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EX-32.1 - SECTION 906 CERTIFICATION - CEO - MEDICINES CO /DEmdcoex32103312016-q12016.htm
EX-10.1 - EXHIBIT 10.1 - MEDICINES CO /DEmdcoex10103312016-q12016.htm
EX-31.1 - SECTION 302 CERTIFICATION - CEO - MEDICINES CO /DEmdcoex31103312016-q12016.htm
EX-31.2 - SECTION 302 CERTIFICATION - CFO - MEDICINES CO /DEmdcoex31203312016-q12016.htm
EX-32.2 - SECTION 906 CERTIFICATION - CFO - MEDICINES CO /DEmdcoex32203312016-q12016.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to

Commission file number 000-31191

THE MEDICINES COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
04-3324394
(I.R.S. Employer
Identification No.)
 
 
 
8 Sylvan Way
Parsippany, New Jersey
(Address of principal executive offices)
 
07054
(Zip Code)

Registrant’s telephone number, including area code: (973) 290-6000

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

As of May 5, 2016, there were 70,072,431 shares of Common Stock, $0.001 par value per share, outstanding (excluding 2,192,982 shares held in treasury).




THE MEDICINES COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended March 31, 2016
TABLE OF CONTENTS





Part I. Financial Information

Item 1. Condensed Financial Statements



1

THE MEDICINES COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)

 
March 31,
2016
 
December 31,
2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
430,196

 
$
373,173

Accounts receivable, net of allowances of approximately $13.7 million and $17.6 million at
March 31, 2016 and December 31, 2015
42,834

 
52,328

Inventory
68,454

 
64,584

Prepaid expenses and other current assets
19,337

 
19,995

Current assets held for sale

 
322,837

Total current assets
560,821

 
832,917

Fixed assets, net
34,416

 
34,780

Intangible assets, net
629,935

 
636,220

Goodwill
289,441

 
289,441

Restricted cash
1,406

 
1,428

Contingent purchase price from sale of business
78,000

 

Other assets
750

 
730

Total assets
$
1,594,769

 
$
1,795,516

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,526

 
$
36,038

Accrued expenses
103,109

 
128,558

Current portion of contingent purchase price
29,939

 
26,800

Convertible senior notes
258,800

 
255,473

Deferred revenue
21,869

 
19,863

Current liabilities held for sale

 
67,515

Total current liabilities
429,243

 
534,247

Contingent purchase price
89,673

 
96,957

Convertible senior notes
315,080

 
312,107

Deferred tax liabilities
89,150

 
89,996

Other liabilities
12,530

 
13,346

Total liabilities
935,676

 
1,046,653

Equity component of currently redeemable convertible senior notes (Note 10)
14,167

 
17,089

Stockholders’ equity:
 
 
 
Preferred stock, $1.00 par value per share, 5,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $.001 par value per share; 187,500,000 authorized, 72,131,960 issued and 69,938,978 outstanding at March 31, 2016 and 71,767,371 issued and 69,574,389 outstanding at December 31, 2015
72

 
72

Additional paid-in capital
1,223,024

 
1,208,058

Treasury stock, at cost; 2,192,982 shares at March 31, 2016 and December 31, 2015
(50,000
)
 
(50,000
)
Accumulated deficit
(522,313
)
 
(429,865
)
Accumulated other comprehensive (loss) income
(5,377
)
 
3,973

Total The Medicines Company stockholders’ equity
645,406

 
732,238

Non-controlling interest in joint venture
(480
)
 
(464
)
Total stockholders’ equity
644,926

 
731,774

Total liabilities and stockholders’ equity
$
1,594,769

 
$
1,795,516

See accompanying notes to condensed consolidated financial statements.


2

THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

 
Three Months Ended
March 31,
 
2016
 
2015
Net product revenues
$
31,375

 
$
110,115

Royalty revenues
18,931

 

Total net revenues
50,306

 
110,115

Operating expenses:
 
 
 
Cost of revenue
18,797

 
20,538

Research and development
33,491

 
23,283

Selling, general and administrative
79,298

 
80,785

Total operating expenses
131,586

 
124,606

Loss from operations
(81,280
)
 
(14,491
)
Co-promotion and license income
975

 
8,388

Gain on remeasurement of equity investment

 
22,741

Loss in equity investment

 
(144
)
Interest expense
(9,746
)
 
(8,615
)
Other (loss) income
(262
)
 
467

(Loss) income from continuing operations before income taxes
(90,313
)
 
8,346

Provision for income taxes
(46
)
 
(4,001
)
Net (loss) income from continuing operations
(90,359
)
 
4,345

(Loss) income from discontinued operations, net of tax
(2,105
)
 
661

Net (loss) income
(92,464
)
 
5,006

Net loss attributable to non-controlling interest
16

 
28

Net (loss) income attributable to The Medicines Company
$
(92,448
)
 
$
5,034

 
 
 
 
Amounts attributable to The Medicines Company:
 
 
 
Net (loss) income from continuing operations
$
(90,343
)
 
$
4,373

(Loss) income from discontinued operations, net of tax
(2,105
)
 
661

Net (loss) income attributable to The Medicines Company
$
(92,448
)
 
$
5,034

 
 
 
 
Basic (loss) earnings per common share attributable to The Medicines Company:
 
 
 
(Loss) earnings from continuing operations
$
(1.31
)
 
$
0.07

(Loss) earnings from discontinued operations
(0.03
)
 
0.01

Basic (loss) earnings per share
$
(1.34
)
 
$
0.08

 
 
 
 
Diluted (loss) earnings per common share attributable to The Medicines Company:
 
 
 
(Loss) earnings from continuing operations
$
(1.31
)
 
$
0.07

(Loss) earnings from discontinued operations
(0.03
)
 
0.01

Diluted (loss) earnings per share
$
(1.34
)
 
$
0.08

 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
Basic
69,210

 
65,174

Diluted
69,210

 
66,929

See accompanying notes to condensed consolidated financial statements.




3

THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)

 
Three Months Ended March 31,
 
2016
 
2015
Net (loss) income
$
(92,464
)
 
$
5,006

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
315

 
2,706

Amounts reclassified from accumulated other comprehensive income
(9,665
)
 

Other comprehensive (loss) income
(9,350
)
 
2,706

Comprehensive (loss) income
(101,814
)
 
7,712

Less: comprehensive loss attributable to non-controlling interest
16

 
28

Comprehensive (loss) income attributable to The Medicines Company
$
(101,798
)
 
$
7,740

See accompanying notes to condensed consolidated financial statements.



4

THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

 
Three Months Ended March 31,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(92,464
)
 
$
5,006

Adjustments to reconcile net (loss) income to net cash used in operating activities:
 
 
 
Depreciation and amortization
7,343

 
7,561

Amortization of debt discount
6,300

 
5,516

Unrealized foreign currency transaction gains, net
(573
)
 
(151
)
Non-cash stock compensation expense
6,940

 
7,618

Gain on sale of business
(1,004
)
 

Loss on disposal of fixed assets

 
530

Deferred tax benefit
(867
)
 
(433
)
Excess tax expense from share-based compensation arrangements

 
282

Gain on remeasurement of equity investment

 
(22,741
)
Change in contingent consideration obligation
(1,372
)
 
1,417

Loss in equity investment

 
144

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
9,580

 
56,032

Inventory, net
(2,347
)
 
(46,006
)
Prepaid expenses and other current assets
635

 
1,214

Accounts payable
(20,559
)
 
(6,142
)
Accrued expenses
(31,181
)
 
(44,230
)
Deferred revenue
1,993

 
(933
)
Other liabilities
(804
)
 
(5,713
)
Net cash used in operating activities
(118,380
)
 
(41,029
)
Cash flows from investing activities:
 
 
 
Proceeds from sale of fixed assets

 
250

Purchases of fixed assets

 
(632
)
Acquisition of business, net of cash acquired

 
(28,397
)
Payments for intangible assets

 
(90,617
)
Proceeds from sale of business
174,068

 

Change in restricted cash
(13
)
 
17

Net cash provided by (used in) investing activities
174,055

 
(119,379
)
Cash flows from financing activities:
 
 
 
Proceeds from issuances of common stock, net
5,104

 
11,975

Milestone payments
(2,773
)
 
(1,000
)
Proceeds from the issuance of convertible senior notes

 
400,000

Debt and equity issuance costs

 
(12,769
)
Excess tax expense from share-based compensation arrangements

 
(282
)
Net cash provided by financing activities
2,331

 
397,924

Effect of exchange rate changes on cash
(983
)
 
(1,184
)
Increase in cash and cash equivalents
57,023

 
236,332

Cash and cash equivalents at beginning of period
373,173

 
370,741

Cash and cash equivalents at end of period
$
430,196

 
$
607,073

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
5,000

 
$

Taxes paid
$
24

 
$
45

See accompanying notes to condensed consolidated financial statements.


5


THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

The Medicines Company® name and logo, Angiomax®, Angiox®, Cleviprex®, Carbavance®, Ionsys®, Kengreal®, Kengrexal® and Orbactiv® are registered trademarks of The Medicines Company in the United States and/or other countries. All other trademarks, service marks or other tradenames appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. Except where otherwise indicated, or where the context may otherwise require, references to “Angiomax” in this Quarterly Report on Form 10-Q mean Angiomax and Angiox, collectively, and references to “Kengreal” mean Kengreal and Kengrexal, collectively. References to “the Company,” “we,” “us” or “our” mean The Medicines Company, a Delaware corporation, and its subsidiaries.

1. Nature of Business

The Medicines Company (the Company) is a global biopharmaceutical company focused on saving lives, alleviating suffering and contributing to the economics of healthcare by focusing on leading acute/intensive care hospitals worldwide. The Company markets Angiomax® (bivalirudin), Cleviprex® (clevidipine) injectable emulsion, Ionsys® (fentanyl iontophoretic transdermal system), Kengreal® (cangrelor), Minocin (minocycline) for injection and Orbactiv® (oritavancin). The Company also has a pipeline of acute and intensive care hospital products in development, including ABP-700, ALN-PCSsc, Carbavance® and MDCO-216. The Company has the right to develop, manufacture and commercialize ALN-PCSsc under its collaboration agreement with Alnylam Pharmaceuticals, Inc. (Alnylam). The Company believes that its products and products in development possess favorable attributes that competitive products do not provide, can satisfy unmet medical needs in the acute and intensive care hospital product market and offer, or, in the case of its products in development, have the potential to offer, improved performance to hospital businesses.

In addition to these products and products in development, the Company sells a ready-to-use formulation of Argatroban and has a portfolio of ten generic drugs, which it refers to as its acute care generic products, that the Company has the non-exclusive right to market in the United States. The Company is currently selling three of its acute care generic products, midazolam, ondansetron and rocuronium.

On July 2, 2015, the Company entered into a supply and distribution agreement with Sandoz Inc. (Sandoz), under which the Company granted Sandoz the exclusive right to sell in the United States an authorized generic of Angiomax (bivalirudin). The Company entered into the supply and distribution agreement as a result of the July 2, 2015 U.S. Court of Appeals for the Federal Circuit (Federal Circuit Court) ruling against the Company in its patent infringement litigation with Hospira, Inc. (Hospira) with respect to U.S. Patent No. 7,582,727 (‘727 patent) and U.S. Patent No. 7,598,343 (‘343 patent), covering a more consistent and improved Angiomax drug product and the processes by which it is made. In its July 2, 2015 ruling, the Federal Circuit Court held the ‘727 patent and the ‘343 patent invalid. On July 15, 2015, Hospira’s Abbreviated New Drug Applications (ANDA) for its generic versions of bivalirudin were approved by the FDA and Hospira began selling its generic versions of bivalirudin. In November 2015, the Company’s petition for en banc review of the Federal Circuit Court’s July 2, 2015 decision was granted and the Federal Circuit Court vacated its July 2, 2015 decision. Notwithstanding the granting of the Company’s petition for en banc review, due to the July 2, 2015 decision and the Company’s resulting entry into a supply and distribution agreement with Sandoz and Hospira’s entry into the market, Angiomax is now subject to generic competition with the authorized generic and Hospira’s generic bivalirudin products.

On November 3, 2015, the Company announced that it was in the process of evaluating its operations with a goal of unlocking stockholder value. In particular, the Company stated its current intention was to explore strategies for optimizing its capital structure and liquidity position and to narrow the Company’s operational focus by strategically separating non-core businesses and products in order to generate non-dilutive cash and reduce associated cash burn and capital requirements, including, among other things, by potentially divesting or partnering its hemostasis portfolio, consisting of PreveLeak (surgical sealant), Raplixa (fibrin sealant) and Recothrom Thrombin topical (Recombinant) (the Hemostasis Business).

On February 1, 2016, the Company completed the sale of its Hemostasis Business, to wholly owned subsidiaries of Mallinckrodt plc (collectively, Mallinckrodt) pursuant to the Purchase and Sale Agreement dated December 18, 2015 (the Purchase and Sale Agreement) between the Company and Mallinckrodt. At completion of the sale, the Company received approximately $174.1 million in cash from Mallinckrodt, and may receive up to an additional $235.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of PreveLeak™ and Raplixa™. As a result of the transaction, the Company accounted for the assets and liabilities of the Hemostasis Business as held for sale at December 31, 2015. As a result of the classification as held for sale, the Company recorded impairment charges of $133.3 million, including $24.5 million related to goodwill, to reduce the Hemostasis Business disposal group’s carrying value to its estimated fair value, less costs to sell for the year ended December 31, 2015. Further, the financial results of the Hemostasis Business held for sale have been


6

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


reclassified to discontinued operations for all periods presented in our condensed consolidated financial statements. See Note 16, “Discontinued Operations,” for further details.

2. Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 “Significant Accounting Policies” in the notes to the condensed consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations, comprehensive (loss) income, and cash flows for the periods presented.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company records net income (loss) attributable to non-controlling interest in the Company’s condensed consolidated financial statements equal to the percentage of ownership interest retained in the respective operations by the non-controlling parties. The Company has no unconsolidated subsidiaries.

The Company’s results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results that may be expected from the Company for the entire fiscal year or any other quarter of the fiscal year ending December 31, 2016. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the 2015 Form 10-K) as filed with the SEC.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, expenses and accumulated other comprehensive (loss)/income that are reported in the condensed consolidated financial statements and accompanying disclosures. Actual results may be different.

Contingencies

The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company continually assesses litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss which could be estimated. In accordance with the guidance of the FASB on accounting for contingencies, the Company accrues for all contingencies at the earliest date at which the Company deems it probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely than another, the Company accrues the minimum of the range. In the cases where the Company believes that a reasonably possible loss exists, the Company discloses the facts and circumstances of the litigation, including an estimable range, if possible.



7

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Contingent purchase price from sale of business
Contingent purchase price from sale of business is measured at fair value utlizing the “income method,” which applies a probability weighting that considers the estimated future net sales of each of the respective products to determine the probability that each sale milestone will be met. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products and expected industry trends. The Company also considers qualitative factors such as development of competing drugs, regulatory developments and other qualitative factors. Once the year in which each of the sales milestones would be achieved is determined, the respective milestones are then discounted to the present value using an appropriate discount rate. The Company will recognize any increases in the carrying amount or impairments of the contingent purchase price if and when the milestones are achieved or determined to have no value. These increases in carrying amount or impairments would be recorded in selling, general and administrative expenses.
Research and Development

Research and development costs are expensed as incurred. Clinical study costs are accrued over the service periods specified in the contracts and adjusted as necessary based upon an ongoing review of the level of effort and costs actually incurred. Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development. Milestone payments made in connection with regulatory approvals are capitalized and amortized to cost of revenue over the remaining useful life of the asset.

The Company performs research and development for U.S. government agencies under a cost-reimbursable contract in which the Company is reimbursed for direct costs incurred plus allowable indirect costs. The Company recognizes the reimbursements under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collection of the contract price is reasonably assured. The reimbursements are classified as an offset to research and development expenses. The Company recorded reductions of research and development expenses of approximately $6.3 million and $3.2 million for the three months ended March 31, 2016 and 2015, respectively.
Recent Accounting Pronouncements

In May 2014, the FASB issued a comprehensive new revenue recognition Accounting Standards Update, “Revenue from Contracts with Customers (Topic 606)” (ASU No. 2014-09). ASU No. 2014-09 provides guidance to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. With the issuance of ASU No. 2015-14 in August 2015, the FASB deferred the effective date of the revenue recognition guidance to reporting periods beginning after December 15, 2017. Early adoption of the standard is permitted but not before the original effective date, which was for reporting periods beginning after December 15, 2016. With the issuance of ASU No. 2016-08 in March 2016 and ASU No. 2016-10 in April 2016, the FASB further amended guidance on recording revenue on a gross versus a net basis and on identifying performance obligations and licensing, respectively.  The Company expects to adopt this guidance when effective and continues to evaluate the effect that the updated standard, as well as additional amendments, may have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 310-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern” (ASU No. 2014-15), which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. This new ASU requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The ASU is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the possible impact of ASU No. 2014-15 on its consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Interpretation of Interest (Subtopic 835-35)” which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. This will make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance in the quarter ended March 31, 2016. As a result of adopting this guidance, the Company has reclassified $2.4 million and $9.0 million of debt issuance costs from noncurrent other assets to current convertible senior notes and noncurrent convertible senior notes, respectively, on its balance sheet as of December 31, 2015.


8

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)



In July 2015, the FASB issued ASU No. 2015-11, “Inventory 9 (Topic 330) - Simplifying the Measurement of Inventory” (ASU No. 2015-11). ASU No. 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value, except for inventory that is measured using the last-in, first-out method or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016 and is to be applied prospectively with early adoption permitted. The Company is currently evaluating the impact of adopting ASU No. 2015-11 on its consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU No. 2016-01). ASU No. 2016-01 enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The new guidance affects all reporting organizations (whether public or private) that hold financial assets or owe financial liabilities. The ASU is effective for years beginning after December 15, 2017, including interim periods within those fiscal years. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (ASU No. 2016-02). ASU No. 2016-02 will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU No. 2016-02 will be effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018, with early adoption permitted. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (ASU No. 2016-09). This ASU makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation, and the financial statement presentation of excess tax benefits or deficiencies. ASU No. 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

3. Share-Based Compensation

The Company recorded share-based compensation expense of approximately $6.9 million and $7.6 million for the three months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was approximately $45.7 million of total unrecognized compensation costs related to non-vested share-based employee compensation arrangements granted under the Company’s equity compensation plans. The Company expects to recognize those costs over a weighted average period of 1.59 years.

During the three months ended March 31, 2016 and 2015, the Company issued a total of 409,220 and 732,686, respectively, of shares of its common stock upon the exercise of stock options, grants of restricted stock, and purchases under the Company’s 2010 employee stock purchase plan (ESPP). Cash received from the exercise of stock options and purchases through the ESPP during the three months ended March 31, 2016 and 2015 was $5.1 million and $12.0 million, respectively, and is included within the financing activities section of the accompanying condensed consolidated statements of cash flows.



9

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


4. (Loss) Earnings per Share

The following table sets forth the computation of basic and diluted (loss) earnings per share for the three months ended March 31, 2016 and 2015:
 
Three Months Ended
March 31,
 
2016
 
2015
 
(in thousands, except per share amounts)
Net (loss) income from continuing operations attributable to The Medicines Company
$
(90,343
)
 
$
4,373

(Loss) income from discontinued operations, net of tax
(2,105
)
 
661

Net (loss) income attributable to The Medicines Company
$
(92,448
)
 
$
5,034

 
 
 
 
Weighted average common shares outstanding, basic
69,210

 
65,174

Plus: net effect of dilutive stock options, warrants, restricted common shares and shares issuable upon conversion of Notes

 
1,755

Weighted average common shares outstanding, diluted
69,210

 
66,929

 
 
 
 
Basic (loss) earnings per common share attributable to The Medicines Company:
 
 
 
(Loss) earnings from continuing operations
$
(1.31
)
 
$
0.07

(Loss) earnings from discontinued operations
(0.03
)
 
0.01

Basic (loss) earnings per share
$
(1.34
)
 
$
0.08

 
 
 
 
Diluted (loss) earnings per common share attributable to The Medicines Company:
 
 
 
(Loss) earnings from continuing operations
$
(1.31
)
 
$
0.07

(Loss) earnings from discontinued operations
(0.03
)
 
0.01

Diluted (loss) earnings per share
$
(1.34
)
 
$
0.08


Basic (loss) earnings per share is computed by dividing consolidated net (loss) income attributable to The Medicines Company by the weighted average number of shares of common stock outstanding during the period, excluding unvested restricted common shares. The number of potentially dilutive common shares equivalents is calculated using the treasury stock method.

For periods of net loss, diluted loss per share is calculated similar to basic loss per share as the effect of including all potentially dilutive common share equivalents is anti-dilutive. Due to the period of net loss from continuing operations attributable to The Medicines Company, the calculation of diluted loss per share for the three months ended March 31, 2016 excluded 2,897,451 potentially dilutive stock options, warrants, restricted common shares, and shares issuable upon conversion of the 2017 and 2022 Notes as their inclusion would have an anti-dilutive effect.

For periods of net income when the effects are not anti-dilutive, diluted earnings per share is computed by dividing the net income attributable to The Medicines Company by the weighted average number of shares outstanding and the impact of all potential dilutive common shares, consisting primarily of stock options, unvested restricted common stock, shares issuable upon conversion of convertible senior notes due 2017 and 2022 and stock purchase warrants. For the three months ended March 31, 2015, there were 4,718,541 shares of unvested restricted stock excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive.

In January 2015, the Company issued the 2022 Notes (see Note 10, “Convertible Senior Notes”). The conversion rate for the 2022 Notes was initially, and remains, 29.8806 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, which is equivalent to an initial conversion price of approximately $33.47 per share of the Company’s common stock. For the three months ended March 31, 2015, there was no dilutive effect of the 2022 Notes as the stock price did not exceed the conversion price.

In June 2012, the Company issued the 2017 Notes (see Note 10, “Convertible Senior Notes”). In connection with the issuance of the 2017 Notes, the Company entered into convertible note hedge transactions with respect to its common stock (2017 Note


10

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Hedges) with several of the initial purchasers of the 2017 Notes, their affiliates and other financial institutions (2017 Hedge Counterparties). The options that are part of the 2017 Note Hedges are not considered for purposes of calculating the total shares outstanding under the basic and diluted net income per share, as their effect would be anti-dilutive. The 2017 Note Hedges are expected generally to reduce the potential dilution with respect to shares of the Company's common stock upon any conversion of the 2017 Notes in the event that the market price per share of the Company's common stock, as measured under the terms of the 2017 Note Hedges, is greater than the strike price of the 2017 Note Hedges, which initially corresponded to the conversion price of the 2017 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the 2017 Notes. For the three months ended March 31, 2015, there were 55,740 shares of common stock issuable upon conversion of the 2017 Notes included in diluted shares.

In addition, in connection with the 2017 Note Hedges, the Company entered into warrant transactions with the 2017 Hedge Counterparties, pursuant to which the Company sold warrants (2017 Warrants) to the Hedge Counterparties to purchase, subject to customary anti-dilution adjustments, up to 9.8 million shares of the Company’s common stock at a strike price of $34.20 per share. The 2017 Warrants will have a dilutive effect with respect to the Company’s common stock to the extent that the market price per share of the Company’s common stock, as measured under the terms of the 2017 Warrants, exceeds the applicable strike price of the 2017 Warrants. However, subject to certain conditions, the Company may elect to settle all of the 2017 Warrants in cash. For the three months ended March 31, 2015, the 2017 Warrants did not have a dilutive effect on earnings per share because the average market price during the period presented was below the strike price.

5. Income Taxes

For the three months ended March 31, 2016 and 2015, the Company recorded a provision of $0.05 million and $4.0 million for income taxes, respectively, based upon its estimated federal, state and foreign (loss)/income for the year. The worldwide effective income tax rates for the Company for the three months ended March 31, 2016 and 2015 were (0.1)% and 45.8%, respectively. This decrease in effective tax rates was primarily driven by the Company’s projected loss for the year 2016 and its inability to realize any benefit from this loss due to the establishment of a valuation allowance against substantial portions of its deferred tax assets during the fourth quarter of 2015. For the three months ended March 31, 2016, the Company’s provision for income taxes is the result of state tax minimums and estimated taxes due by profitable foreign subsidiaries.

The Company considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company placed significant weight on the fact that the Company expects to be in a cumulative net book loss for the three-year period ending December 31, 2016 in recording valuation allowances on substantial portions of its deferred tax assets as of March 31, 2016. The cumulative net book loss is primarily the result of Angiomax facing generic competition in the U.S. since the July 2, 2015 decision by the Federal Circuit Court which held the ‘727 patent and ‘343 patent invalid.

The Company will continue to evaluate its ability to realize its deferred tax assets on a periodic basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of products currently under development. Any additional changes to the valuation allowance recorded on deferred tax assets in the future would impact the Company’s income taxes.

6. Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents included cash of $424.2 million and $367.2 million at March 31, 2016 and December 31, 2015, respectively. Cash and cash equivalents at both March 31, 2016 and December 31, 2015 also included investments of $6.0 million in money market funds with original maturities of less than three months.

Restricted Cash

The Company had restricted cash of $1.4 million at both March 31, 2016 and December 31, 2015, which included $1.0 million at both March 31, 2016 and December 31, 2015 for an outstanding letter of credit associated with the Company’s lease for the office space in Parsippany, New Jersey. The funds are invested in certificates of deposit. The letter of credit permits draws by the landlord to cure defaults by the Company. In addition, as a result of the acquisition of Targanta Therapeutics Corporation (Targanta) in 2009, the Company had restricted cash of $0.1 million at both March 31, 2016 and December 31, 2015, in the form of a guaranteed


11

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


investment certificate collateralizing an available credit facility. The Company also had restricted cash of $0.3 million at both March 31, 2016 and December 31, 2015, related to certain foreign tender requirements.

7. Fair Value Measurements

The Company applies a fair value framework in order to measure and disclose its financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1
Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 asset consists of money market investments.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates and yield curves.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company’s Level 3 assets and liabilities consist of the contingent purchase prices associated with the Company’s dispositions and business combinations, respectively. The fair value of certain development or regulatory milestone based contingent purchase prices was determined in a discounted cash flow framework by probability weighting the future contractual payment with management's assessment of the likelihood of achieving these milestones and present valuing them using a risk-adjusted discount rate. Certain sales milestone based payments were determined in a discounted cash flow framework where risk-adjusted revenue scenarios were estimated using Monte Carlo simulation models to compute contractual payments which were present valued using a risk-adjusted discount rate.

Financial assets measured at fair value on a nonrecurring basis

As part of the Purchase and Sale Agreement with Mallinckrodt, the Company may receive up to an additional $235.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of PreveLeak™ and Raplixa™. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates. The Company utilized the “income method,” which applies a probability weighting that considers the estimated future net sales of each of the respective products to determine the probability that each sale milestone will be met. These projections were based on factors such as relevant market size, patent protection, historical pricing of similar products and expected industry trends. The Company anticipates payment from Malinckrodt on these sales milestones between 2017 and 2022 with probabilities of achievement ranging from 15% to 85%. The Company also considers qualitative factors such as development of competing drugs, regulatory developments and other qualitative factors. The Company determined the year in which it believes each of the sales milestones will be achieved. The respective milestones were then discounted to the present value using a discount rate of 10%. Any changes to fair value will be recorded if and when the sales milestones are achieved. The Company calculated the fair value of these contingent payments to be received from Mallinckrodt as $78.0 million, which are reflected as a contingent purchase price from sale of business on the condensed consolidated balance sheet at March 31, 2016. The Company classified these contingent payments as Level 3 assets. Any increases in the carrying amount or impairments of sales milestones would be recognized in selling, general and administrative expenses if and when the milestones are achieved or determined to have no value.

Financial assets and liabilities measured at fair value on a recurring basis

Financial assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.



12

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Except for the Company’s Level 2 liabilities and hedges which are discussed in Note 10, “Convertible Senior Notes,” the following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015, by level, within the fair value hierarchy:

 
As of March 31, 2016
 
As of December 31, 2015
Assets and Liabilities
Quoted Prices In
Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
 (Level 2)
 
Significant
Unobservable
Inputs
 (Level 3)
 
Balance as of March 31, 2016
 
Quoted Prices In
Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
 (Level 2)
 
Significant
Unobservable
Inputs
 (Level 3)
 
Balance as of December 31, 2015
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market
$
6,036

 
$

 
$

 
$
6,036

 
$
6,033

 
$

 
$

 
$
6,033

Total assets at fair value
$
6,036

 
$

 
$

 
$
6,036

 
$
6,033

 
$

 
$

 
$
6,033

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent purchase price
$

 
$

 
$
119,612

 
$
119,612

 
$

 
$

 
$
123,757

 
$
123,757

Total liabilities at fair value
$

 
$

 
$
119,612

 
$
119,612

 
$

 
$

 
$
123,757

 
$
123,757


There were no transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy that occurred during the three months ended March 31, 2016.

Level 3 disclosures

The Company measures contingent purchase price at fair value based on significant inputs not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of contingent purchase price uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of contingent purchase price related to updated assumptions and estimates are recognized within selling, general and administrative expenses in the accompanying condensed consolidated statements of operations.

The contingent purchase price may change significantly as additional data is obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates. The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.



13

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


The following table provides quantitative information associated with the fair value measurements of the Company’s Level 3 liabilities:

 
 
Fair Value as of
March 31, 2016
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
 
 
(in thousands)
 
 
 
 
 
 
Targanta:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
6,012

 
Probability-adjusted discounted cash flow
 
Probability of success
 
20%
 
 
 
 
 
 
Period in which milestone is expected to be achieved
 
2020
 
 
 
 
 
 
Discount rate
 
11%
Incline:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
25,900

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
64% - 72% (67%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2018 - 2019
 
 
 
 
 
 
Discount rate
 
18%
Rempex:
 
 
 
 
 
 
 
 
Contingent purchase price: commercial milestones
 
$
60,800

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
11% - 95% (55%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2016 - 2021
 
 
 
 
 
 
Discount rate
 
3.4% - 5.8%
Contingent purchase price: sales milestones
 
$
10,900

 
Risk-adjusted revenue simulation
 
Probabilities of successes
 
11% - 63% (25%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2018 - 2022
 
 
 
 
 
 
Discount rate
 
4.9% - 6.0%
 
 
 
 
 
 
 
 
 
Annovation:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
16,000

 
Probability-adjusted discounted cash flow
 
Probability of success
 
9% - 50% (32%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2017 - 2030
 
 
 
 
 
 
Discount rate
 
3.8% - 7.3%


14

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


 
 
Fair Value as of
December 31, 2015
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
 
 
(in thousands)
 
 
 
 
 
 
Targanta:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
5,857

 
Probability-adjusted discounted cash flow
 
Probability of success
 
20%
 
 
 
 
 
 
Period in which milestone is expected to be achieved
 
2020
 
 
 
 
 
 
Discount rate
 
11%
Incline:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
28,600

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
64% - 72% (67%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2017 - 2018
 
 
 
 
 
 
Discount rate
 
18%
Rempex:
 
 
 
 
 
 
 
 
Contingent purchase price: commercial milestones
 
$
63,000

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
11% - 95% (56%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2016 - 2020
 
 
 
 
 
 
Discount rate
 
3.6% - 6.0%
Contingent purchase price: sales milestones
 
$
10,300

 
Risk-adjusted revenue simulation
 
Probabilities of successes
 
11% - 63% (30%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2018 - 2022
 
 
 
 
 
 
Discount rate
 
5.5% - 6.7%
 
 
 
 
 
 
 
 
 
Annovation:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
16,000

 
Probability-adjusted discounted cash flow
 
Probability of success
 
8% - 50% (31%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2016 - 2030
 
 
 
 
 
 
Discount rate
 
4.1% - 8.2%

The fair value of the contingent purchase price represents the fair value of the Company’s liability for all potential payments under the Company’s acquisition agreements for Targanta, Incline Therapeutics, Inc. (Incline), Rempex Pharmaceuticals, Inc. (Rempex) and Annovation BioPharma, Inc. (Annovation). The significant unobservable inputs used in the fair value measurement of the Company’s contingent purchase prices are the probabilities of successful achievement of development, regulatory, and sales milestones, which would trigger payments under the Targanta, Incline, Rempex and Annovation agreements, probabilities as to the periods in which the milestones are expected to be achieved and discount rates. Significant changes in any of the probabilities of success or periods in which milestones will be achieved would result in a significantly higher or lower fair value measurement.



15

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


The changes in fair value of the Company’s Level 3 contingent purchase price during the three months ended March 31, 2016 and 2015 were as follows:

 
Three Months Ended
March 31,
 
2016
 
2015
 
(in thousands)
Balance at beginning of period
$
123,757

 
$
351,134

Fair value of contingent purchase price with respect to Annovation as of February 2, 2015

 
18,000

Settlements
(2,773
)
 
(1,100
)
Fair value adjustment to contingent purchase prices included in net income (loss)
(1,372
)
 
1,518

Balance at end of period
$
119,612

 
$
369,552


For the quarters ended March 31, 2016 and 2015, changes in the carrying value of the contingent purchase price obligations resulted from changes in the fair value of the contingent consideration due to either the passage of time, changes in discount rates, changes in probabilities of success, or milestones payments. Additionally, for the quarter ended March 31, 2015, changes in the carrying value of the contingent purchase price obligations included the initial estimate of the fair value of the contingent consideration related to the Company’s acquisition of Annovation.

No other changes in valuation techniques or inputs occurred during the three months ended March 31, 2016 and 2015.

8. Inventory

The major classes of inventory were as follows:
 
 
March 31,
2016
 
December 31,
2015
 
 
(in thousands)
Raw materials
 
$
37,556

 
$
31,354

Work-in-progress
 
18,298

 
21,487

Finished goods
 
12,600

 
11,743

Total
 
$
68,454

 
$
64,584


The Company reviews inventory, including inventory purchase commitments, for slow moving or obsolete amounts based on expected volume and provides reserves against the carrying amount of inventory as appropriate.



16

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


9. Intangible Assets and Goodwill

The following table sets forth the carrying amounts and accumulated amortization of the Company’s intangible assets:

 
As of March 31, 2016
 
As of December 31, 2015
 
Weighted Average
Useful Life
(years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization and Other Charges
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization and Other Charges
 
Net
Carrying
Amount
 
 
 
(in thousands)
Amortizable intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Product licenses(1)
15.5
 
$
24,500

 
$
(1,403
)
 
$
23,097

 
$
31,500

 
$
(7,869
)
 
$
23,631

Developed product rights(2)
16.3
 
372,560

 
(19,342
)
 
353,218

 
373,090

 
(14,121
)
 
358,969

Total amortizable intangible assets
16.2
 
397,060

 
(20,745
)
 
376,315

 
404,590

 
(21,990
)
 
382,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
 
$
253,620

 
$

 
$
253,620

 
$
253,620

 
$

 
$
253,620

Total intangible assets not subject to amortization:
 
253,620

 

 
253,620

 
253,620

 

 
253,620

Total intangible assets
 
$
650,680

 
$
(20,745
)
 
$
629,935

 
$
658,210

 
$
(21,990
)
 
$
636,220

_______________________________________
(1)
The Company amortizes intangible assets related to the product licenses over their expected useful lives.
(2)
The Company amortizes intangible assets related to developed product rights over the remaining life of the patents.

The Company recognized amortization expense of $6.3 million and $1.7 million related to its intangible assets in the three months ended March 31, 2016 and 2015, respectively. The Company expects amortization expense related to its intangible assets to be $18.9 million for the last nine months of 2016. The Company expects annual amortization expense related to its intangible assets to be $25.2 million, $24.8 million, $24.5 million, $24.4 million and $24.1 million for the years ending December 31, 2017, 2018, 2019, 2020 and 2021, respectively, with the balance of $234.4 million being amortized thereafter. The Company records amortization expense in cost of revenue in the accompanying condensed consolidated statements of operations.

There were no changes in the carrying amount of goodwill for the three months ended March 31, 2016.
 
 
10. Convertible Senior Notes
Convertible Senior Notes Due 2022

In January 2015, the Company issued, at par value, $400 million aggregate principal amount of 2.5% convertible senior notes due 2022 (the “2022 Notes”). The 2022 Notes bear cash interest at a rate of 2.5% per year, payable semi-annually on January 15 and July 15 of each year, beginning on July 15, 2015. The 2022 Notes will mature on January 15, 2022. The net proceeds to the Company from the offering were $387.2 million after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by the Company.

The 2022 Notes are governed by an indenture (the “2022 Notes Indenture”) with Wells Fargo Bank, National Association, a national banking association, as trustee (the “2022 Notes Trustee”).

The 2022 Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2022 Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by the Company’s subsidiaries.



17

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Holders may convert their 2022 Notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2021 only under the following circumstances:

during any calendar quarter commencing on or after March 31, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the 2022 Notes Indenture) per $1,000 principal amount of 2022 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

during any period after the Company has issued notice of redemption until the close of business on the scheduled trading day immediately preceding the relevant redemption date; or

upon the occurrence of specified corporate events.

On or after October 15, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2022 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay cash up to the aggregate principal amount of the 2022 Notes to be converted and deliver shares of its common stock in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of 2022 Notes being converted, subject to a daily share cap.

The conversion rate for the 2022 Notes was initially, and remains, 29.8806 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, which is equivalent to an initial conversion price of approximately $33.47 per share of the Company’s common stock.

The Company may not redeem the 2022 Notes prior to January 15, 2019. The Company may redeem for cash all or any portion of the 2022 Notes, at its option, on or after January 15, 2019 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect on the last trading day of, and for at least 19 other trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the 2022 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2022 Notes, which means that the Company is not required to redeem or retire the 2022 Notes periodically.

If the Company undergoes a “fundamental change” (as defined in the Indenture governing the 2022 Notes Indenture), subject to certain conditions, holders of the 2022 Notes may require the Company to repurchase for cash all or part of their 2022 Notes at a repurchase price equal to 100% of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The 2022 Notes Indenture contains customary events of default with respect to the 2022 Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the 2022 Notes when due and payable) occurring and continuing, the 2022 Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 2022 Notes by notice to the Company and the 2022 Notes Trustee, may, and the 2022 Notes Trustee at the request of such holders (subject to the provisions of the 2022 Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2022 Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2022 Notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

In accounting for the issuance of the 2022 Notes, the Company separated the 2022 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2022 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the seven-year term of the 2022 Notes. The equity component is not re-measured as long as it continues to meet the conditions for


18

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


equity classification. The equity component related to the 2022 Notes is $54.3 million and is recorded in additional paid-in capital on the accompanying condensed consolidated balance sheets.

In accounting for the transaction costs related to the issuance of the 2022 Notes, the Company allocated the total costs incurred to the liability and equity components of the 2022 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the 2022 Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity. Additionally, the Company initially recorded a net deferred tax liability of $31.8 million in connection with the 2022 Notes.

The 2022 Notes consist of the following:
Liability component
 
March 31, 2016
 
December 31, 2015
 
 
(in thousands)
Principal
 
$
400,000

 
$
400,000

Less: Debt discount, net(1)
 
(84,920
)
 
(87,893
)
Net carrying amount
 
$
315,080

 
$
312,107

_______________________________________
(1) 
Included in the accompanying condensed consolidated balance sheets within convertible senior notes (due 2022) and amortized to interest expense over the remaining life of the 2022 Notes using the effective interest rate method.

The fair value of the 2022 Notes was approximately $334.7 million as of March 31, 2016. The Company estimates the fair value of its 2022 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2022 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities, which are classified as Level 2 measurements within the fair value hierarchy. See Note 7, “Fair Value Measurements,” for definitions of hierarchy levels. As of March 31, 2016, the remaining contractual life of the 2022 Notes is approximately 5.8 years.

The following table sets forth total interest expense recognized related to the 2022 Notes:
 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Contractual interest expense
$
2,500

 
$
2,152

Amortization of debt discount
2,974

 
2,403

Total
$
5,474

 
$
4,555

Effective interest rate of the liability component
6.5
%
 
6.5
%

Convertible Senior Notes Due 2017

In June 2012, the Company issued, at par value, $275.0 million aggregate principal amount of 1.375% convertible senior notes due June 1, 2017 (the “2017 Notes). The 2017 Notes bear cash interest at a rate of 1.375% per year, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2012. The 2017 Notes will mature on June 1, 2017. The net proceeds to the Company from the offering were $266.2 million after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by the Company.

The 2017 Notes are governed by an indenture dated as of June 11, 2012 (the “2017 Notes Indenture”), between the Company, as issuer, and Wells Fargo Bank, National Association, a national banking association, as trustee (the “2017 Notes Trustee”). The 2017 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by the Company.

The 2017 Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness, if any, that is expressly subordinated in right of payment to the 2017 Notes and equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated.  The 2017 Notes are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness


19

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


and are structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by the Company’s subsidiaries.

Holders may convert their 2017 Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2017 only under the following circumstances:

during any calendar quarter commencing on or after September 1, 2012 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price (described below) on each applicable trading day;

during the five business day period after any five consecutive trading day period (the Measurement Period) in which the trading price (as defined in the 2017 Notes Indenture) per $1,000 principal amount of 2017 Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or

upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company’s assets.

Since the third quarter of 2015, the conditional conversion feature of the 2017 Notes was triggered and the holders have been entitled to convert the notes into the Company's common stock through June 30, 2016. In any period when holders of the 2017 Notes are eligible to exercise their conversion option, the liability component related to these instruments is classified as current and the equity component related to these instruments is classified as mezzanine (temporary) equity, as the Company is required to settle the aggregate principal amount of the notes in cash. If in any future period the conversion threshold requirements of the 2017 Notes are not met, then the liability component of the instrument is classified as non-current and the difference between (1) the amount of cash deliverable upon conversion (i.e., par value of debt) and (2) the carrying value of the debt component will be reclassified from mezzanine equity to permanent equity, and will continue to be reported as permanent equity for any period in which the debt is not currently convertible. No holders of the 2017 Notes exercised their conversion option in 2015. An immaterial amount of 2017 Notes were converted during the three months ended March 31, 2016.

On or after March 1, 2017, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2017 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay cash up to the aggregate principal amount of the 2017 Notes to be converted and deliver shares of the Company’s common stock in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the 2017 Notes being converted, subject to a daily share cap, as described in the 2017 Notes Indenture. Holders of 2017 Notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a 2017 Note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, if any, of the Company’s common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a 2017 Note.

The conversion rate for the 2017 Notes was initially, and remains, 35.8038 shares of the Company’s common stock per $1,000 principal amount of the 2017 Notes, which is equivalent to an initial conversion price of $27.93 per share of the Company’s common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on the Company’s common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the 2017 Notes Indenture.

The Company may not redeem the 2017 Notes prior to maturity and is not required to redeem or retire the 2017 Notes periodically. However, upon the occurrence of a “fundamental change” (as defined in the 2017 Notes Indenture), subject to certain conditions, in lieu of converting their 2017 Notes, holders may require the Company to repurchase for cash all or part of their 2017 Notes at a repurchase price equal to 100% of the principal amount of the 2017 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 2017 Notes in connection with such change of control in certain circumstances.

The 2017 Notes Indenture contains customary events of default with respect to the 2017 Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the 2017 Notes when due and


20

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


payable) occurring and continuing, the 2017 Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 2017 Notes by notice to the Company and the 2017 Notes Trustee, may, and the 2017 Notes Trustee at the request of such holders (subject to the provisions of the 2017 Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2017 Notes to be due and payable. In case of an event of default involving certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2017 Notes will automatically become due and payable. Upon a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

In accounting for the issuance of the 2017 Notes, the Company separated the 2017 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2017 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the five-year term of the 2017 Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component recorded at issuance related to the 2017 Notes is $55.7 million and is recorded in stockholders’ equity on the accompanying condensed consolidated balance sheets.

In accounting for the transaction costs related to the issuance of the 2017 Notes, the Company allocated the total costs incurred to the liability and equity components of the 2017 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the five-year term of the 2017 Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity. Additionally, the Company initially recorded a deferred tax asset of $1.5 million in connection with the 2017 Notes.

The 2017 Notes consist of the following:
Liability component
 
March 31, 2016
 
December 31, 2015
 
 
(in thousands)
Principal
 
$
275,000

 
$
275,000

Less: Debt discount, net(1)
 
(16,200
)
 
(19,527
)
Net carrying amount
 
$
258,800

 
$
255,473

_______________________________________
(1) 
Included in the accompanying condensed consolidated balance sheets within convertible senior notes (due 2017) and amortized to interest expense over the remaining life of the 2017 Notes using the effective interest rate method.

The fair value of the 2017 Notes was approximately $270.7 million as of March 31, 2016. The Company estimates the fair value of its 2017 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2017 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities, which are classified as Level 2 measurements within the fair value hierarchy. See Note 7, “Fair Value Measurements,” for definitions of hierarchy levels. As of March 31, 2016, the remaining contractual life of the 2017 Notes is approximately 1.2 years.

The following table sets forth total interest expense recognized related to the 2017 Notes:
 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Contractual interest expense
$
945

 
$
945

Amortization of debt discount
3,327

 
3,113

Total
$
4,272

 
$
4,058

Effective interest rate of the liability component
6.02
%
 
6.02
%



21

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Note Hedges

In June 2012, the Company paid an aggregate amount of $58.2 million for the 2017 Note Hedges, which was recorded as a reduction of additional paid-in-capital in stockholders’ equity. The 2017 Note Hedges cover approximately 9.8 million shares of the Company’s common stock, subject to anti-dilution adjustments substantially similar to those applicable to the 2017 Notes, have a strike price that corresponds to the initial conversion price of the 2017 Notes, and are exercisable upon conversion of the 2017 Notes. The 2017 Note Hedges will expire upon the maturity of the 2017 Notes. The 2017 Note Hedges are expected generally to reduce the potential dilution with respect to shares of the Company’s common stock upon conversion of the 2017 Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the 2017 Note Hedges, at the time of exercise is greater than the strike price of the 2017 Note Hedges. The 2017 Note Hedges are separate transactions entered into by the Company with the 2017 Hedge Counterparties and are not part of the terms of the 2017 Notes or the 2017 Warrants. Holders of the 2017 Notes and 2017 Warrants will not have any rights with respect to the 2017 Note Hedges. As of March 31, 2016, the fair value of the 2017 Note Hedges was $75.8 million. The Company estimates the fair value of its 2017 Note Hedges using Monte Carlo simulations model of its stock prices, which are classified as Level 2 measurements within the fair value hierarchy. See Note 7, “Fair Value Measurements,” for definitions of hierarchy levels.

Warrants

The Company received aggregate proceeds of $38.4 million from the sale to the 2017 Hedge Counterparties of the 2017 Warrants to purchase up to 9.8 million shares of the Company’s common stock, subject to customary anti-dilution adjustments, at a strike price of $34.20 per share, which the Company recorded as additional paid-in-capital in stockholders’ equity. The 2017 Warrants will have a dilutive effect with respect to the Company’s common stock to the extent that the market price per share of the Company’s common stock, as measured under the terms of the 2017 Warrants, exceeds the applicable strike price of the 2017 Warrants. However, subject to certain conditions, the Company may elect to settle all of the 2017 Warrants in cash. The 2017 Warrants are separate transactions entered into by the Company with the 2017 Hedge Counterparties and are not part of the terms of the 2017 Notes or 2017 Note Hedges. Holders of the 2017 Notes and 2017 Note Hedges will not have any rights with respect to the 2017 Warrants. The 2017 Warrants also meet the definition of a derivative. Because the 2017 Warrants are indexed to the Company’s common stock and are recorded in equity in the Company’s condensed consolidated balance sheets, the 2017 Warrants are exempt from the scope and fair value provisions related to accounting for derivative instruments.

11. Accumulated Other Comprehensive Income

The following tables provide a reconciliation of the components of accumulated other comprehensive income, net of tax, attributable to The Medicines Company for the three months ended March 31, 2016 and 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
 
2016
 
2015
 
 
Foreign currency translation adjustment
 
Unrealized (gain) loss on available for sale securities
 
Total
 
Foreign currency translation adjustment
 
Unrealized (gain) loss on available for sale securities
 
Total
 
 
(in thousands)
Balance at beginning of period
 
$
3,924

 
$
49

 
$
3,973

 
$
2,479

 
$
49

 
$
2,528

Other comprehensive income before reclassifications
 
315

 

 
315

 
2,706

 

 
2,706

Amounts reclassified from accumulated other comprehensive income(1) (2)
 
(9,616
)
 
(49
)
 
(9,665
)
 

 

 

Total other comprehensive (loss) income
 
(9,301
)
 
(49
)
 
(9,350
)
 
2,706

 

 
2,706

Balance at end of period
 
$
(5,377
)
 
$

 
$
(5,377
)
 
$
5,185

 
$
49

 
$
5,234

_______________________________________
(1)
Amounts were reclassified to other income in the accompanying condensed consolidated statements of operations. There is generally no tax impact related to foreign currency translation adjustments, as earnings are considered permanently reinvested. In addition, there were no material tax impacts related to unrealized gains or losses on available for sale securities in the periods presented.
(2)
See Note 16, “Discontinued Operations,” for a discussion of this reclass of foreign currency translation adjustment.



22

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


12. Segment and Geographic Information

The Company manages its business and operations as one segment and is focused on advancing the treatment of acute and intensive care patients through the delivery of innovative, cost-effective medicines to the worldwide hospital marketplace. The Company allocates resources and assesses financial performance on a consolidated basis. Revenues reported to date are derived primarily from sales of Angiomax in the United States.

The geographic segment information provided below is classified based on the major geographic regions in which the Company operates. Long-lived assets are comprised of the Company’s noncurrent assets.

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
 
 
 
(in thousands)
 
 
Net revenues:
 
 
 
 
 
 
 
United States
$
46,436

 
92.3
%
 
$
104,458

 
94.9
%
Europe
3,080

 
6.1
%
 
4,993

 
4.5
%
Rest of world
790

 
1.6
%
 
664

 
0.6
%
Total net revenues
$
50,306

 
100.0
%
 
$
110,115

 
100.0
%

 
March 31, 2016
 
December 31, 2015
 
(in thousands)
 
 
 
(in thousands)
 
 
Long-lived assets:
 
 
 
 
 
 
 
United States
$
1,027,783

 
99.4
%
 
$
956,298

 
99.3
%
Europe
6,165

 
0.6
%
 
6,301

 
0.7
%
Rest of world

 
%
 

 
%
Total long-lived assets
$
1,033,948

 
100.0
%
 
$
962,599

 
100.0
%

13. Contingencies

The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company accrues for loss contingencies when information becomes available indicating that it is probable that a liability has been incurred and the amount of such loss can be reasonably estimated.

The Company is currently party to the legal proceedings described in Part II, Item 1. Legal Proceedings, of this Quarterly Report on Form 10-Q, which are principally patent litigation matters. The Company has assessed such legal proceedings and does not believe that it is probable that a liability has been incurred or that the amount of any potential liability can be reasonably estimated, other than the class action litigation. As a result, the Company did not record any loss contingencies for any of these matters other than the class action litigation. While it is not possible to determine the outcome of the matters described in Part II, Item 1. Legal Proceedings, of this Quarterly Report on Form 10-Q, the Company believes that the resolution of all such matters will not have a material adverse effect on its consolidated financial position or liquidity, but could possibly be material to its consolidated results of operations in any one accounting period.

14. Collaboration Agreements

Alnylam Pharmaceuticals, Inc.

In February 2013, the Company entered into a license and collaboration agreement with Alnylam Pharmaceuticals, Inc. (“Alnylam”) to develop, manufacture, and commercialize therapeutic products targeting the proprotein convertase subtilisin/kexin type 9 (“PCSK9”) gene, based on certain of Alnylam’s RNA interference (“RNAi”) technology. Under the terms of the agreement, the Company obtained the exclusive, worldwide right under Alnylam’s technology to develop, manufacture, and commercialize PCSK-9 products for the treatment, palliation and/or prevention of all human diseases. Alnylam was responsible for the development costs of the products, subject to an agreed upon limit, until the completion of Phase 1 clinical studies. The Company is responsible


23

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


for completing and funding the development costs of the products through commercialization, if successful. The Company paid Alnylam $25 million in an initial license payment which the Company recorded as research and development expense. The Company has also agreed to pay up to an aggregate of $180 million in success-based development and commercialization milestones. In addition, the Company has agreed to pay specified royalties on net sales of these products. Royalties to Alnylam are payable by the Company on a product-by-product and country-by-country basis until the last to occur of the expiration of patent rights in the applicable country that cover the applicable product, the expiration of non-patent regulatory exclusivities for such product in such country, and the twelfth anniversary of the first commercial sale of the product in such country, subject to reduction in specified circumstances. The Company is also responsible for paying royalties, and in some cases, milestone payments, owed by Alnylam to its licensors with respect to intellectual property covering these products. In December 2014, under the terms of the license and collaboration agreement with Alnylam, Alnylam initiated a Phase 1 clinical trial of ALN-PCSsc in the UK. Upon initiation of the Phase I clinical trial, the Company incurred a $10.0 million milestone which it recorded as research and development expense.

SciClone Pharmaceuticals

On December 16, 2014, the Company entered into a strategic collaboration with SciClone Pharmaceuticals (“SciClone”) under which the Company granted SciClone a license and the exclusive rights to promote, market, and sell Angiomax and Cleviprex in China. Under the terms of the collaboration, SciClone will be responsible for all aspects of commercialization, including pre- and post-launch activities, for both products in the China market (excluding Hong Kong and Macau) and will assist the Company in the registration process for both products in China. The Company has filed in China for marketing approval of Angiomax and to conduct clinical trials of Cleviprex. SciClone agreed to pay the Company an upfront payment of $10.0 million, a product support services fee and regulatory/commercial success milestone payments of up to an aggregate of $50.5 million, and royalties based on net sales of Angiomax and Cleviprex in China.

Activities under the SciClone agreement were evaluated to determine if they represented a multiple element revenue arrangement. The SciClone agreement includes the following deliverables: (1) an exclusive license to commercialize Angiomax and Cleviprex in China, excluding Hong Kong and Macau; (2) the Company’s obligation to conduct research and development activities related to the approvals of Angiomax and Cleviprex; and (3) the Company’s obligation to participate on the joint operating committee established under the terms of the SciClone agreement and related subcommittees. All of these deliverables were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting. Factors considered in this determination included, among other things, the subject of the licenses and the research and development and commercial capabilities of SciClone. Accordingly, each unit will be accounted for separately. For the three months ended March 31, 2016 and 2015, the Company recorded approximately $0.1 million and $7.8 million, respectively, of revenue associated with the SciClone agreement as co-promotion and license income.

The Company believes the regulatory approval milestones that may be achieved under the SciClone agreement are consistent with the definition of a milestone, and accordingly, the Company will recognize payments related to the achievement of such milestones, if any, when the applicable milestones are achieved. Factors considered in this determination included scientific and regulatory risks that must be overcome to achieve each milestone, the level of effort and investment required to achieve each milestone, and the monetary value attributed to each milestone.
Symbio Pharmaceuticals Limited
On October 2, 2015, the Company entered into strategic collaboration with Symbio Pharmaceuticals Limited (“Symbio”) under which the Company granted Symbio a license and the exclusive rights to promote, market, and sell Ionsys in Japan. Under the terms of the collaboration, Symbio will be responsible for all aspects of commercialization, including pre- and post-launch activities, for both products in the Japan market and will assist the Company in the registration process for Ionsys. Symbio paid the Company an upfront payment of $10.0 million, regulatory/commercial success milestone payments of up to an aggregate of $20.9 million, and royalties based on net sales of Ionsys in Japan.
Factors considered in the determination of deliverables included, among other things, the subject of the licenses and the research and development and commercial capabilities of Symbio. For the three months ended March 31, 2016, the Company recorded approximately $0.6 million of revenue associated with the Symbio agreement as co-promotion and license income.
The Company believes the regulatory approval milestones that may be achieved under the Symbio agreement are consistent with the definition of a milestone and, accordingly, the Company will recognize payments related to the achievement of such milestones, if any, when the applicable milestones are achieved.



24

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


15. Restructuring

On October 22, 2014, the Company commenced implementation of a reorganization of its European operations intended to improve efficiency and better align the Company’s costs and employment structure with its strategic plans. The reorganization includes a workforce reduction and the consolidation of European sites into a single location in Zurich, Switzerland. As a result of the workforce reduction, the Company reduced its personnel by 46 employees. Upon signing release agreements, impacted employees were eligible to receive severance payments in specified amounts, and general benefits and outplacement services for specified periods in accordance with our policies and local requirements. The Company completed its reorganization of its European operations in December 2014.

In the year ended December 2014, the Company recorded, in the aggregate, a one-time charge of approximately $9.0 million associated with the reorganization of its European operations, including $0.5 million of non-cash charges. Lease charges were recorded in selling, general and administrative expenses. The Company recorded $8.7 million associated with the work-force reduction. The Company recorded these charges in research and development expense and selling, general and administrative expense based on responsibilities of the impacted employees. Of the charges related to the 2014 European work-force reduction, $0.3 million were non-cash charges. During the three months ended March 31, 2016, the Company made lease payments as shown in the table below. The Company expects to pay the remainder of these lease payments in 2016.

The following table summarizes the restructuring accrual activity during the three months ended March 31, 2016:

 
Balance as of January 1, 2016
 
Expenses,
Net
 
Cash
 
Noncash
 
Balance as of March 31, 2016
 
(in thousands)
Employee severance and other personnel benefits:
 
 
 
 
 
 
 
 
 
2014 European workforce reduction
$
523

 
$

 
$

 
$

 
$
523

2014 European leases and equipment write-off
58

 

 
(22
)
 
(3
)
 
33

Total
$
581

 
$

 
$
(22
)
 
$
(3
)
 
$
556


16. Discontinued Operations

Sale of Hemostasis Business

On February 1, 2016, the Company completed the sale of its Hemostasis Business to Mallinckrodt pursuant to the Purchase and Sale Agreement dated December 18, 2015 between the Company and Mallinckrodt. At the completion of the sale, the Company received approximately $174.1 million in cash from Mallinckrodt, and may receive up to an additional $235.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of PreveLeak and Raplixa. As a result of the transaction, the Company accounted for the assets and liabilities of the Hemostasis Business that were sold as held for sale at December 31, 2015. As a result of the classification as held for sale, the Company recorded impairment charges of $133.3 million, including $24.5 million related to goodwill, to reduce the Hemostasis Business disposal group’s carrying value to its estimated fair value, less costs to sell for the year ended December 31, 2015. The determination of fair value for these assets was based on the best information available that resided within Level 3 of the fair value hierarchy, including internal cash flow estimates discounted at an appropriate interest rate.

Financial results of the Hemostasis Business are presented as “(Loss) income from discontinued operations, net of tax” on the accompanying condensed consolidated statements of operations for the three months ended March 31, 2016 and 2015. Assets and liabilities of the Hemostasis Business to be disposed of are presented as “Current assets held for sale” and “Current liabilities held for sale” on the accompanying condensed consolidated balance sheet as of December 31, 2015.



25

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


The following table presents key financial results of the Hemostasis Business included in “(Loss) income from discontinued operations, net of tax” for the three months ended March 31, 2016 and 2015:

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Net product revenues
$
62

 
$
16,402

Operating expenses:
 
 
 
Cost of product revenue
2,293

 
13,199

Research and development
146

 
666

Selling, general and administrative
693

 
(250
)
Total operating expenses
3,132

 
13,615

(Loss) income from operations
(3,070
)
 
2,787

Gain from sale of business
1,004

 

Other expense, net
(39
)
 
(350
)
(Loss) income from discontinuing operations before income taxes
(2,105
)
 
2,437

Provision for income taxes

 
1,776

Net (loss) income from discontinued operations
$
(2,105
)
 
$
661


Cumulative translation adjustment (“CTA”) gains or losses of foreign subsidiaries related to divested businesses are reclassified into income once the liquidation of the respective foreign subsidiaries is substantially complete. At the completion of the sale of the Hemostasis Business, the Company reclassified $9.6 million, net of tax, of CTA gains from accumulated comprehensive loss to the Company’s results of discontinued operations. Of this amount, $8.4 million was included in the impairment loss recorded to reduce the Hemostasis Business disposal group’s carrying value to its estimated fair value, less costs to sell as of December 31, 2015 and $1.2 million was included in gain from sale of business for the quarter ended March 31, 2016.

The following table presents the major classes of assets and liabilities at December 31, 2015 related to the Hemostasis Business which were reclassified as held for sale:
 
December 31,
2015
 
(in thousands)
Assets:
 
Inventory
$
53,765

Prepaid expenses and other current assets
1,153

Fixed assets, net
1,913

Intangibles, net
374,779

Allowance for reduction of assets of business held for sale
(108,773
)
Total assets held for sale
$
322,837

 
 
Liabilities:
 
Contingent purchase price - current
$
28,600

Deferred tax liability
38,915

Total liabilities held for sale
$
67,515




26

THE MEDICINES COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)


Depreciation and amortization were ceased upon determination that the held for sale criteria were met in the fourth quarter of 2015. The significant cash flow items from discontinued operations for the three months ended March 31, 2016 and 2015 were as follows:

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Depreciation from discontinued operations
$

 
$
25

Amortization from discontinued operations

 
4,730

Gain on sale of business
(1,004
)
 

Change in contingent consideration obligation

 
(1,600
)
Proceeds from sale of business
174,068

 

Capital expenditures

 
82


17. Subsequent Events

On May 9, 2016, the Company entered into a purchase and sale agreement pursuant to which the Company agreed to sell to Chiesi USA, Inc. and its parent company, Chiesi Farmaceutici S.p.A., substantially all of its assets relating to Cleviprex, Kengreal and Argatroban for Injection for an upfront payment equal to approximately $260.0 million payable at the closing of the transaction, subject to certain post-closing adjustments, and potential milestone payments of up to $480.0 million following achievement of specified U.S. net sales milestones with respect to Cleviprex and Kengreal. The closing of the transaction is subject to the satisfaction or waiver of customary conditions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.  The purchase and sale agreement contains representations, warranties and covenants as to the parties’ business, financial and legal obligations and provides for indemnification by each of the parties in certain circumstances and subject to certain limitations. 



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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to the historical information, the discussion in this Quarterly Report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to our critical accounting estimates discussed below and important factors set forth in this Quarterly Report on Form 10-Q, including under “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.

Overview

Our Business

We are a global biopharmaceutical company focused on saving lives, alleviating suffering and contributing to the economics of healthcare by focusing on leading acute/intensive care hospitals worldwide. We market Angiomax® (bivalirudin), Cleviprex® (clevidipine) injectable emulsion, Ionsys® (fentanyl iontophoretic transdermal system), Kengreal® (cangrelor), Minocin (minocycline) for injection, and Orbactiv® (oritavancin). We also have a pipeline of acute and intensive care hospital products in development, including ABP-700, ALN-PCSsc, Carbavance® and MDCO-216. We have the right to develop, manufacture and commercialize ALN-PCSsc under our collaboration agreement with Alnylam Pharmaceuticals, Inc., or Alnylam. We believe that our products and products in development possess favorable attributes that competitive products do not provide, can satisfy unmet medical needs in the acute and intensive care hospital product market and offer, or, in the case of our products in development, have the potential to offer, improved performance to hospital businesses.

In addition to these products and products in development, we sell a ready‑to‑use formulation of Argatroban and have a portfolio of ten generic drugs, which we refer to as our acute care generic products, that we have the non‑exclusive right to market in the United States. We are currently selling three of our acute care generic products, midazolam, ondansetron and rocuronium.

On July 2, 2015, we entered into a supply and distribution agreement with Sandoz Inc., or Sandoz, under which we granted Sandoz the exclusive right to sell in the United States an authorized generic of Angiomax (bivalirudin). We entered into the supply and distribution agreement as a result of the July 2, 2015 U.S. Court of Appeals for the Federal Circuit, or Federal Circuit Court, ruling against us in our patent infringement litigation with Hospira, Inc., or Hospira, with respect to U.S. Patent No. 7,582,727, or the '727 patent, and U.S. Patent No. 7,598,343, or the '343 patent, covering a more consistent and improved Angiomax drug product and the processes by which it is made. In its July 2, 2015 ruling, the Federal Circuit Court held the '727 patent and the '343 patent invalid. On July 15, 2015, Hospira's Abbreviated New Drug Applications, or ANDAs, for its generic versions of bivalirudin were approved by the FDA and Hospira began selling its generic versions of bivalirudin. In November 2015, our petition for en banc review of the Federal Circuit Court's July 2, 2015 decision was granted and the Federal Circuit Court vacated its July 2, 2015 decision. Notwithstanding the granting of our petition for en banc review, due to the July 2, 2015 decision and our resulting entry into a supply and distribution agreement with Sandoz and Hospira's entry into the market, Angiomax is now subject to generic competition with the authorized generic and Hospira's generic bivalirudin products.

On November 3, 2015, we announced that we were in the process of evaluating our operations with a goal of unlocking stockholder value. In particular, we stated our current intention was to explore strategies for optimizing our capital structure and liquidity position and to narrow our operational focus by strategically separating non-core businesses and products in order to generate non-dilutive cash and reduce associated cash burn and capital requirements, including, among other things, by potentially divesting or partnering our hemostasis portfolio, consisting of PreveLeak, Raplixa and Recothrom. On February 1, 2016, we completed the sale of our hemostasis portfolio to wholly owned subsidiaries of Mallinckrodt plc, or Mallinckrodt. At the completion of the sale, we received approximately $174.1 million in cash, and may receive up to an additional $235.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of PreveLeak and Raplixa.

The following table identifies each of our marketed and approved products and our products in development, their stage of development, their mechanism of action and the indications for which they have been approved for use or which they are intended to address. The table also identifies each of our acute care generic products and the therapeutic areas which they are intended to address. All of our products and products in development, except for ALN‑PCSsc and Ionsys are administered intravenously. Ionsys is administered transdermally and ALN‑PCSsc is being developed as a subcutaneous injectable. All of our acute care generic products are injectable products.



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Product or Product
in Development
 
Development Stage
 
Mechanism/Target
 
Clinical Indication(s)/Therapeutic Areas
Marketed and Approved Products
 
 
 
 
 
 
Angiomax
 
Marketed as a branded product, and as an authorized generic in the United States through Sandoz
 
Direct thrombin inhibitor
 
U.S. - for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, or PTCA, and for use in patients undergoing percutaneous coronary intervention, or PCI, including patients with or at risk of heparin induced thrombocytopenia and thrombosis syndrome, or HIT/HITTS
 
 
 
 
 
 
Europe - for use as an anticoagulant in patients undergoing PCI, adult patients with acute coronary syndrome, or ACS, and for the treatment of patients with ST-segment elevation myocardial infarction, or STEMI, undergoing primary PCI
Cleviprex
 
Marketed in the United States, Australia, Germany, Spain and Switzerland

Approved in Austria, Belgium, Canada, France, Kazakhstan, Luxembourg, the Netherlands, New Zealand, Sweden and the United Kingdom

Marketing Authorization Application, or MAA, submitted for other European Union countries
 
Calcium channel blocker
 
U.S. - Blood pressure reduction when oral therapy is not feasible or not desirable

Ex-U.S. - with various indications for blood pressure control in perioperative settings
Ionsys
 
Marketed in the United States; Marketed in the European Union
 
Patient-controlled analgesia system
 
Short-term management of acute postoperative pain in hospitalized patients
Kengreal
 
Marketed in the United States; Marketed in the European Union
 
 
Antiplatelet agent
 
Adjunct to PCI for reducing risk of periprocedural thrombotic events in patients who have not been treated with a P2Y12 inhibitor and are not being given a GPI

Minocin IV
 
Marketed in the United States
 
Tetracycline-class antibiotic
 
Treatment of bacterial infections due to susceptible isolates of designated microorganisms, including Acinetobacter species.

Orbactiv
 
Marketed in the United States; Approved in the European Union
 
Antibiotic
 
Treatment of adult patients with acute bacterial skin and skin structure infections, or ABSSSI, caused or suspected to be caused by susceptible isolates of the label-designated gram-positive microorganisms, including methicillin-resistant Staphylococcus aureus, or MRSA



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Product or Product
in Development
 
Development Stage
 
Mechanism/Target
 
Clinical Indication(s)/Therapeutic Areas
Ready-to-use Argatroban
 
Marketed in the United States
 
Direct thrombin inhibitor
 
For prophylaxis or treatment of thrombosis in adult patients with HIT and for use as an anticoagulant in adult patients with or at risk for HIT undergoing PCI
Acute care generic products:  Adenosine, Amiodarone, Esmolol and Milrinone
 
Approved in the United States
 
Various
 
Acute cardiovascular
Acute care generic products: Azithromycin and Clindamycin
 
Approved in the United States
 
Various
 
Serious infectious disease
Acute care generic products: Haloperidol, Midazolam, Ondansetron and Rocuronium
 
Approved in the United States; Midazolam, Ondansetron and Rocuronium marketed in the United States
 
Various
 
Surgery and perioperative
Research and Development Stage
 
 
 
 
 
 
ABP-700
 
Phase 1
 
Analogue of etomidate, an intravenous imidazole agent used for induction of general anesthesia
 
Sedative-hypnotic used to induce and maintain sedation for procedural care and general anesthesia for surgical care
 

ALN-PCSsc
 
Phase 2
 
PCSK-9 gene antagonist addressing low-density lipoprotein cholesterol disease modification
 
Treatment of hypercholesterolemia
Carbavance
 
Phase 3
 
Combination of vaborbactam (formerly known as RPX-7009), a proprietary, novel beta-lactamase inhibitor, with meropenem, a carbapenem antibiotic
 
Treatment of hospitalized patients with serious gram-negative bacterial infections
MDCO-216
 
Phase 1/2
 
Naturally occurring variant of a protein found in high-density lipoprotein
 
Reverse cholesterol transport agent to reduce atherosclerotic plaque burden development and thereby reduce the risk of adverse thrombotic events

Our revenues to date have been generated primarily from sales of Angiomax in the United States. In the three months ended March 31, 2016, we had net product revenue from sales of Angiomax of approximately $16.9 million and aggregate net revenue from sales of Cleviprex, Minocin IV, Orbactiv, ready-to-use Argatroban, Kengreal and Ionsys of approximately $14.5 million. During this period, net product revenues from sales of Angiomax decreased by $83.8 million from the three months ended March 31, 2015. As a result of our July 2015 supply and distribution agreement with Sandoz, we recognized $18.9 million of royalty revenues related to the authorized generic sales of Angiomax (bivalirudin) in the three months ended March 31, 2016. We expect that net revenue from sales of Angiomax will continue to decline in 2016 and in future years due to competition from generic versions of bivalirudin following the loss of market exclusivity in the United States in July 2015 and in Europe in August 2015. Based on our current business, we expect to incur net losses for the foreseeable future.

Cost of revenue represents expenses in connection with contract manufacture of our products sold and logistics, product costs, royalty expenses and amortization of the costs of license agreements, amortization and impairments of product rights and other identifiable intangible assets from product and business acquisitions and expenses related to excess inventory. Research and development expenses represent costs incurred for licenses of rights to products, clinical trials, nonclinical and preclinical studies, regulatory filings and manufacturing development efforts. We outsource much of our clinical trials, nonclinical and preclinical studies and all of our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries and related expenses, costs associated with general corporate activities, changes in fair value of contingent purchase price obligations related to our acquisitions, and costs associated with marketing and promotional activities. Research and development expense, selling, general and administrative expense and cost of revenue also include share-based compensation expense, which we allocate based on the responsibilities of the recipients of the share-based compensation.



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Angiomax Developments

The principal U.S. patents covering Angiomax included U.S. Patent No. 5,196,404, or the ‘404 patent, the ‘727 patent and the ‘343 patent. The term of the ‘404 patent expired on December 15, 2014 and the six-month period of pediatric exclusivity following expiration of the ‘404 patent resulting from our study of Angiomax in the pediatric setting ended June 15, 2015. The ‘727 patent and the ‘343 patent, issued to us by the U.S. Patent and Trademark Office, or PTO, in the second half of 2009, covering a more consistent and improved Angiomax drug product and the processes by which it is made, were set to expire in July 2028. In response to Paragraph IV Certification Notice letters we received with respect to ANDAs filed by a number of parties with the FDA seeking approval to market generic versions of Angiomax, we filed lawsuits against such ANDA filers alleging patent infringement of the ‘727 patent and ‘343 patent. We have since entered into settlement agreements with respect to our suits against three ANDA filers, Teva Pharmaceuticals USA, Inc. and its affiliates, or Teva, APP Pharmaceuticals LLC, or APP, and Sun Pharmaceutical Industries LTD, or Sun Pharmaceuticals Industries Ltd. and affiliates, or Sun.

On July 2, 2015, the Federal Circuit Court ruled against us in our patent infringement litigation with Hospira with respect to the ‘727 patent and the ‘343 patent. In its ruling, the Federal Circuit Court held the ‘727 patent and ‘343 patent invalid. As a result of the ruling, we do not have market exclusivity for Angiomax (bivalirudin) in the United States. On July 15, 2015, Hospira’s ANDAs for its generic versions of bivalirudin were approved by the FDA. As a result of the Federal Circuit Court’s ruling in the Hospira matter and the FDA’s approval of Hospira’s ANDAs, Angiomax is subject to generic competition from Hospira in the United States. On July 31, 2015, we filed a combined petition for panel rehearing and rehearing en banc with respect to the Federal Circuit Court’s July 2, 2015 decision. On August 24, 2015, the Federal Circuit Court invited Hospira to respond to the petition and on September 8, 2015, Hospira filed a response. On November 13, 2015, the Federal Circuit Court granted our petition for rehearing en banc and vacated its earlier July 2, 2015 decision. The Federal Circuit Court set a briefing schedule, specified specific questions to be answered, invited the DOJ to file a brief expressing the views of the United States and also invited any other amicii curiae to file briefs on the en banc issues raised. Hospira filed its opening brief on January 11, 2016. We filed our response on February 24, 2016 and Hospira filed its reply brief on March 10, 2016. Nine amicus briefs were filed: Department of Justice, American Intellectual Property Law Association, Intellectual Property Owners Association, a Texas law firm, Miller Patti Pershern PLLC, Pharmaceutical Research and Manufacturers of America, Biotechnology Innovation Organization, Gilead Sciences, Inc., an individual, Roberta J. Morris, Esq., and Houston Intellectual Property Law Association. The Federal Circuit Court sitting en banc heard oral argument from the parties and the government on May 5, 2016. The court did not indicate when it would issue its opinion.

In light of the decision by the Federal Circuit Court in the Hospira matter, on July 2, 2015, we entered into a Supply and Distribution Agreement with Sandoz under which we granted Sandoz the exclusive right to sell in the United States an authorized generic of Angiomax (bivalirudin). The authorized generic of Angiomax is sold under our approved NDA for Angiomax but labeled and sold under the Sandoz name. Under the agreement, we have agreed to supply Sandoz with Angiomax, and Sandoz has agreed to purchase Angiomax exclusively from us. Sandoz has agreed to pay us a price per vial equal to our cost of goods. Sandoz has agreed to use commercially reasonable efforts to market, distribute and sell the authorized generic Angiomax in the United States during the term of the agreement. Sandoz will pay us on a quarterly basis a high double digit percentage of its net profits (net sales less our cost of goods and certain agreed expenses of Sandoz) on sales of authorized generic Angiomax. The term of the agreement will continue until July 2, 2020 and will automatically renew for successive one-year periods thereafter unless either party provides notice of non-renewal at least six months prior to the end of the applicable term. Either party may terminate the agreement at any time if the other party is in material breach of the agreement and does not cure such breach within 60 days, the other party undergoes bankruptcy events, the other party is unable to perform its obligations under the agreement for more than 120 consecutive days due to a force majeure event, compliance with the agreement would violate law or net profits related to sales of the authorized generic Angiomax in any month fall below a low double digit percentage of net sales of the authorized generic Angiomax in such month. We may also terminate the agreement at any time that no other pharmaceutical product containing bivalirudin in a lyophilized form as its sole active ingredient is being sold in the United States.

In addition to Hospira's generic versions of bivalirudin, Sandoz's authorized generic and, if approved, Eagle Pharmaceuticals, Inc., or Eagle's, formulation of bivalirudin, Angiomax could be subject to generic competition in the United States from Teva, APP and Sun under the circumstances set forth in our respective settlement agreements with such parties and upon the approval of each companies' ANDA filings by the FDA. Further, we remain in infringement litigation involving the '727 patent and '343 patent with the other ANDA filers as described in Part II, Item 1. Legal Proceedings of this Quarterly Report on Form 10-Q. There can be no assurance as to the outcome of our infringement litigation. We may continue to incur substantial legal expenses related to these matters.

In addition, the principal patent covering Angiomax in Europe expired in August 2015. As a result, we could face generic competition in Europe.


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Business Development Activity

Sale of Hemostasis Business. On February 1, 2016, we completed the sale of our hemostasis business to Mallinckrodt. Under the terms of the purchase and sale agreement, Mallinckrodt acquired all of the outstanding equity of Tenaxis Medical, Inc. and ProFibrix B.V. and assets exclusively related to the Recothrom product. Mallinckrodt assumed all liabilities arising out of Mallinckrodt's operation of the businesses and the acquired assets after closing, including all obligations with respect to milestones relating to the PreveLeak and Raplixa products. At the completion of the sale, we received approximately $174.1 million in cash from Mallinckrodt, and may receive up to an additional $235.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of PreveLeak and Raplixa. The amount paid at closing is subject to a post-closing purchase price adjustment process with respect to the Recothrom inventory and the net working capital of the hemostasis business as of the date of the closing. As a result of the transaction, we accounted for the assets and liabilities of the hemostasis business that were sold as held for sale at December 31, 2015. As a result of the classification as held for sale, we recorded impairment charges of $133.3 million, including $24.5 million related to goodwill, to reduce the hemostasis business disposal group’s carrying value to its estimated fair value, less costs to sell for the year ended December 31, 2015.

Annovation BioPharma, Inc. In February 2015, we completed the acquisition of Annovation BioPharma, Inc., or Annovation, and Annovation became our wholly owned subsidiary. As a result of the acquisition of Annovation, we acquired ABP-700, a novel intravenous anesthetic. Under the terms of the terms of the acquisition agreement, we paid to the holders of Annovation’s capital stock and the holders of options to purchase shares of Annovation’s capital stock, which we refer to collectively as the Annovation equityholders, an aggregate of approximately $28.4 million in cash. In addition, we may be required to pay Annovation equityholders up to an additional $26.3 million in milestone payments subsequent to the closing if we achieve certain development and regulatory approval milestones at the times and on the conditions set forth in the acquisition agreement. We have also agreed to pay Annovation equityholders a low single digit percentage of worldwide net sales, if any, of certain Annovation products, including ABP-700, during a specified earnout period. In addition, as a result of our acquisition of Annovation, we, through our subsidiary Annovation, are a party to a license agreement with The General Hospital Corporation. Under the agreement, we will be obligated to pay General Hospital Corporation up to an aggregate of $6.5 million upon achievement of specified development, regulatory and sales milestones. We will also be obligated to pay General Hospital Corporation low single-digit percentage royalties on a product-by-product and country-by-country basis based on net sales of ABP-700 products until the later of the duration of the licensed patent rights which are necessary to manufacture, use or sell ABP-700 products in a country and the date ten years from our first commercial sale of ABP-700 products in such country.

Promus PREMIER Stent System Co-Promotion. In December 2013, we entered into a co-promotion agreement with Boston Scientific Corporation, or BSX, for the Promus PREMIER Everolimus‑Eluting Platinum Chromium Coronary Stent System, or Promus PREMIER Stent System, to provide promotional support for the Promus PREMIER Stent System in U.S. hospitals. For the year ended December 31, 2014, we recognized $5.0 million in co-promotion income from BSX. Effective December 31, 2014, our co-promotion agreement with BSX was terminated and we ceased to co-promote the Promus PREMIER Stent System.

Rempex Pharmaceuticals, Inc. In December 2013, we acquired Rempex Pharmaceuticals, Inc., or Rempex, and Rempex became our wholly-owned subsidiary. As a result of the transaction, we acquired Rempex’s marketed product, Minocin IV, a broad-spectrum tetracycline antibiotic, and Rempex’s portfolio of product candidates, including RPX-602, a proprietary reformulation of Minocin IV utilizing magnesium sulfate, Carbavance, an investigational agent that is a combination of vaborbactam, a proprietary, novel beta-lactamase inhibitor, with a carbapenem, and Rempex’s other product candidates.

Under the terms of the merger agreement for the acquisition, we paid to the holders of Rempex’s capital stock, the holders of options to purchase shares of Rempex’s capital stock and the holders of certain phantom stock units, which we collectively refer to as the Rempex equityholders, an aggregate of approximately $140.0 million in cash, plus approximately $0.3 million in purchase price adjustments.

In addition, we agreed to pay to the Rempex equityholders milestone payments subsequent to the closing, if we achieve certain development and regulatory approval milestones and commercial sales milestones with respect to Minocin IV, RPX-602, Carbavance and Rempex’s other product candidates, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Rempex equityholders an additional $214.0 million in cash in the aggregate for achieving development and regulatory milestones and an additional $120.0 million in cash in the aggregate for achieving commercial milestones, in each case, less certain transaction expenses and employer taxes owing because of the milestone payments.



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Pursuant to the terms of the merger agreement, as a result of certain milestone payments becoming due within eighteen months following the closing, in October 2014, we entered into an escrow agreement and deposited an aggregate of $14.0 million into an escrow fund during the fourth quarter of 2014.  In June 2015, the escrow fund was released to the Rempex equityholders.

Alnylam License Agreement. In February 2013, we entered into a license and collaboration agreement with Alnylam to develop, manufacture and commercialize therapeutic products targeting the human PCSK-9 gene based on certain of Alnylam’s RNAi technology. Under the terms of the agreement, we obtained the exclusive, worldwide right under Alnylam’s technology to develop, manufacture and commercialize PCSK-9 products for the treatment, palliation and/or prevention of all human diseases. We paid Alnylam $25.0 million in an initial license payment and agreed to pay up to $180.0 million in success-based development, regulatory and commercialization milestones. In addition, Alnylam will be eligible to receive scaled double-digit royalties based on annual worldwide net sales of PCSK-9 products by us or our affiliates and sublicensees. Royalties to Alnylam are payable on a product-by-product and country-by-country basis until the last to occur of the expiration of patent rights in the applicable country that cover the applicable product, the expiration of non-patent regulatory exclusivities for such product in such country, and the twelfth anniversary of the first commercial sale of the product in such country. The royalties are subject to reduction in specified circumstances. We are also responsible for paying royalties, and in some cases milestone payments, owed by Alnylam to its licensors with respect to intellectual property covering these products. Alnylam was responsible for developing the lead product through the end of the first Phase 1 clinical trial and to supply the lead product for the first Phase 1 clinical trial and the first phase 2 clinical trial. Alnylam will bear the costs for these activities, subject to certain caps on its costs. If Alnylam's development and supply costs exceed the applicable cap, Alnylam need not bear any additional development and supply costs except for costs directly caused by Alnylam's gross negligence and we shall have the option to assume such excess costs. We will direct and pay for all other development, manufacturing and commercialization activities under the agreement.
Incline Therapeutics, Inc. In January 2013, we acquired Incline Therapeutics, Inc., or Incline, a company focused on the development of Ionsys, a compact, disposable, needleless patient-controlled system for the short-term management of acute postoperative pain in the hospital setting.

Under the terms of our merger agreement with Incline, we paid to Incline’s equityholders and optionholders an aggregate of approximately $155.2 million in cash. In addition, we paid approximately $13.0 million to Cadence Pharmaceuticals, Inc., or Cadence, to terminate Cadence’s option to acquire Incline pursuant to an agreement between Cadence and Incline and deposited an additional $18.5 million in cash into an escrow fund for the purposes of securing the indemnification obligations of the Incline equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the merger agreement and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. Under the merger agreement, to the extent that any amounts remained in the escrow fund after July 4, 2014 and were not subject to claims by us, such amounts were to be released to Incline’s equityholders and optionholders, subject to certain conditions set forth in the merger agreement. In December 2014, we entered into a settlement and amendment to the merger agreement, which resulted in revisions to certain milestone triggers, a reduction in total potential milestone payments and the immediate release of the escrow fund to us.

Under the terms of our agreement with Incline, as amended, we agreed to pay up to $189.3 million in cash in the aggregate, less certain related expenses, to Incline’s former equityholders and optionholders and up to $115.5 million in additional payments to other third parties.

Collaboration with AstraZeneca LP. On April 25, 2012, we entered into a global collaboration agreement with AstraZeneca LP, or AstraZeneca, pursuant to which we and AstraZeneca agreed to collaborate globally to develop and commercialize certain acute ischemic heart disease compounds. For the year ended December 31, 2014, AstraZeneca LP paid us $16.0 million under the agreement. Effective December 31, 2014, our global collaboration agreement with AstraZeneca LP was terminated and we ceased to co-promote AstraZeneca LP’s BRILINTA.

Targanta Therapeutics Corporation. In February 2009, we acquired Targanta Therapeutics Corporation, or Targanta, a biopharmaceutical company focused on developing and commercializing innovative antibiotics to treat serious infections in the hospital and other institutional settings.

Under the terms of our agreement with Targanta, we paid Targanta shareholders an aggregate of approximately $42.0 million in cash at closing. In addition, we originally agreed to pay contingent cash payments up to an additional $90.4 million in the aggregate. This amount has been reduced to $49.4 million as certain milestones have not been achieved by specified dates. We will owe $49.4 million if aggregate net sales of Orbactiv in four consecutive calendar quarters ending on or before December 31, 2021 reach or exceed $400.0 million, and up to an additional $40.0 million in additional payments to other third parties.




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BARDA Agreement

In February 2014, our subsidiary Rempex entered into an agreement with the Biomedical Advanced Research and Development Authority, or BARDA, of the U.S. Department of Health and Human Services. Under this agreement, as modified, Rempex has the potential to receive up to $91.8 million in funding to support the development of Carbavance. The BARDA agreement is a cost-sharing arrangement that consists of an initial base period and seven option periods that BARDA may exercise in its sole discretion pursuant to the BARDA agreement. The BARDA agreement provides for an initial commitment by BARDA of an aggregate of $19.8 million for the initial base period and the first option period, and up to an additional $70.0 million if the remaining six option periods are exercised by BARDA. In October 2014, BARDA exercised the second option, increasing BARDA’s total commitment to $37.8 million. In September 2015, BARDA exercised the third option, increasing BARDA’s total commitment to $53.8 million. In December 2015, BARDA increased the amount authorized under the third option by $2.0 million, thus increasing BARDA’s total commitment to $55.8 million. Under the cost-sharing arrangement, Rempex will be responsible for a designated portion of the costs associated with each period of work. If all option periods are exercised by BARDA, the estimated period of performance would be extended until approximately July 31, 2019. BARDA is entitled to terminate the agreement, including the projects under the BARDA agreement for convenience, in whole or in part, at any time and is not obligated to provide continued funding beyond current year amounts from Congressionally approved annual appropriations. We expect to use the total award under the BARDA agreement to support non-clinical development activities, clinical studies, manufacturing and associated regulatory activities designed to obtain marketing approval of Carbavance in the United States for treatment of serious gram-negative infections. The BARDA agreement also covers initial non-clinical studies to assess the potential usefulness of Carbavance for treatment of certain gram-negative bioterrorism agents. Under the terms of our agreement with Rempex, we agreed to pay former Rempex equityholders on a quarterly basis, as part of our development milestones, a specified percentage of amounts actually received by us from BARDA. We recorded approximately $6.3 million and $3.2 million as reductions of research and development expenses for the three months ended March 31, 2016 and 2015, respectively.


Convertible Senior Note Offerings

2022 Notes
On January 13, 2015, we completed our private offering of $400.0 million aggregate principal amount of our 2.50% convertible senior notes due 2022, or the 2022 notes, and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, governing the 2022 notes. The aggregate principal amount of 2022 notes sold reflects the exercise in full by the initial purchasers of the 2022 notes of their option to purchase up to an additional $50.0 million in aggregate principal amount of the 2022 notes. The net proceeds from the offering were $387.2 million, after deducting the initial purchasers’ discounts and commissions and our offering expenses.
The 2022 notes bear cash interest at a rate of 2.50% per year, payable semi-annually on January 15 and July 15 of each year, beginning on July 15, 2015. The 2022 notes will mature on January 15, 2022. The 2022 notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, incurrence of other indebtedness, or issuance or repurchase of securities by us.
Holders may convert their 2022 notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2021 only under the following circumstances: (1) during any calendar quarter commencing on or after March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, or measurement period, in which the trading price, as defined in the indenture governing the 2022 notes, per $1,000 principal amount of 2022 notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) during any period after we have issued notice of redemption until the close of business on the scheduled trading day immediately preceding the relevant redemption date; or (4) upon the occurrence of specified corporate events. On or after October 15, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2022 notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay cash up to the aggregate principal amount of the 2022 notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of 2022 notes being converted, subject to a daily share cap, as described in the indenture governing the 2022 notes. Holders of 2022 notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, if any, of our common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a 2022 note.


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The conversion rate for the 2022 notes was initially, and remains, 29.8806 shares of our common stock per $1,000 principal amount of the 2022 notes, which is equivalent to an initial conversion price of approximately $33.47 per share of our common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the indenture governing the 2022 notes.
We may not redeem the 2022 notes prior to January 15, 2019. We may redeem for cash all or any portion of the 2022 notes, at our option, on or after January 15, 2019 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect on the last trading day of, and for at least 19 other trading days (whether or not consecutive) during, any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provides notice of redemption, at a redemption price equal to 100% of the principal amount of the 2022 notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2022 notes, which means that we are not required to redeem or retire the 2022 notes periodically.
If we undergo a fundamental change, as defined in the indenture governing the 2022 notes, subject to certain conditions, holders of the 2022 notes may require us to repurchase for cash all or part of their 2022 notes at a repurchase price equal to 100% of the principal amount of the 2022 notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Following certain corporate transactions that constitute a change of control, we would increase the conversion rate for a holder who elects to convert the 2022 notes in connection with such change of control in certain circumstances.
The 2022 notes are our senior unsecured obligations and will rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the 2022 notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated (including the 2017 notes); effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by our subsidiaries.
The indenture governing the 2022 notes contains customary events of default with respect to the 2022 notes, including that upon certain events of default (including our failure to make any payment of principal or interest on the 2022 notes when due and payable) occurring and continuing, the trustee for the 2022 notes by notice to us, or the holders of at least 25% in principal amount of the outstanding 2022 notes by notice to us and the trustee for the 2022 notes, may, and the trustee at the request of such holders (subject to the provisions of the indenture governing the 2022 notes) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2022 notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2022 notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.
2017 Notes
On June 11, 2012, we completed our private offering of $275.0 million aggregate principal amount of our 1.375% convertible senior notes due 2017, or the 2017 notes, and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, governing the 2017 notes. The net proceeds from the offering were $266.2 million, after deducting the initial purchasers’ discounts and commissions and our offering expenses.
The 2017 notes bear cash interest at a rate of 1.375% per year, payable semi-annually on June 1 and December 1 of each year. The 2017 notes will mature on June 1, 2017. The 2017 notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by us.
Holders may convert their 2017 notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2017 only under the following circumstances: (1) during any calendar quarter commencing on or after September 1, 2012 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, or measurement period, in which the trading price, as defined in the indenture governing the 2017 notes, per $1,000 principal amount of 2017 notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. The conditional conversion feature of the 2017 notes has been triggered and the holders are currently entitled to convert the notes into our common stock through June 30, 2016 pursuant to the terms of the 2017 notes indenture. Additionally, on or after March 1, 2017, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2017 notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay cash up to the aggregate principal amount of the 2017 notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of


35


the aggregate principal amount of the 2017 notes being converted, subject to a daily share cap, as described in the indenture governing the 2017 notes. Holders of 2017 notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, if any, of our common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a 2017 note.
The conversion rate for the 2017 notes was initially, and remains, 35.8038 shares of our common stock per $1,000 principal amount of 2017 notes, which is equivalent to an initial conversion price of $27.93 per share of our common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the indenture governing the 2017 notes.
We may not redeem the 2017 notes prior to maturity and are not required to redeem or retire the 2017 notes periodically. However, upon the occurrence of a “fundamental change”, as defined in the indenture governing the 2017 notes, subject to certain conditions, in lieu of converting their 2017 notes, holders may require us to repurchase for cash all or part of their 2017 notes at a repurchase price equal to 100% of the principal amount of the 2017 notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Following certain corporate transactions that constitute a change of control, we will increase the conversion rate for a holder who elects to convert the 2017 notes in connection with such change of control in certain circumstances.
The 2017 notes are our senior unsecured obligations and will rank senior in right of payment to our future indebtedness, if any, that is expressly subordinated in right of payment to the 2017 notes and equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated (including the 2022 notes). The 2017 notes are effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities, including trade payables, incurred by our subsidiaries.
The indenture governing the 2017 notes contains customary events of default with respect to the 2017 notes, including that upon certain events of default, including our failure to make any payment of principal or interest on the 2017 notes when due and payable, occurring and continuing, the trustee for the 2017 notes by notice to us, or the holders of at least 25% in principal amount of the outstanding 2017 notes by notice to us and the trustee for the 2017 notes, may, and the trustee at the request of such holders, subject to the provisions of the indenture governing the 2017 notes, shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2017 notes to be due and payable.  In case of an event of default involving certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary of ours, 100% of the principal of and accrued and unpaid interest on the 2017 notes will automatically become due and payable. Upon a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

Convertible Note Hedge and Warrant Transactions
In connection with the offering of the 2017 notes, on June 5, 2012, we entered into convertible note hedge transactions and warrant transactions with several of the initial purchasers of the 2017 notes, their respective affiliates and other financial institutions, which we refer to as the hedge counterparties. We used approximately $19.8 million of the net proceeds from the offering of the 2017 notes to pay the cost of the convertible note hedge transactions, after such cost was partially offset by the proceeds to us from the sale of warrants in the warrant transactions.
We expect the convertible note hedge transactions to reduce the potential dilution with respect to shares of our common stock upon any conversion of the 2017 notes in the event that the market price per share of our common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions, which initially corresponds to the conversion price of the 2017 notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the 2017 notes. The warrant transactions will have a dilutive effect with respect to our common stock to the extent that the market price per share of our common stock, as measured under the terms of the warrant transactions, exceeds the applicable strike price of the warrants. However, subject to certain conditions, we may elect to settle all of the warrants in cash.






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Biogen Letter Agreement

On August 7, 2012, we and Biogen Idec MA Inc., or Biogen, entered into a letter agreement resolving a disagreement between the parties as to the calculation and amount of the royalties required to be paid to Biogen by us under our license agreement with Biogen under which Biogen licensed Angiomax to us.  The letter agreement amends the license agreement providing, among other things, that effective solely for the period from January 1, 2013 through and including December 15, 2014, each of the royalty rate percentages payable by us as set forth in the license agreement shall be increased by one percentage point. As of December 15, 2014, we no longer owe royalties to Biogen or Health Research, Inc. relating to sales of Angiomax in the United States. In the third quarter of 2015, Biogen completed an audit of our books and records and indicated its belief that additional amounts are owed to Biogen under the license agreement. In September 2015, we filed suit in the United States District Court for the District of New Jersey seeking declaratory judgments that we have satisfied our obligations under the license agreement. In November 2015, Biogen answered the complaint denying our claims and asserting counterclaims for breach of contract. See Part II, Item 1. Legal Proceedings, of this Quarterly Report on Form 10-Q for additional information.


U.S. Health Care Reform

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, or PPACA, which was amended by the Health Care and Education Reconciliation Act of 2010. The PPACA, as amended, contains numerous provisions that impact the pharmaceutical and healthcare industries that are expected to be implemented over the next several years. We are continually evaluating the impact of the PPACA on our business. As of the date of this Quarterly Report on Form 10-Q, we have not identified any provisions that currently materially impact our business or results of operations other than the Biologics Price Competition and Innovation Act provisions of PPACA . However, the potential impact of the PPACA on our business and results of operations is inherently difficult to predict because many of the details regarding the implementation of this legislation have not been determined. In addition, the impact on our business and results of operations may change as and if our business evolves.

On July 9, 2012, President Obama signed the Food and Drug Administration Safety and Innovation Act, or FDASIA. Under the “Generating Antibiotic Incentives Now,” or GAIN, provisions of FDASIA, the FDA may designate a product as a qualified infectious disease product, or QIDP. A QIDP is defined as an antibacterial or antifungal drug for human use intended to treat serious or life-threatening infections, including those caused by either an antibacterial or antifungal resistant pathogen, including novel or emerging infectious pathogens or a so-called “qualifying pathogen” found on a list of potentially dangerous, drug-resistant organisms to be established and maintained by the FDA under the new law.  The GAIN provisions describe several examples of “qualifying pathogens,” including methicillin-resistant Staphylococcus aureus, or MRSA, and Clostridium difficile. Upon the designation of a drug by the FDA as a QIDP, any non-patent exclusivity period awarded to the drug will be extended by an additional five years.  This extension is in addition to any pediatric exclusivity extension awarded. 

We developed Orbactiv for the treatment of ABSSSI, including infections caused by MRSA, and are exploring the development of Orbactiv for other indications, including ABSSSI in children, uncomplicated bacteremia, endocarditis, prosthetic joint infections, and other gram-positive bacterial infections. We developed the new formulation of Minocin IV, which is approved by the FDA for the treatment of infections due to susceptible strains of designated gram-negative bacteria, including those due to Acinetobacter spp, and designated gram-positive bacteria. We are also developing Carbavance for the treatment of hospitalized patients with serious gram-negative bacterial infections. In November 2013, the FDA designated Orbactiv a QIDP. In August 2014, following approval of Orbactiv, the FDA informed us that Orbactiv met the criteria for an additional five years of non-patent exclusivity to be added to the five year exclusivity period already provided by the Food, Drug and Cosmetic Act. As a result, Orbactiv’s non-patent regulatory exclusivity is scheduled to expire in August 2024. In December 2013, the FDA designated Carbavance a QIDP. We expect that, if we submit an NDA for Carbavance and the NDA is approved, Carbavance would receive an additional five years of non-patent exclusivity. In April 2015, the FDA designated the new formulation of Minocin IV a QIDP for certain additional potential indications involving gram-negative bacteria, and we expect that if we submit a supplemental NDA for one or more of those indications and such supplemental NDA is approved, Minocin IV would receive an additional five years of non-patent exclusivity with respect to such indications.



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Results of Operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

Net Revenues:

Net revenues decreased 54.3% to $50.3 million for the three months ended March 31, 2016 as compared to $110.1 million for the three months ended March 31, 2015.

 
Three Months Ended March 31,
 
2016
 
2015
 
Change $
 
Change %
 
(in thousands)
 
 
Net product revenues
$
31,375

 
$
110,115

 
$
(78,740
)
 
(71.5
)%
Royalty revenues
18,931

 

 
18,931

 
100.0
 %
Total net revenues
$
50,306

 
$
110,115

 
$
(59,809
)
 
(54.3
)%

Net Product Revenues:

The following table reflects the components of net product revenues for the three months ended March 31, 2016 and 2015:

 
Three Months Ended March 31,
 
2016
 
2015
 
Change $
 
Change %
 
(in thousands)
 
 
Angiomax
$
16,877

 
$
100,679

 
$
(83,802
)
 
(83.2
)%
Other products
14,498

 
9,436

 
5,062

 
53.6
 %
Total net product revenues
$
31,375

 
$
110,115

 
$
(78,740
)
 
(71.5
)%

Net product revenues decreased by $78.7 million, or 71.5%, to $31.4 million in the three months ended March 31, 2016 compared to $110.1 million in the three months ended March 31, 2015, reflecting decreases of $77.0 million in the United States and of $1.7 million in international markets.

Angiomax. Net product revenue from sales of Angiomax decreased by $83.8 million, or 83.2%, to $16.9 million in the three months ended March 31, 2016 compared to $100.7 million in the three months ended March 31, 2015, primarily due to volume decreases in the United States. Volume and price decreases for Angiomax in the three months ended March 31, 2016 were primarily due to the launch of generic versions of bivalirudin in the United States in July 2015. On July 2, 2015, the Federal Circuit Court ruled that our '343 patent and our '727 patent, each covering Angiomax, were invalid. On July 15, 2015, Hospira's ANDAs for its generic versions of bivalirudin were approved by the FDA and Hospira began selling its generic version of bivalirudin. In November 2015, our petition for en banc review of the Federal Circuit Court's July 2, 2015 decision was granted and the Federal Circuit Court vacated its July 2, 2015 decision. Notwithstanding the granting of our petition for en banc review, due to the July 2, 2015 decision and our resulting entry into a supply and distribution agreement with Sandoz and Hospira's entry into the market, Angiomax is now subject to generic competition with the authorized generic and Hospira's generic bivalirudin products. Of the $16.9 million, $4.4 million related to shipments of generic Angiomax to Sandoz for the three months ended March 31, 2016.

Net product revenue from sales of Angiomax in the United States in the three months ended March 31, 2016 and 2015 reflect chargebacks related to the 340B Drug Pricing Program under the Public Health Services Act and rebates related to the PPACA. Under the 340B Drug Pricing Program, we offer qualifying entities a discount off the commercial price of Angiomax for patients undergoing percutaneous coronary intervention, or PCI, on an outpatient basis. Chargebacks related to the 340B Drug Pricing Program were $2.8 million and $23.2 million in the three months ended March 31, 2016 and 2015, respectively. Rebates related to the PPACA were $0.4 million and $0.6 million in the three months ended March 31, 2016 and 2015, respectively.

Other Products. Net revenue from sales of Cleviprex, ready-to-use Argatroban, Minocin IV, Orbactiv, Kengreal and Ionsys increased by $5.1 million, or 53.6%, to $14.5 million in the three months ended March 31, 2016 from $9.4 million in the three months ended March 31, 2015, primarily due to increases in revenue due to increased volume from Orbactiv, Cleviprex and Kengreal. This is partially offset by a decrease in ready-to-use Argatroban. Net revenue from sales of Cleviprex was $4.4 million in the three months ended March 31, 2016, compared to $2.2 million in the three months ended March 31, 2015. Net revenue from


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sales of Minocin IV and Orbactiv were $1.3 million and $3.0 million, respectively, in the three months ended March 31, 2016, compared to $0.8 million and $1.2 million, respectively, in the three months ended March 31, 2015. Net revenue from sales of Kengreal, which was launched in the third quarter of 2015, were $2.2 million in the three months ended March 31, 2016. Net revenue from sales of ready-to-use Argatroban were $3.6 million in the three months ended March 31, 2016, compared to $5.3 million in the three months ended March 31, 2015.

Royalty Revenues:

For the three months ended March 31, 2016, we recognized $18.9 million in royalty revenues related to the authorized generic sale of Angiomax to hospitals by Sandoz. Royalty revenues may decline in 2016 and in future years due to competition from generic versions of bivalirudin.

Cost of Revenue:

Cost of revenue for the three months ended March 31, 2016 was $18.8 million, or 59.9% of net product revenue, compared to $20.5 million, or 18.7% of net product revenue, for the three months ended March 31, 2015.

Cost of revenue during these periods consisted of:

expenses in connection with the manufacture of our products sold, including expenses related to excess inventory;

royalty expenses under our agreement with Eli Lilly and Company related to Orbactiv, our agreement with AstraZeneca related to Cleviprex and our agreement with Eagle Pharmaceuticals, Inc. related to ready-to-use Argatroban;

amortization of the costs of selling rights agreements, product licenses, developed product rights and other identifiable intangible assets, which result from product and business acquisitions; and

logistics costs related to Angiomax, Cleviprex, Orbactiv, Minocin IV, ready-to-use Argatroban, Kengreal and Ionsys, including distribution, storage, and handling costs.

 
Three Months Ended March 31,
 
2016
 
% of Total
 
2015
 
% of Total
 
(in thousands)
 
 
 
(in thousands)
 
 
Manufacturing/Logistics
$
10,299

 
54.8
%
 
$
14,413

 
70.2
%
Royalties
2,213

 
11.8
%
 
4,446

 
21.6
%
Amortization of acquired product rights and intangible assets
6,285

 
33.4
%
 
1,680

 
8.2
%
Total cost of revenue
$
18,797

 
100.0
%
 
$
20,539

 
100.0
%

Cost of revenue decreased by $1.7 million during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. This is primarily related to a decrease in Angiomax product sales due to generic competition, offset by an increase in amortization of product rights related to the launch of Ionsys.