Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - MEDICINES CO /DEmdcoex32206302017-q22017.htm
EX-32.1 - EXHIBIT 32.1 - MEDICINES CO /DEmdcoex32106302017-q22017.htm
EX-31.2 - EXHIBIT 31.2 - MEDICINES CO /DEmdcoex31206302017-q22017.htm
EX-31.1 - EXHIBIT 31.1 - MEDICINES CO /DEmdcoex31106302017-q22017.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: June 30, 2017
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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
(Do not check if a smaller reporting company)
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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 August 4, 2017, there were 72,639,409 shares of Common Stock, $0.001 par value per share, outstanding (excluding 3,013,143 shares held in treasury).




THE MEDICINES COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended June 30, 2017
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)

 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
202,422

 
$
541,835

Available for sale securities
131,545

 

Accounts receivable, net of allowances of approximately $3.0 million and $2.9 million at
June 30, 2017 and December 31, 2016, respectively
15,570

 
22,087

Inventory, net
71,417

 
70,898

Prepaid expenses and other current assets
15,074

 
19,133

Total current assets
436,028

 
653,953

Fixed assets, net
20,899

 
30,961

In-process research & development
188,620

 
253,620

Product licenses, net

 
26,987

Developed product rights, net
100,451

 
334,614

Goodwill
255,629

 
255,629

Restricted cash
5,033

 
5,032

Contingent purchase price from sale of businesses
143,700

 
143,700

Other assets
749

 
715

Total assets
$
1,151,109

 
$
1,705,211

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
16,531

 
$
28,450

Accrued expenses
87,384

 
88,524

Current portion of contingent purchase price
66,700

 
55,000

Convertible senior notes
330,637

 
53,749

Deferred revenue
14,039

 
18,902

Total current liabilities
515,291

 
244,625

Contingent purchase price
44,471

 
82,289

Convertible senior notes
305,517

 
623,584

Deferred tax liabilities
67,003

 
89,992

Other liabilities
13,821

 
11,705

Total liabilities
946,103

 
1,052,195

Equity component of currently redeemable convertible senior notes (Note 10)
62,053

 
1,033

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

 

Common stock, $0.001 par value per share, 187,500,000 authorized; 75,599,584 issued and 72,586,441 outstanding at June 30, 2017 and 73,212,545 issued and 71,019,563 outstanding at December 31, 2016
76

 
73

Additional paid-in capital
1,287,260

 
1,256,890

Treasury stock, at cost; 3,013,143 and 2,192,982 shares at June 30, 2017 and December 31, 2016, respectively
(90,016
)
 
(50,000
)
Accumulated deficit
(1,048,921
)
 
(548,983
)
Accumulated other comprehensive loss
(5,446
)
 
(5,479
)
Total The Medicines Company stockholders’ equity
142,953

 
652,501

Non-controlling interest in joint venture

 
(518
)
Total stockholders’ equity
142,953

 
651,983

Total liabilities and stockholders’ equity
$
1,151,109

 
$
1,705,211


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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net product revenues
$
13,355

 
$
30,324

 
$
27,200

 
$
61,699

Royalty revenues
5,387

 
24,407

 
15,758

 
43,338

Total net revenues
18,742

 
54,731

 
42,958

 
105,037

Operating expenses:
 
 
 
 
 
 
 
Cost of product revenues
16,282

 
15,230

 
29,835

 
34,027

Asset impairment charges
329,097

 

 
329,097

 

Research and development
33,072

 
37,567

 
71,499

 
71,058

Selling, general and administrative
49,600

 
94,158

 
112,782

 
173,456

Total operating expenses
428,051

 
146,955

 
543,213

 
278,541

Loss from operations
(409,309
)
 
(92,224
)
 
(500,255
)
 
(173,504
)
Co-promotion and license income
757

 
1,341

 
1,514

 
2,316

Gain on sale of assets

 
288,301

 

 
288,301

Loss on extinguishment of debt

 
(5,380
)
 

 
(5,380
)
Interest expense
(12,590
)
 
(10,363
)
 
(25,012
)
 
(20,109
)
Other income (loss)
854

 
138

 
845

 
(124
)
(Loss) income from continuing operations before income taxes
(420,288
)
 
181,813

 
(522,908
)
 
91,500

Benefit (provision) for income taxes
23,020

 
(11
)
 
22,970

 
(57
)
Net (loss) income from continuing operations
(397,268
)
 
181,802

 
(499,938
)
 
91,443

(Loss) income from discontinued operations, net of tax

 
619

 

 
(1,486
)
Net (loss) income
(397,268
)
 
182,421

 
(499,938
)
 
89,957

Net loss attributable to non-controlling interest

 
21

 

 
37

Net (loss) income attributable to The Medicines Company
$
(397,268
)
 
$
182,442

 
$
(499,938
)
 
$
89,994

 
 
 
 
 
 
 
 
Amounts attributable to The Medicines Company:
 
 
 
 
 
 
 
Net (loss) income from continuing operations
$
(397,268
)
 
$
181,823

 
$
(499,938
)
 
$
91,480

(Loss) income from discontinued operations, net of tax

 
619

 

 
(1,486
)
Net (loss) income attributable to The Medicines Company
$
(397,268
)
 
$
182,442

 
$
(499,938
)
 
$
89,994

 
 
 
 
 
 
 
 
Basic (loss) earnings per common share attributable to The Medicines Company:
 
 
 
 
 
 
 
(Loss) earnings from continuing operations
$
(5.52
)
 
$
2.61

 
$
(6.99
)
 
$
1.32

(Loss) earnings from discontinued operations

 
0.01

 

 
(0.02
)
Basic (loss) earnings per share
$
(5.52
)
 
$
2.62

 
$
(6.99
)
 
$
1.30

 
 
 
 
 
 
 
 
Diluted (loss) earnings per common share attributable to The Medicines Company:
 
 
 
 
 
 
 
(Loss) earnings from continuing operations
$
(5.52
)
 
$
2.51

 
$
(6.99
)
 
$
1.27

(Loss) earnings from discontinued operations

 
0.01

 

 
(0.02
)
Diluted (loss) earnings per share
$
(5.52
)
 
$
2.52

 
$
(6.99
)
 
$
1.25

 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
71,918

 
69,711

 
71,498

 
69,464

Diluted
71,918

 
72,509

 
71,498

 
72,312


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
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(397,268
)
 
$
182,421

 
$
(499,938
)
 
$
89,957

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
368

 
(37
)
 
40

 
278

Unrealized loss on available for sale securities
(7
)
 

 
(7
)
 

Amounts reclassified from accumulated other comprehensive income

 

 

 
(9,665
)
Other comprehensive income (loss)
361

 
(37
)
 
33

 
(9,387
)
Comprehensive (loss) income
(396,907
)
 
182,384

 
(499,905
)
 
80,570

Less: comprehensive loss attributable to non-controlling interest

 
21

 

 
37

Comprehensive (loss) income attributable to The Medicines Company
$
(396,907
)
 
$
182,405

 
$
(499,905
)
 
$
80,607


See accompanying notes to condensed consolidated financial statements.



4

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

 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(499,938
)
 
$
89,957

Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
11,727

 
14,586

Asset impairment charges
329,097

 

Amortization of debt discount
13,822

 
12,770

Unrealized foreign currency transaction losses (gains), net
523

 
(264
)
Stock compensation expense
16,200

 
16,551

Gain on sale of businesses

 
(289,305
)
Deferred tax benefit
(22,989
)
 
(1,623
)
Extinguishment of debt

 
5,380

Reserve for excess or obsolete inventory
2,147

 

Changes in contingent consideration obligations
(4,116
)
 
1,336

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
6,708

 
3,974

Inventory, net
(2,605
)
 
(10,219
)
Prepaid expenses and other current assets
4,595

 
(2,696
)
Accounts payable
(12,070
)
 
(9,320
)
Accrued expenses
1,530

 
(38,377
)
Deferred revenue
(4,960
)
 
(3,450
)
Payments on contingent purchase price
(12,437
)
 

Other liabilities
(2,586
)
 
(1,629
)
Net cash used in operating activities
(175,352
)
 
(212,329
)
Cash flows from investing activities:
 
 
 
Purchases of fixed assets
(4,448
)
 
171

Purchases of available for sale securities
(131,560
)
 

Payments for intangible assets

 
(10,000
)
Proceeds from sale of businesses

 
437,875

Change in restricted cash
17

 
(12
)
Net cash (used in) provided by investing activities
(135,991
)
 
428,034

Cash flows from financing activities:
 
 
 
Proceeds from issuances of common stock, net
35,859

 
16,911

Milestone payments
(9,565
)
 
(6,522
)
Proceeds from the issuance of convertible senior notes

 
402,500

Repayments of convertible senior notes
(54,997
)
 
(323,225
)
Purchase of capped call transactions related to convertible senior notes

 
(33,931
)
Proceeds from settlement of bond hedges related to convertible senior notes

 
100,459

Settlement of warrants

 
(87,874
)
Debt and equity issuance costs

 
(11,725
)
Purchase of shares of non-controlling interest
(167
)
 

Net cash (used in) provided by financing activities
(28,870
)
 
56,593

Effect of exchange rate changes on cash
800

 
(1,275
)
(Decrease) increase in cash and cash equivalents
(339,413
)
 
271,023

Cash and cash equivalents at beginning of period
541,835

 
373,173

Cash and cash equivalents at end of period
$
202,422

 
$
644,196

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
11,988

 
$
6,891

Taxes paid
$

 
$
27

Non-cash investing and financing activities
 
 
 
   Issuance of common stock upon conversion of convertible notes
$
32,018

 
$

   Receipt of common stock upon settlement of 2017 Note hedge
$
40,015

 
$


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®, Ionsys®, Orbactiv® and Vabomere™ are registered trademarks or trademark applications 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. 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 is a global biopharmaceutical company focused on saving lives, alleviating suffering and contributing to the economics of healthcare. The Company markets Angiomax® (bivalirudin), Minocin® (minocycline) for injection and Orbactiv® (oritavancin). The Company also has a pipeline of products in development, including inclisiran and Vabomere (meropenem and vaborbactam). The Company has the right to develop, manufacture and commercialize inclisiran 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 and offer, or, in the case of its products in development, have the potential to offer, improved performance to hospital businesses.

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 the Company’s 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.

On February 1, 2016, the Company completed the sale of its hemostasis portfolio, consisting of PreveLeak (surgical sealant), Raplixa (fibrin sealant) and Recothrom Thrombin topical (Recombinant) (the Hemostasis Business), to wholly owned subsidiaries of Mallinckrodt plc (collectively, Mallinckrodt) pursuant to the purchase and sale agreement dated December 18, 2015 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. The financial results of the Hemostasis Business were classified to discontinued operations for the three and six months ended June 30, 2016 presented in the Company’s condensed consolidated financial statements. See Note 16, “Discontinued Operations,” for further details.

On June 21, 2016, the Company completed the sale of three non-core cardiovascular products, Cleviprex (clevidipine) injectable emulsion, Kengreal (cangrelor) and rights to Argatroban for Injection (collectively the Non-Core ACC Products) and related assets, to Chiesi USA, Inc. (Chiesi USA) and its parent company Chiesi Farmaceutici S.p.A. (Chiesi) pursuant to the purchase and sale agreement dated May 9, 2016 by and among the Company, Chiesi and Chiesi USA.  At the completion of the sale, the Company received approximately $263.8 million in cash, which included the value of product inventory, and may receive up to an additional $480.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of each of Cleviprex and Kengreal. As part of the transaction, the Company sublicensed to Chiesi all of its rights to Cleviprex and Kengreal under the Company’s license from AstraZeneca. Subsequent to the completion of the sale, these sublicenses from the Company to Chiesi were terminated, Chiesi purchased from AstraZeneca all or substantially all of AstraZeneca’s assets relating to Cleviprex and Kengreal, the parties released certain claims against one another, and the Company paid Chiesi $7.5 million. See Note 15, “Dispositions,” for further details.

Consistent with the Company’s intentions announced in November 2015, in January 2017 the Company announced that it was seeking opportunities to partner or divest Ionsys and is exploring alternatives for monetizing, in whole or in part, the Company’s infectious disease business.

Although the Company continues to seek a partnership or divestiture transaction for Ionsys, on June 1, 2017 the Company voluntarily discontinued and withdrew Ionsys from the market in the United States and ceased related commercialization activities, effective June 19, 2017, with the New Drug Application for Ionsys remaining open to December 31, 2017. Concurrent with this market withdrawal, the Company commenced implementation of a workforce reduction, which resulted in the reduction of 57 employees, representing approximately 15% of the Company’s workforce. The Company recorded a pre-tax charge of approximately $277.0 million associated with the discontinuation and market withdrawal of Ionsys in the United States market, of which $268.1 million was a non-cash impairment charge (including a write-off of inventory) and $8.9 million relates to cash severance and other exit costs. The non-cash impairment charge includes $11.4 million to reduce the carrying amount of the fixed


6

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


assets associated with Ionsys to an estimated fair value of zero. The Company is currently preparing to discontinue and withdraw Ionsys in the European market. The Company has an exclusive license with SymBio Pharmaceuticals Ltd. to develop and commercialize Ionsys in Japan. The Company has performed, and continues to perform, its obligations under that arrangement.

The following table presents the impact the discontinuation and market withdrawal of Ionsys had on the Company’s statement of operations for the three and six months ended June 30, 2017:

Operating expenses:
 
Cost of product revenue
$
8,458

Asset impairment charges
264,097

Research and development
1,032

Selling, general and administrative
3,434

Total operating expenses
277,021

Loss from operations
(277,021
)
(Loss) income from continuing operations before income taxes
(277,021
)
Benefit (provision) for income taxes

Net (loss) income from continuing operations
$
(277,021
)

In August 2017, the Company announced that it is discontinuing the clinical development program for MDCO-700. In connection with this decision, the Company’s condensed consolidated statement of operations for the three and six months ended June 30, 2017 includes the following non-cash adjustments: $65.0 million of asset impairment charges to in-process research and development (IPR&D) acquired from Annovation, a $14.7 million decrease in the carrying value of the contingent purchase price to an estimated fair value of zero as a result of the Company’s announcement that it is discontinuing the clinical development program for MDCO-700, an investigational anesthetic agent, and a $23.0 million benefit for income taxes as a result of the impairment charge.

2. Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Significant Accounting Policies,” in the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the 2016 Form 10-K).

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, consisting solely of normal recurring 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 recorded net 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 for the three and six months ended June 30, 2016. The Company has no unconsolidated subsidiaries.

The Company’s results of operations for the three and six months ended June 30, 2017 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, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the 2016 Form 10-K.



7

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


Going Concern

Due to the introduction of generic competition against Angiomax and the divestiture of certain of the Company’s non-core products, the Company’s revenues generated from product sales have declined significantly since 2014. Revenues are expected to continue to decline as generic competition for Angiomax increases. The Company has incurred net losses and negative cash flows from operations since 2014 and has an accumulated deficit of $1,048.9 million as of June 30, 2017. The Company expects to incur significant expenses and operating losses for the foreseeable future as it continues to develop, seek regulatory approval for and commercially launch its products and products in development, including inclisiran and Vabomere. The Company believes that its existing cash and cash equivalents and available for sale securities of approximately $334.0 million as of June 30, 2017, together with the cash flows it generates from product sales, will likely not be sufficient to satisfy the Company’s anticipated operating and other funding requirements for the next twelve months from August 9, 2017 (the date of filing this Form 10-Q).

Because the Company expects to continue to incur negative cash flows from operations, the Company will need to raise additional funds through asset sales, including asset sales of products or businesses that generate a material portion of the Company’s revenues, engage in other strategic transactions, sell additional equity or debt securities, or seek additional financing through other arrangements in order to meet the Company’s anticipated operating and other funding requirements for the next twelve months. There can be no assurances that asset sales or public or private financings may be available in amounts or on terms acceptable to the Company, if at all. The Company’s ability to obtain additional debt financing may be limited by market conditions. If the Company were unable to consummate asset sales, obtain additional financing or otherwise increase its cash resources, it may be required to delay, reduce the scope of, or eliminate one or more of its planned research, development or commercialization activities. Due to these uncertainties, there is substantial doubt about the Company’s ability to continue as a going concern.

The unaudited condensed consolidated financial statements as of June 30, 2017 have been prepared under the assumption that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of the uncertainty discussed above.

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 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 Financial Accounting Standards Board (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.

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 or 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. Payments received in advance of work performed are deferred. The Company recorded reductions of research and development expenses of $1.3 million and $2.2 million for the three months ended June 30, 2017 and


8

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


2016, respectively, and $3.9 million and $8.5 million for the six months ended June 30, 2017 and 2016, respectively, in the accompanying condensed consolidated statements of operations.
Recent Accounting Pronouncements

In May 2014, the FASB issued a comprehensive new revenue recognition Accounting Standards Update (ASU), “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. 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. The FASB has further amended guidance related to recording revenue on a gross versus a net basis and on identifying performance obligations and licensing. The FASB has also revised certain SEC guidance primarily related to ASC Topic 815, “Derivatives and Hedging,” and has issued additional improvements and practical expedients to the standard. 

The Company, has begun to form a project team to analyze the impacts of ASU No. 2014-09 on its revenue streams, specifically focusing on its product revenues, including its arrangement with Sandoz Inc. (Sandoz) to sell in the United States an authorized generic version of Angiomax (bivalirudin), and its collaboration agreements. The Company’s assessment included a review of current accounting policies and practices to identify potential differences that would result from applying the guidance. Currently, the Company uses a deferred revenue model for certain products where the price is not fixed or determinable. Under the new standard, such arrangements will be accounted for as variable consideration, which may result in revenue being recognized earlier provided the Company can reliably estimate the ultimate price expected to be realized from the customer. The Company will continue to assess new customer contracts throughout 2017 and any impact the standard will have on its processes, systems and controls. While the Company’s assessment of the impacts of ASU No. 2014-09 is still in process, the adoption of the guidance is not expected to have a material impact on the Company’s consolidated financial statements. However, it is likely that the Company will be required to provide additional disclosures in the notes to the consolidated financial statements upon adoption. The Company currently intends to adopt the standard using the modified retrospective method.

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 amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in a company’s results of operations. The new standard does not apply to investments accounted for under the equity method of accounting or those that result in consolidation of the investee. Equity investments that do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for changes in observable prices. A financial liability that is measured at fair value in accordance with the fair value option is required to be presented separately in other comprehensive income for the portion of the total change in the fair value resulting from change in the instrument-specific credit risk. In addition, a valuation allowance should be evaluated on deferred tax assets related to available-for-sale debt securities in combination with other deferred tax assets. ASU No. 2016-01 will be effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Based on current investment holdings, the Company does not believe the adoption of this standard is expected to have a material impact the consolidated balance sheets and statement of operations.

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 December 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. On January 1, 2017, the Company adopted ASU No. 2016-09 and has elected to continue its determination


9

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


of compensation costs recognized in each period based upon an estimate of expected future forfeitures. Upon the settlement of awards in the first quarter of 2017, the Company recorded excess tax benefits of $4.2 million but was unable to realize any benefit due to the establishment of a valuation allowance on its net operating loss carry forward deferred tax assets. The Company does not expect to be able to realize any benefit related to additional excess tax benefits recorded throughout 2017. There was no net impact on the Company’s opening accumulated deficit upon application of this guidance using the modified retrospective transition method as the total cumulative-effect adjustment for previously deferred excess tax benefits was offset by a related change in the valuation allowance. The other amended requirements of ASU No. 2016-09 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU No. 2016-15). This guidance clarifies how certain cash receipts and payments should be presented in the statement of cash flows and is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company does not believe that this guidance will have an impact on the consolidated financial statements and related disclosures.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (ASU No. 2016-18). This amends the guidance in ASC 230, including providing additional guidance related to transfers between cash and restricted cash and how entities present, in their statement of cash flows, the cash receipts and cash payments that directly affect the restricted cash accounts. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company does not believe that this guidance will have an impact on the consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company will apply the guidance to applicable transactions after the adoption date. The impact on the Company’s consolidated financial statements will depend on the facts and circumstances of any specific future transactions.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other, Simplifying the Test for Goodwill Impairment, which eliminates Step 2 from the goodwill impairment test. Under the revised test, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for any interim or annual impairment tests for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company does not believe that this guidance will have an impact on the consolidated financial statements and related disclosures.

3. Stock Compensation Expense

The Company recorded stock compensation expense of approximately $9.6 million and $9.7 million for the three months ended June 30, 2017 and 2016, respectively, and $16.2 million and $16.7 million for the six months ended June 30, 2017 and 2016, respectively. As of June 30, 2017, there was approximately $44.3 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 1.4 years.

During the six months ended June 30, 2017 and 2016, the Company issued a total of 1,573,967 and 928,612, 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 six months ended June 30, 2017 and 2016 was $35.9 million and $16.9 million, respectively, and is included within the financing activities section of the accompanying condensed consolidated statements of cash flows.

4. (Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing consolidated net loss 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 potentially dilutive effect of the Company’s stock options, unvested restricted common stock, stock purchase warrants, and convertible senior notes due 2017 (which matured on June 1, 2017) and 2022 on earnings per share is computed under the treasury


10

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


stock method.  In addition, the Company analyzes the potential dilutive effect of the convertible senior notes due 2023 on earnings per share under the “if converted” method, in which it is assumed that the outstanding security converts into common stock at the beginning of the period.

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, 2022 and 2023 and stock purchase warrants.

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 periods of net loss from continuing operations attributable to The Medicines Company, the calculation of diluted loss per share for the three and six months ended June 30, 2017 excluded 13,889,033 and 14,234,901, respectively, of potentially dilutive stock options, warrants, restricted common shares, and shares issuable upon conversion of the 2022 and 2023 Notes as their inclusion would have an anti-dilutive effect.

The calculation of diluted loss per share for the three and six months ended June 30, 2016 excluded 3,102,640 and 3,199,586, respectively, of potentially dilutive stock options, stock purchase warrants, restricted common shares, and shares issuable upon conversion of the 2022 and 2023 Notes as their inclusion would have an anti-dilutive effect.


5. Income Taxes

For the three months ended June 30, 2017, the Company recorded a benefit for income taxes of $23.0 million for income taxes based upon its estimated federal, state and foreign (loss)/income for the year. For the three months ended June 30, 2016, the Company recorded a provision for income taxes of $0.01 million for income taxes 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 June 30, 2017 and 2016 was 5.5% and 0.01%, respectively.

For the six months ended June 30, 2017, the Company recorded a benefit for income taxes of $23.0 million for income taxes based upon its estimated federal, state and foreign (loss)/income for the year. For the six months ended June 30, 2016, the Company recorded a provision for income taxes of $0.1 million for income taxes based upon its estimated federal, state and foreign (loss)/income for the year. The worldwide effective income tax rates for the Company for the six months ended June 30, 2017 and 2016 was 4.4% and 0.1%, respectively. For the three and six months ended June 30, 2017, the Company’s benefit for income taxes is the result of the Company’s impairment of its investment in MDCO-700, which was a discrete item of $23.0 million, partially offset by a provision for state tax minimums and estimated taxes due by profitable foreign subsidiaries. See Note 9, “Intangible Assets and Goodwill,” for further details of this impairment.

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, 2017 in recording valuation allowances on substantial portions of its deferred tax assets as of June 30, 2017.

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 and Available for Sale Securities

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. At June 30, 2017 and December 31, 2016, the Company had cash and cash equivalents of $202.4 million and $541.8 million, respectively, which consisted of cash of $96.3 million and $485.7 million, and money market funds with original maturities of less than three months of $12.9 million and $56.1 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, cash and cash equivalents also included corporate debt securities and U.S. government agency notes with an original maturity of less than three months of $85.7 million and $7.5 million, respectively.


11

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



At June 30, 2017, the Company held available for sale securities with a fair value totaling $131.5 million. These available for sale securities consist of corporate debt securities. At June 30, 2017, all of the $131.5 million of available for sale securities are due within one year. The Company evaluates securities with unrealized losses to determine whether such losses are other than temporary.

Available for sale securities, including carrying value and estimated fair values, are summarized as follows:

 
As of June 30, 2017
 
 
Amortized Cost
 
Fair Value
 
Unrealized
Loss
 
 
(in thousands)
 
Corporate debt securities
131,552

 
131,545

 
7

 
Total
$
131,552

 
$
131,545

 
$
7

 

Because the Company does not intend to sell its corporate debt securities and it is not more likely than not that the Company will be required to sell its corporate debt securities before recovery of their amortized cost basis, which may be maturity, it does not consider its corporate debt securities to be other-than-temporarily impaired at June 30, 2017.

Restricted Cash

The Company had restricted cash of $5.0 million at June 30, 2017 and December 31, 2016, respectively, which included $3.7 million and $1.0 million reserved for an outstanding letter of credit associated with foreign taxes and the Company’s lease for the office space in Parsippany, New Jersey, respectively, at both June 30, 2017 and December 31, 2016, respectively. These funds are invested in certificates of deposit. The letter of credit for the Company’s lease for the office space in Parsippany, New Jersey 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 June 30, 2017 and December 31, 2016, in the form of a guaranteed investment certificate collateralizing an available credit facility. The Company also had restricted cash of $0.2 million at June 30, 2017 and December 31, 2016, respectively, 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 assets consist 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. The Company’s Level 2 assets consist of U.S. government and corporate debt securities.


12

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


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 Mallinckrodt 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 or when the asset is impaired. The Company calculated the fair values 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 June 30, 2017. The Company classified these contingent payments as Level 3 assets. The Company noted no indicators of impairment on the contingent payments to be received from Mallinckrodt. In addition, the Company determined that the fair value of these contingent payments to be received from Mallinckrodt is not readily determinable at June 30, 2017 as the estimated future net sales of each of the respective products are determined by Mallinckrodt.

As part of the purchase and sale agreement with Chiesi USA and Chiesi, the Company may receive up to an additional $480.0 million in the aggregate from Chiesi following the achievement of certain specified calendar year net sales milestones with respect to net sales of each of Cleviprex and Kengreal. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates. The Company utilized a risk adjusted revenue simulation model. In this simulation, the chances of achieving many different revenue levels are estimated and then adjusted to reflect the results of similar products and companies in the market to calculate the fair value of each milestone payment. The breadth of all possible revenue scenarios is captured in an estimate of revenue volatility - a measure that can be estimated from performance of similar companies in the market. The Company estimated revenue volatility as the delivered asset volatility observed in comparable companies’ historical performance, where the delivering asset was based on operational leverage of the Company. Under each of these possible scenarios, different amounts of the sales-based milestone payments are calculated, and the average of the payments across a range of possible scenarios is deemed to be the expected value of the earn-out payments. The Company compared the estimated revenue volatility to the delivered asset volatility to arrive at adjusted revenue volatilities between 30% and 41%. The Company then discounted the expected future value of the earn-out payments using a range of discount rates between 3.1% and 6.9%. The Company calculated the fair values of these contingent payments to be received from Chiesi as $65.7 million, which are reflected as a contingent purchase price from sale of business on the condensed consolidated balance sheet at June 30, 2017. The Company classified these contingent payments as Level 3 assets. The Company noted no indicators of impairment on the contingent payments to be received from Chiesi. In addition, the Company determined that the fair value of these contingent payments to be received from Chiesi is not readily determinable at June 30, 2017 as the estimated future net sales of each of the respective products are determined by Chiesi.

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.



13

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


Except for the Company’s Level 2 liabilities 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 June 30, 2017 and December 31, 2016, by level, within the fair value hierarchy:

 
As of June 30, 2017
 
As of December 31, 2016
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 June 30, 2017
 
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, 2016
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents (1)
$
12,877

 
$
93,208

 
$

 
$
106,085

 
$
56,097

 
$

 
$

 
$
56,097

Available for sale securities

 
131,545

 

 
131,545

 
$

 
$

 
$

 

Total assets at fair value
$
12,877

 
$
224,753

 
$

 
$
237,630

 
$
56,097

 
$

 
$

 
$
56,097

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent purchase price
$

 
$

 
$
111,171

 
$
111,171

 
$

 
$

 
$
137,289

 
$
137,289

Total liabilities at fair value
$

 
$

 
$
111,171

 
$
111,171

 
$

 
$

 
$
137,289

 
$
137,289

_______________________________________
(1)
Cash equivalents represents money market funds with original maturities of less than three months of $12.9 million (Level 1) corporate debt securities with an original maturity of less than three months of $85.7 million (Level 2) and U.S. government agency notes with an original maturity of less than three months of $7.5 million (Level 2), as discussed in Note 6, “Cash, Cash Equivalents and Available for Sale Securities.”

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.



14

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
June 30, 2017
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
 
 
(in thousands)
 
 
 
 
 
 
Targanta:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
6,171

 
Probability-adjusted discounted cash flow
 
Probability of success
 
20%
 
 
 
 
 
 
Period in which milestone is expected to be achieved
 
2021
 
 
 
 
 
 
Discount rate
 
11%
Rempex:
 
 
 
 
 
 
 
 
Contingent purchase price: Event-based milestones
 
$
81,400

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
18% - 90% (77%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2017 - 2024
 
 
 
 
 
 
Discount rate
 
4.2% - 7.3%
Contingent purchase price: Sales-based milestones
 
$
23,600

 
Risk-adjusted revenue simulation
 
Probabilities of successes
 
13% - 72% (61%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2020 - 2022
 
 
 
 
 
 
Discount rate
 
5.5% - 6.7%


15

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


 
 
Fair Value as of
December 31, 2016
 
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
 
2021
 
 
 
 
 
 
Discount rate
 
11%
Incline:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
1,269

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
5%
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2019
 
 
 
 
 
 
Discount rate
 
18%
Rempex:
 
 
 
 
 
 
 
 
Contingent purchase price: Event-based milestones
 
$
95,800

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
18% - 95% (78%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2017 - 2024
 
 
 
 
 
 
Discount rate
 
5.2% - 8.5%
Contingent purchase price: Sales-based milestones
 
$
20,300

 
Risk-adjusted revenue simulation
 
Probabilities of successes
 
16% - 65% (56%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2018 - 2022
 
 
 
 
 
 
Discount rate
 
6.6% - 8.2%
Annovation:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
14,063

 
Probability-adjusted discounted cash flow
 
Probabilities of successes
 
9% - 50% (34%)
 
 
 
 
 
 
Period in which milestones are expected to be achieved
 
2018 - 2031
 
 
 
 
 
 
Discount rate
 
6.0% - 10.0%

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 that 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.



16

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 and six months ended June 30, 2017 and 2016 were as follows:

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Balance at beginning of period
$
124,735

 
$
119,612

 
$
137,289

 
$
123,757

Payments
(936
)
 
(4,474
)
 
(22,002
)
 
(7,247
)
Fair value adjustments to contingent purchase prices included in net loss
(12,628
)
 
3,433

 
(4,116
)
 
2,061

Balance at end of period
$
111,171

 
$
118,571

 
$
111,171

 
$
118,571


For the three and six months ended June 30, 2017 and 2016, 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 milestone payments. This includes a decrease of $14.7 million in the carrying value of the contingent purchase price to an estimated fair value of zero as a result of the Company’s announcement to discontinue the clinical development program for MDCO-700. See Note 1, “Nature of Business,” for further details.

No other changes in valuation techniques or inputs occurred during the three and six months ended June 30, 2017 and 2016.

8. Inventory

The major classes of inventory were as follows:
 
 
June 30,
2017
 
December 31,
2016
 
 
(in thousands)
Raw materials
 
$
62,919

 
$
56,962

Work-in-progress
 
6,383

 
12,033

Finished goods
 
2,115

 
1,903

Total
 
$
71,417

 
$
70,898


The Company reviews inventory, including inventory purchase commitments, for slow moving or obsolete amounts based on expected product sales volume and provides reserves against the carrying amount of inventory as appropriate. If annual volume is less than expected, the Company may be required to make additional allowances for excess or obsolete inventory in the future.



17

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 June 30, 2017
 
As of December 31, 2016
 
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)
-
 
$

 
$

 
$

 
$
30,000

 
$
(3,013
)
 
$
26,987

Developed product rights(2)
15.3
 
120,560

 
(20,109
)
 
100,451

 
370,560

 
(35,946
)
 
334,614

Total amortizable intangible assets
15.3
 
120,560

 
(20,109
)
 
100,451

 
400,560

 
(38,959
)
 
361,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
 
$
188,620

 
$

 
$
188,620

 
$
253,620

 
$

 
$
253,620

Total intangible assets not subject to amortization
 
188,620

 

 
188,620

 
253,620

 

 
253,620

Total intangible assets

 
$
309,180

 
$
(20,109
)
 
$
289,071

 
$
654,180

 
$
(38,959
)
 
$
615,221

_______________________________________
(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 approximately $2.0 million and $6.6 million for the three months ended June 30, 2017 and 2016, respectively, and approximately $8.5 million and $12.9 million during the six months ended June 30, 2017 and 2016, respectively, related to its intangible assets. The Company expects amortization expense related to its intangible assets to be approximately $4.0 million for the last six months of 2017. The Company expects annual amortization expense related to its intangible assets to be approximately $7.9 million, $7.9 million, $7.9 million, $7.9 million and $7.9 million for the years ending December 31, 2018, 2019, 2020, 2021 and 2022, respectively, with the balance of $56.8 million being amortized thereafter. The Company records amortization expense in cost of revenue in the accompanying condensed consolidated statements of operations.

In the second quarter of 2017 the Company recorded impairment charges of $226.5 million and $26.2 million to reduce the unamortized carrying amounts of the product licenses and developed product rights, respectively, associated with Ionsys to their estimated fair values of zero which is a Level 3 fair value measurement, as a result of the discontinuation and market withdrawal of Ionsys which became effective on June 19, 2017. In the second quarter of 2017, the Company recorded impairment charges of $65.0 million to reduce the carrying amount of the in-process research and development associated with MDCO-700 to an estimated fair value of zero, which is a Level 3 fair value measurement, in connection with management’s decision to discontinue the MDCO-700 trials. These impairment charges were recorded in asset impairment charges in the accompanying condensed consolidated statements of operations. See Note 1, “Nature of Business,” for further details and Note 7, “Fair Value Measurements,” for definitions of hierarchy levels.

There were no changes in the carrying amount of goodwill for the six months ended June 30, 2017.



18

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


10. Convertible Senior Notes

Convertible Senior Notes Due 2023

In June 2016, the Company issued, at par value, $402.5 million aggregate principal amount of 2.75% convertible senior notes due 2023 (the “2023 Notes”). The 2023 Notes bear cash interest at a rate of 2.75% per year, payable semi-annually on January 15 and July 15 of each year, beginning on January 15, 2017. The 2023 Notes will mature on July 15, 2023. The net proceeds to the Company from the offering were $390.8 million after deducting the initial purchasers’ discounts and commissions and the offering expenses payable by the Company.

The 2023 Notes are governed by an indenture (the “2023 Notes Indenture”) with Wells Fargo Bank, National Association, a national banking association, as trustee (the “2023 Notes Trustee”).

The 2023 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 2023 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.

Holders may convert their 2023 Notes at their option at any time prior to the close of business on the business day immediately preceding April 15, 2023 only under the following circumstances:

during any calendar quarter commencing on or after September 30, 2016 (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 2023 Notes Indenture) per $1,000 principal amount of 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 April 15, 2023, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2023 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s option, based upon a daily conversion value calculated on a proportionate basis for each trading day in a 50 trading day observation period (as more fully described in the 2023 Notes Indenture). The conversion rate for the 2023 Notes was initially, and remains, 20.4198 shares of the Company’s common stock per $1,000 principal amount of the 2023 Notes, which is equivalent to an initial conversion price of approximately $48.97 per share of the Company’s common stock.

The Company may not redeem the 2023 Notes prior to July 15, 2020. The Company may redeem for cash all or any portion of the 2023 Notes, at its option, on or after July 15, 2020 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 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No redemption date may be designated that falls on or after the 52nd scheduled trading date prior to maturity. No sinking fund is provided for the 2023 Notes, which means that the Company is not required to redeem or retire the 2023 Notes periodically.

If the Company undergoes a fundamental change (as defined in the 2023 Notes Indenture), subject to certain conditions, holders of the 2023 Notes may require the Company to repurchase for cash all or part of their 2023 Notes at a repurchase price equal to


19

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


100% of the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The 2023 Notes Indenture governing the 2023 Notes contains customary events of default with respect to the 2023 Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the 2023 Notes when due and payable) occurring and continuing, the 2023 Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 2023 Notes by notice to the Company and the 2023 Notes Trustee, may, and the 2023 Notes Trustee at the request of such holders (subject to the provisions of the 2023 Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2023 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 2023 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 2023 Notes, the Company separated the 2023 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 2023 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 2023 Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component related to the 2023 Notes is $101.0 million and is recorded in additional paid-in capital on the accompanying condensed consolidated balance sheet.

In accounting for the transaction costs related to the issuance of the 2023 Notes, the Company allocated the total costs incurred to the liability and equity components of the 2023 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 2023 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 $33.5 million in connection with the 2023 Notes.

The 2023 Notes consist of the following:
Liability component
 
June 30, 2017
 
December 31, 2016
 
 
(in thousands)
Principal
 
$
402,500

 
$
402,500

Less: Debt discount, net(1)
 
(96,983
)
 
(103,162
)
Net carrying amount
 
$
305,517

 
$
299,338

_______________________________________
(1) 
Included in the accompanying condensed consolidated balance sheets within convertible senior notes (due 2023) and amortized to interest expense over the remaining life of the 2023 Notes using the effective interest rate method.

The fair value of the 2023 Notes was approximately $425.0 million as of June 30, 2017. The Company estimates the fair value of its 2023 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2023 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 June 30, 2017, the remaining contractual life of the 2023 Notes is approximately 6.0 years.

The following table sets forth total interest expense recognized related to the 2023 Notes:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
 
(in thousands)
Contractual interest expense
$
2,767

 
$
604

 
$
5,526

 
$
604

Amortization of debt discount
3,104

 
727

 
6,179

 
727

Total
$
5,871

 
$
1,331

 
$
11,705

 
$
1,331

Effective interest rate of the liability component
7.5
%
 
7.5
%
 
7.5
%
 
7.5
%


20

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



Capped call transactions

In June 2016, the Company entered into capped call transactions with certain counterparties of the 2023 Notes or their respective affiliates or other financial institutions. The Company used approximately $33.9 million of the net proceeds from the offering to pay the cost of the capped call transactions, which is included as a net reduction to additional paid-in capital on the accompanying condensed consolidated balance sheet.

The capped call transactions are expected to reduce the potential dilution with respect to shares of the Company’s common stock upon any conversion of the 2023 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2023 Notes, as the case may be, if the market price of the Company’s common stock is then greater than the strike price of the capped call transactions. Such reduction of potential dilution or offset of cash payments is subject to a cap based on the cap price of the capped call transactions. The cap price of the capped calls is currently $64.68.

For any conversions of the 2023 Notes prior to the close of business on the 52nd scheduled trading day immediately preceding the stated maturity date of the 2023 Notes, including without limitation upon an acquisition of the Company or similar business combination, a corresponding portion of the capped calls will be terminated. Upon such termination, the portion of the capped calls being terminated will be settled at fair value (subject to certain limitations), as determined by the counterparties to the capped calls and no payments will be due from the Company to such counterparties. The capped calls expire on the earlier of (i) the last day on which any Convertible Securities remain outstanding and (ii) the second “Scheduled Trading Day” (as defined in the 2023 Notes Indenture) immediately preceding the “Maturity Date” (as defined in the 2023 Notes Indenture).

Convertible Senior Notes Due 2022

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.

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.


21

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


During the first quarter of 2017, the conditional conversion feature of the 2022 Notes was triggered based on the trading price of the Company’s common stock during the first quarter of 2017, and the holders were entitled to convert the 2022 Notes through June 30, 2017. In any period when holders of the 2022 Notes are eligible to exercise their conversion option, the liability component related to the 2022 Notes is classified as 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 liability component 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 2022 Notes are not met, then the liability component of the 2022 Notes will be 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.
During the second quarter of 2017 an immaterial amount of the 2022 Notes were submitted for conversion. On July 1, 2017, the conditional conversion feature of the 2022 Notes was no longer triggered based on the trading price of the Company’s common stock.

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 circumstances described above. 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 equity classification. The equity component related to the 2022 Notes was $88.9 million and was recorded in additional paid-in capital on the accompanying condensed consolidated balance sheets.



22

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


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
 
June 30, 2017
 
December 31, 2016
 
 
(in thousands)
Principal
 
$
400,000

 
$
400,000

Less: Debt discount, net(1)
 
(69,363
)
 
(75,754
)
Net carrying amount
 
$
330,637

 
$
324,246

_______________________________________
(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 $528.8 million as of June 30, 2017. 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 June 30, 2017, the remaining contractual life of the 2022 Notes is approximately 4.5 years.

The following table sets forth total interest expense recognized related to the 2022 Notes:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
 
(in thousands)
Contractual interest expense
$
2,500

 
$
2,500

 
$
5,000

 
$
5,000

Amortization of debt discount
3,205

 
2,991

 
6,392

 
5,965

Total
$
5,705

 
$
5,491

 
$
11,392

 
$
10,965

Effective interest rate of the liability component
6.5
%
 
6.5
%
 
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 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 were senior unsecured obligations of the Company and paid cash interest at a rate of 1.375% per year, payable semi-annually on June 1 and December 1 of each year. The conversion rate for the 2017 Notes was 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.

In June 2016, the Company used approximately $323.2 million of the net proceeds of the 2023 Notes to repurchase $220.0 million in aggregate principal amount of the 2017 Notes in privately negotiated transactions effected through the initial purchasers of the 2017 Notes. As part of the June 2016 repurchase of the 2017 Notes, the Company settled a proportionate amount of outstanding bond hedges and warrants related to the 2017 Notes for a net cash receipt of $12.6 million. The Company recorded a loss of $5.4 million on the extinguishment of debt during the three months ended June 30, 2016 and accounted for the difference of $108.7 million between the consideration transferred to the holder and the fair value of the liability component of the 2017 Notes as a reduction of additional paid-in capital on the accompany condensed consolidated balance sheet.



23

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


The 2017 Notes that remained outstanding after the 2016 repurchase matured on June 1, 2017. In connection with the maturity of 2017 Notes, the holders converted substantially all of the outstanding principal amount of the 2017 Notes, the Company paid cash to the converting 2017 Note holders equal to $55.4 million in respect of principal, interest and fractional shares on the 2017 Notes to be converted and delivered 819,901 shares of the Company’s common stock.

The 2017 Notes consist of the following:
Liability component
 
June 30, 2017
 
December 31, 2016
 
 
(in thousands)
Principal
 
$

 
$
55,000

Less: Debt discount, net(1)
 

 
(1,251
)
Net carrying amount
 
$

 
$
53,749

_______________________________________
(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 following table sets forth total interest expense recognized related to the 2017 Notes:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
 
(in thousands)
Contractual interest expense
$
126

 
$
778

 
$
315

 
$
1,723

Amortization of debt discount
540

 
2,752

 
1,251

 
6,078

Total
$
666

 
$
3,530

 
$
1,566

 
$
7,801

Effective interest rate of the liability component
6.02
%
 
6.02
%
 
6.02
%
 
6.02
%

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. As part of the June 2016 repurchase of $220.0 million in aggregate principal amount of the 2017 Notes, the Company settled the related hedges and received cash of approximately $100.5 million. The remaining 2017 Note Hedges covered approximately two million shares of the Company’s common stock, subject to anti-dilution adjustments substantially similar to those applicable to the 2017 Notes, had a strike price that corresponded to the initial conversion price of the 2017 Notes, and were exercisable upon conversion of the 2017 Notes. The 2017 Note Hedges were separate transactions entered into by the Company with the 2017 Hedge Counterparties and were not part of the terms of the 2017 Notes or the 2017 Warrants. Holders of the 2017 Notes and 2017 Warrants did not have any rights with respect to the 2017 Note Hedges. On June 1, 2017, in connection with the maturity of the 2017 Notes, the Company redeemed the 2017 Note Hedges and received from the Note Hedge counterparties approximately 820,000 shares at a weighted average price of $48.79 per share. The redemption offset the dilution with respect to shares of the Company’s common stock issued upon the conversion of the 2017 Notes. The shared delivered to the Company in connection with the redemption of the 2017 Notes Hedges are held by the Company as treasury shares.

Warrants

In June 2012, the Company received aggregate proceeds of $38.4 million from the sale of warrants to the 2017 Hedge Counterparties, which the Company recorded as additional paid-in-capital in stockholders’ equity. As part of the June 2016 repurchase of $220.0 million in aggregate principal amount of the 2017 Notes, the Company paid $87.9 million to settle the related warrants. The remaining 2017 Warrants, which continue to remain outstanding after the maturity of the 2017 Notes, are to purchase up to approximately two million shares of the Company’s common stock, subject to customary anti-dilution adjustments, 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. The warrants will be net-settled, provided that subject to certain conditions the Company may elect to settle all of the 2017 Warrants in cash. The 2017 Warrants will expire on a series of expiration dates between August and December 2017.



24

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


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 did 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 Loss

The following tables provide a reconciliation of the components of accumulated other comprehensive loss, net of tax, attributable to The Medicines Company for the three and six months ended June 30, 2017 and 2016:

 
 
Three Months Ended June 30,
 
 
2017
 
2016
 
 
Foreign currency translation adjustment
 
Unrealized loss on available for sale securities
 
Total
 
Foreign currency translation adjustment
 
Unrealized loss on available for sale securities
 
Total
 
 
(in thousands)
Balance at beginning of period
 
$
(5,807
)
 
$

 
$
(5,807
)
 
$
(5,377
)
 
$

 
$
(5,377
)
Other comprehensive loss before reclassifications
 
368

 
(7
)
 
361

 
(37
)
 

 
(37
)
Total other comprehensive loss
 
368

 
(7
)
 
361

 
(37
)
 

 
(37
)
Balance at end of period
 
$
(5,439
)
 
$
(7
)
 
$
(5,446
)
 
$
(5,414
)
 
$

 
$
(5,414
)

 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 
Foreign currency translation adjustment
 
Unrealized 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
 
$
(5,479
)
 
$

 
$
(5,479
)
 
$
3,924

 
$
49

 
$
3,973

Other comprehensive income before reclassifications
 
40

 
(7
)
 
33

 
278

 

 
278

Amounts reclassified from accumulated other comprehensive income(1) (2)
 

 

 

 
(9,616
)
 
(49
)
 
(9,665
)
Total other comprehensive (loss) income
 
40

 
(7
)
 
33

 
(9,338
)
 
(49
)
 
(9,387
)
Balance at end of period
 
$
(5,439
)
 
$
(7
)
 
$
(5,446
)
 
$
(5,414
)
 
$

 
$
(5,414
)
_______________________________________
(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.

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 below are derived primarily from sales of Angiomax in the United States, including royalty revenue from Sandoz.



25

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


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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
($ in thousands)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
$
17,446

 
93.1
%
 
$
51,267

 
93.7
%
 
$
39,602

 
92.2
%
 
$
97,611

 
92.9
%
Europe
1,252

 
6.7
%
 
2,738

 
5.0
%
 
3,147

 
7.3
%
 
5,818

 
5.5
%
Rest of world
44

 
0.2
%
 
726

 
1.3
%
 
209

 
0.5
%
 
1,608

 
1.6
%
Total net revenues
$
18,742

 
100
%
 
$
54,731

 
100.0
%
 
$
42,958

 
100.0
%
 
$
105,037

 
100.0
%

 
June 30, 2017
 
December 31, 2016
 
($ in thousands)
Long-lived assets:
 
 
 
 
 
 
 
United States
$
712,152

 
99.6
%
 
$
1,047,098

 
99.6
%
Europe
2,929

 
0.4
%
 
4,160

 
0.4
%
Total long-lived assets
$
715,081

 
100.0
%
 
$
1,051,258

 
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 available information indicates that it is probable that a liability has been incurred and the amount of such loss can be reasonably estimated. 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.

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 include patent litigation matters and litigation related to a license agreement. 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. As a result, the Company did not record a loss contingency related to any of these legal proceedings. Particularly with respect to the litigation related to a license agreement, the Company is presently unable to predict the outcome of such lawsuit or to reasonably estimate the possible loss, or range of potential losses, if any, related to such lawsuit. 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 could have a material adverse effect on its financial condition or results of operations.

14. Restructuring

On June 1, 2017, the Company voluntarily discontinued and withdrew Ionsys from the market in the United States and ceased related commercialization activities, effective June 19, 2017, with the New Drug Application for Ionsys remaining open to December 31, 2017. Concurrent with this market withdrawal, the Company commenced implementation of a workforce reduction, which resulted in the reduction of 57 employees, representing approximately 15% of the Company’s workforce. The Company recorded a pre-tax charge of approximately $277.0 million associated with the discontinuation and market withdrawal of Ionsys in the United States market, of which $268.1 million was a non-cash impairment charge (including a write-off of inventory), $5.9 million relates to cash severance and $3.0 million relates to other exit costs. The Company is currently preparing to discontinue and withdraw Ionsys in the European market.

The impacted employees are eligible to receive severance payments in specified amounts, health benefits and outplacement services. The Company has and will record these charges in cost of goods sold, research and development and selling, general and administrative expenses based on responsibilities of the impacted employees.



26

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


The following table sets forth details regarding the activities described above during the six months ended June 30, 2017:

 
Balance as of January 1, 2017
 
Expenses,
Net
 
Cash
 
Noncash
 
Balance as of June 30, 2017
 
(in thousands)
Employee severance and other personnel benefits:
$

 
$
5.9

 
$
(0.1
)
 
$

 
$
5.8


15. Dispositions

On June 21, 2016, the Company completed the sale of its Non-Core ACC Products pursuant to the purchase and sale agreement dated May 9, 2016 by and among the Company, Chiesi USA and Chiesi.  At the completion of the sale, the Company received approximately $263.8 million in cash, which included the value of product inventory, and may receive up to an additional $480.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of each of Cleviprex and Kengreal.

The following table presents the consideration received, major classes of assets sold and the gain recognized on the sale of the Non-Core ACC Products:
 
(in thousands)
Sale price:
 
Cash
$
263,807

Contingent purchase price from sale of business
65,700

Total sale price
329,507

 
 
Assets:
 
Inventory
2,184

Intangibles
5,210

Goodwill
33,812

Total assets sold
41,206

 
 
Gain on sale of business
$
288,301


The Company recognized a gain on sale of business of approximately $288.3 million in the three months ended June 30, 2016 in continuing operations. Disposition related costs during 2016 of approximately $7.9 million for advisory, legal and regulatory fees incurred in connection with the sale of the Non-Core ACC Products were recorded in selling, general and administrative expenses. See Note 7, “Fair Value Measurements,” for further details on the contingent purchase price from sale of businesses.

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.

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 and six months ended June 30, 2016.



27

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 and six months ended June 30, 2016:

 
Three Months Ended
June 30,
 
Six Months Ended June 30,
 
2016
 
2016
 
 
Net product revenues
$
(12
)
 
$
50

Operating expenses:
 
 
 
Cost of product revenue
(589
)
 
1,704

Research and development
(27
)
 
119

Selling, general and administrative
(15
)
 
678

Total operating expenses
(631
)
 
2,501

Income (loss) from operations
619

 
(2,451
)
Gain from sale of business

 
1,004

Other expense, net

 
(39
)
Income (loss) from discontinued operations before income taxes
619

 
(1,486
)
Benefit for income taxes

 

(Loss) income from discontinued operations, net of tax
$
619

 
$
(1,486
)

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 six months ended June 30, 2016.



28


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. We market Angiomax® (bivalirudin), Minocin® (minocycline) for injection and Orbactiv® (oritavancin). We also have a pipeline of products in development, including inclisiran and Vabomere (meropenem and vaborbactam). We have the right to develop, manufacture and commercialize inclisiran 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 and offer, or, in the case of our products in development, have the potential to offer, improved performance to hospital businesses.

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.

On February 1, 2016, we completed the sale of our hemostasis portfolio, consisting of PreveLeak, Raplixa and Recothrom, 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. On June 21, 2016, we completed the sale of Cleviprex, Kengreal and rights to Argatroban for Injection, which we refer to collectively as Non-Core ACC Assets, to Chiesi USA, Inc., or Chiesi USA, and its parent company Chiesi Farmaceutici S.p.A., or Chiesi.  At the completion of the sale, we received approximately $263.8 million in cash, which included the value of product inventory, and may receive up to an additional $480.0 million in the aggregate following the achievement of certain specified calendar year net sales milestones with respect to net sales of each of Cleviprex and Kengreal.

Consistent with our intentions announced in November 2015, in January 2017 we announced that we were seeking opportunities to partner or divest Ionsys and are exploring alternatives for monetizing, in whole or in part, our infectious disease business.

Although we continue to seek a partnership or divestiture transaction for Ionsys, on June 1, 2017 we voluntarily discontinued and withdrew Ionsys from the market in the United States and ceased related commercialization activities, effective June 19, 2017, with the New Drug Application for Ionsys remaining open to December 31, 2017. Concurrent with this market withdrawal, we commenced implementation of a workforce reduction, which resulted in the reduction of 57 employees, representing approximately 15% of our workforce. We recorded a pre-tax charge of approximately $277.0 million associated with the discontinuation and market withdrawal of Ionsys in the United States market, of which $268.1 million was a non-cash impairment charge (including a write-off of inventory) and $8.9 million relates to cash severance and other exit costs. We are currently preparing to discontinue and withdraw Ionsys in the European market. We have an exclusive license with SymBio Pharmaceuticals Ltd. to develop and commercialize Ionsys in Japan. We have performed, and continue to perform, our obligations under that arrangement.

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. All of our products and products in development, except for inclisiran, are administered intravenously. Inclisiran is being developed as a subcutaneous injectable.



29


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
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

Research and Development Stage
 
 
 
 
 
 
Inclisiran
 
Phase 2 Completed
 
PCSK-9 gene antagonist addressing low-density lipoprotein cholesterol disease modification
 
Treatment of hypercholesterolemia
Vabomere
 
Phase 3 Completed; NDA accepted for filing by the FDA in the first quarter of 2017
 
Combination of vaborbactam, a proprietary, novel beta-lactamase inhibitor, with meropenem, a carbapenem antibiotic
 
Treatment of hospitalized patients with serious gram-negative bacterial infections


In August 2017, we announced that we are discontinuing the clinical development program for MDCO-700.

Our revenues to date have been generated primarily from sales of Angiomax in the United States. In the three and six months ended June 30, 2017, we had net product revenues from sales of Angiomax of approximately $5.3 million and $12.2 million, respectively, and aggregate net revenues from sales of Minocin IV, Orbactiv and Ionsys of approximately $8.0 million and $15.0 million, respectively. During this period, net product revenues from sales of Angiomax decreased by $10.5 million and $20.5 million, respectively, from the three and six months ended June 30, 2016. As a result of our July 2015 supply and distribution agreement with Sandoz, we recognized $5.4 million and $15.8 million, respectively, for the three and six months ended June 30, 2017 of royalty revenues related to the authorized generic sales of Angiomax (bivalirudin). We expect that net revenue from sales


30


of Angiomax will continue to decline in 2017 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 product revenues 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 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.


Angiomax Developments

We sell Angiomax in the United States under our name as a branded Angiomax product, and, on July 2, 2015, 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 addition to Hospira, other generic firms have entered the market. APP Pharmaceuticals LLC, or APP, through its affiliated company, Fresenius Kabi, commenced selling its generic version of Angiomax under provisions of a settlement agreement with us triggered by the Federal Circuit Court’s July 2, 2015 decision in the Hospira matter. Apotex Inc. and Dr. Reddy’s Laboratories have each also commenced commercialization of generic bivalirudin products upon receiving final approval if their respective ANDA filings by the FDA even though we remain in active litigation against each company. In addition, we expect Mylan Pharmaceuticals, Inc., or Mylan, to commence marketing its generic bivalirudin product as a result of a decision by the Federal Circuit Court in Mylan’s appeal that reversed an earlier district court decision that found that Mylan’s ANDA product infringed all of the asserted claims of the ‘727 patent.
A number of companies in addition to Hospira, Mylan, APP, Apotex Inc. and Dr. Reddy’s Laboratories have filed ANDAs for their generic versions of Angiomax. In addition the generic versions of bivalirudin currently being sold, Angiomax could be subject to further generic competition in the United States from Teva Pharmaceuticals USA, Inc. and its affiliates, or Teva, and Sun Pharmaceuticals Industries Ltd. and affiliates, or Sun, under the circumstances set forth in our respective settlement agreements with such parties and upon a final approval of each companies' ANDA filings by the FDA. Pliva Hrvatska DOO, an affiliate of Teva, currently has tentative approval for its ANDA filing for its generic version of Angiomax. Other ANDA filers may commercialize their products ‘at risk’ if they receive final approval of their respective ANDA filings and are not subject to a Hatch-Waxman 30-month stay. 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 t