
(97.5)
166.8
1,086.3
(782.7)
1,473.5
(1,648.8)
1,089.9
(12.1)
(9.9)
12.3
(213.0)
(10.3)
2.8
470.5
7.7
(357.3)
—
0.1
(918.3)
(667.1)
717.8
(8.5)
4.0
(332.7)
—
(1.1)
(287.6)
Proceeds from revolving credit facility
Payments on term loan
Repurchase of common stock
Net proceeds from issuance of stock under share-based compensation arrangements
Payments of contingent consideration
Repayment of development-related grants
Other
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents and restricted cash
Net change in cash and cash equivalents and restricted cash
Cash and cash equivalents and restricted cash at beginning of period
Cash and cash equivalents and restricted cash at end of period
250.0
(293.8)
(85.0)
47.3
—
—
(20.9)
(102.4)
(11.2)
782.9
584.4
$ 1,367.3 $
—
(175.0)
(463.6)
85.9
(7.0)
(26.0)
(10.9)
(596.6)
17.7
(381.6)
966.0
584.4 $
—
(375.0)
(430.6)
37.1
(60.0)
—
(7.7)
(836.2)
(6.6)
(44.1)
1,010.1
966.0
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Alexion Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(amounts in millions)
Supplemental cash flow disclosures:
Cash paid for interest (net of amounts capitalized)
Cash paid for income taxes
Supplemental cash flow disclosures from investing and financing activities:
Capitalization of construction costs related to facility lease obligations
Accrued expenses for purchases of property, plant and equipment and intangible
assets
Year Ended December 31,
2018
2017
2016
$
$
$
$
90.9 $
163.9 $
95.3 $
162.1 $
79.6
37.7
44.8 $
121.8 $
103.1
21.4 $
34.7 $
23.5
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
1.
Business Overview and Summary of Significant Accounting Policies
Business
Alexion Pharmaceuticals, Inc. (Alexion, the Company, we, our or us) is a global biopharmaceutical company focused
on serving patients and families affected by rare diseases through the innovation, development and commercialization
of life-changing therapies.
We are the global leader in complement inhibition and have developed and commercialize the only two approved
complement inhibitors to treat patients with paroxysmal nocturnal hemoglobinuria (PNH), as well as the first and only
approved complement inhibitor to treat atypical hemolytic uremic syndrome (aHUS) and anti-acetylcholine receptor
(AchR) antibody-positive generalized myasthenia gravis (gMG). In addition, Alexion has two highly innovative enzyme
replacement therapies for patients with life-threatening and ultra-rare metabolic disorders, hypophosphatasia (HPP) and
lysosomal acid lipase deficiency (LAL-D).
As the leader in complement biology for over 20 years, Alexion focuses its research efforts on novel molecules
and targets in the complement cascade, and its development efforts on the core therapeutic areas of hematology,
nephrology, neurology, and metabolic disorders. We were incorporated in 1992 under the laws of the State of Delaware.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Alexion and its wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. For each of our business
combinations, all of the assets acquired and liabilities assumed were recorded at their respective fair values as of the
date of acquisition, and their results of operations are included in the consolidated financial statements from the date
of acquisition.
Dividend Policy
We have never paid a cash dividend on shares of our stock. We currently intend to retain our earnings to finance
future operations and do not anticipate paying any cash dividends on our stock in the foreseeable future.
Critical Accounting Estimates
The preparation of our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the U.S., requires us to make estimates, judgments and assumptions that may affect
the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities
in our financial statements. We believe the most complex judgments result primarily from the need to make estimates
about the effects of matters that are inherently uncertain and are significant to our consolidated financial statements.
We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the
results of which form the basis for making judgments about the carrying values of assets and liabilities. We evaluate
our estimates, judgments and assumptions on an ongoing basis. Actual results may differ from these estimates under
different assumptions or conditions.
The most significant areas involving estimates, judgments and assumptions used in the preparation of our
consolidated financial statements are as follows:
• 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.
F-10
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Foreign Currency Translation
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.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost plus accrued interest, which approximates fair value, and include
short-term highly liquid investments with original maturities of three months or less. As of December 31, 2018 and 2017,
cash equivalents were comprised of money market funds, reverse repurchase agreements, and other debt securities
with maturities less than 90 days from the date of purchase.
Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, accounts
receivable, other assets, accounts payable, accrued expenses and other liabilities approximate fair value due to their
short-term maturities. Our marketable securities are valued based upon pricing of securities with similar investment
characteristics and holdings. Our mutual fund investments and equity securities are valued based on quoted market
prices in active markets with no valuation adjustment. Investments in equity securities of publicly traded companies
which are subject to holding period restrictions are carried at fair value using an option pricing valuation model and
observable market inputs such as the historical volatility of similar companies and risk-free interest rates. Our derivative
financial instruments are measured at fair value using observable market inputs such as forward rates, interest rates,
our own credit risk and our counterparties’ credit risks. Our debt obligations are carried at historical cost, which
approximates fair value. Our contingent consideration liabilities related to our acquisitions are valued based on various
estimates, including probability of success, estimated revenues, discount rates and amount of time until the conditions
of the milestone payments are met.
Marketable Securities
We invest our excess cash balances in marketable securities of highly rated financial institutions and investment-
grade debt instruments. We seek to diversify our investments and limit the amount of investment concentrations for
individual institutions, maturities and investment types. We classify marketable debt securities as available-for-sale
and, accordingly, record such securities at fair value. We classify these securities as current assets as these investments
are intended to be available to the Company for use in funding current operations.
Unrealized gains and losses on our marketable debt securities that are deemed temporary are included in
accumulated other comprehensive income (loss) as a separate component of stockholders’ equity. If any adjustment
to fair value reflects a significant decline in the value of the security, we evaluate the extent to which the decline is
determined to be other-than-temporary and would mark the security to market through a charge to our consolidated
statement of operations. Credit losses are identified when we do not expect to receive cash flows sufficient to recover
the amortized cost basis of a security. In the event of a credit loss, only the amount associated with the credit loss is
recognized in operating results, with the amount of loss relating to other factors recorded in accumulated other
comprehensive income (loss).
We sponsor a nonqualified deferred compensation plan which allows certain highly-compensated employees to
elect to defer income to future periods. Participants in the plan earn a return on their deferrals based on several
investments options, which mirror returns on underlying mutual fund investments. We choose to invest in the underlying
mutual fund investments to offset the liability associated with our nonqualified deferred compensation plan. These
mutual fund investments are valued at net asset value per share and are carried at fair value with gains and losses
included in investment income. The changes in the underlying liability to the employee are recorded in operating
expenses.
F-11
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Accounts Receivable
Our standard credit terms vary based on the country of sale and range from 30 to 120 days and all arrangements
are payable within one year of the transfer of the product. Our consolidated average days’ sales outstanding ranges
from 60 to 70 days. We evaluate the creditworthiness of customers on a regular basis. The length of time from sale
to receipt of payment in certain countries exceeds our credit terms. In countries in which collections from customers
extend beyond normal payment terms, we seek to collect interest. We record interest on customer receivables as
interest income when collected. Subsequent adjustments for further declines in credit rating are recorded as bad debt
expense as a component of selling, general and administrative expense. We also use judgments as to our ability to
collect outstanding receivables and provide allowances for the portion of receivables if and when collection becomes
doubtful, and we also assess on an ongoing basis whether collectibility is probable at the time of sale. As of December 31,
2018 and 2017, allowances on receivables were not material.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk are limited to cash
equivalents, marketable securities, accounts receivable and our foreign exchange derivative contracts. We invest our
cash reserves in money market funds or high-quality marketable debt 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.
At December 31, 2018, three customers accounted for 48.7% of the accounts receivable balance, with these
individual customers ranging from 14.0% to 19.1% of the accounts receivable balance. At December 31, 2017, four
customers accounted for 57.7% of the accounts receivable balance, with these individual customers ranging from 10.2%
to 18.9% of the accounts receivable balance.
For the year ended December 31, 2018, four customers accounted for 50.3% of our product sales, with these
individual customers ranging from 10.0% to 16.4% of our product sales. For the year ended December 31, 2017, three
customers accounted for 37% of our product sales, with these individual customers ranging from 10.8% to 15.0% of
our product sales. For the year ended December 31, 2016, three customers accounted for 36.7% of our product sales,
with these individual customers ranging from 10.0% to 16.0% of our product sales. No other customers accounted for
more than 10.0% of accounts receivable or net product sales.
We continue to monitor economic conditions, including volatility associated with international economies and the
associated impacts on the financial markets and our business. Substantially all of our accounts receivable are due
from wholesale distributors, public hospitals and other government entities. We monitor the financial performance of
our customers so that we can appropriately respond to changes in their credit worthiness. We can operate in certain
jurisdictions where weakness in economic conditions can result in extended collection periods. To date, we have not
experienced any significant losses with respect to collection of our accounts receivable.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined in a manner that approximates
average costs.
The components of inventory are as follows:
Raw materials
Work-in-process
Finished goods
December 31,
2018
2017
$
$
31.4 $
90.4
350.7
472.5 $
4.7
148.6
307.1
460.4
F-12
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Capitalization of Inventory Costs
We capitalize inventory produced for commercial sale, which may include costs incurred for certain products
awaiting regulatory approval. We capitalize inventory produced in preparation of product launches sufficient to support
estimated initial market demand. Capitalization of such inventory begins when we have (i) obtained positive results in
clinical trials that we believe are necessary to support regulatory approval, (ii) concluded that uncertainties regarding
regulatory approval have been sufficiently reduced, and (iii) determined that the inventory has probable future economic
benefit. In evaluating whether these conditions have been met, we consider clinical trial results for the underlying product
candidate, results from meetings with regulatory authorities, and the compilation of the regulatory application. If we
are aware of any material risks or contingencies outside of the standard regulatory review and approval process, or if
there are any specific negative issues identified relating to the safety, efficacy, manufacturing, marketing or labeling of
the product that would have a significant negative impact on its future economic benefits, the related inventory would
not be capitalized. We had no inventory capitalized for products awaiting regulatory approval as of December 31, 2018
and 2017.
Products that have been approved by the U.S. Food and Drug Administration (FDA) or other regulatory authorities
are also used in clinical programs to assess the safety and efficacy of the products for usage in diseases that have
not been approved by the FDA or other regulatory authorities. The form of the products utilized for both commercial and
clinical programs is identical and, as a result, the inventory has an “alternative future use” as defined in authoritative
guidance. Raw materials and purchased drug product associated with clinical development programs are included in
inventory and charged to research and development expense when the product enters the research and development
process and no longer can be used for commercial purposes and, therefore, does not have an “alternative future use”.
For products which are under development and have not yet been approved by regulatory authorities, purchased
drug product is charged to research and development expense upon delivery. Delivery occurs when the inventory passes
quality inspection and ownership transfers to us. Nonrefundable advance payments for research and development
activities, including production of purchased drug product, are deferred and capitalized until the goods are delivered.
We also recognize expense for raw materials purchased for developmental purposes when the raw materials pass
quality inspection and we have an obligation to pay for the materials.
Inventory Write-Offs
We analyze our inventory levels to identify inventory that may expire prior to sale, inventory that has a cost basis
in excess of its estimated realizable value, or inventory in excess of expected sales requirements. Although the
manufacturing of our product is subject to strict quality control, certain batches or units of product may no longer meet
quality specifications or may expire, which requires adjustments to our inventory values. We also apply judgment related
to the results of quality tests that we perform throughout the production process, as well as our understanding of
regulatory guidelines, to determine if it is probable that inventory will be saleable. These quality tests are performed
throughout the pre-and post-production process, and we continually gather additional information regarding product
quality for periods after the manufacture date. Our products currently have a maximum estimated life ranging from 36
to 48 months and, based on our sales forecasts, we expect to realize the carrying value of our inventory. In the future,
reduced demand, quality issues or excess supply beyond those anticipated by management may result in a material
adjustment to inventory levels, which would be recorded as an increase to cost of sales.
The determination of whether or not inventory costs will be realizable requires estimates by our management. A
critical input in this determination is future expected inventory requirements based on internal sales forecasts. We then
compare these requirements to the expiry dates of inventory on hand. For inventories that are capitalized in preparation
of product launch, we also consider the expected approval date in assessing realizability. To the extent that inventory
is expected to expire prior to being sold, we will write down the value of inventory.
Derivative Instruments
We record the fair value of derivative instruments as either assets or liabilities on the balance sheet. The accounting
for gains and losses resulting from changes in fair value is dependent on the use of the derivative and whether it is
designated and qualifies for hedge accounting.
All qualifying hedging activities are documented at the inception of the hedge and must meet the definition of
highly effective in offsetting changes to future cash. On a quarterly basis, we perform an assessment to confirm that
outstanding hedges remain highly effective and continue to qualify for hedge accounting. We record the fair value of
the qualifying hedges in other current assets, other assets, other current liabilities and other liabilities. All unrealized
F-13
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
gains and losses on derivatives that are designated and qualify for hedge accounting are reported in other comprehensive
income (loss) and recognized when the underlying hedged transaction affects earnings. When the forecasted transaction
occurs, this amount is reclassified into the consolidated statement of operations and presented in the same financial
statement line item as the hedged item.
Derivative instruments for which hedge accounting is not applied are recorded at fair value in other current assets
and other current liabilities. Unrealized gains and losses resulting from changes in the fair value of these derivatives
are reported in other income and expense.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated on a straight-line basis over the estimated
useful lives of the assets. We estimate economic lives as follows:
• Building and improvements—fifteen to thirty five years
• Machinery and laboratory equipment—five to fifteen years
• Computer hardware and software—three to seven years
• Furniture and office equipment— five to ten years
Leasehold improvements and assets under capital lease arrangements are amortized over the lesser of the asset’s
estimated useful life or the term of the respective lease. Maintenance costs are expensed as incurred.
Construction-in-progress reflects amounts incurred for property, plant, or equipment construction or improvements
that have not been placed in service.
Assets Held for Sale
We classify assets as held for sale when the following criteria are met: i) management, having the authority to
approve the action, commits to a plan to sell the asset, ii) the asset is available for immediate sale in its present
condition subject only to terms that are usual and customary for sales of similar assets, iii) an active program to locate
a buyer and other actions required to complete the plan to sell the asset have been initiated, iv) the sale of the asset
is probable, and transfer of the asset is expected to qualify for recognition as a completed sale, within one year, v) the
asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value, and vi) actions
required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the
plan will be withdrawn. Assets that are classified as held for sale are recorded at the lower of their carrying value or
their fair value less the costs to sell.
In the third quarter 2017, we announced our intention to close the Alexion Rhode Island Manufacturing Facility
(ARIMF). In the fourth quarter 2017, we met the criteria for assets held for sale and reclassified the ARIMF assets from
property, plant and equipment to assets held for sale recorded within prepaid expenses and other current assets. We
subsequently sold ARIMF during the third quarter of 2018.
Manufacturing Facilities
We capitalize costs incurred for the construction of facilities which support commercial manufacturing. We also
capitalize costs related to validation activities which are directly attributable to preparing the facility for its intended
use, including engineering runs and inventory production necessary to obtain approval of the facility from government
regulators for the production of a commercially approved drug. When the facility is substantially complete and ready
for its intended use and regulatory approval for commercial production has been received, we will place the asset in
service.
The production of inventory for preparing the facility for its intended use requires two types of production: engineering
runs which are used for testing purposes only and do not result in saleable inventory, and validation runs which are
used for validating equipment and may result in saleable inventory. The costs associated with inventory produced during
engineering runs and normal production losses during validation runs are capitalized to fixed assets and depreciated
over the asset’s useful life. Saleable inventory produced during the validation process is initially treated as a fixed
asset; however, upon regulatory approval, this inventory is reclassified to inventory and expensed in cost of goods sold
as product is sold, or in research and development expenses as product is utilized in R&D activities. Abnormal production
costs incurred during the validation process are expensed as incurred.
F-14
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Acquisitions
Business combinations are accounted for using the acquisition method of accounting. Under the acquisition
method of accounting, the tangible and intangible assets acquired and the liabilities assumed are recorded as of the
acquisition date at their respective fair values. We evaluate a business as an integrated set of activities and assets
that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower
costs or other economic benefits and consists of inputs and substantive processes applied to those inputs that have
the ability to contribute to the creation of outputs. If substantially all of the fair value of gross assets acquired is
concentrated in a single asset or group of similar identifiable assets, the assets do not represent a business. In an
acquisition of a business, the excess of the fair value of the consideration transferred over the fair value of the net
assets acquired is recorded as goodwill.
Acquisitions of assets or group of assets that do not meet the definition of a business are accounted for as asset
acquisitions using the cost accumulation method, whereby the cost of the acquisition, including certain transaction
costs, is allocated to the assets acquired on the basis of relative fair values. No goodwill is recognized in an asset
acquisition. Intangible assets that are acquired in an asset acquisition for use in research and development activities
which have an alternative future use are capitalized as in-process research and development (IPR&D). Acquired IPR&D
which has no alternative future use is recognized as research and development expense at acquisition. Contingent
milestone payments associated with asset acquisitions are recognized when probable and estimable. These amounts
are expensed to research and development if there is no alternative future use associated with the asset, or capitalized
as an intangible asset if alternative future use of the asset exists.
Our consolidated financial statements include the results of operations of an acquired business after the completion
of the acquisition.
Intangible Assets
Our intangible assets generally consist of licensing rights, patents, purchased technology, acquired IPR&D and
other intangibles. Intangible assets with definite lives are amortized based on their pattern of economic benefit over
their estimated useful lives and reviewed periodically for impairment.
Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or
abandonment of the associated research and development efforts. During the period the assets are considered
indefinite-lived, they will not be amortized but will be tested for impairment. Impairment testing is performed at least
annually or when a triggering event occurs that could indicate a potential impairment. If and when development is
complete, which generally occurs when regulatory approval to market a product is obtained, the associated assets are
deemed finite-lived and are amortized over a period that best reflects the economic benefits provided by these assets.
Goodwill
Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination
and is not amortized. Goodwill is subject to impairment testing at least annually or when a triggering event occurs that
could indicate a potential impairment. We are organized and operate as a single reporting unit and therefore the goodwill
impairment test is performed using our overall market value, as determined by our traded share price, compared to our
book value of net assets.
Impairment of Long-Lived Assets
Our long-lived assets are primarily comprised of intangible assets and property, plant and equipment. We evaluate
our finite-lived intangible assets and property, plant and equipment, for impairment whenever events or changes in
circumstances indicate the carrying value of an asset or group of assets is not recoverable. If these circumstances
exist, recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset
group to future undiscounted net cash flows expected to be generated by the asset group. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
In addition, indefinite-lived intangible assets, comprised of IPR&D, are reviewed for impairment annually and
whenever events or changes in circumstances indicate that it is more likely than not that the asset is impaired by
comparing the fair value to the carrying value of the asset. In the second quarter 2017, we recognized an impairment
charge of $31.0 related to our SBC-103 acquired in-process research and development asset due to clinical results.
F-15
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Other Investments
From time to time, we make strategic investments in equity securities of certain biotechnology companies. Our
strategic investment portfolio may include equity securities in publicly traded companies, as well as investments in
companies with securities that are not publicly traded and where fair value is not readily available. These investments
are included in other assets in our consolidated balance sheets.
We have historically recorded our investments in securities that are not publicly traded at cost, less impairments.
As of January 1, 2018, we continue to record these investments at cost, less impairments; however, we also adjust
the investment for any changes resulting from an observable price change in an orderly transaction for identical or
similar investments of the same issuer. We assess relevant transactions that occur on or before the balance sheet
date to identify observable price changes, and we regularly monitor these investments to evaluate whether there is an
indication that the investment is impaired, based on the implied value of recent company financings, public market
prices of comparable companies, and general market conditions.
Our investments in equity securities in publicly traded companies which are unrestricted are regularly measured
and carried at fair value and classified as Level 1 equity securities within the fair value hierarchy. Investments in publicly
traded companies which are subject to holding period restrictions are carried at fair value using an option pricing
valuation model and classified as Level 2 equity securities within the fair value hierarchy. The most significant
assumptions within the option pricing valuation model are the term of the restrictions and the stock price volatility,
which is based upon the historical volatility of similar companies. We also use a constant maturity risk-free interest
rate to match the remaining term of the restrictions on such investments.
Contingent Consideration
We record contingent consideration resulting from a business combination at fair value on the acquisition date.
On a quarterly basis, we revalue these obligations and record increases or decreases in their fair value as an adjustment
to operating earnings. Changes to contingent consideration obligations can result from adjustments to discount rates,
accretion of the liability due to the passage of time, changes in our estimates of the likelihood or timing of achieving
development or commercial milestones, changes in the probability of certain clinical events or changes in the assumed
probability associated with regulatory approval.
Contingent Liabilities
We are currently involved in various claims 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 (and our offers of settlement), we may
reassess the potential liability related to these matters and may revise these estimates (and these revisions may be
material).
Treasury Stock
Treasury stock is accounted for using the cost method, with the purchase price of the common stock recorded
separately as a deduction from stockholders’ equity.
Revenue Recognition
In May 2014, the FASB issued a comprehensive new standard which amends revenue recognition principles. We
adopted the new standard on January 1, 2018 by applying the modified retrospective method to all contracts that were
not completed as of that date. Under the new guidance, revenue is recognized when a customer obtains control of
promised goods or services, in an amount that reflects the consideration expected to be received in exchange for those
goods or services. Revenue is recognized through a five-step process: (i) identify the contract(s) with a customer; (ii)
identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction
price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation
is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect
the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception,
the Company assesses the goods or services promised within each contract, and determines those that are performance
F-16
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
obligations. Revenue is recognized for the applicable performance element when each distinct performance obligation
is satisfied.
While results for reporting periods beginning after January 1, 2018 are presented under the new guidance, prior
period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior
period. The adoption of the new standard did not significantly change our accounting policies.
Nature of Products
Our principal source of revenue is product sales. Our contracts with customers generally contain a single
performance obligation and we recognize revenue from product sales when we have satisfied our performance
obligation by transferring control of the product to our customers. Control of the product generally transfers to
the customer upon delivery. In certain countries, we sell to distributors on a consignment basis and record
revenue when control of the product transfers to the customer upon sale to the end user.
Our customers are primarily comprised of distributors, pharmacies, hospitals, hospital buying groups, and other
healthcare providers. In some cases, we may also sell to governments and government agencies. In addition
to sales in countries where our products are commercially available, we have also recorded revenue on sales
for patients receiving treatment through named-patient programs. The relevant authorities or institutions in
those countries have agreed to reimburse for product sold on a named-patient basis where our products have
not received final approval for commercial sale.
Revenue is recognized at the amount to which we expect to be entitled in exchange for the sale of our products.
This amount includes both fixed and variable consideration and excludes amounts that are collected from
customers and remitted to governmental authorities, such as value-added taxes in foreign jurisdictions. Shipping
and handling costs associated with outbound freight after control of a product has transferred to our customers
are accounted for as a fulfillment cost and are included in operating expenses. The cost for any shipping and
handling activities (including customs clearance activities) associated with transactions for which revenue has
been recognized are accrued if not completed before the respective period end.
The timing between the recognition of revenue for product sales and the receipt of payment is not significant.
Our standard credit terms, which vary based on the country of sale, range from 30 to 120 days and all
arrangements are payable within one year of the transfer of the product. We do not assess whether a contract
has a significant financing component if the expectation at contract inception is such that the period between
the transfer of the promised good to the customer and receipt of payment will be one year or less.
Variable Consideration
We pay distribution fees to our distributors and offer rebates and/or discounts, or enter into volume-based
reimbursement arrangements with certain customers. We reduce the transaction price on our sales for these
amounts. For variable amounts, we estimate the amount of consideration to which we expect to be entitled
based on all available historic, current and forecast information. We primarily use the expected value method
to estimate variable payments and, in limited circumstances, will apply the most likely method based on the
type of variable consideration and what method better predicts the amount of consideration we expect to be
entitled to. Consideration that is received from a customer that we expect will need to be refunded in the future
is recorded as a refund liability to the customer within accrued expenses. Actual amounts of consideration
ultimately received or refunded may differ from our estimates. If actual results in the future vary from our
estimates, we adjust these estimates, which would affect net product sales and earnings in the period such
variances become known.
Variability in the transaction price for our products pursuant to our contracts with customers primarily arises
from the following:
Discounts and Rebates: We offer discounts and rebates to certain distributors and customers under our
arrangements. In many cases, these amounts are fixed at the time of sale and the transaction price is reduced
accordingly. We also provide for rebates under certain governmental programs, including Medicaid in the U.S.
and other programs outside the U.S., which are payable based on actual claim data. We estimate these rebates
based on an analysis of historical claim patterns and estimates of customer mix to determine which sales will
be subject to rebates and the amount of such rebates. We update our estimates and assumptions each period
and record any necessary adjustments, which may have an impact on revenue in the period in which the
F-17
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
adjustment is made. Generally, the length of time between product sale and the processing and reporting of
the rebates is three to six months.
Volume-Based Arrangements: We have entered into volume-based arrangements with governments in certain
countries and other customers in which reimbursement is limited to a contractual amount. Under this type of
arrangement, amounts billed in excess of the contractual limitation are repaid to the customer as a rebate.
We estimate incremental discounts resulting from these contractual limitations, based on forecasted sales
during the limitation period, and we apply the discount percentage to product shipments as a reduction of
revenue. Our calculations related to these arrangements require estimation of sales during the limitation period,
and adjustments in these estimates may have a material impact in the period in which these estimates change.
Distribution & Other Fees: We pay distribution and other fees to certain customers in connection with the sales
of our products. We record distribution and other fees paid to our customers as a reduction of revenue, unless
the payment is for a distinct good or service from the customer and we can reasonably estimate the fair value
of the goods or services received. If both conditions are met, we record the consideration paid to the customer
as an operating expense. These costs are typically known at the time of sale, resulting in minimal adjustments
subsequent to the period of sale.
Product Returns: Our contracts with customers generally provide for returns only if the product is damaged or
defective upon delivery. We assess our sales transactions and arrangements with customers and monitor
inventory within our sales channels to determine whether a provision for returns is warranted and a resulting
adjustment to the transaction price is necessary. This assessment is based on historical experience and
assumptions as of the date of sale and changes in these estimates could have an impact in the period in which
the change occurs. Because of factors such as the price of our products, the limited number of patients, the
short period from product sale to patient infusion and limited contractual return rights, our customers often
carry limited inventory.
The amount of variable consideration included in the transaction price is constrained by the amount that is
probable will not result in a significant reversal of revenue. We consider our experience with similar transactions
and expectations regarding the contract in estimating the amount of variable consideration to which we expect
to be entitled, and determining whether the estimated variable consideration should be constrained. We do
not have any material constraints on the variable consideration included within the transaction price of our
current revenue arrangements.
See Note 19 “Segment Information” for a summary of revenue from contracts with customers by product and
geographical region.
Contract Balances and Receivables
Contract liabilities relate to consideration received and/or billed for goods that have not been delivered to the
customer and for which the performance obligation has not yet been completed. These amounts are included within
other current liabilities in the consolidated statements of operations.
The following table provides information about receivables and contract liabilities from our contracts with
customers.
December 31, 2018
$
$
922.3 $
3.4 $
December 31, 2017
726.5
15.9
Receivables, which are included in "Trade accounts receivable, net"
Contract liabilities, which are included in "Other current liabilities"
F-18
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Research and Development Expenses
Research and development expenses are comprised of costs incurred in performing research and development
activities including payroll and benefits, preclinical, clinical trial and related clinical manufacturing costs, manufacturing
development and scale-up costs, product development and regulatory costs, contract services and other outside
contractor costs, research license fees, depreciation and amortization of lab facilities, and lab supplies. These costs
are expensed as incurred. We accrue costs for clinical trial activities based upon estimates of the services received
and related expenses incurred that have yet to be invoiced by the contract research organizations, clinical study sites,
laboratories, consultants, or other clinical trial vendors that perform the activities.
Share-Based Compensation
We have two share-based compensation plans pursuant to which awards are currently being made: (i) the 2017
Incentive Plan (2017 Plan) and (ii) the 2015 Employee Stock Purchase Plan (ESPP). The 2017 Plan replaced the Amended
& Restated 2004 Incentive Plan (2004 Plan), effective May 10, 2017. Under the 2017 Plan, restricted stock, restricted
stock units, stock options and other stock-related awards may be granted to our directors, officers, employees and
consultants or advisors of the Company or any subsidiary. Under the ESPP, eligible employees can purchase shares of
common stock at a discount semi-annually through payroll deductions. To date, share-based compensation issued under
the plans consists of incentive and non-qualified stock options, restricted stock and restricted stock units, including
restricted stock units with market and non-market performance conditions, and shares issued under our ESPP.
Compensation expense for our share-based awards is recognized based on the estimated fair value of the awards
on the grant date. Compensation expense reflects an estimate of the number of awards expected to vest and is primarily
recognized on a straight-line basis over the requisite service period of the individual grants, which typically equals the
vesting period. Compensation expense for awards with performance conditions is recognized using the graded-vesting
method.
Our estimates of employee stock option values rely on estimates of factors we input into the Black-Scholes model.
The key factors involve an estimate of future uncertain events. Significant assumptions include the use of historical
volatility to determine the expected stock price volatility. We also estimate expected term until exercise and the reduction
in the expense from expected forfeitures. We currently use historical exercise and cancellation patterns as our best
estimate of future estimated life.
For our non-market performance-based awards, we estimate the anticipated achievement of the performance
targets, including forecasting the achievement of future financial targets. These estimates are revised periodically based
on the probability of achieving the performance targets and adjustments are made throughout the performance period
as necessary. We use payout simulation models to estimate the grant date fair value of awards with market-based
performance conditions. The payout simulation models assume volatility of our common stock and the common stock
of a comparator group of companies, as well as correlations of returns of the price of our common stock and the
common stock prices of the comparator group.
The purchase price of common stock under our ESPP is equal to 85.0% of the lower of (i) the market value per
share of the common stock on the first business day of an offering period or (ii) the market value per share of the
common stock on the purchase date. The fair value of the discounted purchases made under our ESPP is calculated
using the Black-Scholes model. The fair value of the look-back provision plus the 15.0% discount is recognized as
compensation expense over the 6 month purchase period.
F-19
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Restructuring and restructuring related expenses
We record liabilities associated with one-time employee termination benefits and exit or disposal activities in the
period in which the liability is incurred. One-time employee benefits are incurred when communicated to employees and
where detailed action plans have been approved. Costs for one-time termination benefits in which the employee is
required to render service until termination in order to receive benefits are recognized ratably over the service period.
For existing benefit arrangements, employee termination costs are accrued when the exit or disposal cost are probable
and estimable.
Restructuring related expenses include accelerated depreciation costs and impairment charges associated with
assets impacted by a restructuring exit activity. Accelerated depreciation costs represent the difference between the
depreciation expense recognized over the revised useful life of the asset, based upon the anticipated date an impacted
site closure and the depreciation expense as determined using the useful life prior to the restructuring activities.
Earnings Per Common Share
Basic earnings per common share (EPS) is computed by dividing net income by the weighted-average number of
shares of common stock outstanding. For purposes of calculating diluted EPS, the denominator reflects the potential
dilution that could occur if stock options, unvested restricted stock units or other contracts to issue common stock
were exercised or converted into common stock, using the treasury stock method.
The following table summarizes the calculation of basic and diluted EPS for years ended December 31, 2018,
2017 and 2016:
Year Ended December 31,
2018
2017
2016
Net income used for basic and diluted calculation
$
77.6 $
443.3 $
Shares used in computing earnings per common share—basic
222.7
223.9
Weighted-average effect of dilutive securities:
Stock awards
Shares used in computing earnings per common share—diluted
Earnings per common share:
Basic
Diluted
1.8
224.5
1.5
225.4
$
$
0.35 $
0.35 $
1.98 $
1.97 $
399.4
224.3
2.0
226.3
1.78
1.76
We exclude from EPS the weighted-average number of securities whose effect is anti-dilutive. Excluded from the
calculation of EPS for the years ended December 31, 2018, 2017 and 2016 were 2.8, 4.0, and 4.2 shares of common
stock, respectively, because their effect is anti-dilutive.
Income Taxes
We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial statement carrying amounts and tax basis
of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to
reverse. 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 when it is more likely than not that deferred tax assets will not
be realized.
We recognize the benefit of an uncertain tax position that has been taken or we expect to take on income tax
returns if such tax position is more likely than not to be sustained. The tax benefit recognized in the financial statements
for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of
unrecognized tax benefits is adjusted, as appropriate, for changes in facts and circumstances, such as significant
amendments to existing tax law, new regulations or interpretations by the taxing authorities, or new information obtained
during a tax examination or resolution of an examination. We also accrued for potential interest and penalties related
to unrecognized tax benefits as a component of tax expense.
In December 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted into law. The Tax Act decreased the U.S.
federal corporate tax rate to 21.0%, imposed a minimum tax on foreign earnings related to intangible assets (GILTI), a
F-20
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
one-time transition tax on previously unremitted foreign earnings, and modified the taxation of other income and expense
items. With regard to the GILTI minimum tax, foreign earnings are reduced by the profit attributable to tangible assets
and a deductible allowance of up to 50.0%, subject to annual limitations. We have elected to account for the impact
of the minimum tax in deferred taxes.
Comprehensive Income
Comprehensive income is comprised of net income and other comprehensive income (loss). Other comprehensive
income (loss) includes changes in equity that are excluded from net income, such as changes in pension liabilities,
unrealized gains and losses on marketable debt securities, unrealized gains and losses on hedge contracts and foreign
currency translation adjustments. Certain of these changes in equity are reflected net of tax.
Reclassifications
Certain items in the prior year’s consolidated financial statements have been reclassified to conform to the current
presentation.
New Accounting Pronouncements
In February 2016, the FASB issued a new standard that requires lessees to recognize leases on-balance sheet
and disclose key information about leasing arrangements. The new standard establishes a right-of-use (ROU) model
that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer
than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and
classification of expense recognition in the income statement. The standard is effective on January 1, 2019, with early
adoption permitted. We adopted the new standard on January 1, 2019 and use the effective date as our date of initial
application. In July 2018, the FASB issued an update that provided an additional transition option that allows companies
to continue applying the guidance under the lease standard in effect at that time in the comparative periods presented
in the consolidated financial statements. Companies that elect this option would record a cumulative-effect adjustment
to the opening balance of retained earnings on the date of adoption. We elected this optional transition method. We
also elected the “package of practical expedients”, which permits us not to reassess under the new standard our prior
conclusions about lease identification, lease classification and initial direct costs. We continue to evaluate other practical
expedients available under the standard.
We have substantially completed our assessment of the standard as well as implementation of our leasing software,
including data upload and test procedures. We continue to finalize our calculations, including our discount rate
assumptions, related to the new standard. We are also continuing to establish new processes and internal controls
that may be required to comply with the new lease accounting and disclosure requirements set by the new standard.
We expect the impact of the standard adoption to decrease our assets, liabilities and retained earnings within our
consolidated balance sheet. These decreases will result from the derecognition of our existing assets and financing
obligations related to our build to suit leases offset by the recognition of new ROU assets and liabilities as a result of
the leasing standard.
In June 2016, the FASB issued a new standard intended to improve reporting requirements specific to loans,
receivables and other financial instruments. The new standard requires that credit losses be reported based on expected
losses compared to the current incurred loss model. The new standard also requires enhanced disclosure of credit risk
associated with respective assets. The standard is effective for interim and annual periods beginning after December
15, 2019 with early adoption permitted. We are currently assessing the impact of this standard on our financial condition
and results of operations.
In February 2018, the FASB issued a new standard that would permit entities to make a one time reclassification
from accumulated other comprehensive income (AOCI) to retained earnings for the stranded tax effects resulting from
the newly enacted corporate tax rates under the Tax Cuts and Jobs Act (the Tax Act), that was effective for the year
ended December 31, 2017. The amount of the reclassification is calculated on the basis of the difference between
the historical tax rate and newly enacted tax rate. The standard is effective for interim and annual periods beginning
after December 15, 2018 with early adoption permitted. We are currently assessing the impact of this standard on our
financial condition.
In August 2018, the FASB issued a new standard on a customer's accounting for implementation, set-up, and
other upfront costs incurred in a cloud computing arrangement (CCA). Under the new guidance, customers will assess
if a CCA includes a software license and if a CCA does include a software license, implementation and set-up costs
will be accounted for consistent with existing internal-use software implementation guidance. Implementation costs
F-21
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
associated with a CCA that does not include a software license would be expensed to operating expenses. The standard
also provides classification guidance on these implementation costs as well as additional quantitative and qualitative
disclosures. The standard is effective for public business entities for fiscal years beginning after December 15, 2019,
and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim periods.
Entities can choose to adopt the new guidance prospectively or retrospectively. We are currently assessing the impact
this standard will have on our statement of financial condition and results of operations.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new standard which amends revenue recognition principles and
provides a single set of criteria for revenue recognition among all industries. The new standard provides a five-step
framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. We
adopted the new standard on January 1, 2018.
In January 2017, the FASB issued a new standard that clarifies the definition of a business and determines when
an integrated set of assets and activities is not a business. This framework requires that if substantially all of the fair
value of gross assets acquired or disposed of is concentrated in a single asset or group of similar identifiable assets,
the assets would not represent a business. We adopted the new standard on January 1, 2018 and applied the new
guidance prospectively to transactions occurring after adoption. We anticipate that the adoption of this new standard
will likely result in more transactions, to the extent that such transactions are undertaken by the Company, being
accounted for as asset acquisitions.
In January 2016, the FASB issued a new standard that changes accounting for equity investments, financial
liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. In addition,
the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting
from unrealized losses on available-for-sale debt securities. Equity investments with readily determinable fair values
will be measured at fair value with changes in fair value recognized in net income. Companies have the option to either
measure equity investments without readily determinable fair values at fair value, or at cost adjusted for changes in
observable prices minus impairment. We adopted the new standard on January 1, 2018, and elected to measure our
existing equity investments without readily determinable fair values at cost adjusted for changes in observable prices
minus impairment. In connection with the adoption of the new standard, we reclassified an immaterial amount of
unrealized gains on equity securities from accumulated other comprehensive income to retained earnings. The guidance
related to equity investments without readily determinable fair values was applied prospectively to equity investments
that existed as of the date of adoption. We will assess equity investments without readily determinable fair values for
observable price changes and impairment on a quarterly basis. Refer to Note 7, Other Investments, for further details.
In March 2017, the FASB issued a new standard that improves the presentation of net periodic pension cost and
net periodic post retirement benefit cost by requiring the bifurcation of net benefit cost. Under the new standard, the
service cost component of net benefit cost will be presented with other employee costs in operating expenses, while
other components will be reported separately in other income and expense. We adopted the new standard on January
1, 2018. The adoption of this standard did not have a material impact on our consolidated statements of operations.
In November 2016, the FASB issued a new standard that clarifies how entities should present restricted cash in
the statement of cash flows. Under the new standard, changes in total cash, inclusive of restricted cash, should be
reflected in the statement of cash flows. As a result, transfers between cash and restricted cash will no longer be
reflected as activity within the statement of cash flows. We adopted the new standard on January 1, 2018. The adoption
of this standard did not have a material impact on our consolidated statements of cash flows.
In August 2017, the FASB issued a new standard intended to improve and simplify certain aspects of the accounting
for hedges. The new standard is intended to more closely align hedge accounting with companies’ risk management
strategies, simplify the application of hedge accounting, and increase transparency as to the scope and results of
hedging programs. It also amends the presentation and disclosure requirements and changes how companies assess
effectiveness. The standard is effective for interim and annual periods beginning after December 15, 2018 with early
adoption permitted. We early adopted the new standard in the second quarter 2018 using the modified retrospective
method. The adoption of this standard did not have a material impact on our consolidated financial statements.
F-22
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Impacts of the New Revenue Standard
We adopted the new revenue standard by applying the modified retrospective method to all contracts that were
not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented
under the new standard, while prior period amounts are not adjusted and continue to be reported under the accounting
standards in effect for the prior period. Upon adoption of the new revenue recognition standard, on January 1, 2018,
we reduced our deferred revenue balance by $10.4, with an offsetting increase of $6.0 in retained earnings due to the
cumulative impact of adopting this new standard.
The impact to net product sales and net income for the year ended December 31, 2018 was an increase of $5.3
and $4.8, respectively, as a result of adopting the new standard. The new standard also resulted in a decrease of $17.9
in deferred revenue and an increase of $10.8 in retained earnings as of December 31, 2018. The adoption of the new
revenue standard did not have a material impact on any other balances within the consolidated financial statements
as of and for the year ended December 31, 2018.
2.
Acquisitions
Wilson Therapeutics AB
On May 25, 2018, we completed the acquisition of Wilson Therapeutics AB (publ), a biopharmaceutical company
based in Stockholm, Sweden (Wilson Therapeutics) that develops a novel therapy for patients with rare copper-mediated
disorders, pursuant to a recommended public cash offer of SEK 232 for each share of stock of Wilson Therapeutics.
As a result of the acquisition, we added WTX101 (ALXN1840), a highly innovative drug candidate that is currently in the
early stages of Phase III clinical trials for the treatment of patients with Wilson disease, to our clinical pipeline.
The acquisition of Wilson Therapeutics is accounted for as an asset acquisition, as substantially all of the fair
value of the gross assets acquired is concentrated in a single asset, WTX101.
The following table summarizes the total consideration for the acquisition and the value of assets acquired and
liabilities assumed:
Consideration
Cash paid for acquisition of Wilson Therapeutics outstanding shares
Transaction costs
Total consideration
Assets Acquired and Liabilities Assumed
Cash
In-process research & development
Employee related liabilities
Other assets and liabilities
Total net assets acquired
$
$
$
$
749.3
15.1
764.4
45.1
803.7
(71.4)
(13.0)
764.4
The acquired in-process research and development asset relates to WTX101. Due to the stage of development of
this asset, significant risk remains and it is not yet probable that there is future economic benefit from this asset.
Absent successful clinical results and regulatory approval for the asset, there is no alternative future use associated
with WTX101. Accordingly, the value of this asset of $803.7 was expensed during the year ended December 31, 2018.
Employee related liabilities include the value of outstanding employee equity incentive awards that were accelerated
in connection with the Wilson Therapeutics acquisition that have been settled in cash. Also included in this amount are
employer tax obligations associated with the employee equity incentive awards.
In connection with rights to WTX101 that were previously acquired by Wilson Therapeutics from third parties, we
could be required to pay up to approximately $19.0 if certain development, regulatory and commercial milestones are
met over time, as well as royalties on commercial sales.
F-23
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Syntimmune, Inc.
In September 2018, we entered into a definitive agreement to acquire Syntimmune, Inc. (Syntimmune), a clinical-
stage biotechnology company developing an antibody therapy targeting the neonatal Fc receptor (FcRn). Syntimmune’s
lead candidate, SYNT001 (ALXN1830), is a monoclonal antibody that is designed to inhibit the interaction of FcRn with
Immunoglobulin G (IgG) and IgG immune complexes, and is being studied in Phase 1b/2a trials for the treatment of
IgG-mediated autoimmune diseases. The acquisition of Syntimmune closed in November 2018. Under the terms of the
agreement, Alexion acquired Syntimmune for an upfront cash payment of $400.0, with the potential for additional
milestone-dependent payments of up to $800.0, for a total value of up to $1,200.0.
The acquisition of Syntimmune is accounted for as an asset acquisition, as substantially all of the fair value of
the gross assets acquired is concentrated in a single in-process research and development asset, SYNT001.
The following table summarizes the total consideration for the acquisition and the value of the assets acquired
and liabilities assumed:
Consideration
Upfront payment for acquisition of Syntimmune outstanding shares
Cash acquired
Working capital adjustment
Transaction costs
Total consideration
Assets Acquired and Liabilities Assumed
Cash
In-process research & development
Deferred tax assets
Other assets and liabilities
Total net assets acquired
$
$
$
$
400.0
4.2
6.4
0.9
411.5
4.2
379.3
25.1
2.9
411.5
The acquired in-process research and development asset relates to SYNT001. Due to the stage of development
of this asset, significant risk remains and it is not yet probable that there is future economic benefit from this asset.
Absent successful clinical results and regulatory approval for the asset, there is no alternative future use associated
with SYNT001. Accordingly, the value of this asset of $379.3 was expensed during the year ended December 31, 2018.
3.
Property, Plant and Equipment, Net
A summary of property, plant and equipment is as follows:
Land
Buildings and improvements
Machinery and laboratory equipment
Computer hardware and software
Furniture and office equipment
Construction-in-progress
Less: Accumulated depreciation and amortization
December 31,
2018
December 31,
2017
$
$
9.6 $
520.1
161.7
144.8
27.5
827.1
1,690.8
(219.3)
1,471.5 $
9.6
427.9
159.2
141.5
23.8
723.7
1,485.7
(160.3)
1,325.4
Included in construction-in-progress at December 31, 2017 was $64.1 of costs associated with the construction
of our leased facility in Boston, Massachusetts. Construction of this facility was completed and the building was placed
into service in the second quarter 2018. Additionally, there were costs of $203.9 and $180.6 as of December 31,
2018 and 2017, respectively, included within construction-in-process associated with the construction of a new Lonza
manufacturing facility. Although we do not legally own these premises, we are deemed to be the owner of the buildings
F-24
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
during the construction period based on applicable accounting guidance for build-to-suit leases, see Note 10, “Facility
Lease Obligations” for additional information.
Depreciation and amortization of property, plant and equipment was approximately $77.9, $95.8 and $64.0
recorded within operating expenses on our consolidated statement of operations for the years ended December 31,
2018, 2017 and 2016, respectively. Included within this amount for the years ended December 31, 2018 and 2017
were charges related to the 2017 restructuring activities. See Note 18, “Restructuring and Related Expenses” for
additional information.
At December 31, 2018 and 2017, computer software costs included in property, plant and equipment were $50.3
and $58.2, respectively. Depreciation and amortization expense for capitalized computer software costs was $17.4,
$16.0 and $12.4 for the years ended December 31, 2018, 2017 and 2016, respectively.
In January 2019, we adopted a new lease accounting standard. See Note 1 “Business Overview & Summary of
Significant Accounting Policies” for an overview of the impact this standard will have on our property, plant and equipment
balances in 2019.
4.
Intangible Assets and Goodwill
The following table summarizes the carrying amount of our intangible assets and goodwill, net of accumulated
amortization:
Licensing Rights
Patents
Purchased technology
Other Intangibles
Total
Goodwill
Estimated
Life (years)
5-8
7
6-16
5
December 31, 2018
Cost
Accumulated
Amortization
Net
Cost
December 31, 2017
Accumulated
Amortization
Net
$
39.0 $
10.5
4,710.5
0.4
(29.3) $
(10.5)
(1,079.1)
(0.2)
9.7 $
—
3,631.4
0.2
31.0 $
10.5
4,710.5
0.4
Indefinite $ 5,040.3 $
$ 4,760.4 $ (1,119.1) $ 3,641.3 $ 4,752.4 $
(2.9) $ 5,037.4 $ 5,040.3 $
(28.5) $
(10.5)
(758.9)
(0.1)
2.5
—
3,951.6
0.3
(798.0) $ 3,954.4
(2.9) $ 5,037.4
Amortization expense was $321.1, $320.2 and $322.2 for the years ended December 31, 2018, 2017 and 2016,
respectively. Assuming no changes in the gross cost basis of intangible assets, the total estimated amortization expense
for finite-lived intangible assets is approximately $322.0 for each of the years ending December 31, 2019 through
December 31, 2023.
5.
Marketable Securities
The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of available-for-
sale debt securities by type of security at December 31, 2018 and December 31, 2017 were as follows:
December 31, 2018
Amortized Cost
Gross Unrealized
Holding Gains
Gross Unrealized
Holding Losses
Fair Value
Commercial paper
Corporate bonds
Other government related obligations:
U.S.
Bank certificates of deposit
$
52.1 $
— $
122.9
17.5
33.2
—
—
—
— $
(0.1)
—
—
Total available-for-sale debt securities
$
225.7 $
— $
(0.1) $
52.1
122.8
17.5
33.2
225.6
F-25
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Amortized Cost
Gross Unrealized
Holding Gains
Gross Unrealized
Holding Losses
Fair Value
December 31, 2017
Commercial paper
Repurchase agreements
Corporate bonds
Other government related obligations:
Foreign
Bank certificates of deposit
$
16.0 $
— $
— $
27.0
432.2
426.3
11.8
—
0.5
0.2
—
—
(0.2)
(0.2)
—
Total available-for-sale debt securities
$
913.3 $
0.7 $
(0.4) $
16.0
27.0
432.5
426.3
11.8
913.6
The aggregate fair value of available-for-sale debt securities in an unrealized loss position as of December 31,
2018 and December 31, 2017 was $128.7 and $436.2, respectively. Investments that have been in a continuous
unrealized loss position for more than twelve months was $12.0 as of December 31, 2017. We did not have any
investments in a continuous unrealized loss position for more than twelve months as of December 31, 2018. As of
December 31, 2018 we believe that the cost basis of our available-for-sale debt securities is recoverable.
The fair values of available-for-sale debt securities by classification in the consolidated balance sheet were as
follows:
Cash and cash equivalents
Marketable securities
December 31,
2018
December 31,
2017
$
$
43.8 $
181.8
225.6 $
42.7
870.9
913.6
The fair values of available-for-sale debt securities as of December 31, 2018, by contractual maturity, are
summarized as follows:
Due in one year or less
Due after one year through three years
Due after three years through five years
December 31, 2018
$
$
211.5
14.1
—
225.6
We sponsor a nonqualified deferred compensation plan which allows certain highly-compensated employees to
elect to defer income to future periods. Participants in the plan earn a return on their deferrals based on several
investment options, which mirror returns on underlying mutual fund investments. We choose to invest in the underlying
mutual fund investments to offset the liability associated with our nonqualified deferred compensation plan. These
mutual fund investments are valued at net asset value per share and are carried at fair value with gains and losses
included in investment income. The changes in the underlying liability to the employee are recorded in operating expenses.
As of December 31, 2018 and December 31, 2017, the fair value of these investments was $16.5 and $18.5,
respectively.
We utilize the specific identification method in computing realized gains and losses. Realized gains and losses on
our marketable securities were not material for the years ended December 31, 2018, 2017 and 2016.
F-26
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
6.
Derivative Instruments and Hedging Activities
We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign currency
exchange rates. The exposures result from portions of our revenues, as well as the related receivables, and expenses
that are denominated in currencies other than the U.S. dollar, primarily the Euro and Japanese Yen. We are also exposed
to fluctuations in interest rates on outstanding borrowings under our revolving credit facility and term loan facility. We
manage these exposures within specified guidelines through the use of derivatives. All of our derivative instruments
are utilized for risk management purposes, and we do not use derivatives for speculative trading purposes.
We enter into foreign exchange forward contracts, with durations of up to 60 months, to hedge exposures resulting
from portions of our forecasted revenues, including intercompany revenues, and certain forecasted expenses that are
denominated in currencies other than the U.S. dollar. The purpose of these hedges is to reduce the volatility of exchange
rate fluctuations on our operating results. These hedges are designated as cash flow hedges upon contract inception.
As of December 31, 2018, we had open revenue related foreign exchange forward contracts with notional amounts
totaling $991.1 that qualified for hedge accounting with current contract maturities through December 2020. As of
December 31, 2018, we had open expense related foreign exchange forward contracts with notional amounts totaling
$20.3 that qualified for hedge accounting with contract maturities through September 2022.
To achieve a desired mix of floating and fixed interest rates on our term loan, we enter into interest rate swap
agreements that qualify for and are designated as cash flow hedges. These contracts convert the floating interest rate
on a portion of our debt to a fixed rate, plus a borrowing spread.
The following tables summarize the total interest rate swap contracts executed as of December 31, 2018:
Type of Interest Rate
Swap
Notional
Amount
Floating to Fixed 2,031.3
450.0
Floating to Fixed
Floating to Fixed
300.0
Floating to Fixed 1,100.0
Effective Date
Termination Date
Fixed Interest
Rate or Rate
Range
December 2016 - January 2018 December 2018 - December 2019 0.98% - 1.62%
2.60% - 2.79%
2.08%
2.70% - 2.83%
December 2018
January 2019
December 2019
December 2022
December 2019
December 2022
In January 2019, we entered into an additional interest rate swap agreement with a notional amount of $200.0
that is effective from December 31, 2019 through December 31, 2022 and converts the floating rate on a portion of
our term loan to a fixed rate of 2.37%, plus a borrowing spread.
During the second quarter 2018, we adopted the new standard for accounting for hedges that is designed to
simplify the application of hedge accounting and increase transparency as to the scope and results of hedging programs.
The updated guidance no longer requires the separate measurement and reporting of hedge ineffectiveness. Following
adoption, all unrealized gains and losses on derivatives that are designated and qualify for hedge accounting are reported
in other comprehensive income (loss) and recognized in our consolidated statements of operations when the underlying
hedged transaction affects earnings.
The amount of gains and losses recognized in the consolidated statements of operations for the years ended
December 31, 2018, 2017, and 2016 from foreign exchange and interest rate swap contracts that qualified as cash
flow hedges were as follows:
Financial Statement Line Item in which the
Effects of Cash Flow Hedges are Recorded
Impact of cash flow hedging relationships:
Foreign Exchange Forward Contracts
Interest Rate Swap Contracts
Year ended December 31,
2018
2017
2016
Net Product
Sales
Interest
Expense
Net Product
Sales
Interest
Expense
Net Product
Sales
Interest
Expense
$ 4,130.1 $
(98.2) $ 3,549.5 $
(98.4) $ 3,081.7 $
(96.9)
$
$
(1.8) $
— $
— $
13.6 $
28.9 $
— $
— $
(1.8) $
73.0 $
— $
—
(0.2)
F-27
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
The impact on accumulated other comprehensive income (AOCI) and earnings from foreign exchange and interest
rate swap contracts that qualified as cash flow hedges, for the years ended December 31, 2018, 2017, and 2016
were as follows:
Year Ended December 31,
2018
2017
2016
Foreign Exchange Contracts:
Gain (loss) recognized in AOCI, net of tax
Gain (loss) reclassified from AOCI to net product sales (effective
portion), net of tax
Interest Rate Contracts:
Gain (loss) recognized in AOCI, net of tax
Gain (loss) reclassified from AOCI to interest expense, net of tax
$
$
$
$
37.7 $
(96.1) $
(1.4) $
18.7 $
(4.8) $
10.8 $
7.9 $
(1.1) $
40.2
47.3
6.2
(0.1)
Assuming no change in foreign exchange rates from market rates at December 31, 2018, $9.8 of gains recognized
in AOCI will be reclassified to revenue over the next 12 months. Assuming no change in LIBOR-based interest rates
from market rates at December 31, 2018, $19.3 of gains recognized in AOCI will be reclassified to interest expense
over the next 12 months. Amounts recognized in AOCI for expense related foreign exchange forward contracts was
immaterial as of December 31, 2018.
We enter into foreign exchange forward contracts, with durations up to 6 months, designed to limit the balance
sheet exposure of monetary assets and liabilities. We enter into these hedges to reduce the impact of fluctuating
exchange rates on our operating results. Hedge accounting is not applied to these derivative instruments as gains and
losses on these hedge transactions are designed to offset gains and losses on underlying balance sheet exposures. As
of December 31, 2018, the notional amount of foreign exchange contracts where hedge accounting is not applied was
$1,511.6.
We recognized a gain (loss) of $23.0, $(14.7) and $(5.2), in other income and expense for the years ended
December 31, 2018, 2017 and 2016, 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 December 31, 2018 and 2017:
December 31, 2018
Asset Derivatives
Liability Derivatives
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Prepaid expenses and
other current assets
Other assets
Prepaid expenses and
other current assets
Other assets
$
16.9 Other current liabilities
$
0.3 Other liabilities
20.1 Other current liabilities
— Other liabilities
7.3
3.1
0.8
17.3
Derivatives designated as
hedging instruments:
Foreign exchange forward
contracts
Foreign exchange forward
contracts
Interest rate contracts
Interest rate contracts
Derivatives not designated as
hedging instruments:
Foreign exchange forward
contracts
Prepaid expenses and
other current assets
23.6 Other current liabilities
11.5
Total fair value of derivative
instruments
$
60.9
$
40.0
F-28
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
December 31, 2017
Asset Derivatives
Liability Derivatives
Balance Sheet
Location
Fair
Value
Balance Sheet
Location
Fair
Value
Prepaid expenses and
other current assets
Other assets
Prepaid expenses and
other current assets
Other assets
$
12.9 Other current liabilities
$
34.8
4.1 Other liabilities
9.3 Other current liabilities
12.5 Other liabilities
26.0
—
—
Derivatives designated as
hedging instruments:
Foreign exchange forward
contracts
Foreign exchange forward
contracts
Interest rate contracts
Interest rate contracts
Derivatives not designated as
hedging instruments:
Foreign exchange forward
contracts
Prepaid expenses and
other current assets
10.0 Other current liabilities
13.7
Total fair value of derivative
instruments
$
48.8
$
74.5
Although we do not offset derivative assets and liabilities within our consolidated balance sheets, our International
Swap and Derivatives Association agreements provide for net settlement of transactions that are due to or from the
same counterparty upon early termination of the agreement due to an event of default or other termination event. The
following tables summarize the potential effect on our consolidated balance sheets of offsetting our foreign exchange
forward contracts and interest rate contracts subject to such provisions:
December 31, 2018
Gross Amounts Not Offset in the
Consolidated Balance Sheet
Description
Gross Amounts
of Recognized
Assets/
Liabilities
Gross Amounts
Offset in the
Consolidated
Balance Sheet
Net Amounts of
Assets/
Liabilities
Presented in the
Consolidated
Balance Sheet
Derivative
Financial
Instruments
Cash Collateral
Received
(Pledged)
Net Amount
Derivative assets
Derivative liabilities
$
$
60.9 $
(40.0) $
— $
— $
60.9 $
(40.0) $
(30.2) $
30.2 $
— $
— $
30.7
(9.8)
December 31, 2017
Gross Amounts Not Offset in the
Consolidated Balance Sheet
Description
Gross Amounts
of Recognized
Assets/
Liabilities
Gross Amounts
Offset in the
Consolidated
Balance Sheet
Net Amounts of
Assets/
Liabilities
Presented in the
Consolidated
Balance Sheet
Derivative
Financial
Instruments
Cash Collateral
Received
(Pledged)
Net Amount
Derivative assets
Derivative liabilities
$
$
48.8 $
(74.5) $
— $
— $
48.8 $
(74.5) $
(26.3) $
26.3 $
— $
— $
22.5
(48.2)
F-29
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
7.
Other Investments
Other investments include strategic equity investments in Moderna Therapeutics, Inc. (Moderna) and Dicerna
Pharmaceuticals, Inc. (Dicerna).
Moderna
During 2014, we purchased $37.5 of preferred equity of Moderna, a nonpublic biotechnology company, which was
recorded at cost. During the first quarter of 2018, Moderna announced the completion of a new round of financing. We
considered this transaction and the rights of the new shares issued in the new round, compared to the rights of the
preferred equity that we hold, and concluded that Moderna’s new round of financing represented an observable price
change in an orderly transaction for a similar investment. We further concluded, based on the respective rights of the
stock and consideration of potential liquidity events, that the value of our preferred stock was equivalent to the value
of the newly issued preferred stock. As a result, we recognized an unrealized gain of $100.8 in investment income
during the first quarter 2018 to adjust our equity investment in Moderna to fair value as of the date of the observable
price change, based on the per share price in Moderna's new round of financing.
On December 6, 2018, Moderna completed its initial public offering (IPO) and shares of Moderna began trading
on the Nasdaq Global Select Market under the symbol “MRNA”. As part of the IPO, our preferred stock was converted
into Moderna common stock and subject to a one year lock-up period. As our equity investment in Moderna common
stock now has a readily determinable fair value, we are recording the investment at fair value, with the effects of the
holding period restriction estimated using an option pricing valuation model. During the fourth quarter 2018, we
recognized an unrealized loss of $56.4 in investment income to adjust our investment in Moderna to fair value as of
December 31, 2018.
The carrying value of this investment was $81.9 and $37.5 as of December 31, 2018 and 2017, respectively.
Dicerna
In October 2018, we purchased $10.3 of Dicerna common stock in connection with a collaboration agreement
that we entered into with Dicerna, a publicly-traded biopharmaceutical company, see Note 11, “Commitments and
Contingencies” for additional information on collaboration agreement. As our equity investment in Dicerna common
stock has a readily determinable fair value, we are recording the investment at fair value. We have considered the effects
of a six month holding period restriction and determined the impact on the fair value is immaterial. During the fourth
quarter 2018, we recognized an unrealized loss of $1.4 in investment income to adjust our equity investment in Dicerna
to fair value as of December 31, 2018.
The fair value of this investment was $8.9 as of December 31, 2018.
8.
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
Accounts Payable
Royalties
Payroll and employee benefits
Taxes payable
Rebates payable
Clinical
Manufacturing
Accrued restructuring costs
Other
December 31, 2018
$
74.4 $
27.0
170.4
24.4
122.8
58.6
72.0
4.2
144.4
698.2 $
December 31, 2017
70.8
22.5
149.9
30.7
99.1
79.1
41.1
58.2
158.8
710.2
$
F-30
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
9.
Debt
On June 7, 2018, we entered into an Amended and Restated Credit Agreement (the Credit Agreement), with Bank
of America, N.A. as Administrative Agent. The Credit Agreement amends and restates our credit agreement dated as
of June 22, 2015 (the Prior Credit Agreement).
The Credit Agreement provides for a $1,000.0 revolving credit facility and a $2,612.5 term loan facility. The
revolving credit facility and the term loan facility mature on June 7, 2023. Beginning with the quarter ending June 30,
2019, we are required to make amortization payments of 5.00% of the aggregate principal amount of the term loan
facility annually, payable in equal quarterly installments.
Loans under the Credit Agreement bear interest, at our option, at either a base rate or a Eurodollar rate, in each
case plus an applicable margin. Under the Credit Agreement, the applicable margins on base rate loans range from
0.25% to 1.00% and the applicable margins on Eurodollar loans range from 1.25%to 2.00%, in each case based on
our consolidated net leverage ratio (as calculated in accordance with the Credit Agreement). At December 31, 2018,
the interest rate on our outstanding loans under the Credit Agreement was 3.90%. Our obligations under the Credit
Agreement are guaranteed by certain of Alexion Pharmaceuticals, Inc.'s foreign and domestic subsidiaries and secured
by liens on certain of our subsidiaries’ equity interests, subject to certain exceptions. Under the terms of the Credit
Agreement, we must maintain a ratio of total net debt to EBITDA of 3.50 to 1.00 (subject to certain limited adjustments)
and EBITDA to cash interest expense ratio of at least 3.50 to 1.00, in each case as calculated in accordance with the
Credit Agreement.
The Credit Agreement contains certain representations and warranties, affirmative and negative covenants and
events of default. The negative covenants in the Credit Agreement restrict Alexion’s and its subsidiaries’ ability, subject
to certain baskets and exceptions, to (among other things) incur liens or indebtedness, make investments, enter into
mergers and other fundamental changes, make dispositions or pay dividends. The restriction on dividend payments
includes an exception that permits us to pay dividends and make other restricted payments regardless of dollar amount
so long as, after giving pro forma effect thereto, we have a consolidated net leverage ratio, as defined in the Credit
Agreement, within predefined ranges, subject to certain increases following designated material acquisitions.
In connection with entering into the Credit Agreement and the Prior Credit Agreement, we paid an aggregate of
$53.1 in financing costs. Financing costs are amortized as interest expense over the life of the debt. Amortization
expense associated with deferred financing costs for the years ended December 31, 2018, 2017, and 2016 was $8.0,
$9.2, and $10.3, respectively. Remaining unamortized deferred financing costs as of December 31, 2018 and
December 31, 2017 were $20.8 and $21.0, respectively.
As of December 31, 2018, we had $2,612.5 outstanding on the term loan and $250.0 of borrowings outstanding
under the revolving credit facility. The $250.0 of proceeds on the revolving credit facility was used to refinance amounts
outstanding under the Prior Credit Agreement. As of December 31, 2018, we had open letters of credit of $1.7 that
offset our availability in the revolving facility. In January 2019 we paid the outstanding revolving credit facility of $250.0
in full.
The fair value of our long term debt, which is measured using Level 2 inputs of the fair value hierarchy, approximates
book value.
The contractual maturities of our long-term debt obligations, including our revolving credit facility, due subsequent
to December 31, 2018 are as follows:
Year
2019
2020
2021
2022
2023
$
348.0
130.6
130.6
130.6
2,122.7
F-31
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
10.
Facility Lease Obligations
New Haven Facility Lease Obligation
In November 2012, we entered into a lease agreement for office and laboratory space to be constructed in New
Haven, Connecticut. The term of the lease commenced in 2015 and will expire in 2030, with a renewal option of ten
years. Although we do not legally own the premises, we are deemed to be the owner of the building due to the substantial
improvements directly funded by us during the construction period based on applicable accounting guidance for build-
to-suit leases. Accordingly, the landlord’s costs of constructing the facility during the construction period are required
to be capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated
balance sheets.
Construction of the facility was completed and the building was placed into service in the first quarter 2016. The
imputed interest rate on this facility lease obligation as of December 31, 2018 was approximately 11%. Associated
with this arrangement, we recognized interest expense of $13.3, $14.2, and $14.0 for the years ended December 31,
2018, 2017, and 2016, respectively. As of December 31, 2018 and 2017, our total facility lease obligation was $133.5
and $134.6, respectively, recorded within other current liabilities and facility lease obligation in our consolidated balance
sheets.
In the fourth quarter of 2018 we amended the New Haven lease agreement significantly reducing our leased
square footage in the building beginning in 2019 through the expiration of the lease. This amendment does not impact
our previous conclusions that we are deemed the owner of the building for accounting purposes. In conjunction with
this lease modification, during the fourth quarter of 2018 we made a payment of $53.0 to a third party as an incentive
to lease the released square footage. This was capitalized within other assets in our consolidated balance sheets as
of December 31, 2018.
Aggregate future minimum non-cancellable commitments under the New Haven facility lease obligation, as of
December 31, 2018 are as follows:
Year
2019
2020
2021
2022
2023
Thereafter
$
9.4
8.8
9.0
9.2
9.2
63.9
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 one of its existing facilities. 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. Accordingly, the landlord’s costs of constructing the facility during the
construction period are required to be capitalized, as a non-cash transaction, offset by a corresponding facility lease
obligation in our consolidated balance sheets. We expect the completion of the facility, including obtaining regulatory
approval, to be in 2019. As of December 31, 2018 and 2017, we recorded a construction-in-process asset of $203.9
and $180.6, respectively, and an offsetting facility lease obligation of $155.1 and $159.1, respectively, within other
current liabilities and facility lease obligation on our consolidated balance sheets.
Payments 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 2018, we incurred $73.8 of payments to Lonza under this
agreement, of which $9.6 was applied against the outstanding facility lease obligation and $64.2 was recognized as a
prepayment of inventory. See Note 11 “Commitments and Contingencies” for minimum fixed payments due under Lonza
agreements.
F-32
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Boston Facility Lease Obligation
In September 2017, we entered into a lease agreement for approximately 150,000 square feet of office space to
be constructed in Boston, Massachusetts. Construction of the facility was completed and the building was placed into
service in the second quarter 2018. The term of the lease commenced upon the landlord's substantial completion of
the facility in the second quarter of 2018 and will expire on the thirteenth anniversary of commencement, with an option
to renew for up to an additional ten years. Although we do not legally own the premises, due to our involvement during
the construction period, we are deemed to be the owner of the portion of the building that we will lease based on
applicable accounting guidance for build-to-suit leases. Accordingly, the landlord's costs of constructing the facility
during the construction period were capitalized, as a non-cash transaction, offset by a corresponding facility lease
obligation in our consolidated balance sheets.
Interest expense recognized during 2018 was not material. As of December 31, 2018 and December 31, 2017,
our total facility lease obligation was $83.6 and $59.6, respectively, recorded within facility lease obligation in our
consolidated balance sheets.
Aggregate future minimum non-cancellable commitments under the Boston facility lease obligation, as of
December 31, 2018 are as follows:
Year
2019
2020
2021
2022
2023
Thereafter
$
4.3
6.6
6.7
6.8
7.0
56.7
In January 2019, we adopted a new lease accounting standard. See Note 1 “Business Overview & Summary of
Significant Accounting Policies” for an overview of the impact this standard is expected to have on our facility lease
obligation balances in 2019.
11.
Commitments and Contingencies
Commitments
License Agreements
We have entered into a number of license agreements in order to advance and obtain technologies and services
related to our business. License agreements generally require us to pay an initial fee and certain agreements call for
future payments upon the attainment of agreed upon development and/or commercial milestones. These agreements
may also require minimum royalty payments based on sales of products developed from the applicable technologies,
if any.
In October 2018, we entered into a collaboration agreement with Dicerna that provides us with exclusive worldwide
licenses and development and commercial rights for two preclinical RNA interference (RNAi) subcutaneously delivered
molecules for complement-mediated diseases, as well as an exclusive option for other preclinical RNAi molecules for
two additional targets within the complement pathway. In addition to the collaboration agreement, we made an equity
investment in Dicerna. Under the terms of the agreements, we made an upfront payment of $37.0 for the exclusive
licenses and the equity investment. The market value of the equity investment was $10.3 as of the date of acquisition,
which we recorded in other assets in our consolidated balance sheets. Due to the early stage of the assets we are
licensing, we recorded the upfront license payment of $26.7 as research and development expense during the fourth
quarter 2018. In addition, as of December 31, 2018, we could also be required to pay up to approximately $625.0 for
option exercise fees and amounts due upon the achievement of specified research, development, regulatory and
commercial milestones, as well as royalties on commercial sales.
In December 2017, we entered into a collaboration and license agreement with Halozyme Therapeutics, Inc. that
allows us to use drug-delivery technology in the development of subcutaneous formulations for our portfolio of products
for up to four targets. Due to the early stage of the assets we are licensing, we recorded expense for the upfront payment
of $40.0 during the fourth quarter 2017. In addition, as of December 31, 2018, we could be required to pay an additional
F-33
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
$160.0 for each target developed, subject to achievement of specified development, regulatory and sales-based
milestones, as well as royalties on commercial sales.
In addition, as of December 31, 2018, we have entered into other license agreements under which we may be
required to pay up to an additional $137.2 if certain development, regulatory and commercial milestones are met.
Manufacturing Agreements
We have various manufacturing development and license 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 our
commercial products and product candidates. We have various manufacturing and license agreements with Lonza, with
remaining total non-cancellable future commitments of approximately $1,084.6. If we terminate certain supply
agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our
arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of SOLIRIS that was
manufactured at the ARIMF facility prior to its sale and a payment with respect to sales of SOLIRIS manufactured at
Lonza facilities.
In addition to Lonza, as of December 31, 2018, we have non-cancellable commitments of approximately $104.1
through 2020 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 information available at the time of the assessment. On a periodic basis, as additional
information becomes available, or based on specific events such as the outcome of litigation or settlement of claims
(and offers of settlement), 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. Costs associated with our
involvement in legal proceedings are expensed as incurred. The outcome of any such proceedings, regardless of the
merits, is inherently uncertain. If we were unable to prevail in any such proceedings, our consolidated financial position,
results of operations, and future cash flows may be materially impacted.
We have 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 our products. 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 our products that we could
be required to pay the owners of patents for technology used in the manufacture and sale of our products. 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 SEC
requesting information related to our grant-making activities and compliance with the FCPA in various countries. In
addition, in October 2015, we received a request from the DOJ for the voluntary production of documents and other
information pertaining to Alexion’s compliance with 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.
The investigations have focused on operations in various countries, including Brazil, Colombia, Japan, Russia and
Turkey, and Alexion's compliance with the FCPA and other applicable laws.
At this time, Alexion is unable to predict the duration, scope or outcome of these investigations. While it is possible
that a loss related to these matters may be incurred, given the ongoing nature of these investigations, management
cannot reasonably estimate the potential magnitude of any such loss or range of loss, or the cost of the ongoing
investigation. Any determination that our operations or activities are not or were not in compliance with existing laws
or regulations could result in the imposition of fines, civil and criminal penalties, equitable remedies, including
disgorgement, injunctive relief, and/or other sanctions against us, and remediation of any such findings could have an
adverse effect on our business operations.
Alexion is committed to strengthening its compliance program and is currently implementing a comprehensive
company-wide transformation plan to enhance and remediate its business processes, structures, controls, training,
talent and systems across Alexion’s global operations.
F-34
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
As previously reported, on December 29, 2016, a shareholder filed a putative class action against the Company
and certain former employees in the U.S. District Court for the District of Connecticut, alleging that defendants made
misrepresentations and omissions about SOLIRIS. On April 12, 2017, the court appointed a lead plaintiff. On July 14,
2017, the lead plaintiff filed an amended putative class action complaint against the Company and seven current or
former employees. The complaint alleges that defendants made misrepresentations and omissions about SOLIRIS,
including alleged misrepresentations regarding sales practices, management changes, and related investigations,
between January 30, 2014 and May 26, 2017, and that the Company's stock price dropped upon the purported disclosure
of the misrepresentations. The plaintiffs seek to recover unspecified monetary relief, unspecified equitable and injunctive
relief, interest, and attorneys’ fees and costs. Defendants moved to dismiss the amended complaint on September
12, 2017. Plaintiffs filed an opposition to defendants’ motion to dismiss on November 13, 2017, and defendants’ filed
a reply brief in further support of their motion on December 28, 2017. Defendants’ motion to dismiss is now fully
briefed and pending before the court. Given the early stages of this litigation, an estimate of the possible loss or range
of loss cannot be made at this time.
In December 2016, we received a subpoena from the U.S. Attorney's Office for the District of Massachusetts
requesting documents relating generally to our support of Patient Services, Inc. (PSI) and National Organization for Rare
Disorders (NORD), 501(c)(3) organizations that provide financial assistance to Medicare patients taking drugs sold by
Alexion; Alexion’s provision of free drug to Medicare patients; and Alexion compliance policies and training materials
concerning the anti-kickback statute and information on donations to PSI and NORD from 2010 through 2016. Other
companies have disclosed similar inquiries. We are cooperating with this inquiry. We have been engaged in discussions
with the DOJ about a potential resolution of this matter and, in December 2018, we reached an agreement in principle
to resolve this matter by entering into a civil settlement agreement with the DOJ and the Office of Inspector General
(OIG) of the U.S. Department of Health and Human Services. As part of the proposed resolution, Alexion will pay
approximately $13.0 to the DOJ and OIG. While we have reached an agreement in principle, there can be no assurance
that the steps necessary to conclusively resolve this matter will be successful or that the settlement terms will be
finalized. We are unable to determine when a potential final settlement may be reached. Further, if we are unable to
reach a final agreement based on the agreement in principle, we will not be able to predict when these matters will be
resolved or what further action, if any, the government will take in connection with them.
In May 2017, Brazilian authorities seized records and data from our Sao Paulo, Brazil offices as part of an
investigation being conducted into Alexion’s Brazilian operations. We are cooperating with this inquiry.
In June 2017, we received a demand to inspect certain of our books and records pursuant to Section 220 of the
General Corporation Law of the State of Delaware on behalf of a purported stockholder. Among other things, the demand
sought to determine whether to institute a derivative lawsuit against certain of the Company’s directors and officers in
relation to the investigation by our Audit and Finance Committee announced in November 2016 and the investigations
instituted by the SEC, DOJ, U.S. Attorney’s Office for the District of Massachusetts, and Brazilian law enforcement
officials that are described above. We have responded to the demand. Given the early stages of this matter, an estimate
of the possible loss or range of loss cannot be made at this time.
On September 27, 2017, a hearing panel of the Canadian Patented Medicine Prices Review Board (PMPRB) issued
a decision in a previously pending administrative pricing matter that we had excessively priced SOLIRIS in a manner
inconsistent with the Canadian pricing rules and guidelines. In its decision, the PMPRB ordered Alexion to decrease
the price of SOLIRIS to an upper limit based upon pricing in certain other countries, and to forfeit excess revenues for
the period between 2009 and 2017. The amount of excess revenues was not determined to be a material amount. In
October 2017, Alexion filed an application for judicial review of the PMPRB’s decision in the Federal Court of Canada.
The hearing of that application for judicial review took place on November 15 and 16, 2018 but a decision on this
matter has not yet been delivered by the Court. At this time, we cannot predict the outcome of these judicial review
proceedings or any appeals that may follow and cannot reasonably estimate the amount of any additional forfeitures
that will be required to be made or the potential impact to future SOLIRIS revenues in Canada relating to any potential
future price reduction.
In October 2018, the Japanese Ministry of Health, Labour and Welfare (MHLW) conducted an administrative
inspection of Alexion’s Japanese operations. The MHLW inquiry has been primarily focused on our communication efforts
regarding the proper use of SOLIRIS in Japan for aHUS, among other matters. We have cooperated, and will continue
to cooperate, with this inquiry. An estimate of the possible loss or range of loss, or what further action, if any, the MHLW
will take in connection with this matter, cannot be made at this time.
F-35
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Chugai Pharmaceutical Co., Ltd. has filed two lawsuits against Alexion. The first was filed in November 2018 in
the United States District Court for the District of Delaware against Alexion Pharmaceuticals, Inc. alleging that ULTOMIRIS
infringes one U.S. patent held by Chugai Pharmaceutical Co., Ltd. The second lawsuit was filed in December 2018 in
the Tokyo District Court against Alexion Pharma GK (a wholly-owned subsidiary of Alexion) in Japan and alleges that
ULTOMIRIS infringes two Japanese patents held by Chugai Pharmaceutical Co., Ltd. Chugai’s complaints seek
unspecified damages and certain injunctive relief. Alexion has filed an answer to the U.S. complaint that denies
infringement. In addition, Alexion has raised defenses and has brought several counterclaims against Chugai
Pharmaceutical Co., Ltd. that request a finding of non-infringement and patent invalidity. Alexion Pharma GK responded
to Chugai at the Tokyo District Court and raised defenses against Chugai Pharmaceutical Co., Ltd. that request a finding
of non-infringement and patent invalidity. Given the early stages of these litigations, an estimate of the possible loss
or range of loss cannot be made at this time.
Operating Leases
As of December 31, 2018, we have operating leases for office and laboratory space in U.S. and foreign locations
to support our operations as a global organization.
Aggregate lease expense was $24.4, $27.2 and $29.3 for the years ended December 31, 2018, 2017 and 2016,
respectively. Lease expense is being recorded on a straight-line basis over the applicable lease terms.
Aggregate future minimum annual rental payments, for the next five years and thereafter under non-cancellable
operating leases (including facilities and equipment) as of December 31, 2018 are:
Year
2019
2020
2021
2022
2023
Thereafter
$
14.1
9.3
5.6
3.9
3.5
11.6
12.
Income Taxes
The income tax expense is based on income before income taxes as follows:
U.S.
Non-U.S.
Year Ended December 31,
2018
2017
2016
$
$
(451.4) $
693.6
242.2 $
(43.9) $
591.7
547.8 $
(164.6)
740.8
576.2
During the fourth quarter of 2013, in connection with the centralization of our global supply chain and technical
operations in Ireland, our U.S. parent company became a direct partner in a captive foreign partnership. The partnership
income, which is derived in foreign jurisdictions, is classified as “non-U.S. income” for purposes of financial reporting.
Substantially all non-U.S. income relates to income from our captive foreign partnership.
F-36
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
The components of the income tax expense are as follows:
Domestic
Current
Deferred
Current
Deferred
Current
Deferred
Foreign
Total
Year Ended December 31,
2018
2017
2016
$
57.0 $
49.5
106.5
74.7
(16.6)
58.1
131.7
32.9
$
164.6 $
42.9 $
7.2
50.1
107.5
(53.1)
54.4
150.4
(45.9)
104.5 $
3.4
107.6
111.0
69.1
(3.3)
65.8
72.5
104.3
176.8
We continue to pay cash taxes in U.S. Federal, various U.S. state, and foreign jurisdictions where we have utilized
all of our tax attributes or have met the applicable limitation for attribute utilization.
Effective Tax Rate
The provision (benefit) for income taxes differs from the U.S. federal statutory tax rate. The reconciliation of the
statutory U.S. federal income tax rate to our effective income tax rate is as follows:
U.S. federal statutory tax rate
Benefit of foreign earnings
Tax credits
Tax reserves
Re-measurement of deferred taxes as a result of the Tax Act
Acquired in-process research & development
U.S. state taxes
Other permanent differences
Effective Income Tax Rate
Year Ended December 31,
2018
2017
2016
21.0 %
(71.2)%
(17.0)%
12.1 %
— %
102.6 %
14.2 %
6.3 %
68.0 %
35.0 %
60.1 %
(10.7)%
(14.0)%
(53.4)%
— %
1.5 %
0.6 %
19.1 %
35.0 %
(7.2)%
(6.0)%
2.7 %
— %
— %
4.1 %
2.1 %
30.7 %
In our reconciliation of our statutory U.S. federal income tax rate to our effective tax rate above, we have included
a Benefit of foreign earnings amount which encapsulates the various tax impacts that result from our foreign derived
income. As a result of U.S. Tax Reform, a substantial portion of our foreign earnings are subject to the GILTI minimum
tax at an effective rate which is lower than the U.S. statutory tax rate of 21.0%. While we are also subject to tax in
foreign jurisdictions locally, substantially all of these taxes are creditable against U.S. taxes imposed on foreign earnings.
As a result, the effective tax rate on our foreign earnings is lower than the U.S. statutory rate.
In the year ended December 31, 2018, the Benefit of foreign earnings includes foreign local tax expense of $58.1,
substantially all of which is offset by the benefit from U.S. foreign tax credits of $54.2, resulting in a net increase to
the effective tax rate of 1.6%. We incurred U.S. tax expense on our foreign earnings of $206.1, which includes GILTI
minimum tax. The U.S. tax on our foreign earnings reflects a benefit of $108.7 or 44.8%, primarily related to the Section
250(a) deduction, compared to the U.S. statutory rate. Also included in this component is a benefit of $67.7 from
adjustments to 2018 provisional accounting for the Tax Act, which resulted in a decrease to our effective tax rate of
approximately 28.0%.
F-37
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
In the year ended December 31, 2017, the Benefit of foreign earnings includes foreign local tax expense of $54.4
partially offset by the benefit from U.S. foreign tax credits of $33.2, resulting in a net increase to the effective tax rate
of 3.9%. We incurred transition tax imposed by the Tax Act of $177.9 and US deferred taxes related to the GILTI provisions
of the Tax Act of $165.4. These Tax Act-related adjustments resulted in an increase to our effective tax rate of
approximately 62.7%. Additional U.S. tax imposed on our foreign earnings of $171.7 reflects a benefit of $35.4 or
6.5% compared to the U.S. statutory rate.
In the year ended December 31, 2016 the Benefit of foreign earnings includes foreign local tax expense of $42.8,
more than offset by the benefit from U.S. foreign tax credits of $48.3, resulting in a net decrease to the effective tax
rate of 0.9%. Additional U.S. tax imposed on our foreign earnings of $103.9 reflects a benefit of $155.4 or 27.0%
compared to the U.S. statutory rate. Also included in this component is the impact to deferred tax attributable to
distributions from our captive foreign partnership of $119.3, which increased the effective tax rate by 20.7%.
The effective tax rate reconciliation includes the tax impact of acquisitions of IPR&D assets. Absent successful
clinical results and regulatory approval, there is no alternative use for certain acquired IPR&D assets. An increase to
the effective tax rate results when the value of such assets are expensed, and no tax benefit is recognized. In the year
ended December 31, 2018, this component of the effective tax rate includes an increase to tax expense of $248.4
related to the acquired IPR&D costs for the acquisitions of Wilson Therapeutics and Syntimmune, which increased our
effective tax rate by 69.7% and 32.9%, respectively.
In the year ended December 31, 2018, Other permanent differences includes tax expense of $21.1 or 8.7% related
to nondeductible compensation and tax benefit of $10.9 or 4.5% related to Foreign-Derived Intangible Income.
In 2017, we concluded the IRS examination of our 2013 and 2014 tax years. Conclusion of the IRS examination
resulted in a decrease to the tax reserves component of the 2017 effective tax rate of approximately 3.6%.
The Tax Act
In December 2017, the Tax Cuts and Jobs Act (Tax Act) was enacted into law. The Tax Act decreased the US federal
corporate tax rate to 21.0%, imposed a minimum tax on foreign earnings related to intangible assets (GILTI), a one-
time transition tax on previously unremitted foreign earnings, and modified the taxation of other income and expense
items. With regard to the GILTI minimum tax, foreign earnings are reduced by the profit attributable to tangible assets
and a deductible allowance of up to 50.0%, subject to annual limitations. We have elected to account for the impact
of the minimum tax in deferred taxes.
At December 31, 2017, the Tax Act resulted in an increase to tax expense and the effective tax rate of $45.8 and
8.4%, respectively:
(a) Income tax expense increased $177.9 or 32.5% related to the transition tax on unremitted earnings imposed
by the Tax Act. This increase includes foreign income subject to US tax of $195.6, partially offset by a related
benefit of foreign tax credits of $17.7.
(b) The decrease to the U.S. federal tax rate resulted in a decrease to deferred tax expense of $292.4 or 53.4%.
This decrease includes the $121.3 or 22.2% benefit of re-measuring domestic deferred taxes and an additional
decrease attributable to re-measuring deferred taxes on foreign earnings of $171.1 or 31.2%.
(c) Other permanent differences includes a decrease to tax expense of $5.1 or 0.9% related to the re-measurement
of income taxes payable as a result of changes in U.S. federal tax rates under the Tax Act.
(d) The enactment of the GILTI minimum tax increased US deferred taxes on foreign earnings $165.4 or 30.2%.
This increase includes deferred tax expense related to the GILTI minimum tax of $236.9. This deferred expense
is partially offset by a related decrease to deferred expense for the release of reserves for uncertain tax
positions of $71.5.
We calculated provisional amounts for the tax effects of the Tax Act that could be reasonably estimated, but not
completed, in our results for the year ended December 31, 2017. As of the fourth quarter 2018 we had completed our
analysis of all provisional estimates, and concluded as follows:
(a) We calculated a reasonable estimate of the one-time transition tax on previously unremitted earnings, which
resulted in an increase to U.S. Federal tax expense of $177.9 and an increase to taxes payable, net of tax
credits, of $28.0 in the period ended December 31, 2017. Our initial accounting for the transition tax was not
F-38
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
complete as of December 31, 2017 because there was uncertainty regarding the calculation of the amounts
subject to the tax. We completed our analysis of the transition tax and related interpretive guidance during the
third quarter 2018. No significant measurement period adjustment to our initial accounting was required.
(b) We calculated a reasonable estimate of the impact of the GILTI minimum tax on deferred taxes, which resulted
in an increase to U.S. Federal tax expense and the deferred tax liability of $236.9 in the period ended December
31, 2017. Our initial accounting for the minimum tax was incomplete because there was uncertainty regarding
the calculation of the temporary differences subject to the minimum tax. We completed our analyses of these
temporary differences and the expected timing and manner of their reversal during the fourth quarter 2018.
We recorded measurement period adjustments during 2018 which resulted in a decrease to U.S. federal tax
expense of $67.7.
(c) We calculated a reasonable estimate of the Tax Act’s limits on deductions for employee remuneration, including
remuneration in kind, which resulted in an insignificant impact to tax expense, taxes payable, and deferred
taxes in the period ended December 31, 2017. Our initial accounting for these limits was incomplete because
there was uncertainty regarding the value of the deduction-limited remuneration. We completed our analysis
of the relevant employee remuneration arrangements during the third quarter 2018. No measurement period
adjustment to our initial accounting was required.
(d) We calculated a reasonable estimate of the impact of the Tax Act to U.S. state income taxes, which resulted
in an increase to tax expense, taxes payable, and deferred taxes of $2.9, $2.2, and $0.7, respectively, in the
period ended December 31, 2017. We interpreted the effect of the Tax Act's changes to federal law on each
U.S. state's system of taxation as of the date of enactment. We completed additional analysis of the effect of
modifications to federal deductions and income inclusions on U.S. state tax systems in the fourth quarter
2018. No measurement period adjustment to our initial accounting was required.
(e) We calculated the deferred tax liability related to our foreign captive partnership in the period ended December
31, 2017 consistent with our calculation in periods prior to enactment of the Tax Act. As a result, the deferred
tax liability we recorded as of December 31, 2017 of $533.4 related to our foreign captive partnership was
provisional. We completed additional analysis of the direct and indirect effects of the Tax Act during the fourth
quarter 2018. We recorded measurement period adjustments during 2018 which resulted in an increase to
U.S. state income tax expense and deferred taxes of $11.1.
Deferred Taxes
Provisions have been made for deferred taxes based on the differences between the basis of the assets and
liabilities for financial statement purposes and the basis of the assets and liabilities for tax purposes using currently
enacted tax rates and regulations that will be in effect when the differences are expected to be recovered or settled. The
components of the deferred tax assets and liabilities are as follows:
F-39
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Deferred tax assets:
Net operating losses
Income tax credits
Stock compensation
Accruals and allowances
Unrealized losses
Research and development expenses
Accrued royalties
Valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Depreciable assets
Unrealized gains
Investment in foreign partnership
Intangible assets
Total deferred tax liabilities
Net deferred tax (liability) asset
December 31,
December 31,
2018
2017
$
41.8 $
371.6
47.6
105.8
—
5.2
89.1
661.1
(19.6)
641.5
(88.7)
(6.6)
(566.6)
(268.8)
(930.7)
(289.2) $
$
4.9
442.5
66.6
97.7
6.6
7.2
74.2
699.7
(3.4)
696.3
(75.2)
—
(607.9)
(285.6)
(968.7)
(272.4)
At December 31, 2018, we have tax effected federal and state net operating loss carryforwards of $20.0 and
$11.6, respectively. Our net operating losses expire between 2022 and 2038. We also have federal and state income
tax credit carryforwards of $370.6 and $8.4, respectively. These income tax credits expire between 2025 and 2038.
The increase in our net operating losses is due to the acquisition of Syntimmune and the recognition of historical
net operating loss carryforwards which are subject to annual utilization limitations in accordance with Section 382 of
the Internal Revenue Code. The decrease in income tax credits is attributable to the utilization of Orphan Drug credits.
The decrease in our investment in foreign partnership deferred tax liability is due to adjustments we recorded in 2018
to our provisional accounting for the Tax Act and the reversal of other component temporary differences. We continue
to maintain a valuation allowance against certain deferred tax assets where realization is not certain.
Included in our investment in foreign partnership above is $(24.1) associated with GILTI minimum tax. Our
accounting for the GILTI minimum tax on our captive foreign partnership as a result of the Tax Act was provisional at
December 31, 2017. We completed our accounting for the Tax Act in the fourth quarter 2018.
Unrecognized Tax Benefits
We follow authoritative guidance regarding accounting for uncertainty in income taxes, which prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures, and transition.
F-40
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
The beginning and ending amounts of unrecognized tax benefits reconciles as follows:
Beginning of period balance
Increases for tax positions taken during a prior period
Decreases for tax positions taken during a prior period
Increases for tax positions taken during the current period
Decreases for tax positions related to settlements
Decreases for tax positions related to lapse of statute
2018
2017
2016
60.9 $
9.1
(5.8)
28.8
—
(0.3)
92.7 $
138.9 $
5.6
(85.8)
19.3
(15.8)
(1.3)
60.9 $
113.9
3.4
(1.1)
22.8
—
(0.1)
138.9
$
$
The total amount of accrued interest and penalties was not significant as of December 31, 2018. The total amount
of tax benefit recorded during 2018, 2017, and 2016 which related to unrecognized tax benefits was $35.4, $27.1,
and $21.5, respectively. All of our unrecognized tax benefits, if recognized, would have a favorable impact on the effective
tax rate.
It is reasonably possible that a portion of our unrecognized tax benefits could reverse within the next twelve
months. Reversal of these amounts is contingent upon the completion of field audits by the taxing authorities in several
jurisdictions, whether a tax adjustment is proposed, the nature and amount of any adjustment, and the administrative
path to resolving the proposed adjustment. We cannot reasonably estimate the range of the potential change.
Tax Audits
We file federal and state income tax returns in the U.S. and in numerous foreign jurisdictions. The U.S. and
foreign jurisdictions have statutes of limitations ranging from 3 to 6 years. However, the limitation period could be
extended due to our tax attribute carryforward position in a number of our jurisdictions. The tax authorities generally
have the ability to review income tax returns for periods where the limitation period has previously expired and can
subsequently adjust tax attribute values.
In 2017, the IRS commenced an examination of our U.S. income tax returns for 2015. We anticipate this audit
will conclude within the next twelve months. We have not been notified of any significant adjustments proposed by the
IRS.
Undistributed Earnings
We have recorded tax on the undistributed earnings of our controlled foreign corporation (CFC) subsidiaries. To
the extent CFC earnings may not be repatriated to the U.S. as a dividend distribution due to limitations imposed by law,
we have not recorded the related potential withholding, foreign local, and U.S. state income taxes.
13.
Share-based Compensation
2017 Incentive Plan
The 2017 Plan was approved by our stockholders in May 2017 and replaced the 2004 Plan effective May 10,
2017. The 2017 Plan is a broad based plan that provides for the grant of equity awards including restricted stock and
restricted stock units (collectively referred to as Restricted Stock), incentive and non-qualified stock options, and other
stock-related awards to our directors, officers, key employees and consultants, for up to a maximum of 18.2 shares in
addition to awards outstanding under the 2004 Incentive Plan on or after March 14, 2017 that are subsequently
canceled, cash settled, expired, forfeited, or otherwise terminated without the delivery of such shares, subject to the
limitations in the 2017 Plan. Stock options granted under the 2017 Plan have a maximum contractual term of ten years
from the date of grant, have an exercise price not less than the fair value of the stock on the grant date and generally
vest over four years. Restricted Stock awards also generally vest over four years, with performance-based restricted
stock units having a three-year vesting period.
F-41
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Stock Options
A summary of the status of our stock options at December 31, 2018, and changes during the year then ended is
presented in the table and narrative below:
Outstanding at December 31, 2017
Granted
Exercised
Forfeited and canceled
Outstanding at December 31, 2018
Vested and unvested expected to vest at
December 31, 2018
Exercisable at December 31, 2018
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (in years)
Aggregate
Intrinsic
Value
Number of
shares
5.3 $
124.71
—
(0.5)
(1.2)
—
82.70
156.20
3.6 $
119.68
4.74 $
3.6 $
119.63
3.2 $
117.73
4.73 $
4.38 $
44.5
44.5
44.5
Total intrinsic value of stock options exercised during the years ended December 31, 2018, 2017 and 2016 was
$27.5, $88.9 and $41.7, respectively. We primarily utilize newly issued shares to satisfy the exercise of stock options.
The total fair value of options vested during the years ended December 31, 2018, 2017 and 2016 was $27.2, $61.5
and $58.1, respectively.
We did not grant any stock options during the year ended December 31, 2018. For the years ended December 31,
2017 and 2016, the fair value of options at the date of grant was estimated using the Black-Scholes model with the
following ranges of weighted average assumptions:
Expected life in years
Interest rate
Volatility
Dividend yield
December 31,
December 31,
2017
2016
4.07 - 4.29
3.82 - 6.29
1.64% - 1.92%
0.87% - 1.66%
38.78% - 39.01% 33.45% - 37.61%
—
—
The expected stock price volatility rates are based on historical volatilities of our common stock. The risk-free
interest rates are based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with
the expected life of the option. The average expected life represents the weighted average period of time that options
granted are expected to be outstanding. We have evaluated three distinct employee groups in determining the expected
life assumptions, and we estimate the expected life of stock options based on historical experience of exercises,
cancellations and forfeitures of our stock options.
The weighted average fair value at the date of grant for options granted during the years ended December 31,
2017 and 2016 was $42.59 and $41.46 per option, respectively.
F-42
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Restricted Stock
A summary of the status of our nonvested Restricted Stock at December 31, 2018 and changes during the year
then ended is as follows:
Nonvested Restricted Stock at December 31, 2017
Shares granted
Shares forfeited
Shares vested
Nonvested Restricted Stock at December 31, 2018
Number of
Shares
Weighted
Average Grant
Date Fair Value
130.75
119.27
126.78
135.17
123.25
3.6 $
2.1
(0.7)
(1.3)
3.7 $
The fair value of Restricted Stock at the date of grant is based on the fair market value of the shares of common
stock underlying the awards on the date of grant. The weighted average fair value at the date of grant for Restricted
Stock awards granted during the years ended December 31, 2018, 2017 and 2016, including restricted stock units
with performance conditions, was $119.27, $125.39 and $133.35 per share, respectively. The total fair value of
Restricted Stock vested during the years ended December 31, 2018, 2017 and 2016 was $181.7, $157.0 and $124.4,
respectively.
Included in the table above is 0.3 shares granted to senior management with market-based performance conditions
which provide the recipient the right to receive restricted stock at the end of a three year performance period, based
on pre-established market-based performance goals. We used payout simulation models to estimate the grant date fair
value of these awards at $123.25. Expense recognized for awards with market-based performance conditions was
$14.9 for the year ended December 31, 2018 and immaterial for the years ended December 31, 2017 and 2016.
Employee Stock Purchase Plan
During 2015, the Company adopted the ESPP under which employees can purchase shares of our common stock
based on a percentage of their compensation subject to certain limits. The purchase price per share is equal to the
lower of 85.0% of the fair market value of our common stock on the offering date or the purchase date with a six month
look-back feature. Under the ESPP, up to 1.0 shares of common stock may be issued to eligible employees who elect
to participate in the purchase plan. Shares issued and compensation expense recognized under the ESPP for the years
ended December 31, 2018, 2017 and 2016 were not material.
Share-Based Compensation Expense
The following table summarizes the share-based compensation expense in the consolidated statements of
operations:
Year Ended December 31,
2018
2017
2016
Cost of sales
Research and development
Selling, general and administrative
Total share-based compensation expense
Income tax effect
$
16.0 $
11.1 $
57.5
129.5
203.0
(46.5)
76.4
155.6
243.1
(89.3)
Total share-based compensation expense, net of tax
$
156.5 $
153.8 $
11.1
57.6
123.6
192.3
(70.3)
122.0
Share-based compensation expense capitalized to inventory during the years ended December 31, 2018, 2017
and 2016 was $14.5, $15.4, and $12.1, respectively.
As of December 31, 2018, there was $312.7 of total unrecognized share-based compensation expense related
to non-vested share-based compensation arrangements granted under our share-based compensation plans. The
expense is expected to be recognized over a weighted-average period of 1.70 years.
F-43
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
14.
Stockholders’ Equity
Share Repurchases
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 February 2017, our Board of Directors increased the
amount that we are authorized to expend on future repurchases to $1,000 under the repurchase program, which
superseded all prior repurchase programs. The repurchase program does not have an expiration date. The repurchase
program may be discontinued at any time at our discretion. Under the program, we repurchased 0.7 and 4.0 shares of
our common stock at a cost of $85.0 and $463.6 during the years ended December 31, 2018 and 2017, respectively.
As of February 6, 2019, there is a total of $451.5 remaining for repurchases under the repurchase program.
15.
Other Comprehensive Income and Accumulated Other Comprehensive Income
The following table summarizes the changes in AOCI, by component, for the years ended December 31, 2018,
2017 and 2016:
Defined Benefit
Pension Plans
Unrealized Gains
(Losses) from
Debt Securities
Unrealized Gains
(Losses) from
Hedging
Activities
Foreign Currency
Translation
Adjustment
Total
Accumulated
Other
Comprehensive
Income (Loss)
Balances, December 31, 2015
$
(9.6) $
(0.8) $
92.7 $
(20.0) $
Other comprehensive income
before reclassifications
Amounts reclassified from other
comprehensive income
Net other comprehensive income
(loss)
Balances, December 31, 2016
Other comprehensive income
before reclassifications
Amounts reclassified from other
comprehensive income
Net other comprehensive income
(loss)
Balances, December 31, 2017
Other comprehensive income
before reclassifications
Amounts reclassified from other
comprehensive income
Net other comprehensive income
(loss)
2.6
0.3
0.2
0.2
46.4
(47.2)
(4.3)
—
2.9
(6.7) $
0.4
(0.4) $
(0.8)
91.9 $
(4.3)
(24.3) $
$
0.5
1.4
1.9
(0.2)
(88.2)
0.8
0.6
(17.6)
(105.8)
8.4
—
8.4
$
(4.8) $
0.2 $
(13.9) $
(15.9) $
1.5
0.7
2.2
0.1
(0.6)
(0.5)
32.9
(9.4)
23.5
(0.5)
—
(0.5)
Balances, December 31, 2018
$
(2.6) $
(0.3) $
9.6 $
(16.4) $
62.3
44.9
(46.7)
(1.8)
60.5
(79.5)
(15.4)
(94.9)
(34.4)
34.0
(9.3)
24.7
(9.7)
F-44
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
The table below provides details regarding significant reclassifications from AOCI during the years ended
December 31, 2018, 2017 and 2016:
Details about Accumulated Other Comprehensive Income
Components
Unrealized Gains (Losses) on Hedging Activity
Effective portion of foreign exchange contracts
Effective portion of interest rate swap contracts
Defined Benefit Pension Items
Amortization of prior service costs and actuarial
losses
Curtailment
Amount Reclassified From
Accumulated Other Comprehensive
Income during the year ended
December 31,
2018
2017
2016
Affected Line Item in the
Consolidated Statements of
Operations
$
$
$
$
(1.8) $ 28.9 $ 73.0 Net product sales
(1.8)
13.6
Interest expense
(0.2)
11.8
72.8
27.1
(25.6)
(9.5)
(2.4)
9.4 $ 17.6 $ 47.2
Income tax expense
(0.3) $
(0.6)
(0.9)
0.2
(0.7) $
(0.4) $
(1.8)
(2.2)
0.8
(1.4) $
(0.5)
(a)
— (a)
(0.5)
0.2 Income tax expense
(0.3)
(a) This AOCI component is included in the computation of net periodic pension benefit cost (see Note 17, Employee
Benefit Plans, for additional details).
16.
Fair Value Measurement
Authoritative guidance establishes a valuation hierarchy for disclosure of the inputs to the valuation used to
measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted
prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar
assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly
through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable
inputs based on our own assumptions used to measure assets and liabilities at fair value.
The following tables present information about our assets and liabilities that are measured at fair value on a
recurring basis as of December 31, 2018 and 2017, and indicate the fair value hierarchy of the valuation techniques
we utilized to determine such fair value.
F-45
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Fair Value Measurement at
December 31, 2018
Total
Level 1
Balance Sheet Classification
Cash equivalents
Cash equivalents
Cash equivalents
Cash equivalents
Marketable securities
Marketable securities
Marketable securities
Marketable securities
Marketable securities
Other assets
Prepaid expenses and other
current assets
Other assets
Other current liabilities
Other liabilities
Prepaid expenses and other
current assets
Other current liabilities
Other liabilities
Current portion of contingent
consideration
Contingent consideration
Type of Instrument
Money market funds
Commercial paper
Corporate bonds
Other government-related
obligations
Mutual funds
Commercial paper
Corporate bonds
Other government-related
obligations
Bank certificates of deposit
Equity securities
Foreign exchange forward contracts
$
Foreign exchange forward contracts $
Foreign exchange forward contracts $
Foreign exchange forward contracts $
Interest rate contracts
$ 569.4 $
35.4 $
$
0.2 $
$
8.2 $
$
16.5 $
$
$
16.7 $
$ 122.6 $
9.3 $
33.2 $
90.8 $
40.5 $
0.3 $
18.8 $
3.1 $
20.1 $
0.8 $
17.3 $
$
$
$
$
$
$
$
Level 3
Level 2
— $ 569.4 $
35.4 $
— $
0.2 $
— $
8.2 $
— $
— $
16.5 $
— $
16.7 $
— $ 122.6 $
— $
— $
8.9 $
— $
— $
— $
— $
— $
— $
— $
9.3 $
33.2 $
81.9 $
40.5 $
0.3 $
18.8 $
3.1 $
20.1 $
0.8 $
17.3 $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
97.6 $
— $
— $
97.6
$ 183.2 $
— $
— $ 183.2
Interest rate contracts
Interest rate contracts
Acquisition-related contingent
consideration
Acquisition-related contingent
consideration
F-46
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Type of Instrument
Commercial paper
Total
Level 1
Level 2
Level 3
$
9.5 $
— $
9.5 $
Fair Value Measurement at
December 31, 2017
$
$
$
$
$
$
Reverse repurchase
agreements
Corporate bonds
Other government-related
obligations
Mutual funds
Commercial paper
Corporate bonds
Other government-related
obligations
$
Bank certificates of deposit $
$
Equity securities
Foreign exchange forward
contracts
Foreign exchange forward
contracts
Foreign exchange forward
contracts
Foreign exchange forward
contracts
Interest rate contracts
$
$
$
$
27.0 $
1.2 $
5.0 $
18.5 $
6.5 $
431.3 $
421.3 $
11.8 $
0.3 $
— $
— $
27.0 $
1.2 $
— $
18.5 $
— $
— $
— $
— $
0.3 $
5.0 $
— $
6.5 $
431.3 $
421.3 $
11.8 $
— $
22.9 $
— $
22.9 $
4.1 $
— $
4.1 $
48.5 $
— $
48.5 $
26.0 $
— $
26.0 $
Interest rate contracts
Acquisition-related
contingent consideration
$
$
$
9.3 $
12.5 $
168.9 $
— $
— $
— $
9.3 $
12.5 $
— $
168.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Balance Sheet Classification
Cash equivalents
Cash equivalents
Cash equivalents
Cash equivalents
Marketable securities
Marketable securities
Marketable securities
Marketable securities
Marketable securities
Marketable securities
Prepaid expenses and other
current assets
Other assets
Other current liabilities
Other liabilities
Prepaid expenses and other
current assets
Other assets
Contingent consideration
There were no securities transferred between Level 1, 2 and 3 during the year ended December 31, 2018.
Valuation Techniques
We classify mutual fund investments and equity securities, which are valued based on quoted market prices in
active markets with no valuation adjustment, as Level 1 assets within the fair value hierarchy.
Cash equivalents and marketable securities classified as Level 2 within the valuation hierarchy consist of
commercial paper, reverse repurchase agreements, U.S. and foreign government-related debt, corporate debt securities
and certificates of deposit. We estimate the fair values of these marketable securities by taking into consideration
valuations obtained from third-party pricing sources. These pricing sources utilize industry standard valuation models,
including both income and market-based approaches, for which all significant inputs are observable, either directly or
indirectly, to estimate fair value. These inputs include market pricing based on real-time trade data for similar securities,
issuer credit spreads, benchmark yields, and other observable inputs. We validate the prices provided by our third-party
pricing sources by understanding the models used, obtaining market values from other pricing sources and analyzing
pricing data in certain instances.
Other investments in equity securities of publicly traded companies which are subject to holding period restrictions
are carried at fair value using an option pricing valuation model and classified as Level 2 equity securities within the
fair value hierarchy. The most significant assumptions within the option pricing valuation model are the term of the
restrictions and the stock price volatility, which is based upon the historical volatility of similar companies. We also use
a constant maturity risk-free interest rate to match the remaining term of the restrictions on such investments.
Our derivative assets and liabilities include foreign exchange and interest rate derivatives that are measured at
fair value using observable market inputs such as forward rates, interest rates, our own credit risk as well as an
F-47
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
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.
As of December 31, 2018, there has not been any impact to the fair value of our derivative liabilities due to our
own credit risk. Similarly, there has not been any significant adverse impact to our derivative assets based on our
evaluation of our counterparties’ credit risks.
Contingent Consideration
In connection with prior business combinations, we may be required to pay future consideration that is contingent
upon the achievement of specified development, regulatory approvals or sales-based milestone events. We determine
the fair value of these obligations using various estimates that are not observable in the market and represent a Level
3 measurement within the fair value hierarchy. The resulting probability-weighted cash flows were discounted using a
cost of debt ranging from 4.2% to 5.1% for developmental milestones and a weighted average cost of capital ranging
from 9.0% to 21.0% for sales-based milestones.
Each reporting period, we adjust the contingent consideration to fair value with changes in fair value recognized
in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the
conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the
interest component of contingent consideration related to the passage of time.
As of December 31, 2018, estimated future contingent milestone payments related to prior business combinations
range from zero if no milestone events are achieved, to a maximum of $702.0 if all development, regulatory and sales-
based milestones are reached. As of December 31, 2018, the fair value of acquisition-related contingent consideration
was $280.8. The following table represents a roll-forward of our acquisition-related contingent consideration:
Balance at beginning of period
Amounts derecognized upon sale of asset
Changes in fair value
Balance at end of period
2018
168.9
(4.6)
116.5
280.8
$
$
In September 2018, we sold all our assets, rights and obligations related to the ALXN1101 program to a third
party and, as a result, in the quarter ended September 30, 2018, derecognized $4.6 of contingent consideration due
under our prior purchase agreement with Orphatec Pharmaceuticals GmbH, dated February 8, 2011. The definitive
agreement related to our sale of ALXN1101 provides for contingent consideration payments to Alexion upon the
achievement of various regulatory and commercial milestones and other events, as well as royalties on commercial
sales. The amount of contingent consideration related to these contingent payments is deemed to be fully constrained
as of December 31, 2018, and therefore has not been included in the transaction price. During the third quarter 2018,
we recognized an immaterial gain on the sale of ALXN1101 within operating income.
In September 2018, we amended the terms of certain contingent milestone payments due under our prior merger
agreement with Enobia Pharma Corp., dated December 28, 2011. The agreement removed our obligations with respect
to a regulatory milestone and redistributed the contingent payment associated with this milestone to various sales
milestones. As a result of this agreement and the probability of achieving the various sales milestones, our contingent
consideration liability increased by $48.7 in the third quarter 2018.
17.
Employee Benefit Plans
Deferred Compensation Plan
We have a nonqualified deferred compensation plan which allows certain highly-compensated employees to make
voluntary deferrals of up to 80% of their base salary and incentive bonuses. The plan is designed to work in conjunction
with the 401(k) plan and provides for a total combined employer match of up to 6% of an employee’s eligible earnings,
F-48
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
up to the IRS annual 401(k) contribution limitations. Deferred compensation amounts under this plan as of December 31,
2018 and 2017 were $16.5 and $18.5, respectively, and are included in other liabilities within the consolidated balance
sheets. Employer matching contributions under the plan for the years ended December 31, 2018, 2017 and 2016 were
not material.
Defined Contribution Plan
We have one qualified 401(k) plan covering all eligible employees. Under the plan, employees may contribute up
to the statutory allowable amount for any calendar year. We make matching contributions equal to $1.00 for each dollar
contributed up to the first 6% of an individual’s base salary and incentive cash bonus up to the annual IRS maximum.
For the years ended December 31, 2018, 2017 and 2016, we recorded matching contributions of approximately $14.1,
$15.9, and $16.7 respectively.
Defined Benefit Plans
We maintain defined benefit plans for employees in certain countries outside the U.S., including retirement benefit
plans required by applicable local law. The plans are valued by independent actuaries using the projected unit credit
method. The liabilities correspond to the projected benefit obligations of which the discounted net present value is
calculated based on years of employment, expected salary increases, and pension adjustments.
In 2018 and 2017 we recorded the impacts of a curtailment related to our Swiss plan as a result of a reduction
of employees due to restructuring events as discussed in Note 18, “Restructuring and Related Expenses”.
The following table sets forth the funded status and the amounts recognized for defined benefit plans, including
the impacts of the curtailments:
December 31,
2018
2017
43.4 $
6.3
(3.8)
(6.5)
39.4 $
36.1 $
December 31,
2018
2017
24.2 $
3.0
1.3
(2.4)
(4.3)
21.8 $
48.4
7.8
(9.6)
(3.2)
43.4
39.4
28.2
4.3
1.5
(6.6)
(3.2)
24.2
(17.6) $
(19.2)
$
$
$
$
$
$
Change in benefit obligation:
Projected benefit obligation, beginning of year
Service cost
Curtailment
Other
Projected benefit obligation, end of year
Accumulated benefit obligation, end of year
Change in plan assets:
Fair value of plan assets, beginning of year
Employer contributions
Plan participants' contributions
Curtailment
Other
Fair value of plan assets, end of year
Funded status at end of year
F-49
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
The Company measures the fair value of plan assets based on the prices that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All plan
asset investments are classified as Level 2 within the fair value hierarchy and are valued utilizing observable prices for
similar instruments and quoted prices for identical or similar instruments in markets that are not active. Plan assets
are managed by an independent investment fiduciary and are primarily invested in debt and equity securities and real
estate funds in order to maximize the overall return from investment income considering asset allocation limits as
determined by pension law.
At December 31, 2018, we have recorded a liability of $17.6 in other noncurrent liabilities and an additional
minimum liability of $2.6, net of tax, to accumulated other comprehensive income.
The following table provides the weighted average assumptions used to calculate net periodic benefit cost and
the actuarial present value of projected benefit obligations:
Weighted average assumptions - Net Periodic Benefit Cost:
Discount rate
Long term rate of return on assets
Rate of compensation increase
Weighted average assumptions - Projected Benefit Obligation:
Discount Rate
Rate of compensation increase
December 31,
2018
2017
0.8%
2.5%
1.3%
0.8%
1.3%
0.7%
3.0%
1.4%
0.8%
1.3%
The discount rates used to determine the net periodic benefit cost and projected benefit obligation represent the
yield on high quality AA-rated corporate bonds for periods that match the duration of the benefit obligations.
The expected long-term rate of return on plan assets represents a weighted average of expected returns per asset
category. The rate of return considers historical and estimated future risk free rates of return as well as risk premiums
for the relevant investment categories.
The components of net periodic benefit cost are as follows:
Service cost
Employee contributions
Amortization of prior service costs
Curtailment
Amortization and deferral of actuarial gain
Other
Total net periodic benefit cost
Year Ended December 31,
2018
2017
2016
$
$
6.3 $
(1.3)
(0.3)
(0.8)
0.5
(0.3)
4.1 $
7.8 $
(1.5)
(0.4)
(1.1)
0.8
(0.6)
5.0 $
8.2
(1.6)
—
—
0.9
(0.8)
6.7
During 2018, service costs were recorded to operating expenses while all other components of the net periodic
benefit was recorded to other income and expense within our consolidated statement of operations.
F-50
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
Other changes in plan assets and benefit obligations recognized in AOCI are as follows:
Amount included in AOCI - December 31, 2016
Prior service cost
Amortization of net gain
Curtailment
Taxes
Other
Amount included in AOCI - December 31, 2017
Prior service cost
Amortization of net gain
Curtailment
Taxes
Other
Amount included in AOCI - December 31, 2018
$
$
$
(6.7)
(0.4)
0.8
1.9
(0.6)
0.2
(4.8)
(0.3)
0.6
0.6
(0.7)
2.0
(2.6)
We estimate that we will pay employer contributions of approximately $2.4 in 2019. The expected future benefits
to be paid in respect of the pension plans as of December 31, 2018 were as follows:
Year
2019
2020
2021
2022
2023
2024 to 2028
$
1.9
1.7
1.7
1.9
1.6
9.1
18.
Restructuring and Related Expenses
In the first quarter of 2017, we initiated a company-wide restructuring designed to help position the Company for
sustainable, long-term growth that we believe will further allow us to fulfill our mission of serving patients and families
with rare diseases. The initial restructuring activities primarily focused on a reduction of the Company's global workforce.
In September 2017, we committed to an operational plan to re-align the global organization with its refocused corporate
strategy. The re-alignment focuses investments in priority growth areas to maximize leadership in complement and grow
the rare disease business. The re-alignment also included the relocation of the Company's headquarters to Boston,
Massachusetts which was completed in the second quarter of 2018. Our New Haven, Connecticut site continues to
support employees working in the research and process development laboratories, the clinical supply and quality teams,
nurse case management and a number of important enterprise business services. The plan also reduced the Company's
global workforce by approximately 20.0%. The restructuring is designed to result in cost savings by focusing the
development portfolio, simplifying business structures and processes across the Company's global operations, and
closing of multiple Alexion sites, including ARIMF and certain regional and country-based offices.
F-51
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
The following table summarizes the total expenses recorded related to the restructuring activities by type of activity
and the locations recognized within the consolidated statements of operations:
December 31, 2018
December 31, 2017
December 31, 2016
Cost of Sales
Research and
Development
Selling , General
and Administrative
Restructuring
Expense
Other expense
Employee
Separation
Costs
Asset-
Related
Charges
$ — $
—
—
Other
Other
Total
5.8 $ — $ 5.8 $ — $152.1 $ — $ 152.1 $ — $ — $ — $ —
Other
Total
Total
Employee
Separation
Costs
Asset-
Related
Charges
Employee
Separation
Costs
Asset-
Related
Charges
0.1
— 0.1
— 16.3
— 16.3
19.4
— 19.4
— 10.9
— 10.9
—
—
—
—
— —
— —
4.6
—
—
3.0
— — —
$ 4.6 $ 25.3 $ 20.8 $50.7 $ 87.3 $179.3 $19.9 $ 286.5 $ 3.0 $ — $ — $ 3.0
— 20.9 25.5
(0.1)
— (0.1)
— 17.3
— 2.6
104.6
2.6
87.3
—
3.0
—
Employee separation costs are associated with headcount reductions, as well as corporate employees not relocating
to the Company's headquarters in 2018.
Asset-related charges consist of accelerated depreciation costs and asset impairment charges. Accelerated
depreciation costs primarily relates to site closures, including ARIMF (which was sold to a third-party in 2018). Accelerated
depreciation costs represent the difference between the depreciation expense recognized over the revised useful life
of the asset, based upon the anticipated date the site closure and the depreciation expense as determined using the
useful life prior to the restructuring activities. Asset impairment charges primarily related to manufacturing assets that
will no longer be utilized due to the 2017 restructuring activities.
Other costs consist of contract termination expenses, relocation costs, and other costs incurred as a direct result
of an exit plan.
The following table presents a reconciliation of the restructuring reserve recorded within accounts payable and
accrued expenses on the Company's consolidated balance sheets for the years ended December 31, 2018 and 2017:
December 31, 2018
December 31, 2017
Employee
Separation
Costs
Asset-
Related
Charges
Other
Total
Employee
Separation
Costs
Asset-
Related
Charges
Other
Total
Liability, beginning of year
$ 53.8 $
— $
4.4 $ 58.2 $
0.5 $
— $
0.1 $
0.6
Charges
Settlements
Adjustments to previous
estimates
Non Cash Activity
Liability, end of year
5.8
(54.2)
25.3
—
(1.2)
—
—
(25.3)
21.1
(25.2)
(0.3)
—
52.2
(79.4)
(1.5)
(25.3)
88.2
(34.0)
179.3
—
19.9
(15.6)
287.4
(49.6)
(0.9)
—
— (179.3)
(0.9)
—
— (179.3)
$
4.2 $
— $
— $
4.2 $ 53.8 $
— $
4.4 $ 58.2
The restructuring reserve of $4.2 and $58.2 is recorded in accounts payable and accrued expenses on the
Company's consolidated balance sheet as of December 31, 2018 and 2017, respectively.
As a result of the relocation of our corporate headquarters to Boston, Massachusetts, we were required to repay
a forgivable loan and grant that were provided by the State of Connecticut Department of Economic Community
Development in 2015 in connection with the construction of our current headquarters in New Haven, Connecticut. The
loan and grant totaled $26.0 and were recognized, upon receipt, as a reduction in the cost of our New Haven facility-
related fixed assets. As a result, the $26.0 repayment obligation was recorded in the third quarter 2017 with an offsetting
increase in the carrying value of the related assets. We repaid this amount in the fourth quarter 2017.
In the first quarter 2019, we have undertaken corporate restructuring activities to re-align our global
organization with our re-focused strategy, reduce costs, and realize operational efficiencies. We expect to incur
estimated expenses up to $25.0 associated with this recent restructuring by the end of 2019.
F-52
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
19.
Segment Information
We operate in a single segment, focusing on serving patients affected by rare diseases through the innovation,
development and commercialization of life-changing therapies. Consistent with our operational structure, our chief
operating decision maker manages and allocates resources at a global, consolidated level. Therefore, results of our
operations are reported on a consolidated basis for purposes of segment reporting, consistent with our management
reporting. Disclosures about net product sales and long-lived assets by geographic area are presented below.
Net Product Sales
Net product sales by product and geographic region are as follows:
Year Ended December 31,
% Change
2018
2017
2016
2018 compared to
2017
2017 compared to
2016
SOLIRIS
United States
Europe
Asia Pacific
Rest of World
STRENSIQ
United States
Europe
Asia Pacific
Rest of World
KANUMA
United States
Europe
Asia Pacific
Rest of World
Total Net Product Sales
** Percentages not meaningful
Long-Lived Assets
$
$
$
$
$
$
1,588.4 $
1,036.7
382.0
555.9
3,563.0 $
1,235.0 $
985.2
328.1
595.8
3,144.1 $
1,058.5
939.7
303.8
541.2
2,843.2
374.3 $
61.7
27.9
11.2
475.1 $
280.1 $
35.6
18.6
5.5
339.8 $
177.5
15.3
13.0
3.6
209.4
51.3 $
21.6
3.7
15.4
92.0 $
4,130.1 $
42.4 $
14.6
2.7
5.9
65.6 $
3,549.5 $
20.4
6.3
1.3
1.1
29.1
3,081.7
28.6 %
5.2 %
16.4 %
(6.7)%
13.3 %
33.6 %
73.3 %
50.0 %
103.6 %
39.8 %
21.0 %
47.9 %
37.0 %
**
40.2 %
16.4 %
16.7%
4.8%
8.0%
10.1%
10.6%
57.8%
132.7%
43.1%
52.8%
62.3%
107.8%
131.7%
107.7%
**
125.4%
15.2%
Long-lived assets consist of property, plant and equipment.
United States
Europe
Other
December 31,
2018
2017
468.3 $
1,001.1
2.1
1,471.5 $
455.9
864.6
4.9
1,325.4
$
$
F-53
Alexion Pharmaceuticals, Inc.
Notes to Consolidated Financial Statements
For the Years ended December 31, 2018, 2017 and 2016
(amounts in millions except per share amounts)
20.
Quarterly Financial Information (unaudited)
The following condensed quarterly financial information is for the years ended December 31, 2018 and 2017:
2018:
Revenues
Cost of sales
Operating expenses
Operating income
Net income
Earnings per common share
Basic
Diluted
2017:
Revenues
Cost of sales
Operating expenses
Operating income
Net income
Earnings per common share
Basic
Diluted
March 31
June 30
September 30
December 31
$
$
$
$
$
$
$
$
930.9
91.6
571.9
267.4
249.1
1.12
1.11
March 31
869.6
69.0
588.6 (3)
212.0
170.1
0.76
0.75
$
$
$
$
$
$
$
$
1,045.0
95.3
1,349.8 (1)
(400.1)
(457.4)
(2.05)
(2.05)
$
$
$
$
1,026.5
90.6
577.3
358.6
330.9
1.48
1.47
$
$
$
$
1,128.8
96.8
988.3 (1)
43.7
(45.0)
(0.20)
(0.20)
June 30
September 30
December 31
912.7
83.6
602.4 (4)
226.7
165.2
0.74
0.73
$
$
$
$
859.1
157.0 (2)
622.0 (3)
80.1
78.0
0.35
0.35
$
$
$
$
909.7
144.6 (2)
656.5
108.6
30.0 (5)
0.13
0.13
Included within operating expenses for the second and fourth quarter of 2018 we recognized $803.7 and
(1)
$379.3, respectively, of acquired in-process research and development expense related to our Wilson and Syntimmune
acquisitions, respectively. See Note 2 “Acquisitions” for additional information.
(2)
restructuring related expenses associated with the planned closure of the ARIMF facility.
Included within cost of sales for the third and fourth quarters 2017 are $83.0 and $69.1, respectively, of
(3)
restructuring and related expenses.
Included within operating expenses for the first and third quarters 2017 are $23.8 and $79.4, respectively of
(4)
with an early stage clinical indefinite-lived intangible asset.
Included within operating expenses for the second quarter 2017 is an impairment charge of $31.0, associated
(5)
We recognized a tax (benefit) expense of $(56.5) and $45.8 in 2018 and 2017, respectively, as a result of the
Tax Cuts and Jobs Act. In 2017, we recorded certain impacts of the Tax Act on a provisional basis. As of December 22,
2018, our accounting for the impact of the Tax Act was complete. See Note 12, “Income Taxes” for additional information.
21.
Subsequent Events
In January 2019, we entered into a collaboration agreement with Caelum Biosciences (Caelum) to develop
CAEL101 for light chain (AL) amyloidosis. Under the terms of the agreement, we acquired a minority equity interest
in Caelum and an exclusive option to acquire the remaining equity in the company based on Phase 2 data, for pre-
negotiated economics. We made an upfront payment of $30.0 and could be required to pay up to an additional
$30.0 in contingent milestone-dependent option fees. The collaboration also provides for potential additional
payments, in the event Alexion exercises the acquisition option, for up to $500.0, which includes an upfront option
exercise payment and potential regulatory and commercial milestone payments.
F-54
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Ludwig Hantson, certify that:
1
2
3
4
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of Alexion
Pharmaceuticals, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Dated: February 6, 2019
/s/ LUDWIG N. HANTSON, Ph.D.
Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Paul J. Clancy, certify that:
1
2
3
4
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2018 of Alexion
Pharmaceuticals, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that
occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Dated: February 6, 2019
/s/ PAUL J. CLANCY
Executive Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Alexion Pharmaceuticals, Inc. (the “Company”) for the
year ended December 31, 2018 as filed with the Securities and Exchange Commission (the “Report”), I, Ludwig N.
Hantson, Ph.D., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant
to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: February 6, 2019
/s/ LUDWIG N. HANTSON, Ph.D.
Chief Executive Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will
be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Alexion Pharmaceuticals, Inc. (the “Company”) for the
year ended December 31, 2018 as filed with the Securities and Exchange Commission (the “Report”), I, Paul J.
Clancy, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
Dated: February 6, 2019
/s/ PAUL J. CLANCY
Executive Vice President and Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to the Company and will
be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
This Page Intentionally Left Blank
This Page Intentionally Left Blank
RACHEL
LIVING WI TH gM G
AIRA
LIVING WI TH HPP
RUT HI E AND HER SON
LIVING WI TH PNH
S H A R E H O L D E R I N F O R M A T I O N
EXECUTIVE MANAGEMENT
DIRECTORS
David R. Brennan2, 3
Chairman of the Board,
Former Chief Executive Officer,
AstraZeneca PLC
Felix J. Baker, Ph.D.4, 3
Co-Managing Member,
Baker Brothers Advisors LP
Christopher J. Coughlin1, 2
Former Executive Vice
President and Chief Financial
Officer, Tyco
Deborah Dunsire, M.D.2, 4
President and Chief Executive
Officer, Lundbeck A/S
Paul A. Friedman, M.D.3, 4
Chief Executive Officer,
Madrigal Pharmaceuticals
Ludwig Hantson, Ph.D.
Chief Executive Officer
John T. Mollen1, 2
Former Executive Vice
President, Human Resources,
EMC Corporation
Francois Nader, M.D.1, 4
Former President and
Chief Executive Officer,
NPS Pharma
Judith Reinsdorf, J.D.1, 3
Former Executive Vice
President and General
Counsel, Johnson Controls
Andreas Rummelt, Ph.D.3, 4
Chief Executive Officer,
InterPharmaLink AG
Ludwig Hantson, Ph.D.
Chief Executive Officer
Paul Clancy
Executive Vice President,
Chief Financial Officer
Anne-Marie Law
Executive Vice President,
Chief Patient and Employee
Experience Officer
John Orloff, M.D.
Executive Vice President,
Head of Research &
Development
Ellen Chiniara, J.D.
Executive Vice President,
General Counsel and
Corporate Secretary
Brian Goff
Executive Vice President,
Chief Commercial Officer
Indrani Franchini, J.D.
Executive Vice President,
Chief Compliance Officer
Aradhana Sarin, M.D.
Executive Vice President,
Chief Strategy and
Business Officer
Rana Strellis
Senior Vice President,
Corporate Communications
and Culture
TOP ROW, LEFT TO RIGHT: Judith Reinsdorf, Christopher J. Coughlin, Francois Nader,
Andreas Rummelt, Paul A. Friedman, John T. Mollen, Felix J. Baker, Deborah Dunsire (INSET)
BOTTOM ROW, LEFT TO RIGHT: Chairman of the Board David Brennan and CEO Ludwig Hantson
OTHER INFORMATION
TRANSFER AGENT AND REGISTRAR
Computershare Trust Company, N.A.
250 Royall Street, Canton, MA 02021
INVESTOR RELATIONS
121 Seaport Boulevard, Boston, MA 02210
Email: InvestorRelations@alexion.com
INDEPENDENT AUDITORS
PricewaterhouseCoopers, LLP, Boston, MA
TRADING SYMBOL
Listing for Alexion Pharmaceuticals, Inc.,
is found on the NASDAQ stock market
under the symbol ALXN.
ANNUAL SHAREHOLDERS MEETING
To be held on May 14, 2019, 5:30 p.m.
Seaport Hotel
1 Seaport Lane, Boston, MA 02210
Tel 617.385.4000
CORPORATE HEADQUARTERS
Alexion Pharmaceuticals, Inc.
121 Seaport Boulevard
Boston, MA 02210
Tel: 475-230-ALXN (2596)
Fax: 203-271-8198
alexion.com
1. Member of the Audit and Finance Committee
2. Member of the Leadership and
Compensation Committee
3. Member of the Nominating and
Corporate Governance Committee
4. Member of the Science and
Innovation Committee
@2019 Alexion Pharmaceuticals, Inc.
ALEXION, KANUMA, SOLIRIS, STRENSIQ,
ULTOMIRIS, and the Alexion logo are trademarks
of Alexion Pharmaceuticals, Inc., registered in the
United States, the European Union, and in other
countries worldwide.
Follow us on Social Media
2018 ANNUAL REPORT
Is An Inspiration
Every Day
A L E X I O N P H A R M A C E U T I C A L S , I N C . 2 0 1 8 A N N U A L R E P O R T
a l e x i o n . c o m