Form 8-K BRISTOL MYERS SQUIBB CO For: Mar 08

March 8, 2019 7:03 AM


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



FORM 8-K



CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
The Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 8, 2019



BRISTOL-MYERS SQUIBB COMPANY
(Exact Name of Registrant as Specified in its Charter)



Delaware
(State or Other Jurisdiction of Incorporation)
1-1136
(Commission File Number)
 
430 East 29th Street, 14th Floor
New York, NY, 10016
(Address of Principal Executive Office)
22-0790350
(IRS Employer Identification Number)

Registrant’s telephone number, including area code: (212) 546-4000



Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth 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.



Item 8.01
Other Events.

Financial Information Related to Celgene Transaction

Bristol-Myers Squibb Company (“Bristol-Myers Squibb”) is filing this Current Report on Form 8-K to provide certain financial information with respect to Celgene Corporation (“Celgene”) and Bristol-Myers Squibb’s proposed acquisition of Celgene. As previously disclosed in its Current Report on Form 8-K filed on January 3, 2019, Bristol-Myers Squibb and Burgundy Merger Sub, Inc., a wholly owned subsidiary of Bristol-Myers Squibb (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Celgene. The Merger Agreement provides, among other things, that on the terms and subject to the conditions set forth therein, Merger Sub will merge with and into Celgene, with Celgene surviving as a wholly owned subsidiary of Bristol-Myers Squibb.

Included in this Current Report on Form 8-K are (a) the audited consolidated financial statements and financial statement schedule of Celgene as of December 31, 2018 and 2017 and for each of the years in the three year period ended December 31, 2018, and the notes related thereto and the related reports of KPMG LLP, Celgene’s independent registered public accounting firm, which are included as Exhibit 99.1, and (b) the unaudited pro forma condensed combined financial information of Bristol-Myers Squibb giving effect to the acquisition of Celgene (the “pro forma financial information”), which includes the unaudited pro forma condensed combined balance sheet as of December 31, 2018, the unaudited pro forma condensed combined statement of earnings for the year ended December 31, 2018, and the notes related thereto, which is included as Exhibit 99.2.

Also included in this Current Report on Form 8-K is the consent of KPMG LLP consenting to the incorporation by reference in certain of Bristol-Myers Squibb’s Registration Statements of its reports forming part of Exhibit 99.1, which is included as Exhibit 23.1.

The pro forma financial information included in this Current Report on Form 8-K has been presented for informational purposes only. It does not purport to represent the actual results of operations that Bristol-Myers Squibb and Celgene would have achieved had the companies been combined during the periods presented in the pro forma financial information and is not intended to project the future results of operations that the combined company may achieve after Bristol-Myers Squibb’s pending acquisition of Celgene is consummated.

Important Information For Investors And Stockholders

This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval. It does not constitute a prospectus or prospectus equivalent document. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

In connection with the proposed transaction between Bristol-Myers Squibb and Celgene, on February 1, 2019, Bristol-Myers Squibb filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4, as amended on February 1, 2019 and February 20, 2019, containing a joint proxy statement of Bristol-Myers Squibb and Celgene that also constitutes a prospectus of Bristol-Myers Squibb. The registration statement was declared effective by the SEC on February 22, 2019, and Bristol-Myers Squibb and Celgene commenced mailing the definitive joint proxy statement/prospectus to the stockholders of Bristol-Myers Squibb and Celgene on or about February 22, 2019. INVESTORS AND SECURITY HOLDERS OF BRISTOL-MYERS SQUIBB AND CELGENE ARE URGED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS AND OTHER DOCUMENTS FILED OR THAT WILL BE FILED WITH THE SEC CAREFULLY AND IN THEIR ENTIRETY BECAUSE THEY CONTAIN OR WILL CONTAIN IMPORTANT INFORMATION.  Investors and security holders will be able to obtain free copies of the registration statement and the definitive joint proxy statement/prospectus and other documents filed with the SEC by Bristol-Myers Squibb or Celgene through the website maintained by the SEC at http://www.sec.gov.  Copies of the documents filed with the SEC by Bristol-Myers Squibb are available free of charge on Bristol-Myers Squibb’s internet website at http://www.bms.com under the tab, “Investors” and under the heading “Financial Reporting” and subheading “SEC Filings” or by contacting Bristol-Myers Squibb’s Investor Relations Department through https://www.bms.com/investors/investor-contacts.html.  Copies of the documents filed with the SEC by Celgene are available free of charge on Celgene’s internet website at http://www.celgene.com under the tab “Investors” and under the heading “Financial Information” and subheading “SEC Filings” or by contacting Celgene’s Investor Relations Department at ir@celgene.com.



Certain Information Regarding Participants

Bristol-Myers Squibb, Celgene, and their respective directors and executive officers may be considered participants in the solicitation of proxies in connection with the proposed transaction.  Information about the directors and executive officers of Bristol-Myers Squibb is set forth in its Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 25, 2019, its proxy statement for its 2018 annual meeting of stockholders, which was filed with the SEC on March 22, 2018, and its Current Report on Form 8-K, which was filed with the SEC on August 28, 2018.  Information about the directors and executive officers of Celgene is set forth in its Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the SEC on February 26, 2019, as amended on March 1, 2019. Other information regarding the participants in the proxy solicitations and a description of their direct and indirect interests, by security holdings or otherwise, are contained in the definitive joint proxy statement/prospectus of Bristol-Myers Squibb and Celgene filed with the SEC and other relevant materials to be filed with the SEC regarding the proposed transaction when they become available. You may obtain these documents (when they become available) free of charge through the website maintained by the SEC at http://www.sec.gov and from Investor Relations at Bristol-Myers Squibb or Celgene as described above.

Cautionary Statement Regarding Forward-Looking Statements

This communication contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  You can generally identify forward-looking statements by the use of forward-looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “explore,” “evaluate,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” or “will,” or the negative thereof or other variations thereon or comparable terminology.  These forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond Bristol-Myers Squibb’s and Celgene’s control.

Statements in this communication regarding Bristol-Myers Squibb, Celgene and the combined company that are forward-looking, including projections as to the anticipated benefits of the proposed transaction, the impact of the proposed transaction on Bristol-Myers Squibb’s and Celgene’s business and future financial and operating results, the amount and timing of synergies from the proposed transaction, the terms and scope of the expected financing for the proposed transaction, the aggregate amount of indebtedness of the combined company following the closing of the proposed transaction, expectations regarding cash flow generation, accretion to cash earnings per share, capital structure, debt repayment, and credit ratings following the closing of the proposed transaction, Bristol-Myers Squibb’s ability and intent to conduct a share repurchase program and declare future dividend payments, the combined company’s pipeline, intellectual property protection and R&D spend, the timing and probability of a payment pursuant to the contingent value right consideration, and the closing date for the proposed transaction, are based on management’s estimates, assumptions and projections, and are subject to significant uncertainties and other factors, many of which are beyond Bristol-Myers Squibb’s and Celgene’s control. These factors include, among other things, effects of the continuing implementation of governmental laws and regulations related to Medicare, Medicaid, Medicaid managed care organizations and entities under the Public Health Service 340B program, pharmaceutical rebates and reimbursement, market factors, competitive product development and approvals, pricing controls and pressures (including changes in rules and practices of managed care groups and institutional and governmental purchasers), economic conditions such as interest rate and currency exchange rate fluctuations, judicial decisions, claims and concerns that may arise regarding the safety and efficacy of in-line products and product candidates, changes to wholesaler inventory levels, variability in data provided by third parties, changes in, and interpretation of, governmental regulations and legislation affecting domestic or foreign operations, including tax obligations, changes to business or tax planning strategies, difficulties and delays in product development, manufacturing or sales including any potential future recalls, patent positions and the ultimate outcome of any litigation matter. These factors also include the combined company’s ability to execute successfully its strategic plans, including its business development strategy, the expiration of patents or data protection on certain products, including assumptions about the combined company’s ability to retain patent exclusivity of certain products, the impact and result of governmental investigations, the combined company’s ability to obtain necessary regulatory approvals or obtaining these without delay, the risk that the combined company’s products prove to be commercially successful or that contractual milestones will be achieved. Similarly, there are uncertainties relating to a number of other important factors, including: results of clinical trials and preclinical studies, including subsequent analysis of existing data and new data received from ongoing and future studies; the content and timing of decisions made by the U.S. FDA and other regulatory authorities, investigational review boards at clinical trial sites and publication review bodies; the ability to enroll patients in planned clinical trials; unplanned cash requirements and expenditures; competitive factors; the ability to obtain, maintain and enforce patent and other intellectual property protection for any product candidates; the ability to maintain key collaborations; and general economic and market conditions. Additional information concerning these risks, uncertainties and assumptions can be found in Bristol-Myers Squibb’s and Celgene’s respective filings with the SEC, including the risk factors discussed in Bristol-Myers Squibb’s and Celgene’s most recent Annual Reports on Form 10-K, as updated by their Quarterly Reports on Form 10-Q and future filings with the SEC.

It should also be noted that projected financial information for the combined businesses of Bristol-Myers Squibb and Celgene is based on management’s estimates, assumptions and projections. None of this information should be considered in isolation from, or as a substitute for, the historical financial statements of Bristol-Myers Squibb or Celgene. Important risk factors could cause actual future results and other future events to differ materially from those currently estimated by management, including, but not limited to, the risks that: a condition to the closing of the proposed acquisition may not be satisfied; a regulatory approval that may be required for the proposed acquisition is delayed, is not obtained or is obtained subject to conditions that are not anticipated; Bristol-Myers Squibb is unable to achieve the synergies and value creation contemplated by the proposed acquisition; Bristol-Myers Squibb is unable to promptly and effectively integrate Celgene’s businesses; management’s time and attention is diverted on transaction related issues; disruption from the transaction makes it more difficult to maintain business, contractual and operational relationships; the credit ratings of the combined company decline following the proposed acquisition; legal proceedings are instituted against Bristol-Myers Squibb, Celgene or the combined company; Bristol-Myers Squibb, Celgene or the combined company is unable to retain key personnel; and the announcement or the consummation of the proposed acquisition has a negative effect on the market price of the capital stock of Bristol-Myers Squibb and Celgene or on Bristol-Myers Squibb’s and Celgene’s operating results.



No assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur, or if any of them do occur, what impact they will have on the results of operations, financial condition or cash flows of Bristol-Myers Squibb or Celgene. Should any risks and uncertainties develop into actual events, these developments could have a material adverse effect on the proposed transaction and/or Bristol-Myers Squibb or Celgene, Bristol-Myers Squibb’s ability to successfully complete the proposed transaction and/or realize the expected benefits from the proposed transaction.

You are cautioned not to rely on Bristol-Myers Squibb’s and Celgene’s forward-looking statements. These forward-looking statements are and will be based upon management’s then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. You also should understand that it is not possible to predict or identify all such factors and that this list should not be considered a complete statement of all potential risks and uncertainties. Investors also should realize that if underlying assumptions prove inaccurate or if unknown risks or uncertainties materialize, actual results could vary materially from Bristol-Myers Squibb’s or Celgene’s projections. Except as otherwise required by law, neither Bristol-Myers Squibb nor Celgene is under any obligation, and each expressly disclaim any obligation, to update, alter, or otherwise revise any forward-looking statements included in this communication or elsewhere, whether written or oral, that may be made from time to time relating to any of the matters discussed in this communication, whether as a result of new information, future events or otherwise, as of any future date.

Item 9.01.
Financial Statements and Exhibits.

(a) Financial statements.

The historical audited consolidated financial statements and financial statement schedule of Celgene Corporation as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018, the notes related thereto and the related reports of KPMG LLP, Celgene’s independent registered public accounting firm, are filed herewith as Exhibit 99.1 and incorporated herein by reference.

 (b) Pro forma financial information.

Unaudited pro forma condensed combined financial information of Bristol-Myers Squibb Company, giving effect to the acquisition of Celgene Corporation, which includes the unaudited pro forma condensed combined balance sheet as of December 31, 2018, the unaudited pro forma condensed combined statement of earnings for the year ended December 31, 2018, and the notes related thereto, are filed herewith as Exhibit 99.2 and incorporated herein by reference.

(d) Exhibits

The following exhibits are included as part of this Current Report on Form 8-K:

Exhibit
No.
 
Description
   
23.1
 
Consent of KPMG LLP, independent registered public accounting firm of Celgene Corporation.
     
99.1
 
The historical audited consolidated financial statements and financial statement schedule of Celgene Corporation as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018, the notes related thereto and the related reports of KPMG LLP, Celgene’s independent registered public accounting firm.
     
99.2
 
Unaudited pro forma condensed combined financial information of Bristol-Myers Squibb Company giving effect to the acquisition of Celgene Corporation, which includes the unaudited pro forma condensed combined balance sheet as of December 31, 2018, the unaudited pro forma condensed combined statement of earnings for the year ended December 31, 2018, and the notes related thereto.




EXHIBIT INDEX

Exhibit
No.
 
Description
   
 
Consent of KPMG LLP, independent registered public accounting firm of Celgene Corporation.
     
 
The historical audited consolidated financial statements and financial statement schedule of Celgene Corporation as of December 31, 2018 and 2017 and for each of the years in the three-year period ended December 31, 2018, the notes related thereto and the related reports of KPMG LLP, Celgene’s independent registered public accounting firm.
     
 
Unaudited pro forma condensed combined financial information of Bristol-Myers Squibb Company giving effect to the acquisition of Celgene Corporation, which includes the unaudited pro forma condensed combined balance sheet as of December 31, 2018, the unaudited pro forma condensed combined statement of earnings for the year ended December 31, 2018, and the notes related thereto.




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


BRISTOL-MYERS SQUIBB COMPANY
     
Dated: March 8, 2019
By:
/s/ Katherine R. Kelly
 
Name:
Katherine R. Kelly
 
Title:
Corporate Secretary




Exhibit 23.1
Consent of Independent Registered Public Accounting Firm

The Board of Directors
Celgene Corporation:

We consent to the incorporation by reference in the registration statements (Nos. 33-33682, 33-62496, 033-61147, 333-49227, 333-114107, 333-117818, 333-150471, 333-182852, 333-206991, 333-65444 and 333-227304) on Form S-3 of Bristol-Myers Squibb, (No. 333-229464) on Form S-4 of Bristol-Myers Squibb, and (Nos. 33-30856, 33-38411, 33-38587, 33-44788, 333-47403, 33-52691, 33-30756-02, 33-58187, 333-02873, 333-65424, 333-107414, 333-144893 and 333-182405) on Form S-8 of Bristol-Myers Squibb of our reports dated February 26, 2019, with respect to the consolidated balance sheets of Celgene Corporation and subsidiaries as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders' equity for each of the years in the three-year period ended December 31, 2018, and the related consolidated financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2018, which reports appear in the Form 8-K of Bristol-Myers Squibb dated March 8, 2019.

As discussed in Note 1 to the consolidated financial statements, on January 1, 2018, the Company adopted on a prospective basis FASB Accounting Standards Update No. 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” and Accounting Standards Update No. 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" which requires accounting for certain equity investments and financial liabilities under the fair value option with changes in fair value recognized in Net income. The Company recognized a cumulative effect adjustment of $731 million to Retained Earnings on January 1, 2018 due to the adoption of these new accounting standards.

/s/ KPMG LLP

Short Hills, New Jersey
March 7, 2019




Exhibit 99.1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Celgene Corporation:

Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Celgene Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three-year period ended December 31, 2018, the related notes, and the consolidated financial statement schedule, “Schedule II - Valuation and Qualifying Accounts” (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 26, 2019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, on January 1, 2018, the Company adopted on a prospective basis FASB Accounting Standards Update No. 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” and Accounting Standards Update No. 2018-03, “Technical Corrections and Improvements to Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” which requires accounting for certain equity investments and financial liabilities under the fair value option with changes in fair value recognized in Net income. The Company recognized a cumulative effect adjustment of $731 million to Retained Earnings on January 1, 2018 due to the adoption of these new accounting standards.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP

We have served as the Company’s auditor since 1986.

Short Hills, New Jersey
February 26, 2019


1



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,234

 
$
7,013

Debt securities available-for-sale
496

 
3,219

Equity investments with readily determinable fair values
1,312

 
1,810

Accounts receivable, net of allowances of $38 and $36 as of December 31, 2018 and 2017, respectively
2,066

 
1,921

Inventory
458

 
541

Other current assets
501

 
388

Total current assets
9,067

 
14,892

Property, plant and equipment, net
1,367

 
1,070

Intangible assets, net
16,213

 
8,436

Goodwill
8,003

 
4,866

Other non-current assets
830

 
877

Total assets
$
35,480

 
$
30,141

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Short-term borrowings and current portion of long-term debt
$
501

 
$

Accounts payable
418

 
305

Accrued expenses and other current liabilities
2,987

 
2,523

Income taxes payable
78

 
84

Current portion of deferred revenue
73

 
75

Total current liabilities
4,057

 
2,987

Deferred revenue, net of current portion
73

 
34

Income taxes payable
2,190

 
2,490

Deferred income tax liabilities
2,753

 
1,327

Other non-current liabilities
477

 
544

Long-term debt, net of discount
19,769

 
15,838

Total liabilities
29,319

 
23,220

Commitments and Contingencies (Note 19)

 

Stockholders’ Equity:
 
 
 
Preferred stock, $.01 par value per share, 5.0 million shares authorized; none outstanding as of December 31, 2018 and 2017, respectively

 

Common stock, $.01 par value per share, 1,150.0 million shares authorized; issued 981.5 million and 971.7 million shares as of December 31, 2018 and 2017, respectively
10

 
10

Common stock in treasury, at cost; 281.3 million and 212.4 million shares as of December 31, 2018 and 2017, respectively
(26,336
)
 
(20,243
)
Additional paid-in capital
14,978

 
13,806

Retained earnings
17,559

 
13,061

Accumulated other comprehensive (loss) income
(50
)
 
287

Total stockholders’ equity
6,161

 
6,921

Total liabilities and stockholders’ equity
$
35,480

 
$
30,141

See accompanying Notes to Consolidated Financial Statements

2



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Revenue:
 
 
 
 
 
Net product sales
$
15,265

 
$
12,973

 
$
11,185

Other revenue        
16

 
30

 
44

Total revenue
15,281

 
13,003

 
11,229

Expenses:
 
 
 
 
 
Cost of goods sold (excluding amortization of acquired intangible assets)                 
587

 
461

 
438

Research and development
5,673

 
5,915

 
4,470

Selling, general and administrative
3,250

 
2,941

 
2,658

Amortization of acquired intangible assets        
468

 
329

 
459

Acquisition related charges (gains) and restructuring, net
112

 
(1,350
)
 
38

Total costs and expenses
10,090

 
8,296

 
8,063

Operating income
5,191

 
4,707

 
3,166

Other income and (expense):
 
 
 
 
 
Interest and investment income, net
45

 
105

 
30

Interest (expense)
(741
)
 
(522
)
 
(500
)
Other income (expense), net
337

 
24

 
(324
)
Income before income taxes
4,832

 
4,314

 
2,372

Income tax provision
786

 
1,374

 
373

Net income
$
4,046

 
$
2,940

 
$
1,999

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
5.65

 
$
3.77

 
$
2.57

Diluted
$
5.51

 
$
3.64

 
$
2.49

Weighted average shares:
 
 
 
 
 
Basic
716.3

 
779.2

 
777.2

Diluted
733.8

 
808.7

 
803.3

See accompanying Notes to Consolidated Financial Statements

3



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in millions)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Net income
$
4,046

 
$
2,940

 
$
1,999

Other comprehensive income (loss):


 


 


Foreign currency translation adjustments
(28
)
 
70

 
(26
)
Pension liability adjustment
(6
)
 
16

 
(24
)
 
 
 
 
 
 
Net unrealized gains (losses) related to cash flow hedges:


 


 


Unrealized holding gains (losses)
245

 
(434
)
 
145

Tax benefit (expense)
1

 
6

 
(13
)
Unrealized holding gains (losses), net of tax
246

 
(428
)
 
132

 
 
 
 
 
 
Reclassification adjustment for losses (gains) included in net income
7

 
(178
)
 
(300
)
Tax (benefit)
(1
)
 
(3
)
 
(3
)
Reclassification adjustment for losses (gains) included in net income, net of tax
6

 
(181
)
 
(303
)
 
 
 
 
 
 
Excluded component related to cash flow hedges:
 
 
 
 
 
Amortization of excluded component (gains)
(20
)
 
(15
)
 

Reclassification of realized excluded component losses to net income
28

 
18

 

Net reclassification adjustment included in net income
8

 
3

 

 
 
 
 
 
 
Net unrealized (losses) gains on available for sale debt / marketable securities (see Note 1):
 
 
 
 
 
Unrealized holding (losses) gains
(9
)
 
611

 
(563
)
Tax benefit (expense)
2

 
(216
)
 
203

Unrealized holding (losses) gains, net of tax
(7
)
 
395

 
(360
)
 
 
 
 
 
 
Reclassification adjustment for losses included in net income
18

 
37

 
358

Tax (benefit)
(4
)
 
(14
)
 
(126
)
Reclassification adjustment for losses included in net income, net of tax
14

 
23

 
232

Total other comprehensive income (loss)
233

 
(102
)
 
(349
)
Comprehensive income
$
4,279

 
$
2,838

 
$
1,650

See accompanying Notes to Consolidated Financial Statements

4



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
 
Net income
$
4,046

 
$
2,940

 
$
1,999

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
160

 
134

 
121

Amortization
475

 
337

 
384

Impairment charges
31

 
1,679

 
489

Deferred income taxes
32

 
(1,330
)
 
(344
)
Change in value of contingent consideration and success payments
19

 
(1,350
)
 
21

Gain on sale of business

 

 
(38
)
Net loss (gain) on sales of debt securities available-for-sale and equity investments
18

 
(61
)
 
(7
)
Fair value adjustments on equity investments
(317
)
 

 

Share-based compensation expense
921

 
644

 
606

Share-based employee benefit plan expense
33

 
34

 
40

Derivative instruments
3

 
72

 
169

Other, net
(15
)
 
(24
)
 
(10
)
Change in current assets and liabilities, excluding the effect of acquisitions:
 
 
 
 
 
Accounts receivable
(178
)
 
(236
)
 
(222
)
Inventory
82

 
(42
)
 
(55
)
Other operating assets
(55
)
 
(73
)
 
94

Accounts payable and other operating liabilities
290

 
273

 
619

Income tax payable
(393
)
 
2,229

 
301

Payment of contingent consideration
(22
)
 

 
(9
)
Deferred revenue
41

 
20

 
7

Net cash provided by operating activities
5,171

 
5,246

 
4,165

Cash flows from investing activities:
 
 
 
 
 
Proceeds from sales of debt securities available-for-sale
3,388

 
5,872

 
633

Purchases of debt securities available-for-sale
(675
)
 
(8,163
)
 
(1,106
)
Capital expenditures
(330
)
 
(279
)
 
(236
)
Proceeds from sales of equity investment securities
96

 
116

 
15

Purchases of equity investment securities
(249
)
 
(410
)
 
(307
)
Payments for acquisition of businesses, net of cash acquired
(8,648
)
 

 

Other

 
(27
)
 
(1
)
Net cash used in investing activities
(6,418
)
 
(2,891
)
 
(1,002
)
Cash flows from financing activities:
 
 
 
 
 
Payment for treasury shares
(6,096
)
 
(3,833
)
 
(2,160
)
Proceeds from short-term borrowing
5,709

 

 
100

Principal repayments on short-term borrowing
(5,709
)
 

 
(100
)
Proceeds from the issuance of long-term debt
4,452

 
3,468

 

Repayments of long-term debt

 
(1,904
)
 

Net proceeds from common equity put options

 

 
8

Payment of contingent consideration
(40
)
 

 
(41
)
Net proceeds from share-based compensation arrangements
144

 
685

 
359

Net cash used in financing activities
(1,540
)
 
(1,584
)
 
(1,834
)
Effect of currency rate changes on cash and cash equivalents
8

 
72

 
(39
)
Net (decrease) increase in cash and cash equivalents
(2,779
)
 
843

 
1,290

Cash and cash equivalents at beginning of period
7,013

 
6,170

 
4,880

Cash and cash equivalents at end of period
$
4,234

 
$
7,013

 
$
6,170

See accompanying Notes to Consolidated Financial Statements



5



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Dollars in millions)
 
Years Ended December 31,
 
2018
 
2017
 
2016
Supplemental schedule of non-cash investing and financing activity:
 
 
 
 
 
Change in net unrealized loss (gain) on debt securities available-for-sale/marketable securities available-for-sale
$
9

 
$
(611
)
 
$
563

Investment in Human Longevity, Inc. common stock

 

 
40

Investment in Celularity, Inc. common stock

 
22

 

Supplemental disclosure of cash flow information:
 
 
 
 
 
Interest paid
$
689

 
$
539

 
$
527

Income taxes paid
1,165

 
475

 
373

See accompanying Notes to Consolidated Financial Statements

6



CELGENE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in millions)
Years Ended December 31, 2018, 2017 and 2016
 
Common
Stock
 
Treasury
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Stockholders’
Equity
Balances as of December 31, 2015
 
$
9

 
$
(14,052
)
 
$
11,119

 
$
8,075

 
$
768

 
$
5,919

Net income
 

 

 

 
1,999

 

 
1,999

Other comprehensive (loss)
 

 

 

 

 
(349
)
 
(349
)
Exercise of stock options and conversion of restricted stock units
 
1

 
(105
)
 
453

 

 

 
349

Shares purchased under share repurchase program
 

 
(2,160
)
 

 

 

 
(2,160
)
Issuance of common stock for employee benefit plans
 

 
36

 
15

 

 

 
51

Expense related to share-based compensation
 

 

 
606

 

 

 
606

Income tax benefit upon exercise of stock options
 

 

 
185

 

 

 
185

Balances as of December 31, 2016
 
$
10

 
$
(16,281
)
 
$
12,378

 
$
10,074

 
$
419

 
$
6,600

Net income
 

 

 

 
2,940

 

 
2,940

Other comprehensive (loss)
 

 

 

 

 
(102
)
 
(102
)
Exercise of stock options and conversion of
restricted stock units
 

 
(83
)
 
776

 

 

 
693

Shares purchased under share repurchase program
 

 
(3,911
)
 

 

 

 
(3,911
)
Issuance of common stock for employee benefit plans
 

 
32

 
8

 

 

 
40

Expense related to share-based compensation
 

 

 
644

 

 

 
644

Adoption of ASU 2016-09 and ASU 2017-12
 

 

 

 
47

 
(30
)
 
17

Balances as of December 31, 2017
 
$
10

 
$
(20,243
)
 
$
13,806

 
$
13,061

 
$
287

 
$
6,921

Net income
 

 

 

 
4,046

 

 
4,046

Other comprehensive income
 

 

 

 

 
233

 
233

Exercise of stock options and conversion of
restricted stock units
 

 
(104
)
 
248

 

 

 
144

Shares purchased under share repurchase program
 

 
(6,020
)
 

 

 

 
(6,020
)
Issuance of common stock for employee benefit plans
 

 
31

 
3

 

 

 
34

Expense related to share-based compensation
 

 

 
921

 

 

 
921

Adoption of ASU 2014-09, ASU 2016-01, ASU2018-03, ASU 2018-02 and ASU 2016-16 (Note 1)
 

 

 

 
452

 
(570
)
 
(118
)
Balances as of December 31, 2018
 
$
10

 
$
(26,336
)
 
$
14,978

 
$
17,559

 
$
(50
)
 
$
6,161

See accompanying Notes to Consolidated Financial Statements

7



CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions, except per share amounts, unless otherwise indicated)
1.  Nature of Business, Basis of Presentation and Summary of Significant Accounting Policies
Celgene Corporation, together with its subsidiaries (collectively “we,” “our,” “us,” “Celgene” or the “Company”), is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation. Celgene Corporation was incorporated in the State of Delaware in 1986.

Our primary commercial stage products include REVLIMID®, POMALYST®/IMNOVID®, OTEZLA®, ABRAXANE®, and VIDAZA®. In addition, we earn revenue from other product sales and licensing arrangements.

The consolidated financial statements include the accounts of Celgene Corporation and its subsidiaries. Investments in limited partnerships and interests where we have an equity interest of 50% or less and do not otherwise have a controlling financial interest are accounted for by one of three methods: the equity method, as an investment without a readily determinable fair value or as an investment with a readily determinable fair value.

We operate in a single segment engaged in the discovery, development, manufacturing, marketing, distribution and sale of innovative therapies for the treatment of cancer and inflammatory diseases. Consistent with our operational structure, our Chief Executive Officer (CEO), as the chief operating decision maker, manages and allocates resources at the global corporate level. Our global research and development organization is responsible for discovery of new product candidates and supports development and registration efforts for potential future products. Our global supply chain organization is responsible for the manufacturing and supply of products. Regional/therapeutic area commercial organizations market, distribute and sell our products. The business is also supported by global corporate staff functions. Managing and allocating resources at the global corporate level enables our CEO to assess both the overall level of resources available and how to best deploy these resources across functions, therapeutic areas, regional commercial organizations and research and development projects in line with our overarching long-term corporate-wide strategic goals, rather than on a product or franchise basis. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, allocating resources, setting incentive compensation targets, as well as forecasting future period financial results.

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures. Actual results could differ from those estimates. We are subject to certain risks and uncertainties related to, among other things, product development, regulatory approval, market acceptance, scope of patent and proprietary rights, competition, outcome of legal and governmental proceedings, credit risk, technological change and product liability.

Certain prior year amounts have been reclassified to conform to the current year’s presentation. During the first quarter of 2018, we adopted Accounting Standards Update No. 2016-01, “Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01). As such, we have recast our previously reported marketable securities available-for-sale of $5,029 million on our Consolidated Balance Sheet as of December 31, 2017 to conform to the current year presentation as shown in the table below. There were no changes to Total current assets or Total assets as a result of this reclassification.
 
December 31, 2017
 
As Reported
 
As Revised
Marketable securities available-for-sale
$
5,029

 
N/A

Debt securities available-for-sale
N/A

 
$
3,219

Equity investments with readily determinable fair values
N/A

 
1,810


In addition, as a result of adopting ASU 2016-01, we have also recast certain activity within our previously reported Consolidated Statement of Cash Flows for the years ended December 31, 2017 and December 31, 2016 to conform to the current year presentation as shown in the table below. There were no changes to Net cash provided by operating activities, Net cash used in investing activities and Net cash used in financing activities as a result of this reclassification.

8

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


 
Year Ended December 31, 2017
 
Year Ended December 31, 2016
 
As Reported
 
As Revised
 
As Reported
 
As Revised
Purchases of marketable securities available for sale
$
(8,478
)
 
N/A

 
$
(1,281
)
 
N/A

Purchases of investment securities
(95
)
 
N/A

 
(132
)
 
N/A

Purchases of debt securities available-for-sale
N/A

 
$
(8,163
)
 
N/A

 
$
(1,106
)
Purchases of equity investment securities
N/A

 
(410
)
 
N/A

 
(307
)
Proceeds from sales of marketable securities available-for-sale
5,968

 
N/A

 
633

 
N/A

Proceeds from sales of investment securities
20

 
N/A

 
15

 
N/A

Proceeds from sales of debt securities available-for-sale
N/A

 
5,872

 
N/A

 
633

Proceeds from sales of equity investment securities
N/A

 
116

 
N/A

 
15


The following is a summary of our significant accounting policies.

Financial Instruments: Certain financial instruments reflected in the Consolidated Balance Sheets, (e.g., cash, cash equivalents, accounts receivable, certain other assets, accounts payable, short-term borrowings and certain other liabilities) are recorded at cost, which approximates fair value due to their short-term nature. The fair values of financial instruments other than debt securities available-for-sale and equity investments with readily determinable fair values are determined through a combination of management estimates and information obtained from third parties using the latest market data. The fair value of debt securities available-for-sale and equity investments with readily determinable fair values is determined utilizing the valuation techniques appropriate to the type of security. See Note 5.

Derivative Instruments and Hedges: All derivative instruments are recognized on the Consolidated Balance Sheets at their fair value. Changes in the fair value of derivative instruments are recorded each period in current earnings or Other comprehensive income (loss) (OCI), depending on whether a derivative instrument is designated as part of a hedging transaction and, if it is, the type of hedging transaction. For a derivative to qualify as a hedge at inception and throughout the hedged period, we formally document the nature and relationships between the hedging instruments and hedged item. We assess, both at inception and on an on-going basis, whether derivative instruments are highly effective in offsetting the changes in the fair value or cash flows of hedged items. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting and any related unrealized gain or loss on the derivative instrument is recognized in Other income (expense), net in our Consolidated Statements of Income. We use derivative instruments, including those not designated as part of a hedging transaction, to manage our exposure to movements in foreign exchange, our stock price and interest rates. The use of these derivative instruments modifies the exposure of these risks with the intent to reduce our risk or cost.

Prior to Accounting Standards Update No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities” (ASU 2017-12), which we adopted on August 31, 2017 (Adoption Date), with an application date of January 1, 2017 (Application Date), we were required to separately measure and reflect the amount by which the hedging instrument did not offset the changes in the fair value or cash flows of hedged items, which was referred to as the ineffective amount. We assessed hedge effectiveness on a quarterly basis and recorded the gain or loss related to the ineffective portion of derivative instruments, if any, in Other income (expense), net in the Consolidated Statements of Income. Pursuant to the provisions of ASU 2017-12, we are no longer required to separately measure and recognize hedge ineffectiveness. Upon adoption of ASU 2017-12, we no longer recognize hedge ineffectiveness in our Consolidated Statements of Income, but we instead recognize the entire change in the fair value of:

cash flow hedges included in the assessment of hedge effectiveness in OCI. The amounts recorded in OCI will subsequently be reclassified to earnings in the same line item in the Consolidated Statements of Income as impacted by the hedged item when the hedged item affects earnings; and

fair value hedges included in the assessment of hedge effectiveness in the same line item in the Consolidated Statements of Income that is used to present the earnings effect of the hedged item.

Prior to the adoption of ASU 2017-12, we excluded option premiums and forward points (excluded components) from our assessment of hedge effectiveness for our foreign exchange cash flow hedges. We recognized all changes in fair value of the excluded components in Other income (expense), net in the Consolidated Statements of Income. The amendments in ASU 2017-12 continue to allow those components to be excluded from the assessment of hedge effectiveness, which we have elected to continue to apply. Pursuant to the provisions of ASU 2017-12, we no longer recognize changes in the fair value of the excluded components in Other income (expense), net, but we instead recognize the initial value of the excluded component on a straight-line basis over

9

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


the life of the derivative instrument, within the same line item in the Consolidated Statements of Income that is used to present the earnings effect of the hedged item. Beginning on April 1, 2018, all new cash flow hedging relationships are accounted for using the forward method. As a result, the entire fair value of the hedging instrument is recorded in OCI as no amounts are excluded from the assessment of hedge effectiveness. In addition, the initial value of the excluded component is recognized in OCI and not in the Consolidated Statements of Income.

In accordance with the transition provisions of ASU 2017-12, the Company is required to eliminate the separate measurement of ineffectiveness for its cash flow hedging instruments existing as of the Adoption Date through a cumulative effect adjustment to retained earnings as of the Application Date. We did not record a cumulative-effect adjustment to eliminate ineffectiveness amounts as all such amounts were not material to the Company’s previously issued Consolidated Financial Statements. In addition, we did not have any ineffectiveness during fiscal year 2017.

Also in accordance with the transition provisions of ASU 2017-12, we modified the recognition model for the excluded component from a mark-to-market approach to an amortization approach for all hedges existing as of the Adoption Date with a cumulative-effect adjustment of $30 million that reduced Accumulated other comprehensive (loss) income (AOCI) with a corresponding adjustment that increased Retained earnings as of the Application Date.

Cash, Cash Equivalents and Debt Securities Available-for-Sale: We invest our excess cash primarily in money market funds, repurchase agreements, time deposits, commercial paper, U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency mortgage-backed securities (MBS), ultra-short income fund investments, global corporate debt securities and asset backed securities. All liquid investments with maturities of three months or less from the date of purchase are classified as cash equivalents and all investments with maturities of greater than three months from the date of purchase are classified as debt securities available-for-sale. We determine the appropriate classification of our investments in marketable debt securities at the time of purchase.

We invest in debt securities that are carried at fair value, held for an unspecified period of time and are intended for use in meeting our ongoing liquidity needs. Unrealized gains and losses on debt securities available-for-sale, which are deemed to be temporary, are reported as a separate component of stockholders’ equity, net of tax. The cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization, along with realized gains and losses and other-than-temporary impairment charges related to debt securities, is included in Interest and investment income, net.

A decline in the market value of any debt security available-for-sale below its carrying value that is determined to be other-than-temporary would result in a charge to earnings and decrease in the debt security’s carrying value down to its newly established fair value. Factors evaluated to determine if an investment is other-than-temporarily impaired include significant deterioration in earnings performance, credit rating, asset quality or business prospects of the issuer; adverse changes in the general market condition in which the issuer operates; our intent to hold to maturity and an evaluation as to whether it is more likely than not that we will not have to sell before recovery of its cost basis; our expected future cash flows from the debt security; and issues that raise concerns about the issuer’s ability to continue as a going concern.

Concentration of Credit Risk: Cash, cash equivalents and debt securities available-for-sale are financial instruments that potentially subject the Company to concentration of credit risk. We invest our excess cash primarily in money market funds, repurchase agreements, time deposits, commercial paper, U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency MBS, ultra-short income fund investments, global corporate debt securities and asset backed securities (see Note 7). We have established guidelines relative to diversification and maturities to maintain safety and liquidity. These guidelines are reviewed periodically and may be modified to take advantage of trends in yields and interest rates.

We sell our products in the United States primarily through wholesale distributors and specialty contracted pharmacies. Therefore, wholesale distributors and large pharmacy chains account for a large portion of our U.S. trade receivables and net product revenues (see Note 20). While most international sales, primarily in Europe, are made directly to hospitals, clinics and retail chains, many of which in Europe are government owned and have extended their payment terms in recent years given the economic pressure these countries are facing, sales in other international regions are also made to wholesalers and distributors. We continuously monitor the creditworthiness of our customers, including these governments, and have internal policies regarding customer credit limits. We estimate an allowance for doubtful accounts primarily based on historical payment patterns, aging of receivable balances and general economic conditions, including publicly available information on the credit worthiness of countries themselves and provinces or areas within such countries where they are the ultimate customers.

We continue to monitor economic conditions, including the volatility associated with international economies, the sovereign debt situation in certain European countries and associated impacts on the financial markets and our business. Our current business model in these markets is typically to sell our hematology and oncology products directly to principally government owned or

10

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


controlled hospitals, which in turn directly deliver critical care to patients. Many of our products are used to treat life-threatening diseases and we believe this business model enables timely delivery and adequate supply of products. Many of the outstanding receivable balances are related to government-funded hospitals and we believe the receivable balances are ultimately collectible. Similarly, we believe that future sales to these customers will continue to be collectible.

Inventory: Inventories are recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. We periodically review the composition of inventory in order to identify excess, obsolete, slow-moving or otherwise non-saleable items. If non-saleable items are observed and there are no alternate uses for the inventory, we will record a write-down to net realizable value in the period that the decline in value is first recognized. Included in inventory are raw materials used in the production of preclinical and clinical products, which are charged to research and development expense when consumed.

We capitalize inventory costs associated with certain products prior to regulatory approval of products, or for inventory produced in new production facilities, when management considers it highly probable that the pre-approval inventories will be saleable. The determination to capitalize is based on the particular facts and circumstances relating to the expected regulatory approval of the product or production facility being considered, and accordingly, the time frame within which the determination is made varies from product to product. The assessment of whether or not the product is considered highly probable to be saleable is made on a quarterly basis and includes, but is not limited to, how far a particular product or facility has progressed along the approval process, any known safety or efficacy concerns, potential labeling restrictions and other impediments. We could be required to write down previously capitalized costs related to pre-launch inventories upon a change in such judgment, or due to a denial or delay of approval by regulatory bodies, a delay in commercialization or other potential factors. As of December 31, 2018, the carrying value of pre-approval inventory was not material.

Property, Plant and Equipment, Net: Property, plant and equipment, net is stated at cost less accumulated depreciation. Depreciation of plant and equipment is recorded using the straight-line method. Building improvements are depreciated over the remaining useful life of the building. Leasehold improvements are depreciated over the lesser of the economic useful life of the asset or the remaining term of the lease, including anticipated renewal options. Capitalized software costs incurred in connection with developing or obtaining software are amortized over their estimated useful life from the date the systems are ready for their intended use. The estimated useful lives of capitalized assets are as follows:
Buildings
40 years
Building and operating equipment
15 years
Manufacturing machinery and equipment
10 years
Other machinery and equipment
5 years
Furniture and fixtures
5 years
Computer equipment and software
3-7 years

Maintenance and repairs are charged to operations as incurred, while expenditures for improvements which extend the life of an asset are capitalized.

Investments in Other Entities: We hold a portfolio of investments in equity securities and certain investment funds that are accounted for under either the equity method, as equity investments with readily determinable fair values, or as equity investments without readily determinable fair values. Investments in companies or certain investment funds over which we have significant influence but not a controlling interest are accounted for using the equity method, with our share of earnings or losses reported in Other income (expense), net in the Consolidated Statements of Income. Our equity investments with readily determinable fair values are primarily equity investments in the publicly traded common stock of companies, including common stock of companies with whom we have entered into collaboration agreements. Prior to ASU 2016-01, which we adopted on January 1, 2018, unrealized gains and losses on these investments, which were deemed to be temporary, were reported as a separate component of stockholder’s equity, net of tax. Realized gains and losses as well as other-than-temporary impairment charges related to these investments were included in Other income (expense), net in the Consolidated Statements of Income. Following the adoption of ASU 2016-01, these investments are measured at fair value with changes in fair value recognized in Other income (expense), net in the Consolidated Statements of Income and are no longer subject to impairment. Also prior to the adoption of ASU 2016-01, equity investments without readily determinable fair values were recorded at cost minus other-than-temporary impairment, with other-than-temporary impairment charges included in Other income (expense), net in the Consolidated Statements of Income. Following the adoption of ASU 2016-01, these investments are measured at cost adjusted for changes in observable prices minus impairment or at net asset value (NAV), as a practical expedient, if available, with changes in measurement recognized in Other income (expense), net in the Consolidated Statements of Income. Investments in equity investments without readily determinable fair values of companies that become publicly traded and are not classified as equity method investments are accounted for as equity investments with

11

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


readily determinable fair values prospectively from the date of such companies’ initial public offering. Our equity method investments and equity investments without readily determinable fair values are included in Other non-current assets on the Consolidated Balance Sheets.

All equity method investments and investments without a readily determinable fair value are reviewed on a regular basis for possible impairment. If an equity method investment’s fair value is determined to be less than its net carrying value and the decline is determined to be other-than-temporary, the investment is written down to its fair value. Investments without a readily determinable fair value that do not qualify for the practical expedient to estimate fair value using NAV per share are written down to fair value if a qualitative assessment indicates that the investment is impaired and the fair value of the investment is less than its carrying value. Such evaluation is judgmental and dependent on specific facts and circumstances. Factors considered in determining whether an other-than-temporary decline in value or impairment has occurred include: market value or exit price of the investment based on either market-quoted prices or future rounds of financing by the investee; length of time that the market value was below its cost basis; financial condition and business prospects of the investee; our intent and ability to retain the investment for a sufficient period of time to allow for recovery in market value of the investment; a bona fide offer to purchase, an offer by the investee to sell, or a completed auction process for the same or similar security for an amount less than the carrying amount of the investment; issues that raise concerns about the investee’s ability to continue as a going concern; and any other information that we may be aware of related to the investment.

Other Intangible Assets: Intangible assets with definite useful lives are amortized to their estimated residual values over their estimated useful lives and reviewed for impairment if certain events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Amortization is initiated for in-process research and development (IPR&D) intangible assets when their useful lives have been determined. IPR&D intangible assets which are determined to have had a drop in their fair value are adjusted downward and an expense recognized in Research and development in the Consolidated Statements of Income. These IPR&D intangible assets are tested at least annually or when a triggering event occurs that could indicate a potential impairment.

Goodwill: Goodwill represents the excess of purchase price over fair value of net assets acquired in a business combination accounted for by the acquisition method of accounting and is not amortized, but is subject to impairment testing. We test our goodwill for impairment at least annually or when a triggering event occurs that could indicate a potential impairment by assessing qualitative factors or performing a quantitative analysis in determining whether it is more likely than not that the fair value of net assets are below their carrying amounts.

Impairment of Long-Lived Assets: Long-lived assets, such as property, plant and equipment and certain other long-term assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the assets exceed their estimated future undiscounted net cash flows, an impairment charge is recognized for the amount by which the carrying amount of the assets exceed the fair value of the assets.

Contingent Consideration from Business Combinations: Subsequent to the acquisition date, we measure contingent consideration arrangements at fair value for each period with changes in fair value recognized in income as Acquisition related charges (gains) and restructuring, net in the Consolidated Statements of Income. Changes in contingent consideration obligation values can result from movements in publicly listed prices of our Contingent Value Rights issued in connection with our acquisition of Abraxis BioScience, Inc. (Abraxis) (Abraxis CVRs), adjustments to discount rates, updates in the assumed achievement or timing of milestones or changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. In the absence of new information, changes in fair value reflect only the passage of time as development work towards the achievement of the milestones progresses, and is accrued based on an accretion schedule.

Foreign Currency Translation: Operations in non-U.S. entities are recorded in the functional currency of each entity. For financial reporting purposes, the functional currency of an entity is determined by a review of the source of an entity’s most predominant cash flows. The results of operations for non-U.S. dollar functional currency entities are translated from functional currencies into U.S. dollars using the average currency rate during each month, which approximates the results that would be obtained using actual currency rates on the dates of individual transactions. Assets and liabilities are translated using currency rates at the end of the period. Adjustments resulting from translating the financial statements of our foreign entities into the U.S. dollar are excluded from the determination of net income and are recorded as a component of OCI. Transaction gains and losses are recorded in Other income (expense), net in the Consolidated Statements of Income.


12

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Advertising Costs: Advertising costs are expensed when incurred and are recorded in Selling, general and administrative in the Consolidated Statements of Income. Advertising costs consist of direct-to-consumer advertising and were $174 million, $119 million and $95 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Research and Development Costs: Research and development costs are expensed as incurred. These include all internal and external costs related to services contracted by us. Upfront and milestone payments made to third parties in connection with research and development collaborations are expensed as incurred up to the point of regulatory approval. Milestone payments made to third parties upon regulatory approval are capitalized and amortized over the remaining useful life of the related product. Upfront payments are recorded when incurred, and milestone payments are recorded when the specific milestone has been achieved. Asset acquisition expenses, including expenses to acquire rights to pre-commercial compounds from a collaboration partner when there will be no further participation from the collaboration partner or other parties, are recorded as incurred.

Income Taxes: We utilize the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for years in which the temporary differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. We recognize the benefit of an uncertain tax position that we have taken or expect to take on income tax returns we file if such tax position is more likely than not to be sustained. We recognize the tax on Global Intangible Low-Taxed Income (GILTI) as a period expense in the period the tax is incurred. Under this policy, we have not provided deferred taxes on temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period.

Revenue Recognition: Revenue from the sale of products is recognized in a manner that depicts the transfer of those promised goods to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for these good or services. To achieve this core principle, we follow a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations and recognizing revenue when, or as, we satisfy a performance obligation. In addition, we recognize revenue from other product sales and royalties based on licensees’ sales of our products or products using our technologies. We do not consider royalty revenue to be a material source of our consolidated revenue.

We record gross-to-net sales accruals for government rebates, chargebacks, distributor services fees, other rebates and administrative fees, sales returns and allowances and sales discounts. See Note 2 for further detail on gross-to-net sales accruals and revenue recognition disclosures.

Share-Based Compensation: We utilize share-based compensation in the form of stock options, restricted stock units (RSUs) and performance-based restricted stock units (PSUs). Compensation expense is recognized in the Consolidated Statements of Income based on the estimated fair value of the awards at grant date. Compensation expense recognized reflects an estimate of the number of awards expected to vest after taking into consideration an estimate of award forfeitures based on actual experience and is recognized on a straight-line basis over the requisite service period, which is generally the vesting period required to obtain full vesting. Management expectations related to the achievement of performance goals associated with PSU grants is assessed regularly and that assessment is used to determine whether PSU grants are expected to vest. If performance-based milestones related to PSU grants are not met or not expected to be met, any compensation expense recognized to date associated with grants that are not expected to vest will be reversed.

The fair values of stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The fair values of RSU and PSU grants that are not based on market performance are based on the market value of our common stock on the date of grant. Certain of our PSU grants are measured based on the achievement of specified performance and market targets, including non-GAAP (Generally Accepted Accounting Principles) revenue, non-GAAP earnings per share, and relative total shareholder return. The grant date fair value for the portion of the PSUs related to non-GAAP revenue and non-GAAP earnings per share is estimated using the fair market value of our common stock on the grant date. The grant date fair value for the portion of the PSUs related to relative total shareholder return is estimated using the Monte Carlo valuation model.

Earnings Per Share: Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period, assuming potentially dilutive common shares resulting from option exercises, RSUs, PSUs, warrants and other incentives had been issued and any proceeds thereof used to repurchase common stock at the average market price during the period. The assumed proceeds used to repurchase common stock is the sum of the amount to be paid to us upon exercise of options and the amount of compensation cost attributed to future services and not yet recognized.


13

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


New accounting standards which have been adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09) and has subsequently issued a number of amendments to ASU 2014-09. The new standard, as amended, provides a single comprehensive model to be used in the accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance, including industry-specific guidance. The standard’s stated core principle is 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. To achieve this core principle, ASU 2014-09 includes provisions within a five step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. See Note 2 for revenue recognition disclosures.

The new standard was effective for us on January 1, 2018 and we elected to adopt it using a modified retrospective transition method, which required a cumulative effect adjustment to opening retained earnings as of January 1, 2018. The implementation of ASU 2014-09 using the modified retrospective transition method did not have a material quantitative impact on our consolidated financial statements as the timing of revenue recognition did not significantly change. We also elected the following practical expedients, which were available to us as a result of utilizing the modified retrospective transition method:

We applied the provisions of the standard only to contracts that were not completed as of January 1, 2018; and
We did not retrospectively restate contracts for contract modifications executed before the beginning of the earliest period presented.

In accordance with the transition provisions of ASU 2014-09, we recorded a cumulative effect adjustment of $4 million to increase Retained earnings (net of a $1 million tax effect). In limited instances, the new standard permits us to recognize revenue earlier than under the previous revenue recognition guidance. Historically, we deferred certain revenue where the transaction price pursuant to the underlying customer arrangement was not fixed or determinable. Under the new standard, such customer arrangements are accounted for as variable consideration, which results in revenue being recognized earlier provided we can reliably estimate the ultimate price expected to be realized from the customer. In addition, ASU 2014-09 requires companies who elect to adopt the standard using the modified retrospective transition method to disclose within the footnotes the effects of applying the provisions of the previous standards to current year financial statements. Revenue and Net income for the year ended December 31, 2018, do not differ materially from amounts that would have resulted from application of the previous standards.

In January 2016 and February 2018, the FASB issued ASU 2016-01 and Accounting Standards Update No. 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU-2018-03), respectively. ASU 2016-01 changes accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. ASU 2016-01 does not apply to equity investments in consolidated subsidiaries or those accounted for under the equity method of accounting. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. Equity investments with readily determinable fair values will be measured at fair value with changes in fair value recognized in Net income. We have elected to measure all of our equity investments without readily determinable fair values at cost adjusted for changes in observable prices minus impairment or at NAV, as a practical expedient, if available. Changes in measurement of equity investments without readily determinable fair values will be recognized in Net income. The guidance related to equity investments without readily determinable fair values, in which the practical expedient has not been elected, will be applied prospectively to equity investments that exist as of the date of adoption. For equity investments without a readily determinable fair value in which the NAV per share practical expedient is elected, ASU 2018-03 clarified that the transition should not be performed prospectively, but rather as a cumulative effect adjustment to opening Retained earnings as of the beginning of the fiscal year of adoption. Equity investments without readily determinable fair values are recorded within Other non-current assets on the Consolidated Balance Sheets. We have not elected the fair value option for financial liabilities with instrument-specific credit risk. Companies must assess valuation allowances for deferred tax assets related to available-for-sale debt securities in combination with their other deferred tax assets. ASU 2016-01 was effective for us on January 1, 2018 which required a cumulative effect adjustment to opening Retained earnings to be recorded for equity investments with readily determinable fair values and equity investments without readily determinable fair values in which the NAV per share practical expedient was elected. As of the adoption date, we held publicly traded equity investments with a fair value of approximately $1.8 billion in a net unrealized gain position of $875 million, and having an associated deferred tax liability of $188 million. We recorded a cumulative effect adjustment of $687 million to decrease AOCI with a corresponding increase to Retained earnings for the amount of unrealized gains or losses, net of tax as of the beginning of fiscal year 2018. In addition, we held an equity investment without a readily determinable fair value in which we elected the NAV per share practical expedient. As such, on January 1, 2018,

14

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


we recorded an additional cumulative effect adjustment of $59 million to increase equity investments without readily determinable fair values as the NAV was in excess of our cost basis as of the adoption date with a corresponding increase to Retained earnings of $44 million, net of the tax effect of $15 million. As a result of the implementation of ASU 2016-01, effective on January 1, 2018 unrealized gains and losses in Equity investments with readily determinable fair values and equity investments without readily determinable fair values for which observable price changes for identical or similar (e.g. dividend rights, voting rights, etc.) investments occur are recorded on the Consolidated Balance Sheets within Other income (expense), net. We recorded a net gain of $317 million in Other income (expense), net for the year ended December 31, 2018 as a result of adopting this standard. The implementation of ASU 2016-01 is expected to increase volatility in our net income as the volatility previously recorded in OCI related to changes in the fair market value of available-for-sale equity investments will now be reflected in Net income effective with the adoption date.

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). The new standard is effective on January 1, 2019 with early adoption permitted. The guidance permits a reclassification from AOCI to Retained earnings for stranded tax effects resulting from U.S. tax reform legislation enacted in December 2017 (2017 Tax Act). We elected to early adopt ASU 2018-02 on January 1, 2018. We use a specific identification approach to release the income tax effects in AOCI. We have recast our previously reported Marketable securities available-for-sale on our Consolidated Balance Sheet as of December 31, 2017 to conform to the current year presentation as outlined earlier in this Note 1. As a result of adopting this standard, we recorded a cumulative effect adjustment to increase AOCI by $117 million with a corresponding decrease to Retained earnings. We recorded the impacts of adopting ASU 2018-02 prior to recording the impacts of adopting ASU 2016-01 and included state income tax related effects in the amounts reclassified to Retained earnings.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). ASU 2016-15 clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows where diversity in practice exists. ASU 2016-15 was effective for us in our first quarter of fiscal 2018 and did not result in any changes to the presentation of our Consolidated Statements of Cash Flows upon adoption.

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory” (ASU 2016-16). ASU 2016-16 requires the income tax consequences of intra-entity transfers of assets other than inventory to be recognized as current period income tax expense or benefit and removes the requirement to defer and amortize the consolidated tax consequences of intra-entity transfers. The new standard was effective for us on January 1, 2018. As of the adoption date, we had net prepaid tax assets of $166 million related to intra-entity transfers of assets other than inventory which was recorded in Other non-current assets. Using the modified retrospective approach, we recorded a cumulative effect adjustment of $166 million to decrease Retained earnings with a corresponding decrease in prepaid tax assets as of the beginning of fiscal year 2018.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, “Business Combinations” (ASU 2017-01). ASU 2017-01 provides guidance for evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance provides a screen to determine when an integrated set of assets and activities (a “set”) does not qualify to be a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in an identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the guidance requires a set to be considered a business to include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs and removes the evaluation as to whether a market participant could replace the missing elements. The new standard was effective for us on January 1, 2018 and was adopted on a prospective basis. In the first quarter of 2018, we acquired Impact Biomedicines Inc. (Impact) and Juno Therapeutics Inc. (Juno) which were accounted for as an asset acquisition and a business combination, respectively. See Note 3 for further information on the acquisitions of Impact and Juno. We anticipate that the adoption of this standard will result in more acquisitions being accounted for as asset acquisitions.


15

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The following table presents a summary of cumulative effect adjustments to Retained earnings and AOCI due to the adoption of new accounting standards on January 1, 2018 as noted above:
 
Retained Earnings
Increase / (Decrease)
 
AOCI
Increase / (Decrease)
ASU 2014-09
$
4

 
$

ASU 2016-01
687

 
(687
)
ASU 2018-03
44

 

ASU 2018-02
(117
)
 
117

ASU 2016-16
(166
)
 

Net cumulative effect adjustments to Retained earnings and AOCI on January 1, 2018 due to the adoption of new accounting standards
$
452

 
$
(570
)

New accounting standards which have not yet been adopted

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, “Leases” (ASU 2016-02). ASU 2016-02 provides accounting guidance for both lessee and lessor accounting models. Among other things, lessees will recognize a right-of-use asset and a lease liability for leases with a duration of greater than one year. For income statement purposes, ASU 2016-02 will require leases to be classified as either an operating or finance lease. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The new standard will be effective for us on January 1, 2019. In July 2018, the FASB issued Accounting Standards Update No. 2018-11, “Leases” (ASU 2018-11), which offers a transition option to entities adopting the new lease standard. Under the transition option, entities can elect to apply the new guidance using a modified retrospective approach at the beginning of the year in which the new lease standard is adopted, rather than to the earliest comparative period presented in their financial statements. We will adopt the standard using the modified retrospective method and intend to elect the available practical expedients on adoption. We anticipate adoption of the new standard will increase total assets by $280 million - $310 million, with an offsetting increase to total liabilities of $310 million - $340 million on our consolidated balance sheet and result in additional lease-related disclosures in the footnotes to our consolidated financial statements. Adoption of the standard has required changes to our business processes, systems and controls to comply with the provisions of the standard. We have implemented a system from a third-party service provider to assist in the adoption of the standard. We are in the process of finalizing our testing of the system. In addition, we have designed and implemented internal controls that became operational during the first quarter of 2019 to ensure our readiness.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (ASU 2016-13). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for us on January 1, 2020. Early adoption will be available on January 1, 2019. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

In November 2018, the FASB issued Accounting Standards Update No. 2018-18, “Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). The issuance of ASU 2014-09 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASU 2014-09 when the collaboration arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. The new standard will be effective for us on January 1, 2020 with early adoption permitted. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
2. Revenue
 
Subsequent to January 1, 2018 we account for revenue in accordance with ASU 2014-09, which we adopted using the modified retrospective method. See Note 1 for further discussion of the adoption, including the impact on our consolidated financial statements. The majority of our revenue is derived from product sales. Our primary commercial stage products include REVLIMID®, POMALYST®/IMNOVID®, OTEZLA®, ABRAXANE® and VIDAZA®. In addition, we recognize revenue from

16

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


other product sales and royalties based on licensees’ sales of our products or products using our technologies. We do not consider royalty revenue to be a material source of our consolidated revenue. As such, the following disclosure only relates to revenue associated with net product sales.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in the current revenue standard. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.

At contract inception, we assess the goods promised in our contracts with customers and identify a performance obligation for each promise to transfer to the customer a good that is distinct. When identifying our performance obligations, we consider all goods promised in the contract regardless of whether explicitly stated in the customer contract or implied by customary business practices. Generally, our contracts with customers require us to transfer an individual distinct product, which would represent a single performance obligation. In limited situations, our contracts with customers will require us to transfer two or more distinct products, which would represent multiple performance obligations for each distinct product. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation on a relative standalone selling price basis. In determining our standalone selling prices for our products, we utilize observable prices for our goods sold separately in similar circumstances and to customers in the same geographical region or market. Our performance obligations with respect to our product sales are satisfied at a point in time, which transfer control upon delivery of product to our customers. We consider control to have transferred upon delivery because the customer has legal title to the asset, we have transferred physical possession of the asset, the customer has significant risks and rewards of ownership of the asset, and in most instances we have a present right to payment at that time. The aggregate dollar value of unfulfilled orders as of December 31, 2018 was not material.

Distribution

REVLIMID® and POMALYST® are distributed in the United States primarily through contracted pharmacies under the REVLIMID Risk Evaluation and Mitigation Strategy (REMS) and POMALYST REMS® programs, respectively. These are proprietary risk-management distribution programs tailored specifically to provide for the safe and appropriate distribution and use of REVLIMID® and POMALYST®. Internationally, REVLIMID® and IMNOVID® are distributed under mandatory risk-management distribution programs tailored to meet local authorities’ specifications to provide for the product’s safe and appropriate distribution and use. These programs may vary by country and, depending upon the country and the design of the risk-management program, the product may be sold through hospitals or retail pharmacies. OTEZLA®, ABRAXANE® and VIDAZA® are distributed through the more traditional pharmaceutical industry supply chain and are not subject to the same risk-management distribution programs as REVLIMID® and POMALYST®/IMNOVID®.

Significant Payment Terms

Our contracts with our customers state the terms of the sale including the description, quantity, and price for each product purchased as well as the payment and shipping terms. Our contractual payment terms vary by jurisdiction. In the United States, our contractual payment terms are typically due in no more than 30 days. Sales made outside the United States typically have payment terms that are greater than 60 days, thereby extending collection periods beyond those in the United States. The period between when we transfer control of the promised goods to a customer and when we receive payment from such customer is expected to be one year or less. Any exceptions to this are either not material or we collect interest from the customer for the time period between the invoice due date and the payment date. As such, we do not adjust the invoice amount for the effects of a significant financing component as the impact is not material to our consolidated financial statements.
  
Contract Balances

When the timing of our delivery of product is different from the timing of payments made by the customers, we recognize either a contract asset (performance precedes the contractual due date) or a contract liability (customer payment precedes performance). There were no significant changes in our contract asset or liability balances during the year ended December 31, 2018 other than from transactions in the ordinary course of operating activities as described above.

Contract Assets

In limited situations, certain customer contractual payment terms require us to bill in arrears; thus, we satisfy some or all of our performance obligations before we are contractually entitled to bill the customer. In these situations, billing occurs subsequent to revenue recognition, which results in a contract asset. We reflect these contract assets as Other current assets on the Consolidated

17

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Balance Sheet. For example, certain of our contractual arrangements do not permit us to bill until the product is sold through to the end-customer. As of December 31, 2018, such contract assets were $36 million.

Contract Liabilities

In other limited situations, certain customer contractual payment terms allow us to bill in advance; thus, we receive customer cash payment before satisfying some or all of its performance obligations. In these situations, billing occurs in advance of revenue recognition, which results in contract liabilities. We reflect these contract liabilities in Deferred revenue on our Consolidated Balance Sheet. For example, certain of our contractual arrangements provide the customer with free product after the customer has purchased a contractual minimum amount of product. We concluded the free product represents a future performance obligation in the form of a contractual material right. As such, we defer a portion of the transaction price as a contract liability upon each sale of product until the contractual minimum volume is achieved. As we satisfy our remaining performance obligations we release a portion of the deferred revenue balance. Revenue recognized for the year ended December 31, 2018 that was reflected in the deferred revenue balance at the beginning of the year was $51 million. As of December 31, 2018, such contract liabilities were $137 million.

Gross-to-Net Sales Adjustments

We record gross-to-net sales accruals for government rebates, chargebacks, distributor service fees, other rebates and administrative fees, sales returns and allowances, and sales discounts. Provisions for discounts, early payments, rebates, sales returns, distributor service fees and chargebacks under terms customary in the industry are provided for in the same period the related sales are recorded. We record estimated reductions to revenue for volume-based discounts and rebates at the time of the initial sale based upon the sales terms, historical experience and trend analysis. We estimate these accruals using an expected value approach based primarily upon our historical rebate and discount payments made and the provisions included in current customer contracts and government regulations.

Government Rebates, including Medicaid and Medicare Rebates

Government rebate accruals are based on estimated payments due to governmental agencies for purchases made by third parties under various governmental programs. In the U.S., we participate in state government Medicaid programs and other Federal and state government programs, which require rebates to participating government entities. U.S. Medicaid rebate accruals are generally based on historical payment data and estimates of future Medicaid beneficiary utilization applied to the Medicaid unit rebate formula established by the Center for Medicaid and Medicare Services. The Medicaid rebate percentage was increased and extended to Medicaid Managed Care Organizations in March 2010. The accrual of the rebates associated with Medicaid Managed Care Organizations is calculated based on estimated historical patient data related to Medicaid Managed Care Organizations. We also analyze actual billings received from the states to further support the accrual rates. Manufacturers of pharmaceutical products are responsible for 50% of the patient’s cost of branded prescription drugs related to the Medicare Part D Coverage Gap (70% beginning in 2019). In order to estimate the cost to us of this coverage gap responsibility, we analyze data for eligible Medicare Part D patients against data for eligible Medicare Part D patients treated with our products as well as the historical invoices. This expense is recognized throughout the year as costs are incurred. In certain international markets government-sponsored programs require rebates to be paid based on program specific rules and, accordingly, the rebate accruals are determined primarily on estimated eligible sales.

Chargebacks, Distributor Service Fees, Other Rebates and Administrative Fees

Chargeback accruals are based on the differentials between product acquisition prices paid by wholesalers and lower government contract pricing paid by eligible customers covered under federally qualified programs. Distributor service fee accruals are based on contractual fees to be paid to the wholesale distributor for services provided. TRICARE is a health care program of the U.S. Department of Defense Military Health System that provides civilian health benefits for military personnel, military retirees and their dependents. TRICARE rebate accruals are included in chargeback accruals and are based on estimated Department of Defense eligible sales multiplied by the TRICARE rebate formula.

Rebates or administrative fees are offered to certain wholesale customers, group purchasing organizations and end-user customers, consistent with pharmaceutical industry practices. Settlement of rebates and administrative fees may generally occur from one to 15 months from the date of sale. We record a provision for rebates at the time of sale based on contracted rates and historical redemption rates. Assumptions used to establish the provision include level of wholesaler inventories, contract sales volumes and average contract pricing. We regularly review the information related to these estimates and adjust the provision accordingly.


18

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Returns, Refunds and Warranties

We base our sales returns allowance on estimated on-hand retail/hospital inventories, measured end-customer demand as reported by third-party sources, actual returns history and other factors, such as the trend experience for lots where product is still being returned or inventory centralization and rationalization initiatives conducted by major pharmacy chains, as applicable. If the historical data we use to calculate these estimates do not properly reflect future returns, then a change in the allowance would be made in the period in which such a determination is made and revenues in that period could be materially affected. Under this methodology, we track actual returns by individual production lots. Returns on closed lots, that is, lots no longer eligible for return credits, are analyzed to determine historical returns experience. Returns on open lots, that is, lots still eligible for return credits, are monitored and compared with historical return trend rates. Any changes from the historical trend rates are considered in determining the current sales return allowance. We do not provide warranties on our products to our customers unless the product is defective as manufactured or damaged in transit within a reasonable period of time after receipt of the product by the customer.

Sales Discounts

Sales discounts are based on payment terms extended to customers, which are generally offered as an incentive for prompt payment. We record our best estimate of sales discounts to which customers are likely to be entitled based on both historical information and current trends.

The reconciliation of gross product sales to net product sales by each significant category of gross-to-net adjustments was as follows:
 
 
Years Ended December 31,
 
 
2018
 
2017
 
2016
Gross Product Sales
 
$
18,270

 
$
15,138

 
$
12,787

Gross-to-Net Adjustments:
 
 
 
 
 
 
Government Rebates
 
(1,076
)
 
(890
)
 
(688
)
Chargebacks and Distributor Services Fees
 
(1,641
)
 
(1,074
)
 
(750
)
Sales Discounts
 
(243
)
 
(193
)
 
(153
)
Sales Returns and Allowances
 
(45
)
 
(8
)
 
(11
)
Total Gross-to-Net Adjustments
 
(3,005
)
 
(2,165
)
 
(1,602
)
Net Product Sales
 
$
15,265

 
$
12,973

 
$
11,185


19

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Total revenues from external customers by our franchises (Hematology / Oncology and Inflammation & Immunology), product and geography for the years ended December 31, 2018, 2017 and 2016 were as follows:
 
 
 
Years Ended December 31,
 
 
 
2018
 
2017
 
2016
Hematology / Oncology:
 
 
 
 
 
 
 
REVLIMID®
 
 
 
 
 
 
 
 
U.S.
 
$
6,469

 
$
5,426

 
$
4,417

 
International
 
3,216

 
2,761

 
2,557

 
Worldwide
 
9,685

 
8,187

 
6,974

POMALYST®/IMNOVID®
 
 
 
 
 
 
 
 
U.S.
 
1,391

 
1,008

 
778

 
International
 
649

 
606

 
533

 
Worldwide
 
2,040

 
1,614

 
1,311

ABRAXANE®
 
 
 
 
 
 
 
 
U.S.
 
663

 
607

 
634

 
International
 
399

 
385

 
339

 
Worldwide
 
1,062

 
992

 
973

VIDAZA®
 
 
 
 
 
 
 
 
U.S.
 
9

 
8

 
12

 
International
 
585

 
620

 
596

 
Worldwide
 
594

 
628

 
608

All Other
 
 
 
 
 
 
 
 
U.S.
 
208

 
203

 
236

 
International
 
68

 
70

 
66

 
Worldwide
 
276

 
273

 
302

Total Hematology / Oncology:
 
 
 
 
 
 
 
 
U.S.
 
8,740

 
7,252

 
6,077

 
International
 
4,917

 
4,442

 
4,091

 
Worldwide
 
13,657

 
11,694

 
10,168

 
 
 
 
 
 
 
 
Inflammation & Immunology:
 
 
 
 
 
 
 
OTEZLA®
 
 
 
 
 
 
 
 
U.S.
 
1,275

 
1,058

 
904

 
International
 
333

 
221

 
113

 
Worldwide
 
1,608

 
1,279

 
1,017

 
 
 
 
 
 
 
 
Total net product sales
 
 
 
 
 
 
 
 
U.S.
 
10,015

 
8,310

 
6,981

 
International
 
5,250

 
4,663

 
4,204

 
Worldwide
 
15,265

 
12,973

 
11,185

 
 
 
 
 
 
 
 
Other revenue
 
 
16

 
30

 
44

 
 
 
 
 
 
 
 
Total revenue
 
 
$
15,281

 
$
13,003

 
$
11,229



20

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


3.   Acquisitions and Divestitures

Acquisitions in 2018:

Impact Biomedicines, Inc. (Impact): On February 12, 2018, we acquired all of the outstanding shares of Impact, a privately held biotechnology company which was developing fedratinib, a highly selective JAK2 kinase inhibitor, for myelofibrosis.

The consideration included an initial payment of approximately $1.1 billion. In addition, the sellers of Impact are eligible to receive contingent consideration based upon regulatory approvals of up to $1.4 billion and contingent consideration of up to $4.5 billion based upon the achievement of sales in any four consecutive calendar quarters between $1.0 billion and $5.0 billion. The acquisition of Impact was concentrated in one single identifiable asset and thus, for accounting purposes, we have concluded that the acquired assets do not meet the accounting definition of a business. The initial payment was allocated primarily to fedratinib, resulting in a $1.1 billion research and development asset acquisition expense and the balance of approximately $7 million was allocated to the remaining net assets acquired.

Juno Therapeutics, Inc. (Juno): On March 6, 2018 (Acquisition Date), we acquired all of the outstanding shares of Juno, resulting in Juno becoming our wholly-owned subsidiary. Juno is developing CAR (chimeric antigen receptor) T and TCR (T cell receptor) therapeutics with a broad, novel portfolio evaluating multiple targets and cancer indications. The acquisition added a novel scientific platform and scalable manufacturing capabilities including JCAR017 and JCARH125, both directed CAR T therapeutics currently in programs for relapsed and/or refractory diffuse large B-cell lymphoma and relapsed and/or refractory multiple myeloma, respectively.

Total consideration for the acquisition was approximately $10.4 billion, consisting of $9.1 billion for common stock outstanding, $966 million for the fair value of our investment in Juno and $367 million for the portion of equity compensation attributable to the pre-combination service period. In addition, the fair value of the awards attributed to post-combination service period was $666 million, which will be recognized as compensation expense over the requisite service period in our post-combination financial statements. We recognized $528 million of post-combination share-based compensation for the year ended December 31, 2018.

The acquisition has been accounted for as a business combination using the acquisition method of accounting which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date and requires the fair value of acquired IPR&D to be classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts.

The total consideration for the acquisition of Juno was $10.4 billion, which consisted of the following:
 
Total Consideration
Cash paid for outstanding common stock at $87.00 per share
$
9,101

Celgene investment in Juno at $87.00 per share (1)
966

Cash for equity compensation attributable to pre-combination service (2)
367

Total consideration
$
10,434


(1) The Company recognized a gain of $458 million during the first quarter of 2018, as a result of remeasuring to fair value the equity interest in Juno held by us before the business combination, which was recorded in Other income (expense), net within the Consolidated Statement of Income. See Note 1 for further information on the adoption of ASU 2016-01.

(2) All equity compensation attributable to pre-combination service was paid during the first quarter of 2018.


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CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


The purchase price allocation resulted in the following amounts being allocated to the assets acquired and liabilities assumed at the Acquisition Date based upon their respective fair values summarized below. The determination of fair value was finalized in the fourth quarter of 2018. During the second and fourth quarters of 2018, the Company recorded certain measurement period adjustments that were not material.
 
Amounts Recognized as of the Acquisition Date
Working capital (1)
$
452

IPR&D
6,980

Technology platform intangible asset
1,260

Property, plant and equipment, net
144

Other non-current assets
32

Deferred tax liabilities, net
(1,530
)
Other non-current liabilities
(41
)
Total identifiable net assets
7,297

Goodwill
3,137

Total net assets acquired
$
10,434


(1)  Includes cash and cash equivalents, debt securities available-for-sale, accounts receivable, net of allowances, other current assets, accounts payable, accrued expenses and other current liabilities (including accrued litigation). See Note 19 for litigation matters related to Juno.

The fair value assigned to acquired IPR&D was based on the present value of expected after-tax cash flows attributable to JCAR017, which is in a pivotal phase II trial and JCARH125. The present value of expected after-tax cash flows attributable to JCAR017 and JCARH125 assigned to IPR&D was determined by estimating the after-tax costs to complete development of JCAR017 and JCARH125 into commercially viable products, estimating future revenue and ongoing expenses to produce, support and sell JCAR017 and JCARH125, on an after-tax basis, and discounting the resulting net cash flows to present value. The revenue and costs projections used were reduced based on the probability that products at similar stages of development will become commercially viable products. The rate utilized to discount the net cash flows to their present value reflects the risk associated with the intangible asset and is benchmarked to the cost of equity. Acquired IPR&D will be accounted for as indefinite-lived intangible assets until regulatory approvals for JCAR017 and JCARH125 in a major market or discontinuation of development.

The fair value of the technology platform intangible asset is equal to the present value of the expected after-tax cash flows attributable to the intangible asset, which was calculated based on the multi-period excess earnings method of the income approach. The multi-period excess earnings method of the income approach included estimating probability adjusted annual after-tax net cash flows through the cycle of development and commercialization of potential products generated by the technology platform then discounting the resulting probability adjusted net post-tax cash flows using a discount rate commensurate with the risk of our overall business operations to arrive at the net present value.

The excess of purchase price over the fair value amounts assigned to identifiable assets acquired and liabilities assumed represents the goodwill amount resulting from the acquisition. The goodwill recorded as part of the acquisition is primarily attributable to the broadening of our product portfolio and research capabilities in the hematology and oncology therapeutic area, the assembled workforce and the deferred tax consequences of the IPR&D asset recorded for financial statement purposes. We do not expect any portion of this goodwill to be deductible for tax purposes. The goodwill attributable to the acquisition has been recorded as a non-current asset in our Consolidated Balance Sheets and is not amortized, but is subject to review for impairment annually.


22

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Juno actual results from the Acquisition Date through December 31, 2018, which are included in the Consolidated Statements of Income are as follows:
Classification in the Consolidated Statements of Income
 
Acquisition Date Through December 31, 2018
Other revenue        
 
$
2

Research and development (1)
 
967

Selling, general and administrative (1)
 
312

Amortization of acquired intangible assets        
 
70

Acquisition related charges (gains) and restructuring, net (2)
 
98

Interest and investment income, net
 
5

Other income (expense), net
 
10

Income tax provision
 
(260
)
Total
 
$
(1,170
)

(1) Includes share-based compensation expense related to the post-combination service period of $320 million and $208 million, which was recorded in Research and development and Selling, general and administrative, respectively, for the period from the Acquisition Date through December 31, 2018.
(2) Consists of acquisition related compensation expense, transaction costs and the change in fair value of contingent consideration and success payment liabilities. In addition, we incurred incremental acquisition costs related to Juno of $41 million for the year ended December 31, 2018.

Pro Forma Financial Information:

The following table provides unaudited pro forma financial information for the years ended December 31, 2018 and 2017 as if the acquisition of Juno had occurred on January 1, 2017.
 
 
Years Ended December 31,
 
 
2018
 
2017
Total revenue
 
$
15,291

 
$
13,029

Net income
 
4,058

 
2,151

 
 
 
 
 
Net income per common share: basic
 
$
5.67

 
$
2.76

Net income per common share: diluted
 
$
5.53

 
$
2.66


The unaudited pro forma financial information was prepared using the acquisition method of accounting and was based on the historical financial information of Celgene and Juno. The supplemental pro forma financial information reflects primarily the following pro forma adjustments:

Elimination of research related cost sharing transactions between Celgene and Juno;
The pro forma financial information assumes that the acquisition related transaction fees and costs, including post combination share-based compensation related to the acquisition, were removed from the year ended December 31, 2018 and were assumed to have been incurred during the first quarter of 2017;
The pro forma financial information assumes that the gain recognized as a result of remeasuring to fair value the equity interest we held in Juno prior to the business combination was removed from the year ended December 31, 2018 and was assumed to have been recognized during the first quarter of 2017;
Additional interest expense and amortization of debt issuance costs for a portion of the $4.5 billion of debt that was issued in February 2018 to partially finance the acquisition;
Additional amortization expense on the acquired technology platform asset; and
Statutory tax rates were applied, as appropriate, to each pro forma adjustment based on the jurisdiction in which the adjustment occurred.

The unaudited pro forma results do not reflect any operating efficiencies or potential cost savings that may result from the combined operations of Celgene and Juno. Accordingly, these unaudited pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved

23

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


had the acquisition occurred at the beginning of the periods presented, nor are they intended to represent or be indicative of future results of operations.

Acquisitions in 2017:

Delinia, Inc. (Delinia): On February 3, 2017, we acquired all of the outstanding shares of Delinia, a privately held biotechnology company focused on developing novel therapeutics for the treatment of autoimmune diseases. The transaction expands our Inflammation and Immunology pipeline primarily through the acquisition of Delinia’s lead program, DEL-106, as well as related second generation programs. DEL-106 is a novel IL-2 mutein Fc fusion protein designed to preferentially upregulate regulatory T cells (Tregs), immune cells that are critical to maintaining natural self-tolerance and immune system homeostasis.

The consideration included an initial payment of $302 million. In addition, the sellers of Delinia are eligible to receive up to $475 million in contingent development, regulatory and commercial milestones. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The initial payment was allocated primarily to the DEL-106 program, resulting in a $300 million research and development asset acquisition expense and approximately $2 million of net assets acquired.

Other acquisitions: In addition, during the first quarter of 2017, we acquired all of the outstanding shares of a privately held biotechnology company for total initial consideration of $26 million. The sellers are also eligible to receive up to $210 million in contingent development and regulatory approval milestones. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The consideration transferred resulted in a $25 million research and development asset acquisition expense and $1 million of net assets acquired. 

Divestitures in 2017:

Celgene Pharmaceutical (Shanghai) Co. Ltd. (Celgene China): On August 31, 2017, we completed the sale of our Celgene commercial operations in China to BeiGene, Ltd. (BeiGene). The transaction resulted in an immaterial loss on disposal that was recorded on our Consolidated Statement of Income in Other income (expense), net during the third quarter of 2017. In conjunction with the sale, we contemporaneously entered into both a product supply agreement and strategic collaboration arrangement with BeiGene. See Note 18 for additional details related to the collaboration arrangement with BeiGene.

Acquisitions in 2016:

EngMab AG (EngMab): On September 27, 2016, we acquired all of the outstanding shares of EngMab, a privately held biotechnology company focused on T-cell bi-specific antibodies. EngMab’s lead molecule, EM901 is a preclinical T-cell bi-specific antibody targeting B-cell maturation antigen (BCMA). The acquisition also included another early stage program.

The consideration included an initial payment of approximately 607 million Swiss Francs (CHF) (approximately $625 million at the time of acquisition), contingent development and regulatory milestones of up to CHF 150 million (approximately $155 million at the time of the acquisition) and contingent commercial milestones of up to CHF 2.3 billion (approximately $2.3 billion at the time of the acquisition) based on cumulative sales levels of between $1 billion and $40 billion. The acquisition of EngMab did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The initial payment was allocated primarily to the EM901 molecule and another early stage program, resulting in a $623 million research and development asset acquisition expense and $2 million of net working capital acquired.

Acetylon Pharmaceuticals, Inc. (Acetylon): On December 16, 2016, we acquired all of the remaining outstanding equity interests we did not already own (approximately 86%) in Acetylon, a privately held biotechnology company focused on developing next-generation selective small molecule histone deacetylase (HDAC) inhibitors, which allow for epigenetic regulation of gene and protein function. Acetylon’s lead molecule, ACY-241 is a HDAC6 inhibitor in phase I trials for relapsed and/or refractory multiple myeloma. The acquisition also included another early stage molecule. Prior to the acquisition, we had an equity interest equal to approximately 14% of Acetylon’s total capital stock with a carrying value of approximately $30 million.

The consideration transferred included an initial payment of approximately $196 million. In addition, the sellers of Acetylon are eligible to receive contingent regulatory milestones of up to $375 million per eligible product, contingent commercial milestones of up to $1.5 billion based on achieving annual net sales in excess of $1 billion and tiered royalties on annual net sales of eligible products. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The initial payment and carrying value of our previous equity interest were allocated primarily to ACY-241 and another early stage molecule, resulting in a $226 million research and development asset acquisition expense.

24

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



Triphase Research and Development I Corporation (Triphase): On November 17, 2016, we acquired from Triphase Accelerator, L.P. (Sellers) all of the outstanding shares of Triphase by exercising the option we acquired on October 22, 2012. Triphase was a privately held, biotechnology company focusing on the development of marizomib for glioblastoma and relapsed and/or refractory multiple myeloma.

The consideration transferred was valued at approximately $42 million including the value of the exercised option of $18 million. In addition, the sellers are eligible to receive contingent development and regulatory milestones of up to $125 million, contingent commercial milestones of up to $300 million based on achieving annual net sales equal in excess of $1 billion and royalties on annual net sales. The acquisition did not include any significant processes and thus, for accounting purposes, we have concluded that the acquired assets did not meet the definition of a business. The consideration transferred was allocated primarily to the marizomib asset, resulting in a $44 million research and development asset acquisition expense and $1 million of net liabilities acquired.

Divestitures in 2016:

LifebankUSA: In February 2016, we completed the sale of certain assets of Celgene Cellular Therapeutics (CCT) comprising CCT’s biobanking business known as LifebankUSA, CCT’s biomaterials portfolio of assets, including Biovance®, and CCT’s rights to PSC-100, a placental stem cell program, to Human Longevity, Inc. (HLI), a genomics and cell therapy-based diagnostic and therapeutic company based in San Diego, California. We received 3.4 million shares of HLI Class A common stock with a fair value of approximately $40 million as consideration in the transaction. The fair value of the shares common stock we received was determined based on the most recent preferred share offering and reduced for the estimated value of the liquidation preference not offered to common share-holders. The transaction generated a $38 million gain that was recorded on our Consolidated Statements of Income in Other income (expense), net. As of December 31, 2018, our total investment in HLI represents approximately 14% of HLI’s outstanding capital stock.

4.   Earnings Per Share

(Amounts in millions, except per share)
 
 
2018
 
2017
 
2016
Net income
 
$
4,046

 
$
2,940

 
$
1,999

Weighted-average shares:
 
 
 
 
 
 
Basic
 
716.3

 
779.2

 
777.2

Effect of dilutive securities:
 
 
 
 
 
 
Options, RSUs, PSUs, warrants and other
 
17.5

 
29.5

 
26.1

Diluted
 
733.8

 
808.7

 
803.3

Net income per share:
 
 
 
 
 
 
Basic
 
$
5.65

 
$
3.77

 
$
2.57

Diluted
 
$
5.51

 
$
3.64

 
$
2.49


The total number of potential shares of common stock excluded from the diluted earnings per share computation because their inclusion would have been anti-dilutive was 44.8 million in 2018, 24.5 million in 2017 and 23.8 million in 2016.

Share Repurchase Program: In February and May 2018, our Board of Directors approved increases of $5.0 billion and $3.0 billion, respectively to our authorized share repurchase program, bringing the total amount authorized since April 2009 to $28.5 billion of our common stock. As part of the existing Board authorized share repurchase program, in May 2018, we entered into an Accelerated Share Repurchase (ASR) agreement with a bank to repurchase an aggregate of $2.0 billion of our common stock. As part of the ASR agreement, we received an initial delivery of approximately 18.0 million shares in May 2018 and a final delivery of approximately 6.0 million shares in August 2018. The total number of shares repurchased under the ASR agreement was approximately 24.0 million shares at a weighted average price of $83.53 per share.

As part of the management of our share repurchase program, we may, from time to time, sell put options on our common stock with strike prices that we believe represent an attractive price to purchase our shares. If the trading price of our shares exceeds the strike price of the put option at the time the option expires, we will have economically reduced the cost of our share repurchase program by the amount of the premium we received from the sale of the put option. If the trading price of our stock is below the strike price of the put option at the time the option expires, we would purchase the shares covered by the option at the strike price

25

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


of the put option. During 2018 and 2017, we did not sell any put options on our common stock. During 2016, we recorded net gains of $8 million from selling put options on our common stock on the Consolidated Statements of Income in Other income (expense), net. As of December 31, 2018 and 2017, we had no outstanding put options.

We repurchased 67.8 million shares of common stock under the share repurchase program from all sources during 2018 at a total cost of $6.0 billion As of December 31, 2018, we had a remaining share repurchase authorization of approximately $2.8 billion.

5.   Financial Instruments and Fair Value Measurement
The table below presents information about assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2018 and 2017, and the valuation techniques we utilized to determine such fair value. 
 
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Our level 1 assets consist of equity investments with readily determinable fair values. Our level 1 liability relates to our publicly traded Abraxis CVRs. See Note 19 for a description of the Abraxis CVRs. 

Level 2 inputs utilize observable quoted prices for similar assets and liabilities in active markets and observable quoted prices for identical or similar assets in markets that are not very active. From time to time, our level 2 assets consist primarily of U.S. Treasury securities, U.S. government-sponsored agency securities, U.S. government-sponsored agency MBS, global corporate debt securities, asset backed securities, ultra short income fund investments, time deposits and repurchase agreements with original maturities of greater than three months. We also have derivative instruments including foreign currency forward contracts, purchased currency options, zero-cost collar currency contracts and interest rate swap contracts, which may be in an asset or liability position.

Level 3 inputs utilize unobservable inputs and include valuations of assets or liabilities for which there is little, if any, market activity. We do not have any level 3 assets. Our level 3 liabilities consist of contingent consideration related to undeveloped product rights and technology platforms resulting from the acquisitions of Gloucester Pharmaceuticals, Inc. (Gloucester), Nogra Pharma Limited (Nogra), Avila Therapeutics, Inc. (Avila) and Quanticel Pharmaceuticals, Inc. (Quanticel). In addition, in connection with our acquisition of Juno in the first quarter of 2018, we assumed Juno’s contingent consideration and success payment liabilities.

Our contingent consideration obligations are recorded at their estimated fair values and we revalue these obligations each reporting period until the related contingencies are resolved. The fair value measurements are estimated using probability-weighted discounted cash flow approaches that are based on significant unobservable inputs related to product candidates acquired in business combinations and are reviewed quarterly. These inputs include, as applicable, estimated probabilities and timing of achieving specified development and regulatory milestones, estimated annual sales and the discount rate used to calculate the present value of estimated future payments. Significant changes which increase or decrease the probabilities of achieving the related development and regulatory events, shorten or lengthen the time required to achieve such events, or increase or decrease estimated annual sales would result in corresponding increases or decreases in the fair values of these obligations. The fair value of our contingent consideration as of December 31, 2018 and December 31, 2017 was calculated using the following significant unobservable inputs:
Inputs
Ranges (weighted average) utilized as of:
December 31, 2018
December 31, 2017
Discount rate
3.6 to 4.8% (4.3%)
2.7% to 12.0% (3.5%)
Probability of payment
0% to 68% (5%)
0% to 20% (4%)
Projected year of payment for development and regulatory milestones
2020 to 2029 (2024)
2020 to 2029 (2024)
Projected year of payment for sales-based milestones and other amounts calculated as a percentage of annual sales
N/A
2024 to 2030 (2028)

The maximum remaining potential payments related to the contingent consideration from the acquisitions of Gloucester, Avila, Quanticel and those assumed in our acquisition of Juno are estimated to be $120 million, $475 million, $214 million, and $286 million, respectively, and $1.8 billion plus other amounts calculated as a percentage of annual sales pursuant to the license agreement with Nogra.

Success payment obligations assumed through our acquisition of Juno are also recorded at their estimated fair values and are revalued quarterly. Changes in the fair value of contingent consideration and success payment obligations are recognized in Acquisition related charges (gains) and restructuring, net in the Consolidated Statements of Income.


26

CELGENE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


Effective January 1, 2018, we adopted ASU 2016-01. Among other provisions, the new standard required modifications to existing presentation and disclosure requirements on a prospective basis. Certain disclosures as of December 31, 2017 below conform to the disclosure requirements of ASU 2016-01. See Note 1 for additional information related to the adoption of ASU 2016-01.

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2018 and 2017:
 
 
Balance at December 31, 2018
 
Quoted Price in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Debt securities available-for-sale
 
$
496

 
$

 
$
496

 
$

Equity investments with readily determinable fair values
 
1,312

 
1,312

 

 

Forward currency contracts
 
78

 

 
78

 

Total assets
 
$
1,886

 
$
1,312

 
$
574

 
$

Liabilities:
 
 
 
 
 
 
 
 
Contingent value rights
 
$
(19
)
 
$
(19
)
 
$

 
$

Interest rate swaps
 
(10
)
 

 
(10