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ALEXION PHARMACEUTICALS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.(Edgar Glimpses Via Acquire Media NewsEdge) Note Regarding Forward-Looking Statements This quarterly report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by our management, and may include, but are not limited to, statements regarding the potential benefits and commercial potential of Soliris® (eculizumab) for its approved indications and any expanded uses, timing and effect of sales of Soliris in various markets worldwide, pricing for Soliris, level of insurance coverage and reimbursement for Soliris, level of future Soliris sales and collections, timing regarding development and regulatory approvals for additional indications or in additional territories for Soliris, the medical and commercial potential of additional indications for Soliris, failure to satisfactorily address the issues raised by the U.S. Food and Drug Administration (FDA) in the March 2013 Warning Letter, costs, expenses and capital requirements, cash outflows, cash from operations, status of reimbursement, price approval and funding processes in various countries worldwide, progress in developing commercial infrastructure and interest about Soliris and our drug candidates in the patient, physician and payer communities, the safety and efficacy of Soliris and our product candidates, estimates of the potential markets and estimated commercialization dates for Soliris and our drug candidates around the world, sales and marketing plans, any changes in the current or anticipated market demand or medical need for Soliris or our drug candidates, status of our ongoing clinical trials for eculizumab, asfotase alfa and our other product candidates, commencement dates for new clinical trials, clinical trial results, evaluation of our clinical trial results by regulatory agencies, the adequacy of our pharmacovigilance and drug safety reporting processes, prospects for regulatory approval, need for additional research and testing, the uncertainties involved in the drug development process and manufacturing, performance and reliance on third party service providers, our future research and development activities, plans for acquired programs, our ability to develop and commercialize products with our collaborators, assessment of competitors and potential competitors, the outcome of challenges and opposition proceedings to our intellectual property, assertion or potential assertion by third parties that the manufacture, use or sale of Soliris infringes their intellectual property, estimates of the capacity of manufacturing and other service facilities to support Soliris and our product candidates, potential costs resulting from product liability or other third party claims, the sufficiency of our existing capital resources and projected cash needs, the possibility that expected tax benefits will not be realized, assessment of impact of recent accounting pronouncements, declines in sovereign credit ratings or sovereign defaults in countries where we sell Soliris, delay of collection or reduction in reimbursement due to adverse economic conditions or changes in government and private insurer regulations and approaches to reimbursement, the short and long term effects of other government healthcare measures, and the effect of shifting foreign exchange rates. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Such risks and uncertainties include, but are not limited to, those discussed later in this report under the section entitled "Risk Factors". Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether because of new information, future events or otherwise. However, readers should carefully review the risk factors set forth in this and other reports or documents we file from time to time with the Securities and Exchange Commission (the SEC). Business Overview We are a biopharmaceutical company focused on serving patients with severe and ultra-rare disorders through the innovation, development and commercialization of life-transforming therapeutic products. Our marketed product Soliris is the first and only therapeutic approved for patients with either of two severe and ultra-rare disorders resulting from chronic uncontrolled activation of the complement component of the immune system: paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, and atypical hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease. We are also evaluating additional potential indications for Soliris in severe and devastating diseases in which we believe that uncontrolled complement activation is the underlying mechanism, and we are progressing in various stages of development with additional biotechnology product candidates as treatments for patients with severe and life-threatening ultra-rare disorders. Soliris is designed to inhibit a specific aspect of the complement component of the immune system and thereby treat inflammation associated with chronic disorders in several therapeutic areas, including hematology, nephrology, transplant 19 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) rejection and neurology. Soliris is a humanized monoclonal antibody that effectively blocks terminal complement activity at the doses currently prescribed. The initial indication for which we received approval for Soliris is PNH. PNH is a debilitating and life-threatening, ultra-rare genetic blood disorder defined by chronic uncontrolled complement activation leading to the destruction of red blood cells (hemolysis). The chronic hemolysis in patients with PNH may be associated with life-threatening thromboses, recurrent pain, kidney disease, disabling fatigue, impaired quality of life, severe anemia, pulmonary hypertension, shortness of breath and intermittent episodes of dark-colored urine (hemoglobinuria). Soliris was approved for the treatment of PNH by the FDA and the European Commission (EC) in 2007 and by Japan's Ministry of Health, Labour and Welfare (MHLW) in 2010, and has been approved in several other territories. Additionally, Soliris has been granted orphan drug designation for the treatment of PNH in the United States, Europe, Japan and several other territories. In September and November 2011, Soliris was approved by the FDA and EC, respectively, for the treatment of pediatric and adult patients with aHUS in the United States and Europe. In September 2013, the MHLW approved Soliris for the treatment of pediatric and adult patients with aHUS in Japan. aHUS is a severe and life-threatening genetic ultra-rare disease characterized by chronic uncontrolled complement activation and thrombotic microangiopathy (TMA), the formation of blood clots in small blood vessels throughout the body, causing a reduction in platelet count (thrombocytopenia) and life-threatening damage to the kidney, brain, heart and other vital organs. In addition, the FDA and EC have granted Soliris orphan drug designation for the treatment of patients with aHUS. Products and Development Programs We focus our product development programs on life-transforming therapeutics for severe and life-threatening ultra-rare diseases for which we believe current treatments are either non-existent or inadequate. Marketed Product/Indications Our marketed product/indications include the following: Product Development Area Indication Development Stage Soliris (eculizumab) Hematology Paroxysmal Nocturnal Commercial Hemoglobinuria (PNH) PNH Registry Phase IV Hematology/Nephrology Atypical Hemolytic Commercial Uremic Syndrome (aHUS) aHUS Long-term Phase IV Follow-up aHUS Registry Phase IV Paroxysmal Nocturnal Hemoglobinuria (PNH) Soliris is the first and only therapy approved for the treatment of patients with PNH, a debilitating and life-threatening ultra-rare blood disorder in which an acquired genetic deficiency causes uncontrolled complement activation which leads to life-threatening complications. We continue to work with researchers to expand the base of knowledge in PNH and the utility of Soliris to treat patients with PNH. Additionally, 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. Atypical Hemolytic Uremic Syndrome (aHUS) aHUS is a chronic and life-threatening ultra-rare genetic disease in which uncontrolled complement activation causes blood clots in small blood vessels throughout the body (TMA) leading to kidney failure, stroke, heart attack and death. Soliris is the first and only therapy approved for the treatment of adult and pediatric patients with aHUS. Pursuant to a post marketing requirement imposed by the FDA, we have now completed both a prospective open-label trial in adults with aHUS, as well as, a prospective trial of pediatric patients with aHUS. In May 2014, based on data from these trials, the FDA approved conversion of Soliris accelerated approval in aHUS to regular approval for the treatment of adult and pediatric patients with aHUS to inhibit complement-mediated TMA. 20 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) Clinical Development Program Our significant programs, including investigator sponsored clinical programs, include the following: Product Development Area Indication Development Stage Soliris (eculizumab) Transplant Antibody Mediated Phase II Rejection (AMR) Presensitized Renal Transplant - Living Donor Antibody Mediated Phase II Rejection (AMR) Presensitized Renal Transplant - Deceased Donor Treatment of Antibody Phase II Mediated Rejection (AMR) Following Renal Transplantation* Delayed Kidney Phase III Transplant Graft Function* Neurology Neuromyelitis Optica Phase III (NMO) Myasthenia Gravis (MG) Phase III Asfotase alfa Metabolic Disorders Hypophosphatasia (HPP) Phase II cPMP (ALXN 1101) Metabolic Disorders MoCD Type A Phase II ALXN 1007 Inflammatory Disorders Anti-phospholipid Phase II Syndrome Acute GI Graft versus Phase II Host Disease * Investigator Initiated Trial Soliris (eculizumab) Transplant Acute Antibody Mediated Rejection (AMR) in Presensitized Kidney Transplant Patients AMR is the term used to describe a type of transplant rejection that occurs when the recipient has antibodies to the donor organ. Enrollment in a multi-national, multi-site controlled clinical trial of eculizumab in presensitized kidney transplant patients at elevated risk for AMR who received kidneys from deceased organ donors was completed in March 2013. The study was re-opened in October 2013 to enroll additional patients at the request of participating investigators. Enrollment and dosing in this expanded trial has been completed and patient follow-up in the trial is continuing. In September 2013, researchers presented positive preliminary data from the eculizumab deceased-donor AMR kidney transplant study at the European Society of Organ Transplant in Vienna, Austria. Enrollment in a multi-national, multi-site randomized controlled clinical trial of eculizumab in presensitized kidney transplant patients at elevated risk for AMR who received kidneys from living donors has been completed and patient follow-up in the trial is ongoing. Enrollment in a U.S., multi-site, open-label, randomized, controlled, investigator-initiated trial of eculizumab to treat kidney transplant patients who are diagnosed with biopsy proven acute AMR has been initiated. In April 2014, the EC granted orphan drug designation to eculizumab for the prevention of graft rejection following solid organ transplantation. Delayed Kidney Transplant Graft Function Delayed graft function (DGF) is the term used to describe the failure of a kidney or other organs to function immediately after transplantation due to ischemia-reperfusion and immunological injury. Enrollment has been completed in an investigator-initiated Phase II study of eculizumab in patients at elevated risk for DGF following kidney transplant. Eculizumab has been granted orphan drug designation for DGF by the FDA and, in the first quarter of 2014, the EC granted orphan drug designation to eculizumab for prevention of DGF after solid organ transplantation. In August 2014, we announced the initiation of dosing in a single, multinational, placebo-controlled DGF registration trial based on positive discussions with regulators in the U.S. and EU. 21 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts)Neurology Neuromyelitis Optica (NMO) NMO is a severe and ultra-rare autoimmune disease of the central nervous system (CNS) that primarily affects the optic nerves and spinal cord. In an investigator-initiated Phase II clinical trial of eculizumab in severe and relapsing NMO, eculizumab reduced the median number of NMO attacks at 12 months with a high degree of statistical significance. In the first half of 2014, a single pivotal trial in patients with relapsing NMO commenced patient enrollment. The FDA and the EC have each granted orphan designation for eculizumab as a treatment for patients with NMO. Myasthenia Gravis (MG) MG is an ultra-rare autoimmune syndrome characterized by complement activation leading to the failure of neuromuscular transmission. Data from a Phase II trial evaluating the safety and efficacy of eculizumab in patients with refractory generalized MG indicated improvement in clinical measures. In the second quarter of 2014, we commenced a Phase III pivotal trial to evaluate eculizumab as a treatment for patients with refractory generalized MG. In addition, the FDA has granted orphan drug designation for eculizumab as a treatment for patients with MG. In August 2014, the EC granted orphan drug designation for eculizumab as treatment for patients with MG. Asfotase Alfa Hypophosphatasia (HPP) HPP is an ultra-rare, genetic, and life-threatening metabolic disease characterized by impaired phosphate and calcium regulation, leading to progressive damage to multiple vital organs including destruction and deformity of bones, profound muscle weakness, seizures, impaired renal function, and respiratory failure. Asfotase alfa, a targeted enzyme replacement therapy in Phase II clinical trials for patients with HPP, is designed to directly address the morbidities and mortality of HPP by targeting alkaline phosphatase directly to the deficient tissue. In this way, asfotase alfa is designed to normalize the genetically defective metabolic process and prevent or reverse its severe, crippling and life-threatening complications in patients with HPP. Studies with asfotase alfa in HPP patients indicate that the treatment significantly decreases the levels of targeted metabolic substrates. In 2013, asfotase alfa received Breakthrough Therapy Designation from the FDA. In September 2014, the MHLW granted orphan drug designation to asfotase alfa for the treatment of patients with HPP. We continue to enroll and dose patients in a separate multinational Phase II open-label study of infants and children with HPP. Interim results of this trial were presented at the European Society of Pediatric Endocrinology meeting held in September 2013. Results of 15 enrolled and treated patients representing a range of HPP characteristics were summarized, showing that the primary efficacy endpoint was achieved with a high degree of clinical and statistical significance and several key secondary endpoints were also achieved. We have completed a natural history study in infantile-onset patients with HPP and have completed our initial analysis for the study. The natural history study in juveniles with HPP has completed enrollment and data evaluation is ongoing. We have commenced a rolling submission of our U.S. Biologics License Application (BLA) for asfotase alfa, which allows completed portions of the application to be submitted and reviewed by the FDA on an ongoing basis. We submitted certain portions of the BLA to the FDA during the second quarter and expect to complete the submission of the remaining sections in the fourth quarter of 2014. In July 2014, we announced that the European Medicines Agency (EMA) informed us that it had validated, and granted accelerated assessment to, our Marketing Authorization Application (MAA) for asfotase alfa for the treatment of HPP. We believe the analysis of our clinical data supports our regulatory filings in the U.S., EU, and Japan. In September 2014, results of several HPP trials were presented at the 2014 Annual Meeting of the American Society of Bone and Mineral Research (ASBMR). Results of these trials indicate that in HPP patients at high risk of death, overall survival rates significantly greater in asfotase alfa patients compared with survival in historical control patients. In addition, patients receiving asfotase alfa significantly improved ventilator-free survival. cPMP (ALXN 1101) Molybdenum Cofactor Deficiency (MoCD) Disease Type A (MoCD Type A) MoCD Type A is a rare metabolic disorder characterized by severe and rapidly progressive neurologic damage and death in newborns. MoCD Type A results from a genetic deficiency in cyclic Pyranopterin Monophosphate (cPMP), a molecule that enables production of certain enzymes, the absence of which allows neurotoxic sulfite to accumulate in the brain. To date, there is no approved therapy available for MoCD Type A. There has been some early clinical experience with the cPMP replacement therapy in a small number of children with MoCD Type A, and we have initiated a natural history study in patients with MoCD Type A. In October 2013, cPMP received Breakthrough Therapy Designation from the FDA for the treatment of patients with MoCD Type A. Evaluation of our synthetic cPMP replacement therapy in a Phase I healthy volunteer study is 22 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts)complete. As a result, we have initiated a multi-center, multinational, open-label clinical trial of synthetic cPMP in patients with MoCD Type A being treated with recombinant Escherichia coli-derived cPMP. ALXN 1007 ALXN 1007 is a novel humanized antibody designed to target rare and severe inflammatory disorders and is a product of our proprietary antibody discovery technologies. We have completed enrollment in both a Phase I single-dose, dose escalating safety and pharmacology study in healthy volunteers, as well as in a multi-dose, dose escalating safety and pharmacology study in healthy volunteers. As a result of meetings with the FDA, we commenced screening in a Phase II proof-of-concept study in patients with anti-phospholipid syndrome (APS), in the second quarter of 2014. APS is an autoimmune, hypercoagulable state caused by antiphospholipid antibodies. A second proof-of-concept study in patients with graft versus host disease (GVHD) is expected to start in the fourth quarter of 2014. Patients with GVHD following bone marrow or hematopoietic stem cell transplant experience engrafted hematopoietic cells that attack host gastrointestinal tissues in the first 100 days post-transplant causing damage to the GI tract, liver and skin. Manufacturing We currently rely on three manufacturing facilities, Alexion's Rhode Island manufacturing facility (ARIMF) and two facilities operated by Lonza Group AG and its affiliates (Lonza), to produce commercial and clinical bulk quantities of Soliris, and we rely on a facility operated by Lonza for clinical quantities of asfotase alfa. We produce our clinical and preclinical quantities of our other product candidates at ARIMF. We also depend on a limited number of third party providers for other services with respect to our clinical and commercial requirements, including manufacturing services, product finishing, packaging, filling and labeling. In March 2013, we received a Warning Letter (Warning Letter) from the FDA regarding compliance with current Good Manufacturing Practices (cGMP) at ARIMF. The Warning Letter followed an FDA inspection which concluded in August 2012. At the conclusion of that inspection, the FDA issued a Form 483 Inspectional Observations, to which we responded in August 2012 and provided additional information to the FDA in September and December 2012. The observations relate to commercial and clinical manufacture of Soliris at ARIMF. We responded to the Warning Letter in a letter to the FDA in April 2013. At the conclusion of another inspection of ARIMF in August 2014, the FDA issued a Form 483 with three inspectional observations, none of which were designated as a repeat observation to the March 2013 Warning Letter. The observations are inspectional and do not represent a final FDA determination of compliance. We continue to manufacture products, including Soliris, iat ARIMF. While the resolution of the issues raised in this Warning Letter is difficult to predict, we do not currently believe a loss related to this matter is probable or that the potential magnitude of such loss or range of loss, if any, can be reasonably estimated. To the extent that circumstances related to this matter change, the impact could have a material adverse effect on our financial operations. The EMA inspected ARIMF in January 2013 and issued a cGMP certificate in May 2013. Independent of the Warning Letter, we initiated voluntary recalls and replacements of certain lots of Soliris in 2013 and 2014 due to the presence of visible particles detected in a limited number of vials in these lots. These recalls did not interrupt the supply of Soliris to patients. Following investigation, we believe that we have identified the fill/finish process step at our third party provider that resulted in the presence of the visible particles and we have implemented the changes necessary to modify the process step. During the fourth quarter of 2013, we recorded expense of $14,277 in cost of sales resulting from the expected disposal of inventory in 2014, and we do not expect a material impact from these recalls in 2014. In April 2014, we purchased a fill/finish facility in Athlone, Ireland. Following refurbishment of the facility, and after successful completion of the appropriate validation processes and regulatory approvals, the facility will become our first company-owned fill/finish and packaging facility for Soliris and other clinical and commercial products. Our plans for future expansion in Ireland also include the construction of office and laboratory facilities on property in Dublin, Ireland, which we purchased in April 2014. Critical Accounting Policies and the Use of Estimates The significant accounting policies and basis of preparation of our consolidated financial statements are described in Note 1, "Business Overview and Summary of Significant Accounting Policies," of our financial statements included in our Form 10-K for the year ended December 31, 2013. Under accounting principles generally accepted in the United States, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities in our financial statements. Actual results could differ from those estimates. We believe the judgments, estimates and assumptions associated with the following critical accounting policies have the greatest potential impact on our consolidated financial statements: 23 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) • Revenue recognition; • Contingent liabilities; • Inventories; • Research and development expenses; • Share-based compensation; • Valuation of goodwill, acquired intangible assets and in-process research and development (IPR&D); • Valuation of contingent consideration; and • Income taxes. For a complete discussion of these critical accounting policies, refer to "Critical Accounting Policies and Use of Estimates" within "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" included within our Form 10-K for the year ended December 31, 2013. We have reviewed our critical accounting policies as disclosed in our Form 10-K, and we have not noted any material changes. New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board issued a comprehensive new standard which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. The new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2016 and allows for adoption using a full retrospective method, or a modified retrospective method. We are currently assessing the method of adoption and the expected impact the new standard has on our financial position and results of operations. Results of Operations Net Product Sales The following table summarizes net product sales for the three and nine months ended September 30, 2014 and 2013: Three months ended Nine months ended September 30, $ September 30, $ 2014 2013 Variance 2014 2013 Variance Net product sales $555,146 $400,405 $154,741 $1,634,257 $1,109,437 $524,820 In March 2014, we entered into an agreement with the French government which positively impacts prospective reimbursement of Soliris and also provides for reimbursement for shipments made in years prior to January 1, 2014. As a result of the agreement, in the first quarter of 2014, we recognized $87,830 of net product sales from Soliris in France relating to years prior to January 1, 2014. The factors driving of the increase in revenues for the three and nine months ended September 30, 2014, exclusive of the $87,830 recognized related to prior years, are as follows: Three months ended Nine months ended September 30, September 30, 2014 2014 Total change in net product sales 38.6 % 39.4 % Factors of change: Price 7.3 % 6.4 % Volume 31.9 % 34.2 % Foreign exchange (0.6 )% (1.2 )% Total change in net product sales 38.6 % 39.4 % 24 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) The increase in net product sales for the three and nine months ended September 30, 2014, as compared to the same periods in 2013, was primarily due to an increase in unit volumes of 31.9% and 34.2%, due to increased physician demand globally for Soliris therapy for patients with PNH or aHUS during the respectively periods. Price had a positive impact on net product sales of 7.3% and 6.4% for the three and nine months ended September 30, 2014, respectively. The positive price impact was primarily due to the agreement with the French government and a reduction in estimated rebates in Germany, offset by an increase in rebates in certain countries in Europe. The positive impacts of volume and price on net product sales were offset by the negative impact of foreign exchange of 0.6% and 1.2% for the three and nine months ended September 30, 2014, as compared to the same periods in 2013. The negative impact on foreign exchange of $2,334 and $14,081, or 0.6% and 1.2%, for the three and nine months ended September 30, 2014 was due to changes in foreign currency exchange rates (inclusive of hedging activity) versus the U.S. dollar for the three and nine months ended September 30, 2013. The negative impact was primarily due to changes in the Japanese Yen and the Russian Ruble, partly offset by the positive impacts of the Euro during the same respective periods. We recorded a gain in revenue of $3,283 and $5,709 for the three months ended September 30, 2014 and 2013, respectively, and $3,854 and $18,364 for the nine months ended September 30, 2014 and 2013, respectively, related to our foreign currency cash flow hedging program. Cost of Sales Cost of sales includes manufacturing costs as well as actual and estimated royalty expenses associated with sales of Soliris. The following table summarizes cost of sales for the three and nine months ended September 30, 2014 and 2013: Three months ended Nine months ended September 30, September 30, 2014 2013 Variance 2014 2013 Variance Cost of sales 51,858 42,177 $9,681 124,423 116,823 $7,600 Cost of sales as a percentage of net product sales 9.3 % 10.5 % (1.2 )% 7.6 % 10.5 % (2.9 )% In the first quarter of 2014, we entered into a settlement agreement with a third party related to the calculation of royalties payable to such third party under a pre-existing license agreement. Based on this settlement agreement, the Company recorded a reversal of accrued royalties of $5,124 as a reduction of cost of sales. In the first quarter of 2014, we also recorded an incremental impact in cost of sales of $2,055 for additional royalties related to the $87,830 of net product sales from prior year shipments. The remaining decrease in cost of sales for the three and nine months ended September 30, 2014 as a percentage of sales resulted from a decrease in royalties paid on sales of Soliris. In October 2013, we entered into a settlement agreement and dismissal with Novartis Vaccines and Diagnostics, Inc. pursuant to which Alexion was granted a nonexclusive, fully paid license and the case was dismissed with prejudice. As a result, we recorded expense of $9,181 in cost of sales in the third quarter 2013 related to this litigation settlement agreement. Research and Development Expense Our research and development expense includes personnel, facility and external costs associated with the research and development of our product candidates, as well as product development costs. We group our research and development expenses into two major categories: external direct expenses and all other research and development (R&D) expenses. External direct expenses are comprised of costs paid to outside parties for clinical development, product development and discovery research, as well as costs associated with strategic licensing agreements we have entered into with third parties. Clinical development costs are comprised of costs to conduct and manage clinical trials related to eculizumab and other product candidates. Product development costs are those incurred in performing duties related to manufacturing development and regulatory functions, including manufacturing of material for clinical and research activities. Discovery research costs are incurred in conducting laboratory studies and performing preclinical research for other uses of eculizumab and other product candidates. Licensing agreement costs include upfront and milestone payments made in connection with strategic licensing arrangements we have entered into with third parties. Clinical development costs have been accumulated and allocated to each of our programs, while product development and discovery research costs have not been allocated. 25 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts)All other R&D expenses consist of costs to compensate personnel, to maintain our facility, equipment and overhead and similar costs of our research and development efforts. These costs relate to efforts on our clinical and preclinical products, our product development and our discovery research efforts. These costs have not been allocated directly to each program. The following table provides information regarding research and development expenses: Three months ended Nine months ended September 30, $ September 30, $ 2014 2013 Variance 2014 2013 Variance Clinical development $28,254 $20,719 $7,535 $78,553 $48,715 $29,838 Product development 17,758 12,435 5,323 42,939 48,951 (6,012) Licensing agreements - 11,500 (11,500) 101,925 14,500 87,425 Discovery research 3,388 254 3,134 8,318 4,232 4,086 Total external direct expenses 49,400 44,908 4,492 231,735 116,398 115,337 Payroll and benefits 45,112 38,504 6,608 133,611 101,288 32,323 Operating and occupancy 2,809 2,099 710 9,450 6,308 3,142 Depreciation and amortization 3,340 2,698 642 9,876 7,314 2,562 Total other R&D expenses 51,261 43,301 7,960 152,937 114,910 38,027 Research and development expense $100,661 $88,209 $12,452 $384,672 $231,308 $153,364 For the three months ended September 30, 2014, the increase of $12,452 in research and development expense, as compared to the same period in the prior year, was primarily related to the following: • Increase of $7,535 in external clinical development expenses related primarily to an expansion of studies within our eculizumab programs and additional clinical costs associated with our asfotase alfa program (see table below). • Decrease of $11,500 in licensing agreement costs primarily due to the upfront payment on the license agreement entered into in the third quarter of 2013. • Increase of $6,608 in R&D payroll and benefit expense related primarily to the continued global expansion of staff supporting our increasing number of clinical and development programs. For the nine months ended September 30, 2014, the increase of $153,364 in research and development expense, as compared to the same period in the prior year, was primarily related to the following: • Increase of $29,838 in external clinical development expenses related primarily to an expansion of studies within our eculizumab programs and additional clinical costs associated with our asfotase alfa program (see table below). • Decrease of $6,012 in external product development expenses related primarily to a decrease in costs associated with the production of asfotase alfa for clinical trials, which have been capitalized to inventory starting in the second quarter of 2014. • Increase of $87,425 in licensing agreement costs primarily related to the upfront payment of $100,000 on the option agreement entered into with Moderna Therapeutics, Inc. in the first quarter of 2014. • Increase of $32,323 in R&D payroll and benefit expense related primarily to the continued global expansion of staff supporting our increasing number of clinical and development programs. 26-------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) The following table summarizes external direct expenses related to our clinical development programs. Please refer to "Clinical Development Programs" above for a description of each of these programs: Three months ended Nine months ended September 30, $ September 30, $ 2014 2013 Variance 2014 2013 Variance External direct expenses Eculizumab $18,427 $14,234 $4,193 $51,158 $30,555 $20,603 Asfotase alfa 5,491 2,234 3,257 14,838 8,518 6,320 cPMP 1,782 1,965 (183) 5,190 4,753 437 Other programs 1,515 1,686 (171) 4,328 3,469 859 Unallocated 1,039 600 439 3,039 1,420 1,619 $28,254 $20,719 $7,535 $78,553 $48,715 $29,838 The successful development of our drug candidates is uncertain and subject to a number of risks. We cannot guarantee that results of clinical trials will be favorable or sufficient to support regulatory approvals for our other programs. We could decide to abandon development or be required to spend considerable resources not otherwise contemplated. For additional discussion regarding the risks and uncertainties regarding our development programs, please refer to Item 1A "Risk Factors" in this Form 10-Q. Selling, General and Administrative Expense Our selling, general and administrative expense includes commercial and administrative personnel, corporate facility and external costs required to support the marketing and sales of our commercialized products. These selling, general and administrative costs include: corporate facility operating expenses and depreciation; marketing and sales operations in support of Soliris; human resources; finance, legal, information technology and support personnel expenses; and other corporate costs such as telecommunications, insurance, audit, government affairs and our global corporate compliance program. The table below provides information regarding selling, general and administrative expense: Three months ended Nine months ended September 30, $ September 30, $ 2014 2013 Variance 2014 2013 VarianceSalary, benefits and other labor expense $ 102,672 $ 75,222 $ 27,450 $ 280,427 $ 216,384 $ 64,043 External selling, general and administrative expense 54,993 47,664 7,329 166,006 138,517 27,489 Total selling, general and administrative expense $ 157,665 $ 122,886 $ 34,779 $ 446,433 $ 354,901 $ 91,532 For the three months ended September 30, 2014, the increase of $34,779 in selling, general and administrative expense, as compared to the same period in the prior year, was primarily related to the following: • Increase in salary, benefits and other labor expenses of $27,450. The increase was a result of increased headcount related to commercial development activities, including increases in payroll and benefits costs of $10,626 related to our global commercial staff to support global expansion. This increase was also due to increases in payroll and benefits of $16,824 within our general and administrative functions to support our infrastructure growth as a global commercial entity. • Increase in external selling, general and administrative expenses of $7,329. The increase was primarily due to an increase in marketing costs to support the continued growth in global sales of Soliris, as well as an increase in other administrative functions to support our infrastructure growth. For the nine months ended September 30, 2014, the increase of $91,532 in selling, general and administrative expense, as compared to the same period in the prior year, was primarily related to the following: • Increase in salary, benefits and other labor expenses of $64,043. The increase was a result of increased headcount related to commercial development activities, including increases in payroll and benefits costs of $32,737 related to our global commercial staff to support global expansion. This increase was also due to increases in payroll and 27-------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) benefits of $31,306 within our general and administrative functions to support our infrastructure growth as a global commercial entity. • Increase in external selling, general and administrative expenses of $27,489. This increase was primarily due to an increase in marketing costs to support the continued growth in global sales of Soliris, as well as an increase in other administrative functions to support our infrastructure growth. Impairment of Intangible Asset During the first quarter of 2014, we reviewed for impairment the value of an early stage, Phase I indefinite-lived intangible asset related to the Taligen acquisition. We initiated such review based on a reassessment of scientific findings associated with this acquired asset. As a result, in the first quarter of 2014, we recognized an impairment of $3,464 to adjust this asset to fair value, which was determined to be de minimis. We did not recognize any impairment loss for intangible assets during the three and nine months ended September 30, 2013. Acquisition-related Costs For the three and nine months ended September 30, 2014 and 2013, acquisition-related costs associated with our business combinations included the following: Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 Separately-identifiable employee costs $ - $ - $ - $ 248 Professional fees - - - 775 Changes in fair value of contingent consideration 8,303 2,573 10,254 5,951 $ 8,303 $ 2,573 $ 10,254 $ 6,974 The following table provides information for acquisition-related costs for each business combination: Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 Enobia Pharma Corp. $ 8,145 $ 2,210 $ 12,682 $ 5,920 Taligen Therapeutics, Inc. 24 (53 ) (2,411 ) 118 Orphatec Pharmaceuticals GmbH 134 416 (17 ) 936 $ 8,303 $ 2,573 $ 10,254 $ 6,974 Included in the acquisition-related costs for Taligen for the nine months ended September 30, 2014 is a benefit of $2,458 related to the decrease in the fair value of contingent consideration related to this acquisition during the first quarter of 2014. The decrease in fair value was a result of a decreased likelihood of payments for contingent consideration due to a reassessment of scientific findings associated with an early stage Phase I asset. Other Income and Expense The following table provides information regarding other income and expense: Three months ended Nine months ended September 30, $ September 30, $ 2014 2013 Variance 2014 2013 Variance Investment income $ 2,250 $ 638 $ 1,612 $ 6,177 $ 1,793 $ 4,384 Interest expense (655 ) (1,078 ) 423 (2,433 ) (3,305 ) 872 Foreign currency loss (2,045 ) (547 ) (1,498 ) (1,989 ) (134 ) (1,855 ) Total other income and expense $ (450 ) $ (987 ) $ 537 $ 1,755 $ (1,646 ) $ 3,401 We recognize investment income primarily from our portfolio of cash equivalents and marketable securities. Investment income was $2,250 and $638, for the three months ended, and $6,177 and $1,793 for the nine months ended September 30, 2014 and 2013, respectively. 28 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) We incur interest on our term notes and revolving credit facility. Interest expense was $655 and $1,078, for the three months ended, and $2,433 and $3,305 for the nine months ended September 30, 2014 and 2013, respectively. Foreign currency transaction gains and losses relate to changes in the fair value of monetary assets and liabilities denominated in foreign currencies. The foreign currency transaction losses totaled $2,045 and $547, for the three months ended, and $1,989 and $134, for the nine months ended September 30, 2014 and 2013, respectively. The amounts recorded in these periods were a result of the costs of hedging our exposures, as well as the fluctuation in exchange rates on the portion of our monetary assets and liabilities that were not fully hedged as part of our hedging programs. Income Taxes During the three and nine months ended September 30, 2014, we recorded an income tax provision of $58,478 and $163,186 and an effective tax rate of 24.8% and 24.5% , compared to an income tax provision of $40,503 and $116,405 and an effective tax rate of 30.2% and 30.0% for the three and nine months ended September 30, 2013. The reduction in the effective tax rate is primarily attributable to the centralization of our global supply chain and technical operations in Ireland. The tax provision for the three and nine months ended September 30, 2014 is attributable to the U.S. federal, state and foreign income taxes on our operations. Additionally, included in the nine months ended September 30, 2014 is $2,148 of tax attributable to our agreement with the French government that provided reimbursement for shipments of Soliris made prior to January 1, 2014. The tax provision for the three and nine months ended September 30, 2013 is attributable to the U.S. federal, state and foreign income taxes on our operations. Additionally, included in the nine months ended September 30, 2013 is a benefit of $2,854 attributable to the 2012 U.S. Federal tax credit for research and experimentation. The U.S. Federal tax credit for research and experimentation expenses expired December 31, 2011. In connection with this expiration, our 2012 tax expense did not include any benefit from the U.S. Federal tax credit for research and experimentation. In January 2013, the American Taxpayer Relief Act of 2012, which retroactively extended the tax credit for research and experimentation back to January 1, 2012 through the end of 2013, was signed into law. The effects of a change in tax law is recognized in the period that includes the date of enactment and, therefore, our tax benefit attributable to the 2012 U.S. Federal tax credit for research and experimentation was recorded in the first quarter of 2013. The U.S. Federal tax credit for research and experimentation expenses expired again on December 31, 2013. In connection with this expiration, our 2014 tax provision does not include any benefit from the U.S. Federal tax credit for research and experimentation. We continue to maintain a valuation allowance against certain other deferred tax assets where realization is not certain. Financial Condition, Liquidity and Capital Resources The following table summarizes the components of our financial condition as of September 30, 2014 and December 31, 2013: $ September 30, 2014 December 31, 2013 Variance Cash and cash equivalents $ 752,164 $ 529,857 $ 222,307 Marketable securities $ 1,029,543 $ 984,994 $ 44,549 Long-term debt (includes current portion) $ 69,500 $ 113,000 $ (43,500 ) Current assets $ 2,559,878 $ 2,186,857 $ 373,021 Current liabilities 502,537 582,429 (79,892 ) Working capital $ 2,057,341 $ 1,604,428 $ 452,913 The increase in cash and cash equivalents was primarily attributable to cash generated from operations, proceeds from the maturity or sale of available-for-sale securities, and net proceeds from the exercise of stock options. Offsetting these increases in cash were purchases of marketable securities, payments on our outstanding term loan, purchases of property, plant and equipment, and the repurchase of common stock. We also paid an upfront fee of $100,000 during the first quarter of 2014 related to an option agreement we entered into with Moderna Therapeutics, Inc. and an additional $25,000 for the purchase of Moderna LLC preferred equity. We expect continued growth in our expenditures, particularly those related to research and product development, clinical trials, regulatory approvals, international expansion, commercialization of products and capital investment. However, we anticipate that cash generated from operations and our existing available cash, cash equivalents and marketable securities should provide us adequate resources to fund our operations as currently planned. 29 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) We have financed our operations and capital expenditures primarily through positive cash flows from operations. We expect to continue to be able to fund our operations, including principal and interest payments on our credit facility and contingent payments from our acquisitions principally through our cash flows from operations. We may, from time to time, also seek additional funding through a combination of equity or debt financings or from other sources, if necessary, for future acquisitions or other strategic purposes. Financial Instruments Until required for use in the business, we may invest our cash reserves in money market funds or high-quality marketable securities in accordance with our investment policy. The stated objectives of our investment policy are to preserve capital, provide liquidity consistent with forecasted cash flow requirements, maintain appropriate diversification and generate returns relative to these investment objectives and prevailing market conditions. Financial instruments that potentially expose us to concentrations of credit risk are cash equivalents, marketable securities, accounts receivable and our foreign exchange derivative contracts. At September 30, 2014, three individual customers accounted for 21%, 11% and 10% of the accounts receivable balance. At December 31, 2013, two individual customers accounted for 20% and 10% of the accounts receivable balance. For the three and nine months ended September 30, 2014, one customer accounted for 18% of our product sales. For the three and nine months ended September 30, 2013, one customer accounted for 20% of our 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 due from these countries are due from or backed by sovereign or local governments, and the amount of non-sovereign accounts receivable is not material. The adverse credit and economic conditions in Italy and Spain, among other members of the European Union, have improved in recent periods and, although collection of our accounts receivables due from these countries may extend beyond our standard credit terms, we do not expect any such delays to have a material impact on our financial condition or results of operations. We manage our foreign currency 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. As of September 30, 2014, we have foreign exchange forward contracts with notional amounts totaling $1,637,681. These outstanding foreign exchange forward contracts had a net fair value of $85,042, of which an unrealized gain of $87,878 is included in other assets, offset by an unrealized loss of $2,836 included in other liabilities. The counterparties to these foreign exchange forward contracts are large multinational commercial banks, and we believe the risk of nonperformance is not material. At September 30, 2014, our financial assets and liabilities were recorded at fair value. We have classified our financial assets and liabilities as Level 1, 2 or 3 within the fair value hierarchy. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Our Level 1 assets consist of mutual fund investments. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, but substantially the full term of the financial instrument. Our Level 2 assets consist primarily of money market funds, marketable securities and foreign exchange forward contracts. Our Level 2 liabilities consist also of foreign exchange forward contracts. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. Our Level 3 liabilities consist of contingent consideration related to acquisitions. Business Combinations and Contingent Consideration Obligations The purchase agreements for our business combinations include contingent payments totaling up to $876,000 that will become payable if and when certain development and commercial milestones are achieved. Of these milestone amounts, $561,000 and $315,000 of the contingent payments relate to development and commercial milestones, respectively. We do not expect these amounts to have a significant impact on our liquidity in the near-term, and, during the next 12 months, we expect to make milestone payments totaling approximately $50,000. As additional future payments become probable, we will evaluate methods of funding payments, which could be made from available cash and marketable securities, cash generated from operations or proceeds from other financing. Leases In November 2012, we entered into a lease agreement for office and laboratory space to be constructed in New Haven, Connecticut. Although we will not legally own the premises, we are deemed to be the owner of the building during the construction period based on applicable accounting guidance for build-to-suit leases due to our involvement during the construction period. Accordingly, the landlord's costs of constructing the facility are capitalized, as a non-cash transaction, offset by a corresponding facility lease obligation in our consolidated balance sheet. As of September 30, 2014, we recorded a 30 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) construction-in-process asset of $91,759, inclusive of the landlord's costs as well as costs incurred by Alexion, and an offsetting facility lease obligation of $87,030 associated with the new facility. License Agreements In January 2014, we entered into an agreement with Moderna Therapeutics, Inc. (Moderna) that allows us to purchase ten product options to develop and commercialize treatments for rare diseases with Moderna's messenger RNA (mRNA) therapeutics platform. Alexion will lead the discovery, development and commercialization of the treatments produced through this broad, long-term strategic agreement, while Moderna will retain responsibility for the design and manufacture of the messenger RNA against selected targets. Due to the early stage of these assets, we recorded expense for an upfront payment of $100,000. We will also be responsible for funding research activities under the program. In addition, for each drug target, up to a maximum of ten targets, we could be required to make an option exercise payment of $15,000 and to pay up to an additional $120,000 with respect to a rare disease product and $400,000 with respect to a non-rare disease product in development and sales milestones if the specific milestones are met over time as well as royalties on commercial sales. In addition to the option agreement, we purchased $25,000 of non-voting preferred equity of Moderna LLC, Moderna's parent company. Long-term Debt In February 2012, we entered into a Credit Agreement (Credit Agreement) with a syndicate of lenders and other parties named in the Credit Agreement that provides for a $240,000 senior secured term loan facility payable in equal quarterly installments of $12,000 starting June 30, 2012 and a $200,000 senior secured revolving credit facility, which includes up to a $60,000 sublimit for letters of credit and a $10,000 sublimit for swingline loans. We may use the facilities for working capital requirements, acquisitions and other general corporate purposes. Any of Alexion's wholly-owned foreign subsidiaries may borrow funds under the facilities upon satisfaction of certain conditions described in the Credit Agreement. As of September 30, 2014, we had $69,500 outstanding on the term loan. As of September 30, 2014, we had open letters of credit of $11,621, and our borrowing availability under the revolving facility was $188,379. We expect that cash generated from operations will be sufficient to meet debt service obligations. Lonza Agreement We have supply agreements with Lonza relating to the manufacture of eculizumab and asfotase alfa, which requires payments to Lonza at the inception of contract and upon the initiation and completion of product manufactured. On an ongoing basis, we evaluate our plans for future levels of manufacturing by Lonza, which depends upon our commercial requirements, the progress of our clinical development programs and the production levels of ARIMF. We have various agreements with Lonza, with remaining total commitments of approximately $111,500 through 2018. Such commitments may be canceled only in limited circumstances. If we terminate certain supply agreements with Lonza without cause, we will be required to pay for product scheduled for manufacture under our arrangement. Under an existing arrangement with Lonza, we also pay Lonza a royalty on sales of Soliris manufactured at ARIMF. Taxes We do not record U.S. tax expense on the undistributed earnings of our controlled foreign corporation (CFC) subsidiaries as these earnings are intended to be permanently reinvested offshore. During the fourth quarter of 2013, in connection with the centralization of our global supply chain and technical operations in Ireland, our U.S. parent company became a direct partner in a foreign partnership subsidiary. To the extent that our U.S. parent company receives its allocation of partnership taxable income, the amounts will be taxable in the U.S. and therefore the permanent reinvestment assertion will no longer apply. The recognition of deferred tax liabilities associated with the aforementioned partnership resulted in tax expense of approximately $95,800 during the fourth quarter of 2013. We also distributed the majority of earnings and profits of our non-U.S. subsidiaries via a dividend in the amount of $152,000 during the fourth quarter of 2013. This resulted in repatriation of a significant portion of our unremitted earnings at December 31, 2013. We do not have any present or anticipated future need for cash held by our CFCs, as cash generated in the U.S., as well as borrowings, are expected to be sufficient to meet U.S. liquidity needs for the foreseeable future. At September 30, 2014, approximately $505,000 of our cash and cash equivalents was held by foreign subsidiaries, a significant portion of which is required for liquidity needs of our foreign subsidiaries. Due to the liability position of our foreign subsidiaries, these subsidiaries will repay any outstanding intercompany debt, prior to having excess cash available which could be used to repatriate to our entities in the United States. While our expectation is that all future undistributed earnings of our CFCs will be permanently reinvested, there could be certain unforeseen future events that could impact our permanent reinvestment assertion. Such events include acquisitions, corporate restructurings or tax law changes not currently contemplated. 31 -------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) Common Stock Repurchase Program In November 2012, we announced that our Board of Directors authorized the repurchase of up to $400,000 of our common stock. This repurchase program does not have an expiration date. We expect that cash generated from operations and our existing available cash and cash equivalents are sufficient to fund any share repurchases. Under the program, we repurchased 1,789 and 758 shares of our common stock at a cost of $283,148 and $66,136 during the nine months ended September 30, 2014 and 2013, respectively. As of September 30, 2014, there is a total of $39,163 remaining for repurchases under the program. Subsequent to September 30, 2014, we repurchased 100 shares of our common stock under our repurchase program at a cost of $16,890. Cash Flows The following summarizes our net change in cash and cash equivalents: Nine months ended September 30, $ 2014 2013 VarianceNet cash provided by operating activities $ 356,616 $ 288,468 $ 68,148 Net cash used in investing activities (165,690 ) (413,870 ) 248,180 Net cash provided by financing activities 37,238 47,123 (9,885 ) Effect of exchange rate changes on cash (5,857 ) (811 ) (5,046 ) Net change in cash and cash equivalents $ 222,307 $ (79,090 ) $ 301,397 The increase in cash and cash equivalents was primarily attributable to cash generated from operations, proceeds from the maturity or sale of available-for-sale securities, and net proceeds from the exercise of stock options. Offsetting these increases in cash were purchases of marketable securities, payments on our outstanding term loan, purchases of property, plant and equipment, and the repurchase of common stock. We also paid an upfront fee of $100,000 during the first quarter of 2014 related to an option agreement we entered into with Moderna Therapeutics, Inc. and an additional $25,000 for the purchase of Moderna LLC preferred equity. Operating Activities The components of cash flows from operating activities, as reported in our Condensed Consolidated Statements of Cash Flows, are as follows: • Our net income was $503,580 and $271,887 for the nine months ended September 30, 2014 and 2013, respectively. During the first quarter of 2014, we recorded expense of $100,000 for an upfront payment related to an option agreement we entered into with Moderna Therapeutics, Inc. • Non-cash items included depreciation and amortization,impairment of intangible assets, change in fair value of contingentconsideration, share-based compensation expense, premium amortization of available-for-sale securities, deferred taxes, unrealized foreign currency gains, and unrealized gains and losses on forward contracts, and were (decreases) increases to reconcile net income to net cash flows from operating activities of $(17,438) and $95,394 for the nine months ended September 30, 2014 and 2013,respectively. • We reclassified $286,325 and $95,832 of windfall tax benefits from cash flows from operations to cash flows from financing activities, which caused a decrease in cash from operations during the nine months ended September 30, 2014 and 2013, respectively. The amount of the windfall tax benefit was significantly higher during the nine months ended September 30, 2014 due to an increased stock price and increased level of stock option exercises. • Net cash inflow due to changes in operating assets and liabilities was $156,799 and $17,019 for the nine months ended September 30, 2014 and 2013, respectively. The $156,799 change in operating assets and liabilities primarily relates to: • Increase in inventory of $26,217 related to increased production of inventory to support commercial growth and the capitalization of $9,876 of inventory produced for commercial sale for products awaiting regulatory approval. • Increase of $6,241 in prepaid expenses and other assets primarily related to an increase in prepaidmanufacturing expenses. 32-------------------------------------------------------------------------------- Alexion Pharmaceuticals, Inc. (amounts in thousands, except per share amounts) • Increase of $166,545 in accounts payable, accrued expenses and other liabilities primarily related to an increase in trade accounts payable and a change in accrued income taxes, offset by a decrease in accruals for rebates of approximately $87,800 resulting from the agreement with the French government for reimbursement of prior year shipments and a decrease in accruals for royalties of approximately $20,100 resulting from the settlement agreement we entered into with a third party related to the calculation of royalties under a pre-existing license agreement. • Increase in deferred revenue of $45,443 due to increased shipments in advance of recognizing revenue. Investing Activities The components of cash flows from investing activities consisted of the following: • Purchases of available-for-sale marketable securities of $451,842 and $420,515 for the nine months ended September 30, 2014 and 2013, respectively, offset by proceeds from the maturity or sale of available-for-sale marketable securities of $398,071 and $27,951, respectively, during the same periods. • Purchase of $25,000 of preferred equity of Moderna LLC during the nine months ended September 30, 2014. • Additions to property, plant and equipment of $83,879 and $20,628 for the nine months ended September 30, 2014 and 2013,respectively. Financing Activities Net cash flows from financing activities reflected proceeds from the exercise of stock options of $77,680 and $44,560 for the nine months ended September 30, 2014 and 2013, respectively. Net cash flows for the nine months ended September 30, 2014 and 2013 also include $286,325 and $95,832, respectively, of excess tax benefits from stock options attributable to the utilization of the excess tax benefit portion of federal and state net operating losses and tax credits. In connection with the acquisition of Enobia Pharma Corp. in February 2012, we borrowed $240,000 under the term loan facility. During the nine months ended September 30, 2014 and 2013, we made payments of $43,500 and $24,000, respectively, against the term loan facility and the facility had $69,500 remaining outstanding as of September 30, 2014. During the nine months ended September 30, 2014 and 2013, we repurchased $283,148 and $66,136 worth of shares of our common stock under a repurchase program that was approved by our Board of Directors in November 2012. As of September 30, 2014, there is a total of $39,163 remaining for repurchases under the program. Contractual Obligations The disclosure of payments we have committed to make under our contractual obligations are summarized in our Annual Report on Form 10-K for the twelve months ended December 31, 2013, in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Contractual Obligations." There have not been any material changes to such contractual obligations since December 31, 2013. |