item 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits 31 certificate incorporation amended1 32 bylaws1 41 specimen common stock certificate1 101 employment agreement dated april 1 1997 company dr leonard bell2 102 employment agreement dated october 22 1997 company david w keiser 103 employment agreement dated october 22 1997 company dr stephen p squinto 104 employment agreement dated october 22 1997 company dr louis matis 105 employment agreement dated july 1993 company dr james wilkins amended1 106 employment agreement dated july 1994 company dr bernadette l alford amended1 107 administrative facility lease dated august 23 1995 company science park development corporation1 108 research development facility lease dated august 23 1995 company science park development corporation1 109 option agreement dated april 1 1992 company dr leonard bell1 1010 companys 1992 stock option plan amended1 1011 companys 1992 outside directors stock option plan amended1 1012 registration agreement dated december 4 1992 company benefit certain individuals listed schedules thereto amended1 1013 amendment registration agreement dated july 31 1995 company united states surgical corporation1 1014 agreement dated june 15 1993 company benefit certain individuals listed schedules thereto amended1 1015 form investor rights agreement dated december 23 1994 company purchasers companys series preferred stock amended1 1016 stock purchase agreement dated july 31 1995 company united states surgical corporation1 1017 form warrant purchase shares companys common stock issued pursuant certain companys private placements1 1018 form warrant purchase shares companys common stock issued placement agent certain companys private placements1 1019 form warrant purchase shares companys common stock issued certain warrantholders company connection warrant exchange1 1020 license agreement dated may 27 1992 company yale university amended september 23 19921 1021 exclusive license agreement dated june 19 1992 among company yale university oklahoma medical research foundation2 1022 research development agreement dated june 19 1992 company oklahoma medical research foundation1 1023 license agreement dated september 30 1992 company yale university amended july 2 19931 1024 license agreement dated august 1 1993 company biotechnology research development corporation brdc amended july 1 19951 1025 cooperative research development agreement dated december 10 1993 company national institutes health1 1026 license agreement dated january 25 1994 company austin research institute1 1027 exclusive patent license agreement dated april 21 1994 company national institutes health1 1028 license agreement dated july 22 1994 company austin research institute1 1029 license agreement dated january 10 1995 company yale university1 1030 joint development agreement dated july 31 1995 company united states surgical corporation1 1031 advanced technology program atp cooperative agreement 70nanb5h national institute standards technology entitled universal donor organs transplantation dated september 15 19951 1032 us department health human services national heart lung book institute small business research program phase ii grant application entitled role complement activation cardiopulmonary bypass dated december 14 1994 notice grant award dated september 21 19951 1033 research subcontract agreement dated october 1 1995 company tufts university1 1034 agreement bound shareholders agreement dated august 1 1993 company brdc1 1035 agreement bound master agreement dated august 1 1993 company brdc1 1036 research development facility lease dated april 1 1996 company science park development corporation3 1037 license agreement dated march 27 1996 company medical research council3 1038 license agreement dated may 8 1996 company enzon inc3 1039 license collaborative research agreement alexion pharmaceuticals inc genetic therapy inc3 1040 amended joint development agreement september 1997 company united states surgical corporation4 1041 form stock purchase agreement dated june 1997 1042 stock purchase agreement dated september 9 1997 company bb biotech 1043 stock purchase agreement dated september 30 1997 company us surgical4 231 consent arthur andersen llp 99 important factors regarding forwardlooking statements previously filed 1 incorporated reference companys registration statement form s1 reg 33300202 2 incorporated reference companys amendment 1 registration statement form s1 reg 33319905 filed april 4 1997 3 incorporated reference companys annual report form 10k fiscal year ended july 31 1996 4 incorporated reference companys current report form 8k dated october 1 1997 confidential treatment granted portions document request confidential treatment made portions document confidential portions omitted filed separately commission required rule 24b2 b reports form 8k current report form 8k dated june 17 1997 relating companys sale 1450000 shares companys common stock current report form 8k dated july 9 1997 relating companys sale shares referenced current report form 8k dated september 9 1997 relating companys sale 10000000 series b preferred stock current report form 8k dated october 1 1997 relating amendment joint development agreement united states surgical corporation sale companys common stock united states surgical c exhibits see 3 financial statement schedules see 2 signatures pursuant requirements section 13 15d securities act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized alexion pharmaceuticals inc leonard bell leonard bell md president chief executive officer secretary treasurer david w keiser david w keiser executive vice president chief operating officer pursuant requirements securities act 1934 registration statement signed following persons capacities dates indicated leonard bell president chief executive october 24 1997 officer secretary leonard bell md treasurer director principal executive officer david w keiser executive vice president october 24 1997 chief operating officer david w keiser principal financial officer barry p luke senior director finance october 24 1997 administration principal barry p luke accounting officer john h fried chairman board october 24 1997 directors john h fried phd timothy f howe director october 24 1997 timothy f howe max link director october 24 1997 max link phd joseph madri director october 24 1997 joseph madri phd md leonard marks director october 24 1997 leonard marks jr phd eileen director october 24 1997 eileen alexion pharmaceuticals inc development stage company page report independent public accountants balance sheets july 31 1996 1997 statements operations years ended july 31 1995 1996 1997 period inception january 28 1992 july 31 1997 statements stockholders equity period inception january 28 1992 july 31 1997 statements cash flows years ended july 31 1995 1996 1997 period inception january 28 1992 july 31 1997 notes financial statements report independent public accountants board directors stockholders alexion pharmaceuticals inc audited accompanying balance sheets alexion pharmaceuticals inc delaware corporation development stage july 31 1996 1997 related statements operations stockholders equity cash flows three years period ended july 31 1997 period inception january 28 1992 july 31 1997 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position alexion pharmaceuticals inc july 31 1996 1997 results operations cash flows three years period ended july 31 1997 period inception january 28 1992 july 31 1997 conformity generally accepted accounting principles arthur andersen llp hartford connecticut august 29 1997 except respect matters discussed note 16 date september 30 1997 alexion pharmaceuticals inc development stage company balance sheets july 31 1996 1997 assets current assets cash equivalents 9491217 16742516 marketable securities 9106534 6006380 prepaid expenses 466731 232385 total current assets 19064482 22981281 equipment net 592271 786495 assets licensed technology rights net 330365 242366 patent application costs net 194004 168691 organization costs net 5280 security deposits assets 267578 81728 797227 492785 total assets 20453980 24260561 liabilities stockholders equity current liabilities current portion notes payable 322508 130000 current obligations capital leases 28593 7768 accounts payable 280913 727553 accrued expenses 400577 1201770 deferred revenue 1000000 347070 total current liabilities 2032591 2414161 notes payable less current portion included 128264 obligations capital leases less current portion included 8200 commitments contingencies notes 1 9 11 stockholders equity convertible preferred stock 0001 par value 5000000 shares authorized shares issued outstanding july 31 1996 1997 common stock 0001 par value 25000000 shares authorized 7334909 8858012 issued july 31 1996 1997 respectively 733 886 additional paidin capital 42858975 53671867 deficit accumulated development stage 24574681 31826251 treasury stock cost 11875 shares 102 total stockholders equity 18284925 21846400 total liabilities stockholders equity 20453980 24260561 accompanying notes integral part financial statements accompanying notes integral part financial statements accompanying notes integral part financial statements accompanying notes integral part financial statements b accompanying notes integral part financial statements alexion pharmaceuticals inc development stage company notes financial statements 1 organization operations alexion pharmaceuticals inc company organized january 1992 engaged research development proprietary immunoregulatory compounds treatment cardiovascular disorders inflammation perioperative bleeding associated cardiopulmonary bypass myocardial infarction stroke autoimmune diseases lupus nephritis rheumatoid arthritis multiple sclerosis outgrowth core technologies company developing collaboration third parties see note 10 nonhuman organ xenograft organs products designed transplantation humans without clinical rejection immunoprotected retroviral vectors producer cells gene therapy company development stage devoting substantially efforts toward product research development company incurred losses since inception cumulative net losses 318 million july 31 1997 company made product sales date recognized cumulative revenue research grants funding 66 million july 31 1997 1996 company completed initial public offering ipo 2530000 shares common stock resulting net proceeds approximately 184 million 1997 company completed offering 1450000 shares common stock resulting net proceeds approximately 104 million see note 12 addition company received various grants fund certain research activities see note 10 company need additional financing obtain regulatory approvals fund operating losses deemed appropriate establish manufacturing sales marketing capability addition normal risks associated development stage companies assurance companys research development successfully completed adequate patent protection companys technology obtained products developed obtain necessary government regulatory approval approved products commercially viable addition company operates environment rapid change technology substantial competition pharmaceutical biotechnology companies dependent upon services employees consultants company expects incur substantial expenditures foreseeable future research development commercialization products companys management believes based upon current business plans cash marketable securities aggregating 227 million july 31 1997 sufficient fund operations company least calendar 1998 company require funds addition previously described seek raise public private equity debt financings collaborative arrangements corporate sources financing company banking capital sources arrangements commitments regard obtaining funds 2 summary significant accounting policies cash equivalents cash equivalents stated cost approximates market include shortterm highly liquid investments original maturities less three months marketable securities company invests marketable securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company classified marketable securities available sale accordingly carries securities aggregate fair value unrealized gains losses included stockholders equity component additional paidin capital july 31 1997 companys marketable securities maximum maturity approximately one year following summary marketable securities july 31 1996 1997 equipment recorded cost depreciated estimated useful lives assets involved depreciation commences time assets placed service computed using straightline method useful lives equipment three four years maintenance repairs charged expense incurred equipment capital leases depreciated lesser lease term estimated useful life longlived assets march 1995 financial accounting standards board issued statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed sfas 121 sfas 121 requires company review longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable adoption standard material impact companys results operations financial position licensed technology rights licensed technology rights amortized shorter license term seven years using straightline method company reviews licensed technology rights periodic basis capitalized costs provide future benefit expensed accumulated amortization july 31 1996 1997 amounted 285624 373623 respectively see note 9 patent application costs incurred filing patents capitalized costs related unsuccessful patent applications expensed becomes determinable applications successful capitalized costs related successful patent applications amortized seven year period remaining life patent whichever shorter using straightline method accumulated amortization july 31 1996 1997 amounted 141801 190282 respectively revenue recognition contract research revenues recognized related work performed terms contracts expenses development activities incurred revenue contingent upon future funding company deferred recognized future funding expended revenues resulting achievement milestones would recognized milestone achieved research development expenses research development costs expensed period incurred use estimates preparation financial statements preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting pronouncements march 1997 financial accounting standards board issued sfas 128 earnings per share establishes new standards computing presenting earnings per share sfas 128 effective financial statements issued periods ending december 31 1997 earlier adoption permitted company believes impact adoption statement material effect net loss per share reported accompanying financial statements july 1997 financial accounting standards board issued sfas 130 reporting comprehensive income establishes standards reporting display comprehensive income components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income sfas 130 effective financial statements issued fiscal years beginning december 15 1997 earlier application permitted company believes impact adoption statement significant effect companys financial position results operations net loss per common share net loss per common share computed using weighted average number common shares outstanding period common equivalent shares including stock options warrants excluded computation effect antidulitive except pursuant requirements sec pursuant requirements common stock issued company 12 months immediately preceding initial public offering plus shares common stock became issuable period pursuant grant common stock options warrants included calculation weighted average number common shares outstanding period august 1 1994 april 30 1996 using treasury stock method 3 equipment summary equipment july 31 1996 1997 follows july 31 1996 1997 laboratory equipment 2038304 2645553 office equipment 112351 230432 furniture 22088 45971 equipment capital leases 378064 2550807 3300020 less accumulated depreciation amortization 1958536 2513525 592271 786495 4 security deposits assets summary security deposits assets july 31 1996 1997 follows july 31 1996 1997 amounts held deposit collateral notes payable see note 7 183444 84134 81728 267578 81728 5 accrued expenses summary accrued expenses july 31 1996 1997 follows july 31 1996 1997 research development 86369 590000 payroll employee benefits 23000 354395 professional fees 225990 185281 65218 72094 400577 1201770 6 deferred revenue deferred revenue results cash received advance revenue recognition research development contracts see notes 1 10 7 notes payable notes payable consist borrowings lease financing arrangement financing company purchase certain laboratory equipment borrowings line credit secured laboratory equipment related security deposits cash collateral equal 3040 equipment cost see note 4 company additional borrowing capacity agreements july 31 1997 upon certain conditions amounts held security deposits reduced funds released company completion companys ipo 1996 companys common stock offering 1997 security deposits relating lease financing arrangement returned company including earned interest terms financing company required make monthly payments principal interest fiscal 1998 based upon average interest rate approximately 15 per annum 8 obligations capital leases obligations capital leases principally represent leases laboratory equipment terms leases company required make monthly payments principal interest fiscal 1998 interest rates ranging approximately 1012 per annum 9 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities government agencies order advance obtain technologies management believes important companys overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies companys policy amortize capitalized licensed technology seven year period license term whichever shorter using straightline method research development agreements generally provide company fund future project research one four years based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research companys policy expense research development payments incurred minimum payments assuming nontermination agreements july 31 1997 next five years follows year research ending license development july 31 agreements 1998 32000 109811 1999 27000 50000 2000 22000 50000 2001 22000 50000 2002 22000 50000 company achieve certain milestones related product development product license applications approvals additional payments would required company elects continue maintain licenses agreements also require company fund certain costs associated filing patent applications 10 contract research revenues contract research revenues recorded company three years ended july 31 1997 consisted research development support collaborations third parties various government grants national institute health department commerce july 1995 company entered research development agreement third party third party agreed fund preclinical development companys xenotransplant products return exclusive worldwide manufacturing marketing distribution rights products paying company 75 million allocated follows 1 40 million cost preclinical development four semiannual installments 10 million 2 35 million upon achieving certain milestones furtherance joint collaboration third party also purchased 40 million companys common stock see note 12 years ended july 31 1996 1997 company recognized 20 18 million respectively revenue related agreement july 31 1997 company received preclinical funding available agreement additionally fiscal 1996 third party purchased additional 18 million common stock offered companys ipo december 1996 company entered license collaborative research agreement third party relating companys gene transfer technology agreement third party granted worldwide exclusive license use companys technology gene therapy products third party agreed pay company initial payment 850000 consisting nonrefundable license fee 750000 onetime research support payment 100000 fund minimum 400000 per year two years research development support company third party also make payments company upon achievement certain product development milestones gene therapy products utilizing companys technology pay royalties net sales year ended july 31 1997 company recognized 1083330 revenue related agreement 11 commitments company entered threeyear fiveyear employment agreements executives agreements provide individuals receive aggregate annual base salaries approximately 916000 july 31 1997 individuals may also receive discretionary bonus awards determined board directors july 31 1997 company leases administrative research development facilities three operating leases expiring june 1998 december 1997 march 1999 respectively option additional three years future minimum annual rental payments july 31 1997 leases noncancellable operating leases primarily equipment approximately 308000 37000 years ended july 31 1998 1999 respectively 12 common stock series preferred stock fiscal 1993 bridge financing private placements december 1992 company obtained approximately 52 million equity financing bridge financing issuance common stock warrants purchase shares common stock conversion advances stockholder company sold bridge units consisting 531424 shares common stock warrants purchase shares common stock see note 13 gross proceeds approximately 40 million connection sale bridge units company 12 million advances stockholder converted bridge units consisting 160000 shares common stock warrants purchase shares common stock june 1993 company raised 8 million private placement issuance placement units consisting aggregate 999975 shares common stock warrants purchase shares common stock see note 13 fiscal 1994 private placements october december 1993 company raised 52 million private placement sale placement units consisting aggregate 646872 shares common stock warrants purchase shares common stock fiscal 1995 private placements december 1994 march 1995 company raised approximately 38 million sale 1986409 shares series convertible preferred stock share series preferred stock equal voting rights companys common stock july 31 1995 company received gross proceeds 40 million sale 457142 shares common stock corporate partner see notes 1 10 company granted exclusive worldwide rights market xenotransplantation products shareholder exchange commitment shareholder contribute subsequent research development make certain milestone payments pay royalties future product sales fiscal 1996 initial public offering fiscal 1996 company completed ipo 2530000 shares common stock price 825 per share common stock resulting net proceeds approximately 184 million connection companys ipo preferred stockholders converted shares 794554 shares common stock fiscal 1997 common stock offering july 1997 company completed private placement offering 1450000 shares common stock resulting net proceeds approximately 104 million rights purchase preferred stock february 1997 board directors company declared dividend one preferred stock purchase right outstanding share common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 75 subject adjustment rights may exercised public announcement party acquired 20 companys common stock commencement public announcement make tender offer 20 companys common stock rights voting rights expire march 6 2002 may redeemed company price 01 per right time prior expiration acquisition 20 companys stock preferred stock purchasable upon exercise rights minimum preferential dividend 10 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock event company acquired merger business combination transaction 50 assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 13 stock options warrants stock options companys 1992 stock option plan 1992 stock option plan directors plans incentive nonqualified stock options may granted maximum 480000 shares common stock directors officers key employees consultants company less fair market value date grant september 1996 plans amended shareholders majority consent increase number shares covered plans 1800000 options generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions october 1995 financial accounting standards board issued sfas 123 accounting stockbased compensation sfas 123 sfas 123 requires measurement fair value stock options warrants included statement income disclosed notes financial statements company determined continue account stockbased compensation employees accounting principles board opinion 25 elect disclosureonly alternative sfas 123 company computed pro forma discloses required sfas 123 options granted fiscal 1996 1997 using blackscholes option pricing model prescribed sfas 123 weighted average assumptions used follows 1996 1997 risk free interest rate 625 expected dividend yield 0 expected lives 5 years 5 years expected volatility 53 compensation cost companys stock option plans determined based fair value grant dates awards plans consistent method sfas 123 companys net loss pro forma net loss per common share would increased pro forma amounts indicated 1996 1997 net loss reported 5434516 7251570 pro forma 5540770 7815053 pro forma net loss per common share reported 95 97 pro forma 96 105 sfas 123 method accounting applied options granted prior august 1 1995 result pro forma compensation cost may representative expected future years summary status companys stock options plan july 31 1995 1996 1997 changes years ended presented table narrative 1996 options purchase 388300 shares common stock granted exercise price equal fair value stock date grant weighted average exercise price options 994 per share weighted average fair value options date grant 527 per option addition options purchase 17500 shares common stock granted exercise price 250 per share less fair value stock date grant weighted average fair value options date grant 773 per option following table presents weighted average price life information significant option groups outstanding july 31 1997 december 1994 company offered certain holders outstanding stock options opportunity tender options exchange stock options exercise price 2375 per share represented current fair market value date determined board directors outstanding stock options cancelled reissued exercise price 2375 per share company recorded compensation expense 122500 certain nonqualified stock options granted employees fiscal 1996 immediately vested charge based difference fair value companys common stock date grant option exercise price warrants connection private placements fiscal 1993 1994 company issued warrants purchase 1295363 shares common stock exercise price 1500 per share 1250 case placement agent comprising 131249 shares common stock february 1995 company offered warrantholders opportunity exchange existing warrants new warrants could purchase fewer shares reduced exercise price warrantholders entitled receive new warrants representing right purchase onehalf number shares common stock warrantholder entitled originally purchase reduced exercise price 750 connection offer warrantholders existing warrants purchase 1101028 shares common stock 1500 1250 per share exchanged warrants new warrants purchase 550501 shares common stock 750 per share remaining original warrants continue entitle warrantholders purchase 194334 shares common stock 1250 1500 per share fiscal 1997 warrants purchase 38166 shares common stock exercised aggregate purchase price 286246 warrants may redeemed company 05 per common share following initial public offering share companys common stock equals exceeds 200 exercise price warrants expire december 4 1997 value assigned warrants accompanying balance sheets connection companys public offering company sold underwriter nominal consideration warrants purchase 220000 shares common stock warrants initially exercisable price 990 per share period fortytwo 42 months commencing august 27 1997 14 401k plan company 401k plan employees may contribute 12 percent compensation maximum 9500 per employee calendar year 1997 effective may 1996 company matching contributions 25 dollar deferred first 6 deferred authorized board directors company matching contributions approximately 6000 31000 years ended july 31 1996 1997 respectively 15 federal income taxes july 31 1997 company available tax reporting purposes net operating loss carryforwards approximately 13400000 expire commencing fiscal 2008 company also research development credit carryovers approximately 1100000 expire commencing fiscal 2008 tax reform act 1986 contains certain provisions may limit companys ability utilize net operating loss tax credit carryforwards given year certain events occur including cumulative changes ownership interests excess 50 threeyear period assurance ownership changes future periods significantly limit companys use existing net operating loss tax credit carryforwards company follows sfas 109 accounting income taxes statement requires deferred income tax assets liabilities reflect impact temporary differences amount assets liabilities financial reporting purposes amounts measured tax laws regulations components deferred income taxes july 31 1997 follows deferred tax assets net operating loss carryforwards 13400000 tax credit carryforwards 1100000 370000 total deferred tax assets 14870000 valuation allowance deferred tax assets 14870000 net deferred tax assets company yet achieved profitable operations accordingly management believes tax benefits july 31 1997 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax asset 16 subsequent events september 1997 company sold 400000 shares convertible preferred stock investor gross proceeds 10 million stock convertible automatically six months election holder time date issuance 935782 shares common stock investor entitled dividend 225 per share convertible preferred stock held six months dividend paid payable cash companys common stock discretion company option redeem convertible preferred stock certain conditions defined company elect exercise option company required fund redemption related dividends cash september 1997 company modified july 1995 research development agreement third party see note 10 part modification third party made additional 65 million payment company equity exclusive licensing rights certain xenograft manufacturing assets modified agreement additional 65 million payment consisted 3 million equity investment company purchase 166945 shares companys common stock ii 35 million payment acquire exclusive licensing rights certain xenograft manufacturing assets part modified agreement third party company agreed preclinical milestone payments original agreement considered satisfied exhibit index exhibit 102 employment agreement dated october 22 1997 company david w keiser 103 employment agreement dated october 22 1997 company dr stephen p squinto 104 employment agreement dated october 22 1997 company dr louis matis 1041 form stock purchase agreement dated june 1997 1042 stock purchase agreement dated september 9 1997 company b biotech 231 consent arthur andersen llp 27 financial data schedule 99 important factors regarding forwardlooking statementsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits 31 certificate incorporation amended1 32 bylaws1 41 specimen common stock certificate1 101 employment agreement dated april 1 1997 company dr leonard bell2 102 employment agreement dated october 22 1997 company david w keiser4 103 employment agreement dated october 22 1997 company dr stephen p squinto4 104 employment agreement dated october 22 1997 company dr louis matis4 105 employment agreement dated july 1993 company dr james wilkins amended1 106 employment agreement dated july 1994 company dr bernadette l alford amended1 107 administrative facility lease dated august 23 1995 company science park development corporation1 108 research development facility lease dated august 23 1995 company science park development corporation1 109 option agreement dated april 1 1992 company dr leonard bell1 1010 companys 1992 stock option plan amended1 1011 companys 1992 outside directors stock option plan amended1 1012 registration agreement dated december 4 1992 company benefit certain individuals listed schedules thereto amended1 1013 amendment registration agreement dated july 31 1995 company united states surgical corporation1 1014 agreement dated june 15 1993 company benefit certain individuals listed schedules thereto amended1 1015 form investor rights agreement dated december 23 1994 company purchasers companys series preferred stock amended1 1016 stock purchase agreement dated july 31 1995 company united states surgical corporation1 1017 form warrant purchase shares companys common stock issued pursuant certain companys private placements1 1018 form warrant purchase shares companys common stock issued placement agent certain companys private placements1 1019 form warrant purchase shares companys common stock issued certain warrantholders company connection warrant exchange1 1020 license agreement dated may 27 1992 company yale university amended september 23 19921 1021 exclusive license agreement dated june 19 1992 among company yale university oklahoma medical research foundation2 1022 research development agreement dated june 19 1992 company oklahoma medical research foundation1 1023 license agreement dated september 30 1992 company yale university amended july 2 19931 1024 license agreement dated august 1 1993 company biotechnology research development corporation brdc amended july 1 19951 1025 cooperative research development agreement dated december 10 1993 company national institutes health1 1026 license agreement dated january 25 1994 company austin research institute1 1027 exclusive patent license agreement dated april 21 1994 company national institutes health 1028 license agreement dated july 22 1994 company austin research institute 1029 license agreement dated january 10 1995 company yale university 1030 joint development agreement dated july 31 1995 company united states surgical corporation1 1031 advanced technology program atp cooperative agreement 70nanb5h national institute standards technology entitled universal donor organs transplantation dated september 15 19951 1032 us department health human services national heart lung book institute small business research program phase ii grant application entitled role complement activation cardiopulmonary bypass dated december 14 1994 notice grant award dated september 21 19951 1033 research subcontract agreement dated october 1 1995 company tufts university1 1034 agreement bound shareholders agreement dated august 1 1993 company brdc1 1035 agreement bound master agreement dated august 1 1993 company brdc1 1036 research development facility lease dated april 1 1996 company science park development corporation2 1037 license agreement dated march 27 1996 company medical research council2 1038 license agreement dated may 8 1996 company enzon inc2 1039 license collaborative research agreement alexion pharmaceuticals inc genetic therapy inc2 1040 amended joint development agreement september 4 1997 company united states surgical corporation4 1041 stock purchase agreement dated september 8 1997 company biotech target sa 4 1042 stock purchase agreement dated march 4 1998 company biotech target sa 8 231 consent arthur andersen llp 99 risk factors previously filed 1 incorporated reference companys registration statement form s1 reg 33300202 2 incorporated reference companys amendment 1 registration statement form s1 reg 33319905 filed april 4 1997 3 incorporated reference companys annual report form 10k fiscal year ended july 31 1996 4 incorporated reference companys annual report form 10k fiscal year ended july 31 1997 5 incorporated reference companys registration statement amendment 1 form s3 reg 33329617 filed july 7 1997 6 incorporated reference companys registration statement post effective amendment form s1 reg 33319905 filed july 18 1997 7 incorporated reference companys registration statement form s3 reg 33341397 filed december 11 1997 8 incorporated reference companys registration statement form s3 reg 33347645 filed march 17 1998 confidential treatment granted portions document request confidential treatment granted portions document confidential portions omitted filed separately commission required rule 24b2 b reports form 8k current report form 8k dated july 7 1998 relating companys commencement dosing rheumatoid arthritis patients phase iii clinical trial antiinflammatory complement inhibitor drug candidate 5g11 current report form 8k dated october 8 1998 relating companys fourth quarter year end results c exhibits see 3 financial statement schedules see 2 signatures pursuant requirements section 13 15d securities act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized alexion pharmaceuticals inc leonard bell leonard bell md president chief executive officer secretary treasurer david w keiser david w keiser executive vice president chief operating officer pursuant requirements securities act 1934 registration statement signed following persons capacities dates indicated alexion pharmaceuticals inc report independent public accountants board directors stockholders alexion pharmaceuticals inc audited accompanying balance sheets alexion pharmaceuticals inc delaware corporation july 31 1998 1997 related statements operations stockholders equity cash flows three years period ended july 31 1998 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position alexion pharmaceuticals inc july 31 1998 1997 results operations cash flows three years period ended july 31 1998 conformity generally accepted accounting principles sarthur andersen llp hartford connecticut august 28 1998 alexion pharmaceuticals inc balance sheets dollars thousands except per share amounts accompanying notes integral part financial statements alexion pharmaceuticals inc statements operations dollars thousands except per share amounts accompanying notes integral part financial statements alexion pharmaceuticals inc statements stockholders equity dollars thousands accompanying notes integral part financial statements alexion pharmaceuticals inc statements cash flows dollars thousands accompanying notes integral part financial statements alexion pharmaceuticals inc notes financial statements 1 organization operations alexion pharmaceuticals inc alexion company organized 1992 biopharmaceutical company engaged research development proprietary immunoregulatory compounds treatment acute coronary syndromes cardiopulmonary bypass acute myocardial infarction coronary angioplasty unstable angina autoimmune diseases systemic lupus rheumatoid arthritis multiple sclerosis diabete mellitus outgrowth core technologies company developing collaboration third parties see note 9 nonhuman organ xernograft organs products designed transplantation humans without clinical rejection immunoprotected retroviral vector particles producer cells use gene therapy company incurred losses since inception accumulated deficit 406 million july 31 1998 company made product sales date recognized cumulative revenue research grants funding 116 million july 31 1998 1996 company completed initial public offering ipo 2530000 shares common stock resulting net proceeds approximately 184 million company completed additional equity offerings resulting aggregate net proceeds 213 million 104 million fiscal 1998 1997 respectively company need additional financing obtain regulatory approvals fund operating losses deemed appropriate establish manufacturing sales marketing capability addition company operates environment rapid change technology substantial competition pharmaceutical biotechnology companies dependent upon services employees consultants company expects incur substantial expenditures foreseeable future research development commercialization products companys management believes based upon current business plans cash marketable securities aggregating 375 million july 31 1998 sufficient fund operations company least calendar year 1999 company require funds addition previously described seek raise public private equity debt financings collaborative arrangements corporate sources financing 1998 company obtained term loan facility 12 million commercial bank financing capital expenditures principally related facilities manufacturing scaleup equipment see note 7 company capital sources arrangements commitments regard obtaining funds prior july 31 1998 company reported development stage entity alexion pharmaceuticals inc notes financial statements 2 summary significant accounting policies cash equivalents cash equivalents stated cost approximates market include shortterm highly liquid investments original maturities less three months marketable securities company invests marketable securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company classified marketable securities available sale accordingly carries securities aggregate fair value unrealized gains losses included stockholders equity component additional paidin capital july 31 1998 companys marketable securities maximum maturity less one year following summary marketable securities july 31 1998 1997 dollars thousands equipment recorded cost depreciated estimated useful lives assets involved depreciation commences time assets placed service computed using straightline method useful lives equipment three five years maintenance repairs charged expense incurred equipment capital leases depreciated lesser lease term estimated useful life alexion pharmaceuticals inc notes financial statements continued 2 summary significant accounting policies continued longlived assets company accounts investments longlived assets accordance statement financial accounting standard 121 accounting impairment longlived assets longlived assets disposed sfas 121 sfas 121 requires company review longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable licensed technology rights licensed technology rights amortized shorter license term seven years using straightline method company reviews licensed technology rights periodic basis capitalized costs provide future benefit expensed accumulated amortization july 31 1998 1997 amounted 462000 374000 respectively see note 8 patent application costs incurred filing patents capitalized costs related unsuccessful patent applications expensed becomes determinable applications successful capitalized costs related successful patent applications amortized seven year period remaining life patent whichever shorter using straightline method accumulated amortization july 31 1998 1997 amounted 215000 190000 respectively revenue recognition contract research revenues recognized related work performed terms contracts expenses development activities incurred revenue contingent upon future funding company deferred recognized future funding expended revenues resulting achievement milestones would recognized milestone achieved research development expenses research development costs expensed period incurred use estimates preparation financial statements preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates new accounting pronouncement july 1997 financial accounting standards board issued sfas 130 reporting comprehensive income establishes standards reporting display comprehensive income components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income alexion pharmaceuticals inc notes financial statements continued 2 summary significant accounting policies continued sfas 130 effective financial statements issued fiscal years beginning december 15 1997 earlier application permitted company adopted standard effective august 1 1998 impact adoption statement significant effect companys financial position results operations net loss per common share february 1997 financial accounting standards board issued sfas 128 earnings per share superceded accounting principles board opinion 15 additionally february 4 1998 securities exchange commission released staff accounting bulletin sab 98 computations earnings per share changed guidance cheap stock treated earnings per share computations new standard sab 98 replace computation primary earnings loss per share new computation basic earnings loss per share accordingly period earnings per share data presented accordance sfas 128 sab 98 effect previously reported net loss per common share years ended july 31 1998 1997 effect restatement previously reported year ended july 31 1996 increase net loss per common share 07 difference basic diluted net loss per common share effect exercising outstanding stock options warrants converting preferred stock common stock antidilutive periods presented outstanding stock options warrants entitled holders purchase 1947986 2410953 2172169 shares common stock july 31 1998 1997 1996 respectively 3 equipment summary equipment follows dollars thousand alexion pharmaceuticals inc notes financial statements continued 4 security deposits summary security deposits assets follows dollars thousands 5 accrued expenses summary accrued expenses follows dollars thousands 6 deferred revenue deferred revenue results cash received advance revenue recognition research development contracts see notes 1 9 7 notes payable notes payable july 31 1998 consist 12 million term loan used finance purchase capital equipment term loan requires quarterly principal payments 92000 commencing august 3 1998 payable august 2001 interest due principal variable rate repriced quarterly rate july 31 1998 date last repriced 7647 term loan agreement requires company maintain restricted cash balance 15 million collateral note future repayments term loan scheduled follows dollars thousands alexion pharmaceuticals inc notes financial statements continued 8 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities government agencies order advance obtain technologies management believes important companys overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies companys policy amortize capitalized licensed technology seven year period license term whichever shorter using straightline method research development agreements generally provide company fund future project research one four years based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research companys policy expense research development payments incurred minimum payments assuming nontermination agreements july 31 1998 next five years follows dollars thousands company achieve certain milestones related product development product license applications approvals additional payments would required company elects continue maintain licenses agreements also require company fund certain costs associated filing patent applications 9 contract research revenues contract research revenues recorded company year ended july 31 1998 consisted research development support collaborations third parties various government grants national institutes health commerce departments national institute standards technology nist alexion pharmaceuticals inc notes financial statements continued 9 contract research revenues continued july 1995 company entered research development agreement united states surgical corporation us surgical us surgical agreed fund preclinical development companys xenotransplant products return exclusive worldwide manufacturing marketing distribution rights products paying company 75 million preclinical funding represented 40 million paid july 31 1997 35 million upon achieving certain milestones september 1997 company modified july 1995 research development agreement us surgical part modification agreement us surgical purchased 166945 shares common stock 30 million made payment 35 million acquire exclusive licensing rights certain xenograft manufacturing assets part modified agreement us surgical company agreed preclinical milestone payments original agreement considered satisfied years ended july 31 1998 1997 1996 company recognized 37 million 18 million 20 million respectively revenue related agreement july 31 1998 company received preclinical funding available agreement december 1996 company entered license collaborative research agreement genetics therapy inc gtinovartis subsidiary novartis inc relating companys gene transfer technology agreement gtinovartis granted worldwide exclusive license use companys technology gene therapy products gtinovartis agreed pay company initial payment 850000 consisting nonrefundable license fee 750000 onetime research support payment 100000 fund minimum 400000 per year two years research development support company gtinovartis also make payments company upon achievement certain product development milestones gene therapy products utilizing companys technology pay royalties net sales years ended july 31 1998 1997 company recognized approximately 400000 11 million respectively revenue related agreement november 1997 company us surgical awarded threeyear 20 million cooperative agreement nist fund joint xenotransplantation project 10 commitments company entered threeyear fiveyear employment agreements executives agreements provide individuals receive aggregate annual base salaries approximately 952000 july 31 1998 individuals may also receive discretionary bonus awards determined board directors alexion pharmaceuticals inc notes financial statements continued 10 commitments continued july 31 1998 company leases administrative research development facilities three operating leases expiring december 1997 june 1998 march 1999 option additional three years company currently continuing leases expired december 1997 june 1998 monthtomonth basis discussions lease extensions ongoing future minimum annual rental payments july 31 1998 leases noncancellable operating leases primarily equipment approximately 56000 17000 4000 five years ended july 31 2003 respectively 11 common stock preferred stock fiscal 1996 initial public offering fiscal 1996 company completed ipo 2530000 shares common stock resulting net proceeds approximately 184 million connection companys ipo series preferred stockholders converted shares 794554 shares common stock fiscal 1997 private placement july 1997 company completed private placement offering 1450000 shares common stock resulting net proceeds approximately 104 million fiscal 1998 private placements september 1997 company completed private placement 400000 shares series b convertible preferred stock aggregate consideration 10 million single institutional investor biotech target sa net proceeds company approximately 95 million investor entitled dividend 225 per share series b convertible preferred stock held march 4 1998 march 1998 investor converted preferred stock 935782 shares common stock dividends 900000 paid delivery additional 70831 shares companys common stock september 1997 company sold 166945 shares common stock us surgical aggregate consideration 30 million sale common stock made connection modification joint development agreement company us surgical see note 9 march 1998 biotech target sa purchased additional 670000 shares common stock aggregate consideration approximately 88 million 12 stock options warrants stock options companys 1992 stock option plan 1992 stock option plan directors plans amended incentive nonqualified stock options may granted maximum 18 million shares common stock directors officers key employees consultants company less fair market value date grant options generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions alexion pharmaceuticals inc notes financial statements continued 12 stock options warrants continued october 1995 financial accounting standards board issued sfas 123 accounting stockbased compensation sfas 123 sfas 123 requires measurement fair value stock options warrants included statement income disclosed notes financial statements company determined continue account stockbased compensation employees accounting principles board opinion 25 elect disclosureonly alternative sfas 123 company computed pro forma disclosure required sfas 123 options granted using blackscholes option pricing model prescribed sfas 123 weighted average assumptions used follows compensation cost companys stock option plans determined based fair value grant dates awards plans consistent method sfas 123 companys net loss pro forma net loss per common share would increased pro forma amounts indicated dollars thousands except per share amounts sfas 123 method accounting applied options granted prior august 1 1995 result pro forma compensation cost may representative expected future years summary status companys stock option plans july 31 1998 1997 1996 changes years ended presented table narrative alexion pharmaceuticals inc notes financial statements continued 12 stock options warrants continued 1996 options purchase 388300 shares common stock granted exercise price equal fair value stock date grant weighted average exercise price options 994 per share weighted average fair value options date grant 527 per option addition options purchase 17500 shares common stock granted nonmanagement employees exercise price 250 per share less fair value stock date grant weighted average fair value options date grant 773 per option company recorded compensation expense 123000 certain nonqualified stock options granted nonmanagement employees fiscal 1996 immediately vested charge based difference fair value companys common stock date grant option exercise price following table presents weighted average price life information significant option groups outstanding july 31 1998 year ended july 31 1998 options purchase 267250 shares common stock granted employees exercise price 900 per share options granted subject shareholders approval increase number shares authorized companys 1992 stock option plan financial statement purposes options considered granted prerequisite approvals obtained accordingly options excluded tables warrants connection private placements fiscal 1993 1994 company issued warrants purchase common stock warrants exercisable time prior close business december 4 1997 warrants held expired exercised warrants exercised purchase 551719 shares common stock aggregating approximately 41 million proceeds company connection companys initial public offering company sold underwriter nominal consideration warrants purchase 220000 shares common stock warrants initially exercisable price 990 per share period fortytwo 42 months commencing august 27 1997 none warrants exercised july 31 1998 alexion pharmaceuticals inc notes financial statements continued 13 rights purchase preferred stock february 1997 board directors company declared dividend one preferred stock purchase right outstanding share common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 75 subject adjustment rights may exercised public announcement party acquired 20 companys common stock commencement public announcement make tender offer 20 companys common stock rights voting rights expire march 6 2002 may redeemed company price 01 per right time prior expiration acquisition 20 companys stock preferred stock purchasable upon exercise rights minimum preferential dividend 10 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock event company acquired merger business combination transaction 50 assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 14 401k plan company 401k plan employees may contribute 15 percent compensation maximum 10000 per employee calendar year 1998 effective january 1998 company matching contributions 50 dollar deferred first 6 deferred authorized board directors company matching contributions approximately 48000 31000 6000 years ended july 31 1998 1997 1996 respectively 15 federal income taxes july 31 1998 company available tax reporting purposes net operating loss carryforwards approximately 375 million expire commencing fiscal 2008 company also research development credit carryovers approximately 14 million expire commencing fiscal 2008 tax reform act 1986 contains certain provisions may limit companys ability utilize net operating loss tax credit carryforwards given year certain events occur including cumulative changes ownership interests excess 50 threeyear period assurance ownership changes future periods significantly limit companys use existing net operating loss tax credit carryforwards company follows sfas 109 accounting income taxes statement requires deferred income tax assets liabilities reflect impact temporary differences amount assets liabilities financial reporting purposes amounts measured tax laws regulations alexion pharmaceuticals inc notes financial statements continued 15 federal income taxes continued components deferred income taxes july 31 1998 follows dollars thousands company yet achieved profitable operations accordingly management believes tax benefits july 31 1998 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax assetitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits previously filed 1 incorporated reference companys registration statement form s1 reg 33300202 2 incorporated reference companys amendment 1 registration statement form s1 reg 33319905 filed april 4 1997 3 incorporated reference companys annual report form 10k fiscal year ended july 31 1997 4 incorporated reference companys registration statement form s8 reg 33371879 filed february 5 1999 5 incorporated reference companys registration statement form s8 reg 33371985 filed february 8 1999 6 incorporated reference companys annual report form 10k fiscal year ended july 31 1996 7 incorporated reference companys annual report form 10k fiscal year ended july 31 1998 confidential treatment granted portions document request confidential treatment filed portions document confidential portions omitted filed separately commission required rule 24b2 b reports form 8k current report form 8k dated may 25 1999 relating election alvin parven companys board directors current report form 8k dated september 24 1999 relating election jerry jackson r douglas norby companys board directors c exhibits see 3 financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc index consolidated financial statements report independent public accountants board directors stockholders alexion pharmaceuticals inc audited accompanying consolidated balance sheets alexion pharmaceuticals inc delaware corporation subsidiary july 31 1999 1998 related consolidated statements operations stockholders equity cash flows three years period ended july 31 1999 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position alexion pharmaceuticals inc subsidiary july 31 1999 1998 consolidated results operations cash flows three years period ended july 31 1999 conformity generally accepted accounting principles arthur andersen llp hartford connecticut august 27 1999 alexion pharmaceuticals inc consolidated balance sheets amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements stockholders equity amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements 1 organization operations alexion pharmaceuticals inc alexion company organized 1992 company engaged development proprietary products treatment cardiovascular autoimmune neurologic diseases disorders company currently conducting phase ii clinical trials two lead c5 inhibitor product candidates 5g11sc 5g11 company also developing apogen immunotherapeutic products affecting diseasecausing tcells addition company developing therapies permit transplantation cells species humans known xenotransplantation company incurred consolidated losses since inception made product sales date company continue need additional financing obtain regulatory approvals product candidates fund operating losses deemed appropriate establish manufacturing sales marketing distribution capabilities addition company operates environment rapid changes technology fda guidelines regulations healthcare regulations competition pharmaceutical biotechnology companies dependent upon services employees third parties company expects incur substantial expenditures foreseeable future research development commercialization products company seek raise necessary funds public private equity debt financings bank loans collaborative arrangements corporate sources financing 2 summary significant accounting policies principles consolidation accompanying consolidated financial statements include alexion pharmaceuticals inc whollyowned subsidiary columbus farming corporation columbus formed february 9 1999 acquire certain manufacturing assets united states surgical corporation us surgical see notes 3 6 significant intercompany balances transactions eliminated consolidation cash equivalents cash equivalents stated cost approximates market include shortterm highly liquid investments original maturities less three months marketable securities company invests marketable securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company classified marketable securities available sale accordingly carries securities aggregate fair value unrealized gains losses included stockholders equity component additional paidin capital july 31 1999 companys marketable securities alexion pharmaceuticals inc notes consolidated financial statements continued 2 summary significant accounting policies continued maximum maturity less two years average approximately six months following summary marketable securities july 31 1999 1998 dollars thousands property plant equipment property plant equipment recorded cost depreciated estimated useful lives assets involved depreciation commences time assets placed service computed using straightline method estimated useful lives assets see note 3 maintenance repairs charged expense incurred longlived assets company accounts investments longlived assets accordance statement financial accounting standard 121 accounting impairment longlived assets longlived assets disposed sfas 121 sfas 121 requires company review longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable company reviewed longlived assets determined impairments exist revenue recognition contract research revenues recorded company consist research development support payments license fees milestone payments collaborations third parties amounts received various government grants research development support revenues recognized related work expenses incurred terms contracts development activities revenues derived achievement milestones recognized milestone achieved nonrefundable license fees received alexion pharmaceuticals inc notes consolidated financial statements continued 2 summary significant accounting policies continued exchange specific rights companys technologies research potential products markets recognized revenues earned accordance terms contracts unbilled reimbursable contract costs shown accompanying consolidated balance sheets represent reimbursable costs incurred connection research contracts yet billed company bills costs recognizes costs related revenues accordance terms contracts deferred revenue results cash received advance revenue recognition research development contracts see note 8 research development expenses research development costs expensed period incurred use estimates preparation financial statements preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates comprehensive income july 1997 financial accounting standards board issued sfas 130 reporting comprehensive income establishes standards reporting display comprehensive income loss components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income loss impact adoption statement significant effect companys financial position results operations significant difference comprehensive income loss net loss represented gain loss marketable securities 9000 2000 20000 years ended july 31 1999 1998 1997 respectively net loss per common share company computes presents net loss per common share accordance sfas 128 earnings per share difference basic diluted net loss per common share effect stock options warrants antidilutive periods presented outstanding stock options warrants entitled holders purchase 2568587 1947986 2410953 shares common stock july 31 1999 1998 1997 respectively alexion pharmaceuticals inc notes consolidated financial statements continued 3 property plant equipment summary equipment follows dollars thousand 1999 company acquired land building additional laboratory equipment total cost approximately 39 million financed note payable us surgical see note 6 4 security deposits summary security deposits assets follows dollars thousands 5 accrued expenses summary accrued expenses follows dollars thousands alexion pharmaceuticals inc notes consolidated financial statements continued 6 notes payable summary notes payable follows dollars thousands future repayments notes payable scheduled follows dollars thousands 7 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities government agencies order advance obtain technologies management believes important companys overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies companys policy amortize capitalized licensed technology seven year period license term whichever shorter using straightline method research development agreements generally provide company fund future project research one four years based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research companys policy expense research development payments incurred alexion pharmaceuticals inc notes consolidated financial statements continued 7 license research development agreements continued minimum payments assuming nontermination agreements july 31 1999 next five years follows dollars thousands company achieve certain milestones related product development product license applications approvals additional payments would required company elects continue maintain licenses agreements also require company fund certain costs associated filing patent applications 8 contract research revenues three years ended july 31 1999 company recorded contract research revenues commerce departments national institute standards technology nist national institutes health nih july 1995 company entered collaborative research development agreement connection xenotransplantation program us surgical september 1997 company modified research development agreement us surgical part modification agreement us surgical purchased 166945 shares common stock 30 million february 1999 part termination agreement company purchased certain manufacturing assets effected return technology rights xenotransplantation program us surgical company financed asset purchase 39 million note payable see note 6 december 1996 company entered license collaborative research agreement genetic therapy inc gtinovartis subsidiary novartis inc relating companys gene transfer technology october 1998 view alexions increased focus advanced clinical development antiinflammatory drug candidates gtinovartis announced restructuring reorganization company gtinovartis agreed discontinue collaborative gene therapy program august 1995 company awarded threeyear agreement approximately 2 million nist fund xenotransplantation project november 1997 company us surgical awarded threeyear 2 million cooperative agreement nist fund joint xenotransplantation project agreement modified single entity agreement february 1999 october 1998 company awarded another threeyear 2 million agreement nist fund xenotransplantation project january 1999 company procter gamble pharmaceuticals inc pg entered exclusive collaboration develop commercialize 5g11sc one companys lead product candidates collaboration company initially pursue development 5g11sc alexion pharmaceuticals inc notes consolidated financial statements continued 8 contract research revenues continued treatment inflammation caused cardiopulmonary bypass surgery heart attack angioplasty pg agreed fund clinical development manufacturing costs relating 5g11sc indications additionally pg agreed pay company 95 million payments include nonrefundable upfront license fee milestone payments research development support payments company also receive royalties worldwide sales 5g11sc indications company also preferred position relative thirdparty manufacturers manufacture 5g11sc worldwide company shares copromotion rights pg sell market distribute 5g11sc united states granted pg exclusive rights sell market distribute 5g11sc outside united states july 31 1999 company recorded revenues 178 million pg including receiving nonrefundable upfront license fee 10 million 78 million research development support expenses summary revenues generated contract research collaboration grant awards follows years ended july 31 dollars thousands 9 commitments company entered threeyear fiveyear employment agreements executives agreements provide individuals receive aggregate annual base salaries approximately 827000 july 31 1999 individuals may also receive discretionary bonus awards determined board directors july 31 1999 company leases administrative research development facilities three operating leases expired december 1997 june 1998 march 1999 company currently continuing leases monthtomonth basis discussions new lease arrangements continue company believes reach agreement regarding facilities commercially adequate terms lease expense companys facilities 420000 415000 216000 years ended july 31 1999 1998 1997 respectively future minimum annual rental payments july 31 1999 noncancellable operating leases primarily equipment approximately 36000 34000 30000 five years ended july 31 2004 respectively alexion pharmaceuticals inc notes consolidated financial statements continued 10 common stock preferred stock fiscal 1997 private placement july 1997 company completed private placement offering 1450000 shares common stock resulting net proceeds approximately 104 million fiscal 1998 private placements september 1997 company completed private placement 400000 shares series b convertible preferred stock aggregate consideration 10 million single institutional investor biotech target sa whollyowned subsidiary bb biotech ag net proceeds company approximately 95 million investor entitled dividend 225 per share series b convertible preferred stock held march 4 1998 march 1998 investor converted preferred stock 935782 shares common stock dividends 900000 paid delivery additional 70831 shares companys common stock also march 1998 biotech target sa purchased additional 670000 shares common stock aggregate consideration approximately 88 million september 1997 company sold 166945 shares common stock us surgical aggregate consideration 30 million sale common stock made connection modification joint development agreement company us surgical 11 stock options warrants stock options companys 1992 stock option plan amended incentive nonqualified stock options may granted maximum 31 million shares common stock directors officers key employees consultants company companys 1992 stock option plan outside directors amended company registered additional 200000 shares common stock issuance upon exercise options granted plan options generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions statement financial accounting standard 123 accounting stockbased compensation sfas 123 requires measurement fair value stock options warrants included statement income disclosed notes financial statements company determined continue account stockbased compensation employees accounting principles board opinion 25 elect disclosureonly alternative sfas 123 company computed pro forma disclosure required sfas 123 options granted using blackscholes option pricing model prescribed sfas 123 weighted average assumptions used follows alexion pharmaceuticals inc notes consolidated financial statements continued 11 stock options warrants continued compensation cost companys stock option plans determined based fair value grant dates awards plans consistent method sfas 123 companys net loss pro forma net loss per common share would increased pro forma amounts indicated dollars thousands except per share amounts summary status companys stock option plans july 31 1999 1998 1997 changes years ended presented table narrative fiscal 1999 options purchase 513500 shares common stock granted exercise price equal fair value stock date grant weighted average exercise price options 998 per share weighted average fair value options date grant 589 per option addition options purchase 267250 shares common stock granted subject shareholders approving increase total shares available granted plan options granted exercise price 900 per share equal fair value common stock date grant exercise price options less fair value stock date shareholder approval accordingly company recording compensation expense based upon difference vesting period associated options compensation expense associated options 132000 year ended july 31 1999 aggregate compensation expense approximately 600000 associated option grants expected recognized next three years weighted average fair value options date shareholder approval 773 per option alexion pharmaceuticals inc notes consolidated financial statements continued 11 stock options warrants continued following table presents weighted average price life information significant option groups outstanding july 31 1999 warrants connection companys initial public offering company sold underwriter nominal consideration warrants purchase 220000 shares common stock warrants exercisable price 990 per share period fortytwo 42 months commencing august 27 1997 none warrants exercised july 31 1999 12 rights purchase preferred stock february 1997 board directors company declared dividend one preferred stock purchase right outstanding share common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 subject adjustment rights may exercised public announcement party acquired 20 companys common stock commencement public announcement make tender offer 20 companys common stock rights voting rights expire march 6 2002 may redeemed company price 001 per right time prior expiration acquisition 20 companys stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock event company acquired merger business combination transaction 50 assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right alexion pharmaceuticals inc notes consolidated financial statements continued 13 401k plan company 401k plan employees may contribute 15 percent compensation maximum 10000 per employee calendar year 1999 effective january 1998 company matching contributions 050 dollar deferred first 6 deferred authorized board directors company matching contributions approximately 85000 48000 31000 years ended july 31 1999 1998 1997 respectively 14 income taxes july 31 1999 company available federal tax reporting purposes net operating loss carryforwards approximately 441 million expire 2019 company also research development credit carryovers approximately 22 million begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions may limit companys ability utilize net operating loss tax credit carryforwards given year certain events occur including cumulative changes ownership interests excess 50 threeyear period accordingly assurance companys ability utilize existing net operating loss tax credit carryforwards future periods limited result effect changes ownership excess 50 threeyear period company follows sfas 109 accounting income taxes statement requires deferred income tax assets liabilities reflect impact temporary differences amount assets liabilities financial reporting purposes amounts measured tax laws regulations components deferred income taxes july 31 1999 follows dollars thousands company yet achieved profitable operations accordingly management believes tax benefits july 31 1999 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax assetitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits 21 agreement plan merger among alexion pharmaceuticals inc pi acquisition company inc prolifaron inc dated september 22 20001 31 certificate incorporation amended2 32 bylaws2 41 specimen common stock certificate2 101 employment agreement dated april 1 2000 company dr leonard bell3 102 employment agreement dated october 2 2000 company david w keiser4 103 employment agreement dated october 22 1997 company dr stephen p squinto5 104 employment agreement dated september 21 2000 company dr katherine bowdish1 105 administrative research development facility lease dated may 9 2000 company knotter llc6 106 option agreement dated april 1 1992 company dr leonard bell2 107 companys 1992 stock option plan amended7 108 companys 2000 stock option plan8 109 companys 1992 outside directors stock option plan amended9 1010 exclusive license agreement dated june 19 1992 among company yale university oklahoma medical research foundation3 1011 license agreement dated september 30 1992 company yale university amended july 2 19932 1012 license agreement dated august 1 1993 company biotechnology research development corporation brdc amended july 1 19952 1013 license agreement dated january 25 1994 company austin research institute2 1014 exclusive patent license agreement dated april 21 1994 company national institutes health2 1015 license agreement dated july 22 1994 company austin research institute2 1016 license agreement dated january 10 1995 company yale university2 1017 license agreement dated may 27 1992 company yale university amended september 23 19922 1018 agreement bound master agreement dated august 1 1993 company brdc2 1019 license agreement dated march 27 1996 company medical research council10 1020 license agreement dated may 8 1996 company enzon inc10 1021 asset purchase agreement date february 9 1999 company united states surgical corporation11 1022 collaboration agreement dated january 25 1999 company procter gamble company amended11 1023 letter agreement dated september 14 1999 company leonard bell11 211 subsidiaries alexion pharmaceuticals inc 231 consent arthur andersen llp 99 risk factors previously filed 1 incorporated reference report form 8k filed october 3 2000 2 incorporated reference registration statement form s1 reg 33300202 3 incorporated reference quarterly report form 10q quarter ended april 30 2000 4 incorporated reference annual report form 10k fiscal year ended july 31 2000 5 incorporated reference annual report form 10k fiscal year ended july 31 1997 6 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 7 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 8 incorporated reference registration statement form s8 reg 33369478 filed september 14 2001 9 incorporated reference registration statement form s8 reg 33371985 filed february 8 1999 10 incorporated reference annual report form 10k fiscal year ended july 31 1996 11 incorporated reference annual report form 10k fiscal year ended july 31 1999 confidential treatment granted portions document b reports form 8k current report form 8k filed june 7 2001 issuance two press releases announcing commencement phase ii lupus nephritis clinical trial completion phase psoriasis pilot safety study c exhibits see 3 financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized alexion pharmaceuticals inc leonard bell leonard bell md president chief executive officer secretary treasurer david w keiser david w keiser executive vice president chief operating officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc index report independent public accountants board directors stockholders alexion pharmaceuticals inc audited accompanying consolidated balance sheets alexion pharmaceuticals inc delaware corporation subsidiaries collectively company july 31 2001 2000 related consolidated statements operations stockholders equity comprehensive loss cash flows three years period ended july 31 2001 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position alexion pharmaceuticals inc subsidiaries july 31 2001 2000 consolidated results operations cash flows three years period ended july 31 2001 conformity accounting principles generally accepted united states discussed note 2 consolidated financial statements year ended july 31 2001 company changed method revenue recognition relating nonrefundable upfront licensing fees accordance staff accounting bulletin 101 arthur andersen llp hartford connecticut august 31 2001 alexion pharmaceuticals inc consolidated balance sheets amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements stockholders equity comprehensive loss amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements stockholders equity comprehensive loss continued amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements 1 organization operations alexion pharmaceuticals inc alexion company organized 1992 engaged development therapeutic products treatment wide array severe diseases including cardiovascular autoimmune disorders cancer companys two lead product candidates antibodies address specific diseases arise human immune system attacks human body produces undesired inflammation antibodies proteins bind specifically selected targets body antibody binds target may activate bodys immune system target block activities target stimulate activities target one lead antibody product candidates pexelizumab large phase iib clinical study cardiopulmonary bypass cpb patients completed two additional large phase ii studies myocardial infarction heart attack patients progress companys lead antibody product candidate 5g11 large phase ii clinical study rheumatoid arthritis patients completed clinical programs ongoing four additional diseases including phase ii study membranous nephritis patients well open label extension trials rheumatoid arthritis membranous nephritis patients company also developing apogen immunotherapeutic products target tcell related disorders developing therapies employing transplantation cells species humans known xenotransplantation september 2000 company acquired prolifaron inc prolifaron privately held biopharmaceutical company extensive combinatorial human antibody library technologies expertise prolifaron acquisition see note 4 october 2000 company filed shelf registration statement offer 300 million equity securities see note 12 company incurred consolidated losses since inception made product sales date company continue seek financing obtain regulatory approvals product candidates fund operations losses deemed appropriate establish manufacturing sales marketing distribution capabilities company expects incur substantial expenditures foreseeable future research development commercialization products company seek raise necessary funds public private equity debt financings bank loans collaborative arrangements corporate sources financing 2 cumulative effect accounting change december 1999 securities exchange commission staff issued staff accounting bulletin 101 revenue recognition financial statements sab 101 sab 101 summarizes certain staffs views applying generally accepted accounting principles revenue recognition financial statements specifically addresses revenue recognition biotechnology industry nonrefundable upfront fees prior implementation sab 101 nonrefundable license fees received upon execution license agreements recognized revenue immediately company adopted sab 101 fiscal 2001 therefore changed revenue recognition policy upfront nonrefundable payments immediate recognition deferral revenue upfront fee amortized revenue life agreement alexion pharmaceuticals inc notes consolidated financial statements 1999 company recognized 10 million revenue non refundable upfront licensing fee received proctor gamble see note 10 adoption sab 101 company required recognize 10 million license fee revenue average remaining patent lives underlying technologies 17 years agreement proctor gamble provides ongoing collaborative services funding specified clinical development manufacturing costs companys pexelizumab product candidate license recognized lives patents agreement specified contractual term part change accounting method company recognized noncash cumulative effect adjustment 91 million august 1 2000 income tax effects related accounting change company provided pro forma operating loss net loss net loss per share information company adopted sab 101 periods presented 3 summary significant accounting policies principles consolidation accompanying consolidated financial statements include alexion pharmaceuticals inc whollyowned subsidiaries alexion antibody technologies aat columbus farming corporation columbus results operations aat included companys consolidated statements operations since september 23 2000 effective date prolifaron acquisition see note 4 columbus formed february 9 1999 acquire certain manufacturing assets united states surgical corporation us surgical significant intercompany balances transactions eliminated consolidation cash equivalents cash equivalents stated cost approximates market includes shortterm highly liquid investments original maturities less 90 days marketable securities company invests marketable debt securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company classified marketable securities available sale accordingly carries securities aggregate fair value unrealized gains losses included comprehensive income loss component stockholders equity significant realized gains losses recorded years ended july 31 2001 2000 1999 july 31 2001 companys marketable securities maximum maturity less two years average approximately twelve months weighted average interest rate associated marketable debt securities 42 69 july 31 2001 2000 respectively alexion pharmaceuticals inc notes consolidated financial statements following summary marketable securities july 31 2001 2000 amounts thousands longlived assets company accounts investments longlived assets accordance statement financial accounting standard sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 requires company review longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable company reviewed longlived assets determined impairments exist revenue recognition contract research revenues recorded company consist research development support payments license fees collaborations third parties amounts received various government grants result companys adoption sab 101 see note 2 upfront non refundable license fees received connection collaboration deferred amortized revenue life underlying technologies revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred research development support revenues recognized related work performed expenses incurred terms contracts development activities unbilled reimbursable contract costs shown accompanying consolidated balance sheets represent reimbursable costs incurred connection research contracts yet billed company bills costs recognizes costs related revenues accordance terms contracts deferred revenue results cash received amounts receivable advance revenue recognition research development contracts see notes 2 10 alexion pharmaceuticals inc notes consolidated financial statements research development expenses research development expenses expensed incurred unless recoverable contract research development expenses include following major types costs salaries benefit costs research license fees various contractor costs depreciation amortization lab facilities leasehold improvements building utilities costs related research space lab supplies use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates comprehensive income loss company reports presents comprehensive income loss accordance sfas 130 reporting comprehensive income establishes standards reporting display comprehensive income loss components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income loss companys comprehensive income loss arises net unrealized gains losses marketable securities company elected display comprehensive income loss component statements stockholders equity comprehensive loss stock options company accounts stock options granted employees accordance accounting principles board opinion 25 company accounts stock options granted consultants accordance emerging issues task force eitf 9618 accounting equity instruments issued employees acquiring conjunction selling goods services company recognizes compensation cost associated stock option grants prorata basis applicable vesting term net loss per common share company computes presents net loss per common share accordance sfas 128 earnings per share basic net loss per common share based weighted average shares common stock outstanding period diluted net loss per common share assumes addition dilutive effect common shares equivalents outstanding period common share equivalents represent dilutive stock options warrants convertible subordinated debt outstanding stock options warrants convertible subordinated debt entitled holders acquire 4689075 3829887 2568587 shares common stock july 31 2001 2000 1999 respectively difference basic diluted net loss per common share effect common share equivalents antidilutive periods presented pro forma net loss per share reported accompanying statements operations years ended july 31 2001 2000 1999 assumes retroactive adoption sab 101 see notes 2 17 alexion pharmaceuticals inc notes consolidated financial statements segment reporting sfas 131 disclosure segments enterprise related information establishes annual interim reporting standards enterprises operating segments related disclosures products services geographic areas major customers company determined operates one segment addition revenues generated us entities longlived assets maintained us fair value financial instruments financial instruments include cash equivalents marketable securities notes payable convertible subordinated notes cash equivalents marketable securities carried fair value notes payable convertible subordinated notes carried cost management believes notes payable approximates fair value based upon recent borrowing rates carrying value convertible subordinated notes exceeded fair value approximately 463 million based upon trading values reported july 31 2001 recently issued accounting standards july 2001 financial accounting standards board issued sfas 141 business combinations sfas 142 goodwill intangible assets together significantly change accounting disclosures required activities related assets primary changes resulting standards consist cessation pooling interests method accounting goodwill intangible assets segregated amortized reviewed impairment disclosed within footnotes financial statements companys adoption sfas 141 impact historical financial statements company electing adopt sfas 142 effective august 1 2001 adoption sfas 142 cause amortization relates 232 million goodwill acquired connection acquisition prolifaron see note 4 cease date prior adoption standard annual amortization expected approximately 33 million annually seven year period prospective basis goodwill subject annual impairment reviews conditions warrant interim reviews based upon estimated fair value impairment charges recorded component operating expenses period impairment determined company yet determined whether impairment charge would need recorded result adoption standard june 1998 financial accounting standards board fasb issued sfas 133 accounting derivative financial instruments hedging activities provides comprehensive consistent standard recognition measurement derivatives hedging activities sfas 133 effective fiscal years beginning june 15 1999 june 1999 fasb issued sfas 137 accounting derivative financial instruments hedging activities deferral effective date sfas 133 amendment sfas 133 sole purpose updating effective date adoption sfas 133 fiscal years beginning june 15 2000 adoption sfas 133 impact companys results operations financial condition company currently hold derivative financial instruments engage hedging activities alexion pharmaceuticals inc notes consolidated financial statements 4 prolifaron acquisition september 23 2000 company acquired prolifaron inc prolifaron privatelyheld biopharmaceutical company extensive combinatorial human antibody library technologies expertise acquisition accomplished prolifaron merged wholly owned subsidiary alexion renamed alexion antibody technologies inc consideration thereof company issued 355594 shares companys common stock fully vested options purchase 44364 shares companys common stock weighted average exercise price 4435 per share exchange outstanding equity prolifaron including fully vested options stock option plan fair value companys common stock options issued date acquisition approximately 439 million prolifaron acquisition accounted purchase accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values date acquisition company allocated 210 million purchase price inprocess research development projects allocation represented estimated fair value based riskadjusted cash flows related incomplete research development projects date acquisition development projects yet reached technological feasibility research development progress alternative future uses accordingly costs expensed acquisition date merger date prolifaron conducting pre clinical development testing activities goal develop technologies antibody discovery engineering identify new fully human therapeutic antibodies addressing multiple disease areas drug candidates development represent innovative technologies addressing autoimmune inflammatory disorders cancer acquisition date prolifaron incurred approximately 57 million expenses development projects since inception 1998 expected spend approximately 85 million next seven years complete animal testing developmental drug candidates management anticipates inprocess projects would successful marketed us five nine years making purchase price allocation management considered present value calculations income analysis project accomplishments remaining outstanding items assessment overall contributions well technological regulatory risks value assigned purchased inprocess technology determined estimating costs develop acquired technology commercially viable products estimating resulting net cash flows projects discounting net cash flows present value revenue projection used value process research development based estimates relevant market sizes growth factors expected trends technology nature expected timing new product introductions prolifaron competitors rates utilized discount net cash flows present value based estimated cost capital calculations due risks associated projected cash flow forecast discount rate 40 percent considered appropriate inprocess research development selected rate reflects inherent uncertainties surrounding successful development purchased inprocess technology useful life technology uncertainty technological advances unknown time alexion pharmaceuticals inc notes consolidated financial statements projects successfully developed sales profitability combined companies may adversely affected future periods additionally value acquired intangible assets may become impaired research development projects acquired connection acquisition prolifaron expected continue line estimates described excess cost fair value net assets acquired amounted approximately 232 million reflected goodwill amortized approximately 7 years see recently issued accounting standards note 3 following table summarizes allocation purchase price net assets acquired amounts thousands following unaudited pro forma condensed consolidated information prepared give effect acquisition transaction occurred beginning periods presented historical results adjusted reflect elimination onetime charge operations purchase acquired inprocess research development ii amortization goodwill arising transaction iii elimination income tax benefits expenses would realized combined basis amounts thousands except per share amounts sab 101 retroactively applied pro forma information year ended july 31 2000 contract revenues would increase net loss would decrease 588000 basic diluted net loss per share would reduced 164 per share year unaudited pro forma condensed consolidated financial information necessarily indicative actual results would transaction occurred dates indicated purport indicate results future operations alexion pharmaceuticals inc notes consolidated financial statements 5 property plant equipment property plant equipment recorded cost depreciated estimated useful lives assets involved depreciation amortization commences time assets placed service computed using straightline method estimated useful lives assets maintenance repairs charged expense incurred depreciation amortization fixed assets approximately 2095000 1429000 764000 years ended july 31 2001 2000 1999 respectively asset estimated useful life building improvements 15 years leasehold improvements life lease laboratory equipment 5 years furniture office equipment 3 years summary property plant equipment follows amounts thousand 6 accrued expenses summary accrued expenses follows amounts thousands alexion pharmaceuticals inc notes consolidated financial statements 7 notes payable summary notes payable follows amounts thousands 8 convertible subordinated notes march 2000 company completed 120 million private placement 575 convertible subordinated notes due march 15 2007 notes bear interest payable semiannually september 15 march 15 year beginning september 15 2000 holders may convert portion notes common stock time march 15 2007 conversion price 106425 per share notes subordinated companys existing future senior indebtedness effectively subordinated indebtedness liabilities including trade payables company subsidiaries indenture governing notes limit amount indebtedness including senior indebtedness company may incur noteholders may require company repurchase notes upon repurchase event defined loan agreement cash option company common stock 105 principal amount notes plus accrued unpaid interest notes entitled sinking fund time march 20 2003 ending march 14 2007 company may redeem notes least 30 days notice whole time part certain premiums principal amount plus accrued interest company incurred deferred financing costs related offering approximately 40 million recorded consolidated balance sheet amortized component interest expense sevenyear term notes amortization expense associated financing costs 566000 185000 years ended july 31 2001 2000 respectively alexion pharmaceuticals inc notes consolidated financial statements 9 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities government agencies order advance obtain technologies management believes important companys overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies research development agreements generally provide company fund future project research clinical trials based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research minimum fixed payments assuming nontermination agreements july 31 2001 next five years follows amounts thousands years research ending license development july 31 agreements 2002 487 4680 2003 367 6504 2004 347 2005 402 2006 425 company achieve certain milestones related product development product license applications approvals additional payments would required july 31 2001 agreements contain milestone payment provisions aggregating approximately 159 million agreements also require company fund certain costs associated filing patent applications 10 contract research revenues three years ended july 31 2001 company recorded contract research revenues research development support payments license fees collaboration third parties amounts received various government grants january 1999 company procter gamble pharmaceuticals inc pg entered exclusive collaboration develop commercialize pexelizumab one companys lead product candidates collaboration company pursuing development pexelizumab treatment inflammation caused cardiopulmonary bypass surgery heart attack angioplasty company granted pg exclusive license companys intellectual property related pexelizumab right sublicense pg agreed fund clinical development manufacturing costs relating pexelizumab indications additionally pg agreed pay company 95 million payments include nonrefundable upfront license fee milestone payments research development support payments company also receive royalties worldwide sales pexelizumab indications company also preferred position relative thirdparty manufacturers manufacture alexion pharmaceuticals inc notes consolidated financial statements pexelizumab worldwide company shares copromotion rights pg sell market distribute pexelizumab united states granted pg exclusive rights sell market distribute pexelizumab outside united states july 31 2001 company received proceeds approximately 448 million pg including receiving nonrefundable upfront license fee 10 million fiscal 1999 see note 2 348 million research development support expenses approximately 91 87 reimbursable contract costs relate pg collaboration agreement july 31 2001 2000 respectively company awarded various grants agencies us government fund specific research projects based upon costs incurred projects july 31 2001 company approximately 15 million additional funding available grants summary revenues generated contract research collaboration grant awards follows amounts thousands 11 commitments company entered two three five year employment agreements certain executives agreements provide individuals receive aggregate annual base salaries approximately 928000 july 31 2001 individuals may also receive discretionary bonus awards determined board directors july 31 2001 company leases headquarters research development facilities lease commenced august 2000 term ten years six months company required pay pro rata percentage real estate taxes operating expenses monthly fixed rent starts approximately 80000 increasing approximately 96000 term lease company issued 200000 open letter credit secure lease alexion pharmaceuticals inc notes consolidated financial statements pilot manufacturing plant used producing compounds clinical trials monthly fixed rent approximately 16500 company currently leasing facility month basis company leases additional research facilities monthly fixed rent approximately 14200 lease expires august 2002 lease expense companys facilities 1536000 694000 420000 years ended july 31 2001 2000 1999 respectively lease expense recorded straightline basis applicable rental terms aggregate future minimum annual rental payments next five years noncancellable operating leases including facilities equipment follows amounts thousands years ended july 31 2002 1178 2003 1146 2004 1131 2005 1095 2006 1085 2007 thereafter 5127 12 common stock fiscal 2001 common stock sale october 2000 company filed shelf registration statement offer 300 million equity securities november 2000 company sold 23 million shares common stock price 9075 per share resulting proceeds approximately 2085 million net fees expenses approximately 201000 related transaction fiscal 2000 common stock sale november 1999 company sold 3415 million shares common stock price 14 per share followon public offering resulting net proceeds approximately 444 million net fees expenses 34 million related transaction 13 stock options warrants stock options fiscal 2001 stockholders company approved adoption 2000 stock option plan elected terminate previous 1992 plan 2000 plan incentive nonqualified stock options may granted maximum 1500000 shares common stock directors officers key employees consultants company july 31 2001 approximately 376700 options available grant 2000 plan fiscal 2001 stockholders company approved amendment 1992 stock option plan outside directors amendment increases number stock options granted initially qualifying directors well upon annual reelection board directors options generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions alexion pharmaceuticals inc notes consolidated financial statments sfas 123 accounting stockbased compensation requires measurement fair value stock options warrants disclosed notes financial statements company computed pro forma disclosure required sfas 123 options granted using blackscholes option pricing model prescribed sfas 123 assumptions used follows 2001 2000 1999 risk free interest rate 47 60 50 expected dividend yield 0 expected lives 5 years 5 years 5 years expected volatility 101 85 65 compensation cost companys stock option plans determined based fair value grant dates awards plans consistent method sfas 123 companys net loss pro forma net loss per common share would increased pro forma amounts indicated amounts thousands except per share amounts summary status companys stock option plans july 31 2001 2000 1999 changes years ended presented table narrative alexion pharmaceuticals inc notes consolidated financial statments fiscal 2001 options purchase 1220800 shares common stock granted employees exercise prices equal fair value stock date grant weighted average exercise price options 2916 per share weighted average fair value options date grant 2240 per option addition options purchase 10000 shares common stock granted employees exercise prices less fair value common stock date grant accordingly company recording compensation expense based upon difference vesting period associated options compensation expense associated options 121000 year ended july 31 2001 aggregate compensation expense approximately 203000 associated option grants expected recognized next three years weighted average exercise price options 7551 per share weighted average fair value options date grant 9227 per option connection acquisition prolifaron see note 4 company issued fully vested options purchase 44364 shares common stock weighted average exercise price 4435 per share weighted average fair value options date grant 10146 per option value options included component purchase price prolifaron date acquisition fiscal 2000 options purchase 644800 shares common stock granted employees consultants company exercise price equal fair value stock date grant company recording compensation expense based upon fair value options granted consultants vesting term compensation expense related options 93000 239000 years ended july 31 2001 2000 respectively fiscal 1999 options purchase 513500 shares common stock granted employees exercise prices equal fair value stock date grant weighted average exercise price options 998 per share weighted average fair value options date grant 589 per option addition options purchase 267250 shares common stock granted employees subject shareholders approving increase total shares available granted plan options granted exercise price 900 per share equal fair value common stock date grant however exercise price options less fair value stock date shareholder approval accordingly company recording compensation expense based upon difference vesting period associated options compensation expense associated options 194000 191000 132000 years ended july 31 2001 2000 1999 respectively aggregate compensation expense approximately 166000 associated option grants expected recognized next two years weighted average fair value options date shareholder approval 773 per option alexion pharmaceuticals inc notes consolidated financial statments following table presents weighted average price life information significant option groups outstanding july 31 2001 warrants connection companys initial public offering 1996 company sold underwriter nominal consideration warrants purchase 220000 shares common stock fully exercised july 31 2001 warrants exercisable price 990 per share period fortytwo 42 months commencing august 27 1997 fiscal 2000 warrants purchase 201883 shares exercised resulting proceeds 20 million company fiscal 2001 remaining warrants purchase 18117 shares exercised resulting proceeds approximately 179000 company 14 rights purchase preferred stock february 1997 board directors company declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 see subject adjustment rights may exercised public announcement party acquired 20 companys common stock commencement public announcement make tender offer 20 companys common stock rights voting rights expire march 6 2003 may redeemed company price 01 per right time prior expiration acquisition 20 companys stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock alexion pharmaceuticals inc notes consolidated financial statments september 18 2000 board directors company amended purchase price preferred stock purchase rights purchase price one onehundredth share preferred stock issued upon exercise preferred stock purchase right increased 7500 72500 except increase purchase price terms conditions rights remain unchanged event company acquired merger business combination transaction 50 assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 15 401k plan company 401k plan employees may contribute 15 percent compensation maximum 10500 per employee calendar year 2000 company matches contributions rate 050 dollar deferred first 6 compensation company made matching contributions approximately 177000 127000 85000 years ended july 31 2001 2000 1999 respectively 16 income taxes july 31 2001 company available federal tax reporting purposes net operating loss carryforwards approximately 976 million expire 2021 approximately 112 million resulted exercise nonqualified stock options discussed company also federal state research development credit carryforwards approximately 100 million begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions limits companys ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period company believes triggered limitation provisions recently enacted state tax legislation connecticut may allow company exchange certain research development tax credit carryforwards generated fiscal 2001 cash payment company elects exchange credits cash company recognize value associated tax credit carryforwards receivable applicable taxing authority company follows sfas 109 accounting income taxes statement requires deferred income tax assets liabilities reflect impact temporary differences amount assets liabilities financial reporting purposes amounts measured tax laws regulations alexion pharmaceuticals inc notes consolidated financial statements components deferred income tax assets follows amounts thousands exercise price nonqualified stock options gives rise compensation included taxable income applicable employees deducted company federal state income tax purposes result exercise nonqualified stock options company related net operating loss carryforwards approximately 112 million used offset future taxable income realized related tax benefits net operating loss carryforwards credited directly paid capital reconciliation statutory federal income tax rate companys effective income tax rate follows company yet achieved profitable operations accordingly management believes tax benefits july 31 2001 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax assets alexion pharmaceuticals inc notes consolidated financial statements 17 unaudited quarterly financial information following condensed quarterly financial information amounts thousands except per share amounts alexion pharmaceuticals inc notes consolidated financial statements company required adopt sab 101 later july 31 2001 company elected adopt sab 101 quarter ended april 30 2001 retroactive august 1 2000 accordingly following quarterly information fiscal quarters ended october 31 2000 january 31 2001 reflects quarters previously reported prior adoption restated retroactive adoption sab 101 august 1 2000 noted column headings impact change resulted increase total revenues corresponding decrease loss cumulative effect change accounting principle 147000 quarters ended october 31 2000 january 31 2001 compared amounts previously reported form 10qs filed sec amounts thousands except per share amountsitem 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits 21 agreement plan merger among alexion pharmaceuticals inc pi acquisition company inc prolifaron inc dated september 22 20001 31 certificate incorporation amended2 32 bylaws2 41 specimen common stock certificate2 101 employment agreement dated april 1 2000 company dr leonard bell3 102 employment agreement dated september 21 2000 company dr katherine bowdish1 103 administrative research development facility lease dated may 9 2000 company knotter llc6 104 company’s 1992 stock option plan amended7 105 company’s 2000 stock option plan8 106 company’s 1992 outside directors stock option plan amended9 107 exclusive license agreement dated june 19 1992 among company yale university oklahoma medical research foundation3 108 license agreement dated september 30 1992 company yale university amended july 2 19932 109 license agreement dated august 1 1993 company biotechnology research development corporation “brdc” amended july 1 19952 1010 license agreement dated january 25 1994 company austin research institute2 1011 exclusive patent license agreement dated april 21 1994 company national institutes health2 1012 license agreement dated july 22 1994 company austin research institute2 1013 license agreement dated january 10 1995 company yale university2 1017 license agreement dated may 27 1992 company yale university amended september 23 19922 1018 agreement bound master agreement dated august 1 1993 company brdc2 1019 license agreement dated march 27 1996 company medical research council10 1020 license agreement dated may 8 1996 company enzon inc10 1021 asset purchase agreement date february 9 1999 company united states surgical corporation11 1022 collaboration agreement dated january 25 1999 company procter gamble company amended11 1023 letter agreement dated september 14 1999 company leonard bell11 1024 binding memorandum understanding dated december 11 2001 company procter gamble company 1025 research development facility lease dated february 1 2002 company pmsi srf llc12 211 subsidiaries alexion pharmaceuticals inc 231 consent pricewaterhousecoopers llp 991 certification pursuant 18 usc section 1350 adopted pursuant section 906 sarbanesoxley act 2002 992 risk factors 993 copy report previously issued arthur andersen llp reissued arthur andersen llp previously filed 1 incorporated reference report form 8k filed october 3 2000 2 incorporated reference registration statement form s1 reg 33300202 3 incorporated reference quarterly report form 10q quarter ended april 30 2000 4 incorporated reference annual report form 10k fiscal year ended july 31 2000 5 incorporated reference annual report form 10k fiscal year ended july 31 1997 6 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 7 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 8 incorporated reference registration statement form s8 reg 33369478 filed september 14 2001 9 incorporated reference registration statement form s8 reg 33371985 filed february 8 1999 10 incorporated reference annual report form 10k fiscal year ended july 31 1996 11 incorporated reference annual report form 10k fiscal year ended july 31 1999 12 incorporated reference quarterly report form 10q quarter ended january 31 2002  confidential treatment granted portions document  request confidential treatment filed certain portions indicated document confidential portions omitted filed separately commission required rule 24b2 b reports form 8k current report form 8k filed june 3 2002 adopting policy allowing directors officers company effect sales company’s securities exchange commission rule 10b51 current report form 8ka filed june 21 2002 replace arthur andersen llp company’s independent public accountants pricewaterhousecoopers llp effective may 31 2002 c exhibits see 3 financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated signature title date leonard bell leonard bell md chief executive officer secretary treasurer director principal executive officer october 24 2002 david w keiser david w keiser president chief operating officer director principal financial officer october 24 2002 barry p luke barry p luke vice president finance administration principal accounting officer october 24 2002 john h fried john h fried phd chairman board directors october 24 2002 jerry jackson jerry jackson director october 24 2002 max link max link phd director october 24 2002 joseph madri joseph madri phd md director october 24 2002 signature title date r douglas norby r douglas norby director october 24 2002 alvin parven alvin parven director october 24 2002 leonard bell certify 1 reviewed annual report form 10k alexion pharmaceuticals inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report date october 24 2002 leonard bell leonard bell md chief executive officer david w keiser certify 1 reviewed annual report form 10k alexion pharmaceuticals inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report date october 24 2002 david w keiser david w keiser president chief operating officer principal financial officer alexion pharmaceuticals inc index consolidated financial statements page report independent accountants consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements stockholders’ equity comprehensive loss consolidated statements cash flows notes consolidated financial statements report independent accountants board directors stockholders alexion pharmaceuticals inc opinion accompanying consolidated balance sheet july 31 2002 related consolidated statements operations stockholders’ equity comprehensive loss cash flows present fairly material respects financial position alexion pharmaceuticals inc subsidiaries july 31 2002 results operations cash flows year ended conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audit conducted audit statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audit provides reasonable basis opinion financial statements company july 31 2001 two years period ended july 31 2001 audited independent accountants ceased operations independent accountants expressed unqualified opinion financial statements revisions described note 2 report dated august 31 2001 discussed financial statements alexion pharmaceuticals inc july 31 2001 two years period ended july 31 2001 audited independent accountants ceased operations described note 2 financial statements revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” adopted company august 1 2001 audited transitional disclosures described note 2 opinion transitional disclosures 2001 2000 note 2 appropriate however engaged audit review apply procedures 2001 2000 financial statements company respect disclosures accordingly express opinion form assurance 2001 2000 financial statements taken whole discussed note 4 consolidated financial statements company changed method revenue recognition relating nonrefundable upfront licensing fees accordance staff accounting bulletin 101 fiscal 2001 pricewaterhousecoopers llp hartford connecticut october 18 2002 alexion pharmaceuticals inc consolidated balance sheets thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements stockholders’ equity comprehensive loss thousands alexion pharmaceuticals inc consolidated statements stockholders’ equity comprehensive loss continued thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements 1 organization operations alexion pharmaceuticals inc “alexion” “company” organized 1992 engaged development therapeutic products treatment wide array severe diseases including cardiovascular autoimmune disorders cancer company’s two lead product candidates antibodies address specific diseases arise human immune system attacks human body produces undesired inflammation company incurred consolidated losses since inception made product sales date company continue seek financing obtain regulatory approvals product candidates fund operations losses deemed appropriate establish manufacturing sales marketing distribution capabilities company expects incur substantial expenditures foreseeable future research development commercialization products company seek raise necessary funds public private equity debt financings bank loans collaborative arrangements corporate sources financing 2 summary significant accounting policies principles consolidation accompanying consolidated financial statements include alexion pharmaceuticals inc whollyowned subsidiaries alexion antibody technologies “aat” columbus farming corporation “columbus” results operations aat included company’s consolidated statements operations since september 23 2000 effective date prolifaron acquisition see note 3 columbus formed february 9 1999 acquire certain manufacturing assets tyco healthcare significant intercompany balances transactions eliminated consolidation cash equivalents cash equivalents stated cost approximates market includes shortterm highly liquid investments original maturities less 90 days marketable securities company invests marketable debt securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company classified marketable securities “available sale” accordingly carries securities aggregate fair value unrealized gains losses included comprehensive income loss component stockholders’ equity year ended july 31 2002 company realized gain sales marketable securities approximately 19 million significant realized gains losses recorded years ended july 31 2001 2000 company utilizes specific identification method computing realized gains losses july 31 2002 company’s marketable securities maximum alexion pharmaceuticals inc notes consolidated financial statementscontinued maturity less two years average approximately twelve months weighted average interest rate associated marketable debt securities 24 42 july 31 2002 2001 respectively following summary marketable securities july 31 2002 2001 amounts thousands goodwill july 2001 fasb issued sfas 141 “business combinations” sfas 142 “goodwill intangible assets” together significantly change accounting disclosures required activities related assets primary changes resulting standards consist cessation “pooling interests” method accounting goodwill intangible assets segregated amortized reviewed impairment disclosed within footnotes financial statements company adopted sfas 142 effective august 1 2001 adoption sfas 142 caused amortization relates 229 million goodwill acquired connection acquisition prolifaron see note 3 cease effective august 1 2001 prior adoption standard annual amortization expected approximately 33 million annually sevenyear period prospective basis goodwill subject annual impairment reviews conditions warrant interim reviews based upon estimated fair value impairment charges recorded component operating expenses period impairment determined impairment charge resulted upon adoption standard result company’s annual impairment assessment changes goodwill fiscal 2002 resulted primarily adjustments related tax benefits generated prolifaron prior acquisition alexion pharmaceuticals inc notes consolidated financial statementscontinued reconciliation reported net loss adjusted net loss amortization goodwill follows dollars thousands except per share amounts includes noncash charge iprd 21000 cumulative effect adoption sab 101 9118 b includes noncash charges iprd 121 cumulative effect adoption sab 101 052 longlived assets company accounts investments longlived assets accordance statement financial accounting standard sfas 121 “accounting impairment longlived assets longlived assets disposed of” sfas 121 requires company review longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable company reviewed longlived assets determined impairments exist revenue recognition contract research revenues recorded company consist research development support payments license fees collaborations third parties amounts received various government grants result company’s adoption sab 101 see note 4 upfront nonrefundable license fees received connection collaboration deferred amortized revenue based upon terms collaborative arrangement revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred research development support revenues recognized related work performed expenses incurred terms contracts development activities alexion pharmaceuticals inc notes consolidated financial statementscontinued unbilled reimbursable contract costs shown accompanying consolidated balance sheets represent reimbursable costs incurred connection research contracts yet billed company bills costs recognizes costs related revenues accordance terms contracts deferred revenue results cash received amounts receivable advance revenue recognition research development contracts see notes 4 10 research development expenses research development expenses expensed incurred unless recoverable contract research development expenses include following major types costs salaries benefit costs research license fees various contractor costs depreciation amortization lab facilities leasehold improvements building utilities costs related research space lab supplies comprehensive income loss company reports presents comprehensive income loss accordance sfas 130 “reporting comprehensive income” establishes standards reporting display comprehensive income loss components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income loss company’s comprehensive income loss arises net unrealized gains losses marketable securities company elected display comprehensive income loss component statements stockholders’ equity comprehensive loss stock options company accounts stock options granted employees accordance accounting principles board opinion 25 company accounts stock options granted consultants accordance emerging issues task force “eitf” 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” company recognizes compensation cost associated stock option grants applicable vesting term net loss per common share company computes presents net loss per common share accordance sfas 128 “earnings per share” basic net loss per common share based weighted average shares common stock outstanding period diluted net loss per common share assumes addition dilutive effect common shares equivalents outstanding period common share equivalents represent dilutive stock options convertible subordinated debt outstanding stock options warrants convertible subordinated debt entitled holders acquire 4685160 4689075 3829887 shares common stock july 31 2002 2001 2000 respectively difference basic diluted net loss per common share effect common share equivalents antidilutive periods presented alexion pharmaceuticals inc notes consolidated financial statementscontinued pro forma net loss per share reported accompanying statements operations years ended july 31 2002 2001 2000 assumes retroactive adoption sab 101 see note 4 segment reporting sfas 131 “disclosure segments enterprise related information” establishes annual interim reporting standards enterprise’s operating segments related disclosures products services geographic areas major customers company determined operates one segment addition revenues generated united states “us” entities longlived assets maintained us fair value financial instruments financial instruments include cash equivalents marketable securities reimbursable contract costs accounts payable notes payable convertible subordinated notes cash equivalents marketable securities carried fair value reimbursable contract costs accounts payable notes payable convertible subordinated notes carried cost management believes reimbursable contract costs accounts payable notes payable approximate fair value carrying value convertible subordinated notes exceeded fair value approximately 477 million based upon trading values reported july 31 2002 use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently issued accounting standards june 2002 financial accounting standards board “fasb” issued sfas 146 “accounting costs associated exit disposal activities” “sfas 146” statement addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” provisions sfas 146 effective exit disposal activities initiated december 31 2002 early application encouraged management believes adoption new standard material impact either operating results financial position company april 2002 fasb issued sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” statement rescinds sfas 4 “reporting gains losses extinguishment debt” sfas 44 “accounting intangible assets alexion pharmaceuticals inc notes consolidated financial statementscontinued motor carriers” sfas 64 “extinguishments debt made satisfy sinkingfund requirements” statement also amends sfas 13 “accounting leases” makes various technical corrections existing pronouncements corrections substantive nature provisions sfas 145 effective may 15 2002 adoption new standard impact operating results financial position company august 2001 fasb issued sfas 144 “accounting impairment disposal longlived assets” sfas 144 modifies rules accounting impairment disposal longlived assets supercedes sfas 121 new rules become effective fiscal years beginning december 15 2001 earlier application encouraged adoption standard august 1 2002 material impact operating results financial position company august 2001 fasb issued sfas 143 “accounting obligations associated retirement longlived assets” objective sfas 143 provide accounting guidance legal obligations associated retirement longlived assets retirement obligations included within scope pronouncement entity cannot avoid result either acquisition construction normal operation longlived asset components larger systems also fall pronouncement well tangible longlived assets indeterminable lives provisions sfas 143 effective financial statements issued fiscal years beginning june 15 2002 adoption standard august 1 2002 material impact operating results financial position company 3 alexion antibody technologies inc september 23 2000 company acquired prolifaron inc “prolifaron” privatelyheld biopharmaceutical company extensive combinatorial human antibody library technologies expertise acquisition accomplished prolifaron merged wholly owned subsidiary alexion renamed alexion antibody technologies inc consideration thereof company issued 355594 shares company’s common stock fully vested options purchase 44364 shares company’s common stock weighted average exercise price 4435 per share exchange outstanding equity prolifaron including fully vested options stock option plan fair value company’s common stock options issued date acquisition approximately 439 million prolifaron acquisition accounted purchase accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values date acquisition company allocated 210 million purchase price inprocess research development projects allocation represented estimated fair value based riskadjusted cash flows related incomplete research development projects date acquisition development projects yet reached technological feasibility research development progress alternative future uses accordingly costs expensed acquisition date merger date prolifaron conducting preclinical development testing activities goal develop technologies antibody discovery engineering identify new fully human therapeutic antibodies addressing multiple disease areas alexion pharmaceuticals inc notes consolidated financial statementscontinued drug candidates development represent innovative technologies addressing autoimmune inflammatory disorders cancer acquisition date prolifaron incurred approximately 57 million expenses development projects since inception 1998 expected spend approximately 85 million next seven years complete animal testing developmental drug candidates management anticipates inprocess projects would successful marketed us five nine years making purchase price allocation management considered present value calculations income analysis project accomplishments remaining outstanding items assessment overall contributions well technological regulatory risks value assigned purchased inprocess technology determined estimating costs develop acquired technology commercially viable products estimating resulting net cash flows projects discounting net cash flows present value revenue projection used value inprocess research development based estimates relevant market sizes growth factors expected trends technology nature expected timing new product introductions prolifaron competitors rates utilized discount net cash flows present value based estimated cost capital calculations due risks associated projected cash flow forecast discount rate 40 percent considered appropriate inprocess research development selected rate reflects inherent uncertainties surrounding successful development purchased inprocess technology useful life technology uncertainty technological advances unknown time projects successfully developed sales profitability combined companies may adversely affected future periods additionally value acquired intangible assets may become impaired research development projects acquired connection acquisition prolifaron expected continue line estimates described excess cost fair value net assets acquired amounted approximately 229 million reflected goodwill amortized approximately 7 years fiscal 2001 see goodwill note 2 following table summarizes allocation purchase price net assets acquired amounts thousands alexion pharmaceuticals inc notes consolidated financial statementscontinued following unaudited pro forma condensed consolidated information prepared give effect acquisition transaction occurred beginning period presented historical results adjusted reflect elimination onetime charge operations purchase acquired inprocess research development ii amortization goodwill arising transaction iii elimination income tax benefits expenses would realized combined basis amounts thousands except per share amounts sab 101 retroactively applied see note 4 pro forma information year ended july 31 2000 contract revenues would increase net loss would decrease 588000 basic diluted net loss per share would reduced 164 per share year unaudited pro forma condensed consolidated financial information necessarily indicative actual results would transaction occurred dates indicated purport indicate results future operations 4 cumulative effect accounting change december 1999 securities exchange commission staff issued staff accounting bulletin 101 “revenue recognition financial statements” sab 101 sab 101 summarized certain staff’s views applying generally accepted accounting principles revenue recognition financial statements specifically addressed revenue recognition biotechnology industry nonrefundable upfront fees prior implementation sab 101 nonrefundable license fees received upon execution license agreements recognized revenue immediately company adopted sab 101 fiscal 2001 therefore changed revenue recognition policy upfront nonrefundable payments immediate recognition deferral revenue upfront fee amortized revenue life agreement fiscal 1999 company recognized 10 million revenue nonrefundable upfront licensing fee received procter gamble pharmaceuticals “pg” see note 10 adoption sab 101 company required recognize 10 million license fee revenue average remaining patent lives underlying technologies 17 years agreement pg provided ongoing collaborative services funding specified clinical development manufacturing costs company’s pexelizumab product candidate license recognized lives patents agreement specified contractual term part change accounting method company recognized noncash cumulative effect adjustment 91 million august 1 2000 income tax effects related accounting change alexion pharmaceuticals inc notes consolidated financial statementscontinued company provided pro forma operating loss net loss net loss per share information company adopted sab 101 periods presented 5 property plant equipment property plant equipment recorded cost depreciated estimated useful lives assets involved depreciation amortization commences time assets placed service computed using straightline method estimated useful lives assets maintenance repairs charged expense incurred depreciation amortization fixed assets approximately 2953000 2095000 1429000 years ended july 31 2002 2001 2000 respectively summary property plant equipment follows amounts thousand 6 accrued expenses summary accrued expenses follows amounts thousands alexion pharmaceuticals inc notes consolidated financial statementscontinued 7 note payable company term note payable tyco healthcare formerly us surgical corporation bearing interest 6 per annum payable quarterly principal balance 392 million note matures may 2005 note payable collateralized certain assets columbus net book value approximately 284 million july 31 2002 8 convertible subordinated notes march 2000 company completed 120 million private placement 575 convertible subordinated notes due march 15 2007 notes bear interest payable semiannually september 15 march 15 year beginning september 15 2000 holders may convert portion notes common stock time march 15 2007 conversion price 106425 per share resulting issuance 1127555 shares common stock aggregate notes subordinated company’s existing future senior indebtedness effectively subordinated indebtedness liabilities including trade payables company subsidiaries indenture governing notes limit amount indebtedness including senior indebtedness company may incur noteholders may require company repurchase notes upon repurchase event defined loan agreement cash option company common stock 105 principal amount notes plus accrued unpaid interest notes entitled sinking fund time march 20 2003 ending march 14 2007 company may elect redeem solely discretion notes least 30 days notice whole time part certain premiums principal amount plus accrued interest company incurred deferred financing costs related offering approximately 40 million recorded consolidated balance sheet amortized component interest expense sevenyear term notes amortization expense associated financing costs approximately 570000 years ended july 31 2002 2001 9 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities government agencies order advance obtain technologies management believes important company’s overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones alexion pharmaceuticals inc notes consolidated financial statementscontinued limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies research development agreements generally provide company fund future project research clinical trials based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research clinical manufacturing development agreements generally provide company fund manufacturing development ongoing clinical trails order maintain rights agreements company may required provide minimum level funding support company may elect terminate arrangements accordingly company recognizes expense related arrangements period performance minimum fixed payments assuming nontermination agreements july 31 2002 next five years follows amounts thousands company achieve certain milestones related product development product license applications approvals additional payments would required addition payments july 31 2002 agreements contain milestone payment provisions aggregating approximately 242 million agreements also require company fund certain future costs associated filing patent applications 10 contract research revenues three years ended july 31 2002 company recorded contract research revenues research development support payments license fees collaboration third parties amounts received various government grants company pg entered exclusive collaboration january 1999 develop commercialize pexelizumab company granted pg exclusive license company’s intellectual property related pexelizumab right sublicense pg originally agreed fund generally clinical development manufacturing costs relating pexelizumab treatment inflammation caused alexion pharmaceuticals inc notes consolidated financial statementscontinued cardiopulmonary bypass surgery heart attack angioplasty see additionally pg agreed pay company 95 million payments included nonrefundable upfront 10 million license fee see note 4 milestone payments including 33 million milestone payments achievement certain sales thresholds research development support payments company also receive royalties worldwide sales pexelizumab indications company retain preferred position relative thirdparty manufacturers manufacture pexelizumab worldwide company share copromotion rights pg sell market distribute pexelizumab us grant pg exclusive rights sell market distribute pexelizumab outside us december 2001 company pg entered binding memorandum understanding “mou” pursuant revised january 1999 collaboration revised structure per mou company pg share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts prior december 2001 pg generally funding clinical development manufacturing costs pexelizumab revised collaboration per mou provides company pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us firm receive approximate equal share gross margin us sales company agreed bear first 50 projected costs associated us coronary artery bypass graft surgery “cabg” phase iii clinical trial costs pg bear second 50 final adjustment make even 50 sharing costs company pg agreed share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab pg agreed retain responsibility future development commercialization costs outside us company receiving royalty sales rest world company responsible royalties certain third party intellectual property worldwide intellectual property necessary additionally part mou company receive milestone payments achieving specified development steps regulatory filings approvals receive previously agreed sales milestones generally forego research development support payments pg right terminate collaboration time pg terminates prior incurring 50 cabgphase iii clinical trial costs pg required contribute towards approximately equal share us cabgphase iii clinical trial costs pg released future funding obligations circumstance rights exclusive license company’s intellectual property related pexelizumab revert back company entitled future pexelizumab revenues without sharing revenues pg part revised collaboration per mou pg agreed continue fund 100 costs complete two acute myocardial infarction “ami” phase ii clinical trials myocardial infarction “heart attack” patients recently completed enrollment company pg agreed share concurrently 50 future amiphase iii clinical trial costs company awarded various grants agencies us government fund specific research projects based upon costs incurred projects july 31 2002 company approximately 200000 additional funding available grants alexion pharmaceuticals inc notes consolidated financial statementscontinued summary revenues generated contract research collaboration grant awards follows amounts thousands 11 commitments july 31 2002 company leases headquarters primary research development facilities lease commenced august 2000 term ten years six months company required pay pro rata percentage real estate taxes operating expenses monthly fixed rent started approximately 80000 increasing approximately 104000 term lease company issued 200000 open letter credit secure lease pilot manufacturing plant used producing compounds clinical trials monthly fixed rent approximately 16700 company currently leasing facility month basis company leases additional research facility starting monthly fixed rent approximately 35000 increasing approximately 90000 facility expanded lease expires 2012 aggregate lease expense company’s facilities 1373000 1536000 694000 years ended july 31 2002 2001 2000 respectively lease expense recorded straightline basis applicable rental terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment follows amounts thousands alexion pharmaceuticals inc notes consolidated financial statementscontinued 12 common stock fiscal 2001 common stock sale october 2000 company filed shelf registration statement offer 300 million equity securities november 2000 company sold 23 million shares common stock price 9075 per share resulting proceeds approximately 2085 million net fees expenses approximately 201000 related transaction fiscal 2000 common stock sale november 1999 company sold 3415 million shares common stock price 14 per share followon public offering resulting net proceeds approximately 444 million net fees expenses 34 million related transaction 13 stock options warrants stock options fiscal 2001 stockholders company approved adoption 2000 stock option plan “2000 plan” elected terminate previous 1992 plan july 31 2002 stock options acquire 2164588 shares common stock outstanding 1992 plan 2000 plan incentive nonqualified stock options may granted maximum 1500000 shares common stock directors officers key employees consultants company july 31 2002 273990 options available grant 2000 plan fiscal 2001 stockholders company approved amendment 1992 stock option plan outside directors amendment increased number stock options granted initially qualifying directors well upon annual reelection board directors options generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions sfas 123 “accounting stockbased compensation” requires measurement fair value stock options warrants disclosed notes financial statements company computed pro forma disclosure required sfas 123 options granted using blackscholes option pricing model prescribed sfas 123 assumptions used follows compensation cost company’s stock option plans determined based fair value grant dates awards plans consistent method sfas 123 company’s net loss alexion pharmaceuticals inc notes consolidated financial statementscontinued pro forma net loss per common share would increased pro forma amounts indicated amounts thousands except per share amounts summary status company’s stock option plans july 31 2002 2001 2000 changes years ended presented table narrative fiscal 2002 options purchase 203855 shares common stock granted employees directors exercise prices equal fair value stock date grant fiscal 2001 options purchase 1220800 shares common stock granted employees directors exercise prices equal fair value stock date grant weighted average exercise price options 2916 per share weighted average fair value options date grant 2240 per option addition options purchase 10000 shares common stock granted employees exercise prices less fair value common stock date grant accordingly company recording compensation expense based upon difference vesting period associated options compensation expense associated options 65000 121000 years ended july 31 2002 2001 respectfully aggregate compensation expense approximately 138000 associated option grants expected recognized next two years weighted average exercise price options 7551 per share weighted average fair value options date grant 9227 per option alexion pharmaceuticals inc notes consolidated financial statementscontinued fiscal 2001 connection acquisition prolifaron see note 3 company also issued fully vested options purchase 44364 shares common stock weighted average exercise price 4435 per share weighted average fair value options date grant 10146 per option value options included component purchase price prolifaron date acquisition fiscal 2000 options purchase 644800 shares common stock granted employees directors consultants company exercise price equal fair value stock date grant company recording compensation expense based upon fair value options granted consultants vesting term compensation expense related options 12000 93000 239000 years ended july 31 2002 2001 2000 respectively company also records compensation expense certain options purchase common stock granted prior fiscal 2000 employees options subject shareholders approving increase total shares available granted plan exercise price options less fair value stock date shareholder approval accordingly company recording compensation expense based upon difference vesting period associated options compensation expense associated options 104000 194000 191000 years ended july 31 2002 2001 2000 respectively aggregate compensation expense approximately 36000 associated option grants expected recognized next year following table presents weighted average price life information significant option groups outstanding july 31 2002 warrants connection company’s initial public offering 1996 company sold underwriter nominal consideration warrants purchase 220000 shares common stock warrants exercisable price 990 per share period fortytwo 42 months commencing august 27 1997 fiscal 2000 warrants purchase 201883 shares exercised resulting proceeds 20 million company fiscal 2001 remaining warrants purchase 18117 shares exercised resulting proceeds approximately 179000 company alexion pharmaceuticals inc notes consolidated financial statementscontinued 14 rights purchase preferred stock february 1997 board directors company declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 see subject adjustment rights may exercised public announcement party acquired 20 company’s common stock commencement public announcement make tender offer 20 company’s common stock rights voting rights expire march 6 2007 may redeemed company price 001 per right time prior expiration acquisition 20 company’s stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock september 18 2000 board directors company amended purchase price preferred stock purchase rights purchase price one onehundredth share preferred stock issued upon exercise preferred stock purchase right increased 7500 72500 except increase purchase price terms conditions rights remain unchanged event company acquired merger business combination transaction 50 assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 15 401k plan company 401k plan employees may contribute 15 percent compensation maximum 11000 per employee calendar year 2001 company matches contributions rate 050 dollar deferred first 6 compensation company made matching contributions approximately 207000 177000 127000 years ended july 31 2002 2001 2000 respectively 16 income taxes july 31 2002 company available federal tax reporting purposes net operating loss carryforwards approximately 1626 million expire 2022 approximately 180 million resulted exercise nonqualified stock options discussed company also federal state research development credit carryforwards approximately 96 million begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions limits alexion pharmaceuticals inc notes consolidated financial statementscontinued company’s ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period company believes triggered limitation provisions result recent legislation state connecticut provides companies opportunity exchange certain research development tax credit carryforwards cash exchange foregoing carryforward research development credit program provides exchange research development credits rate 65 annual incremental research development credits defined year ended july 31 2002 company filed claim exchange fiscal 2001 incremental research development credit result recognized state tax benefit 700000 company follows sfas 109 “accounting income taxes” statement requires deferred income tax assets liabilities reflect impact “temporary differences” amount assets liabilities financial reporting purposes amounts measured tax laws regulations components deferred income tax assets follows amounts thousands exercise price nonqualified stock options gives rise compensation included taxable income applicable employees deducted company federal state income tax purposes result exercise nonqualified stock options company related net operating loss carryforwards approximately 180 million used offset future taxable income realized related tax benefits net operating loss carryforwards credited directly paid capital alexion pharmaceuticals inc notes consolidated financial statementscontinued reconciliation statutory federal income tax rate company’s effective income tax rate follows company yet achieved profitable operations accordingly management believes tax benefits july 31 2002 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax assets 17 unaudited quarterly financial information following condensed quarterly financial information amounts thousands except per share amountsitem 14 principle accountant fees services information required item set forth definitive proxy statement filed within 120 days end fiscal year covered annual report form 10k incorporated reference proxy statement item 15item 14 principle accountant fees services information required item set forth definitive proxy statement filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement item 15item 14 principal accountant fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement item 15a exhibits financial statement schedules 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 21 agreement plan merger among alexion pharmaceuticals inc pi acquisition company inc prolifaron inc dated september 22 2000 1 31 certificate incorporation amended13 32 bylaws amended 12 41 specimen common stock certificate 2 42 form amended restated senior debt indenture dated may 7 2004 alexion pharmaceuticals inc us bank national association trustee 16 43 form amended restated subordinated debt indenture dated may 7 2004 alexion pharmaceuticals inc us bank national association trustee 16 44 rights agreement alexion pharmaceuticals inc continental stock transfer trust company rights agent dated february 14 1997 17 45 amendment 1 rights agreement dated september 18 2000 alexion pharmaceuticals inc continental stock transfer trust company 18 46 amendment 2 rights agreement dated december 12 2001 alexion pharmaceuticals inc continental stock transfer trust company includes exhibit b form right certificate 19 47 amendment 3 rights agreement dated november 16 2004 alexion pharmaceuticals inc continental stock transfer trust company 20 48 indenture alexion pharmaceuticals inc us bank national association relating alexion pharmaceuticals inc’s 1375 convertible senior notes due 2012 21 49 registration rights agreement alexion pharmaceuticals inc morgan stanley co incorporated bear stearns co inc sg cowen co llc jp morgan securities inc 21 101 employment agreement dated october 20 2003 company dr leonard bell 10 102 employment agreement dated october 20 2003 company david w keiser 10 103 employment agreement dated october 20 2003 company dr stephen p squinto 10 104 administrative research development facility lease dated may 9 2000 company knotter llc3 105 company’s 1992 stock option plan amended 9 106 company’s 2000 stock option plan amended 12 107 company’s 1992 outside directors stock option plan amended 5 108 company’s 2004 incentive plan 14 109 exclusive license agreement dated june 19 1992 among company yale university oklahoma medical research foundation 2 1010 license agreement dated september 30 1992 company yale university amended july 2 1993 2 1011 exclusive patent license agreement dated april 21 1994 company national institutes health 2 1012 license agreement dated january 10 1995 company yale university 2 1013 license agreement dated may 27 1992 company yale university amended september 23 1992 2 1014 license agreement dated march 27 1996 company medical research council 5 1015 license agreement dated may 8 1996 company enzon inc 5 1016 asset purchase agreement date february 9 1999 company united states surgical corporation 6 1017 collaboration agreement dated january 25 1999 company procter gamble company amended 6 1018 binding memorandum understanding dated december 11 2001 company procter gamble company 7 1019 research development facility lease dated february 1 2002 company pmsi srf llc 8 1020 largescale product supply agreement dated december 18 2002 company lonza biologics plc amended 13 1021 industrial real estate lease dated january 1 2003 company spk development llc 9 1022 codevelopment cocommercialization agreement company xoma us llc dated december 17 2003 11 1023 employment agreement dated july 19 2005 company vikas sinha 15 1024 form stock option agreement directors 14 1025 form stock option agreement executive officers form 22 1026 form stock option agreement executive officers form b 22 1027 form restricted stock award agreement executive officers form 23 121 statement regarding computation ratio earnings fixed charges 13 211 subsidiaries alexion pharmaceuticals inc 231 consent pricewaterhousecoopers llp 311 certificate chief executive officer pursuant exchange act rules 13a14 15d14 adopted pursuant section 302 sarbanes oxley act 2002 312 certificate chief financial officer pursuant exchange act rules 13a14 15d14 adopted pursuant section 302 sarbanes oxley act 2002 321 certificate chief executive officer pursuant section 18 usc section 1350 adopted pursuant section 906 sarbanes oxley act 322 certificate chief financial officer pursuant section 18 usc section 1350 adopted pursuant section 906 sarbanes oxley act 1 incorporated reference report form 8k filed october 3 2000 2 incorporated reference registration statement form s1 reg 33300202 3 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 4 incorporated reference registration statement form s8 reg 33371985 filed february 8 1999 5 incorporated reference annual report form 10k fiscal year ended july 31 1996 6 incorporated reference annual report form 10k fiscal year ended july 31 1999 7 incorporated reference annual report form 10k fiscal year ended july 31 2002 8 incorporated reference quarterly report form 10q quarter ended january 31 2002 9 incorporated reference quarterly report form 10q quarter ended january 31 2003 10 incorporated reference annual report form 10k fiscal year ended july 31 2003 11 incorporated reference report form 8ka filed march 22 2004 12 incorporated reference quarterly report form 10q quarter ended january 31 2004 13 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 14 incorporated reference report form 8k filed december 16 2004 15 incorporated reference report form 8k filed september 2 2005 16 incorporated reference amendment 1 form s3 reg 333114449 filed may 10 2004 17 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 18 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 19 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 20 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 21 incorporated reference report form 8k reg 00027756 filed january 25 2005 22 incorporated reference quarterly report form 10q quarter ended january 31 2005 23 incorporated reference report form 8k reg 00027756 filed march 14 2005 confidential treatment granted portions document item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc consolidated financial statements july 31 2005 2004 alexion pharmaceuticals inc contents july 31 2005 2004 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc completed integrated audit alexion pharmaceuticals inc’s 2005 consolidated financial statements internal control financial reporting july 31 2005 audits 2004 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries july 31 2005 2004 results operations cash flows three years period ended july 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included management’s annual report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting july 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting july 31 2005 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp hartford connecticut october 4 2005 alexion pharmaceuticals inc consolidated balance sheets july 31 2005 2004 amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations years ended july 31 2005 2004 2003 amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive loss years ended july 31 2005 2004 2003 amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows years ended july 31 2005 2004 2003 amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts 1 organization summary significant accounting policies business alexion pharmaceuticals inc “alexion” organized 1992 engaged development biologic therapeutic products treatment severe diseases incurred consolidated losses since inception product sales date continue seek financing fund operating losses deemed appropriate establish manufacturing sales marketing distribution capabilities product candidates expect incur substantial expenditures foreseeable future research development commercialization product candidates seek raise necessary funds public private equity debt financings bank loans collaborative arrangements corporate sources financing principles consolidation accompanying consolidated financial statements include accounts alexion pharmaceuticals inc whollyowned subsidiaries alexion antibody technologies “aat” columbus farming corporation “cfc” intercompany balances transactions eliminated consolidation cash equivalents cash equivalents stated fair value approximates market include shortterm highly liquid investments original maturities less 90 days marketable securities invest marketable debt securities highly rated financial institutions investmentgrade debt instruments limit amount credit exposure one entity classified marketable securities “available sale” accordingly carry securities aggregate fair value unrealized gains losses included accumulated comprehensive loss separate component stockholders’ equity property plant equipment property plant equipment recorded original cost depreciation amortization plant equipment computed straightline basis estimated useful live assets longlived assets assess potential impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value amount recognized impairment charge year ended july 31 2005 impairment charges years ended july 31 2004 2003 impairment charges 760 2560 respectively alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts intangible assets identifiable intangible assets recorded original cost intangible assets finite lives amortized evenly estimated useful lives intangible assets indefinite lives amortized goodwill represents difference purchase price acquired businesses fair value net assets amortized test goodwill impairment least annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charge resulted upon adoption standard result company’s annual impairment assessment prepaid manufacturing costs cash advances paid us secure future longterm manufacturing production thirdparty contract manufacturers recorded prepaid manufacturing costs recognized period manufacturing production unit production method cash advances subject refund manufacturing facility unavailable scheduled forfeiture terminate scheduled production see note 10 revenue recognition record contract research revenues research development support payments license fees milestone payments collaboration third parties amounts received various government grants evaluate deliverables collaborative agreements determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value upfront nonrefundable license fees received connection collaboration deferred amortized revenue life agreement underlying technologies revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies theses costs expensed incurred entered certain research agreements share costs collaborator record costs research development expenses incurred portion costs reimbursed collaborator recorded reduction research development expense alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts stockbased compensation account stock options restricted stock utilizing intrinsic value method accordance accounting principles board opinion “apb” 25 “accounting stock issued employees” accordingly recognize compensation expense options option grants exercise price equal fair market value date grant incentive nonqualified stock options fixed number shares employees exercise price equal fair market value shares date grant also issued restricted stock consultants key employees record expense vesting periods adopted disclosure provisions sfas 123 “accounting stockbased compensation” amended sfas 148 “accounting stockbased compensation” transition disclosure” issuance sfas 123r significantly change way account grants stock options new pronouncement potential impact discussed section titled “recently issued accounting pronouncements” also occasion grant stock options consultants accordance emerging issues task force “eitf” 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” accordingly recognize compensation expense equal fair value awards amortize expense performance period fair value award estimated using blackscholes model reporting period performance complete changes fair value recorded compensation expense july 31 2005 compensation expense recognized outstanding stock option grants except noted compensation cost outstanding stock option grants determined based fair value grant date awards 2005 2004 2003 consistent fair value provisions sfas 123 net loss per share would adjusted pro forma amounts indicated stockbased compensation grants stock options presented include restricted stock expense reported part net loss additional options expected granted future years options vest several years pro forma results necessarily indicative future results alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts earnings loss per share eps basic eps computed dividing net loss weighted average number shares common stock outstanding period diluted eps reflects potential dilution could occur options contracts issue common stock exercised converted common stock due net loss convertible debt unvested restricted stock options granted stock option plan yet exercised antidilutive therefore considered diluted eps calculations convertible debt unvested restricted stock options entitled holders aquire 9604003 5669764 5148365 shares common stock years ended july 31 2005 2004 2003 respectively difference basic diluted net loss per common share effect common share equivalents antidilutive periods presented income taxes deferred income taxes provided differences income tax financial reporting bases assets liabilities statutory tax rates effect differences expected reverse valuation allowance deferred tax assets recorded extent cannot determine ultimate realization net deferred tax assets likely making determination may consider estimated future reversals existing temporary differences estimated future earnings available tax planning strategies extent estimates items reduced realized amount deferred tax assets considered realizable could adversely affected use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates segment reporting sfas 131 “disclosure segments enterprise related information” establishes annual interim reporting standards enterprise’s operating segments related disclosures products services geographic areas major customers determined operate one segment addition revenues generated united states entities longlived assets maintained united states reclassifications certain reclassifications made 2004 financial statements order conform 2005 presentation recently issued accounting standards december 2004 fasb issued sfas 123r revised 2004 “sharebased payment” “sfas 123r” replaces sfas 123 “accounting stockbased compensation” supersedes apb opinion 25 “accounting stock issued employees” sfas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first annual period june 15 2005 pursuant revisions sfas 123r april 2005 fasb obligated start expensing options commencement fiscal year august 1 2005 addition march 2005 sec issued staff accounting bulletin 107 sab 107 provides guidance regarding interaction sfas 123r certain sec rules regulations provides additional guidance regarding valuation sharebased payment arrangements public companies expect implement sfas 123r using modified prospective application method alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts may 2005 fasb issued fasb 154 “accounting changes error corrections” statement replaces apb opinion 20 accounting changes fasb statement 3 reporting accounting changes interim financial statements changes requirements accounting reporting change accounting principle statement applies voluntary changes accounting principle also applies changes required accounting pronouncement unusual instance pronouncement include specific transition provisions pronouncement includes specific transition provisions followed statement effective accounting changes corrections errors made fiscal years beginning december 15 2005 2 collaborations procter gamble pharmaceuticals collaboration december 2001 pg entered binding memorandum understanding mou pursuant january 1999 collaboration revised structure per mou pg share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts revised collaboration per mou provides pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us receive approximately 50 gross margin us sales pg agreed retain responsibility future development commercialization costs outside us receiving royalty sales outside us responsible royalties certain third party intellectual property worldwide intellectual property necessary additionally part mou receive milestone payments achieving specified development steps regulatory filings approvals pg agreed per mou share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well ami cabg phase iii clinical trial costs pg right terminate collaboration sublicense rights time pg terminates collaboration per mou pg required contribute share agreed obligations costs incurred prior termination may required contribute towards obligations incurred termination circumstance rights exclusive license intellectual property related pexelizumab would revert back us would entitled future pexelizumab revenues without sharing revenues pg sublicense rights sublicensee would required assume pg’s obligations collaboration rely pg development manufacture potential commercialization pexelizumab termination agreement pg sublicense collaboration rights could cause significant delays development manufacture potential commercialization pexelizumab result significant additional costs us terms mou may obligated reimburse pg 50 cancellation costs pg’s thirdparty pexelizumab manufacturing contract portion cancellation costs could amount much 8000 alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts xoma ltd collaboration december 2003 xoma us llc xoma entered collaborative agreement development commercialization rationally designed human cmpl agonist antibody treat chemotherapyinduced thrombocytopenia abnormal blood condition number platelets reduced potentially leading bleeding complications november 2004 xoma determined lead molecule cmpl agonist antibody collaboration meet criteria established program continued development xoma agreed continue joint development program terminated collaboration april 2005 terms agreement received 1500 upfront nonrefundable payment upon initiation collaboration originally recorded payment deferred research development payment recognized reduction research development expenses 8 years represents estimated length time achieve commercial viability termination agreement april 2005 recognized remaining balance approximately 1300 deferred payment reduction research development expenses july 31 2004 balance approximately 1400 license research development agreements entered number license research development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies necessary services management believes important overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application approval biologics license application bla agreements require minimum royalty payments based upon sales developed applicable technologies research development agreements generally provide us fund future research projects based upon agreements may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrolment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza biologics plc longterm commercial scale manufacture eculizumab see note 10 order maintain rights agreements may required provide minimum level funding support may elect terminate arrangements accordingly recognize expense related obligation related arrangements period performance minimum fixed payments assuming nontermination agreements july 31 2005 next five years follows alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts achieve certain milestones related product development product license applications approvals additional payments would required addition payments july 31 2005 agreements contain milestone payment provisions aggregating approximately 20300 agreements also require us fund certain future costs associated filing patent applications 3 marketable securities following table summarizes marketable securities unrealized losses 3 related holdings cash equivalents included accumulated comprehensive income year ended july 31 2005 alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts realized gains approximately 101 0 recorded year ended july 31 2005 2004 respectively realized losses recorded years ended july 31 2005 2004 utilize specific identification method computing realized gains losses july 31 2005 marketable securities maximum maturity less 2 years average approximately 6 months weighted average interest rate associated marketable debt securities 37 percent 19 percent july 31 2005 2004 respectively following table summarizes investment maturities july 31 2005 periodically review impairment investment securities whose unrealized losses remained unrealized six months determine unrealized losses temporary gross unrealized losses individual investment securities aggregated 566 411 july 31 2005 2004 respectively intend hold related investment securities maturity ability result consider unrealized losses temporary recorded loss consolidated statements operations following tables shows gross unrealized losses fair value investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position july 31 alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts investments categories shown table comprising 43 securities aggregate unrealized losses caused primarily interest rate increases 4 assets prepaid expenses current assets consist following july 31 alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts 5 property plant equipment summary property plant equipment follows leasehold improvements amortized term lease estimated useful life asset whichever shorter depreciation amortization fixed assets approximately 2996 2865 3108 years ended july 31 2005 2004 2003 respectively year ended july 31 2005 utilizing services third party appraisers performed inventory fixed assets performance inventory found assets cost approximately 4600 accumulated depreciation approximately 4500 currently included accounting records longer service held us consequently recorded loss disposal assets approximately 100 year ended july 31 2005 classified property plant equipment cfc property plant equipment held sale july 31 2004 per guidelines set forth sfas 144 “accounting impairment disposal longlived assets” see note 6 year ended july 31 2003 concluded investment unigraft program meet sufficient criteria continued development termination unigraft program resulted impairment cfc’s unigraft manufacturing assets causing write approximately 760 2560 assets years ended july 31 2004 2003 respectively 6 note payable february 1999 cfc purchased substantially assets unigraft xenotransplantation program including principally land buildings laboratory equipment partner program us surgical corporation division tyco international ltd tyco purchase financed issuance cfc 3900 note payable tyco upon cfc’s failure make quarterly interest payment due tyco august 2003 cfc defaulted note quarter ended october 31 2003 conjunction event default notified tyco unigraft xenotransplantation program cfc activities terminated quarter ended october 31 2004 offer 450 thirdparty accepted tyco cfc’s assets tyco retained proceeds sale cfc’s assets extinguished note unpaid interest transferred assets tyco october 31 2004 since cfc’s assets alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts consisting property plant equipment insufficient satisfy 3900 note unpaid interest 300 obligations cfc tyco formally discharged cfc obligations result extinguished 3900 note unpaid interest 300 offset transfer cfc’s assets 450 tyco consequently recorded resulting gain 3804 gain extinguishment note payable first quarter fiscal 2005 7 accrued expenses summary accrued expenses follows july 31 8 convertible notes january 2005 sold 150000 principal amount 1375 convertible senior notes due february 1 2012 “1375 notes” private placement qualified institutional buyers pursuant rule 144a securities act 1933 amended interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 317914 shares common stock equivalent conversion price approximately 3146 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity financial covenants related debt however certain designated events could occur liquidation tender offer consolidation merger recapitalization otherwise connection 50 common stock exchanged converted acquired constitutes solely right receive consideration least 90 common stock listed us national exchange market holder elects convert 1375 notes upon occurrence designated event holder entitled receive additional number shares common stock conversion date additional shares intended compensate holders loss time value conversion option set according table within offering document capped event shares issuable upon conversion note exceed 4291 per 1 principal amount incurred deferred financing costs related offering approximately 4800 recorded consolidated balance sheet amortized component interest expense sevenyear term notes alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts shelf registration statement covering resale notes common stock issuable upon conversion notes declared effective sec may 25 2005 net proceeds approximately 145200 offering used redeem entire outstanding 120000 principal amount 575 convertible subordinated notes due march 2007 “575 notes” general corporate purposes march 15 2005 redeemed 575 notes outstanding redemption price 101643 1 principal amount 575 notes paid redemption premium related notes approximately 2000 2005 incurred deferred financing costs related offering approximately 4000 amortized component interest expense term notes remaining balance deferred financing costs approximately 1200 redemption date difference amount paid including redemption premium carrying value notes including remaining deferred financing costs recognized 3185 loss early extinguishment convertible notes amortization expense associated deferred financing costs years ended july 31 2005 2004 2003 approximately 686 573 respectively cash paid interest expense years ended july 31 2005 2004 2003 approximately 7966 6901 7135 respectively 9 leases capital leases lease office equipment capital lease agreements expiring 2008 assets liabilities capital lease recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives amortization assets capital lease included depreciation expense july 31 2005 cost equipment capital lease 418 net book value 215 minimum future lease payments capital lease july 31 2005 interest rate capital lease 5625 imputed based lower incremental borrowing rate inception lease operating leases july 31 2005 lease headquarters primary research development facilities cheshire ct lease commenced august 2000 term ten years six months required pay pro rata percentage real estate taxes operating expenses monthly fixed rent started approximately 80 increasing approximately 104 term lease issued 200 open letter credit secure lease alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts january 2003 entered lease agreement pilot manufacturing plant associated labs offices new ct used producing compounds clinical trials monthly fixed rent started approximately 36 increasing approximately 50 term lease expires 2007 option extend lease additional three years furthermore lease additional research space san diego ca starting monthly fixed rent approximately 35 increasing approximately 90 facility expanded lease expires 2012 aggregate lease expense facilities 2296 2176 1998 years ended july 31 2005 2004 2003 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment july 31 2005 10 commitments contingencies purchase commitments largescale product supply agreement dated december 18 2002 lonza agreement lonza biologics plc lonza us relating manufacture product candidate eculizumab amended lonza amendment april 2004 lonza amendment facility lonza manufacture eculizumab changed manufacturing capacity required purchase reduced future potential payments 10000 us lonza relating achievement eculizumab sales milestones 15000 payable us relating manufacturing yields achieved lonza eliminated august 2004 paid lonza additional 3500 nonrefundable advance lonza amendment addition amounts would required pay connection voluntary termination lonza agreement us changed lonza agreement amended lonza amendment terminate lonza agreement prior september 30 2006 may required pay different amounts depending lonza agreement terminated zero approximately 10000 terminate lonza agreement september 30 2006 may required pay batches product scheduled manufacture 12 months following termination amounts paid lonza consideration lonza agreement reflected prepaid manufacturing costs within accompanying balance sheet recognized additional alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts manufacturing costs batches manufactured quarterly basis evaluate plans proceed production agreement depends upon clinical development programs’ progress well commercialization plans addition evaluate prepaid manufacturing costs estimated net realizable value “nrv” estimated nrv positive portion prepaid manufacturing cost may recognized expense indemnifications enter indemnification provisions agreements companies ordinary course business typically business partners clinical sites suppliers pursuant agreements generally indemnify hold harmless agree reimburse indemnified parties losses suffered incurred indemnified parties connection us patent copyright intellectual property infringement claim third party respect products use testing product candidates term indemnification agreements generally perpetual potential amount future payments could required make indemnification agreements unlimited incurred material costs defend lawsuits settle claims related indemnification agreements result estimated fair value agreements minimal accordingly liabilities recorded agreements july 31 2005 11 income taxes july 31 2005 available federal tax reporting purposes net operating loss carry forwards approximately 439800 expire 2025 approximately 27400 resulted exercise nonqualified stock options discussed also federal state research development credit carry forwards approximately 16127 begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions limit ability utilize net operating loss tax credit carry forwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered however limitation us minimal years ended july 31 2005 2004 limitation approximately 1402 annually state connecticut provides companies opportunity exchange certain research development tax credit carry forwards cash exchange foregoing carry forward research development credits program provides exchange research development credits rate 65 percent annual incremental nonincremental research development credits defined tax year ended july 31 2005 plan file claims exchange fiscal 2005 research tax development credits therefore recognized state tax benefit approximately 765 state tax benefit excludes estimated capitalbased state taxes approximately 215 recorded operating expense components deferred income tax assets follows alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts yet achieved profitable operations accordingly management believes tax benefits july 31 2005 satisfy realization criteria set forth sfas 109 recorded valuation allowance total deferred tax asset exercise nonqualified stock options gives rise compensation included taxable income applicable employees deducted us federal state income tax purposes result exercise nonqualified stock options related net operating loss carry forwards approximately 27400 used offset future taxable income realized related tax benefits net operating loss carry forwards credited directly paidin capital reconciliation statutory federal income tax rate effective income tax rate follows 12 stock options restricted stock options year ended july 31 2005 one stock option plan 2004 incentive plan “2004 plan” 2000 stock option plan “2000 plan” 1992 stock option plan outside directors “1992 outside directors’ plan” terminated december 2004 adoption 2004 plan 2004 plan common stock well incentive nonqualified stock options may granted maximum 3093519 shares common stock directors officers key employees consultants amount shares authorized granting includes 593519 shares transferred 2000 plan stock options granted plans maximum term ten years date grant exercise price less fair value stock grant date generally vest four years july 31 2005 2441828 shares available issuance 2004 plan purpose 2004 plan aid us attracting retaining motivating rewarding employees nonemployee directors consultants us subsidiaries affiliates provide alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts equitable competitive compensation opportunities recognize individual contributions reward achievement goals promote creation longterm value stockholders closely aligning interests participants stockholders plan authorizes stockbased cashbased incentives participants year ended july 31 2001 options purchase 10000 shares common stock granted employee exercise prices less fair value date grant accordingly recorded compensation expense based upon difference exercise price fair value vesting period associated options compensation expense associated options 5 67 65 years ended july 31 2005 2004 2003 respectively weighted average exercise price options 7551 per share weighted average fair value options date grant 9227 per option also record compensation expense certain options purchase common stock granted prior july 31 2001 employees consultants compensation expense associated options 0 17 78 years ended july 31 2005 2004 2003 respectively compensation expense related options issued consultants 132 22 4 years ended july 31 2005 2004 2003 respectively summary status stock option plans july 31 2005 2004 2003 changes years ended presented table narrative alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts following table presents weighted average price life information significant option groups outstanding july 31 2005 weighted average fair value date grant options granted 2005 2004 2003 1427 1325 858 per option respectively fair value options date grant estimated using blackscholes model following weighted average assumptions restricted stock year ended july 31 2005 109800 shares restricted stock generally vest four years grant date issued certain key employees consultants compensation expense approximately 238 related restricted stock recorded year ended 3000 shares restricted stock cancelled year ended 2005 prior 2005 restricted stock issued balance deferred compensation related restricted stock grants noted approximately 1938 13 common preferred stock common september 2003 sold 3600000 shares common stock price 1300 per share resulting net proceeds approximately 43900 net underwriting discounts fees expenses approximately 2900 related transaction july 2004 sold 5500000 shares common stock price 1550 per share resulting net proceeds approximately 80900 net underwriting discounts fees expenses approximately 4400 related transaction year ended july 31 2005 sales common stock occurred exercise stock options alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 see subject adjustment rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2007 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock september 18 2000 board directors amended purchase price preferred stock purchase rights purchase price one onehundredth share preferred stock issued upon exercise preferred stock purchase right increased 7500 72500 except increase purchase price terms conditions rights remain unchanged event acquired merger business combination transaction 50 percent assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 14 accumulated comprehensive loss components accumulated comprehensive losses july 31 15 401k plan qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions rate 050 dollar deferred first 6 percent compensation made matching contributions approximately 390 330 291 years ended july 31 2005 2004 2003 respectively alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts 16 contract research revenues awarded various grants agencies us government fund specific research projects july 2004 received approval grant amounting approximately 700 national institutes health fund specific research project november 2004 department defense awarded us grant approximately 700 fund additional specific research years ended july 31 2005 2004 2003 recorded approximately 588 revenue previously deferred related upfront payment received pg fiscal year 2004 pg revenue primarily included milestone receivable 4000 concurrent dosing first patient apexami clinical trial see note 2 summary revenues generated contract research collaboration grant awards july 31 follows 17 financial instruments following methods assumptions used us estimating fair value disclosures financial instruments • cash equivalents marketable securities carried approximate fair value • milestone receivable reimbursable contract costs accounts payable notes payable carried cost believe approximate fair value short term maturity period • fair market value convertible notes determined based upon trading values reported july 31 2005 alexion pharmaceuticals inc notes consolidated financial statements july 31 2005 2004 amounts thousands except per share amounts 18 subsequent event august 2005 sold 2500000 shares common stock public offering 2675 per share resulting gross proceeds sale 66875 incurred underwriting discounts commissions 2145 086 per share well expenses resulting net proceeds 64530 19 quarterly financial information unaudited following condensed quarterly financial informationitem 14 principal accountant fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end year ended december 31 2006 covered annual report form 10k incorporated herein reference proxy statement item 15item 14 principal accountant fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end year ended december 31 2007 covered annual report form 10k incorporated herein reference proxy statement item 15item 14 principal accountant fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end year ended december 31 2008 covered annual report form 10k incorporated herein reference proxy statement item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end year ended december 31 2009 covered annual report form 10k incorporated herein reference proxy statement item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14principal accounting fees services information required item set forth definitive proxy statement alternatively provided amendment annual report caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement amendment annual report part iv item 15item 14 exhibits financial statement schedules reports form 8k a1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits previously filed 1 incorporated reference companys registration statement form s1 reg 33300202 2 incorporated reference companys quarterly report form 10q quarter ended april 30 2000 3 incorporated reference companys annual report form 10k fiscal year ended july 31 1997 4 incorporated reference companys registration statement form s8 reg 33371879 filed february 5 1999 5 incorporated reference companys registration statement form s8 reg 33371985 filed february 8 1999 6 incorporated reference companys amendment 1 registration statement forms s1 reg 33319905 filed april 4 1997 7 incorporated reference companys annual report form 10k fiscal year ended july 31 1996 8 incorporated reference companys annual report form 10k fiscal year ended july 31 1998 9 incorporated reference companys annual report form 10k fiscal year ended july 31 1999 confidential treatment granted portions document b reports form 8k none c exhibits see a3 financial statement schedules see a2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized october 5 2000 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc consolidated financial statements july 31 2000 1999 three years period ended july 31 2000 together report independent public accountants alexion pharmaceuticals inc index consolidated financial statements report independent public accountants board directors stockholders alexion pharmaceuticals inc audited accompanying consolidated balance sheets alexion pharmaceuticals inc delaware corporation subsidiary july 31 2000 1999 related consolidated statements operations stockholders equity cash flows three years period ended july 31 2000 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion consolidated financial statements referred present fairly material respects consolidated financial position alexion pharmaceuticals inc subsidiary july 31 2000 1999 consolidated results operations cash flows three years period ended july 31 2000 conformity accounting principles generally accepted united states arthur andersen llp hartford connecticut september 5 2000 except respect matter discussed note 15 date september 22 2000 alexion pharmaceuticals inc consolidated balance sheets amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements stockholders equity amounts thousands alexion pharmaceuticals inc consolidated statements stockholders equity amounts thousands continued alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements 1 organization operations alexion pharmaceuticals inc alexion company organized 1992 engaged development proprietary products treatment cardiovascular autoimmune neurologic disorders company currently conducting phase ii clinical trials two lead c5 inhibitor product candidates 5g11sc 5g11 company also developing apogen immunotherapeutic products target tcells related disorders developing therapies employing transplantation cells species humans known xenotransplantation company incurred consolidated losses since inception made product sales date company may need additional financing obtain regulatory approvals product candidates fund operating losses deemed appropriate establish manufacturing sales marketing distribution capabilities company expects incur substantial expenditures foreseeable future research development commercialization products company seek raise necessary funds public private equity debt financing bank loans collaborative arrangements corporate sources financing 2 summary significant accounting policies principles consolidation accompanying consolidated financial statements include alexion pharmaceuticals inc whollyowned subsidiary columbus farming corporation columbus formed february 9 1999 acquire certain manufacturing assets united states surgical corporation us surgical subsidiary tyco international see notes 3 5 significant intercompany balances transactions eliminated consolidation cash equivalents cash equivalents stated cost approximates market includes shortterm highly liquid investments original maturities less three months marketable securities company invests marketable debt securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company classified marketable securities available sale accordingly carries securities aggregate fair value unrealized gains losses included comprehensive income loss component stockholders equity july 31 2000 companys marketable securities maximum maturity less two years average approximately twelve months weighted average interest rate associated marketable debt securities 69 57 july 31 2000 1999 respectively alexion pharmaceuticals inc notes consolidated financial statements continued 2 summary significant accounting policies continued following summary marketable securities july 31 2000 1999 dollars thousands property plant equipment property plant equipment recorded cost depreciated estimated useful lives assets involved depreciation commences time assets placed service computed using straightline method estimated useful lives assets see note 3 maintenance repairs charged expense incurred longlived assets company accounts investments longlived assets accordance statement financial accounting standard 121 accounting impairment longlived assets longlived assets disposed sfas 121 sfas 121 requires company review longlived assets impairment whenever events changes circumstances indicate carrying amount asset may recoverable company reviewed longlived assets determined impairments exist revenue recognition contract research revenues recorded company consist research development support payments license fees milestone payments collaborations third parties amounts received various government grants research development support revenues recognized related work performed expenses incurred terms contracts development activities revenues derived achievement milestones recognized milestone achieved nonrefundable license fees received exchange specific rights companys technologies research potential alexion pharmaceuticals inc notes consolidated financial statements continued 2 summary significant accounting policies continued products markets recognized revenues earned accordance terms contracts see recently issued accounting standard unbilled reimbursable contract costs shown accompanying consolidated balance sheets represent reimbursable costs incurred connection research contracts yet billed company bills costs recognizes costs related revenues accordance terms contracts deferred revenue results cash received amounts receivable advance revenue recognition research development contracts see note 8 research development expenses research development costs expensed period incurred use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates comprehensive income loss company reports presents comprehensive income loss accordance sfas 130 reporting comprehensive income establishes standards reporting display comprehensive income loss components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income loss companys comprehensive income loss arises net unrealized gains losses marketable securities company elected display comprehensive income loss component statements stockholders equity net loss per common share company computes presents net loss per common share accordance sfas 128 earnings per share company computes basic net loss per share dividing net loss weighted average shares common stock outstanding year difference basic diluted net loss per common share effect stock options warrants convertible subordinated debt would included computation diluted net loss per share antidilutive periods presented outstanding stock options warrants convertible subordinated debt entitled holders acquire 3829887 2568587 1947986 shares common stock july 31 2000 1999 1998 respectively alexion pharmaceuticals inc notes consolidated financial statements continued 2 summary significant accounting policies continued recently issued accounting standards staff accounting bulletin 101 sab 101 revenue recognition issued december 1999 sab 101 require companies recognize certain upfront nonrefundable fees life related collaboration agreement fees received conjunction collaboration agreements multiple elements company required adopt new accounting principle cummulative charge retained earnings statements operations accordance provisions apb opinion 20 fiscal 2001 company believes adoption sab 101 material impact future operating results applies 100 million upfront nonrefundable payment received connection collaboration procter gamble see note 8 companys historical financial statements reflect payment revenue year ended july 31 1999 based guidance currently available company required record 100 million fee revenue future life defined collaboration agreement july 31 2000 company yet adopted new accounting principle june 1998 financial accounting standards board fasb issued sfas 133 accounting derivative financial instruments hedging activities sfas 133 provides comprehensive consistent standard recognition measurement derivatives hedging activities sfas 133 effective fiscal years beginning june 15 2000 june 1999 fasb issued sfas 137 accounting derivative financial instruments hedging activitiesdeferral effective date sfas 133an amendment sfas 133 sole purpose updating effective date adoption sfas 133 january 1 2001 company believe adoption sfas 133 impact results operations financial condition company holds derivative financial instruments engage hedging activities 3 property plant equipment summary equipment follows dollars thousand 1999 company acquired land building additional laboratory equipment total cost approximately 39 million financed note payable us surgical see note 5 alexion pharmaceuticals inc notes consolidated financial statements continued 4 accrued expenses summary accrued expenses follows dollars thousands 5 notes payable summary notes payable follows dollars thousands future repayments notes payable scheduled follows dollars thousands 6 convertible subordinated notes march 2000 company completed 120 million private placement 575 convertible subordinated notes due march 15 2007 notes bear interest payable semiannually september 15 march 15 year beginning september 15 2000 holders may convert alexion pharmaceuticals inc notes consolidated financial statements continued 6 convertible subordinated notes continued portion notes common stock time march 15 2007 conversion price 106425 per share notes subordinated companys existing future senior indebtedness effectively subordinated indebtedness liabilities including trade payables company subsidiary indenture governing notes limit amount indebtedness including senior indebtedness company subsidiary may incur noteholders may require company repurchase notes upon repurchase event defined loan agreement cash option company common stock 105 principal amount notes plus accrued unpaid interest notes entitled sinking fund time march 20 2003 ending march 14 2007 company may redeem notes least 30 days notice whole time part certain premiums principal amount plus accrued interest company incurred deferred financing costs related offering approximately 40 million recorded consolidated balance sheet amortized component interest expense sevenyear term notes amortization expense associated financing costs 185000 year ended july 31 2000 7 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities government agencies order advance obtain technologies management believes important companys overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies research development agreements generally provide company fund future project research one ten years based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research companys policy expense research development payments incurred alexion pharmaceuticals inc notes consolidated financial statements continued 7 license research development agreements continued minimum payments assuming nontermination agreements july 31 2000 next five years follows dollars thousands company achieve certain milestones related product development product license applications approvals additional payments would required agreements also require company fund certain costs associated filing patent applications 8 contract research revenues three years ended july 31 2000 company recorded contract research revenues research development support payments license fees milestone payments collaboration third parties amounts received various government grants february 1999 part termination us surgical collaborative research development agreement company purchased certain manufacturing assets effected return technology rights xenotransplantation program us surgical company financed asset purchase 39 million note payable us surgical see note 5 november 1997 company us surgical awarded threeyear 2 million cooperative agreement commerce departments national institute standards technology nist fund joint xenotransplantation project agreement modified single entity agreement february 1999 october 1998 company awarded another threeyear 2 million agreement nist fund xenotransplantation project november 1999 company awarded threeyear 2 million agreement nist fund another xenotransplantation project january 1999 company procter gamble pharmaceuticals inc pg entered exclusive collaboration develop commercialize 5g11sc one companys lead product candidates collaboration company initially pursue development 5g11sc treatment inflammation caused cardiopulmonary bypass surgery heart attack angioplasty pg agreed fund clinical development manufacturing costs relating 5g11sc indications additionally pg agreed pay company 95 million payments include nonrefundable upfront license fee milestone payments research development support payments company also receive royalties worldwide sales 5g11sc indications company also preferred position relative thirdparty manufacturers manufacture 5g11sc worldwide company shares copromotion rights pg sell market distribute 5g11sc united states granted pg exclusive rights sell market distribute 5g11sc outside united states july 31 2000 company recorded revenues 375 million pg including receiving nonrefundable upfront alexion pharmaceuticals inc notes consolidated financial statements continued 8 contract research revenues continued license fee 10 million fiscal 1999 275 million research development support expenses see note 2 recently issued accounting standards related revenue recognition summary revenues generated contract research collaboration grant awards follows dollars thousands 9 commitments company entered threeyear fiveyear employment agreements executives agreements provide individuals receive aggregate annual base salaries approximately 914000 july 31 2000 individuals may also receive discretionary bonus awards determined board directors july 31 2000 company leases administrative offices portion research development facilities operating lease 25 science park new connecticut science park may 2000 company entered new lease headquarters research development facilities cheshire connecticut lease commenced august 2000 term ten years six months occupancy leased facility contingent upon timely departure current tenant subsequent additional work completed landlord site company lease occupy total 82000 square feet space company expects incur initial leasehold improvements relocation costs aggregating approximately 25 million 16000 incurred july 31 2000 companys option landlord required fund 25 million improvements financing arrangement payable term lease 11 per annum addition company required pay pro rata percentage real estate taxes operating expenses monthly fixed rent starts approximately 80000 increasing approximately 95500 term lease company issued 200000 open letter credit secure lease pilot manufacturing plant used producing compounds clinical trials remain current facility encompassing approximately 21000 square feet labs offices science park monthly fixed rent plant starts approximately 16500 increasing 18300 december 2002 lease expense companys facilities 694000 420000 415000 years ended july 31 2000 1999 1998 respectively alexion pharmaceuticals inc notes consolidated financial statements continued 9 commitments continued future minimum annual rental payments july 31 2000 noncancellable operating leases primarily equipment approximately 56000 32000 five years ended july 31 2004 respectively 10 common stock preferred stock fiscal 2000 secondary public offering november 1999 company sold 3415 million shares common stock price 14 per share followon public offering resulting net proceeds approximately 444 million company fiscal 1998 private placements september 1997 company completed private placement 400000 shares series b convertible preferred stock aggregate consideration 10 million single institutional investor biotech target sa whollyowned subsidiary bb biotech ag net proceeds company approximately 95 million investor entitled dividend 225 per share series b convertible preferred stock held march 4 1998 march 1998 investor converted preferred stock 935782 shares common stock dividends 900000 paid delivery additional 70831 shares companys common stock also march 1998 biotech target sa purchased additional 670000 shares common stock aggregate consideration approximately 88 million september 1997 company sold 166945 shares common stock us surgical aggregate consideration 30 million sale common stock made connection modification joint development agreement company us surgical 11 stock options warrants stock options companys 1992 stock option plan amended incentive nonqualified stock options may granted maximum 31 million shares common stock directors officers key employees consultants company companys 1992 stock option plan outside directors amended company registered additional 200000 shares common stock issuance upon exercise options granted plan options generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions statement financial accounting standard 123 accounting stockbased compensation sfas 123 requires measurement fair value stock options warrants included statement income disclosed notes financial statements company determined continue account stockbased compensation employees accounting principles board opinion 25 elect disclosureonly alternative sfas 123 company computed pro forma disclosure required sfas 123 options granted alexion pharmaceuticals inc notes consolidated financial statements continued 11 stock options warrants continued using blackscholes option pricing model prescribed sfas 123 weighted average assumptions used follows compensation cost companys stock option plans determined based fair value grant dates awards plans consistent method sfas 123 companys net loss pro forma net loss per common share would increased pro forma amounts indicated dollars thousands except per share amounts summary status companys stock option plans july 31 2000 1999 1998 changes years ended presented table narrative fiscal 1998 options purchase 279750 shares common stock granted employees exercise prices equal fair value stock date grant fiscal 1999 options purchase 513500 shares common stock granted employees exercise prices equal fair value stock date grant weighted alexion pharmaceuticals inc notes consolidated financial statements continued 11 stock options warrants continued average exercise price options 998 per share weighted average fair value options date grant 589 per option addition options purchase 267250 shares common stock granted employees subject shareholders approving increase total shares available granted plan options granted exercise price 900 per share equal fair value common stock date grant however exercise price options less fair value stock date shareholder approval accordingly company recording compensation expense based upon difference vesting period associated options compensation expense associated options 191000 132000 years ended july 31 2000 1999 respectively aggregate compensation expense approximately 430000 associated option grants expected recognized next two years weighted average fair value options date shareholder approval 773 per option fiscal 2000 options purchase 644800 shares common stock granted employees consultants company exercise price equal fair value stock date grant accordance eitf 9618 accounting equity instruments issued employees acquiring conjunction selling goods services company recording compensation expense based upon fair value options granted consultants vesting term compensation expense related options 239000 year ended july 31 2000 following table presents weighted average price life information significant option groups outstanding july 31 2000 warrants connection companys initial public offering 1996 company sold underwriter nominal consideration warrants purchase 220000 shares common stock warrants exercisable price 990 per share period fortytwo 42 months commencing august 27 1997 fiscal 2000 warrants purchase 201883 shares exercised resulting proceeds 20 million company alexion pharmaceuticals inc notes consolidated financial statements continued 12 rights purchase preferred stock february 1997 board directors company declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 subject adjustment rights may exercised public announcement party acquired 20 companys common stock commencement public announcement make tender offer 20 companys common stock rights voting rights expire march 6 2002 may redeemed company price 01 per right time prior expiration acquisition 20 companys stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock event company acquired merger business combination transaction 50 assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 13 401k plan company 401k plan employees may contribute 15 percent compensation maximum 10500 per employee calendar year 2000 effective january 1998 company matching contributions 050 dollar deferred first 6 compensation authorized board directors company matching contributions approximately 127000 85000 48000 years ended july 31 2000 1999 1998 respectively 14 income taxes july 31 2000 company available federal tax reporting purposes net operating loss carryforwards approximately 646 million expire 2020 company also federal state research development credit carryforwards approximately 56 million begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions may limit companys ability utilize net operating loss tax credit carryforwards given year certain events occur including cumulative changes ownership interests excess 50 threeyear period accordingly assurance companys ability utilize existing net operating loss tax credit carryforwards future periods limited result effect changes ownership excess 50 three year period company follows sfas 109 accounting income taxes statement requires deferred income tax assets liabilities reflect impact temporary differences amount assets liabilities financial reporting purposes amounts measured tax laws regulations alexion pharmaceuticals inc notes consolidated financial statements continued 14 income taxes continued components deferred income taxes follows dollars thousands company yet achieved profitable operations accordingly management believes tax benefits july 31 2000 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax assets 15 subsequent event september 2000 company acquired outstanding stock options prolifaron inc formerly privately held company possesses combinatorial human antibody library technologies expertise approximately 41 million company finance acquisition issuance 400000 shares common stock options aggregate acquisition accounted purchase method accountingitem 14 principal accounting fees services information required item set forth definitive proxy statement caption “independent registered public accounting firm” filed within 120 days end fiscal year covered annual report form 10k incorporated herein reference proxy statement part iv item 15item 14 exhibits financial statement schedules reports form 8k 1 financial statements financial statements requried item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits management contract compensatory plan arrangement required identified see paragraph c b reports form 8k reports form 8k filed company fourth quarter fiscal year ended july 31 1996 c exhibits 31 certificate incorporation amended 32 bylaws 41 specimen common stock certificate 42 form representatives warrant agreement including form warrant 101 employment agreement dated april 1992 company dr leonard bell amended 102 employment agreement dated june 1992 company david keiser amended 103 employment agreement dated march 1992 company dr stephen p squinto amended 104 employment agreement dated september 1992 company dr louis matis amended 105 employment agreement dated july 1993 company dr james wilkins amended 106 employment agreement dated july 1994 company dr bernadette alford amended 107 administrative facility lease dated august 23 1995 company science park development corporation 108 research development facility lease dated august 23 1995 company science park development corporation 109 option agreement dated april 1 1992 company dr leonard bell 1010 companys 1992 stock option plan amended 1011 companys 1992 outside directors stock option plan amended 1012 registration agreement dated december 4 1992 company benefit certain individuals listed schedules thereto amended 1013 amendment registration agreement dated july 31 1995 company united states surgical corporation 1014 agreement dated june 15 1993 company benefit certain individuals listed schedules thereto amended 1015 form investor rights agreement dated december 23 1994 company purchasers companys series preferred stock amended 1016 stock purchase agreement dated july 31 1995 company united states surgical corporation 1017 form warrant purchase shares companys common stock issued pursuant certain companys private placements 1018 form warrant purchase shares companys common stock issued placement agent certain companys private placements 1019 form warrant purchase shares companys common stock issued certain warrantholders company connection warrant exchange 1020 license agreement dated may 27 1992 company yale university amended september 23 1992 1021 exclusive license agreement dated june 19 1992 among company yale university oklahoma medical research foundation 1022 research development agreement dated june 19 1992 company oklahoma medical research foundation 1023 license agreement dated september 30 1992 company yale university amended july 2 1993 1024 license agreement dated august 1 1993 company biotechnology research development corporation brdc amended july 1 1995 1025 cooperative research development agreement dated december 10 1993 company national institutes health 1026 license agreement dated january 25 1994 company austin research institute 1027 exclusive patent license agreement dated april 21 1994 company national institutes health 1028 license agreement dated july 22 1994 company austin research institute 1029 license agreement dated january 10 1995 company yale university 1030 joint development agreement dated july 31 1995 company united states surgical corporation 1031 advanced technology program atp cooperative agreement 70nanb5h national institute standards technology entitled universal donor organs transplantation dated september 15 1995 1032 us department health human services national heart lung book institute small business research program phase ii grant application entitled role complement activation cardiopulmonary bypass dated december 14 1994 notice grant award dated september 21 1995 1033 research subcontract agreement dated october 1 1995 company tufts university 1034 agreement bound shareholders agreement dated august 1 1993 company brdc 1035 agreement bound master agreement dated august 1 1993 company brdc 1036 research development facility lease dated april 1 1996 company science park development corporation 1037 license agreement dated march 27 1996 company medical research council 1038 license agreement dated may 8 1996 company enzon inc incorporated reference companys registration statement form s1 reg 33300202 confidential treatment granted portions document request confidential treatment made portions document confidential portions omitted filed separately commission required rule 24b2 b financial statement schedules signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized alexion pharmaceuticals inc leonard bell md leonard bell md president chief executive officer secretary treasurer david w keiser david w keiser executive vice president chief operating officer pursuant requirements securities act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc development stage company report independent public accountants board directors stockholders alexion pharmaceuticals inc audited accompanying balance sheets alexion pharmaceuticals inc delaware corporation development stage july 31 1995 1996 related statements operations stockholders equity cash flows three years period ended july 31 1996 period inception january 28 1992 july 31 1996 financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred present fairly material respects financial position alexion pharmaceuticals inc july 31 1995 1996 results operations cash flows three years period ended july 31 1996 period inception january 28 1992 july 31 1996 conformity generally accepted accounting principles arthur andersen llp hartford connecticut august 30 1996 accompanying notes integral part financial statements accompanying notes integral part financial statements accompanying notes integral part financial statements alexion pharmaceuticals inc development stage company statements cash flows accompanying notes integral part financial statements alexion pharmaceuticals inc development stage company notes financial statements 1 organization operations alexion pharmaceuticals inc company organized january 1992 engaged research development proprietary immunoregulatory compounds treatment cardiovascular disorders perioperative bleeding associated cardiopulmonary bypass myocardial infarction stroke autoimmune diseases lupus nephritis rheumatoid arthritis multiple sclerosis outgrowth core technologies company developing collaboration third party see note 10 nonhuman organ xenograft organs products designed transplantation humans without clinical rejection company development stage devoting substantially efforts toward product research development company incurred losses since inception cumulative net losses 246 million july 31 1996 company made product sales date recognized cumulative revenue research grants funding 28 million july 31 1996 company completed initial public offering ipo 2530000 shares common stock resulting net proceeds approximately 184 million see note 12 addition company received various grants fund certain research activities see note 10 company need additional financing obtain regulatory approvals fund early operating losses deemed appropriate establish manufacturing sales marketing capability addition normal risks associated development stage companies assurance companys research development successfully completed adequate patent protection companys technology obtained products developed obtain necessary government regulatory approval approved products commercially viable addition company operates environment rapid change technology substantial competition pharmaceutical biotechnology companies dependent upon services employees consultants company expects incur substantial expenditures foreseeable future research development commercialization products companys management believes based upon current business plans cash marketable securities aggregating 186 million july 31 1996 sufficient fund operations company least calendar 1997 company require funds addition previously described seek raise public private equity debt financings collaborative arrangements corporate sources financing company banking capital sources arrangements commitments regard obtaining funds 2 summary significant accounting policies cash equivalents cash equivalents stated cost approximates market include shortterm highly liquid investments original maturities less three months marketable securities company invests marketable securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company follows statement financial accounting standards sfas 115 accounting certain investments debt equity securities pursuant statement company classified marketable securities available sale accordingly carries securities aggregate fair value unrealized gains losses included stockholders equity component additional paidin capital july 31 1996 companys marketable securities maximum maturity approximately one year consisted us government obligations municipal obligations corporate bonds unrealized losses companys marketable securities aggregated approximately 16000 12000 july 31 1995 1996 respectively following summary marketable securities july 31 1995 1996 amortized unrealized fair cost losses value us government obligations 450171 7893 442278 municipal obligations 80000 1873 78127 corporate bonds 108359 6511 101848 total marketable securities july 31 1995 638530 16277 622253 amortized unrealized fair cost losses value us government obligations 5268177 481 5267696 municipal obligations 80000 390 79610 corporate bonds 3770832 11604 3759228 total marketable securities july 31 1996 9119009 12475 9106534 equipment recorded cost depreciated estimated useful lives assets involved depreciation commences time assets placed service computed using straightline method useful lives equipment three four years maintenance repairs charged expense incurred equipment capital leases depreciated lesser lease term estimated useful life licensed technology rights licensed technology rights amortized shorter license term seven years using straightline method company reviews licensed technology rights periodic basis capitalized costs provide future benefit expensed accumulated amortization july 31 1995 1996 amounted 197626 285624 respectively see note 9 patent application costs incurred filing patents capitalized costs related unsuccessful patent applications expensed becomes determinable applications successful capitalized costs related successful patent applications amortized seven year period remaining life patent whichever shorter using straightline method accumulated amortization july 31 1995 1996 amounted 95845 141801 respectively organization costs incurred connection organization company amortized five year period using straightline method accumulated amortization july 31 1995 1996 amounted 45544 58250 respectively revenue recognition contract research revenues recognized related work performed terms contracts expenses development activities incurred revenue contingent upon future funding company deferred recognized future funding expended revenues resulting achievement milestones would recognized milestone achieved research development expenses research development costs expensed period incurred reverse stock split december 1995 company effected two onehalfforone reverse stock split common stock decreased authorized number common stock preferred stock shares addition board authorized decrease number authorized shares common stock 60000000 25000000 shares preferred stock 20000000 5000000 shares respectively accompanying financial statements restated reflect reverse stock split change authorized shares use estimates preparation financial statements preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates effect recent accounting pronouncement march 1995 financial accounting standards board fasb issued statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed established criteria recognition measurement impairment loss associated longlived assets company required adopt standard fiscal 1997 based companys initial evaluation adoption expected material impact companys financial position results operations company plans adopt sfas 123 accounting stockbased compensation fiscal 1997 sfas 123 issued financial accounting standards board october 1995 allows companies choose whether account stockbased compensation fair value method continue account stockbased compensation current intrinsic value method prescribed apb opinion 25 accounting stock issued employees entities electing remain accounting apb opinion 25 must make proforma disclosures net income fair value based method accounting defined statement applied company plans continue follow provisions apb opinion 25 management company believes impact adoption significant effect companys financial position results operations net loss per common share net loss per common share computed using weighted average number common shares outstanding period common equivalent shares stock options warrants excluded computation effect antidulitive except pursuant requirements sec pursuant requirements common stock issued company 12 months immediately preceding initial public offering plus shares common stock became issuable period pursuant grant common stock options warrants included calculation weighted average number common shares outstanding period august 1 1993 april 30 1996 using treasury stock method inclusion additional shares assuming conversion series convertible preferred stock common stock would antidilutive periods presented accordingly excluded computation net loss per common share 3 equipment summary equipment july 31 1995 1996 follows july 31 1995 1996 laboratory equipment 1732840 2038304 office equipment 91367 112351 furniture 16109 22088 equipment capital leases 378064 2218380 2550807 less accumulated depreciation amortization 1247442 1958536 970938 592271 4 security deposits assets summary security deposits assets july 31 1995 1996 follows july 31 1995 1996 amounts held deposit collateral notes payable see note 7 379932 183444 67884 84134 447816 267578 5 accrued expenses summary accrued expenses july 31 1995 1996 follows july 31 1995 1996 professional fees 320914 225990 research development agreements 106914 86369 148369 88218 576197 400577 6 deferred revenue deferred revenue results cash received advance revenue recognition research development contracts see notes 1 10 7 notes payable notes payable consist borrowings lease financing arrangement financing company purchase certain laboratory equipment borrowings line credit secured laboratory equipment related security deposits cash collateral equal 3040 equipment cost see note 4 company additional borrowing capacity agreements july 31 1996 upon certain conditions amounts held security deposits reduced funds released company completion companys ipo security deposits aggregating 180238 returned company including earned interest terms financing company required make monthly payments principal interest fiscal 1998 based upon average interest rate approximately 15 per annum payments principal july 31 1996 next two fiscal years follows year ending july 31 1997 322508 1998 128264 450772 8 obligations capital leases obligations capital leases principally represent leases laboratory equipment terms leases company required make monthly payments principal interest fiscal 1999 interest rates ranging approximately 1012 per annum future annual minimum required payments july 31 1996 follows year ending july 31 1997 30778 1998 8359 1999 135 total minimum lease payments 39272 less amounts representing interest 2479 present value net minimum lease payments 36793 less current portion 28593 8200 9 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities government agencies order advance obtain technologies management believes important companys overall business strategy license agreements generally call initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies companys policy amortize capitalized licensed technology seven year period license term whichever shorter using straightline method research development agreements generally call company fund future project research one four years based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research companys policy expense research development payments incurred minimum payments assuming nontermination agreements july 31 1996 next four years follows year research ending license development july 31 agreements 1997 77500 375000 1998 177500 50000 1999 177500 50000 2000 177500 50000 company achieve certain milestones related product development product license applications approvals additional payments would required company elects continue maintain licenses agreements also require company fund certain costs associated filing patent applications 10 contract research revenues contract research revenues recorded company year ended july 31 1995 consist small business innovation research sbir grants national institutes health nih research development support collaboration third party july 1995 company entered research development agreement third party third party agreed fund preclinical development companys xenotransplant products return exclusive worldwide manufacturing marketing distribution rights products paying company 75 million allocated follows 1 40 million cost preclinical development four semiannual installments 10 million first installment paid july 31 1995 2 35 million upon achieving certain milestones furtherance joint collaboration third party also purchased 40 million companys common stock see note 12 revenue recognized related agreement july 31 1995 year ended july 31 1996 company recognized 198 million revenue related agreement fiscal 1996 third party purchased additional 18 million common stock offered companys ipo july 1995 company awarded 100000 phase sbir grant nih award made support research development companys gene transfer technology year ended july 31 1996 company recognized 100000 revenue related agreement august 1995 company awarded funding commerce departments national institute standards technology advanced technology program atp company may receive approximately 2 million three years support companys unigrafttm program universal donor organs transplantation year ended july 31 1996 company recognized 246000 revenue related agreement september 1995 company awarded phase ii sbir grant approximately 750000 two years nih support research clinical development companys product treat complications cardiovascular surgery year ended july 31 1996 company recognized 315000 revenue related agreement 11 commitments company entered fiveyear employment agreements five executives agreements provide individuals receive aggregate annual base salaries approximately 710000 july 31 1996 individuals may also receive discretionary bonus awards determined board directors july 31 1996 company leases administrative research development facilities three operating leases expiring june 1998 december 1997 march 1999 respectively option additional three years future minimum annual rental payments july 31 1996 leases noncancellable operating leases primarily equipment follows year ending july 31 1997 365372 1998 297883 1999 33333 696588 12 common stock series preferred stock fiscal 1993 bridge financing private placements december 1992 company obtained approximately 52 million equity financing bridge financing issuance common stock warrants purchase shares common stock conversion advances stockholder company sold bridge units consisting 531424 shares common stock warrants purchase shares common stock see note 13 gross proceeds approximately 40 million connection sale bridge units company 12 million advances stockholder converted bridge units consisting 160000 shares common stock warrants purchase shares common stock june 1993 company raised 8 million private placement issuance placement units consisting aggregate 999975 shares common stock warrants purchase shares common stock see note 13 fiscal 1994 private placements october december 1993 company raised 52 million private placement sale placement units consisting aggregate 646872 shares common stock warrants purchase shares common stock fiscal 1995 private placements december 1994 march 1995 company raised approximately 38 million sale 1986409 shares series convertible preferred stock share series preferred stock equal voting rights companys common stock july 31 1995 company received gross proceeds 40 million sale 457142 shares common stock corporate partner see notes 1 10 company granted exclusive worldwide rights market xenotransplantation products shareholder exchange commitment shareholder contribute subsequent research development pay royalties future product sales fiscal 1996 initial public offering fiscal 1996 company completed ipo 2530000 shares common stock price 825 per share common stock resulting net proceeds approximately 184 million connection companys ipo preferred stockholders converted shares 794554 shares common stock 13 stock options warrants stock options companys 1992 stock option plan 1992 stock option plan directors plans incentive nonqualified stock options may granted maximum 480000 shares common stock directors officers key employees consultants company less fair market value date grant fair market value determined board directors based examination comparable companies consultation financial advisors consultation certain large investors company march 1995 plans amended shareholders majority consent increase number shares covered plans 1320000 options generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions summary stock option activity follows number price shares per share outstanding january 28 1992 granted 80000 750 outstanding july 31 1992 80000 750 granted 176795 750 cancelled 10000 750 outstanding july 31 1993 246795 750 granted 220074 800 825 cancelled 18200 750 800 outstanding july 31 1994 448669 750 825 cancelled 276129 2375 825 grantedreissued 671284 2375 exercised 1500 750 outstanding july 31 1995 842324 2375 800 granted 405800 250 1000 cancelled 27348 2375 800 exercised 13442 2375 750 outstanding july 31 1996 1207334 2375 1000 exercisable july 31 1996 363492 2375 800 december 1994 company offered certain holders outstanding stock options opportunity tender options exchange stock options exercise price 2375 per share represented current fair market value date determined board directors outstanding stock options cancelled reissued exercise price 2375 per share company recorded compensation expense 122500 certain nonqualified stock options granted fiscal 1996 immediately vested charge based difference fair value companys common stock date grant option exercise price warrants connection private placements fiscal 1993 1994 company issued warrants purchase 1295363 shares common stock exercise price 1500 per share 1250 case placement agent comprising 131249 shares common stock february 1995 company offered warrantholders opportunity exchange existing warrants new warrants could purchase fewer shares reduced exercise price warrantholders entitled receive new warrants representing right purchase onehalf number shares common stock warrantholder entitled originally purchase reduced exercise price 750 connection offer warrantholders existing warrants purchase 1101028 shares common stock 1500 1250 per share exchanged warrants new warrants purchase 550501 shares common stock 750 per share remaining original warrants continue entitle warrantholders purchase 194334 shares common stock 1250 1500 per share july 31 1996 warrants exercised warrants may redeemed company 05 per common share following initial public offering share companys common stock equals exceeds 200 exercise price warrants expire december 4 1997 value assigned warrants accompanying balance sheets connection companys public offering company sold underwriter nominal consideration warrants purchase 220000 shares common stock warrants initially exercisable price 990 per share period fortytwo 42 months commencing august 27 1997 14 401k plan company 401k plan employees may contribute 12 percent compensation maximum 9500 per employee calendar year 1996 effective may 1996 company matching contributions 25 dollar deferred first 6 deferred authorized board directors company matching contributions approximately 6000 year ended july 31 1996 15 federal income taxes july 31 1996 company available tax reporting purposes net operating loss carryforwards approximately 23000000 expire commencing fiscal 2008 company also research development credit carryovers approximately 1190000 expire commencing fiscal 2008 company follows sfas 109 accounting income taxes statement requires deferred income tax assets liabilities reflect impact temporary differences amount assets liabilities financial reporting purposes amounts measured tax laws regulations components deferred income taxes july 31 1996 follows deferred tax assets net operating loss carryforwards 10400000 tax credit carryforwards 1190000 160000 total deferred tax assets 11750000 valuation allowance deferred tax assets 11750000 net deferred tax assets company yet achieved profitable operations accordingly management believes tax benefits july 31 1996 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax asset item 7 managements discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause companys plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed important factors regarding forwardlooking statements attached hereto exhibit 99 overview since inception january 1992 alexion devoted substantially resources drug discovery research product development programs date alexion received revenues sale products company unprofitable since inception expects incur substantial increasing operating losses next several years due expenses associated product research development preclinical clinical testing regulatory activities manufacturing development scaleup july 31 1997 company incurred cumulative net loss 318 million companys plan develop commercialize product candidates clinical trial marketing requirements funded company certain companys c5 inhibitor apogen products greater resources required alexions strategy form corporate partnerships major pharmaceutical companies product development commercialization alexion entered strategic alliance us surgical respect companys unigraft program gtinovartis respect companys gene transfer technology intends seek additional strategic alliances major pharmaceutical companies although assurances given alliances successfully entered company recognizes research development revenues development expenses incurred related work performed terms contracts revenue contingent upon future expenditures company deferred recognized expenditures incurred revenues contingent upon achievement milestones recognized milestones achieved results operations years ended july 31 1997 1996 1995 company earned grant license contract research revenues 38 million 26 million 136000 fiscal years ended july 31 1997 1996 1995 respectively increase fiscal 1997 primarily due 11 million revenues company received gtinovartis represented onetime upfront license fee 750000 contract research development revenues 350000 increase fiscal year 1996 revenues compared fiscal 1995 resulted principally companys revenues received us surgical approximately 20 million collaborative research development agreement funding 246000 nists atp grant revenues fiscal 1995 resulted receipt funds two sbir grants nih see item 1 businessstrategic alliances collaborations licenses fiscal years ended july 31 1997 1996 1995 company expended 91 million 66 million 56 million respectively research development activities increases research development spending primarily attributable expanded preclinical development companys research programs included manufacturing product development companys c5 inhibitor apogen product candidates initiation clinical trials following authorization fda companys ind lead c5 inhibitor product candidate see item 1 businessalexions drug development programs cardiopulmonary bypass surgery companys general administrative expenses 28 million 18 million 16 million fiscal years ended july 31 1997 1996 1995 respectively increase general administrative expenses fiscal 1997 consisted 523000 related increased expenses associated facilities expansion employee benefits increased travel administrative costs attributable increased clinical regulatory scientific conference activities remaining balance 477000 increase related increased costs outside professional services insurance related business development recruiting patent legal activities public company income expense net representing primarily net investment income expenses 843754 397495 29195 fiscal years ended july 31 1997 1996 1995 respectively fluctuation past three years due primarily greater investment income higher cash balances available investment favorable investment market fiscal year 1997 compared prior two fiscal years result factors company incurred net losses 73 million 54 million 71 million fiscal years ended july 31 1997 1996 1995 respectively liquidity capital resources since inception july 31 1997 company financed operations capital expenditures primarily private placements initial public offering equity securities resulting approximately 523 million aggregate net proceeds company financed purchase certain equipment 12 million secured notes payable financing institution 378000 capital lease obligations july 31 1997 company also received approximately 52 million research development support collaborations us surgical gtinovartis company also received 11 million sbir grants nih 660000 atp grant nist foregoing proceeds used fund operating activities approximately 265 million investments approximately 29 million 975000 equipment licensed technology rights patents respectively july 31 1997 july 31 1997 company working capital approximately 206 million total cash equivalents marketable securities amounted approximately 227 million company increased cash equivalents 725 million twelve months ended july 31 1997 increase resulted principally cash flows provided financing activities provided 1079 million net proceeds received issuance common stock 185000 return security deposits offset 320000 repayments notes payable ii investing activities generated 312 million net proceeds maturing marketable securities offset equipment purchases 749000 cash inflows offset 572 million cash outflow used operating activities primarily result 725 million operating losses july 31 1997 approximately 1674 million cash held shortterm highly liquid investments original maturities less three months subsequent companys fiscal year end july 31 1997 company received following significant additional proceeds september 1997 company received approximately 95 million net proceeds issuance shares series b preferred stock single institutional investor end september 1997 us surgical company modified july 1995 joint development agreement part modification us surgical made additional 65 million payment company equity exclusive licensing rights certain manufacturing assets see item 1 strategic alliances collaborations licensesunited states surgical corporation see item 5 market registrants common equity related stockholder mattersrecent sale unregistered securities company leases administrative research development facilities three operating leases expiring june 1998 december 1997 march 1999 renewal option additional three years company obligated make payments pursuant certain licensing research development agreements company scheduled pay 142000 77000 72000 assuming termination agreements fiscal years ending july 31 1998 1999 2000 respectively addition company obligated make certain future milestone payments aggregating 400000 certain licensors regards receiving regulatory approval companys anticipated ind filings well upon certain patent issuances see item 1 businessstrategic alliances collaborations licenses company anticipates existing available capital resources interest earned available cash marketable securities sufficient fund operating expenses capital requirements currently planned least next eighteen months company currently material commitments capital expenditures companys future capital requirements depend many factors including progress companys research development programs progress clinical trials time costs involved obtaining regulatory approvals costs involved obtaining enforcing patents necessary licenses ability company establish development commercialization relationships costs manufacturing scaleup see item 1 businessalexions drug development strategy company expects incur substantial additional costs including costs associated research preclinical clinical testing manufacturing process development additional capital expenditures associated facility expansion manufacturing requirements order commercialize products currently development company need raise substantial additional funds additional financings including public private equity offerings collaborative research development arrangements corporate partners assurance funds available terms acceptable company discussions potential collaborative partners result agreements unavailability additional financing could require company delay scale back eliminate certain research product development programs license third parties commercialize products technologies company would otherwise undertake could material adverse effect company july 31 1997 company approximately 134 million 11 million net operating loss tax credit carryforwards tax reporting purposes respectively expire commencing fiscal 2008 tax reform act 1986 tax act contains certain provisions may limit companys ability utilize net operating loss tax credit carryforwards given year certain events occur including cumulative changes ownership interests excess 50 threeyear period assurance ownership changes future periods significantly limit companys use existing net operating loss tax credit carryforwards item 8item 7 managements discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause companys plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed important factors regarding forwardlooking statements attached hereto exhibit 99 overview since inception january 1992 alexion devoted substantially resources drug discovery research product development programs date alexion received revenues sale products company unprofitable since inception expects incur substantial increasing operating losses next several years due expenses associated product research development preclinical clinical testing regulatory activities manufacturing development scaleup july 31 1998 company accumulated deficit 406 million companys plan develop commercialize product candidates clinical trial marketing requirements funded company certain companys c5 inhibitor apogen products greater resources required alexions strategy form corporate partnerships major pharmaceutical companies product development commercialization alexion entered strategic alliance us surgical respect companys unigraft program intends seek additional strategic alliances major pharmaceutical companies although assurances given alliances successfully entered company recognizes research development revenues development expenses incurred related work performed terms contracts revenue contingent upon future expenditures company deferred recognized expenditures incurred revenues contingent upon achievement milestones recognized milestones achieved results operations years ended july 31 1998 1997 1996 company earned grant license contract research revenues 50 million 38 million 26 million fiscal years ended july 31 1998 1997 1996 respectively increase fiscal 1998 primarily due revenues company received us surgical 35 million represented onetime license fee connection companies collaborative research development agreement increase fiscal 1997 revenues compared fiscal 1996 resulted principally companys revenues received gtinovartis 11 million represented onetime upfront license fee 750000 contract research development revenues 350000 revenues fiscal 1996 resulted receipt funds us surgical approximately 20 million collaborative research development agreement 246000 funding received nists atp grant see item 1 businessstrategic alliances collaborations licenses fiscal years ended july 31 1998 1997 1996 company expended 123 million 91 million 66 million respectively research development activities increases research development spending primarily attributable companys clinical trials companys lead c5 inhibitor product candidate expanded preclinical development companys research programs included manufacturing product development companys c5 inhibitor apogen product candidates see item 1 businessalexions drug development programs cardiopulmonary bypass surgery companys general administrative expenses 27 million 28 million 18 million fiscal years ended july 31 1998 1997 1996 respectively decrease general administrative expenses fiscal 1998 primarily related lower legal patent costs fiscal 1998 compared fiscal 1997 increase general administrative expenses fiscal 1997 compared fiscal 1996 consisted 523000 related increased expenses related facilities expansion employee benefits increased travel administrative costs attributable increased clinical regulatory scientific conference activities remaining balance 477000 increase related increased costs outside professional services insurance related business development recruiting patent legal activities public company income expense net representing primarily net investment income 21 million 843000 397000 fiscal years ended july 31 1998 1997 1996 respectively increase past three years due primarily greater investment income higher cash balances available investment fiscal year 1998 compared prior two fiscal years result factors company incurred net losses 79 million 73 million 54 million fiscal years ended july 31 1998 1997 1996 respectively liquidity capital resources since inception july 31 1998 company financed operations capital expenditures primarily private placements initial public offering equity securities resulting approximately 776 million aggregate net proceeds company financed purchase certain equipment 12 million secured notes payable financing institution 378000 capital lease obligations july 31 1998 company also received approximately 91 million research development support collaborations us surgical gtinovartis company also received 11 million sbir grants nih 15 million atp grant nist addition company us surgical awarded november 1997 threeyear 20 million cooperative agreement another atp grant nist foregoing proceeds used fund operating activities approximately 345 million investments approximately 50 million 980000 equipment licensed technology rights patents respectively july 31 1998 july 31 1998 company working capital approximately 358 million total cash equivalents marketable securities amounted approximately 375 million july 31 1998 approximately 315 million cash held shortterm highly liquid investments original maturities less three months company increased cash equivalents 148 million twelve months ended july 31 1998 increase resulted principally cash flows provided financing activities provided 252 million net proceeds received issuance common stock offset 130000 repayments notes payable capital equipment purchases approximately 21 million 80 million cash outflow used operating activities primarily result 79 million operating losses company leases administrative research development facilities three operating leases expiring december 1997 june 1998 march 1999 company currently continuing leases expired december 1997 june 1998 monthtomonth basis discussions lease extensions going company obligated make payments pursuant certain licensing research development agreements company scheduled pay 265000 254000 249000 assuming termination agreements fiscal years ending july 31 1999 2000 2001 respectively addition company obligated make certain future milestone payments certain licensors contingent upon receiving regulatory approval certain patent issuances well certain companys possible product plas approved see item 1 businessstrategic alliances collaborations licenses company anticipates existing available capital resources interest earned available cash marketable securities sufficient fund operating expenses capital requirements currently planned least next eighteen months company currently material commitments capital expenditures companys future capital requirements depend many factors including progress companys research development programs progress clinical trials time costs involved obtaining regulatory approvals costs involved obtaining enforcing patents necessary licenses ability company establish development commercialization relationships costs manufacturing scaleup see item 1 business alexions drug development strategy company expects incur substantial additional costs including costs associated research preclinical clinical testing manufacturing process development additional capital expenditures associated facility expansion manufacturing requirements order commercialize products currently development company need raise substantial additional funds additional financings including public private equity offerings collaborative research development arrangements corporate partners assurance funds available terms acceptable company discussions potential collaborative partners result agreements timely basis unavailability additional financing could require company delay scale back eliminate certain research product development programs license third parties commercialize products technologies company would otherwise undertake could material adverse effect company july 31 1998 company approximately 375 million 14 million net operating loss tax credit carryforwards tax reporting purposes respectively expire commencing fiscal 2008 tax reform act 1986 tax act contains certain provisions may limit companys ability utilize net operating loss tax credit carryforwards given year certain events occur including cumulative changes ownership interests excess 50 threeyear period assurance ownership changes future periods significantly limit companys use existing net operating loss tax credit carryforwards year 2000 year 2000 y2k issue affects computer information technology systems well nonit systems include embedded technology microprocessors microcontrollers microchips date sensitive programs may properly recognize year 2000 systems properly recognize information could generate inaccurate data cause system fail resulting business interruption company currently developing plan provide measured assurances computer itsystems nonit systems including embedded systems hvac heating ventilation air conditioning systems analytical instruments equipment third parties material relationship company y2k compliant company expects complete november 1998 comprehensive inventory assessment existing nonit systems third parties well planned anticipated systems third parties services company may purchase use assessment include identifying critical systems internal external including third parties order formulate remediation verification plan company currently believes remediation verification include obtaining written assurances key vendors suppliers well testing complete july 1999 company believes based preliminary information costs associated remediation verification become y2k compliant material adverse impact companys financial position results operations cash flow event companys y2k compliance plan successfully implemented company may experience temporary disruptions companys clinical trial sites well external contract manufacturing companys therapeutic products presuming broad y2k compliance general service providers utilities telephone data transfer government private entities company yet developed contingency plans event company expects prepare plans august 1999 although company taken steps address y2k problem assurance failure company andor material third parties timely attain y2k compliance failures andor impacts broader compliance failures telephone mail data transfer utility general service providers government private entities material adverse effect company assurance costs associated achieving compliance failure become y2k compliant material companys financial position results operations cash flow item 7aitem 7 managements discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed important factors regarding forwardlooking statements attached hereto exhibit 99 overview since inception january 1992 devoted substantially resources drug discovery research product development 1998 began focus resources clinical testing trials conducting clinical trials two lead product candidates 5g11sc treatment inflammation caused cardiopulmonary bypass surgery 5g11 chronic treatment rheumatoid arthritis membranous nephritis date received revenues sale products incurred operating losses since inception july 31 1999 accumulated deficit 470 million expect incur substantial increasing operating losses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup developing sales marketing force results operations fiscal years ended july 31 1999 1998 1997 earned contract research revenues 188 million fiscal year ended july 31 1999 50 million fiscal year ended july 31 1998 38 million fiscal year ended july 31 1997 increase fiscal year ended july 31 1999 compared fiscal year ended july 31 1998 primarily due nonrefundable license fee 100 million received procter gamble february 1999 exchange rights sell market distribute 5g11sc additionally fiscal year ended july 31 1999 received 78 million contract revenues procter gamble collaborative research development agreement increase fiscal year ended july 31 1998 compared fiscal year ended july 31 1997 primarily due revenues 35 million received united states surgical corporation exchange licensing rights xenotransplantation manufacturing assets revenues fiscal year ended july 31 1997 consisted principally contract revenues 18 million us surgical 11 million genetic therapy inc subsidiary novartis fiscal year ended july 31 1999 incurred expenses 237 million research development activities fiscal year ended july 31 1998 incurred expenses 123 million fiscal year ended july 31 1997 incurred expenses 91 million research development activities increase research development expenses fiscal year ended july 31 1999 compared fiscal year ended july 31 1998 primarily attributable expansion clinical trials lead c5 inhibitor product candidates process manufacturing development c5 inhibitor product candidates fiscal year ended july 31 1998 research development expenses increased 32 million compared fiscal year ended july 31 1997 due principally expanded preclinical development research programs process development c5 inhibitor apogen product candidates general administrative expenses 30 million fiscal year ended july 31 1999 27 million fiscal year ended july 31 1998 28 million fiscal year ended july 31 1997 increase general administrative expenses fiscal year ended july 31 1999 primarily related higher recruiting expenses legal expenses related business development patent costs fiscal year ended july 31 1999 compared fiscal year ended july 31 1998 decrease general administrative expenses fiscal year ended july 31 1998 primarily related lower legal patent costs fiscal year ended july 31 1998 compared fiscal year ended july 31 1997 income expense net representing primarily net investment income 15 million fiscal year ended july 31 1999 21 million fiscal year ended july 31 1998 843000 fiscal year ended july 31 1997 decrease fiscal year ended july 31 1999 due lower cash balances available investment compared fiscal year ended july 31 1998 increase fiscal year ended july 31 1998 due higher cash balances available investment compared fiscal year ended july 31 1997 result factors incurred net losses 64 million fiscal year ended july 31 1999 79 million fiscal year ended july 31 1998 73 million fiscal year ended july 31 1997 liquidity capital resources since inception january 1992 financed operations capital expenditures principally private placements common preferred stock initial public offering common stock equipment leasehold improvements financing debt financing payments corporate collaborations fiscal year ended july 31 1998 financed purchase laboratory process development equipment leasehold improvements 12 million secured term loan commercial bank principal payments 92000 payable quarterly august 2001 july 31 1999 outstanding balance term loan 831000 principal due interest variable rate reset quarterly july 31 1999 annualized interest rate 71 term loan agreement requires us maintain restricted cash balance equal 1150 outstanding loan balance plus accrued interest earning money market account security note february 1999 acquired manufacturing assets principally land buildings laboratory equipment xenotransplantation program developed us surgical financed purchase manufacturing assets 39 million term note payable us surgical interest 60 per annum payable quarterly principal balance note due may 2005 security term note manufacturing assets purchased july 31 1999 cash equivalents marketable securities totaled 283 million july 31 1999 cash equivalents consisted 242 million cash hold shortterm highly liquid investments original maturities less three months july 31 1999 invested 108 million property equipment support research development efforts anticipate research development expense increase significantly foreseeable future support clinical manufacturing development product candidates lease administrative office research development facilities three operating leases expired december 1997 june 1998 march 1999 currently continuing leases monthtomonth basis participating ongoing discussions new leases current facilities procter gamble agreed fund clinical testing c5 inhibitor 5g11sc initially use cardiopulmonary bypass surgery myocardial infarction angioplasty procter gamble collaboration involve product candidates anticipate existing available capital resources interest earned available cash marketable securities sufficient fund operating expenses capital requirements currently planned least next 18 months currently material commitments capital expenditures future capital requirements depend many factors including progress research development programs progress results clinical trials time costs involved obtaining regulatory approvals costs involved obtaining enforcing patents necessary licenses ability establish development commercialization relationships costs manufacturing scaleup expect incur substantial additional costs research preclinical studies clinical testing manufacturing process development additional capital expenditures related personnel facilities expansion manufacturing requirements addition funds may receive collaboration procter gamble need raise generate substantial additional funding order complete development commercialization product candidates addition achieve contractual milestones related product development product license applications approvals additional payments would required elect continue maintain licenses licensors aggregating maximum 20 million additional financing may include public private debt equity offerings bank loans andor collaborative research development arrangements corporate partners tax reporting purposes july 31 1999 approximately 441 million federal net operating loss carryforwards expire 2019 22 million tax credit carryforwards expire commencing fiscal 2008 provisions tax reform act 1986 may limit ability utilize net operating loss tax credit carryforwards given year certain events occur including provision relating cumulative changes ownership interests excess 50 threeyear period cannot assure ability utilize net operating loss tax credit carryforwards future years limited result change ownership year 2000 year 2000 issue y2k refers potential problems computer systems equipment computer chips software use dates date stored two digits january 1 2000 clock date recording mechanism incorporating date sensitive software uses two digits represent year may recognize date using 00 year 1900 rather year 2000 could result system failure miscalculations causing disruption operations including among things temporary inability process transactions perform laboratory analyses engage similar business activities biotechnology company proposed product candidates software computer based therefore proposed products directly impacted y2k problem exposure potential risks problem involves computer information technology systems include embedded technology using date sensitive programs heating ventilation air conditioning hvac scientific instrumentation laboratory facilities internal information systems consist offtheshelf accounting email systems offtheshelf application programs spreadsheet word processing graphics database management presentation software certain instrumentationdata acquisition software noninformational technology systems consist hvac telecommunications taken actions minimize impact y2k problem systems operations excluding systemic failure outside control prolonged loss electrical telephone service inventoried reviewed systems scientific instrumentation laboratory facilities including querying third parties material relationship us ascertain y2k compliance review included examining information equipment software vendors literature supplied software test evaluations systems based upon work knowledge date included updating various software programs believe risk minimal internal systems scientific instrumentation laboratory facilities materially impacted y2k noncompliance disruptions existing systems scientific instrumentation laboratory facilities y2k compliant expected y2k compliant december 31 1999 vendors offtheshelf applications including accounting email systems informed us products y2k compliant date review disclosed otherwise reason believe applications y2k compliant applications y2k compliant expect cannot certain vendors make appropriate upgrades available customers cost minimal cost believe necessary replace offtheshelf software applications software could replaced reasonable costs example approximate replacement cost email system would 10000 identified y2k problem hvac system engaged outside contractor correct y2k problem believe cost correcting problem approximately 20000 expect problem corrected december 1999 regularly scheduled maintenance cycle result personnel expansion upgraded telecommunication system whether y2k problem cost upgrade y2k compliant approximately 35000 also provided future enhancements regard thirdparty risks continue assess y2k risks third parties include research suppliers partners manufacturers research organizations clinical study administrators vendors suppliers indicated make every effort y2k compliant december 31 1999 guarantees given example informed outside payroll processor payroll system y2k compliant expect third parties honor contractual obligations majority material thirdparty contracts relate sites clinical trials product candidates research development collaboration procter gamble believe readily available replacement collaboration agreement procter gamble believe would difficult time consuming costly find alternative clinical sites research arrangements continue work third parties identify resolve problems y2k compliance worst case scenario could experience delays receiving research development manufacturing supplies well managing accessing data patients enrolled clinical studies delays could slow clinical development research development programs impact ability effectively manage monitor programs delays could also adverse impact stock price based information assessments date contingency plans developed y2k compliance problems arise could materially adversely affect business results operations cash flow continue identify y2k problems could materially adversely affect business operations however possible determine complete certainty y2k problems affecting us third parties material relationship us identified possible insure economically conceivable risks date incurred less 5000 costs associated y2k program excludes costs older computer scientific instrumentation replaced ordinary course systems upgraded expanded believe costs associated repairs upgrades verification internal systems become y2k compliant 50000 believe repairs upgrades verification complete december 1999 repair upgrade hvac system discussed expect fund expenses working capital item 7aitem 7 managements discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed important factors regarding forwardlooking statements attached hereto exhibit 99 overview engaged discovery development therapeutic products aimed treating patients wide array severe disease states including cardiovascular autoimmune disorders inflammation cancer since inception january 1992 devoted substantially resources drug discovery research product clinical development additionally wholly owned subsidiary alexion antibody technologies inc aat engaged discovering developing portfolio additional antibody therapeutics targeting severe unmet medical needs currently examining two lead antibody product candidates eight clinical development programs one antibody product candidates pexelizumab antibody fragment developed collaboration procter gamble pharmaceuticals completed phase iib study cpb cardiopulmonary bypass surgery patients undergoing cabg coronary artery bypass graft surgery pending fda food drug administration discussions expect initiate phase iii efficacy trial pexelizumab cpb patients earliest possible opportunity also collaboration procter gamble currently conducting two additional large phase ii studies pexelizumab acute myocardial infarction heart attack patients one study patients receiving thrombolytic therapy procedure dissolving clots block heart vessels patients receiving angioplasty procedure opening narrowed blocked arteries supply blood heart september 2000 fda granted fast track status development pexelizumab cpb lead antibody product candidate 5g11 clinical development treatment variety chronic autoimmune diseases initiated phase ii study lupus nephritis kidney disease separate phase ii study membranous nephritis kidney disease ongoing completed phase ii clinical study rheumatoid arthritis ra patients planning initiate two phase iib ra studies one expect may serve pivotal study obtain strong efficacy safety results rheumatoid arthritis membranous nephritis enrollment commenced additional 12month openlabel extension studies test longterm safety addition two separate ongoing early stage clinical programs study 5g11 patients dermatomyositis muscle disorder bullous pemphigoid severe inflammatory skin disorder october 2000 fda granted us orphan drug status development 5g11 treatment dermatomyositis recently completed phase pilot safety trial 5g11 psoriasis patients date received revenues sale products incurred operating losses since inception july 31 2001 accumulated deficit 1243 million expect incur substantial increasing operating loses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup commercial manufacturing developing sales marketing force september 2000 acquired prolifaron inc privately held biopharmaceutical company located san diego california issuance common stock fully vested options aggregate fair value approximately 439 million date acquisition prolifaron developing therapeutic antibodies addressing multiple diseases including cancer acquisition form merger new wholly owned subsidiary alexion form alexion antibody technologies inc prolifaron accounted acquisition prolifaron using purchase method accounting aat0 developed important additional capabilities discover develop additional antibody product candidates treatment inflammatory diseases cancer october 2000 contributed technology help form new company arradial inc aimed commercializing novel desktop siliconbased microarray assay technology expected applications genomics drug discovery minority shareholder arradial inc plan develop commercialize product candidates clinical trials marketing requirements funded resources products require greater resources strategy form corporate partnerships major pharmaceutical companies product development commercialization results operations fiscal years ended july 31 2001 2000 1999 earned contract research revenues 118 million 214 million 188 million fiscal years ended july 31 2001 2000 1999 respectively decrease revenues fiscal year 2001 compared 2000 primarily due lower contract research revenues resulting completion phase ii pexelizumab cpb study related collaborative research development agreement procter gamble increase revenues fiscal year 2000 compared 1999 primarily due increased contract revenues collaborative research development agreement procter gamble fiscal year 2001 incurred research development expenses 389 million excluding noncash charges related acquisition prolifaron noncash charges included inprocess research development charge 21 million amortization goodwill purchased intangibles 29 million fiscal years 2000 1999 incurred research development expenses 402 million 237 million respectively decrease research development expenses fiscal 2001 compared 2000 primarily attributable lower clinical manufacturing clinical trial costs associated completion phase ii pexelizumab cpb study lower costs offset increased costs clinical trials manufacturing development manufacturing lead c5 inhibitor product candidate 5g11 consolidated ongoing research development costs aat formed september 2000 acquisition prolifaron increase research development costs fiscal 2000 compared 1999 primarily attributable ongoing clinical trials lead c5 inhibitor product candidates cost manufacturing development manufacturing c5 inhibitors clinical trials general administrative expenses 71 million 42 million 30 million fiscal years 2001 2000 1999 respectively increase general administrative expenses fiscal 2001 compared 2000 principally due increased personnel professional fees well higher facilities expenses resulting relocation expansion operations support growth including acquisition prolifaron increase fiscal 2000 compared 1999 principally due higher payrollrelated costs well higher facilities expenses related increased rent expense professional fees related public relations patentlegal costs total operating expenses substantially higher twelve months ended july 31 2001 due principally onetime noncash inprocess research development charge 210 million noncash amortization goodwill 29 million resulting september 2000 acquisition prolifaron income net 101 million 27 million 15 million fiscal years 2001 2000 1999 respectively increase fiscal year 2001 compared 2000 due increased interest income higher cash balances resulting 2085 million net proceeds received sale common stock november 2000 increase income net fiscal 2000 compare 1999 due increased interest income higher cash balances resulting net proceeds obtained issuance 120 million subordinated convertible notes march 2000 fiscal year 2001 recorded 91 million noncash charge related cumulative change accounting principle per adoption staff accounting bulletin 101 sab 101 required adopt sab 101 later july 31 2001 elected adopt sab 101 quarter ended april 30 2001 recognized noncash cumulative effect adjustment 91 million august 1 2000 result factors incurred net losses 570 million 202 million 64 million fiscal years ended july 31 2001 2000 1999 respectively shown statements operations fiscal years ended 2001 2000 1999 excluding impact noncash charges resulting acquisition prolifaron incurred pro forma net loss 240 million fiscal year ended july 31 2001 excludes noncash iprd amortization gw cumulative effect adoption sab 101 liquidity capital resources since inception january 1992 financed operations capital expenditures principally private placements common preferred stock initial public offering common stock subsequent followon offerings convertible subordinated notes debt financing payments corporate collaborations grants equipment leasehold improvements financing october 2000 filed shelf registration statement offer 300 million equity securities november 1 2000 sold 23 million shares common stock price 9075 per share resulting net proceeds us approximately 2085 million net fees expenses approximately 201000 related transaction march 2000 completed 120 million private placement 575 convertible subordinated notes due march 15 2007 notes bear interest semi annually september 15 march 15 year beginning september 15 2000 holders may convert portion notes common stock time march 15 2007 conversion price 106425 per share incurred issuance costs related offering approximately 40 million amortized interest expense sevenyear term notes may 2000 pursuant registration rights agreement filed registration statement securities act 1933 sec register resales notes shares common stock notes convertible november 1999 sold 3415 million shares common stock price 1400 per share followon public offering resulting net proceeds us approximately 444 million february 1999 acquired manufacturing assets principally land buildings laboratory equipment xenotransplantation program developed us surgical financed purchase manufacturing assets 39 million term note payable us surgical interest 60 per annum payable quarterly principal balance note due may 2005 security term note manufacturing assets purchased july 31 2001 cash equivalents marketable securities totaled 3553 million july 31 2001 cash equivalents consisted 1352 million hold shortterm highly liquid investments original maturities less three months increase cash equivalents marketable securities compared july 31 2000 due increase available cash resulting followon public offering common stock november 2000 july 31 2001 invested 200 million property equipment support research development efforts anticipate research development expense increase significantly foreseeable future support clinical manufacturing development product candidates lease headquarters research development facility cheshire connecticut relocated november 2000 lease term ten years six months site lease total 82000 square feet space includes approximately 62000 square feet related research laboratories incurred initial leasehold improvements aggregating approximately 48 million addition paying pro rata percentage real estate taxes operating expenses pilot manufacturing plant may used producing compounds current anticipated clinical trials expected remain new connecticut encompasses approximately 30000 square feet labs offices currently negotiating longerterm arrangement facilities new connecticut believe new space pilot manufacturing facility adequate current ongoing activities alexion antibody technologies inc whollyowned subsidiary leases approximately 7500 square feet labs office space san diego california procter gamble agreed fund clinical development manufacturing pexelizumab initially use cardiopulmonary bypass surgery myocardial infarction angioplasty procter gamble collaboration involve product candidates anticipate existing available capital resources together anticipated funding collaboration agreement procter gamble well addition interest investment income earned available cash marketable securities provide us adequate resources fund operating expenses capital requirements currently planned least next thirtysix months future capital requirements depend many factors including progress research development programs progress results clinical trials time costs involved obtaining regulatory approvals costs involved obtaining enforcing patents necessary licenses dependence procter gamble performance development commercial matters related pexelizumab delays development changes status commercial relationships delays developing arranging satisfactory manufacturing capability costs manufacturing scaleup commercial manufacturing ability establish marketing sales capabilities ability establish development commercialization relationships expect incur substantial additional costs research preclinical studies clinical testing manufacturing process development additional capital expenditures related personnel facilities expansion clinical commercial manufacturing requirements marketing sales achieve contractual milestones related product development product license applications approvals additional payments would required elect continue maintain licenses licensors aggregating 159 million furthermore owe royalties parties licensed intellectual property connection sale products addition funds may receive collaboration procter gamble need raise generate substantial additional funding order complete development commercialization product candidates additional financing may include public private debt equity offerings equity line facilities bank loans andor collaborative research development arrangements corporate partners assurance funds available terms acceptable us discussions potential strategic collaborative partners results agreements timely basis unavailability additional financing could require us delay scale back eliminate certain research product development programs license third parties commercialize products technologies would otherwise undertake could material adverse effect tax reporting purposes july 31 2001 approximately 976 million federal net operating loss carryforwards expire 2021 100 million tax credit carryforwards expire commencing fiscal 2008 provisions tax reform act 1986 may limit ability utilize net operating loss tax credit carryforwards given year certain events occur including provision relating cumulative changes ownership interests excess 50 threeyear period believe triggered limitation provisions recently issued accounting standards july 2001 financial accounting standards board issued sfas 141 business combinations sfas 142 goodwill intangible assets together significantly change accounting disclosures required activities related assets primary changes resulting standards consist cessation pooling interests method accounting goodwill intangible assets segregated amortized reviewed impairment disclosed within footnotes financial statements adoption sfas 141 impact historical financial statements elected adopt sfas 142 effective august 1 2001 adoption sfas 142 cause amortization relates 232 million goodwill acquired connection acquisition prolifaron cease date prior adoption standard annual amortization expected approximately 33 million annually sevenyear period prospective basis goodwill subject annual impairment reviews conditions warrant interim reviews based upon estimated fair value impairment charges recorded component operating expenses period impairment determined yet determined whether impairment charge would need recorded result adoption standard june 1998 financial accounting standards board fasb issued sfas 133 accounting derivative financial instruments hedging activities provides comprehensive consistent standard recognition measurement derivatives hedging activities sfas 133 effective fiscal years beginning june 15 1999 june 1999 fasb issued sfas 137 accounting derivative financial instruments hedging activities deferral effective date sfas 133 amendment sfas 133 sole purpose updating effective date adoption sfas 133 fiscal years beginning june 15 2000 adoption sfas 133 impact results operations financial condition currently hold derivative financial instruments engage hedging activities item 7aitem 7 management’s discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed “risk factors” attached hereto exhibit 992 overview engaged discovery development therapeutic products aimed treating patients wide array severe disease states including cardiovascular autoimmune disorders inflammation cancer since incorporation january 1992 devoted substantially resources drug discovery research product clinical development additionally wholly owned subsidiary alexion antibody technologies inc aat engaged discovery development portfolio additional antibody therapeutics targeting severe unmet medical needs two lead product candidates antibodies address specific diseases arise human immune system attacks human body produces undesired inflammation antibodies proteins bind specifically selected targets antigens body antibody binds target may activate body’s immune system target block activities target stimulate activities target currently examining two lead antibody product candidates pexelizumab eculizumab eight different clinical development programs aat wholly owned subsidiary extensive combinatorial human antibody library technologies expertise developed important additional capabilities discover develop additional antibody product candidates treatment inflammatory diseases cancer also developing therapies employing transplantation cells species humans known xenotransplantation date received revenues sale products incurred operating losses since inception july 31 2002 accumulated deficit 1808 million expect incur substantial increasing operating losses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup commercial manufacturing developing sales marketing force may need obtain additional financing cover costs plan develop commercialize product candidates clinical trials commercialization requirements funded accomplished resources products require greater resources strategy form corporate partnerships major pharmaceutical companies product development commercialization stay play major role december 2001 pg entered binding memorandum understanding mou pursuant pg revised january 1999 collaboration revised structure pg share decisionmaking responsibility future united states us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts prior december 2001 pg generally funding clinical development manufacturing costs pexelizumab per mou revised collaboration pg provides us pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us firm receive approximate equal share gross margin us sales pg agreed retain responsibility costs future development commercialization outside us receiving royalty sales rest world responsible royalties certain third party intellectual property worldwide intellectual property necessary additionally part mou receive milestone payments achieving specified development steps regulatory filings approvals receive previously agreed sales milestones generally forego research development support payments pg part revised collaboration per mou pg agreed continue fund 100 costs complete two ongoing phase ii clinical trials myocardial infarction heart attack patients recently completed enrollment agreed bear first 50 projected costs associated cabgphase iii clinical trial pg bear second 50 final adjustment make even 50 sharing costs pg agreed share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well future amiphase iii clinical trial costs letter understanding signed relating negotiation completion agreement third party manufacturer large scale commercial manufacture pexelizumab five years preparation financial statements requires us make estimates assumptions judgments affect reported amounts assets liabilities revenues expenses related disclosures contingent liabilities ongoing basis evaluate estimates including related intangible assets collaborative royalty license arrangements contingencies base estimates historical experience various assumptions believe reasonable circumstances results form basis making judgments carrying values assets liabilities readily apparent sources actual results may differ estimates different assumptions conditions believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements revenueswe record contract research revenues research development support payments license fees milestone payments collaboration third parties amounts received various government grants upfront nonrefundable license fees received connection collaboration deferred amortized revenue life agreement underlying technologies revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred research development support revenues recognized related work performed expenses incurred terms contracts development activities revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period unbilled reimbursable contract costs shown consolidated balance sheets represent reimbursable costs incurred connection research contracts yet billed bill costs recognize costs related revenues accordance terms contracts deferred revenue results cash received amounts receivable advance revenue recognition research development contracts research development expenseswe record research development expenses incurred unless recoverable contract research development expenses include following major types costs salaries benefit costs research license fees various contractor costs depreciation amortization lab facilities leasehold improvements building utilities costs related research space lab supplies goodwillat july 31 2002 carry 200 million goodwill net acquired connection acquisition prolifaron see financial note no3 representing excess cost fair value net assets acquired prospective basis goodwill longlived investment asset subject annual impairment reviews impairment charges recorded component operating expenses period impairment determined results operations fiscal years ended july 31 2002 2001 2000 earned contract research revenues 65 million 118 million 214 million fiscal years ended july 31 2002 2001 2000 respectively decrease revenues fiscal year 2002 compared 2001 primarily due decreased research payments procter gamble pharmaceuticals pg resulting 1 december 2001 agreement per binding memorandum understanding mou revise 1999 collaboration agreement pg 2 completion phase ii pexelizumab cpb study decrease revenues fiscal year 2001 compared 2000 primarily due lower research payments resulting completion phase ii pexelizumab cpb study fiscal year 2002 incurred research development expenses 600 million fiscal years 2001 2000 incurred research development expenses 389 million 402 million respectively increase research development expenses fiscal year 2002 compared 2001 attributable higher clinical trial costs associated primarily phase iii pexelizumab primocabg trial result revised collaboration agreement pg required us share pexelizumab development costs greater clinical manufacturing costs associated two lead product candidatespexelizumab eculizumab decrease research development expenses fiscal 2001 compared 2000 primarily attributable lower clinical manufacturing clinical trial costs associated completion phase ii pexelizumab cpb study lower costs offset increased costs clinical trials manufacturing development manufacturing lead c5 inhibitor product candidate eculizumab consolidated ongoing research development costs aat formed september 2000 acquisition prolifaron acquisition prolifaron fiscal 2001 resulted onetime noncash charge 21 million allocated inprocess research development projects addition company recognized approximately 23 million purchase price goodwill amortized seven years following purchase amortization goodwill resulted charge 29 million twelve months ended july 31 2001 effective august 1 2001 company’s adoption sfas 142 caused amortization goodwill cease general administrative expenses 80 million 71 million 42 million fiscal years 2002 2001 2000 respectively increase general administrative expenses fiscal year 2002 compared 2001 principally due higher payroll related costs increase fiscal year 2001 compared 2000 principally due increased personnel professional fees well higher facilities expenses resulting relocation expansion operations support growth including acquisition prolifaron total operating expenses 680 million 699 million 444 million fiscal years 2002 2001 2000 respectively total operating expenses twelve months ended july 31 2001 included onetime noncash inprocess research development charge noncash amortization goodwill income net 42 million 101 million 27 million fiscal years 2002 2001 2000 respectively decrease fiscal year 2002 compared 2001 due decreased interest income lower cash balances lower market interest rates increase fiscal year 2001 compared 2000 due increased interest income higher cash balances resulting primarily 2085 million net proceeds received sale common stock november 2000 state tax benefit 07 million recognized fiscal year 2002 resulting company’s exchange fiscal 2001 incremental research development tax credit fiscal year 2001 recorded 91 million noncash charge related cumulative change accounting principle per adoption staff accounting bulletin 101 sab 101 adopted sab 101 fiscal year 2001 therefore changed revenue recognition policy front nonrefundable payments immediate recognition deferral revenue front fee amortized revenue life agreement recognized noncash cumulative effect adjustment 91 million august 1 2000 included fiscal years 2002 2001 contract revenues 06 million related sab 101 amortization front nonrefundable payment life agreement result factors incurred net loss 565 million 570 million 202 million 312 328 145 basic diluted net loss per share fiscal years ended july 31 2002 2001 2000 respectively shown statements operations fiscal years ended 2002 2001 2000 excluding impact noncash charges resulting acquisition prolifaron cumulative effect sab 101 incurred pro forma net loss 240 million 138 basic diluted net loss per share fiscal year ended july 31 2001 following table displays results operations well pro forma basis relative 2001 results pro forma 2001 results exclude noncash charges inprocess research development amortization goodwill cumulative effect adoption sab 101 excludes noncash iprd amortization gw cumulative effect adoption sab 101 liquidity capital resources since inception january 1992 financed operations capital expenditures principally private placements common preferred stock initial public offering common stock subsequent followon offerings sale convertible subordinated notes debt financing payments received corporate collaborations grants equipment leasehold improvements financing july 31 2002 cash equivalents marketable securities totaled 3086 million compared 3553 million july 31 2001 july 31 2002 cash equivalents consisted 476 million hold shortterm highly liquid investments original maturities less three months decrease cash equivalents marketable securities compared july 31 2001 due use funds fund operations capital equipment investments july 31 2002 invested 247 million property equipment support research development efforts anticipate research development expense increase significantly foreseeable future support clinical manufacturing development product candidates anticipate existing capital resources together anticipated funding revised collaboration pg well addition interest investment income earned available cash marketable securities provide us adequate resources fund operating expenses capital requirements currently planned least next twentyfour months also provide us adequate funding clinical testing c5 inhibitor product candidates support broad research development additional product candidates contractual obligations commercial commitments consist principally 120 million convertible subordinated notes 39 million note payable operating leasesprincipally facilities equipment open letter credit 200000 serves security deposit facility lease cheshire connecticut outstanding capital leases cancelable research development clinical manufacturing development cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses aggregating 588 million next three years achieve specified contractual milestones related product development product license applications approvals additional payments would required elect continue maintain licenses licensors aggregating 242 million following table summarizes contractual obligations commercial commitments anticipated supporting arrangementssubject certain limitations cancellation clausesand effect obligations expected liquidity cash flow future periods amounts millions interest 120 million 575 convertible subordinated notes due march 15 2007 payable semiannually september march year holders may convert portion notes common stock time march 15 2007 conversion price 106425 per common share beginning march 20 2003 may redeem notes per declining redemption prices listed notes may also elect pay repurchase price notes cash common stock interest 39 million note payable due may 2005 bearing interest 60 per annum payable quarterly note payable used finance certain manufacturing assets acquired february 1999 principally land buildings laboratory equipment xenograft program developed tyco healthcare formerly known us surgical corporation principal balance note due may 2005 security term note manufacturing assets purchased looking leverage opportunities program complete optimization manufacturing methods unigraft cellstissue enable clinical development unable secure collaboration share future funding development clinical trials may unable maximize value program subsequently may reduce financial commitment program may cause delay termination unigraft program impairment unigraft manufacturing assets resulting write portion assets july 31 2002 carrying value assets approximately 4 million lease headquarters research development facility cheshire connecticut relocated november 2000 lease initial term ten years six months expiring december 2010 site lease total 89000 square feet space includes approximately 69000 square feet related research laboratories incurred initial leasehold improvements aggregating approximately 57 million addition paying pro rata percentage real estate taxes operating expenses pilot manufacturing plant may used producing compounds current anticipated clinical trials expected remain new connecticut encompasses approximately 30000 square feet labs offices monthtomonth rental currently negotiating longerterm arrangement facilities new connecticut believe research development facilities pilot manufacturing facility adequate current ongoing activities alexion antibody technologies inc whollyowned subsidiary leases approximately 12000 square feet labs office space san diego california lease term ten years expiring august 2012 december 2001 pg entered binding memorandum understanding mou pursuant pg revised january 1999 collaboration revised structure share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts prior december 2001 pg generally funding clinical development manufacturing costs pexelizumab revised collaboration per mou provides us pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us firm receive approximate equal share gross margin us sales pg agreed retain responsibility cost future development commercialization outside us receiving royalty sales rest world responsible royalties certain third party intellectual property worldwide intellectual property necessary additionally part mou receive milestone payments achieving specified development steps regulatory filings approvals receive previously agreed sales milestones generally forgo research development support payments pg part revised collaboration per mou pg agreed continue fund 100 costs complete two ongoing phase ii clinical trials myocardial infarction heart attack patients recently completed enrollment agreed bear first 50 projected costs associated cabgphase iii clinical trial pg bear second 50 final adjustment make even 50 sharing costs pg agreed share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well future amiphase iii clinical trial costs parties agreed secure commercial manufacturing capacity pexelizumab letter understanding signed relating negotiation completion agreement third party manufacturer large scale commercial production pg right terminate collaboration time pg terminates prior incurring 50 cabgphase iii clinical trial costs pg required contribute towards approximately equal share us cabgphase iii clinical trial costs pg released future funding obligations addition pg would offer assign pexelizumab third party manufacturing agreements could obligated assume future costs reimburse p g prior payments thereunder pg terminates rights exclusive license intellectual property related pexelizumab revert back us entitled future pexelizumab revenues without sharing revenues pg continue development pexelizumab costs would increase significantly would need fund development commercialization pexelizumab identify new collaboration partner expect continue operate net loss least next several years continue research development efforts continue conduct clinical trials develop manufacturing sales marketing distribution capabilities operating expenses depend many factors including • progress timing scope research development programs • progress timing scope preclinical studies clinical trials • time cost necessary obtain regulatory approvals • time cost necessary develop manufacturing processes arrange contract manufacturing build manufacturing facilities obtain necessary regulatory approvals facilities • time cost necessary develop sales marketing distribution capabilities • changes applicable governmental regulatory policies • new collaborative licensing commercial relationships may establish expect incur substantial additional costs research preclinical clinical testing manufacturing process development additional capital expenditures related personnel facilities expansion clinical commercial manufacturing requirements secure commercial contract manufacturing capacity marketing sales order commercialize products currently development furthermore owe royalties parties licensed intellectual property may future license intellectual property connection development manufacture sale products addition milestone payments may receive collaboration pg interest investment income subject market interest rate fluctuations need raise generate substantial additional funding order complete development commercialization product candidates furthermore development expansion business acquired business companies may require substantial capital investment us additional financing may include public private debt equity offerings equity line facilities bank loans collaborative research development arrangements corporate partners andor sale licensing property assurance funds available terms acceptable us discussions potential strategic collaborative partners result agreements timely basis unavailability additional financing required could require us delay scale back eliminate certain research product development programs license third parties commercialize products technologies would otherwise undertake could material adverse effect tax reporting purposes july 31 2002 approximately 1626 million federal net operating loss carryforwards expire 2022 approximately 180 million resulted exercise nonqualified stock options 96 million tax credit carryforwards expire commencing fiscal 2008 provisions tax reform act 1986 may limit ability utilize net operating loss tax credit carryforwards given year certain events occur including provision relating cumulative changes ownership interests excess 50 threeyear period believe triggered limitation provisions recently issued accounting standards june 2002 financial accounting standards board “fasb” issued sfas 146 “accounting costs associated exit disposal activities” “sfas 146” statement addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” provisions sfas 146 effective exit disposal activities initiated december 31 2002 early application encouraged believe adoption new standard material impact either operating results financial position company april 2002 fasb issued sfas 145 “rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections” statement rescinds sfas 4 “reporting gains losses extinguishment debt” sfas 44 “accounting intangible assets motor carriers” sfas 64 “extinguishments debt made satisfy sinkingfund requirements” statement also amends sfas 13 “accounting leases” makes various technical corrections existing pronouncements corrections substantive nature provisions sfas 145 effective may 15 2002 adoption new standard impact operating results financial position company august 2001 fasb issued sfas 144 “accounting impairment disposal longlived assets” sfas 144 modifies rules accounting impairment disposal longlived assets supercedes sfas 121 new rules become effective fiscal years beginning december 15 2001 earlier application encouraged adoption standard august 1 2002 material impact operating results financial position company august 2001 fasb issued sfas 143 “accounting obligations associated retirement longlived assets” objective sfas 143 provide accounting guidance legal obligations associated retirement longlived assets retirement obligations included within scope pronouncement entity cannot avoid result either acquisition construction normal operation longlived asset components larger systems also fall pronouncement well tangible longlived assets indeterminable lives provisions sfas 143 effective financial statements issued fiscal years beginning june 15 2002 adoption standard august 1 2002 material impact operating results financial position company item 7aitem 7 management’s discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed “important factors regarding forwardlooking statements” attached hereto exhibit 991 overview engaged discovery development therapeutic products aimed treating patients wide array severe disease states including cardiovascular autoimmune hematologic disorders inflammation cancer since incorporation january 1992 devoted substantially resources drug discovery research product clinical development additionally wholly owned subsidiary alexion antibody technologies inc aat engaged discovery development portfolio additional antibody therapeutics targeting severe unmet medical needs two lead product candidates therapeutic antibodies address specific diseases arise human immune system produces inflammation human body antibodies proteins bind specifically selected targets antigens body antibody binds target may activate body’s immune system target block activities target stimulate activities target currently examining two lead antibody product candidates variety clinical development programs developing pexelizumab collaboration procter gamble pharmaceuticals pg rely pg timely development potential commercialization pexelizumab date received revenues sale products incurred operating losses since inception july 31 2003 accumulated deficit approximately 265 million expect incur substantial increasing operating losses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup commercial manufacturing precommercialization activities developing sales marketing force increasing administrative personnel professional services support growth operations may need obtain additional financing cover costs plan develop commercialize product candidates clinical trials commercialization requirements funded accomplished resources products require greater resources strategy form corporate partnerships major pharmaceutical companies product development commercialization stay play major role critical accounting policies use estimates believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements research development expenseswe record research development expenses incurred unless recoverable contract research development expenses include following major types costs salaries benefit costs research license fees various contractor costs depreciation amortization lab facilities leasehold improvements building utilities costs related research space lab supplies research development expenses fluctuate significantly milestone payments due third parties upon attainment triggering contractual milestones grant patent fda filing fda approval achieving manufacturing sales objective accrued research development expenses comprised amounts owed suppliers research development work performed behalf company period end evaluate accrued expense balance related activities based upon information received supplier estimated progress toward completion research development objectives ensure balance appropriately stated evaluations subject changes estimate subsequent periods goodwillat july 31 2003 carried 200 million goodwill net acquired connection acquisition prolifaron see financial note no3 representing excess cost fair value net assets acquired prospective basis goodwill longlived investment asset subject annual impairment reviews impairment charges recorded component operating expenses period impairment determined longlived assets prepaid manufacturing costswe evaluate recoverability longlived assets prepaid manufacturing costs based upon planned usage projected cash flows plans subject periodic revisions dependent success research development programs product candidate development accordingly impairment charges may periodically occur revisions result change planned asset use cash flow generation record cash advances paid secure future long term manufacturing production thirdparty contract manufacturers prepaid manufacturing costs amortized period manufacturing production cash advances subject refund manufacturing facility unavailable scheduled forfeiture terminate scheduled manufacturing production pursuant contractual terms currently anticipate proceed production contract results operations fiscal years ended july 31 2003 2002 2001 earned contract research revenues 09 million 65 million 118 million fiscal years ended july 31 2003 2002 2001 respectively decrease revenues fiscal year 2003 compared fiscal year 2002 principally due decreased research payments procter gamble pharmaceuticals pg resulting december 2001 agreement per binding memorandum understanding mou revise 1999 collaboration agreement pg decrease revenues fiscal year 2002 compared 2001 primarily due decreased research payments pg resulting revised 1999 collaboration agreement completion phase ii pexelizumab cpb study fiscal year 2003 incurred research development expenses 710 million fiscal years 2002 2001 incurred research development expenses 600 million 389 million respectively increase research development expenses fiscal year 2003 compared 2002 due greater clinical trial costs sustaining greater manufacturing costs two lead product candidates pexelizumab eculizumab agreement pg bear first 50 phase iii pexelizumab primocabg trial costs along concurrent clinical trials eculizumab pnh rheumatoid arthritis membranous nephritis patients resulted higher clinical trial costs fiscal 2003 compared 2002 although completed january 2003 obligations associated incurring first 50 projected primocabg trial costs increase research development expenses fiscal year 2002 compared 2001 attributable higher clinical trial costs associated primarily phase iii pexelizumab primocabg trial enrollment began january 2002 result revised collaboration agreement pg required us share pexelizumab development costs greater clinical manufacturing costs associated two lead product candidates expect subject outcome discussions regarding potential clinical development requirements pexelizumab overall research development expenses fiscal 2004 decrease due lower clinical trial study costs resulting phase iii primocabg clinical trial completion however offset increased manufacturing development scaleup manufacturing activities costs associated two lead c5 inhibitor candidates pexelizumab eculizumab however clinical manufacturing activities costs highly dependent upon initiation performance enrollment clinical trials general administrative expenses 106 million 80 million 71 million fiscal years 2003 2002 2001 respectively increase general administrative expenses fiscal year 2003 compared 2002 principally due increased costs associated premarketing business development activities increased personnel professional services support growth operations increase general administrative expenses fiscal year 2002 compared 2001 principally due higher payroll related costs expect general administrative expenses increase premarketing business development activities increased personnel support growth operations concluded investment unigraft program us meet sufficient criteria continued development resources compared internal programs consequently suspended financial commitment program termination unigraft program following inability secure collaboration share future funding program resulted impairment unigraft manufacturing assets principally real estate building improvements capital lab farm equipment subsidiary columbus farming corporation cfc resulting write approximately 27 million assets july 31 2003 carrying value assets approximately 12 million write assets continue classified held use time ability dispose cfc purchased assets relating unigraft program 1999 partner xenotransplantation program us surgical corporation division tyco healthcare tyco purchase price paid issuance 39 million note assets pledged secure cfc’s obligations note cfc failed make august 2003 interest payment due note accordingly cfc tyco discussions regarding sale assets application proceeds cfc’s obligations note acquisition prolifaron fiscal 2001 resulted onetime noncash charge 21 million allocated inprocess research development projects addition recognized approximately 23 million purchase price goodwill amortized seven years following purchase amortization goodwill resulted charge 290 million twelve months ended july 31 2001 effective august 1 2001 adoption sfas 142 caused amortization goodwill cease total operating expenses 842 million 680 million 699 million fiscal years 2003 2002 2001 respectfully total operating expenses twelve months ended july 31 2001 included onetime noncash inprocess research development charge noncash amortization goodwill related acquisition prolifaron income expense net expense 19 million fiscal year 2003 income 42 million 102 million fiscal years 2002 2001 respectively represents interest expense offset investment income expense net fiscal year 2003 compared 2002 due interest expense offset lower investment income lower market interest rates lower cash balances decrease fiscal year 2002 income net compared 2001 due decreased investment income lower cash balances lower market interest rates state tax benefit 08 million 07 million recognized fiscal year 2003 2002 resulting exchange fiscal 2003 2002 2001 incremental research development tax credits fiscal year 2001 recorded 91 million noncash charge related cumulative effect change accounting principle per adoption staff accounting bulletin 101 sab 101 adopted sab 101 fiscal year 2001 therefore changed revenue recognition policy front nonrefundable payments immediate recognition deferral revenue front fee amortized revenue life agreement recognized noncash cumulative effect adjustment 91 million august 1 2000 included fiscal years 2003 2002 2001 contract revenues 06 million related sab 101 amortization front nonrefundable payment life agreement result factors incurred net losses 845 million 565 million 570 million 464 312 328 basic diluted net loss per share fiscal years ended july 31 2003 2002 2001 respectively shown statements operations fiscal years ended 2003 2002 2001 following table displays results operations relative 2001 results liquidity capital resources since inception january 1992 financed operations capital expenditures principally private placements common preferred stock initial public offering common stock subsequent followon offerings sale convertible subordinated notes debt financing payments received corporate collaborations grants equipment leasehold improvements financing july 31 2003 cash equivalents marketable securities totaled 2154 million compared 3086 million july 31 2002 july 31 2003 cash equivalents consisted 248 million hold shortterm highly liquid investments original maturities less three months decrease cash equivalents marketable securities compared july 31 2002 due use funds fund operations including prepaid manufacturing costs reserve commercial manufacturing capacity capital equipment investments year ended july 31 2003 invested 31 million property plant equipment support research development efforts anticipate research development expense increase generally foreseeable future support clinical manufacturing development product candidates anticipate existing capital resources together anticipated funding revised collaboration pg well addition interest investment income earned available cash marketable securities provide us adequate resources fund operating expenses capital requirements currently planned least next twentyfour months also provide us adequate funding clinical testing c5 inhibitor product candidates support broad research development additional product candidates contractual obligations include 120 million convertible subordinated notes due march 2007 annual payments approximately 22 million operating leases principally facilities equipment open letter credit 200000 serves security deposit facility cheshire connecticut addition cfc payer 39 million note commercial commitments consist cancelable research development clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs assuming utilize longterm commercial scale product manufacturing capacity may realized contingent upon clinical development programs’ progress well commercialization plans terms agreement lonza biologics plc lonza manufacture commercial supplies eculizumab could owe penalties failure purchase minimum manufacturing capacity volume terminate agreement prior expiration terminate agreement could required pay unused contracted scheduled manufacturing capacity usage 18 months following termination election make termination payment 25 million less partial return unused portion prepaid manufacturing costs obligations commitments supporting arrangements represent payments based current operating forecast subject change terms memorandum understanding procter gamble pharmaceuticals may obligated reimburse pg 50 cancellation costs pg’s thirdparty pexelizumab manufacturing contract portion cancellation costs could amount 98 million additional payments aggregating 49 million would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization approximately 3 million costs may incurred next three years following table summarizes contractual obligations effect obligations commercial commitments expected liquidity cash flow future fiscal years include aforementioned milestones assume nontermination agreements amounts millions august 2003 note payable classified current liability based upon default august 2003 see discussion february 1999 wholly owned subsidiary columbus farming corporation cfc purchased substantially assets xenotransplantation program including principally land buildings laboratory equipment partner program us surgical corporation division tyco healthcare tyco purchase financed issuance cfc 39 million note payable tyco interest 39 million note payable 6 per annum payable quarterly cfc august 2003 cfc unable make scheduled quarterly interest payment note principal balance note stated due may 2005 classified current liability note deemed default since cfc unable make quarterly interest payment due tyco xenotransplantation manufacturing assets cfc purchased us surgical including real estate pledged security note notified tyco cfc operations suspended cfc seeking liquidate fulfill debt obligation best possible cfc notified tyco funds assets satisfy 39 million note unable make quarterly interest payment due tyco august 2003 cfc discussions tyco regarding sale cfc assets application proceeds cfc’s obligations note well regard satisfaction note generally event default note requires note classified current liability time default cfc’s assets consisting property plant equipment current estimated fair value 12 million insufficient satisfy 39 million note obligations cfc unpaid amount note may discharged debt recognized income future period cfc lease headquarters research development facility cheshire connecticut relocated november 2000 lease initial term ten years six months expiring december 2010 site lease total 89000 square feet space includes approximately 69000 square feet related research laboratories incurred initial leasehold improvements aggregating approximately 74 million addition paying pro rata percentage real estate taxes operating expenses pilot manufacturing plant may used producing compounds current anticipated clinical trials expected remain new connecticut encompasses approximately 33000 square feet labs offices lease new initial term approximately 5 years ending october 2007 three options extend one year believe research development facilities pilot manufacturing facility together third party manufacturing facilities adequate current ongoing activities alexion antibody technologies inc whollyowned subsidiary leases approximately 25000 square feet labs office space unimproved storage san diego california lease term ten years expiring august 2012 january 1999 entered collaboration pg respect joint development pexelizumab december 2001 pg entered binding memorandum understanding mou pursuant pg revised january 1999 collaboration revised structure per mou pg share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts prior december 2001 pg generally funding clinical development manufacturing costs pexelizumab revised collaboration per mou provides pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us receive approximately 50 gross margin us sales pg agreed retain responsibility future development commercialization costs outside us receiving royalty sales rest world responsible paying royalties licensing fees certain third party intellectual property worldwide intellectual property necessary additionally part mou receive milestone payments achieving specified development steps regulatory filings approvals previously agreed sales milestones generally forego research development support payments pg agreed bear first 50 projected costs associated us phase iii primocabg clinical trials pg bear second 50 costs final adjustment make even 50 sharing costs january 31 2003 completed obligation associated first 50 projected costs expected end first fiscal quarter fiscal year 2004 pg complete obligation respect second 50 projected costs phase iii primocabg completion final adjustment make even 50 sharing costs occur fiscal 2004 reimbursements received pg connection alexion services related personnel pg’s 50 cost share recorded reduction research development market research expense part revised collaboration per mou pg agreed continue fund 100 costs two phase ii clinical trials acute myocardial infarction ami heart attack patients pg agreed share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well future amiphase iii clinical trial costs pg right terminate collaboration sublicense collaboration rights time pg terminates collaboration pg required contribute share agreed obligations costs incurred prior termination may required contribute towards costs incurred termination event pg terminate collaboration mou rights exclusive license intellectual property related pexelizumab would revert back us mou contemplate payments pg event pg terminate collaboration however pg might seek negotiate payment might seek sublicense mou rights rather terminate collaboration rely heavily pg development manufacture potential commercialization pexelizumab termination agreement pg sublicense collaboration rights could cause significant delays development manufacture potential commercialization pexelizumab result substantial additional cost us tax reporting purposes july 31 2003 approximately 2456 million federal net operating loss carryforwards expire 2022 approximately 182 million resulted exercise nonqualified stock options 95 million tax credit carryforwards expire commencing fiscal 2008 provisions tax reform act 1986 may limit ability utilize net operating loss tax credit carryforwards given year certain events occur including provision relating cumulative changes ownership interests excess 50 threeyear period believe triggered limitation provisions september 2003 sold 36 million shares common stock price 1300 per share resulting net proceeds approximately 439 million net underwriting discount fees expenses approximately 29 million related transaction expect use net proceeds sale common stock fund working capital general corporate purposes including additional clinical trials pexelizumab eculizumab well research product development activities recently issued accounting standards june 2002 financial accounting standards board “fasb” issued statement financial accounting standards “sfas” 146 accounting costs associated exit disposal activities statement addresses financial accounting reporting costs associated exit disposal activities nullifies emerging issues task force “eitf” issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring provisions sfas 146 effective exit disposal activities initiated december 31 2002 early application encouraged adoption new standard material impact either operating results financial position november 2002 eitf issued abstract 0021 revenue arrangements multiple deliverables eitf 0021 addresses certain aspects accounting arrangements vendor perform multiple revenuegenerating activities guidance issue effective revenue arrangements entered fiscal periods beginning june 15 2003 believe adoption eitf 0021 material operating results financial position november 2002 fasb issued fasb interpretations “fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” fin 45 clarifies requirements sfas 5 “accounting contingencies” relating guarantor’s accounting disclosure issuance certain types guarantees adoption fin 45 material impact either operating results financial position complied disclosure provisions fin 45 may 2003 fasb issued sfas 150 accounting certain financial instruments characteristics liabilities equity sfas 150 establishes standards issuer classifies measures financial instruments standard effective new modified contracts may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 believe adoption sfas 150 material operating results financial position item 7aitem 7 management’s discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed “important factors regarding forwardlooking statements” section entitled “risk factors” overview engaged discovery development therapeutic products aimed treating patients wide array severe disease states including hematologic cardiovascular autoimmune disorders since incorporation january 1992 devoted substantially resources drug discovery research product clinical development additionally wholly owned subsidiary alexion antibody technologies inc aat engaged discovery development portfolio additional antibody therapeutics targeting severe unmet medical needs two lead product candidates therapeutic antibodies address specific diseases arise human immune system produces inflammation human body antibodies proteins bind specifically selected targets antigens body antibody binds target may activate body’s immune system target block activities target stimulate activities target currently examining two lead antibody product candidates variety clinical development programs one product candidate eculizumab phase iii clinical development treatment paroxysmal nocturnal hemoglobinuria pnh chronic hematologic disease second product candidate pexelizumab clinical development two distinct acute cardiac indications developing pexelizumab collaboration procter gamble pharmaceuticals pg rely pg timely development potential commercialization pexelizumab currently none drug product candidates available commercial sale potential products clinical preclinical development status lead product candidates set forth indication item 1 report heading “phase iii product candidates” successful completion development product candidate contingent numerous risks uncertainties factors described detail section entitled “risk factors” factors include • completion preclinical clinical trials product candidate scientific results support development andor regulatory approval • receipt necessary regulatory approvals • obtaining adequate supplies product candidates commercially reasonable terms • obtaining capital necessary fund operations including research development efforts manufacturing requirements clinical trials • performance thirdparty collaborators particularly procter gamble pharmaceuticals rely heavily codevelopment commercialization one lead product candidates • performance thirdparty manufacturers particularly lonza biologics rely heavily manufacture one lead product candidates • obtaining manufacturing sales marketing capabilities presently limited resources result amount nature factors many outside control success timing completion ultimate cost development product candidates highly uncertain cannot estimated degree certainty timing cost complete drug trials alone may impacted among things • slow patient enrollment • long treatment time required demonstrate effectiveness • lack sufficient supplies product candidate • adverse medical events side effects treated patients • lack effectiveness product candidate tested • lack sufficient funds successfully complete clinical trials receive regulatory approval market drug products obtain maintain regulatory approval products generate revenues sale products value company financial condition results operations substantially harmed date received revenues sale products incurred operating losses since inception july 31 2004 accumulated deficit approximately 3394 million expect incur substantial increasing operating losses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup commercial manufacturing precommercialization activities developing sales marketing force increasing administrative personnel professional services support growth operations may need obtain additional financing cover costs plan develop commercialize product candidates clinical trials commercialization requirements funded accomplished resources products require greater resources strategy form corporate partnerships product development commercialization stay play major role critical accounting policies use estimates believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements revenues record contract research revenues research development support payments license fees milestone payments collaboration third parties amounts received various government grants evaluate deliverables collaborative agreements determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value upfront nonrefundable license fees received connection collaboration deferred amortized revenue life agreement underlying technologies revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred research development support revenues recognized related work performed expenses incurred terms contracts development activities revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period deferred revenue results cash received amounts receivable advance revenue recognition research development contracts research development expenses record research development expenses incurred unless recoverable contract research development expenses include following major types costs salaries benefit costs research license fees various contractor costs products developed clinical trials depreciation amortization lab facilities leasehold improvements building utilities costs related research space lab supplies research development expenses fluctuate significantly milestone payments due third parties upon attainment triggering contractual milestones grant patent fda filing fda approval achieving manufacturing sales objective accrued research development expenses comprised amounts owed suppliers research development work performed behalf us period end evaluate accrued expense balance related activities based upon information received supplier estimated progress toward completion research development objectives ensure balance appropriately stated estimates subject change additional information becomes available longlived assets assess impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fairmarket value determine whether impairment charge required fairmarket value less carrying value amount recognized impairment charge see section entitled “liquidity capital resources” goodwill net july 31 2004 carry 200 million goodwill net acquired connection fiscal 2001 acquisition prolifaron representing excess cost fair value net assets acquired prospective basis goodwill longlived investment asset subject annual impairment reviews impairment charges recorded component operating expenses period impairment determined prepaid manufacturing costs july 31 2004 carry 95 million prepaid manufacturing costs cash remitted lonza pursuant largescale product supply agreement longterm commercial manufacture c5 inhibitor antibody eculizumab recognizing advance largescale manufacture eculizumab per lonza amendment defined section entitled “liquidity capital resources” amounts advanced refundable subject forfeiture pursuant contractual terms related cancellation termination failure purchase minimum manufacturing capacity evaluate prepaid manufacturing costs estimated net realizable value nrv estimated nrv positive portion prepaid manufacturing cost may recognized expense results operations reclassification made presentation operating expenses twelve months ended july 31 2003 order conform current year expense classifications connecticut capitalbased tax prior fiscal year reclassified state tax benefit operating expense addition certain reclassifications made prior year balance sheet items conform current year classifications reimbursable contract costs previously netted accounts payable 2003 disclosed separate item balance sheet summary revenues generated contract research collaboration grant awards follows amounts thousands fiscal years ended july 31 2004 2003 2002 earned contract research revenues 46 million 09 million 65 million fiscal years ended july 31 2004 2003 2002 respectively fourth quarter 2004 recognized 4 million milestone payment pg concurrent dosing first patient apexami trial revenue fiscal year 2004 2003 primarily noncash item representing amortization 10 million upfront fee paid us pg february 1999 us government grants totaled 21000 fiscal 2004 204000 fiscal 2003 183000 decrease revenues associated us government grants resulted primarily reduction grant reimbursable billings various government grants result completion related research decrease revenues fiscal year 2003 compared fiscal year 2002 principally due decreased research payments pg resulting december 2001 agreement per binding memorandum understanding mou revise 1999 collaboration agreement pg fiscal year 2004 incurred research development expenses 598 million fiscal years 2003 2002 incurred research development expenses 710 million 600 million respectively track research development costs category incurred rather project research development costs consist primarily payroll benefits costs clinical trial costs clinicalrelated development costs manufacturing development manufacturing costs discovery research costs depreciation amortization expense occupancy related facility operating costs following table summarizes major research development expense categories fiscal years ended july 31 2004 2003 2002 respectively thousands 112 million decrease research development expenses fiscal 2004 fiscal 2003 resulted primarily lower clinical development costs 47 million due principally completion pexelizumab phase iii primocabg clinical trial ii lower costs discovery research 46 million due lower external research license fees suspension unigraft program cfc iii lower manufacturing development manufacturing activities 34 million resulting amended manufacturing agreement lonza timing costs related manufacture pexelizumab lower expenses partially offset increased payroll benefits costs approximately 11 million increased occupancy depreciation costs 04 million believe research development expenses increase fiscal 2005 due among things confirmatory pivotal phase iii clinical trial pexelizumab cabg patients pivotal phase iii clinical trial pexelizumab ami patients receiving angioplasty preparation initiation pivotal phase iii program eculizumab pnh patients increase research development expenses fiscal year 2003 compared 2002 due greater clinical trial costs sustaining greater manufacturing costs two lead product candidates pexelizumab eculizumab agreement pg bear first 50 phase iii pexelizumab primocabg trial costs along concurrent clinical trials eculizumab pnh rheumatoid arthritis membranous nephritis patients resulted higher clinical trial costs fiscal 2003 compared 2002 general administrative expenses 145 million 109 million 80 million fiscal years 2004 2003 2002 respectively increase general administrative expenses 36 million fiscal year 2004 compared 2003 due principally increased premarketing business development activities approximately 18 million support pnh clinical trials well continued growth operations growth resulted increased payroll benefits cost approximately 438000 increased occupancy costs 584000 increased professional legal fees approximately 520000 increase personal franchise taxes approximately 118000 well increase directors officers liability insurance general liability insurance approximately 252000 partially offset decrease capitalbased state taxes approximately 135000 increase general administrative expenses fiscal year 2003 compared 2002 principally due increased costs associated premarketing business development activities increased personnel professional services support growth operations termination unigraft program resulted impairment unigraft manufacturing assets principally real estate building improvements capital lab farm equipment subsidiary columbus farming corporation cfc assets purchased us surgical corporation division tyco issuance 39 million note cfc tyco purchased assets pledged security note cfc liquidate assets satisfy debt obligation whole part anticipate tyco retain proceeds sale cfc’s assets discharge note unpaid interest august 2004 written offer 450000 accepted tyco cfc’s assets used accepted offer basis determining fairmarket value cfc’s assets accordingly written fair market value assets 760000 12 million 450000 july 31 2004 see section entitled “unigraft xenotransplantation technologies program” total operating expenses 751 million 845 million 680 million fiscal years 2004 2003 2002 respectively income expense net expense 43 million 19 million fiscal years 2004 2003 respectively income 42 million fiscal year 2002 represents interest expense offset investment income increase expense net fiscal year 2004 2003 compared 2002 due approximately amount interest expense partially offset lower investment income lower market interest rates lower cash balances state tax benefit 691000 1012000 700000 recognized fiscal year 2004 2003 2002 respectively resulting estimated exchange fiscal 2004 actual exchange fiscal 2003 2002 2001 incremental research development tax credits result factors incurred net losses 741 million 845 million 565 million 343 464 312 basic diluted net loss per share fiscal years ended july 31 2004 2003 2002 respectively liquidity capital resources since inception january 1992 financed operations capital expenditures principally private placements common preferred stock initial public offering common stock subsequent followon offerings sale convertible subordinated notes debt financing payments received corporate collaborations grants equipment leasehold improvements financing july 31 2004 cash equivalents marketable securities totaled 2665 million compared 2154 million july 31 2003 july 31 2004 cash equivalents consisted 1132 million hold shortterm highly liquid investments original maturities less three months increase cash equivalents marketable securities compared july 31 2003 due principally sale 55 million shares common stock july 2004 price 1550 per share resulting net proceeds approximately 809 million net underwriting discounts fees expenses approximately 44 million related transaction sale 36 million shares common stock september 2003 price 1300 per share resulting net proceeds approximately 439 million net underwriting discounts fees expenses approximately 29 million related transaction increase cash equivalents marketable securities partially offset use funds fund operations including prepaid manufacturing costs reserve commercial manufacturing capacity capital equipment investments year ended july 31 2004 invested 31 million property plant equipment support research development efforts anticipate research development expense increase generally foreseeable future support clinical manufacturing development product candidates anticipate existing capital resources together anticipated funding revised collaboration pg well addition interest investment income earned available cash marketable securities provide us adequate resources fund operating expenses capital requirements currently planned least next twentyfour months following table summarizes contractual obligations july 31 2004 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change amounts millions contractual obligations contractual obligations include 120 million convertible subordinated notes due march 2007 annual payments approximately 23 million operating leases principally facilities equipment open letter credit 200000 serves security deposit facility cheshire connecticut addition cfc payor 39 million note payable february 1999 cfc purchased substantially assets unigraft xenotransplantation program including principally land buildings laboratory equipment partner program us surgical corporation division tyco international ltd tyco purchase financed issuance cfc 39 million note payable tyco interest 39 million note payable 6 per annum payable quarterly cfc xenotransplantation manufacturing assets cfc purchased tyco including real estate pledged security note upon cfc’s failure make quarterly interest payment due tyco august 2003 cfc defaulted note continue recognize cfc’s interest expense note payable obligations discharged quarter ended october 31 2003 conjunction event default notified tyco unigraft xenotransplantation program cfc activities terminated cfc seeking liquidate fulfill debt obligation whole part cfc notified tyco funds assets satisfy 39 million note unpaid interest quarter ended january 31 2004 tyco initiated plan sell liquidate cfc’s assets present condition anticipate tyco retain proceeds sale cfc’s assets discharge note unpaid interest august 2004 written offer 450000 accepted tyco cfc’s assets used accepted offer basis determining fairmarket value cfc’s assets accordingly written fairmarket value assets 12 million 450000 july 31 2004 since cfc’s assets consisting property plant equipment insufficient satisfy 39 million note unpaid interest obligations cfc expect unpaid amount note interest discharged debt recognized income fiscal 2005 cfc subordinated convertible notes interest 120 million 575 convertible subordinated notes due march 15 2007 payable semiannually september march year holders may convert portion notes common stock time march 15 2007 conversion price 106425 per common share beginning march 20 2003 may redeem notes per declining redemption prices listed notes may also elect pay repurchase price notes cash common stock may time depending market conditions repurchase outstanding convertible debt cash exchange debt shares common stock preferred stock debt consideration combination foregoing exchange shares capital stock securities convertible exercisable capital stock outstanding convertible debt number shares might issue result exchanges would significantly exceed number shares originally issuable upon conversion debt accordingly exchanges could result material dilution holders common stock assurance repurchase exchange outstanding convertible debt operating leases operating leases principally facilities equipment lease headquarters research development facility cheshire connecticut lease initial term expiring december 2010 site lease total 89000 square feet space includes approximately 69000 square feet related research laboratories incurred costs relating initial leasehold improvements aggregating approximately 83 million addition paying pro rata percentage real estate taxes operating expenses pilot manufacturing plant may used producing compounds current anticipated clinical trials expected remain new connecticut encompasses approximately 33000 square feet labs offices lease new initial term ending october 2007 three options extend one year believe research development facilities pilot manufacturing facility together third party manufacturing facilities adequate current ongoing activities alexion antibody technologies inc whollyowned subsidiary leases approximately 25000 square feet labs office space unimproved storage san diego california lease expires august 2012 commercial commitments commercial commitments consist cancelable research development licenses operations clinical development including clinical trials manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs assuming utilize longterm commercial scale product manufacturing capacity may realized contingent upon clinical development programs’ progress well commercialization plans commercial commitments represented principally agreement lonza biologics plc collaboration pg pharmaceuticals lonza agreement largescale product supply agreement dated december 18 2002 lonza agreement lonza biologics plc lonza us relating manufacture product candidate eculizumab amended lonza amendment april 2004 lonza amendment facility lonza manufacture eculizumab changed manufacturing capacity required purchase reduced future potential payments 10 million us lonza relating achievement eculizumab sales milestones 15 million payable us relating manufacturing yields achieved lonza eliminated august 2004 paid lonza additional 35 million nonrefundable advance lonza amendment addition amounts would required pay connection voluntary termination lonza agreement us changed lonza agreement amended lonza amendment terminate lonza agreement prior september 30 2006 may required pay different amounts depending lonza agreement terminated zero approximately 10 million terminate lonza agreement september 30 2006 may required pay batches product scheduled manufacture 12 months following termination pg pharmaceuticals collaboration december 2001 pg entered binding memorandum understanding mou pursuant january 1999 collaboration revised structure per mou pg share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts revised collaboration per mou provides pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us receive approximately 50 gross margin us sales pg agreed retain responsibility future development commercialization costs outside us receiving royalty sales outside us responsible royalties certain third party intellectual property worldwide intellectual property necessary additionally part mou receive milestone payments achieving specified development steps regulatory filings approvals pg agreed per mou share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well ami cabg phase iii clinical trial costs pg right terminate collaboration sublicense rights time pg terminates collaboration per mou pg required contribute share agreed obligations costs incurred prior termination may required contribute towards obligations incurred termination circumstance rights exclusive license intellectual property related pexelizumab would revert back us would entitled future pexelizumab revenues without sharing revenues pg sublicense rights sublicensee would required assume pg’s obligations collaboration rely pg development manufacture potential commercialization pexelizumab termination agreement pg sublicense collaboration rights could cause significant delays development manufacture potential commercialization pexelizumab result significant additional costs us terms mou may obligated reimburse pg 50 cancellation costs pg’s thirdparty pexelizumab manufacturing contract portion cancellation costs could amount much 98 million additional payments additional payments aggregating 24 million would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization approximately 3 million costs may incurred next three years taxes tax reporting purposes july 31 2004 approximately 3199 million federal net operating loss carryforwards expire 2024 approximately 196 million resulted exercise nonqualified stock options 146 million tax credit carryforwards expire commencing fiscal 2008 provisions tax reform act 1986 may limit ability utilize net operating loss tax credit carryforwards given year certain events occur including provision relating cumulative changes ownership interests excess 50 threeyear period believe triggered limitation provisions recently issued accounting standards november 2003 emerging issues task force “eitf” reached consensus eitf issue 031 “the meaning otherthantemporary impairment application certain investments” regarding issue disclosures marketable securities debt securities accounted sfas 115 “accounting certain investments debt equity securities” eitf requires additional quantitative disclosure related unrealized losses specifically presentation aging losses also requires additional qualitative disclosures help users understand quantitative disclosures otherthantemporarily impaired adoption disclosure requirements effective companies fiscal years ending december 15 2003 adoption standard material impact either operating results financial position december 2003 sec issued staff accounting bulletin 104 “sab 104” “revenue recognition” supercedes sab 101 “revenue recognition financial statements” sab 104’s primary purpose rescind accounting guidance contained sab 101 related multiple element revenue arrangements superceded result issuance eitf 0021 “accounting revenue arrangements multiple deliverables” issuance sab 104 reflects concepts contained eitf 0021 revenue recognition concepts contained sab 101 remain unchanged issuance sab 104 material impact operating results financial position april 2004 eitf reached consensus eitf issue 036 “participating securities two class method fasb statement 128” “eitf 036” eitf 036 addresses number questions regarding computation earnings per share companies issued securities common stock contractually entitle holder participate dividends earnings company declares dividends common stock eitf 036 also provides guidance applying twoclass method calculating earnings per share clarifying constitutes participating security apply twoclass method computing earnings per share determined security participating including allocate undistributed earnings security eitf 036 effective fiscal periods beginning march 31 2004 requires retroactive restatement prior earnings per share amounts adoption standard material impact either operating results financial position risk factors carefully consider following risk factors decide invest company business risk factors may significant impact business operating results financial condition cash flows risk uncertainties described ones face additional risks uncertainties presently known us currently deem immaterial may also impair business operations following risks actually occur business financial condition results operations could materially adversely affected continue incur operating losses may unable continue operations incurred losses since started company january 1992 july 31 2004 accumulated deficit approximately 339 million continue incur operating losses fail become profitable company may unable continue operations since began business focused research development product candidates products available sale know products available sale ever expect continue operate net loss least next several years continue research development efforts continue conduct clinical trials develop manufacturing sales marketing distribution capabilities future profitability depends receiving regulatory approval product candidates ability successfully manufacture market approved drugs extent timing future losses profitability ever profitable highly uncertain subject extensive government regulation obtain regulatory approval drug products able sell drug products partners cannot sell market drugs without regulatory approval partners obtain maintain regulatory approval products value company results operations harmed united states partners must obtain maintain approval fda drug intend sell obtaining fda approval typically lengthy expensive process approval highly uncertain foreign governments also regulate drugs distributed outside united states whose approval also lengthy expensive highly uncertain none product candidates received regulatory approval marketed sold united states country may receive regulatory approval product candidates least next several years ever partners contract manufacturers suppliers subject rigorous extensive regulation fda federal state agencies governmental authorities countries regulations apply approval product candidates product candidates ever approved cover among things testing manufacturing quality control labeling advertising promotion export biologics failure comply laws including statutes regulations administered fda agencies could result administrative judicial sanctions including warning letters fines civil penalties delay approving refusal approve product candidate product recall seizure interruption production operating restrictions injunctions criminal prosecution fda granted “fast track” status pexelizumab use cpb treatment ami eculizumab treatment membranous nephritis although fast track status may expedite development fda review application assurance pexelizumab eculizumab reviewed expeditiously “fasttrack” indications would otherwise case approved promptly fda could revoke fast track status pexelizumab eculizumab fda granted orphan drug designation eculizumab treatment pnh membranous nephritis orphan drug designation convey advantage shorten duration fda review approval process product orphan drug designation subsequently receives first fda approval indication designation product entitled orphan exclusivity ie fda may approve applications market drug indication period seven years except limited circumstances drug trials delayed achieve unfavorable results delay may unable obtain regulatory approval products must conduct extensive testing product candidates obtain regulatory approval products need conduct preclinical animal testing clinical human trials tests trials may achieve favorable results would need reevaluate drug test favorably either alter study drug dose perform additional repeat tests abandon drug development project circumstances would able obtain regulatory approval timely basis ever even approval granted approval may require limitations indicated uses drug may marketed clinical trials completed date achieved primary endpoints december 1999 completed phase iib trial pexelizumab treatment complications patients cabg cpb including reduction frequency severity myocardial infarctions frequency death primary therapeutic preset goal trial referred primary endpoint achieved however prespecified population included approximately 90 patient population ie 800 patients cabg surgery without valve surgery received pexelizumab highest dose level experienced statistically significant reduction larger postsurgical heart attacks based results january 2002 commenced enrollment phase iii clinical trial pexelizumab patients undergoing cabg cpb completed target patient enrollment approximately 3000 patients february 2003 august 2003 disclosed preliminary results indicated primary endpoint achieved statistical significance primary endpoint phase iii trial composite incidence death myocardial infarction measured 30 days postprocedure patients undergoing cabg without simultaneous valve surgery concluded two phase ii studies pexelizumab ami one study patients receiving angioplasty procedure opening narrowed blocked arteries supply blood heart patients receiving thrombolytic therapy procedure dissolving clots block heart vessels angioplasty study called comma thrombolytic study called comply completed patient enrollment april 2002 january 2002 respectively results studies reported november 2002 annual meeting american heart association studies primary endpoint reduction myocardial infarction reached however comma study pexelizumab treatment associated statistically significant dosedependent reduction death 2001 announced completion phase iia trial eculizumab treatment rheumatoid arthritis ra primary endpoint trial met group patients received midlevel monthly dosing regimen eculizumab patients received higher lower doses eculizumab clinical trial achieve primary endpoint primary endpoint phase iia trial acr 20 325 months january 2004 announced preliminary results phase iib study eculizumab approximately 350 ra patients results trial indicate primary endpoint achieved statistical significance one dosing regimens monthly dosing arm higher bimonthly dosing arm completion trials guarantee initiate additional trials product candidates trials initiated scope phase trial completed trials completed results provide sufficient basis proceed trials apply receive regulatory approvals commercialize products results trials could inconclusive requiring additional repeat trials results achieved clinical trials insufficient proceed trials regulatory approval product candidates company could materially adversely affected failure trial achieve prespecified primary endpoint generally increases likelihood additional studies required determine continue development product candidate reduces likelihood timely development regulatory approval market product candidate many reasons drug testing could delayed terminated human trials patients must recruited product candidate must tested various doses formulations clinical indication also ensure safety effectiveness effect drugs often must studied long period time especially chronic diseases studying unfavorable results insufficient patient enrollment clinical trials could delay cause us abandon product development program additional factors cause delay termination clinical trials include • slow patient enrollment • long treatment time required demonstrate effectiveness • lack sufficient supplies product candidate • adverse medical events side effects treated patients • failure patients taking placebo continue participate clinical trials • lack effectiveness product candidate tested • lack sufficient funds may expand business new acquisitions could disrupt business harm financial condition business strategy includes expanding products capabilities may seek acquisitions involve numerous risks including • substantial cash expenditures • potentially dilutive issuance equity securities • incurrence debt contingent liabilities may difficult impossible identify time acquisition • difficulties assimilating operations acquired companies • diverting management’s attention away business concerns • risks entering markets limited direct experience • potential loss key employees key employees acquired companies cannot assure acquisition result shortterm longterm benefits us may incorrectly judge value worth acquired company business addition future success would depend part ability manage rapid growth associated acquisitions cannot assure able make combination business acquired businesses companies work successful furthermore development expansion business acquired business companies may require substantial capital investment us may necessary funds might available us acceptable terms may also seek raise funds selling shares stock could dilute current stockholders’ ownership interest company securities convertible stock could dilute current stockholders’ ownership interest company upon conversion fail obtain capital necessary fund operations unable continue complete product development believe sufficient capital fund operations product development least twentyfour months may need raise additional capital time complete development commercialization product candidates currently conducting initiating several clinical trials funding needs may shift programs potentially accelerate increase initiate new pivotal trials product candidates including pivotal clinical trial pexelizumab ami patients undergoing angioplasty rely heavily pg fund development pexelizumab pg terminate pexelizumab collaboration could raise additional capital find new collaboration partners order continue development pexelizumab additional financing could take form public private debt equity offerings equity line facilities bank loans collaborative research development arrangements corporate partners andor sale licensing property amount capital may need depends many factors including • existence terms status collaborative arrangements strategic partnerships collaboration pg • progress timing scope research development programs • progress timing scope preclinical studies clinical trials • time cost necessary obtain regulatory approvals • time cost necessary develop manufacturing processes arrange contract manufacturing build manufacturing facilities obtain necessary regulatory approvals f facilities • time cost necessary develop sales marketing distribution capabilities • cost necessary sell market distribute products approved • changes applicable governmental regulatory policies • new collaborative licensing commercial relationships may establish may get funding need funding may available unfavorable terms cannot raise adequate funds satisfy capital requirements may delay scaleback eliminate research development activities future operations might license technology others could result sharing revenues might otherwise retain actions would harm business significantly leveraged currently outstanding 120 million principal amount 5 34 convertible subordinated notes degree leveraged could among things • make difficult us make payments notes • make difficult us obtain financing working capital acquisitions purposes favorable terms • make us vulnerable industry downturns competitive pressures • limit flexibility planning reacting changes business ability meet debt service obligations depend upon future performance subject financial business factors affecting operations many beyond control collaboration pg terminated pg reduces commitment collaboration ability develop commercialize pexelizumab time expected business would harmed rely heavily pg perform development obtain commercial manufacturing provide sales marketing pexelizumab cannot assure pexelizumab ever successfully developed commercialized pg perform obligations timely manner ability commercialize pexelizumab significantly adversely affected rely pg provide funding additional resources development commercialization pexelizumab include funds resources • clinical development clinical commercial manufacturing • obtaining regulatory approvals • sales marketing distribution efforts worldwide pg right terminate collaboration sublicense collaboration rights time termination agreement pg would cause significant delays development pexelizumab result significant additional development costs us continue development pexelizumab following termination pg would need fund development commercialization pexelizumab identify new development partner would need develop acquire replacement expertise many areas necessary development potential commercialization pexelizumab enter agreements companies respect matters resources replace functions provided funded pg accordingly might stop development pexelizumab shift resources product development programs alternative resources obtained sublicense pg also could cause significant delays development pexelizumab result substantial additional development costs us might also repeat testing already completed pg addition sublicense would introduce new collaboration partner could create new additional risks development pexelizumab cannot identified time cannot guarantee pg devote resources necessary successfully develop commercialize pexelizumab timely manner furthermore pg may devote necessary resources may still successfully develop commercialize pexelizumab unable engage retain thirdparty collaborators research development efforts may delayed depend upon thirdparty collaborators assist us development product candidates existing collaborators breaches terminates agreement us perform development work agreement timely manner would experience significant delays development commercialization product candidates would also experience significant delays could engage additional collaborators required either event would required devote additional funds resources activities terminate would divert funds resources parts business cannot assure • current collaboration arrangements continued current form • able negotiate acceptable collaborative agreements develop commercialize product candidates • arrangements third parties successful • current potential collaborators pursue treatments diseases seek ways developing treatments disease targets trading price common stock continues fluctuate wide range stockholders suffer considerable uncertainty respect investment stock trading price common stock volatile may continue volatile future factors announcements fluctuations competitors’ operating results clinical scientific results fluctuations trading prices business prospects competitors collaborators including limited pg changes prospects market conditions biotechnology stocks general could significant impact future trading prices common stock convertible subordinated notes particular trading price common stock many biotechnology companies including experienced extreme price volume fluctuations times unrelated operating performance companies whose stocks affected due several factors including general market conditions announcement results clinical trials product development results attempts obtain fda approval products particular since august 1 1999 sales price common stock ranged low 905 per share high 11988 per share cannot predict future performance stock price continues fluctuate wide range investment stock may result considerable uncertainty investor cannot protect confidentiality proprietary nature trade secrets business competitive position harmed business requires using sensitive technology techniques proprietary compounds protect trade secrets however since small company also rely heavily collaboration suppliers outside scientists drug companies collaboration presents strong risk exposing trade secrets trade secrets exposed would help competitors adversely affect business prospects order protect drugs technology effectively need obtain patents covering drugs technologies develop may obtain patents ownership license drugs expensive timeconsuming test develop without patent protection competitors may copy methods chemical structure aspects drugs even obtain patents may broad enough protect drugs copycat products found infringing patents owned others may forced pay damages patent owner obtain license continue manufacture sale development drugs andor pay damages cannot obtain license may prevented manufacture sale development drugs parts including inlicensed technology techniques proprietary compounds potential drug candidates may conflict patents owned granted others cannot resolve conflicts may liable damages required obtain costly licenses stopped manufacturing using selling products conducting activities example aware broad patents owned others relating manufacture use sale recombinant humanized antibodies recombinant humanized single chain antibodies recombinant human antibodies recombinant human single chain antibodies many product candidates genetically engineered antibodies including recombinant humanized antibodies recombinant humanized single chain antibodies recombinant human antibodies recombinant human single chain antibodies received notices owners patents claiming patents may relevant development manufacture sale drug candidates including pexelizumab eculizumab response notices obtained licenses expect obtain licenses however regard patents either determined judgment • products infringe patents • believe patents valid • identified testing various modifications believe infringe patents permit commercialization product candidates patent holders could sue us damages seek prevent us manufacturing selling developing drugs legal disputes costly time consuming defend patent holder successfully challenges judgment products infringe patents invalid could required pay costly damages obtain license sell develop drugs required license may costly may available acceptable terms assurance would prevail patent infringement action able obtain license third party patent commercially reasonable terms successfully develop noninfringing alternatives timely basis license alternative noninfringing technology exists commercially reasonable terms impediment ability manufacture sell approved forms product candidates could material adverse effect business prospects testing use products harms people could subject costly damaging product liability claims testing manufacturing marketing sale drugs use humans exposes us product liability risks side effects problems using products could give rise product liability claims us might recall products marketplace risks unknown time addition may sued people participate trials number patients participate trials already ill enter trial informed consents waivers obtained people sign trials may protect us liability litigation product liability insurance may cover potential liabilities may completely cover covered liabilities moreover may able maintain insurance acceptable terms addition negative publicity relating product liability claim may make difficult impossible us recruit patients clinical trials market sell products result factors product liability claim even successfully defended could material adverse effect business financial condition results operations use c5 inhibitors pexelizumab eculizumab associated increased risk infection neisseria bacteria one patient trials eculizumab treatment membranous nephritis became infected neisseria bacteria serious cases neisseria infection result brain damage loss limbs parts limbs kidney failure death subject environmental laws potential exposure environmental liabilities subject various federal state local environmental laws regulations govern operations including handling disposal nonhazardous hazardous wastes including medical biological wastes emissions discharges environment including air soils water sources failure comply laws regulations could result costs corrective action penalties imposition liabilities also subject laws regulations impose liability cleanup responsibility releases hazardous substances environment certain laws regulations current previous owner operator property may liable costs remediating property locations wastes sent facilities without regard whether owner operator knew necessarily caused contamination obligations liabilities date material could material impact business financial condition cannot manufacture drug candidates sufficient amounts acceptable costs timely basis may unable necessary materials product testing later potential sale market either event would harm business drug trials need produce sufficient amounts product testing small manufacturing plant cannot manufacture enough product candidates later stage clinical development commercial supply addition capacity produce one product candidate time depend outside suppliers manufacturing experience interruptions manufacture products drug development commercialization efforts delayed outside manufacturers stops manufacturing products reduces amount manufactured otherwise unable manufacture required amounts required quality need find alternatives unable find acceptable outside manufacturer reasonable terms divert resources manufacturing may sufficient produce necessary quantity quality product result ability conduct testing drug trials plans commercialization would materially adversely affected submission products new development programs regulatory approval well plans commercialization would delayed competitive position prospects achieving profitability would materially adversely affected manufacture drug products including need develop utilize manufacturing processes consistently produce drug products required quality specifications highly regulated fda domestic foreign authorities cannot assure thirdparty collaborators successfully comply regulations failure would materially adverse effect business manufacture drug products highly technical thirdparties ability capacity manufacture drug products development commercialization needs assure potential thirdparty collaborators agree manufacture products behalf commercially reasonable terms achieve agreement one third parties manufacture drug products assure able willing honor terms agreements including obligations manufacture drug products accordance regulatory requirements quality specifications volume requirements due highly technical requirements manufacturing drug products thirdparty collaborators may unable manufacture drug products despite efforts inability contract thirdparty manufacturers commercially reasonable terms failure delay thirdparty manufacturers manufacturing drug products volumes quality required would material adverse effect business experience capacity manufacturing drug products volumes would necessary support commercial sales unable establish maintain commercial scale manufacturing within planned time cost parameters sales products financial performance would adversely affected currently relying pg retain appropriate commercial manufacturing pexelizumab one thirdparty manufacturers pg contracted one thirdparty manufacturer largescale commercial manufacture pexelizumab failure pg obtain appropriate commercial manufacturing pexelizumab timely basis may prevent impede commercialization pexelizumab executed largescale product supply agreement lonza biologics plc longterm manufacture eculizumab failure lonza manufacture appropriate supplies eculizumab timely basis may prevent impede commercialization eculizumab due nature current market thirdparty commercial manufacturing arrangements many arrangements require substantial penalty payments customer failure use manufacturing capacity contracted could owe substantial penalty payments lonza use manufacturing capacity contracted could required share equal basis pg substantial penalty payments owed pg failure utilize manufacturing capacity contracted thirdparty manufacturers supply pexelizumab payment substantial penalty would harm financial condition unable establish sales marketing distribution capabilities enter agreements third parties unable successfully market sell future drug products sales distribution personnel capabilities recently established core precommercial marketing capabilities unable continue developing capabilities either developing capabilities entering agreements others able successfully sell future drug products event able generate significant revenues cannot guarantee able hire qualified sales marketing personnel need may able enter marketing distribution agreements thirdparty providers acceptable terms currently relying pg sales marketing distribution pexelizumab pg future thirdparty collaborators may succeed selling marketing distributing future drug products unable obtain reimbursement future products government health administration authorities private health insurers organizations products may costly regular use ability generate revenues would harmed products commercialized may significantly expensive traditional drug treatments future revenues profitability adversely affected cannot depend governmental private thirdparty payors defray cost products consumer entities refuse provide reimbursement respect products determine provide insufficient level reimbursement products may costly general use profitability may adversely impacted choose offer products reduced price limitation use products decrease price products without corresponding decrease expenses material adverse effect ability achieve profitability competitors get marketplace better cheaper drugs may profitable sell continue develop abbott laboratories inc adprotech ltd avant immunotherapeutics inc baxter international inc millennium pharmaceuticals inc neurogen corporation tanox inc xoma ltd publicly announced intentions develop drugs target inflammatory effects complement immune system also aware glaxosmithkline plc merck co inc pfizer inc also attempting develop complement inhibitor therapies cambridge antibody technology group plc morphosys ag dyax corporation publicly announced intentions develop therapeutic human antibodies libraries human antibody genes additionally abgenix inc medarex inc publicly announced intentions develop therapeutic human antibodies mice bred include human antibody genes pharmaceutical companies many significantly greater resources may develop manufacture market better cheaper drugs product candidates may establish marketplace able even finish clinical trials pharmaceutical companies also compete us attract academic research institutions drug development partners including licensing institutions’ proprietary technology competitors successfully enter arrangements academic institutions precluded pursuing unique opportunities may able find equivalent opportunities elsewhere fail recruit retain personnel research product development programs may delayed highly dependent upon efforts senior management scientific personnel particularly dr leonard bell md chief executive officer member board directors david w keiser president chief operating officer member board directors stephen p squinto phd executive vice president head research intense competition biotechnology industry qualified scientific technical personnel since business scienceoriented specialized need continue attract retain people may able continue attract retain qualified personnel necessary developing business key man life insurance policy dr bell employment agreements dr bell mr keiser dr squinto none key personnel nearing retirement age knowledge planning retire knowledge tension key personnel board directors lose services management scientific personnel fail recruit scientific technical personnel research product development programs materially adversely affected particular highly value services dr bell chief executive officer loss services could materially adversely affect ability achieve development objectives ability use net operating loss carryforwards reduce future tax payments may limited change ownership alexion july 31 2004 approximately 320 million net operating loss carryforwards nols available reduce taxable income future years believe nols currently subject annual limitation section 382 internal revenue code 1986 amended ability utilize nols may limited undergo ownership change defined section 382 result subsequent changes ownership outstanding stock would undergo ownership change among things stockholders group stockholders owned directly indirectly 5 value stock otherwise treated 5 stockholders section 382 regulations promulgated thereunder increase aggregate percentage ownership stock 50 percentage points lowest percentage stock owned stockholders time testing period generally threeyear period preceding potential ownership change event ownership change section 382 imposes annual limitation amount postownership change taxable income corporation may offset preownership change nols limitation imposed section 382 postchange year would determined multiplying value stock immediately ownership change subject certain adjustments applicable longterm taxexempt rate unused limitation may carried later years limitation may certain circumstances increased builtin gains may present respect assets held us time ownership change recognized fiveyear period ownership change use nols arising date ownership change would affected believe experienced change ownership within meaning section 382 result offering common stock july 30 2004 however assurance internal revenue service could successfully challenge conclusion even offering common stock cause ownership change occur immediately issuance directly indirectly relatively large number shares offering may mean may able engage transactions involving issuance deemed issuance stock within subsequent threeyear period without triggering ownership change within meaning section 382 addition circumstances beyond control market purchases stock investors existing 5 shareholders become 5 shareholders result purchases could result ownership change respect stock thus assurance future actions future actions stockholders result occurrence ownership change may limit use nols negatively affect future cash flows item 7aitem 7 management’s discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed section entitled “risk factors” overview engaged discovery development therapeutic products aimed treating patients wide array severe disease states including hematologic cardiovascular disorders autoimmune diseases cancer since incorporation january 1992 devoted substantially resources drug discovery research product clinical development additionally wholly owned subsidiary alexion antibody technologies inc aat engaged discovery development portfolio additional antibody therapeutics targeting severe unmet medical needs two lead product candidates therapeutic antibodies address specific diseases arise human immune system produces inflammation human body antibodies proteins bind specifically selected targets antigens body antibody binds target may activate body’s immune system target block activities target stimulate activities target currently examining two lead antibody product candidates variety clinical development programs one product candidate eculizumab phase iii clinical development treatment paroxysmal nocturnal hemoglobinuria pnh chronic hematologic disease second product candidate pexelizumab clinical development two distinct acute cardiac indications developing pexelizumab collaboration procter gamble pharmaceuticals pg rely pg timely development potential commercialization pexelizumab currently none drug product candidates available commercial sale potential products clinical preclinical development status lead product candidates set forth indication item 1 report heading “product development programs” successful completion development product candidate contingent numerous risks uncertainties factors described detail section entitled “risk factors” factors include • completion preclinical clinical trials product candidate scientific results support development andor regulatory approval • receipt necessary regulatory approvals • obtaining adequate supplies product candidates commercially reasonable terms • obtaining capital necessary fund operations including research development efforts manufacturing requirements clinical trials • performance thirdparty collaborators particularly procter gamble pharmaceuticals rely heavily codevelopment commercialization one lead product candidates • performance thirdparty manufacturers particularly lonza biologics rely heavily manufacture one lead product candidates • obtaining manufacturing sales marketing capabilities presently limited resources result amount nature factors many outside control success timing completion ultimate cost development product candidates highly uncertain cannot estimated degree certainty timing cost complete drug trials alone may impacted among things • slow patient enrollment • long treatment time required demonstrate effectiveness • lack sufficient supplies product candidate • disruption operations clinical trial sites • adverse medical events side effects treated patients • failure patients taking placebo continue participate clinical trials • lack effectiveness product candidate tested • lack sufficient funds successfully complete clinical trials receive regulatory approval market drug products obtain maintain regulatory approval products generate revenues sale products value company financial condition results operations substantially harmed date received revenues sale products incurred operating losses since inception july 31 2005 accumulated deficit approximately 4481 million expect incur substantial increasing operating losses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup commercialscale manufacturing precommercialization activities developing sales marketing force increasing administrative personnel professional services support growth operations need obtain additional financing cover costs plan develop commercialize eculizumab product candidates clinical trials commercialization requirements funded accomplished resources products require greater resources pexelizumab plan develop commercialize drugs corporate partnerships offbalance sheet arrangements offbalance sheet arrangements guarantee obligations entity indemnify certain third parties liabilities may incur connection manufacturing development sale drug candidates critical accounting policies use estimates preparation consolidated financial statements use certain estimates assumptions affect reported amounts disclosures estimates often based judgments probabilities assumptions believe reasonable inherently uncertain unpredictable judgments estimates materially impact result operations believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements marketable securities invest marketable debt securities highly rated financial institutions investmentgrade debt instruments limit amount credit exposure one entity unrealized gains losses included accumulated comprehensive loss component stockholders’ equity believe conservative investment policy ensures reasonable assurance impairment marketable securities held also enables us avoid incurring realized losses could occur securities held maturity longlived assets assess potential impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value amount recognized impairment charge goodwill represents difference purchase price acquired businesses fair value net assets amortized test goodwill impairment least annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charge resulted upon adoption standard result company’s annual impairment assessment prepaid manufacturing costs cash advances paid us secure future long term manufacturing production thirdparty contract manufacturers recorded prepaid manufacturing costs recognized period manufacturing production unit production method cash advances subject refund manufacturing facility unavailable scheduled forfeiture terminate scheduled production evaluate prepaid manufacturing costs estimated net realizable value nrv estimated nrv negative portion prepaid manufacturing cost may recognized expense calculation nrv involves estimates expected sales volume sales price market penetration product question revenue recognition record contract research revenues research development support payments license fees milestone payments collaborations third parties amounts received various government grants evaluate deliverables collaborative agreements determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value undelivered items upfront nonrefundable license fees received connection collaboration agreement deferred amortized revenue life agreement underlying technologies revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies theses costs expensed incurred entered certain research agreements share costs collaborator record costs research development expenses incurred portion costs reimbursed collaborator recorded reduction research development expense accrued research development expenses comprised amounts owed suppliers research development work performed behalf end period evaluate accrued expense balance related activities based upon information received supplier estimated progress toward completion research development objectives ensure balance appropriately stated estimates subject change additional information becomes available stock based compensation account stock options restricted stock utilizing intrinsic value method accordance accounting principles board opinion apb 25 “accounting stock issued employees” accordingly recognize compensation expense options option grants exercise price equal fair market value date grant believe difficult accurately measure value employee stock option estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significantly use historical volatility determine expected stock price volatility factor also significance expected term exercise factor currently use historical exercise patterns best estimate future exercise patterns employee stock option values determined may changed continually seek refine improve approach measure value employee stock options issuance sfas 123r significantly change way account grants stock options new pronouncement potential impact discussed section titled “recently issued accounting pronouncements” results operations reclassification made presentation operating expenses twelve months ended july 31 2003 order conform current year expense classifications connecticut capitalbased tax prior fiscal year reclassified state tax benefit operating expense addition certain reclassifications made prior year balance sheet items conform current year classifications fiscal years ended july 31 2005 2004 2003 summary revenues generated contract research collaboration grant awards follows amounts thousands earned contract research revenues 11 million 46 million 09 million fiscal years ended july 31 2005 2004 2003 respectively fourth quarter 2004 recognized 4 million milestone payment pg concurrent dosing first patient apexami trial substantially revenue fiscal years 2005 2004 2003 noncash item representing amortization deferred revenue 10 million upfront fee paid us pg february 1999 revenue us government grants totaled 476000 fiscal 2005 21000 fiscal 2004 204000 fiscal 2003 455000 increase revenues associated us government grants obtained fiscal 2005 resulted research antianthrax biodefense program 183000 decrease revenues associated us government grants 2003 2004 resulted primarily reduction grant reimbursable billings various government grants due completion related research fiscal year 2005 incurred research development expenses 914 million fiscal years 2004 2003 incurred research development expenses 598 million 710 million respectively report research development costs category incurred rather project research development costs consist primarily payroll benefits costs preclinical costs clinical trial costs clinicalrelated development costs manufacturing development manufacturing costs discovery research costs depreciation amortization expense occupancy related facility operating costs following table summarizes major research development expense categories fiscal years ended july 31 2005 2004 2003 respectively amounts thousands increase clinical development expenses 2004 2005 attributable principally cost conducting two phase iii clinical trials primocabg2 apexami pexelizumab increase payroll benefits 2004 2005 primarily attributable increase staff involved clinical manufacturing development well regulatory quality assurance activities increase manufacturing development expenses 2004 2005 caused largely increased production material used clinical trials involving eculizumab pexelizumab decrease discovery research due principally recognition 13 million balance nonrefundable payment received xoma 2003 xoma paid upfront nonrefundable fee 15 million pursuant collaborative agreement recorded payment deferred research development payment amortized payment reduction research development expense upon cancellation xoma collaborative agreement 2005 remaining balance 13 million recognized reduction research development expenses 112 million decrease research development expenses fiscal 2004 fiscal 2003 resulted primarily lower clinical development costs 47 million due principally completion pexelizumab phase iii primocabg clinical trial ii lower costs discovery research 46 million due lower external research license fees suspension unigraft program cfc iii lower manufacturing development manufacturing activities 34 million resulting amended manufacturing agreement lonza timing related manufacture pexelizumab lower expenses partially offset increased payroll benefits costs approximately 11 million increased occupancy depreciation costs 04 million expect research development expenses increase fiscal 2006 due among things completion primocabg2 trial continuation apexami trial completion triumph shepherd trials ongoing enrollment extension clinical trial eculizumab pnh patients general administrative expenses 190 million 145 million 109 million fiscal years 2005 2004 2003 respectively increase general administrative expenses 45 million 2004 2005 due principally increased precommercial activities associated two lead product candidates well increased headcount support operations increase general administrative expenses 36 million fiscal year 2004 compared 2003 due principally increased precommercial business development activities support pnh clinical trials well continued growth operations believe general administrative costs increase fiscal 2006 continue put place structure needed commercialize pexelizumab eculizumab total operating expenses 1103 million 751 million 845 million fiscal years 2005 2004 2003 respectively investment income 53 million fiscal year 2005 compared 34 million fiscal year 2004 58 million fiscal 2003 increase investment income 19 million 2005 resulted primarily higher interest rates higher principal amounts interest expense 61 million fiscal year 2005 compared 77 million fiscal year 2004 77 million fiscal 2003 decrease interest expense attributable lower interest rate 1375 notes fiscal year 2005 recorded 32 million loss early extinguishment 575 notes consisted writeoff remaining balance nonrefundable deferred financing costs approximately 12 million redemption premium approximately 20 million first fiscal quarter 2005 recorded net gain income 38 million complete termination unigraft xenotransplantation program columbus farming corporation cfc consisted extinguishment 39 million note payable used purchase xenotransplantation assets extinguishment accrued interest 03 million note partially offset transfer tyco international ltd tyco remaining assets 450000 used secure note see section entitled “business preclinical programs “unigraft xenotransplantation technologies program” state tax benefit 08 million 07 million 10 million recognized fiscal year 2005 2004 2003 respectively resulting estimated exchange fiscal 2005 actual exchange fiscal 2004 2003 2002 incremental research development tax credits result factors incurred net losses 1088 million 741 million 845 million 390 343 464 basic diluted net loss per share fiscal years ended july 31 2005 2004 2003 respectively liquidity capital resources since inception january 1992 financed operations capital expenditures principally private placements common preferred stock initial public offering common stock subsequent followon offerings sale convertible notes debt financing payments received corporate collaborations grants equipment leasehold improvements financing july 31 2005 cash equivalents marketable securities totaled 1954 million compared 2665 million july 31 2004 july 31 2005 cash equivalents consisted 470 million hold shortterm highly liquid investments original maturities less three months decrease cash equivalents marketable securities compared july 31 2004 due primarily redemption 120 million 575 notes funding operating activities partially offset sale 1375 notes approximately 1452 million net financing fees net proceeds sale 1375 notes less redemption 575 notes including redemption premium 233 million year ended july 31 2005 invested 30 million property plant equipment support research development efforts anticipate research development expense increase generally foreseeable future support clinical manufacturing development product candidates august 2005 sold 2500000 shares common stock public offering 2675 per share resulting gross proceeds sale 669 million incurred underwriting discounts commissions 21 million 0858 per share well expenses resulting estimated net proceeds 645 million anticipate existing capital resources july 31 2005 together net proceeds august 2005 public offering well addition interest investment income earned available cash marketable securities provide us adequate resources fund operating expenses capital requirements currently expected least next 24 months may pursue additional stock offerings debt sources funds finance operations following table summarizes contractual obligations july 31 2005 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change amounts millions contractual obligations contractual obligations include 150 million 1375 convertible senior notes due february 2012 1375 notes annual payments approximately 23 million operating capital leases principally facilities equipment open letter credit 200000 serves security deposit facility cheshire connecticut convertible senior notes january 2005 sold 150 million principal amount 1375 notes private placement qualified institutional buyers pursuant rule 144a securities act 1933 amended interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 317914 shares common stock per 1000 principal amount 1375 notes subject adjustment equivalent conversion price approximately 3146 per share right redeem 1375 notes prior maturity financial covenants related 1375 notes however certain designated events could occur liquidation tender offer consolidation merger recapitalization otherwise connection 50 common stock exchanged converted acquired constitutes solely right receive consideration least 90 common stock listed us national exchange market holder elects convert 1375 notes upon occurrence designated event holder entitled receive additional number shares common stock conversion date additional shares intended compensate holders loss time value conversion option set according table within offering document capped event shares issuable upon conversion note exceed 4291 per 1000 principal amount incurred deferred financing costs related offering 1375 notes approximately 48 million recorded consolidated balance sheet amortized component interest expense sevenyear term notes capital leases currently lease office equipment capital lease agreements expiring 2008 assets liabilities capital lease recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives interest rate capital lease 5625 imputed based lower incremental borrowing rate inception lease amortization interest expense years ended july 31 2005 2004 55000 0 respectively operating leases operating leases principally facilities equipment lease headquarters research development facility cheshire connecticut lease initial term expiring december 2010 site lease total 89000 square feet space pay pro rata percentage real estate taxes operating expenses pilot manufacturing plant may used producing compounds current anticipated clinical trials expected remain new connecticut encompasses approximately 33000 square feet labs offices lease new initial term ending october 2007 three options extend one year alexion antibody technologies inc whollyowned subsidiary leases approximately 25000 square feet labs office space unimproved storage san diego california lease expires august 2012 believe research development facilities pilot manufacturing facility together third party manufacturing facilities adequate current ongoing activities commercial commitments commercial commitments consist cancelable research development licenses operations clinical development including clinical trials manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs assuming utilize longterm commercial scale product manufacturing capacity may realized contingent upon clinical development programs’ progress well commercialization plans commercial commitments represented principally agreement lonza biologics plc collaboration pg pharmaceuticals lonza agreement largescale product supply agreement dated december 18 2002 lonza agreement lonza biologics plc lonza us relating manufacture product candidate eculizumab amended lonza amendment april 2004 lonza amendment facility lonza manufacture eculizumab changed manufacturing capacity required purchase reduced future potential payments 10 million us lonza relating achievement eculizumab sales milestones 15 million payable us relating manufacturing yields achieved lonza eliminated august 2004 paid lonza additional 35 million nonrefundable advance lonza amendment addition amounts would required pay connection voluntary termination lonza agreement us changed lonza agreement amended lonza amendment terminate lonza agreement prior september 30 2006 may required pay different amounts depending lonza agreement terminated zero approximately 10 million terminate lonza agreement september 30 2006 may required pay batches product scheduled manufacture 12 months following termination pg pharmaceuticals collaboration december 2001 pg entered binding memorandum understanding mou pursuant january 1999 collaboration revised structure per mou pg share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts revised collaboration per mou provides pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us receive approximately 50 gross margin us sales pg agreed retain responsibility future development commercialization costs outside us receiving royalty sales outside us responsible royalties certain third party intellectual property worldwide intellectual property necessary additionally part mou receive milestone payments achieving specified development steps regulatory filings approvals pg agreed per mou share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well ami cabg phase iii clinical trial costs pg right terminate collaboration sublicense rights time pg terminates collaboration per mou pg required contribute share agreed obligations costs incurred prior termination may required contribute towards obligations incurred termination circumstance rights exclusive license intellectual property related pexelizumab would revert back us would entitled future pexelizumab revenues without sharing revenues pg sublicense rights sublicensee would required assume pg’s obligations collaboration rely pg development manufacture potential commercialization pexelizumab termination agreement pg sublicense collaboration rights could cause significant delays development manufacture potential commercialization pexelizumab result significant additional costs us terms mou may obligated reimburse pg 50 cancellation costs pg’s thirdparty pexelizumab manufacturing contract portion cancellation costs could amount much 80 million additional payments additional payments aggregating 20 million would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization approximately 3 million costs may incurred next three years taxes tax reporting purposes july 31 2005 available federal tax reporting purposes net operating loss carry forwards approximately 4398 million expire 2025 approximately 274 million resulted exercise nonqualified stock options also federal state research development credit carry forwards approximately 161 million begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions limit ability utilize net operating loss tax credit carry forwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limitation provisions triggered 1995 years ended july 31 2005 2004 limitation approximately 14 million annually future limitation result change ownership recently issued accounting standards december 2004 fasb issued sfas 123r revised 2004 “sharebased payment” sfas 123r replaces sfas 123 “accounting stockbased compensation” supersedes apb opinion 25 “accounting stock issued employees” sfas 123r requires sharebased payments employees including grants employee stock options recognized financial statements based fair values beginning first annual period june 15 2005 pursuant revisions sfas 123r april 2005 fasb obligated start expensing options commencement fiscal year august 1 2005 addition march 2005 fasb issued staff accounting bulletin 107 sab 107 provide guidance regarding interaction sfas 123r certain sec rules regulations provide additional guidance regarding valuation sharebased payment arrangements public companies expect implement sfas 123r using modified prospective application method may 2005 fasb issued sfas 154 “accounting changes error corrections” replaces apb opinion 20 “accounting changes” sfas 3 “reporting accounting changes interim financial statements” changes requirements accounting reporting change accounting principle sfas 154 applies voluntary changes accounting principle also applies changes required accounting pronouncement unusual instance pronouncement include specific transition provisions pronouncement includes specific transition provisions followed statement effective accounting changes corrections errors made fiscal years beginning december 15 2005 risk factors carefully consider following risk factors decide invest company business risk factors may significant impact business operating results financial condition cash flows risk uncertainties described ones face additional risks uncertainties presently known us currently deem immaterial may also impair business operations following risks actually occur business financial condition results operations could materially adversely affected continue incur operating losses may unable continue operations incurred losses since started company january 1992 july 31 2005 accumulated deficit approximately 4481 million continue incur operating losses fail become profitable company may unable continue operations since began business focused research development product candidates products available sale know products available sale ever expect continue operate net loss least next several years continue research development efforts continue conduct clinical trials develop manufacturing sales marketing distribution capabilities future profitability depends receiving regulatory approval product candidates ability successfully manufacture market approved drugs extent timing future losses profitability ever profitable highly uncertain subject extensive government regulation obtain regulatory approval drug products able sell drug products partners cannot sell market drugs without regulatory approval partners obtain maintain regulatory approval products value company results operations harmed united states partners must obtain maintain approval fda indication drug intend sell obtaining fda approval typically lengthy expensive process approval highly uncertain foreign governments also regulate drugs distributed outside united states whose approval also lengthy expensive highly uncertain none product candidates received regulatory approval marketed sold united states country may receive regulatory approval product candidates least next several years ever partners contract manufacturers suppliers subject rigorous extensive regulation fda federal state agencies governmental authorities countries regulations apply approval product candidates product candidates ever approved cover among things testing manufacturing quality control labeling advertising promotion export biologics failure comply laws including statutes regulations administered fda agencies could result administrative judicial sanctions including warning letters fines civil penalties delay approving refusal approve product candidate product recall seizure interruption production operating restrictions injunctions criminal prosecution fda granted “fast track” status pexelizumab use cpb treatment ami eculizumab treatment membranous nephritis although fast track status may expedite development fda review application assurance pexelizumab eculizumab reviewed expeditiously “fasttrack” indications would otherwise case approved promptly fda could revoke fast track status pexelizumab eculizumab fda granted orphan drug designation eculizumab treatment pnh membranous nephritis orphan drug designation convey advantage shorten duration fda review approval process product orphan drug designation first drug type receive fda approval indication designation product entitled orphan exclusivity ie fda may approve applications market drug indication period seven years except limited circumstances depend heavily success lead product candidates eculizumab pexelizumab still development obtain fda approval lead product candidates fda delays approval narrows indications may market product candidates business materially harmed anticipate near term ability generate revenues depend successful development commercialization eculizumab pexelizumab commercial success lead product candidates depend several factors including following successful completion ongoing phase iii clinical trials product candidates receipt marketing approvals fda similar foreign regulatory authorities establishing commercial manufacturing capabilities third party manufacturers successfully launching commercial sales products acceptance products medical community third party payers data ongoing phase iii pivotal clinical trials lead product candidates satisfactory may proceed filing biological license application bla one lead product candidates may forced delay filing even results ongoing pivotal trials appear satisfactory file bla fda similar foreign regulatory agencies may accept filing may request additional information us including data additional clinical trials ultimately may grant marketing approval even fda similar foreign regulatory authorities grant marketing approval one product candidates may narrow indications permitted market one products may pose restrictions use marketing product narrowed indication restrictions may limit market potential affected product successful commercializing one lead product candidates significantly delayed limited business materially harmed may need curtail cease operations drug trials delayed achieve unfavorable results delay may unable obtain regulatory approval products must conduct extensive testing product candidates obtain regulatory approval products need conduct preclinical animal testing clinical human trials tests trials may achieve favorable results fda typically requires two well controlled clinical trials demonstrate efficacy order obtain fda approval market product candidate spa ongoing phase iii clinical programs eculizumab pexelizumab provides single efficacy trial fda indicated trials provide compelling evidence clinically meaningful benefit order warrant consideration marketing approval product candidate fda noted study merely statistically positive may provide evidence necessary support filing approval product candidate addition fda noted may require additional safety information granting marketing approval would need reevaluate drug test favorably either alter study drug dose perform additional repeat tests abandon drug development project circumstances would able obtain regulatory approval timely basis ever even approval granted approval may require limitations indicated uses drug may marketed clinical trials completed date achieved primary endpoints september 2000 announced completion enrollment phase iib trial pexelizumab treatment complications patients cabg cpb including reduction frequency severity myocardial infarctions frequency death primary therapeutic preset goal trial referred primary endpoint achieved however prespecified population included approximately 90 patient population ie 800 patients cabg surgery without valve surgery received pexelizumab highest dose level experienced statistically significant reduction larger postsurgical heart attacks based results january 2002 commenced enrollment phase iii clinical trial pexelizumab patients undergoing cabg cpb completed target patient enrollment approximately 3000 patients february 2003 august 2003 disclosed preliminary results indicated primary endpoint achieved statistical significance primary endpoint phase iii trial composite incidence death myocardial infarction measured 30 days postprocedure patients undergoing cabg without simultaneous valve surgery concluded two phase ii studies pexelizumab ami one study patients receiving angioplasty procedure opening narrowed blocked arteries supply blood heart patients receiving thrombolytic therapy procedure dissolving clots block heart vessels angioplasty study called comma thrombolytic study called comply completed patient enrollment april 2002 january 2002 respectively results studies reported november 2002 annual meeting american heart association studies primary endpoint reduction myocardial infarction reached however comma study pexelizumab treatment associated statistically significant dosedependent reduction death 2001 announced completion phase iia trial eculizumab treatment rheumatoid arthritis ra primary endpoint trial met group patients received midlevel monthly dosing regimen eculizumab patients received higher lower doses eculizumab clinical trial achieve primary endpoint primary endpoint phase iia trial acr 20 325 months january 2004 announced preliminary results phase iib study eculizumab approximately 350 ra patients results trial indicate primary endpoint achieved statistical significance one dosing regimens monthly dosing arm higher bimonthly dosing arm completion trials guarantee initiate additional trials product candidates trials initiated scope phase trial completed trials completed results provide sufficient basis proceed trials apply receive regulatory approvals commercialize products results trials could inconclusive requiring additional repeat trials results achieved clinical trials insufficient proceed trials regulatory approval product candidates company could materially adversely affected failure trial achieve prespecified primary endpoint generally increases likelihood additional studies required determine continue development product candidate reduces likelihood timely development regulatory approval market product candidate many reasons drug testing could delayed terminated human trials patients must recruited product candidate must tested various doses formulations clinical indication also ensure safety effectiveness effect drugs often must studied long period time especially chronic diseases studying unfavorable results insufficient patient enrollment clinical trials could delay cause us abandon product development program additional factors cause delay impairment termination clinical trials include • slow patient enrollment • long treatment time required demonstrate effectiveness • lack sufficient supplies product candidate • disruption operations clinical trial sites • adverse medical events side effects treated patients • failure patients taking placebo continue participate clinical trials • lack effectiveness product candidate tested • lack sufficient funds may expand business new acquisitions could disrupt business harm financial condition business strategy includes expanding products capabilities may seek acquisitions involve numerous risks including • substantial cash expenditures • potentially dilutive issuance equity securities • incurrence debt contingent liabilities may difficult impossible identify time acquisition • difficulties assimilating operations acquired companies • diverting management’s attention away business concerns • risks entering markets limited direct experience • potential loss key employees key employees acquired companies cannot assure acquisition result shortterm longterm benefits us may incorrectly judge value worth acquired company business addition future success would depend part ability manage rapid growth associated acquisitions cannot assure able make combination business acquired businesses companies work successful furthermore development expansion business acquired business companies may require substantial capital investment us may necessary funds might available us acceptable terms may also seek raise funds selling shares capital stock could dilute current stockholders’ ownership interest company securities convertible capital stock could dilute current stockholders’ ownership interest company upon conversion fail obtain capital necessary fund operations unable continue complete product development believe sufficient capital fund operations product development least twenty four months need raise additional capital time complete development commercialization product candidates currently conducting initiating several clinical trials funding needs may shift programs potentially accelerate increase initiate new pivotal trials product candidates including pivotal clinical trial pexelizumab ami patients undergoing angioplasty rely heavily pg fund development pexelizumab pg terminate pexelizumab collaboration could raise additional capital find new collaboration partners order continue development pexelizumab additional financing could take form public private debt equity offerings equity line facilities bank loans collaborative research development arrangements corporate partners andor sale licensing property amount capital may need depends many factors including • existence terms status collaborative arrangements strategic partnerships collaboration pg • progress timing scope research development programs • progress timing scope preclinical studies clinical trials • time cost necessary obtain regulatory approvals • time cost necessary develop manufacturing processes arrange contract manufacturing build manufacturing facilities obtain necessary regulatory approvals facilities • time cost necessary develop sales marketing distribution capabilities • cost necessary sell market distribute products approved • changes applicable governmental regulatory policies • new collaborative licensing commercial relationships may establish may get funding need funding may available unfavorable terms cannot raise adequate funds satisfy capital requirements may delay scaleback eliminate research development activities future operations might license technology others could result sharing revenues might otherwise retain actions would harm business significantly leveraged july 31 2005 outstanding 150 million principal amount 1375 convertible senior notes remain outstanding degree leveraged could among things • make difficult us make payments notes • make difficult us obtain financing working capital acquisitions purposes favorable terms • make us vulnerable industry downturns competitive pressures • limit flexibility planning reacting changes business ability meet debt service obligations depend upon future performance subject financial business factors affecting operations many beyond control collaboration pg terminated pg reduces commitment collaboration ability develop commercialize pexelizumab time expected business would harmed rely heavily pg perform development obtain commercial manufacturing provide sales marketing pexelizumab cannot assure pexelizumab ever successfully developed commercialized pg perform obligations timely manner ability commercialize pexelizumab significantly adversely affected rely pg provide funding additional resources development commercialization pexelizumab include funds resources • clinical development clinical commercial manufacturing • obtaining regulatory approvals • sales marketing distribution efforts worldwide pg right terminate collaboration sublicense collaboration rights time termination agreement pg would cause significant delays development pexelizumab result significant additional development costs us continue development pexelizumab following termination pg would need fund development commercialization pexelizumab identify new development partner would need develop acquire replacement expertise many areas necessary development potential commercialization pexelizumab enter agreements companies respect matters resources replace functions provided funded pg accordingly might stop development pexelizumab shift resources product development programs alternative resources obtained sublicense pg also could cause significant delays development pexelizumab result substantial additional development costs us might also repeat testing already completed pg addition sublicense would introduce new collaboration partner could create new additional risks development pexelizumab cannot identified time cannot guarantee pg devote resources necessary successfully develop commercialize pexelizumab timely manner furthermore pg may devote necessary resources may still successfully develop commercialize pexelizumab unable engage retain thirdparty collaborators research development efforts may delayed depend upon thirdparty collaborators assist us development product candidates existing collaborators breaches terminates agreement us perform development work agreement timely manner would experience significant delays development commercialization product candidates would also experience significant delays could engage additional collaborators required either event would required devote additional funds resources activities terminate would divert funds resources parts business cannot assure • current collaboration arrangements continued current form • able negotiate acceptable collaborative agreements develop commercialize product candidates • arrangements third parties successful • current potential collaborators pursue treatments diseases seek ways developing treatments disease targets trading price common stock continues fluctuate wide range stockholders suffer considerable uncertainty respect investment common stock trading price common stock volatile may continue volatile future factors announcements fluctuations competitors’ operating results clinical scientific results fluctuations trading prices business prospects competitors collaborators including limited pg changes prospects market conditions biotechnology stocks general could significant impact future trading prices common stock convertible senior notes particular trading price common stock many biotechnology companies including experienced extreme price volume fluctuations times unrelated operating performance companies whose stocks affected due several factors including general market conditions announcement results clinical trials product development results attempts obtain fda approval products particular since august 1 1999 sales price common stock ranged low 905 per share high 11988 per share cannot predict future performance stock price continues fluctuate wide range investment common stock may result considerable uncertainty investor cannot protect confidentiality proprietary nature trade secrets business competitive position harmed business requires using sensitive technology techniques proprietary compounds protect trade secrets however since small company also rely heavily collaboration suppliers outside scientists drug companies collaboration presents strong risk exposing trade secrets trade secrets exposed would help competitors adversely affect business prospects order protect drugs technology effectively need obtain maintain patents covering drugs technologies develop may obtain patents ownership license drugs expensive timeconsuming test develop without patent protection competitors may copy methods chemical structure aspects drugs even obtain maintain patents may broad enough protect drugs copycat products found infringing patents owned others may forced pay damages patent owner obtain license continue manufacture sale development drugs andor pay damages cannot obtain license may prevented manufacture sale development drugs parts technology techniques proprietary compounds potential drug candidates including inlicensed may found infringe patents owned granted others cannot resolve conflicts may liable damages required obtain costly licenses stopped manufacturing using selling products conducting activities example aware broad patents owned others relating manufacture use sale recombinant humanized antibodies recombinant humanized single chain antibodies recombinant human antibodies recombinant human single chain antibodies many product candidates including two leading product candidates eculizumab pexelizumab either genetically engineered antibodies including recombinant humanized antibodies recombinant humanized single chain antibodies recombinant human antibodies recombinant human single chain antibodies received notices owners patents claiming patents may infringed development manufacture sale drug candidates including pexelizumab eculizumab also aware patents owned third parties might claimed infringed development commercialization drug candidates including pexelizumab eculizumab respect patents obtained licenses expect obtain licenses however regard patents either determined judgment • products infringe patents • believe patents valid • identified testing various modifications believe infringe patents permit commercialization product candidates holder patents covering similar technology could sue us damages seek prevent us manufacturing selling developing drugs legal disputes costly time consuming defend patent holder successfully challenges judgment products infringe patents invalid could required pay costly damages obtain license sell develop drugs required license may costly may available acceptable terms costly license inability obtain necessary license could material adverse effect business assurance would prevail patent infringement action able obtain license third party patent commercially reasonable terms successfully develop noninfringing alternatives timely basis license alternative noninfringing technology exists commercially reasonable terms impediment ability manufacture sell approved forms product candidates could material adverse effect business prospects testing use products harms people could subject costly damaging product liability claims testing manufacturing marketing sale drugs use humans exposes us product liability risks side effects problems using products could give rise product liability claims us might recall products marketplace risks unknown time addition may sued people participate trials number patients participate trials already ill enter trial informed consents waivers obtained people sign trials may protect us liability litigation product liability insurance may cover potential liabilities may completely cover covered liabilities moreover may able maintain insurance acceptable terms addition negative publicity relating product liability claim may make difficult impossible us recruit patients clinical trials market sell products result factors product liability claim even successfully defended could material adverse effect business financial condition results operations use c5 inhibitors pexelizumab eculizumab associated increased risk infection neisseria bacteria one patient trials eculizumab treatment membranous nephritis became infected neisseria bacteria serious cases neisseria infection result brain damage loss limbs parts limbs kidney failure death subject environmental laws potential exposure environmental liabilities subject various federal state local environmental laws regulations govern operations including handling disposal nonhazardous hazardous wastes including medical biological wastes emissions discharges environment including air soils water sources failure comply laws regulations could result costs corrective action penalties imposition liabilities also subject laws regulations impose liability cleanup responsibility releases hazardous substances environment certain laws regulations current previous owner operator property may liable costs remediating property locations wastes sent facilities without regard whether owner operator knew necessarily caused contamination obligations liabilities date material could material impact business financial condition cannot manufacture drug candidates sufficient amounts acceptable costs timely basis may unable necessary materials product testing later potential sale market either event would harm business drug trials need produce sufficient amounts product testing small manufacturing plant cannot manufacture enough product candidates later stage clinical development commercial supply addition capacity produce one product candidate time depend outside suppliers manufacturing experience interruptions manufacture products drug development commercialization efforts delayed outside manufacturers stops manufacturing products reduces amount manufactured otherwise unable manufacture required amounts required quality need find alternatives unable find acceptable outside manufacturer reasonable terms divert resources manufacturing may sufficient produce necessary quantity quality product result ability conduct testing drug trials plans commercialization would materially adversely affected submission products new development programs regulatory approval well plans commercialization would delayed competitive position prospects achieving profitability would materially adversely affected manufacture drug products including need develop utilize manufacturing processes consistently produce drug products required quality specifications highly regulated fda domestic foreign authorities cannot assure thirdparty collaborators successfully comply regulations failure would materially adverse effect business manufacture drug products highly technical thirdparties ability capacity manufacture drug products development commercialization needs assure potential thirdparty collaborators agree manufacture products behalf commercially reasonable terms achieve agreement one third parties manufacture drug products assure able willing honor terms agreements including obligations manufacture drug products accordance regulatory requirements quality specifications volume requirements due highly technical requirements manufacturing drug products thirdparty collaborators may unable manufacture drug products despite efforts inability contract thirdparty manufacturers commercially reasonable terms failure delay thirdparty manufacturers manufacturing drug products volumes quality required would material adverse effect business experience capacity manufacturing drug products volumes would necessary support commercial sales unable establish maintain commercial scale manufacturing within planned time cost parameters sales products financial performance would adversely affected currently relying pg retain appropriate commercialscale manufacturing pexelizumab one thirdparty manufacturers pg contracted chiron corporation commercialscale manufacture pexelizumab failure pg obtain maintain appropriate commercialscale manufacturing pexelizumab accordance regulatory requirements timely basis may prevent impede commercialization pexelizumab executed commercialscale product supply agreement lonza biologics plc longterm manufacture eculizumab failure lonza manufacture appropriate supplies eculizumab timely basis may prevent impede commercialization eculizumab due nature current market thirdparty commercial manufacturing arrangements many arrangements require substantial penalty payments customer failure use manufacturing capacity contracted could owe substantial penalty payments lonza use manufacturing capacity contracted could required share equal basis pg substantial penalty payments owed pg failure utilize manufacturing capacity contracted thirdparty manufacturers supply pexelizumab payment substantial penalty would harm financial condition unable establish sales marketing distribution capabilities enter agreements third parties unable successfully market sell future drug products sales distribution personnel capabilities recently established core precommercial marketing capabilities unable continue developing capabilities either developing capabilities entering agreements others able successfully sell future drug products event able generate significant revenues cannot guarantee able hire qualified sales marketing personnel need may able enter marketing distribution agreements thirdparty providers acceptable terms currently relying pg sales marketing distribution pexelizumab pg future thirdparty collaborators may succeed selling marketing distributing future drug products unable obtain reimbursement future products government health administration authorities private health insurers organizations products may costly regular use ability generate revenues would harmed products commercialized may significantly expensive traditional drug treatments future revenues profitability adversely affected cannot depend governmental private thirdparty payers defray cost products consumer entities refuse provide reimbursement respect products determine provide insufficient level reimbursement products may costly general use profitability may adversely impacted choose offer products reduced price limitation use products decrease price products without corresponding decrease expenses material adverse effect ability achieve profitability foreign countries proposed pricing drug must approved may lawfully marketed requirements governing drug pricing vary widely country example european union provides options member states restrict range medicinal products national health insurance systems provide reimbursement control prices medicinal products human use member state may approve specific price medicinal product may instead adopt system direct indirect controls profitability company placing medicinal product market results operation may suffer unable market products foreign countries reimbursement products foreign countries limited since products likely expensive patients afford without health insurance coverage adequate coverage reimbursement thirdparty payors essential ability successfully commercialize product candidates particular given number factors including limited pnh population costs manufacturing commercialization clinical costs historic future costs likely price eculizumab established prohibitively expensive without patient access adequate health insurance coverage reimbursement thirdparty payors patients access adequate coverage third party payors provide reimbursement sufficient level would likely material adverse effect business financial condition results operation competitors get marketplace better cheaper drugs may profitable sell continue develop abbott laboratories inc adprotech ltd avant immunotherapeutics inc baxter international inc millennium pharmaceuticals inc neurogen corporation tanox inc xoma ltd publicly announced intentions develop drugs target inflammatory effects complement immune system also aware glaxosmithkline plc merck co inc pfizer inc also attempting develop complement inhibitor therapies cambridge antibody technology group plc morphosys ag dyax corporation publicly announced intentions develop therapeutic human antibodies libraries human antibody genes additionally abgenix inc medarex inc publicly announced intentions develop therapeutic human antibodies mice bred include human antibody genes pharmaceutical companies many significantly greater resources may develop manufacture market better cheaper drugs product candidates may establish marketplace able even finish clinical trials pharmaceutical companies also compete us attract academic research institutions drug development partners including licensing institutions’ proprietary technology competitors successfully enter arrangements academic institutions precluded pursuing unique opportunities may able find equivalent opportunities elsewhere fail recruit retain personnel research product development programs may delayed highly dependent upon efforts senior management scientific personnel particularly dr leonard bell md chief executive officer member board directors david w keiser president chief operating officer member board directors stephen p squinto phd executive vice president head research intense competition biotechnology industry qualified scientific technical personnel since business scienceoriented specialized need continue attract retain people may able continue attract retain qualified personnel necessary developing business key man life insurance policy dr bell employment agreements dr bell mr keiser dr squinto none key personnel nearing retirement age knowledge planning retire knowledge tension key personnel board directors lose services management scientific personnel fail recruit scientific technical personnel research product development programs materially adversely affected particular highly value services dr bell chief executive officer loss services could materially adversely affect ability achieve development objectives ability use net operating loss carry forwards reduce future tax payments may limited change ownership alexion july 31 2005 approximately 440 million net operating loss carry forwards nols available reduce taxable income future years believe nols currently subject annual limitation section 382 internal revenue code 1986 amended ability utilize nols may limited undergo ownership change defined section 382 result subsequent changes ownership outstanding stock would undergo ownership change among things stockholders group stockholders owned directly indirectly 5 value stock otherwise treated 5 stockholders section 382 regulations promulgated increase aggregate percentage ownership stock 50 percentage points lowest percentage stock owned stockholders time testing period generally threeyear period preceding potential ownership change event ownership change section 382 imposes annual limitation amount postownership change taxable income corporation may offset preownership change nols limitation imposed section 382 postchange year would determined multiplying value stock immediately ownership change subject certain adjustments applicable longterm taxexempt rate unused limitation may carried later years limitation may certain circumstances increased builtin gains may present respect assets held us time ownership change recognized fiveyear period ownership change use nols arising date ownership change would affected based upon review aggregate change percentage ownership current testing period believe experienced change ownership within meaning section 382 result offering common stock august 2005 however determination complex assurance internal revenue service could successfully challenge conclusion even offering common stock cause ownership change occur immediately issuance directly indirectly relatively large number shares offering may mean may able engage transactions involving issuance deemed issuance stock within subsequent threeyear period without triggering ownership change within meaning section 382 addition circumstances beyond control market purchases stock investors existing 5 shareholders become 5 shareholders result purchases could result ownership change respect stock thus assurance future actions future actions stockholders result occurrence ownership change may limit use nols negatively affect future cash flows item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except per share data report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed section entitled item 1a “risk factors” overview biotechnology company working develop deliver lifechanging drug therapies patients serious lifethreatening medical conditions engaged discovery development therapeutic products aimed treating patients wide array severe disease states including hematologic diseases cancer autoimmune disorders since incorporation january 1992 devoted substantially resources drug discovery research product clinical development since september 2005 formed number whollyowned foreign domestic entities support commercial regulatory operations july 2006 acquired manufacturing plant smithfield rhode island future commercial production products september 2006 filed biologics license application bla us food drug administration fda european marketing authorization application maa europe soliris™ eculizumab treatment rare lifethreatening blood disorder known paroxysmal nocturnal hemoglobinuria pnh phase iii clinical development program soliris™ eculizumab pnh comprised two phase iii clinical trials known triumph shepherd fda agreed design protocols two trials special protocol assessment spa process triumph placebocontrolled efficacy trial shepherd openlabel nonplacebo controlled safety trial efficacy secondary endpoints january 2006 reported positive results triumph results later published september 2006 issue new england journal medicine prespecified primary secondary endpoints triumph trial achieved statistical significance december 2006 reported positive results shepherd soliris™ eculizumab appeared safe well tolerated twelve month shepherd trial prespecified primary secondary efficacy endpoints shepherd trial achieved statistical significance data triumph shepherd served primary basis bla maa submitted united states europe respectively november 2006 received priority review designation soliris™ eculizumab bla fda priority review status granted fda products approved would significant improvement existing therapies similarly august 2006 announced soliris™ eculizumab maa granted accelerated assessment european medicines agency emea europe review accelerated assessment procedure provided emea medicinal products major therapeutic interest shortens timeframe review agency november 2006 also announced emea validated soliris maa allowing commencement review process addition phase iii pnh clinical program conducting following efforts 1 embrace expanded access trial 2 explore diagnostics trial 3 global patient registry pnh patients embrace trial paroxysmal nocturnal hemoglobinuria early access treatment protocol initiated december 2006 provide investigational agent eculizumab united states pnh patients accordance treatment protocol authorized fda treatment protocols designed make promising investigational agents available patients serious lifethreatening diseases comparable satisfactory alternative therapies general marketing authorized initiated explore trial august 2006 investigate frequency clinical characteristics undiagnosed pnh patients diagnosed bone marrow failure diseases aplastic anemia myelodysplasia global pnh patient registry involves study natural history pnh addition pnh considering evaluation potential indications soliris™ eculizumab well formulations eculizumab additional clinical indications actively pursuing development antibody product candidates early stages development 2006 completed final phase iii trial another product candidate known pexelizumab partner product procter gamble pharmaceuticals reviewing results trial along procter gamble pharmaceuticals determined pursue development pexelizumab date received revenues sale products incurred operating losses since inception december 31 2006 accumulated deficit approximately 637723 expect incur substantial operating losses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup commercialscale manufacturing precommercialization activities developing sales marketing force infrastructure support costs may need obtain additional financing cover costs november 2006 sold 3450000 shares common stock registered offering price public 4300 per share resulting proceeds approximately 140229 net underwriting discount fees expenses intend use net proceeds offering general corporate purposes offbalance sheet arrangements offbalance sheet arrangements guarantee obligations entity indemnify certain third parties liabilities may incur connection manufacturing development sale drug candidates january 2005 sold 150000 principal amount 1375 notes private placement qualified institutional buyers pursuant rule 144a securities act 1933 amended holder elects convert 1375 notes upon occurrence designated event holder entitled receive additional number shares common stock conversion date additional shares intended compensate holders loss time value conversion option set according table within offering document capped event shares issuable upon conversion note exceed 429100 per 1 principal amount critical accounting policies use estimates preparation consolidated financial statements use certain estimates assumptions affect reported amounts disclosures estimates often based judgments probabilities assumptions believe reasonable inherently uncertain unpredictable judgments estimates materially impact result operations believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements marketable securitieswe invest marketable debt securities highly rated financial institutions investmentgrade debt instruments limit amount credit exposure one entity unrealized gains losses included accumulated comprehensive loss component stockholders’ equity believe conservative investment policy ensures reasonable assurance impairment marketable securities held also enables us avoid incurring realized losses could occur securities held maturity inventoriesinventories stated lower cost estimated realizable value cost determined firstin firstout fifo method policy capitalize inventory costs associated products subsequent filing biologics license application bla prior regulatory approval based management’s judgment future commercialization considered probable future economic benefit expected realized assess regulatory approval process particular product stands relation approval process assessment includes known constraints impediments approval including safety efficacy potential labeling restrictions evaluate anticipated research development initiatives constraints relating product indication used consider manufacturing environment including supply chain determining logistical constraints could possibly hamper approval commercialization consider shelf life product relation expected timeline approval consider patent related contract issues may prevent cause delay commercialization also base judgment viability commercialization trends marketplace market acceptance criteria finally consider reimbursement strategies may prevail respect product assess economic benefit likely realize risk inherent judgments would required expense previously capitalized costs related preapproval inventory upon change judgment due among potential factors denial delay approval necessary regulatory bodies periodically review inventories excess obsolete inventory writedown obsolete otherwise unmarketable inventory estimated net realizable value actual realizable value less estimated us determinations inventory marketable based estimates demand additional inventory writedowns may required reserves determined based significant estimates substantial amount current soliris™ eculizumab inventory manufactured early enough regulatory process determined expense full manufacturing cost approximately 100 patient years soliris™ eculizumab inventory sellable fully expensed longlived assetswe assess potential impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value amount recognized impairment charge goodwillgoodwill represents difference purchase price acquired businesses fair value net assets amortized test goodwill impairment least annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charge resulted upon adoption standard result annual impairment assessment first step review compare fair market capitalization alexion annually november net stockholders’ equity fair market capitalization greater net stockholders’ equity impairment charges necessary analysis impacted price stock date test impairment charges recorded component operating expenses period impairment determined prepaid manufacturing costscash advances paid us secure future longterm manufacturing production thirdparty contract manufacturers recorded prepaid manufacturing costs recognized period manufacturing production unit production method cash advances subject refund manufacturing facility unavailable scheduled forfeiture terminate scheduled production evaluate prepaid manufacturing costs estimated net realizable value nrv estimated nrv negative portion prepaid manufacturing cost may recognized expense calculation nrv involves estimates expected sales volume sales price market penetration product question revenue recognitionwe record contract research revenues research development support payments license fees milestone payments collaborations third parties amounts received various government grants evaluate deliverables collaborative agreement determine whether represents separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value undelivered items upfront nonrefundable license fees received connection collaboration agreement deferred amortized revenue life agreement underlying technologies revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts research development expensesresearch development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies theses costs expensed incurred entered collaboration research agreement pg share costs record costs research development expenses incurred portion costs reimbursed collaborator recorded reduction research development expense accrued research development expenses comprised amounts owed suppliers research development work performed behalf end period evaluate accrued expense balance related activities based upon information received supplier estimated progress toward completion research development objectives ensure balance appropriately stated estimates subject change additional information becomes available stock based compensationwe adopted statement financial accounting standards 123 revised 2004 sharebased payment “sfas 123r” effective august 1 2005 sfas 123r requires recognition fair value stockbased compensation net earnings elected utilize modified prospective transition method adopting sfas 123r method provisions sfas 123r apply awards granted modified date adoption addition unrecognized expense awards yet vested date adoption determined original provisions sfas 123 shall recognized periods date adoption due net loss position windfall tax benefit realized period december 31 2006 30713 total unrecognized compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 2 years prior august 1 2005 accounted stock options restricted stock utilizing intrinsic value method accordance accounting principles board opinion apb 25 “accounting stock issued employees” accordingly recognize compensation expense options option grants exercise price equal fair market value date grant estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also significance expected term exercise currently use historical exercise patterns best estimate future exercise patterns employee stock option values determined may changed continually seek refine improve assumptions used measure value employee stock options foreign currency translationfor foreign subsidiary functional currency different us dollars translate financial statements us dollars using current exchange rate balance sheet date assets liabilities average exchange rate prevailing period revenues expenses historical exchange rate investments foreign subsidiary adjustments translating financial statements us dollars included “accumulated comprehensive loss” results operations december 9 2005 board directors approved change fiscal year end july 31 december 31 five months results reported relate transition period ended december 31 2005 following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report amounts thousands except per share data comparison years ended december 31 2006 2005 amounts thousands except per share amounts earned revenues approximately 1558 1482 years ended december 31 2006 2005 respectively revenue reflects amortization deferred revenue resulting cash received pg collaboration development commercialization pexelizumab us government funded research grant revenue related research programs nonrefundable fee exclusive access xenotransplantation technologies program terminated october 2003 year ended december 31 2006 incurred research development expenses 83225 compared period 2005 incurred research development expenses 107755 report research development costs category incurred rather project research development costs consist primarily payroll benefits costs product development costs discovery research costs depreciation amortization expense occupancy related facilityoperating costs product development costs consist preclinical costs clinical trial costs clinicalrelated development costs manufacturing development manufacturing costs 24530 decrease research development expenses resulted primarily significant decrease clinical development manufacturing expenses costs 20211 18636 respectively related termination pexelizumab programs decreases total research development partially offset substantial increases payroll benefits costs 8859 primarily impacted adoption sfas 123r resulting expensing employee stock options grants well increased headcount support research drug development activities addition research discovery expenses increased approximately 5642 primarily related development activities related pnh programs anticipate expenses research development remain significant level 2007 critical substantive clinical trials near completion may initiate development promising candidates year ended december 31 2006 incurred general administrative expenses 55418 include impairment costs 539 compared period 2005 incurred general administrative expenses 25509 increase general administrative expenses 29909 2005 2006 due principally increased precommercial activities associated soliris™ us well europe increased headcount support operations 7087 expenses related closure alexion antibody technologies inc excluding effect closure alexion antibody technologies expect general administrative costs increase fiscal 2007 continue put place commercial organization infrastructure required bring soliris™ market total operating expenses 138643 133264 years ended december 31 2006 2005 respectively investment income 8076 year ended december 31 2006 compared 6633 period 2005 reflecting higher market interest rates higher principal amounts interest expense decreased 2799 4164 impacted lower coupon rate convertible debt 150000 principal amount 1375 convertible senior notes 1375 notes following redemption 120000 principal amount 575 convertible subordinated notes 575 notes march 2005 state tax benefit 373 450 recognized years ended december 31 2006 2005 respectively resulting estimated exchange december 31 2006 2005 incremental research development tax credits result factors incurred net losses 131514 131344 415 430 basic diluted net loss per share years ended december 31 2006 2005 respectively comparison five months ended december 31 2005 five months ended december 31 2004 amounts thousands except per share amounts earned contract research revenues 664 245 five months ended december 31 2005 2004 respectively revenue earned five months ended december 31 2005 2004 245 noncash item representing amortization deferred revenue 10000 upfront fee paid us pg february 1999 revenue us government grants totaled 419 0 five months ended december 31 2005 2004 respectively increase revenues associated us government grants obtained transition period ended december 31 2005 resulted primarily research antianthrax biodefense program five months ended december 31 2005 incurred research development expenses 48238 compared five months ended december 31 2004 incurred research development expenses 31914 report research development costs category incurred rather project research development costs consist primarily payroll benefits costs product development costs discovery research costs depreciation amortization expense occupancy related facility operating costs product development costs consist preclinical costs clinical trial costs clinicalrelated development costs manufacturing development manufacturing costs 16324 increase research development expenses resulted primarily greater product development costs 11751 higher clinical development higher manufacturing expenses costs related current phase iii clinical trials lead drug candidates soliris™ eculizumab pexelizumab triumph shepherd pnh extension trials primocabg2 apexami trials respectively payroll benefits costs impacted adoption sfas 123r resulting expensing employee stock options grants well increased headcount support research drug development activities collaboration pg resulted pexelizumabrelated product development costs excluding payrollrelated costs 17805 five months ended december 31 2005 compared 11121 five months ended december 31 2004 represented 54 53 respectively product development costs remaining balance product development costs primarily soliris™ preclinical product candidates general administrative expenses 12763 period compared 6160 period last year increase general administrative expenses 6603 2004 2005 principally expensing employee stock options increased headcount dedicated commercial development activities higher professional fees principally patent compliance activities impact payroll benefits expenses adoption sfas 123r material overall increase expenses predominantly driven ongoing development commercial organization ultimately support sales marketing product candidates approved regulatory agencies total operating expenses 61001 38074 five months ended december 31 2005 2004 respectively investment income 3123 five months ended december 31 2005 compared 1756 period 2004 reflecting higher market interest rates higher principal balance higher principal balance result august 2005 issuance 2500000 shares common stock public offering 2675 per share resulting net proceeds sale 64530 well increase convertible debt due sale 150000 principal amount 1375 convertible senior notes 1375 notes january 2005 partially offset redemption 120000 principal amount 575 convertible subordinated notes 575 notes march 2005 interest expense decreased 1192 3153 impacted lower coupon rate 1375 notes state tax benefit 450 61 recognized five months ended december 31 2005 2004 respectively resulting estimated exchange december 31 2005 2004 incremental research development tax credits result factors incurred net losses 57956 35361 190 128 basic diluted net loss per share five months ended december 31 2005 2004 respectively comparison fiscal years ended july 31 2005 2004 amounts thousands except per share amounts earned contract research revenues 1064 4609 fiscal years ended july 31 2005 2004 respectively fourth quarter 2004 recognized 4000 milestone payment pg concurrent dosing first patient apexami trial substantially revenue fiscal years 2005 2004 noncash item representing amortization deferred revenue 10000 upfront fee paid us pg february 1999 revenue us government grants totaled 476 fiscal 2005 21 fiscal 2004 455 increase revenues associated us government grants obtained fiscal 2005 resulted research antianthrax biodefense program fiscal year 2005 incurred research development expenses 91388 compared fiscal year 2004 incurred research development expenses 59840 report research development costs category incurred rather project research development costs consist primarily payroll benefits costs preclinical costs clinical trial costs clinicalrelated development costs manufacturing development manufacturing costs discovery research costs depreciation amortization expense occupancy related facility operating costs 31548 increase research development expenses 2004 2005 resulted primarily greater product development costs 29724 higher clinical development higher manufacturing expenses cost conducting two phase iii clinical trials primocabg2 apexami pexelizumab increased production material used clinical trials involving soliris™ pexelizumab increase payroll benefits 2004 2005 primarily attributable increase staff involved clinical manufacturing development well regulatory quality assurance activities decrease discovery research due principally recognition approximately 1300 balance nonrefundable payment received xoma 2003 xoma paid upfront nonrefundable fee approximately 1500 pursuant collaborative agreement recorded payment deferred research development payment amortized payment reduction research development expense upon cancellation xoma collaborative agreement 2005 remaining balance 1300 recognized reduction research development expenses collaboration pg resulted pexelizumabrelated product development costs excluding payrollrelated costs 36358 2005 compared 15902 2004 representing 57 46 respectively product development costs remaining balance product development costs primarily soliris™ preclinical product candidates general administrative expenses 18951 14459 fiscal years 2005 2004 respectively increase general administrative expenses 4492 2004 2005 due principally increased precommercial activities associated two lead product candidates well increased headcount support operations total operating expenses 110339 75059 years ended july 31 2005 2004 respectively investment income 5266 year ended july 31 2005 compared 3373 year ended july 31 2004 increase investment income 1893 2005 resulted primarily higher interest rates higher principal amounts interest expense 6125 year ended july 31 2005 compared 7709 year ended july 31 2004 decrease interest expense fiscal 2005 attributable lower interest rate 1375 notes issued january 2005 replaced previous outstanding notes rate 575 recorded 3185 loss early extinguishment 575 notes consisted writeoff remaining balance nonrefundable deferred financing costs approximately 1200 redemption premium approximately 2000 first fiscal quarter 2005 recorded net gain income 3804 complete termination unigraft xenotransplantation program columbus farming corporation cfc consisted extinguishment 3900 note payable used purchase xenotransplantation assets extinguishment accrued interest 300 note partially offset transfer tyco international ltd tyco remaining assets 450 used secure note state tax benefit 765 691 recognized year ended july 31 2005 2004 respectively resulting estimated exchange july 31 2005 actual exchange july 31 2004 incremental research development tax credits result factors incurred net losses 108750 74095 390 343 basic diluted net loss per share years ended july 31 2005 2004 respectively liquidity capital resources amounts thousands except shares per share amounts since inception 1992 primary source cash public offerings common stock sale convertible notes sources include debt financing payments received corporate collaborations grants equipment leasehold improvements financing primary use cash includes business development activities research development december 31 2006 cash equivalents marketable securities 250148 compared 212456 december 31 2005 increase primarily due issuance 3450000 shares common stock public offering 4300 per share resulting gross proceeds sale 148350 incurred underwriting discounts commissions 7788 226 per share well expenses resulting net proceeds 140229 substantially offset cash used fund operating activities operating activities net cash used operating activities year ended december 31 2006 109914 decrease compared balance december 31 2005 primarily due working capital fluctuations driven increased prepaid expenses inventory balances decreased accrued expense balance offset partly increased accounts payable balance investing activities net cash provided investing activities year ended december 31 2006 53907 included 119357 proceeds maturity sale marketable securities net purchases marketable securities offset property plant equipment additions 31856 increases restricted cash 33594 financing activities net cash provided financing activities year ended december 31 2006 179324 consisting proceeds sale common stock 140229 proceeds mortgage loan 26000 exercise stock options 13598 offset acquisition 6919 treasury shares cost 279 payment capital leases 224 sufficiency cash resources anticipate existing capital resources december 31 2006 well cash investment income earned available cash marketable securities provide us adequate resources fund operating expenses capital requirements currently expected next eighteen months may pursue additional stock offerings debt sources funding finance operations contractual obligations contractual obligations include 150000 1375 convertible senior notes due february 2012 1375 notes 26000 mortgage loan due august 2016 fixed annual interest rate 917 annual payments approximately 4000 operating capital leases principally facilities equipment open letter credit 200 serves security deposit facility cheshire connecticut following table summarizes contractual obligations december 31 2006 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change convertible senior notes january 2005 sold 150000 principal amount 1375 notes private placement qualified institutional buyers pursuant rule 144a securities act 1933 amended interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 317914 shares common stock per 1 principal amount 1375 notes subject adjustment equivalent conversion price approximately 3146 per share right redeem 1375 notes prior maturity financial covenants related 1375 notes however certain designated events could occur liquidation tender offer consolidation merger recapitalization otherwise connection 50 common stock exchanged converted acquired constitutes solely right receive consideration least 90 common stock listed us national exchange market holder elects convert 1375 notes upon occurrence designated event holder entitled receive additional number shares common stock conversion date additional shares intended compensate holders loss time value conversion option set according table within offering document capped event shares issuable upon conversion note exceed 429100 shares per 1 principal amount incurred deferred financing costs related offering 1375 notes approximately 4800 recorded consolidated balance sheet amortized component interest expense sevenyear term notes purchase manufacturing facility july 13 2006 wholly owned affiliate alexion manufacturing llc purchased manufacturing facility smithfield rhode island dow chemical company 13000000 biopharmaceutical manufacturing facility used primarily produce soliris™ eculizumab pursuant purchase sale agreement dated april 13 2006 purchase agreement acquired rights approximately 55000 square foot facility certain equipment located used connection facility certain rights service contracts related facility deposited escrow account 500000 upon execution purchase agreement april 13 2006 additional 500000 upon completion due diligence period july 2006 deposits held escrow closing date time escrowed amounts remaining balance net property taxes owed first part year 11926289 paid dow mortgage loan july 2006 wholly owned affiliate alexion manufacturing llc entered mortgage loan agreement borrow 26000 finance purchase construction smithfield rhode island manufacturing facility mortgage loan bears interest fixed annual rate 917 obligations loan agreement guaranteed alexion pharmaceuticals inc loan principal required repaid equal monthly instalments 289 starting march 2009 august 2016 time outstanding balances due loan may prepaid whole part prior july 2009 date loan prepaid whole part must include prepayment premium described loan agreement terms agreement among things alexion manufacturing llc restricted respect additional borrowings leasing arrangements mergers event approval market soliris™ eculizumab obtained december 31 2007 alexion manufacturing llc must deliver acceptable letter credit lender amount 13000 also included loan agreement certain provisions satisfied would allow additional borrowings 9000 terms agreement among things alexion manufacturing restricted respect additional borrowings leasing arrangements mergers alexion manufacturing also may modify amend waive material obligations respect terminate material agreements proprietary rights engage business ownership operation facility alexion pharmaceuticals inc may among things liquidate windup dissolve long guarantee remains effect condition loan alexion manufacturing llc required maintain restricted cash accounts must used specifically purchase construction manufacturing facility lender first priority security interest right approve disbursements accounts holding restricted cash agreement required times maintain balance restricted cash accounts sufficient complete project capital leases currently lease office equipment capital lease agreements expiring 2010 assets liabilities capital lease recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives interest rate capital lease 221 imputed based lower incremental borrowing rate inception lease operating leases operating leases principally facilities equipment lease headquarters research development facility cheshire connecticut lease initial term ten years six months expiring december 2010 extended august 2006 expire july 2017 site lease total 129000 square feet space pay pro rata percentage real estate taxes operating expenses pilot manufacturing plant may used producing compounds current anticipated clinical trials located new connecticut encompasses approximately 33000 square feet labs offices lease new initial term ending october 2007 three options extend one year alexion antibody technologies inc whollyowned subsidiary leases approximately 17000 square feet labs office space unimproved storage san diego california lease san diego expires august 2012 believe research development facilities pilot manufacturing facility together third party manufacturing facilities adequate current ongoing activities commercial commitments commercial commitments consist cancelable research development licenses operations clinical development including clinical trials manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs assuming utilize longterm commercial scale product manufacturing capacity may realized contingent upon clinical development programs’ progress well commercialization plans commercial commitments represented principally agreement lonza biologics plc collaboration procter gamble pharmaceuticals lonza agreement largescale product supply agreement dated december 18 2002 lonza agreement lonza biologics plc lonza us relating manufacture product candidate soliris™ eculizumab amended lonza amendment april 2004 lonza amendment facility lonza manufacture soliris™ changed manufacturing capacity required purchase reduced future potential payments 10000 us lonza relating achievement soliris™ sales milestones 15000 payable us relating manufacturing yields achieved lonza eliminated august 2004 paid lonza additional 3500 nonrefundable advance lonza amendment addition amounts would required pay connection voluntary termination lonza agreement us changed current agreement terminate agreement september 30 2006 may required pay batches product scheduled manufacture 12 months following termination pg pharmaceuticals collaboration january 1999 procter gamble pharmaceuticals pg entered exclusive collaboration develop commercialize pexelizumab granted pg exclusive license intellectual property related pexelizumab right sublicense december 2001 pg entered binding memorandum understanding mou pursuant january 1999 collaboration revised pg agreed per mou share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well ami cabg phase iii clinical trial costs pg right terminate collaboration sublicense rights time pg terminates collaboration per mou pg required contribute share agreed obligations costs incurred prior termination may required contribute towards obligations incurred termination circumstance rights exclusive license intellectual property related pexelizumab would revert back us would entitled future pexelizumab revenues without sharing revenues pg sublicense rights sublicensee would required assume pg’s obligations collaboration 2006 completed final phase iii trial pexelizumab reviewing results trial along pg determined pursue development pexelizumab terms mou may obligated reimburse pg 50 cancellation costs pg’s thirdparty pexelizumab manufacturing contract portion cancellation costs amounts approximately 2000 additional payments additional payments aggregating approximately 8243 would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization approximately 2380 costs may incurred next three years taxes december 31 2006 available federal tax reporting purposes net operating loss carry forwards approximately 618061 expire 2007 2026 also federal state research development credit carry forwards approximately 21891 expire 2008 2026 tax reform act 1986 contains certain provisions limit taxpayer’s ability utilize net operating loss tax credit carry forwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered however limitation expected result loss federal net operating loss research development credit carry forward recently issued accounting standards july 2006 fasb approved issuance fasb interpretation fin 48 “accounting uncertainty income taxes amended” interpretation clarifies accounting uncertain income tax positions income taxes recognized enterprise’s financial statements accordance fasb statement 109 accounting income taxes additionally interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition interpretation effective reporting periods beginning december 15 2006 earlier application permitted alexion effective date first quarter 2007 management evaluating impact adopting accounting standard financial position results operations item 7aitem 7 managements discussion analysis financial condition results operations amounts thousands except per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning form 10k risks uncertainties cause actual results differ significantly forecasted forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere form 10k overview biopharmaceutical company engaged discovery development delivery biologic therapeutic products aimed treating patients severe lifethreatening disease states including hematologic neurologic diseases cancer autoimmune disorders inception january 1992 early 2007 devoted substantially resources drug discovery research product clinical development march 2007 us food drug administration fda granted approval lead product soliris® eculizumab treatment rare lifethreatening blood disorder known paroxysmal nocturnal hemoglobinuria pnh june 2007 european commission ec also approved soliris treatment pnh december 31 2007 product sales solely attributable sales soliris generated three sources commercial sales united states beginning second quarter 2007 “namedpatient” sales certain european countries beginning first quarter 2007 commercial sales certain european countries beginning fourth quarter 2007 incurred operating losses since inception expect incur operating losses negative cash flow additional periods due costs associated commercialization soliris united states europe precommercialization activities anticipated commercialization activities territories development manufacturing plant rhode island including engineering validation runs product research development preclinical studies clinical testing regulatory activities commercialscale manufacturing third party contractor manufacturing plant site approved manufacture soliris infrastructure support costs generate sufficient levels cash operations expect continue finance future cash needs primarily use available cash equivalents shortterm investments availability credit agreement extent necessary proceeds equity debt financings loans collaborative agreements critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements • revenue recognition • royalties • inventories • prepaid manufacturing • research development expenses • stockbased compensation • longlived assets • income taxes revenue recognition net product sales date product sales consisted solely soliris treatment pnh recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations amounts collected customers remitted governmental authorities primarily comprised valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers cases also sell soliris government agencies soliris generally shipped directly third party warehouse patients’ healthcare provider typically direct customer revenue recorded transaction upon receipt product patients’ healthcare provider typically hospital physician’s office december 31 2007 recorded revenue sales individual patients namedpatient programs certain european countries relevant authorities countries agreed reimburse product sold namedpatient basis soliris received formal approval commercial sales europe entered transitional agreements distributor distribute soliris namedpatient basis specified european countries continue engage appropriate authorities operational reimbursement price approval funding processes separately required european country complete processes certain countries germany earlier stages countries united kingdom european countries soliris currently commercially available commercially available future customers expected primarily hospitals hospital buying groups pharmacies health care providers exception united kingdom primary product sales distributor sales within europe recorded upon receipt product healthcare provider date actual refunds returns negligible pricing soliris limited number patients short period sale product patient infusion lack return rights soliris customers generally carry limited inventory accordingly expect sales related soliris closely tied patient demand monitor inventory within distribution channel determine whether reserves required related inventory sales channels extent actual experience differs estimates revise estimates resulting impact period adjustment made record estimated rebates payable governmental programs including medicaid programs europe reduction revenue time product sales recorded calculations related rebate accruals require estimates including estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments reserves generally length time product sale processing reporting rebates three nine months upon reconciliation government reporting sales records revise estimates rebates payable impact revenue period adjustment made also record distribution fees paid customers reduction revenue costs typically known time sale resulting minimal adjustments subsequent period sale contract research revenue record contract research revenues research development support payments license fees milestone payments collaboration third parties amounts received various government grants evaluate deliverables collaborative agreement determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value undelivered item upfront nonrefundable license fees received connection collaboration deferred amortized revenue life agreement period performance obligations revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts royalties record actual estimated royalties third parties related sale commercial manufacture soliris estimate royalties potentially owed third parties based contractual arrangements certain parties well assessment possible royalty amounts owed third parties estimates may influenced outcome current litigation results uncertain see note 9 consolidated financial statements included form 10k periodic basis based events changes status litigation may reassess estimates resulting adjustments cost sales inventories stated lower cost estimated realizable value determine cost inventory using average cost method capitalized inventory costs associated soliris prior regulatory approval subsequent filing biologics license application bla determine inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial significant portion product sold year ended december 31 2007 previously expensed prior submission bla therefore included cost product revenues period fourth quarter 2007 fully exhausted supply previously expensed inventory beginning 2008 cost sales reflect full manufacturing cost inventory analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 42 months based sales forecasts expect fully realize carrying value soliris inventory determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required date recorded material adjustments inventory related excess expired obsolete inventory future reduced demand quality issues excess supply may result writedowns would recorded adjustments cost sales prepaid manufacturing costs cash advances paid us secure future manufacturing production thirdparty contract manufacturers recorded prepaid manufacturing costs recognized period manufacturing production unitofproduction method cash advances subject forfeiture terminate scheduled production evaluate prepaid manufacturing costs estimated net realizable value nrv estimated nrv negative portion prepaid manufacturing cost may recognized expense calculation nrv involves estimates expected sales volumes sales price soliris actual volumes prices substantially less estimates writedowns prepaid manufacturing balance cost sales may required based sales forecasts expect carrying value prepaid manufacturing costs fully realized research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred march 31 2007 involved collaboration research agreement pg shared costs recorded costs research development expenses incurred portion costs reimbursed collaborator recorded reduction research development expense accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations cro’s clinical study sites laboratories consultants clinical trial vendors perform activities related contracts vary significantly length may fixed amount variable amount based actual costs incurred capped certain limit combination elements activity levels monitored close communication cro’s clinical trial vendors including detailed invoice task completion review analysis expenses budgeted amounts analysis work performed approved contract budgets payment schedules recognition changes scope services performed certain cro significant clinical trial vendors provide estimate costs incurred invoiced end quarter individual trial estimates reviewed discussed cro vendor necessary included research development expenses related period clinical study sites paid periodically persubject basis institutions performing clinical study accrue estimated amount based subject screening enrollment quarter estimates may differ actual amount subsequently invoiced may result adjustment research development expense several months related services performed stockbased compensation one stockbased compensation plan known 2004 incentive plan restricted stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise forfeiture cancellation well reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates factors change employ different assumptions application fas 123r compensation expense record future periods may differ significantly prior recorded amounts longlived assets assess potential impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value amount recognized impairment charge integration plan initiated subsidiary alexion antibody technology inc experienced significant triggering event therefore recorded impairment charges related long lived assets extent experience triggering event particularly relates largest longlived asset smithfield rhode island manufacturing facility resulting analysis may require impairment charge statement operations income taxes record valuation allowance reduce deferred tax assets amount likely realized recorded full valuation allowance net deferred tax assets principal amount tax effect federal net operating loss carryforwards approximately 732653 december 31 2007 future taxable income ongoing prudent feasible tax planning strategies considered assessing need valuation allowance later determine likely deferred tax assets would realized previously provided valuation allowance would reversed order realize deferred tax assets must able generate sufficient taxable income tax jurisdictions deferred tax assets located critical accounting assumption historically accurate able utilize net deferred tax assets expect changes assumption ultimate realizability deferred tax assets becomes certain results operations following table sets forth consolidated statements operations data periods indicated information years ended december 31 2007 2006 derived audited consolidated financial statements included elsewhere form 10k information year ended december 31 2005 derived unaudited consolidated financial statements amounts thousands except per share data comparison year ended december 31 2007 year ended december 31 2006 amounts thousands except per share data revenues year ended december 31 2007 recorded sales soliris related commercial sales united states 46196 commercial namedpatient sales european union 20185 commercial preapproval sales programs begin 2007 sales soliris year ended december 31 2006 additional pnh patients request soliris obtain reimbursement expect number patients taking soliris increase resulting increase product sales us europe also expect product sales europe increase progress appropriate authorities operational reimbursement price approval funding process european country recorded contract research revenues 5660 1458 years ended december 31 2007 2006 respectively contract research revenues reflect amortization deferred revenue resulting cash received pg collaboration development commercialization pexelizumab us government funded research grant revenue asthma program year ended december 31 2007 increase contract research revenue compared year ended december 31 2006 due termination collaborative agreement pg effective march 30 2007 pg agreed terminate 1999 collaboration agreement development commercialization pexelizumab agreement terminated remaining portion 10000 nonrefundable upfront license fee 5343 recognized revenue three months ended march 31 2007 due termination pg agreement expect future contract research revenue dependent upon future awards grants year ended december 31 2007 decrease us government grants compared period prior year primarily due conclusion anthrax program 2006 cost sales cost sales 6696 year ended december 31 2007 cost sales incurred periods prior december 31 2006 cost sales includes actual estimated royalty expenses associated sales soliris well manufacturing costs changes estimates royalties owed certain third parties could material impact cost sales future periods expect purchase patents omrf february 2008 favorable impact cost sales product sold year ended december 31 2007 included inventory previously expensed prior submission bla therefore included cost sales period fourth quarter 2007 exhausted supply previously expensed inventory beginning 2008 cost sales increase reflecting full manufacturing cost inventory research development expenses year ended december 31 2007 incurred research development expenses 68961 decrease 14264 171 versus 83225 incurred year ended december 31 2006 decrease primarily due offset following • decrease 14968 clinical development expense due largely decreases spending pexelizumab program 10022 reduction completion eculizumab programs including triumph shepherd extension clinical trials incurrence 2006 costs association filing bla 7516 decreases offset increases 7850 related new programs 2007 including explore embrace clinical trials pnh registry • increase 3896 product development expenses due increase 5518 related expenditures drug development quality assurance scientific communications regulatory affairs due regulatory approvals united states march 2007 european union june 2007 increase offset decrease manufacturing costs 1622 related capitalization inventory costs beginning filing bla september 2006 prior september 2006 expensed manufacturing costs resulting lower 2007 expenses compared 2006 • decrease 2160 discovery research primarily due closure aat operations expect research development expenses increase 2008 result clinical trials research related eculizumab development programs asthma myasthenia gravis multifocal motor neuropathy well expected initiation clinical study anticd200 antibody chronic lymphocytic leukemia additional information programs please refer “product development programs” item form 10k selling general administrative expenses year ended december 31 2007 incurred selling general administrative expenses 96142 increase 41263 752 versus 54879 incurred year ended december 31 2006 increase primarily due following • year ended december 31 2007 salaries benefits labor expenses increased 49521 increase 21863 790 versus 27658 incurred year ended december 31 2006 increase result increased headcount related commercial development activities including increases payroll benefits costs 18250 related global commercial operations teams increases related payroll benefits within executive finance information technology human resources legal groups support growth commercial entity • increase nonlabor commercial operations 14087 year ended december 31 2007 year ended december 31 2007 increase comprised primarily increases advertising promotion soliris related april 2007 commercial launch united states market research related approval soliris european union well promotion soliris commercial launches certain european countries • increase nonlabor general administration information technology 3862 year ended december 31 2007 related increases infrastructure costs support growth commercial entity expect selling general administrative expenses increase reduced rate 2008 reflecting completion product launch soliris united states increased promotion marketing infrastructure costs outside united states income expense year ended december 31 2007 recognized 1132 foreign currency gain foreign currency gain loss recorded 2006 result european operations exposure primarily accounts receivable intercompany receivables payables denominated foreign currencies adverse movements foreign currency exchange rates primarily related euro year ended december 31 2007 investment income interest expense consistent results recognized year ended december 31 2006 income taxes year ended december 31 2007 recorded income tax benefit 745 compared 373 year ended december 31 2006 increase tax benefit attributable increase estimated cash exchange state incremental research development tax credit expect reduced tax benefit 2008 due reduction state research development credits incurrence state tax liabilities continue monitor deferred tax assets 2008 determine whether necessary adjustments may required related valuation allowance comparison year ended december 31 2006 year ended december 31 2005 amounts thousands except per share data revenues earned contract research revenues approximately 1458 1482 years ended december 31 2006 2005 respectively revenue reflects amortization deferred revenue resulting cash received pg collaboration development commercialization pexelizumab us government funded research grant revenue related research programs nonrefundable fee exclusive access xenotransplantation technologies program terminated october 2003 research development expenses year ended december 31 2006 incurred research development expenses 83225 decrease 24530 228 versus 107755 incurred year ended december 31 2005 decrease primarily due offset following • significant decrease clinical development manufacturing expenses costs 20211 18636 respectively related termination pexelizumab programs • substantial increases payroll benefits costs 8859 primarily impacted adoption sfas 123r resulting expensing employee stock options grants • increased headcount support research drug development activities • research discovery expenses increased approximately 5642 primarily related development activities related pnh programs selling general administrative expenses year ended december 31 2006 incurred selling general administrative expenses 54879 increase 29370 1151 versus 25509 incurred year ended december 31 2005 increase primarily due following • increased precommercial activities associated soliris us well europe • increased headcount support operations • increased expenses related closure alexion antibody technologies inc income expenses year ended december 31 2006 recognized 8076 investment income representing increase 1443 218 versus 6633 recognized year ended december 31 2005 increase reflection higher market interest rates higher cash equivalent marketable securities balances interest expense decreased 2799 4164 years ended december 31 2006 2005 respectively decrease resulted lower coupon rate 150000 principal amount 1375 convertible senior notes following redemption 120000 principal amount 575 convertible subordinated notes march 2005 state tax benefit 373 1154 recognized years ended december 31 2006 2005 respectively resulting estimated exchange december 31 2006 2005 incremental research development tax credits liquidity capital resources amounts thousands except per share data december 31 2007 consolidated cash equivalents marketable securities restricted cash totaled 106712 decrease 143436 250148 december 31 2006 reduction cash held primarily due ongoing expenditures commercialization efforts related soliris united states european union expenditures rhode island manufacturing facility inventory purchases continuing product research development efforts required use business invest cash reserves money market funds high quality commercial corporate us government notes accordance investment policy december 31 2007 958 cash restricted used construction costs related rhode island manufacturing facility december 31 2007 working capital 167645 compared 208954 december 31 2006 offbalance sheet arrangements guarantee obligations entity indemnify certain third parties liabilities may incur connection manufacturing development sale soliris drug candidates incurred operating losses since inception december 31 2007 accumulated deficit 729279 expect incur operating losses negative cash flows additional future periods due costs associated launch commercialization soliris united states precommercialization activities anticipated commercialization activities outside united states development manufacturing plant rhode island including engineering validation runs product research development preclinical studies clinical testing regulatory activities commercialscale manufacturing third party contractor manufacturing plant site qualified manufacture soliris infrastructure support costs generate sufficient levels cash operations expect continue finance future cash needs primarily cash equivalents shortterm investments availability credit agreement extent necessary proceeds equity debt financings loans collaborative agreements requirement obtain additional cash debt equity financing highly dependent sales related cash collections soliris united states european union cash flows operating activities net cash used operating activities 140373 year ended december 31 2007 versus 109914 year ended december 31 2006 increase 30459 277 increase cash used compared period previous year primarily due increased commercialization activities compared period 2006 components cash used operating activities year ended december 31 2007 follows • net loss 70514 net noncash items including depreciation amortization 4927 stockbased compensation 22025 recognition remaining 5343 deferred revenue related termination pg agreement • net cash outflow due changes operating assets 80578 primarily attributable increases inventories accounts receivable due payment terms granted us european union customers significant portion product sales date yet collected increases offset increase accrued expenses compensation actual estimated royalties 2008 changes cash operations highly dependent sales levels related cash collections sales soliris addition expect cash outflows related changes operating assets continue increase related sales resulting accounts receivable increases purchases additional inventory supply agreement lonza cash flows investing activities net cash provided investing activities 3458 year ended december 31 2007 versus 53907 provided investing activities year ended december 31 2006 year ended december 31 2007 net cash used investing activities consisted following • 39306 cash inflow net sale marketable securities used fund operations • 68484 additions property plant equipment 62575 attributable construction rhode island manufacturing facility remaining attributable spending information technology facility capital costs • 32636 restricted cash used costs incurred connection construction certain operating escrow balances rhode island manufacturing facility pursuant terms mortgage loan july 2006 acquired manufacturing plant smithfield rhode island future commercial production soliris manufacturing development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related validation activities including engineering runs necessary obtain approval facility government regulators production commercially approved drug date costs primarily include direct labor materials overhead related facility begin depreciating fixed assets related facility assets substantially complete ready intended use december 31 2007 capitalized 91231 related facility includes costs associated construction renovation upgrades engineering runs capitalized interest december 31 2007 costs incurred seeking regulatory approval including engineering runs 21999 capitalized interest 4328 cash flows financing activities net cash provided financing activities 65562 179324 year ended december 31 2007 2006 respectively consisting primarily proceeds issuance common stock related exercise stock options 47005 153827 respectively proceeds mortgage loan agreement istar 18000 26000 respectively contractual obligations contractual obligations include 150000 1375 convertible senior notes due february 2012 1375 notes 44000 mortgage loan due august 2017 fixed annual interest rate 912 annual payments approximately 4500 operating capital leases principally facilities equipment open letter credit 200 serves security deposit facility cheshire connecticut also contractual obligations related third party manufacturer third parties following table summarizes contractual obligations december 31 2007 effect obligations commercial commitments expecting liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change addition acquired omrf february 2008 certain patents related complementinhibition technology oklahoma medical research foundation omrf pay 10000 plus interest omrf rights patents 7500 remitted 2008 remaining 2500 first half 2009 amounts including royalties owed omrf respect sales soliris use omrf patents convertible notes payable hold 150000 principal amount 1375 convertible senior notes due february 1 2012 1375 notes pay interest notes semiannual basis february 1 august 1 year beginning august 1 2005 however principal payments due february 2012 except certain circumstances liquidation merger business combination convertible notes payable covenants related financial performance 1375 notes convertible common stock initial conversion rate 317914 shares common stock equivalent conversion price approximately 3146 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity december 31 2007 market value 150000 1375 convertible notes due february 1 2012 based quoted market prices estimated 375000 157875 increase december 31 2006 largely attributable increase price common stock period mortgage loan july 2006 entered mortgage loan agreement borrow 26000 finance purchase construction smithfield rhode island manufacturing facility july 2007 amended existing mortgage loan agreement istar financial inc increase loan amount 18000 resulting aggregate principal balance 44000 effective date amendment mortgage loan bears interest new fixed annual rate 912 loan principal required repaid equal monthly instalments 489 starting march 2010 august 2017 time outstanding balances due loan collateralized assets smithfield ri manufacturing facility loan may prepaid whole part prior july 2009 date loan prepaid whole part must include prepayment premium described loan agreement condition loan required maintain restricted cash accounts must used specifically purchase construction manufacturing facility maintain certain operating escrow balances lender first priority security interest right approve disbursements accounts holding restricted cash agreement required maintain balance restricted cash accounts sufficient complete project 2007 substantial portion disbursements made resulting restricted cash balance 958 mortgage loan require covenants related financial performance working capital loan february 2008 entered credit agreement bank america na provide available 25000 revolving credit facility used working capital requirements general corporate purposes loan collateralized substantially alexion pharmaceuticals incs assets including pledge equity interests certain direct subsidiaries excluding intellectual property assets foreign subsidiaries assets related manufacturing facility smithfield ri borrowing base limited 80 eligible domestic receivables defined february 25 2008 borrowed revolving credit facility may elect loans agreement bear interest rate per annum equal libor plus 175 225 depending alexions liquidity calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 plus 0 025 depending alexions liquidity defined interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 28 2011 maturity date revolving credit facility requires alexion comply quarterly financial covenants related liquidity profitability ratios well revenue agreement includes negative covenants subject exceptions restricting limiting alexions ability alexions subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions enter transactions affiliates agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan capital leases currently lease office equipment capital lease agreements expiring 2010 assets liabilities capital lease agreements recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives average interest rates capital leases 95 imputed based lower incremental borrowing rate inception lease operating leases operating leases principally facilities equipment lease headquarters research development facility cheshire connecticut lease initial term ten years six months expiring december 2010 extended august 2006 revised june 2007 lease set expire may 2017 site lease total 125424 square feet space january 2003 entered lease agreement pilot manufacturing plant associated labs offices new connecticut lease expired october 2007 pilot manufacturing operations transferred manufacturing facility located smithfield rhode island lease additional research space san diego california connection closure alexion antibody technologies 2006 accrued fair value future payments lease see note 6 consolidated financial statements included form 10k september 2007 company signed sublease aat facility provides sublease payments term lease 2012 believe research development facilities pilot manufacturing facility together third party manufacturing facilities adequate current ongoing activities commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon clinical development programs’ progress well commercialization plans commercial commitments represented principally supply agreement lonza sales ag lonza agreement supply agreement lonza sales ag relating manufacture soliris requires payments lonza inception contract product manufactured required prepay certain amounts related production soliris reflected prepaid manufacturing costs take title inventory produced lonza amounts reclassified inventory ongoing basis evaluate plans proceed production soliris lonza depends upon commercial requirements well progress clinical development programs june 2007 amended supply agreement provide additional purchase commitments soliris 30000 35000 2013 commitments may cancelled limited circumstances agreed purchase certain minimum quantities product lonza existing arrangements terminate lonza agreement without cause required pay batches product scheduled manufacture arrangement additional commercial commitments additional payments related commercial commitments licenses aggregating approximately 1745 would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization amounts included table income taxes december 31 2007 available federal tax reporting purposes net operating loss carry forwards approximately 732653 expire 2008 2027 also federal state research development credit carry forwards approximately 25088 expire 2008 2027 tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carry forwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered however limitation expected result loss federal net operating loss research development credit carry forwards result net operating losses tax credits expected significantly reduce cash payable federal income taxes united states foreseeable future recently issued accounting standards december 2007 statement financial accounting standards 141r business combinations sfas 141r issued standard require acquiring company measure assets acquired liabilities assumed including contingent consideration contractual contingencies fair value acquisition date addition acquiring company required capitalize iprd either amortize life product write project abandoned impaired standard effective transactions occurring january 1 2009 february 2007 statement financial accounting standards 159 fair value option financial assets financial liabilities including amendment fasb statement 115 sfas 159 issued standard permits us choose measure many financial instruments certain items fair value also establishes presentation disclosure requirements standard effective january 1 2008 company september 2006 statement financial accounting standards 157 fair value measurement sfas 157 issued standard defines fair value establishes framework measuring fair value generally accepted accounting principles gaap expands disclosure fair value measurements standard effective january 1 2008 company expect standards material impact financial statements item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning form 10k risks uncertainties cause actual results differ significantly forecasted forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere form 10k overview biopharmaceutical company engaged discovery development delivery biologic therapeutic products aimed treating patients severe lifethreatening disease states including hematologic neurologic diseases transplant rejection cancer autoimmune disorders marketed product soliris® eculizumab first therapy approved treatment patients paroxysmal nocturnal hemoglobinuria pnh soliris designed inhibit specific aspect complement component immune system thereby treat inflammation associated chronic hematologic neurological disorders transplant rejection autoimmune disorders soliris humanized antibody generally blocks complement activity one two weeks single dose doses currently prescribed initial indication received approval soliris pnh rare debilitating lifethreatening acquired genetic deficiency blood disorder defined destruction red blood cells hemolysis chronic hemolysis patients pnh may associated lifethreatening thromboses recurrent pain kidney disease disabling fatigue impaired quality life severe anemia pulmonary hypertension shortness breath intermittent episodes darkcolored urine hemoglobinuria since incorporation january 1992 april 2007 devoted resources drug discovery research product clinical development march 2007 food drug administration fda granted marketing approval soliris united states soliris indicated treatment patients pnh reduce hemolysis began commercial sale soliris united states april 2007 june 2007 european commission ec approved use soliris patients pnh european union also serves basis approval iceland norway subsequently engaged appropriate authorities operational reimbursement price approval funding processes separately required country initiated commercialization countries process completed june 2007 european commission ec approved use soliris patients pnh european union also serves basis approval iceland norway subsequently engaged appropriate authorities operational reimbursement price approval funding processes separately required country initiated commercialization countries process completed several countries outside united states continued meaningful sales individual patients approved namedpatient programs 2008 submitted application marketing authorization australia soliris treatment patients pnh application accepted priority review soliris received orphan drug designation australia provides certain regulatory filing fee advantages including market exclusivity several years approval subject certain exceptions also submitted applications marketing authorization soliris canada switzerland treatment patients pnh granted limited marketing authorization switzerland september 2008 approval canada january 2009 completed 12week aegis study japanese patients october 2008 study single registration study evaluate safety efficacy pharmacology soliris treatment japanese patients pnh open label study authorized japan’s pharmaceutical medical devices agency summary results reported december 2008 prespecified primary efficacy endpoint change hemolysis achieved statistical significance drug appeared safe well tolerated study patients also focusing research efforts use eculizumab treatment patients rare severe complementmediated conditions including chronic hemolytic thrombotic disorders transplant rejection chronic debilitating neurological disorders fda authorized investigational new drug application ind studying safety efficacy eculizumab treating myasthenia gravis rare autoimmune syndrome characterized failure neuromuscular transmission commenced clinical development 2008 currently developing clinical programs investigate use eculizumab treatment patients complementmediated disorders including three severe lifethreatening rare hematologic disorders atypical hemolytic uremic syndrome ahus disease lack naturally occurring complement inhibitors cause lifethreatening kidney damage catastrophic antiphospholipid syndrome disorder uncontrollable blood clotting often leads multiple organ failure cold agglutinin disease autoimmune hemolytic anemia program ahus initiated january 2009 also completed phase iii proof concept study iv eculizumab allergic asthmatic patients fourth quarter 2008 aware investigatorinitiated trials eculizumab begun patients multifocal motor neuropathy mmn severe autoimmune neurologic disorder dense deposit disease severe kidney disease also aware independent investigators commenced study evaluate eculizumab organ transplantation fda also authorized ind evaluate activity antibody immune regulator cd200 patients chronic lymphocytic leukemia cll incurable chronic cancer results expansion blymphocytes blood tumors multiple myeloma commenced dosing initial cll patients anticd200 second quarter 2008 july 2008 company’s board directors approved twoforone stock split effected form 100 percent stock dividend additional shares distributed august 22 2008 stockholders record close trading august 12 2008 share per share data presented form 10k retroactively restated reflect stock split october 2008 certain holders 1375 convertible senior notes due 2012 1375 notes exercised conversion rights respect aggregate principal amount 52778 1375 notes resulting issuance 3356 shares common stock shares issued november 2008 december 31 2008 outstanding principal balance 1375 notes 97222 critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements consider critical accounting policies • revenue recognition • royalties • inventories • research development expenses • stockbased compensation • longlived assets • income taxes revenue recognition net product sales principal source revenue product sales applied following principles recognizing revenue date product sales consisted solely soliris recognize revenue product sales persuasive evidence arrangement exists risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations amounts collected customers remitted governmental authorities primarily comprised valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers cases also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors addition commercial sales recorded revenue sales individual patients namedpatient programs outside united states relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sales record estimated rebates payable governmental programs including medicaid programs europe reduction revenue time product sales recorded calculations related rebate accruals require estimates including estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments reserves generally length time product sale processing reporting rebates three nine months upon reconciliation government reporting sales records revise estimates rebates payable may impact revenue period adjustment made due limited number rebate programs small number patients treated soliris short period time sale product patient infusion lack contractual rights return able estimate rebates payable third parties future adjustments expected insignificant provided balances activity rebates payable account year ended december 31 2006 2007 2008 follows pricing soliris limited number patients short period sale product patient infusion lack contractual return rights soliris customers generally carry limited inventory monitor inventory within distribution channel determine whether deferral sales required related inventory sales channels date actual refunds returns negligible also record distribution fees paid customers reduction revenue costs known time sale resulting minimal adjustments subsequent period sale deferred revenue results cash received amounts receivable advance revenue recognition research development contracts royalties cost sales includes royalties third parties related sale commercial manufacture soliris estimate royalty obligations based existing contractual obligations assessment estimated royalties owed third parties estimates may influenced outcome unasserted claims litigation results uncertain see note 11 consolidated financial statements periodic basis based events outcome litigation may reassess estimates resulting adjustments cost sales inventories stated lower cost estimated realizable value determine cost inventory using average cost method products initial clinical development capitalize inventory costs prior regulatory approval subsequent filing biologics license application bla determine inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial also capitalize cost inventory manufactured manufacturing plant property plant equipment prior validation facility fda receive approval fda cost inventory reclassified property plant equipment inventory analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect fully realize carrying value soliris inventory determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required date recorded material adjustments inventory related excess expired obsolete inventory future reduced demand quality issues excess supply may result writedowns would recorded adjustments cost sales research development expenses accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations cro’s clinical study sites laboratories consultants clinical trial vendors perform activities related contracts vary significantly length may fixed amount variable amount based actual costs incurred capped certain limit combination elements activity levels monitored close communication cro’s clinical trial vendors including detailed invoice task completion review analysis expenses budgeted amounts analysis work performed approved contract budgets payment schedules recognition changes scope services performed certain cro significant clinical trial vendors provide estimate costs incurred invoiced end quarter individual trial estimates reviewed discussed cro vendor necessary included research development expenses related period clinical study sites paid periodically persubject basis institutions performing clinical study accrue estimated amount based subject screening enrolment quarter estimates may differ actual amount subsequently invoiced may result adjustment research development expense several months related services performed stockbased compensation one stockbased compensation plan known 2004 incentive plan restricted stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise forfeiture cancellation well reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates factors change employ different assumptions application fas 123r compensation expense record future periods may differ significantly prior recorded amounts longlived assets assess potential impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value amount recognized impairment charge integration plan initiated subsidiary alexion antibody technologies inc experienced significant triggering event therefore recorded impairment charges related long lived assets extent experience triggering event particularly relates largest longlived asset smithfield rhode island manufacturing facility resulting analysis may require impairment charge statement operations income taxes despite achieving profitability 2008 continue maintain valuation allowance net operating losses nols deferred tax assets certain jurisdictions extended history annual losses jurisdictions federal nol carryforwards total approximately 745000 2008 reversed valuation allowances related several foreign entities based assessment current future profitability quarterly basis reassess valuation allowance deferred income tax assets would consider reversing significant portion valuation reserve upon assessment certain factors including demonstration sustained profitability ii support internal financial forecasts demonstrating utilization nols prior expiration determine reversal valuation reserves jurisdictions appropriate significant onetime benefit recognized income tax provision period reversal addition portion nols income tax credits related deductions employee stock options credited additional paidin capital realized time also commence recognizing income tax provision effective tax rate however ability utilize nols credits offset taxable income continue provide us cash savings nols credits fully utilized expire nols credits remain subject examination federal state authorities due carried forward position adopted provisions fin 48 fsp fin 481 “definition settlement fasb interpretation 48” fsp fin 481 effective january 1 2007 fin 48 clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition account interest penalties related uncertain tax positions part provision income taxes unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well experience provide estimates unrecognized tax benefits adjustments may made estimates result events resolution tax audits lapsing statutory audit periods also refine estimates time operations mature gain experience operating taxpayer worldwide basis estimates representative actual outcomes tax provision related effective tax rate recorded statement operations could materially impacted results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere form 10k comparison year ended december 31 2008 year ended december 31 2007 revenues year ended december 31 2008 recorded sales soliris related commercial sales united states 113204 commercial namedpatient sales outside united states 145800 included revenue outside united states recorded gain 4141 related foreign currency cash flow hedging program year ended december 31 2007 recorded sales soliris related commercial sales united states 46196 commercial namedpatient sales european union 20185 march 2007 fda granted approval soliris treatment pnh june 2007 ec also approved soliris treatment pnh product sales solely attributable sales soliris generated three sources commercial sales united states beginning second quarter 2007 “namedpatient” sales prior fullscale commercialization certain countries outside united states beginning first quarter 2007 commercial sales countries outside united states beginning fourth quarter 2007 increases revenue fiscal year 2008 versus 2007 due increased number patients treated soliris result product launch united states various countries europe additional physicians request soliris patients pnh obtain governmental reimbursement expect number patients receiving soliris treatments increase resulting increase product sales existing countries also expect product sales rest world increase progress appropriate authorities regulatory price approval reimbursement process additional territories recorded contract research revenues 95 5660 years ended december 31 2008 2007 respectively 5660 contract research revenues recorded 2007 5343 relates termination collaborative agreement proctor gamble effective march 30 2007 cost sales cost sales 28366 6696 years ended december 31 2008 2007 respectively cost sales includes actual estimated royalty expenses associated sales soliris well manufacturing costs changes estimates royalties owed certain third parties could material impact cost sales future periods product sold year ended december 31 2007 included inventory previously expensed prior submission bla therefore included cost sales period fourth quarter 2007 exhausted supply previously expensed inventory beginning 2008 cost sales reflected full manufacturing cost inventory fourth quarter 2008 entered patent license agreement settlement agreement pdl biopharma obligated pay total 25000 fully paid perpetual license result settlement evaluation potential royalties recorded reduction cost goods sold approximately 1800 related adjustment estimated accrued royalties sales soliris prior fourth quarter expect settlement favorable impact future cost goods sold periodic basis based events outcome litigation may reassess estimates royalties owed certain third parties changes estimates could material impact cost sales future periods research development expenses research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research clinical costs comprised costs conduct manage clinical trials related soliris product candidates product development costs historically relate primarily soliris incurred performing duties related pre postapproval manufacturing development regulatory functions discovery research costs incurred conducting laboratory studies performing preclinical research uses soliris product candidates clinical costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products well discovery research efforts costs allocated directly program following table provides information regarding research development expenses following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs previous january 1 2006 spent approximately 475838 research development programs substantially research development expenses prior year ended december 31 2006 related two products eculizumab pexelizumab obtained approval eculizumab treatment pnh 2007 united states european union ceased development pexelizumab 2006 successful development drug candidates uncertain subject number risks large portion annual expenses relates commercialization soliris general administrative costs may able raise necessary capital support commercialization soliris well development programs commercialization cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer risk factors form 10k including risk factors set forth page 30 “if fail obtain capital necessary fund operations unable continue commercialization soliris continue complete product development” page 25 “none product candidates except soliris received regulatory approvals” page 25 “completion preclinical studies clinical trials guarantee advancement next phase development” page 26 “there many reasons drug testing could delayed terminated” year ended december 31 2008 incurred research development expenses 62581 decrease 6380 93 versus 68961 incurred year ended december 31 2007 decrease primarily due following • decrease 3254 research development payroll benefit expense related primarily reduction stockbased compensation due employee forfeitures additional capitalization inventory property plant equipment • increase 813 depreciation amortization related primarily amortization costs associated new pilot plant located manufacturing facility smithfield ri placed service fourth quarter 2007 • decrease 1600 discovery research primarily due reduction external research consulting fees • decrease 1425 product development expenses due increased manufacturing plant readiness activities including decrease approximately 925 relating additional capitalization costs associated validation manufacturing facility smithfield rhode island expect research development expenses increase 2009 due clinical trials manufacturing costs research related eculizumab anticd200 development programs additional information programs please refer “product development programs” item form 10k selling general administrative expenses year ended december 31 2008 incurred selling general administrative expenses 133543 increase 37401 389 versus 96142 incurred year ended december 31 2007 increase primarily due following • year ended december 31 2008 salaries benefits labor expenses increased 66856 increase 17335 35 versus 49521 incurred year ended december 31 2007 increase result increased headcount related commercial development activities including increases payroll benefits costs 17211 related global commercial operations teams increases related payroll benefits within executive finance information technology human resources legal groups support growth commercial entity • increase nonlabor commercial operations 14746 year ended december 31 2008 primarily due expansion foreign operations expanded significantly latter half 2007 • increase nonlabor general administration 5977 primarily related increases legal costs associated ongoing litigation increases infrastructure costs support growth commercial entity • decrease nonlabor information technology 1293 primarily related costs associated build european operations 2007 expect selling general administrative expenses increase 2009 reflecting additional growth organizational structure us rest world income expense year ended december 31 2008 recognized 282 foreign currency loss decrease 1414 1249 versus gain 1132 incurred year ended december 31 2007 decreased impact foreign currency fluctuations due hedging programs implemented 2008 year ended december 31 2008 investment income decreased 5270 652 2810 due primarily reduced interest rates earned money market funds year ended december 31 2008 interest expense 2407 consistent amounts recognized year ended december 31 2007 income taxes year ended december 31 2008 recorded income tax provision 1581 compared income tax benefit 745 year ended december 31 2007 tax expense 2008 principally attributable entities certain foreign jurisdictions achieved profitability year offset reversal valuation allowances foreign jurisdictions exchange research tax credits cash income tax benefit 2007 attributable exchange research tax credits cash company maintains valuation allowance certain us foreign deferred tax assets realizability assets uncertain 2009 continue monitor deferred tax assets order assess whether adjustments related valuation allowance may required comparison year ended december 31 2007 year ended december 31 2006 revenues year ended december 31 2007 recorded sales soliris related commercial sales united states 46196 commercial namedpatient sales european union 20185 commercial preapproval sales programs begin 2007 sales soliris year ended december 31 2006 recorded contract research revenues 5660 1458 years ended december 31 2007 2006 respectively contract research revenues reflect amortization deferred revenue resulting cash received pg collaboration development commercialization pexelizumab us government funded research grant revenue asthma program year ended december 31 2007 increase contract research revenue compared year ended december 31 2006 due termination collaborative agreement pg effective march 30 2007 pg agreed terminate 1999 collaboration agreement development commercialization pexelizumab agreement terminated remaining portion 10000 nonrefundable upfront license fee 5343 recognized revenue three months ended march 31 2007 due termination pg agreement expect future contract research revenue dependent upon future awards grants year ended december 31 2007 decrease us government grants compared period prior year primarily due conclusion anthrax program 2006 cost sales cost sales 6696 year ended december 31 2007 cost sales incurred periods prior december 31 2006 cost sales includes actual estimated royalty expenses associated sales soliris well manufacturing costs changes estimates royalties owed certain third parties could material impact cost sales future periods product sold year ended december 31 2007 included inventory previously expensed prior submission bla therefore included cost sales period fourth quarter 2007 exhausted supply previously expensed inventory research development expenses following table provides information regarding research development expenses year ended december 31 2007 incurred research development expenses 68961 decrease 14264 171 versus 83225 incurred year ended december 31 2006 decrease primarily due offset following • decrease 14968 clinical development expense due largely decreases spending pexelizumab program 10022 reduction completion eculizumab programs including triumph shepherd extension clinical trials incurrence 2006 costs association filing bla 7516 decreases offset increases 7850 related new programs 2007 including explore embrace clinical trials pnh registry • increase 3909 product development expenses due increase 5518 related expenditures drug development quality assurance scientific communications regulatory affairs due regulatory approvals united states march 2007 european union june 2007 increase offset decrease manufacturing costs 1622 related capitalization inventory costs beginning filing bla september 2006 prior september 2006 expensed manufacturing costs resulting lower 2007 expenses compared 2006 • decrease 2172 discovery research primarily due closure aat operations selling general administrative expenses year ended december 31 2007 incurred selling general administrative expenses 96142 increase 41263 752 versus 55418 incurred year ended december 31 2006 increase primarily due following • year ended december 31 2007 salaries benefits labor expenses increased 49521 increase 21863 790 versus 27658 incurred year ended december 31 2006 increase result increased headcount related commercial development activities including increases payroll benefits costs 18250 related global commercial operations teams increases related payroll benefits within executive finance information technology human resources legal groups support growth commercial entity • increase nonlabor commercial operations 14087 year ended december 31 2007 year ended december 31 2007 increase comprised primarily increases advertising promotion soliris related april 2007 commercial launch united states market research related approval soliris european union well promotion soliris commercial launches certain european countries • increase nonlabor general administration information technology 3862 year ended december 31 2007 related increases infrastructure costs support growth commercial entity income expense year ended december 31 2007 recognized 1132 foreign currency gain foreign currency gain loss recorded 2006 result european operations exposure primarily accounts receivable intercompany receivables payables denominated foreign currencies adverse movements foreign currency exchange rates primarily related euro year ended december 31 2007 investment income interest expense consistent results recognized year ended december 31 2006 income taxes year ended december 31 2007 recorded income tax benefit 745 compared 373 year ended december 31 2006 increase tax benefit attributable increase estimated cash exchange state incremental research development tax credit liquidity capital resources amounts thousands except per share data december 31 2008 consolidated cash equivalents restricted cash marketable securities totaled 139711 32999 increase december 31 2007 largely attributable significantly increased sales resulting collection accounts receivable proceeds employee option exercises offset payments patent purchase omrf investments inventory smithfield rhode island facility required use business invest cash reserves money market funds high quality commercial corporate us government notes accordance investment policy investments auction rate securities december 31 2008 619 cash restricted used construction costs related rhode island manufacturing facility additional 1100 restricted part leasehold deposit office space financial instruments potentially expose company concentrations credit risk limited cash equivalents accounts receivable foreign exchange derivative contracts substantially cash equivalents held single aaa rated institutional money market fund participates us department treasury’s temporary guarantee program money market funds december 31 2008 two individual customers accounted 203 200 accounts receivable balance period ended december 31 2008 one customer accounted 210 product sales december 31 2008 foreign currency forward contracts notional amounts totaling 128876 outstanding foreign currency forward contracts fair value 5409 included current assets counterparty forward contracts large multinational commercial bank believe risk nonperformance material however assured financial institution impacted negative economic environment december 31 2008 working capital 192683 compared 167645 december 31 2007 december 31 2008 current ratio 328 compared 545 december 31 2007 decrease current ratio relates primarily 25000 license payable owed pdl biopharma anticipate cash generated operations existing available cash well interest investment income earned available cash marketable securities provide us adequate resources fund operating expenses capital requirements currently planned least next twelve months cash flows operating activities net cash provided operating activities 53199 year ended december 31 2008 versus 139614 used operating activities year ended december 31 2007 change primarily due net income achieved 2008 versus net loss compared period 2007 components cash provided operating activities period ended december 31 2008 follows • reported net income plus noncash items including depreciation amortization unrealized currency gain unrealized hedge gains unrealized pension losses stock compensation 64959 • net cash outflow due changes operating assets 46011 primarily attributable increases inventories accounts receivable offset increases accounts payable accrued expenses 32912 growth sales soliris required substantial investments working capital items inventories accounts receivable 2009 expect changes cash operations highly dependent sales levels related cash collections soliris addition expect cash outflows related changes operating assets continue increase related sales resulting accounts receivable increases cash flows investing activities net cash used investing activities 38650 year ended december 31 2008 versus 3077 provided investing activities year ended december 31 2007 year ended december 31 2008 net cash used investing activities consisted following • cash inflow net sale marketable securities 9368 used fund operations • additions property plant equipment 39733 25180 attributable construction rhode island manufacturing facility remaining attributable spending information technology facility capital costs • outflow 7500 purchase patents omrf 1124 purchase license association acquisition legend kk july 2006 acquired manufacturing plant smithfield rhode island future commercial production soliris manufacturing development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related validation activities including engineering runs necessary obtain approval facility government regulators production commercially approved drug date costs primarily include direct labor materials overhead prevalidation inventory related facility begin depreciating fixed assets related facility assets substantially complete ready intended use occur upon regulatory approval plant production commercial quantities eculizumab december 31 2008 capitalized 116364 related facility includes costs associated construction renovation upgrades engineering runs capitalized interest december 31 2008 costs incurred seeking regulatory approval including engineering runs 42416 capitalized interest 9045 expect continue incur costs related validation process end 2009 point receive regulatory approval cease capitalizing costs property plant equipment cash flows financing activities net cash provided financing activities 28308 64844 year ended december 31 2008 2007 respectively consisting primarily proceeds issuance common stock related exercise stock options 28893 47005 respectively proceeds mortgage loan agreement istar 18000 2007 contractual obligations contractual obligations include 97222 1375 convertible senior notes due february 2012 1375 notes 44000 mortgage loan due august 2017 fixed annual interest rate 912 25000 license payable owed pdl biopharma annual payments approximately 4500 operating capital leases principally facilities equipment also contractual obligations related third party manufacturer certain third parties described well open letters credit totaling 4165 following table summarizes contractual obligations december 31 2008 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described “risk factors” table also include liability unrecognized tax benefits related various federal state foreign income tax matters 9569 december 31 2008 timing settlement amounts reasonably estimable december 31 2008 expect settlement within next twelve months convertible notes hold 97222 principal amount 1375 convertible senior notes due february 1 2012 1375 notes pay interest notes semiannual basis february 1 august 1 year beginning august 1 2005 however principal payments due february 2012 except certain circumstances liquidation merger business combination convertible notes payable contain covenants related financial performance october 2008 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 52778 1375 notes resulting issuance 3356 shares common stock shares issued november 2008 1375 notes convertible common stock initial conversion rate 635828 shares common stock equivalent conversion price approximately 1573 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity conversion rate conversion price adjusted stock split effected august 22 2008 december 31 2008 market value 97222 1375 convertible notes due february 1 2012 based quoted market prices estimated 211106 versus 375000 december 31 2007 decrease 163894 december 31 2007 largely attributable conversion 52778 principal value notes october 2008 mortgage loan mortgage loan 44000 finance purchase construction manufacturing facility smithfield rhode island mortgage loan bears interest fixed annual rate 912 loan principal required repaid equal monthly installments 489 starting march 2010 august 2017 time outstanding balances due loan collateralized assets smithfield ri manufacturing facility loan may prepaid whole part prior july 2009 date loan prepaid whole part must include prepayment premium described loan agreement condition loan required maintain restricted cash accounts must maintain certain operating escrow balances december 31 2008 balance restricted cash 619 mortgage loan contain covenants related financial performance revolving credit facility february 2008 entered credit agreement bank america na provide available 25000 revolving credit facility used working capital requirements general corporate purposes loan collateralized substantially alexion pharmaceuticals inc’s assets including pledge equity interests certain direct subsidiaries excluding intellectual property assets foreign subsidiaries assets related manufacturing facility smithfield ri borrowing base limited lesser 25000 80 eligible domestic receivables december 31 2008 outstanding balance revolving credit facility may elect loans agreement bear interest rate per annum equal libor plus 175 225 depending alexion’s liquidity calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 plus additional 0 025 depending alexion’s liquidity interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 28 2011 maturity date revolving credit facility requires comply quarterly financial covenants related liquidity profitability ratios well minimum revenue requirements agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions enter transactions affiliates agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan capital leases currently lease office equipment capital lease agreements expiring 2010 assets liabilities capital lease agreements recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives average interest rates capital leases 947 imputed based lower incremental borrowing rate inception lease operating leases operating leases principally facilities equipment lease 125424 square feet space headquarters research development facility cheshire connecticut lease set expire may 2017 lease additional research space san diego california connection closure alexion antibody technologies 2006 accrued fair value future payments lease see note 6 consolidated financial statements included form 10k september 2007 company signed sublease aat facility provides sublease payments term lease 2012 believe research development facilities pilot manufacturing facility together third party manufacturing facilities provides adequate space current requirements commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza sales ag lonza agreement supply agreement lonza sales ag relating manufacture soliris requires payments lonza inception contract product manufactured ongoing basis evaluate plans proceed production soliris lonza depends upon commercial requirements progress clinical development programs status smithfield rhode island manufacturing facility agreed purchase certain minimum quantities product lonza existing arrangements terminate lonza agreement without cause required pay batches product scheduled manufacture arrangement license patent rights february 2008 agreed acquire certain patents related complementinhibition technology oklahoma medical research foundation omrf 10000 addition initial payment 3000 paid february 2008 4500 paid december 2008 final payment 2500 due prior july 2009 amounts including royalties owed omrf respect sales soliris use omrf patents december 2008 entered definitive license agreement pdl biopharma inc respect certain patents relating humanization antibodies 25000 initial payment 12500 paid january 2009 final payment 12500 due june 30 2009 additional payments owed alexion pdl patents respect soliris sales indication additional commercial commitments additional payments related commercial commitments licenses aggregating approximately 1795 would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization amounts included table income taxes december 31 2008 pretax federal state foreign net operating loss carryforwards 745102 713040 20310 respectively nols expire 2009 2027 also federal state research development income tax credit carryforwards approximately 18826 8834 respectively income tax credits expire 2009 2027 due amount nols credit carryforwards anticipate paying substantial us federal income taxes foreseeable future expect pay cash taxes number foreign jurisdictions well certain states net operating losses fully utilized 2008 subject alternative minimum tax 2008 expect continue subject cash payments alternative minimum tax near term tax reform act 1986 contains certain provisions limit taxpayer’s ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered prior year however believe limitation expected result expiration loss federal nols recently issued accounting standards march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” sfas 161 statement intended improve transparency financial reporting requiring enhanced disclosures entity’s derivative instruments hedging activities effects entity’s financial position financial performance cash flows sfas 161 applies derivative instruments within scope sfas 133 “accounting derivative instruments hedging activities” sfas 133 well related hedged items bifurcated derivatives nonderivative instruments designated qualify hedging instruments entities instruments subject sfas 161 must provide robust qualitative disclosures expanded quantitative disclosures sfas 161 effective prospectively financial statements issued fiscal years interim periods beginning november 15 2008 early application permitted currently evaluating disclosure implications statement expect include expanded disclosures derivative instruments result adoption sfas 161 april 2008 fasb issued fsp fas 1423 “determination useful life intangible assets” fsp amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” sfas 142 objective fsp improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r us generally accepted accounting principles gaap fsp applies intangible assets whether acquired business combination otherwise shall effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years applied prospectively intangible assets acquired effective date early adoption prohibited evaluated new statement determined significant impact determination reporting financial results april 2008 fasb issued fsp fas 1423 “determination useful life intangible assets” fsp amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” sfas 142 objective fsp improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r us generally accepted accounting principles gaap fsp applies intangible assets whether acquired business combination otherwise shall effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years applied prospectively intangible assets acquired effective date early adoption prohibited evaluated new statement determined significant impact determination reporting financial results item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning form 10k risks uncertainties cause actual results differ significantly forecasted forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere form 10k overview biopharmaceutical company engaged discovery development commercialization biologic therapeutic products aimed treating patients severe lifethreatening disease states including hematologic kidney neurologic diseases transplant rejection cancer autoimmune disorders marketed product soliris® eculizumab first therapy approved treatment patients paroxysmal nocturnal hemoglobinuria pnh soliris designed inhibit specific aspect complement component immune system thereby treat inflammation associated chronic hematologic kidney neurological disorders transplant rejection autoimmune disorders soliris humanized monoclonal antibody generally blocks complement activity one two weeks single dose doses currently prescribed initial indication received approval soliris pnh rare debilitating lifethreatening acquired genetic deficiency blood disorder defined destruction red blood cells hemolysis chronic hemolysis patients pnh may associated lifethreatening thromboses recurrent pain kidney disease disabling fatigue impaired quality life severe anemia pulmonary hypertension shortness breath intermittent episodes darkcolored urine hemoglobinuria soliris granted marketing approval us food drug administration fda european commission ec 2007 received approval several countries throughout world additionally soliris granted orphan drug designation treatment pnh united states europe japan several territories 2009 fda ec granted soliris orphan drug designation treatment patients atypical hemolytic uremic syndrome ahus rare inherited lifethreatening complementinhibitor deficiency disease often progresses endstage kidney disease failure alexion currently enrolling patients four clinical studies soliris investigational treatment adolescent adult patients ahus critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • royalties • inventories • research development expenses • stockbased compensation • income taxes revenue recognition net product sales principal source revenue product sales applied following principles recognizing revenue date product sales consisted solely soliris recognize revenue product sales persuasive evidence arrangement exists risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations amounts collected customers remitted governmental authorities primarily comprised valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers cases also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors addition sales soliris commercially available also recorded revenue sales individual patients namedpatient programs outside united states relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sales pricing soliris limited number patients short period sale product patient infusion lack contractual return rights soliris customers generally carry limited inventory monitor inventory within distribution channel determine whether deferral sales required date actual refunds returns negligible record estimated rebates payable governmental programs including medicaid programs europe reduction revenue time product sales recorded calculations related rebate accruals require estimates including estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments generally length time product sale processing reporting rebates three six months upon review historical rebate payments compared accruals revise estimates rebates payable may impact revenue period adjustment made provided balances activity rebates payable account years ended december 31 2009 2008 2007 follows record distribution fees paid customers reduction revenue costs typically known time sale resulting minimal adjustments subsequent period sale royalties cost sales includes royalties third parties related sale commercial manufacture soliris estimate royalty obligations based existing contractual obligations assessment estimated royalties owed third parties estimates may influenced outcome future litigation claims results uncertain periodic basis based specific events outcome litigation settlement claims may reassess estimates resulting adjustments cost sales inventories stated lower cost estimated realizable value determine cost inventory using average cost method products initial clinical development capitalize inventory costs prior regulatory approval subsequent filing biologics license application bla determine inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial also capitalize cost inventory manufactured manufacturing plant property plant equipment prior approval facility regulatory authorities analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required future reduced demand quality issues excess supply beyond anticipated management may result adjustment inventory levels would recorded increase cost sales research development expenses accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations cro’s clinical study sites laboratories consultants clinical trial vendors perform activities related contracts vary significantly length may fixed amount variable amount based actual costs incurred capped certain limit combination elements activity levels monitored close communication cro’s clinical trial vendors including detailed invoice task completion review analysis expenses budgeted amounts analysis work performed approved contract budgets payment schedules recognition changes scope services performed certain cro significant clinical trial vendors provide estimate costs incurred invoiced end quarter individual trial estimates reviewed discussed cro vendor necessary included research development expenses related period clinical study sites paid periodically persubject basis institutions performing clinical study accrue estimated amount based subject screening enrollment quarter estimates may differ actual amount subsequently invoiced may result adjustment research development expense several months related services performed stockbased compensation one stockbased compensation plan known 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise forfeiture cancellation well reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates factors change employ different assumptions compensation expense record future periods may differ significantly prior recorded amounts income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted fourth quarter 2009 reversed valuation allowance recorded significant portion deferred tax assets united states resulting tax benefit 215516 decision reverse valuation allowance made management determined likely deferred tax assets would realized made determination evaluation levels recent profitability well forecasts future taxable income impact utilization tax attributes primarily net operating losses research income tax credits continue maintain valuation allowance certain deferred tax assets realizability certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material changes income tax expense period results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere form 10k comparison year ended december 31 2009 year ended december 31 2008 revenues year ended december 31 2009 recorded sales soliris united states 159829 outside united states 226971 recorded gain 3363 related foreign currency cash flow hedging program included revenue outside united states year ended december 31 2008 recorded sales soliris united states 113204 outside united states 145800 recorded gain 4141 related foreign currency cash flow hedging program included revenue outside united states increases revenue fiscal year 2009 versus 2008 due increased number patients treated soliris united states outside united states additional physicians request soliris governmental reimbursement soliris provided territories expect number patients receiving soliris treatment increase resulting increase product sales existing countries also expect product sales rest world increase progress appropriate authorities regulatory price approval reimbursement process additional territories recorded contract research revenues year ended december 31 2009 95 year ended december 31 2008 cost sales cost sales 45059 28366 12 11 product revenue years ended december 31 2009 2008 respectively cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris periodic basis based events outcome litigation may reassess estimates royalties owed certain third parties changes estimates could material impact cost sales future periods research development expenses research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related pre postapproval manufacturing development regulatory functions discovery research costs incurred conducting laboratory studies performing preclinical research uses eculizumab product candidates clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products well discovery research efforts costs allocated directly program following table provides information regarding research development expenses following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs prior january 1 2006 spent approximately 475838 research development programs substantially research development expenses prior year ended december 31 2006 related two products eculizumab pexelizumab obtained approval eculizumab treatment pnh 2007 united states european union made decision cease development pexelizumab 2006 expenses pexelizumab program recorded 2007 related termination program successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer risk factors form 10k year ended december 31 2009 incurred research development expenses 81915 increase 19334 31 versus 62581 incurred year ended december 31 2008 increase primarily due following • increase 12344 research development payroll benefit expense related primarily global expansion staff supporting expanding number clinical programs manufacturing product development activities production facility smithfield ri • increase 2969 external clinical development expenses related primarily expansion studies eculizumab nonpnh indications well growth samalizumab program offset decreases spending pnh program see table • increase 2372 external product development expenses related primarily increases manufacturing development activities production facility smithfield ri expect research development expenses increase lower rate revenue 2010 due clinical development manufacturing costs related expanding eculizumab samalizumab development programs additional information programs please refer “product development programs” item form 10k selling general administrative expenses selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit legal expenses year ended december 31 2009 incurred selling general administrative expenses 172767 increase 39224 29 versus 133543 incurred year ended december 31 2008 increase primarily due following • year ended december 31 2009 salaries benefits labor expenses increased 88622 increase 21766 33 versus 66856 incurred year ended december 31 2008 increase result increased headcount related commercial development activities including increases payroll benefits costs 15108 related global commercial operations teams increases related payroll benefits within executive finance information technology human resources legal groups support growth commercial entity • increase external selling general administrative expenses 17458 due primarily increases marketing consulting services 5693 travel costs 3006 occupancy depreciation expenses 4901 relating new expanded office space europe japan canada australia latin america 1348 telecommunications information technology expenses expect selling general administrative expenses increase lower rate revenue 2010 reflecting growth commercial organization throughout world income expense year ended december 31 2009 recognized 530 foreign currency loss increase 248 versus loss 282 incurred year ended december 31 2008 increase primarily result fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs year ended december 31 2009 investment income decreased 2024 72 786 due primarily reduced interest rates earned money market funds year ended december 31 2009 interest expense decreased 1801 75 606 due primarily lower principal balance convertible notes result note conversion october 2008 exchange april may 2009 year ended december 31 2009 interest expense decreased 1801 75 606 due primarily lower principal balance convertible notes result note conversion october 2008 exchange april may 2009 income taxes year ended december 31 2009 recorded income tax benefit 211852 compared provision 1581 year ended december 31 2008 tax benefit reported 2009 includes benefit 215516 attributable release valuation allowances us deferred tax assets offset principally income tax provisions profitable foreign subsidiaries valuation allowance reversed management determined significant portion deferred tax assets relating united states would realized made determination evaluation levels recent profitability well forecasts future taxable income impact utilization tax attributes primarily net operating losses research income tax credits income tax provision 2008 principally attributable entities certain foreign jurisdictions achieved profitability year offset reversal valuation allowances foreign jurisdictions exchange federal research credits cash due reversal valuation allowance year ended december 31 2009 record income taxes effective tax rate starting 2010 significantly higher historical tax rates company granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 expected renewed additional 5 years comparison year ended december 31 2008 year ended december 31 2007 revenues year ended december 31 2008 recorded sales soliris related commercial sales united states 113204 commercial namedpatient sales outside united states 145800 recorded gain 4141 related foreign currency cash flow hedging program included revenue outside united states year ended december 31 2007 recorded sales soliris related commercial sales united states 46196 commercial namedpatient sales european union 20185 increases revenue fiscal year 2008 versus 2007 due increased number patients treated soliris result product launch united states various countries europe recorded contract research revenues 95 5660 years ended december 31 2008 2007 respectively 5660 contract research revenues recorded 2007 5343 relates termination collaborative agreement proctor gamble effective march 30 2007 cost sales cost sales 28366 6696 years ended december 31 2008 2007 respectively cost sales includes actual estimated royalty expenses associated sales soliris well manufacturing costs changes estimates royalties owed certain third parties could material impact cost sales future periods product sold year ended december 31 2007 included inventory previously expensed prior submission bla therefore included cost sales period fourth quarter 2007 exhausted supply previously expensed inventory beginning 2008 cost sales reflected full manufacturing cost inventory fourth quarter 2008 entered patent license agreement settlement agreement pdl biopharma obligated pay total 25000 fully paid perpetual license result settlement evaluation potential royalties recorded reduction cost goods sold approximately 1800 related adjustment estimated accrued royalties sales soliris prior fourth quarter research development expenses following table provides information regarding research development expenses following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs year ended december 31 2008 incurred research development expenses 62581 decrease 6380 93 versus 68961 incurred year ended december 31 2007 decrease primarily due following • decrease 2732 research development payroll benefit expense related primarily reduction stockbased compensation due employee forfeitures additional capitalization inventory property plant equipment • decrease 2045 external clinical development expenses related primarily termination pexelizumab program 2007 decreases spending soliris pnh offset expansion studies eculizumab nonpnh indications well growth samalizumab program see table • decrease 1600 discovery research primarily due reduction external research consulting fees • increase 813 depreciation amortization related primarily amortization costs associated new pilot plant located manufacturing facility smithfield ri placed service fourth quarter 2007 selling general administrative expenses year ended december 31 2008 incurred selling general administrative expenses 133543 increase 37401 389 versus 96142 incurred year ended december 31 2007 increase primarily due following • year ended december 31 2008 salaries benefits labor expenses increased 66856 increase 17335 35 versus 49521 incurred year ended december 31 2007 increase result increased headcount related commercial development activities including increases payroll benefits costs 17211 related global commercial operations teams increases related payroll benefits within executive finance information technology human resources legal groups support growth commercial entity • increase nonlabor commercial operations 14746 year ended december 31 2008 primarily due expansion foreign operations expanded significantly latter half 2007 • increase nonlabor general administration 5977 primarily related increases legal costs associated ongoing litigation increases infrastructure costs support growth commercial entity • decrease nonlabor information technology 1293 primarily related costs associated build european operations 2007 income expense year ended december 31 2008 recognized 282 foreign currency loss versus gain 1132 incurred year ended december 31 2007 decreased impact foreign currency fluctuations due hedging programs implemented 2008 year ended december 31 2008 investment income decreased 5270 652 2810 due primarily reduced interest rates earned money market funds year ended december 31 2008 interest expense 2407 consistent amounts recognized year ended december 31 2007 income taxes year ended december 31 2008 recorded income tax provision 1581 compared income tax benefit 745 year ended december 31 2007 tax expense 2008 principally attributable entities certain foreign jurisdictions achieved profitability year offset reversal valuation allowances foreign jurisdictions exchange federal research tax credits cash income tax benefit 2007 attributable exchange state research tax credits cash liquidity capital resources amounts thousands except per share data december 31 2009 consolidated cash equivalents marketable securities totaled 176220 38208 increase december 31 2008 largely attributable significantly increased sales resulting collection accounts receivable proceeds employee option exercises offset payments mortgage loan 44000 payments related pdl settlement 25000 omrf patent purchase agreement 2500 capital expenditures associated validation regulatory approval smithfield rhode island facility required use business invest cash reserves money market funds high quality commercial corporate us government notes accordance investment policy financial instruments potentially expose company concentrations credit risk limited cash equivalents corporate bonds accounts receivable foreign exchange derivative contracts december 31 2009 one individual customer accounted 20 accounts receivable balance december 31 2009 foreign currency forward contracts notional amounts totaling 284895 outstanding foreign currency forward contracts net fair value 2528 unrealized gain 5209 included current assets 2061 included assets unrealized loss 4742 included current liabilities counterparty forward contracts large multinational commercial bank believe risk nonperformance material however assured financial institution impacted negative economic environment january 2010 amended restated existing credit agreement bank america na among things increase revolving credit facility 25000 amended agreement provides 50000 revolving credit facility 20000 sublimit letters credit used working capital requirements general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase facility 75000 accordance terms december 31 2009 working capital 288194 compared 192683 december 31 2008 december 31 2009 current ratio 438 compared 328 december 31 2008 increase current ratio relates primarily increases accounts receivable cash equivalents well reductions amounts payable pdl omrf anticipate cash generated operations existing available cash provide us adequate resources fund operating expenses capital requirements currently planned least next twelve months cash flows operating activities net cash provided operating activities 113841 year ended december 31 2009 versus 53199 provided operating activities year ended december 31 2008 change primarily due increase pretax income achieved 2009 versus period 2008 components cash provided operating activities reported statement cash flows period ended december 31 2009 follows • reported net income adjusted noncash items including depreciation amortization noncash debt exchange expense unrealized currency gain unrealized hedge gains deferred taxes stock compensation 128080 year ended december 31 2009 versus 64959 year ended december 31 2008 • net cash outflow due changes operating assets liabilities 14239 primarily relates increases accounts receivable 36440 offset increase accounts payable accrued expenses 14131 decrease inventory 14596 2010 expect changes cash operations highly dependent sales levels related cash collections soliris cash flows investing activities net cash used investing activities 81423 year ended december 31 2009 versus 38650 used investing activities year ended december 31 2008 year ended december 31 2009 net cash used investing activities consisted following • additions property plant equipment 35275 20900 attributable expenditures related rhode island manufacturing facility remaining attributable spending information technology facility capital costs • final payments 25000 2500 related settlement agreement pdl biopharma purchase patents oklahoma medical research foundation omrf respectively july 2006 acquired manufacturing plant smithfield rhode island future commercial production soliris development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related validation activities including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug december 2009 received final regulatory approval production commercial quantities eculizumab ec accordingly plant substantially complete ready intended use therefore placed plant service fourth quarter 2009 fda commenced inspection rhode island manufacturing facility requested additional information regarding manufacturing processes expect address 2010 december 31 2009 capitalized 143822 related facility includes costs associated construction renovation upgrades engineering runs preapproval inventory production capitalized interest cash flows financing activities net cash used provided financing activities 14270 28308 years ended december 31 2009 2008 respectively amount related proceeds issuance common stock related exercise stock options 30733 28893 respectively year ended december 31 2009 amount offset 44000 prepayment full mortgage loan contractual obligations contractual obligations related third party manufacturer certain third parties described open letters credit totaling 5263 9918 1375 convertible senior notes due february 2012 following table summarizes contractual obligations december 31 2009 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described “risk factors” table also include liability unrecognized tax benefits related various federal state foreign income tax matters 7305 december 31 2009 timing settlement amounts reasonably estimable december 31 2009 expect payment amounts related unrecognized tax benefits within next twelve months convertible notes outstanding 9918 principal amount 1375 convertible senior notes due february 1 2012 1375 notes pay interest notes semiannual basis february 1 august 1 year however principal payments due february 2012 except certain circumstances liquidation merger business combination convertible notes payable contain covenants related financial performance october 2008 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 52778 1375 notes resulting issuance 3356 shares common stock shares issued november 2008 april may 2009 issued aggregate 5644 shares common stock exchange 87304 principal amount 1375 convertible senior notes due 2012 owned certain note holders 1375 notes convertible common stock initial conversion rate 635828 shares common stock equivalent conversion price approximately 1573 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity conversion rate conversion price adjusted stock split effected august 22 2008 december 31 2009 market value 9918 principal amount 1375 notes based quoted market prices estimated 30732 versus 211106 december 31 2008 decrease 180374 december 31 2008 largely attributable issuance 5644 shares common stock exchange 87304 principal amount notes second quarter 2009 mortgage loan mortgage loan 44000 finance purchase construction manufacturing facility smithfield rhode island june 2009 amended mortgage loan agreement permit prepayment loan without penalty prepaid portion mortgage loan month beginning july 2009 made final payment remaining principal balance october 2009 revolving credit facility february 2008 entered credit agreement financial institution provide available 25000 revolving credit facility could used working capital requirements general corporate purposes loan collateralized substantially alexion pharmaceuticals inc’s assets including pledge equity interests certain direct subsidiaries excluding intellectual property assets foreign subsidiaries assets related manufacturing facility smithfield rhode island borrowing base limited lesser 25000 80 eligible domestic receivables december 31 2009 outstanding balance revolving credit facility compliance financial debt covenants january 2010 amended restated credit agreement amended credit agreement among things increase revolving credit facility 25000 amended credit agreement provides 50000 facility 20000 sublimit letters credit used working capital requirements general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase facility 75000 accordance amended credit agreement loan secured substantially alexion pharmaceuticals inc’s assets including pledge equity interests certain direct subsidiaries real estate owned alexion manufacturing llc wholly owned subsidiary excluding intellectual property assets foreign subsidiaries borrowed amended credit agreement may borrow agreement time based needs may elect loans agreement bear interest rate per annum equal libor plus 250 300 depending ratio cash liabilities calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 1 plus 050 100 depending ratio cash liabilities calculated accordance agreement may prepay loans whole part minimum amounts without premium penalty customary breakage costs respect libor borrowings interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due january 22 2013 maturity date may borrow repay reborrow facility january 22 2013 amended credit agreement requires us comply certain financial covenants quarterly basis agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions enter transactions affiliates agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan capital leases currently lease office equipment capital lease agreements expiring 2013 assets liabilities capital lease agreements recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives average interest rates capital leases 376 imputed based lower incremental borrowing rate inception lease operating leases operating leases principally facilities equipment currently lease 141454 square feet space headquarters research development facility cheshire connecticut approximately 5249 square feet space regional executive sales offices lausanne switzerland additionally lease research space san diego california connection closure alexion antibody technologies 2006 accrued fair value future payments lease see note 7 consolidated financial statements included form 10k september 2007 entered sublease aat facility provides sublease payments us term lease 2012 believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities addition locations also lease offices certain countries facilitate operations global organization commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza sales ag lonza agreement supply agreement lonza sales ag relating manufacture soliris requires payments lonza inception contract product manufactured ongoing basis evaluate plans future levels production lonza depends upon commercial requirements progress clinical development programs production levels smithfield rhode island manufacturing facility agreed purchase certain minimum quantities product lonza existing arrangements terminate lonza agreement without cause required pay batches product scheduled manufacture arrangement additional commercial commitments additional payments related commercial commitments licenses aggregating approximately 1350 would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization amounts included table income taxes december 31 2009 pretax federal state net operating loss carryforwards 665740 117778 respectively nol’s expire 2010 2028 also federal state income tax credit carryforwards approximately 34208 7689 respectively income tax credits expire 2010 2029 due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes foreseeable future expect pay cash taxes various us states foreign jurisdictions operations utilized net operating losses subject alternative minimum tax 2009 expect continue subject cash payments alternative minimum tax near term payment alternative minimum tax amount generates credit may carried forward indefinitely used offset regular income tax liability tax reform act 1986 contains certain provisions limit taxpayer’s ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered prior year however believe limitation expected result expiration loss federal nol’s item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning form 10k risks uncertainties cause actual results differ significantly forecasted forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere form 10k overview biopharmaceutical company engaged discovery development commercialization biologic therapeutic products aimed treating patients severe lifethreatening disease states including therapeutic areas hematology nephrology including transplant rejection neurology ophthalmology cancer marketed product soliris® eculizumab first therapy approved treatment patients paroxysmal nocturnal hemoglobinuria pnh ultrarare lifethreatening blood disorder incorporated 1992 began commercial sale soliris 2007 soliris designed inhibit specific aspect complement component immune system thereby treat inflammation associated chronic disorders therapeutic areas hematology nephrology including transplant rejection neurology ophthalmology soliris humanized monoclonal antibody generally blocks complement activity one two weeks single dose doses currently prescribed initial indication received approval soliris pnh ultrarare debilitating lifethreatening acquired genetic deficiency blood disorder defined uncontrolled complement activation leading destruction red blood cells hemolysis chronic hemolysis patients pnh may associated lifethreatening thromboses recurrent pain kidney disease disabling fatigue impaired quality life severe anemia pulmonary hypertension shortness breath intermittent episodes darkcolored urine hemoglobinuria soliris approved us food drug administration fda european commission ec 2007 japan’s ministry health labour welfare mhlw 2010 approved several territories additionally soliris granted orphan drug designation treatment pnh united states europe japan several territories 2009 fda ec granted soliris orphan drug designation treatment patients atypical hemolytic uremic syndrome ahus ultrarare inherited lifethreatening complementinhibitor deficiency disease often progresses endstage kidney disease kidney failure death critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • research development expenses • sharebased compensation • income taxes revenue recognition net product sales principal source revenue product sales applied following principles recognizing revenue date product sales consisted solely soliris recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors addition sales countries soliris commercially available also recorded revenue sales individual patients namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sales factors pricing soliris limited number patients short period sale product patient infusion lack contractual return rights soliris customers generally carry limited inventory monitor inventory within distribution channel determine whether deferral sales required date actual refunds returns negligible record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months march 2010 united states government healthcare legislation contains several provisions impact rebates payable enacted provisions legislation relate rebates payable include increase minimum medicaid rebate percentages also extended discount 340b institutions extension medicaid rebate managed care organizations dispense drugs medicaid recipients recorded estimated rebates payable according new legislation provisions legislation change may revise estimates rebates payable may impact revenue period adjustment made provided balances activity rebates payable account years ended december 31 2010 2009 2008 follows record distribution fees paid customers reduction revenue costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss significant judgement required determination probability determination whether exposure reasonably estimable uncertainties related matters accruals based best estimates based available information additional information becomes available upon specific events outcome litigation settlement claims reassess potential liability related pending claims litigation may revise estimates revisions estimates potential liabilities could material impact consolidated results operations financial position inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method products initial clinical development capitalize inventory costs prior regulatory approval subsequent filing biologics license application bla determine inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial also capitalize cost inventory manufactured manufacturing plant property plant equipment prior approval facility regulatory authorities analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required future reduced demand quality issues excess supply beyond anticipated management may result adjustment inventory levels would recorded increase cost sales research development expenses accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations cro’s clinical study sites laboratories consultants clinical trial vendors perform activities related contracts vary significantly length may fixed amount variable amount based actual costs incurred capped certain limit combination elements activity levels monitored close communication cro’s clinical trial vendors including detailed invoice task completion review analysis expenses budgeted amounts analysis work performed approved contract budgets payment schedules recognition changes scope services performed certain cro significant clinical trial vendors provide estimate costs incurred invoiced end quarter individual trial estimates reviewed discussed cro vendor necessary included research development expenses related period clinical study sites paid periodically persubject basis institutions performing clinical study accrue estimated amount based subject screening enrollment quarter estimates may differ actual amount subsequently invoiced may result adjustment research development expense several months related services performed sharebased compensation one sharebased compensation plan known 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise forfeiture cancellation well reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates factors change employ different assumptions sharebased compensation expense record future periods may differ significantly prior recorded amounts income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted fourth quarter 2009 reversed valuation allowance recorded substantial portion deferred tax assets united states resulting tax benefit 215516 decision reverse valuation allowance made management determined likely deferred tax assets would realized made determination evaluation levels recent profitability well forecasts future taxable income impact utilization tax attributes primarily net operating losses research income tax credits also reversed valuation allowance recorded certain nonus deferred tax assets second quarter 2010 realization assets likely continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material changes income tax expense period results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere form 10k comparison year ended december 31 2010 year ended december 31 2009 revenues significant geographic region follows increase revenue fiscal year 2010 versus 2009 primarily due increased number patients treated soliris globally increase treated patients due additional patients physicians requesting soliris therapy well reimbursement price approvals additional territories including approvals japan included impacted sales third fourth quarters 2010 increase revenues offset negative impact approximately 9277 year ended december 31 2010 due changes foreign currency exchange rates inclusive hedging activity primarily euro british pound compared usd versus year ended december 31 2009 recorded gain revenue 8778 3363 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2010 2009 respectively cost sales cost sales 64437 45059 12 product revenue years ended december 31 2010 2009 respectively cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris january 26 2011 novartis filed civil action alexion pharmaceuticals inc biopharmaceuticals companies us district court district delaware novartis claims willful infringement alexion us patent 5688688 novartis seeks among things monetary damages finally determined infringe novartis patent may required pay royalties novartis sales soliris regarding certain manufacturing technology although believe manufacture soliris infringes valid patent claim owned novartis cannot guarantee successful defending action given early stages litigation management believe loss related matter probable potential magnitude loss reasonably estimated research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development regulatory functions discovery research costs incurred conducting laboratory studies performing preclinical research uses eculizumab product candidates clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs prior january 1 2006 spent approximately 475838 research development programs substantially research development expenses prior year ended december 31 2006 related two products eculizumab pexelizumab obtained approval eculizumab treatment pnh 2007 united states european union made decision cease development pexelizumab 2006 successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer risk factors form 10k year ended december 31 2010 incurred research development expenses 98394 increase 16479 20 versus 81915 incurred year ended december 31 2009 increase primarily related following • increase 6561 research development payroll benefit expense related primarily global expansion staff supporting increasing number clinical preclinical programs • increase 6392 external clinical development expenses related primarily expansion studies eculizumab nonpnh indications offset decreases spending pnh programs see table • increase 1070 discovery research primarily due external research consulting fees • increase 1736 depreciation amortization expenses primarily related depreciation rhode island manufacturing facility placed service december 2009 expect research development expenses increase lower rate revenue 2011 due clinical development manufacturing costs related expanding eculizumab samalizumab development programs well expenses related taligen orphatec programs additional information programs please refer “product development programs” item form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit legal expenses year ended december 31 2010 incurred selling general administrative expenses 227488 increase 54721 32 versus 172767 incurred year ended december 31 2009 increase primarily related following • year ended december 31 2010 salaries benefits labor expenses increased 134669 increase 34631 35 versus 100038 incurred year ended december 31 2009 increase result increased headcount related commercial development activities including increases payroll benefits costs 21487 related global commercial operations teams increase also due increases payroll benefits 13144 within general administrative functions support infrastructure global commercial entity • increase external selling general administrative expenses 20090 due primarily increases marketing consulting services 11984 increases occupancy depreciation expenses 2978 relating new expanded office spaces europe japan canada australia latin america increases 2268 relating charitable compassionate care programs increases 1112 telecommunications information technology expenses expect selling general administrative expenses increase lower rate revenue 2011 reflecting growth commercial organization throughout world income expense foreign currency transaction gains losses relate changes fair value monetary assets liabilities denominated foreign currencies year ended december 31 2010 recognized 2434 foreign currency loss increase 1904 versus loss 530 incurred year ended december 31 2009 increase primarily result fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs recognize investment income primarily portfolio cash equivalents marketable securities year ended december 31 2010 investment income increased 725 92 1511 due primarily higher cash equivalents marketable securities balances incur interest convertible notes revolving credit facility capital lease obligations year ended december 31 2010 interest expense increased 98 16 704 due primarily reduction capitalized interest associated manufacturing plant rhode island placed service fourth quarter 2009 fees relating amended restated credit facility partially offset lower principal balance convertible notes result note conversions exchanges 2009 2010 recorded 3395 noncash debt exchange expense year ended december 31 2009 relating exchange 5644 shares 87304 principal amount 1375 convertible senior notes expense recorded based fair value additional shares provided note holders stated conversion rate income taxes year ended december 31 2010 recorded income tax provision 51981 compared benefit 211852 year ended december 31 2009 income tax provision 2010 principally attributable us federal state foreign income taxes profitable operations tax benefit reported 2009 includes benefit 215516 attributable release valuation allowances us deferred tax assets offset principally income tax provisions profitable foreign subsidiaries company granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 expected renewed additional 5 years comparison year ended december 31 2009 year ended december 31 2008 revenues significant geographic region follows increases revenue fiscal year 2009 versus 2008 due increased number patients treated soliris united states outside united states additional physicians request soliris governmental reimbursement soliris provided territories expect number patients receiving soliris treatment increase resulting increase product sales existing countries also expect product sales rest world increase progress appropriate authorities regulatory price approval reimbursement process additional territories recorded gain revenue 3363 4141 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2009 2008 respectively recorded contract research revenues year ended december 31 2009 95 year ended december 31 2008 cost sales cost sales 45059 28366 12 11 product revenue years ended december 31 2009 2008 respectively cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris research development expenses following table provides information regarding research development expenses following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs year ended december 31 2009 incurred research development expenses 81915 increase 19334 31 versus 62581 incurred year ended december 31 2008 increase primarily due following • increase 13567 research development payroll benefit expense related primarily global expansion staff supporting expanding number clinical programs manufacturing product development activities production facility smithfield ri • increase 2702 external clinical development expenses related primarily expansion studies eculizumab nonpnh indications well growth samalizumab program offset decreases spending pnh program see table • increase 1416 external product development expenses related primarily increases manufacturing development activities production facility smithfield ri selling general administrative expenses year ended december 31 2009 incurred selling general administrative expenses 172767 increase 39224 29 versus 133543 incurred year ended december 31 2008 increase primarily due following • year ended december 31 2009 salaries benefits labor expenses increased 100038 increase 24775 33 versus 75263 incurred year ended december 31 2008 increase result increased headcount related commercial development activities including increases payroll benefits costs 17962 related global commercial operations teams increase also due increases payroll benefits 6813 within general administrative functions support infrastructure global commercial entity • increase external selling general administrative expenses 14449 due primarily increases marketing consulting services 5693 occupancy depreciation expenses 4901 relating new expanded office space europe japan canada australia latin america 1348 telecommunications information technology expenses income expense year ended december 31 2009 recognized 530 foreign currency loss increase 248 versus loss 282 incurred year ended december 31 2008 increase primarily result fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs year ended december 31 2009 investment income decreased 2024 72 786 due primarily reduced interest rates earned money market funds year ended december 31 2009 interest expense decreased 1801 75 606 due primarily lower principal balance convertible notes result note conversion october 2008 exchange april may 2009 income taxes year ended december 31 2009 recorded income tax benefit 211852 compared provision 1581 year ended december 31 2008 tax benefit reported 2009 includes benefit 215516 attributable release valuation allowances us deferred tax assets offset principally income tax provisions profitable foreign subsidiaries valuation allowance reversed management determined significant portion deferred tax assets relating united states would realized made determination evaluation levels recent profitability well forecasts future taxable income impact utilization tax attributes primarily net operating losses research income tax credits income tax provision 2008 principally attributable entities certain foreign jurisdictions achieved profitability year offset reversal valuation allowances foreign jurisdictions exchange federal research credits cash liquidity capital resources amounts thousands except per share data cash equivalents marketable securities working capital december 31 2010 december 31 2009 follows financial assets select measures liquidity capital resources required use business invest cash reserves money market funds high quality commercial corporate us government agency bonds commercial paper accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions increase cash equivalents marketable securities primarily attributable increase product sales related cash generated operations increase working capital primarily due increases cash equivalents marketable securities accounts receivable inventory offset primarily increase accrued expenses financial instruments potentially expose company concentrations credit risk limited cash equivalents corporate bonds commercial paper accounts receivable foreign exchange derivative contracts december 31 2010 one individual customer accounted 178 accounts receivable balance december 31 2009 one individual customer accounted 200 accounts receivable balance manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2010 foreign exchange forward contracts notional amounts totaling 445476 outstanding foreign exchange forward contracts net fair value 5273 unrealized gain 9955 included assets offset unrealized loss 15228 included liabilities counterparties foreign exchange forward contracts large multinational commercial banks believe risk nonperformance material january 2010 amended restated existing credit agreement among things increase revolving credit facility 25000 amended credit agreement provides 50000 revolving credit facility 20000 sublimit letters credit used working capital requirements general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase facility 75000 accordance terms december 31 2010 accrued royalty balance 50133 includes estimates royalties potentially owed third parties estimates amounts potentially owed third parties may influenced outcome future litigation claims results uncertain increase estimated amounts owed requirement pay amounts accelerated basis may result material adverse effect liquidity expect continued growth expenditures particularly related research product development clinical trials regulatory approvals international expansion commercialization products capital investment however anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned foreseeable future cash flows change cash equivalents operating activities increase net cash equivalents december 31 2010 primarily due net income achieved 2010 versus net income achieved period 2009 components cash flows operating activities reported statement cash flows follows • reported net income adjusted noncash items including depreciation amortization sharebased compensation expense noncash debt exchange expense deferred taxes unrealized foreign currency gain unrealized loss foreign exchange forward contracts 188267 128080 year ended december 31 2010 2009 respectively • net cash outflow due changes operating assets liabilities 27361 14239 year ended december 31 2010 2009 respectively 27361 change operating assets liabilities primarily relates increases accounts receivable 59239 due increased number patients treated soliris globally well reimbursement price approvals additional territories additionally increase inventory 14119 relates increased production manufacturing facility rhode island resulting inventory buildup support commercial growth increases offset increase 47455 accounts payable accrued expenses consists primarily accrued royalties payroll taxes 2011 expect changes cash operations highly dependent sales levels related cash collections soliris investing activities components cash flows investing activities consisted following • additions property plant equipment 12823 35275 year ended december 31 2010 2009 respectively reduction additions property plant equipment primarily result approval rhode island manufacturing facility ec december 2009 approval date capitalized costs associated construction validation rhode island manufacturing facility ceased capitalization costs beginning january 2010 • purchases marketable securities 129860 sales marketable securities 53387 year ended december 31 2010 • payments 25000 2500 related final payment pdl biopharma patent settlement oklahoma medical research foundation patent purchase agreement year ended december 31 2009 january february 2011 completed business combinations taligen orphatec acquisitions required us make upfront payments approximately 114000 paid available cash equivalents marketable securities acquisitions continue expect cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned foreseeable future addition upfront payments purchase agreements also include contingent payments totaling 367000 taligen 42000 orphatec expect contingent payments made next 12 months accordingly expect amounts impact liquidity nearterm future payments become probable evaluate methods funding payments could made available cash generated operations proceeds financing activities net cash flows financing activities reflected proceeds exercise stock options 37546 30733 years ended december 31 2010 2009 respectively 2009 cash financing activities reduced 44000 prepayment mortgage loan contractual obligations following table summarizes contractual obligations december 31 2010 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described risk factors note 10 consolidated financial statements table also include liability unrecognized tax benefits related various federal state foreign income tax matters 8658 december 31 2010 timing settlement amounts reasonably estimable december 31 2010 expect payment amounts related unrecognized tax benefits within next twelve months also include contingent payments related taligen orphatec acquisitions timing payment amounts reasonably estimable december 31 2010 contingent payments business combinations total 367000 taligen 42000 orphatec expect make contingent payments next 12 months convertible notes december 31 2010 outstanding 3718 principal amount 1375 convertible senior notes due february 1 2012 1375 notes pay interest notes semiannual basis february 1 august 1 year however principal payments due february 2012 except certain circumstances liquidation merger business combination notes contain covenants related financial performance 1375 notes convertible common stock initial conversion rate 635828 shares common stock equivalent conversion price approximately 1573 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity december 31 2010 3718 principal amount 1375 notes outstanding fair value based quoted market prices estimated 18892 11840 decrease fair value december 31 2009 primarily attributable exchange 6200 principal amount notes 394211 shares common stock first half 2010 mortgage loan mortgage loan 44000 finance purchase construction manufacturing facility smithfield rhode island june 2009 amended mortgage loan agreement permit prepayment loan without penalty prepaid portion mortgage loan month beginning july 2009 made final payment remaining principal balance october 2009 revolving credit facility january 2010 entered amended restated credit agreement amended credit agreement provides available 50000 revolving credit facility january 22 2013 20000 sublimit letters credit used working capital requirements general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase facility 75000 loan collateralized substantially alexion pharmaceuticals incs assets including pledge equity interests certain direct subsidiaries rhode island facility excluding intellectual property assets foreign subsidiaries may elect loans agreement bear interest rate per annum equal libor plus 250 300 depending ratio cash liabilities calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus 050 100 depending ratio cash liabilities calculated accordance agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due january 22 2013 maturity date amended credit agreement requires us comply certain financial covenants quarterly basis agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions enter transactions affiliates agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan december 31 2010 outstanding amounts revolving credit facility open letters credit 6647 december 31 2010 capital leases currently lease office equipment capital lease agreements expiring 2013 assets liabilities capital lease agreements recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives average interest rates capital leases 402 imputed based lower incremental borrowing rate inception lease operating leases operating leases principally facilities equipment currently lease 205554 square feet space headquarters research development facility cheshire connecticut approximately 26500 square feet space regional executive sales offices lausanne switzerland additionally lease research space san diego california connection closure alexion antibody technologies 2006 accrued fair value future payments lease september 2007 entered sublease aat facility provides sublease payments us term lease 2012 believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities addition locations also lease offices certain countries facilitate operations global organization commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza sales ag lonza agreement supply agreement lonza sales ag relating manufacture soliris requires payments lonza inception contract product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels smithfield rhode island manufacturing facility agreed purchase certain minimum quantities product lonza existing arrangements december 31 2010 remaining contractual commitments approximately 39000 terminate lonza agreement without cause required pay batches product scheduled manufacture arrangement additional commercial commitments additional payments related commercial commitments licenses aggregating approximately 1350 would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization amounts included table income taxes december 31 2010 pretax federal state net operating loss carryforwards 579308 86138 respectively nol’s expire 2011 2029 also federal state income tax credit carryforwards approximately 37913 4199 respectively income tax credits expire 2011 2030 due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes foreseeable future expect pay cash taxes various us states foreign jurisdictions operations utilized net operating losses subject alternative minimum tax 2010 expect continue subject cash payments alternative minimum tax near term payment alternative minimum tax amount generates credit may carried forward indefinitely used offset regular income tax liability tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered prior year however believe limitation expected result expiration loss federal nol’s item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning form 10k risks uncertainties cause actual results differ significantly forecasted forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere form 10k overview biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris® eculizumab first therapeutic approved patients two ultrarare severe disorders resulting chronic uncontrolled activation complement component immune system paroxysmal nocturnal hemoglobinuria pnh ultrarare lifethreatening blood disorder atypical hemolytic uremic syndrome ahus ultrarare lifethreatening genetic disease also evaluating potential indications soliris diseases chronic uncontrolled complement activation underlying mechanism progressing biotechnology product candidates ultrarare severe disorders various stages development incorporated 1992 began commercial sale soliris 2007 soliris designed inhibit specific aspect complement component immune system thereby treat inflammation associated chronic disorders therapeutic areas hematology nephrology transplant rejection neurology ophthalmology soliris humanized monoclonal antibody effectively blocks terminal complement activity doses currently prescribed initial indication received approval soliris pnh ultrarare debilitating lifethreatening deficiency blood disorder defined chronic uncontrolled complement activation leading destruction red blood cells hemolysis chronic hemolysis patients pnh may associated lifethreatening thromboses recurrent pain kidney disease disabling fatigue impaired quality life severe anemia pulmonary hypertension shortness breath intermittent episodes darkcolored urine hemoglobinuria soliris approved treatment pnh us food drug administration fda european commission ec 2007 japan’s ministry health labour welfare mhlw 2010 approved several territories additionally 2003 soliris granted orphan drug designation treatment pnh united states europe japan several territories september 2011 soliris approved fda treatment pediatric adult patients ahus genetic ultrarare disease characterized chronic uncontrolled complement activation thrombotic microangiopathy formation blood clots small blood vessels throughout body causing reduction platelet count thrombocytopenia lifethreatening damage kidney brain heart vital organs also november 2011 ec granted marketing authorization soliris treat pediatric adult patients ahus europe 2009 fda ec granted soliris orphan drug designation treatment patients ahus february 7 2012 acquired enobia pharma corp enobia privately held clinicalstage biotechnology company based montreal canada cambridge massachusetts transaction expected accounted business combination acquisition intended objective develop deliver therapies patients ultrarare severe lifethreatening disorders enobias lead product candidate asfotase alfa human recombinant targeted alkaline phosphatase enzymereplacement therapy patients suffering hypophosphatasia hpp ultrarare lifethreatening genetic metabolic disease approved treatments made upfront cash payment 610000 subject purchase price adjustments 100 enobias capital stock additional contingent payments aggregate 470000 would due upon reaching various regulatory sales milestones financed acquisition available cash proceeds new credit facility february 8 2011 acquired patents assets orphatec pharmaceuticals gmbh orphatec related investigational therapy patients type molybdenum cofactor deficiency mocd ultrarare disorder characterized severe brain damage rapid death newborn infants acquisition accounted business combination orphatec privately held development stage biotechnology company headquarters cologne germany made upfront cash payment approximately 3050 additional contingent payments 42000 would earned upon reaching various development regulatory commercial milestones also make future payments orphatec manufacturing development services january 28 2011 acquired taligen therapeutics inc taligen privately held development stage biotechnology company based cambridge massachusetts transaction accounted business combination acquisition intended broaden portfolio preclinical compounds expand capabilities translational medicine preclinical compounds acquired taligen include product candidates potential treatment patients ophthalmic diseases agerelated macular degeneration amd well novel antibody protein regulators complement inflammatory pathways made upfront cash payments 111773 100 taligen’s equity interests additional contingent payments aggregate 367000 would due upon reaching various clinical efficacy product approval milestones united states european union six product candidates critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • research development expenses • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition net product sales principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels contractual terms financial strength distributors date actual refunds returns negligible entered volumebased arrangements governments certain countries reimbursement limited contractual amount estimate incremental discounts resulting contractual limitations based estimated sales limited period apply discount percentage product shipments reduction revenue addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months provided balances activity rebates payable account years ended december 31 2011 2010 2009 follows record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled sell soliris limited number customers evaluate creditworthiness customer regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payor governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries typically exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful continue monitor economic conditions including volatility associated international economies associated impacts financial markets business sovereign debt crisis europe credit economic conditions greece italy spain portugal among members european union deteriorated throughout 2011 conditions resulted may continue result increase average length time takes collect outstanding accounts receivable countries december 31 2011 accounts receivable greece italy spain ireland portugal approximately 83400 approximately 24000 amount outstanding greater one year recorded allowance approximately 3500 related receivables december 31 2011 july 2011 received noninterest bearing bonds issued greek government mature 2012 2013 payment receivables 2008 2009 part greek governments plan repayment debt international pharmaceutical companies sold bonds july 2011 year ended december 31 2011 recorded bad debt expense approximately 4100 related reduction value greek bonds reduction realizable value accounts receivable countries contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method capitalize inventory produced commercial sale including costs incurred prior regulatory approval subsequent filing biologics license application bla determined inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial products approved indication raw materials purchased drug product associated clinical development programs included inventory charged research development expense consumed products without approved indication purchased drug product charged research development expense upon final quality release also capitalize cost inventory manufactured manufacturing plant property plant equipment prior approval facility regulatory authorities analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory future reduced demand quality issues excess supply beyond anticipated management may result adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required research development expenses accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations cro’s clinical study sites laboratories consultants clinical trial vendors perform activities related contracts vary significantly length may fixed amount variable amount based actual costs incurred capped certain limit combination elements activity levels monitored close communication cro’s clinical trial vendors including detailed invoice task completion review analysis expenses budgeted amounts analysis work performed approved contract budgets payment schedules recognition changes scope services performed certain cro significant clinical trial vendors provide estimate costs incurred invoiced end quarter individual trial estimates reviewed discussed cro vendor necessary included research development expenses related period clinical study sites paid periodically persubject basis institutions performing clinical study accrue estimated amount based subject screening enrollment quarter estimates may differ actual amount subsequently invoiced may result adjustment research development expense several months related services performed sharebased compensation grant equity awards one sharebased compensation plan known 2004 amended restated incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary stockrelated awards also outstanding sharebased compensation plans granted awards plans since 2004 estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise forfeiture cancellation well reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates factors change employ different assumptions sharebased compensation expense record future periods may differ significantly prior recorded amounts valuation goodwill acquired intangible assets iprd recorded goodwill acquired intangible assets iprd primarily taligen orphatec acquisitions identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited •timing costs complete inprocess projects •timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects •discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur intangible assets related iprd treated indefinitelived intangible assets amortized product approved sale regulatory authorities specified markets time determine useful life asset reclassify asset iprd begin amortization impairment testing also performed least annually triggering event occurs could indicate potential impairment projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions assurance given however underlying assumptions used estimate expected project sales development costs profitability events associated projects occur estimated goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized single reporting unit therefore goodwill impairment test done using overall market value determined traded share price compared book value net assets completed annual impairment test december 31 2011 determined carrying value goodwill impaired valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors •timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones sales levels specific compound •discount rates contingent consideration liabilities arose connection taligen orphatec acquisitions quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material adjustments income tax expense period new accounting pronouncements may 2011 financial accounting standards board fasb issued new standard fair value measurement disclosure requirements new standard changes fair value measurement principles disclosure requirements including measuring fair value financial instruments managed within portfolio application applying premiums discounts fair value measurement additional disclosure fair value measurements new standard effective interim annual periods beginning december 15 2011 expect material impact adoption new standard june 2011 fasb issued new standard presentation comprehensive income new standard eliminated current option report comprehensive income components statement changes equity new standard companies elect present items net income comprehensive income one continuous statement two separate consecutive statements new standard effective beginning fiscal years beginning december 15 2011 comply requirement first quarter 2012 september 2011 fasb issued new standard simplify entity tests goodwill impairment new standard allows companies option first assess qualitative factors determine whether likely fair value reporting unit less carrying amount basis determining necessary perform twostep quantitative goodwill impairment test new standard company longer required calculate fair value reporting unit unless company determines based qualitative assessment likely fair value less carrying amount new standard effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere form 10k comparison year ended december 31 2011 year ended december 31 2010 net product sales net product sales significant geographic region follows increase revenue fiscal year 2011 versus 2010 primarily due increased number patients treated soliris globally increase treated patients due additional patients physicians requesting soliris therapy well reimbursement price approvals additional territories including approval pnh japan third quarter 2010 australia first quarter 2011 certain provinces canada third quarter 2011 approval ahus united states third quarter 2011 increase revenues offset negative impact approximately 815 year ended december 31 2011 due changes foreign currency exchange rates inclusive hedging activity versus dollar year ended december 31 2010 negative impact primarily due euro british pound offset positive impact japanese yen recorded loss gain revenue 6558 8778 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2011 2010 respectively cost sales cost sales 93140 64437 12 product revenue years ended december 31 2011 2010 cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment cost sales research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development regulatory functions discovery research costs incurred conducting laboratory studies performing preclinical research uses eculizumab product candidates clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs prior january 1 2006 spent approximately 475838 research development programs substantially research development expenses prior year ended december 31 2006 related two products eculizumab pexelizumab obtained approval eculizumab treatment pnh 2007 united states european union made decision cease development pexelizumab 2006 successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer risk factors form 10k year ended december 31 2011 incurred research development expenses 137421 increase 39027 40 versus 98394 incurred year ended december 31 2010 increase primarily related following • increase 16385 research development payroll benefit expense related primarily global expansion staff supporting increasing number clinical development programs • increase 12344 external product development expenses related primarily costs associated nephrology clinical programs regulatory affairs supporting clinical programs including ahus • increase 6434 external clinical development expenses related primarily expansion studies eculizumab nonpnh indications including costs stechus trial initiated second quarter 2011 see table • increase 3004 discovery research expenses related primarily costs associated new translation medicine group initiated acquisition taligen expect research development expenses increase 2012 due clinical development manufacturing costs related expanding development programs well expenses related enobia programs additional information programs please refer “product development programs” item business form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit legal expenses year ended december 31 2011 incurred selling general administrative expenses 308176 increase 81410 36 versus 226766 incurred year ended december 31 2010 increase primarily related following • year ended december 31 2011 salaries benefits labor expenses increased 185018 increase 50483 38 versus 134535 incurred year ended december 31 2010 increase result increased headcount related commercial development activities including increases payroll benefits costs 35943 related global commercial staff support global expansion prepare initiation soliris therapy ahus granted approval united states europe fourth quarter 2011 increase also due increases payroll benefits 14540 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 30927 primarily due costs associated marketing professional services 26410 occupancy costs 4528 due expansion current facilities united states switzerland new facilities turkey india china increases 2544 due increased bad debt expense associated declines credit ratings greek receivables quarters subsequent recognition corresponding revenue expect selling general administrative expenses increase lower rate revenue 2012 reflecting growth commercial organization throughout world acquisitionrelated costs incurred following acquisitionrelated costs 2011 associated acquisitions taligen orphatec enobia income expense foreign currency transaction gains losses relate changes fair value monetary assets liabilities denominated foreign currencies year ended december 31 2011 recognized 2281 foreign currency loss decrease 153 versus loss 2434 incurred year ended december 31 2010 decrease primarily result fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs recognize investment income primarily portfolio cash equivalents marketable securities year ended december 31 2011 investment income increased 400 26 1911 due primarily higher cash equivalents marketable securities balances incur interest convertible notes revolving credit facility capital lease obligations year ended december 31 2011 interest expense increased 84 788 income taxes year ended december 31 2011 recorded income tax provision 54353 effective tax rate 237 compared income tax provision 51981 effective tax rate 349 year ended december 31 2010 income tax provision 2011 2010 principally attributable us federal state foreign income taxes profitable operations september 2011 completed assessment impact election claim federal foreign tax credits federal orphan drug credits would historical tax returns based assessment management elected claim foreign tax credit tax year ended december 31 2010 orphan drug credit tax years ended december 31 2010 2009 net federal income tax benefit recorded 2011 result election claim federal foreign tax credit 2010 federal orphan drug credit 2010 2009 approximately 15400 company granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 expected renewed additional 5 years comparison year ended december 31 2010 year ended december 31 2009 net product sales revenues significant geographic region follows increases revenue fiscal year 2010 versus 2009 primarily due increased number patients treated soliris globally increase treated patients due additional patients physicians requesting soliris therapy well reimbursement price approvals additional territories including approvals japan included impacted sales third fourth quarters 2010 increase revenues offset negative impact approximately 9277 year ended december 31 2010 due changes foreign currency exchange rates inclusive hedging activity primarily euro british pound compared us dollar versus year ended december 31 2009 recorded gain revenue 8778 3363 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2010 2009 respectively cost sales cost sales 64437 45059 12 product revenue years ended december 31 2010 2009 cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris research development expenses following table provides information regarding research development expenses following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs year ended december 31 2010 incurred research development expenses 98394 increase 16479 20 versus 81915 incurred year ended december 31 2009 increase primarily related following • increase 6561 research development payroll benefit expense related primarily global expansion staff supporting increasing number clinical preclinical programs • increase 6392 external clinical development expenses related primarily expansion studies eculizumab nonpnh indications offset decreases spending pnh programs see table • increase 1070 discovery research primarily due external research consulting fees • increase 1736 depreciation amortization expenses primarily related depreciation arimf placed service december 2009 selling general administrative expense year ended december 31 2010 incurred selling general administrative expenses including acquisitionrelated costs 227488 increase 54721 32 versus 172767 incurred year ended december 31 2009 increase primarily related following • year ended december 31 2010 salaries benefits labor expenses increased 134669 increase 34631 35 versus 100038 incurred year ended december 31 2009 increase result increased headcount related commercial development activities including increases payroll benefits costs 21487 related global commercial operations teams increase also due increases payroll benefits 13144 within general administrative functions support infrastructure global commercial entity • increase external selling general administrative expenses 20090 due primarily increases marketing consulting services 11984 increases occupancy depreciation expenses 2978 relating new expanded office spaces europe japan canada australia latin america increases 2268 relating charitable compassionate care programs increases 1112 telecommunications information technology expenses income expense year ended december 31 2010 recognized 2434 foreign currency loss increase 1904 versus loss 530 incurred year ended december 31 2009 increase primarily result fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs recognize investment income primarily portfolio cash equivalents marketable securities year ended december 31 2010 investment income increased 725 92 1511 due primarily higher cash equivalents marketable securities balances year ended december 31 2010 interest expense increased 98 16 704 due primarily reduction capitalized interest associated arimf placed service fourth quarter 2009 fees relating amended restated credit facility partially offset lower principal balance convertible notes result note conversions exchanges 2009 2010 recorded 3395 noncash debt exchange expense year ended december 31 2009 relating exchange 5644 shares 87304 principal amount 1375 convertible senior notes expense recorded based fair value additional shares provided note holders stated conversion rate income taxes year ended december 31 2010 recorded income tax provision 51981 compared benefit 211852 year ended december 31 2009 income tax provision 2010 principally attributable us federal state foreign income taxes profitable operations tax benefit reported 2009 includes benefit 215516 attributable release valuation allowances us deferred tax assets offset principally income tax provisions profitable foreign subsidiaries liquidity capital resources amounts thousands except per share data cash equivalents marketable securities working capital december 31 2011 december 31 2010 follows financial assets select measures liquidity capital resources increase cash equivalents marketable securities primarily attributable cash generated operations stock option exercises offset usage cash taligen orphatec acquisitions decrease current ratio primarily due increase royalties rebates payable deferred revenue usage cash taligen orphatec acquisitions required use business invest cash reserves money market funds high quality commercial corporate us government agency bonds commercial paper accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose company concentrations credit risk limited cash equivalents corporate bonds commercial paper accounts receivable foreign exchange derivative contracts december 31 2011 two individual customers accounted 18 13 accounts receivable balance december 31 2010 one individual customer accounted 18 accounts receivable balance continue monitor economic conditions including volatility associated international economies associated impacts financial markets business sovereign debt crisis europe credit economic conditions greece italy spain ireland portugal among members european union deteriorated throughout 2011 conditions resulted may continue result increase average length time takes collect outstanding accounts receivable countries december 31 2011 accounts receivable greece italy spain ireland portugal approximately 83400 approximately 24000 amount outstanding greater one year recorded allowance approximately 3500 related receivables december 31 2011 manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2011 foreign exchange forward contracts notional amounts totaling 692577 outstanding foreign exchange forward contracts net fair value 14854 unrealized gain 25328 included assets offset unrealized loss 10474 included liabilities counterparties foreign exchange forward contracts large multinational commercial banks believe risk nonperformance material december 31 2011 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily money market funds commercial paper us corporate bonds federal agency obligations foreign exchange forward contracts level 2 liabilities consist also foreign exchange forward contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related taligen orphatec acquisitions march 2011 amended restated existing credit agreement provide 100000 revolving credit facility 20000 sublimit letters credit used working capital requirements acquisitions general corporate purposes december 31 2011 outstanding amounts revolving credit facility open letters credit 3754 borrowing availability approximately 96000 december 31 2011 february 2012 terminated credit facility entered 440000 credit facility described february 2012 whollyowned swiss subsidiary alexion pharma international sàrl entered credit agreement credit agreement provides 240000 senior secured term loan facility 200000 senior secured revolving credit facility includes 60000 sublimit letters credit 10000 sublimit swingline loans february 7 2012 borrowed 320000 used facilities pay portion consideration acquisition enobia may also use facilities working capital requirements acquisitions general corporate purposes credit agreement provides subject satisfaction certain conditions including receipt commitments existing additional lenders alexion may increase commitments term loan facility andor revolving facility aggregate amount exceed 150000 accordance credit agreement alexions whollyowned foreign subsidiaries may borrow funds facilities upon satisfaction certain conditions described credit agreement december 31 2011 accrued royalty balance 82010 includes estimates royalties potentially owed third parties estimates amounts potentially owed third parties may influenced outcome future litigation claims results uncertain increase estimated amounts owed requirement pay amounts accelerated basis may result material adverse effect liquidity expect continued growth expenditures particularly related research product development clinical trials regulatory approvals international expansion commercialization products capital investment however anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned foreseeable future cash flows change cash equivalents increase cash equivalents december 31 2011 primarily due cash generated operations maturities marketable securities stock option exercises offset cash used taligen orphatec acquisitions operating activities components cash flows operating activities reported statement cash flows follows • reported net income 175315 97030 year ended december 31 2011 2010 respectively • noncash items included depreciation amortization change fair value contingent consideration sharebased compensation expense deferred taxes marketable securities premium amortization unrealized foreign currency gain loss gains losses forward contracts currency translation adjustments loss disposal property plant equipment 111952 91237 year ended december 31 2011 2010 respectively • net cash outflow due changes operating assets liabilities 17183 27361 year ended december 31 2011 2010 respectively 17183 change operating assets liabilities primarily relates • increases accounts receivable 78778 due increased number patients treated soliris globally well reimbursement price approvals additional territories • increase inventory 12179 relates increased production arimf resulting inventory buildup support commercial growth • increase prepaid expenses assets 21040 mainly related tax receivables prepaid taxes • increases offset increase 15033 deferred revenue due increased shipments advance recognizing revenue increase 79781 accounts payable accrued expenses related rebates royalties compensation 2012 expect increases cash flow operations highly dependent sales levels related cash collections soliris investing activities components cash flows investing activities consisted following • additions property plant equipment 21982 12823 year ended december 31 2011 2010 respectively • maturities marketable securities 94458 53387 year ended december 31 2011 2010 respectively purchases marketable securities 129860 year ended december 31 2010 • payments 105886 related acquisitions taligen orphatec february 2012 completed business combination enobia acquisition required us make payments approximately 610000 paid available cash equivalents proceeds new credit facility integration enobia current operations initial phases also initial stages evaluating tax impact enobia acquisition made preliminary plans structuring enobia legal entities including determination legal entities acquired assets could create tax liability 2012 based preliminary analysis amount tax liability could 100000 determined timing amount tax liability final amounts timing could change based various factors finalization asset valuations tax analyzes related acquired assets believe sufficient available cash pay liability becomes due addition upfront payments purchase agreements enobia taligen orphatec acquisitions also include contingent payments totaling 470000 367000 42000 respectively certain development commercial milestones achieved milestone amounts 564000 315000 contingent payments relate development commercial milestones respectively expect contingent payments made next 12 months accordingly expect amounts impact liquidity nearterm future payments become probable evaluate methods funding payments could made available cash generated operations proceeds financing activities net cash flows financing activities reflected proceeds exercise stock options 35765 37546 years ended december 31 2011 2010 respectively february 2012 whollyowned swiss subsidiary alexion pharma international sàrl entered credit agreement credit agreement provides 240000 senior secured term loan facility 200000 senior secured revolving credit facility includes 60000 sublimit letters credit 10000 sublimit swingline loans may also use facilities working capital requirements acquisitions general corporate purposes credit agreement provides subject satisfaction certain conditions including receipt commitments existing additional lenders alexion may increase commitments term loan facility andor revolving facility aggregate amount exceed 150000 accordance credit agreement alexions whollyowned foreign subsidiaries may borrow funds facilities upon satisfaction certain conditions described credit agreement connection acquisition enobia february 2012 borrowed approximately 320000 facility used available cash remaining purchase price borrowed 240000 term loan facility 80000 revolving facility term loan facility requires minimum quarterly payments 12000 starting june 2012 expect generate sufficient cash flow operations fund required principal interest payments expect repay revolving facility next 1 2 years generate cash operations addition amounts borrowed approximately 116000 available borrowing revolving facility utilize needed compliance covenants date borrowing forecast compliance covenants ongoing basis also seek maintain minimum cash balance representing least one year operating expenses may utilize revolving facility meet cash balance since commercial launch soliris 2007 financed operations capital expenditures primarily positive cash flows operations expect continue able fund foreseeable future operations including principal interest payments credit facility contingent payments acquisitions principally cash flows operations existing cash resources access additional financing necessary may time also seek additional funding combination equity debt financings sources identify significant new opportunity company provide us taxes undistributed earnings nonus subsidiaries earnings intended permanently reinvested businesses offshore company present anticipated future need cash held nonus subsidiaries cash generated us well borrowings expected sufficient meet future us liquidity needs contractual obligations following table summarizes contractual obligations december 31 2011 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a risk factors note 11 consolidated financial statements noted note 11 consolidated financial statements recorded accrued liabilities 82010 related known potential royalty amounts included amounts table precise timing settlement amounts reasonably estimable december 31 2011 recorded full amount within current liabilities balance sheet reflect full amount could payable next 12 months table also include liability unrecognized tax benefits related various federal state foreign income tax matters 9773 december 31 2011 timing settlement amounts reasonably estimable december 31 2011 expect payment amounts related unrecognized tax benefits within next twelve months also include contingent payments related enobia taligen orphatec acquisitions timing payment amounts reasonably estimable december 31 2011 contingent payments business combinations total 470000 enobia 367000 taligen 42000 orphatec expect make contingent payments next 12 months convertible notes december 31 2011 outstanding 718 principal amount 1375 convertible senior notes due february 1 2012 1375 notes february 2012 1375 notes became due issued additional 91 shares common stock upon conversion 718 principal amount subsequent february 2012 conversion 1375 notes outstanding revolving credit facility march 2011 entered amended restated credit agreement provided available 100000 revolving credit facility march 7 2014 loan collateralized substantially alexion pharmaceuticals incs assets including pledge equity interests certain direct subsidiaries real estate located rhode island excluding intellectual property assets foreign subsidiaries december 31 2011 outstanding balance revolving credit facility open letters credit 3754 borrowing availability approximately 96000 december 31 2011 february 2012 terminated credit facility entered 440000 credit facility described new credit facility february 2012 whollyowned swiss subsidiary alexion pharma international sàrl entered credit agreement credit agreement provides 240000 senior secured term loan facility 200000 senior secured revolving credit facility includes 60000 sublimit letters credit 10000 sublimit swingline loans may also use facilities working capital requirements acquisitions general corporate purposes credit agreement provides subject satisfaction certain conditions including receipt commitments existing additional lenders alexion may increase commitments term loan facility andor revolving facility aggregate amount exceed 150000 accordance credit agreement alexions whollyowned foreign subsidiaries may borrow funds facilities upon satisfaction certain conditions described credit agreement february 7 2012 borrowed 240000 term loan facility 80000 revolving facility fund portion purchase price acquisition enobia capital leases currently lease office equipment capital lease agreements expiring 2014 assets liabilities capital lease agreements recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives average interest rates capital leases 404 imputed based lower incremental borrowing rate inception lease operating leases operating leases principally facilities equipment currently lease approximately 235300 square feet space headquarters research development facility cheshire connecticut approximately 33250 square feet space regional executive sales offices lausanne switzerland additionally lease research space san diego california connection closure alexion antibody technologies 2006 accrued fair value future payments lease september 2007 entered sublease aat facility provides sublease payments us term lease august 2012 believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities addition locations also lease offices countries facilitate operations global organization commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza sales ag lonza agreement supply agreements lonza relating manufacture eculizumab requires payments lonza inception contract product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf currently rely two manufacturing facilities arimf lonza producing commercial clinical quantities soliris clinical preclinical quantities eculizumab samalizumab product candidates produced arimf third party facility arimf third party facility also depend limited number third party providers services respect clinical commercial requirements including product finishing packaging vialing labeling various agreements lonza remaining total commitments approximately 136000 2018 commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf additional commercial commitments additional payments related commercial commitments licenses aggregating approximately 1350 would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization amounts included table income taxes december 31 2011 pretax federal state net operating loss carryforwards 464918 109095 respectively nol’s expire 2012 2031 also federal state income tax credit carryforwards approximately 72278 1361 respectively income tax credits expire 2012 2031 due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes near future expect pay cash taxes various us states foreign jurisdictions operations utilized net operating losses tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered prior year however believe limitation expected result expiration loss significant amount federal nol’s item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecast forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris first therapeutic approved patients two severe ultrarare disorders resulting chronic uncontrolled activation complement component immune system pnh lifethreatening ultrarare blood disorder ahus lifethreatening ultrarare genetic disease also evaluating additional potential indications soliris severe ultrarare diseases chronic uncontrolled complement activation underlying mechanism progressing various stages development additional biotechnology product candidates treatments patients severe ultrarare disorders incorporated 1992 began commercial sale soliris 2007 soliris designed inhibit specific aspect complement component immune system thereby treat inflammation associated chronic disorders therapeutic areas hematology nephrology transplant rejection neurology soliris humanized monoclonal antibody effectively blocks terminal complement activity doses currently prescribed initial indication received approval soliris pnh ultrarare debilitating lifethreatening genetic deficiency blood disorder defined chronic uncontrolled complement activation leading destruction red blood cells hemolysis chronic hemolysis patients pnh may associated lifethreatening thromboses recurrent pain kidney disease disabling fatigue impaired quality life severe anemia pulmonary hypertension shortness breath intermittent episodes darkcolored urine hemoglobinuria soliris approved treatment pnh fda ec 2007 mhlw 2010 approved several territories additionally soliris granted orphan drug designation treatment pnh united states europe japan several territories september 2011 soliris approved fda treatment pediatric adult patients ahus genetic ultrarare disease characterized chronic uncontrolled complement activation thrombotic microangiopathy formation blood clots small blood vessels throughout body causing reduction platelet count thrombocytopenia lifethreatening damage kidney brain heart vital organs also november 2011 ec granted marketing authorization soliris treat pediatric adult patients ahus europe fda ec granted soliris orphan drug designation treatment patients ahus february 7 2012 acquired enobia privately held clinicalstage biotechnology company based montreal canada cambridge massachusetts transaction accounted acquisition method accounting business combinations acquisition intended objective develop commercialize therapies patients severe ultrarare lifethreatening disorders enobias lead product candidate asfotase alfa human recombinant targeted alkaline phosphatase enzymereplacement therapy patients suffering hypophosphatasia hpp ultrarare lifethreatening genetic metabolic disease approved treatments made cash payment 610000 subject purchase price adjustments 100 enobias capital stock additional contingent payments aggregate 470000 may due upon reaching various regulatory sales milestones financed acquisition combination existing cash proceeds new credit facility february 8 2011 acquired patents assets orphatec related investigational therapy patients mocd type ultrarare genetic disorder characterized severe brain damage rapid death newborns made initial payments 3050 cash may make additional future payments 42000 contingent milestone payments upon various development regulatory commercial milestones january 28 2011 acquired taligen privately held development stage biotechnology company based cambridge massachusetts transaction accounted acquisition method accounting business combinations acquisition intended broaden portfolio preclinical compounds expand capabilities translational medicine acquired preclinical compounds novel antibody protein regulators complement inflammatory pathways made upfront cash payment 111773 100 taligen’s equity interests additional contingent payments aggregate 367000 may due upon achievement various development commercial milestones united states european union six product candidates critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • research development expenses • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition net product sales principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels contractual terms financial strength distributors addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limited period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change provided balances activity rebates payable account years ended december 31 2012 2011 2010 follows record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled sell soliris limited number customers evaluate creditworthiness customer regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries typically exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue creditworthiness declines subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense assess ongoing basis whether collectibility reasonably assured time sale also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful continue monitor economic conditions including volatility associated international economies sovereign debt crisis europe associated impacts financial markets business additional information related concentration credit risk associated certain international accounts receivable balances refer liquidity capital resources section contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method capitalize inventory produced commercial sale including costs incurred prior regulatory approval subsequent filing biologics license application bla company determined inventory probable future economic benefit products approved fda regulatory authorities soliris also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form soliris utilized commercial clinical programs identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased raw materials pass quality inspection obligation pay materials also capitalize cost inventory manufactured arimf property plant equipment prior approval facility regulatory authorities analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory future reduced demand quality issues excess supply beyond anticipated management may result adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required research development expenses accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations cro’s clinical study sites laboratories consultants clinical trial vendors perform activities related contracts vary significantly length may fixed amount variable amount based actual costs incurred capped certain limit combination elements activity levels monitored close communication cro’s clinical trial vendors including detailed invoice task completion review analysis expenses budgeted amounts analysis work performed approved contract budgets payment schedules recognition changes scope services performed certain cro significant clinical trial vendors provide estimate costs incurred invoiced end quarter individual trial estimates reviewed discussed cro vendor necessary included research development expenses related period clinical study sites paid periodically persubject basis institutions performing clinical study accrue estimated amount based subject screening enrollment quarter estimates may differ actual amount subsequently invoiced may result adjustment research development expense several months related services performed sharebased compensation grant equity awards one sharebased compensation plan known amended restated incentive 2004 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary stockrelated awards also outstanding sharebased compensation plans granted awards plans since 2004 estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise forfeiture cancellation well reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates factors change employ different assumptions sharebased compensation expense record future periods may differ significantly prior recorded amounts valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets iprd related acquisitions identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited •timing costs complete inprocess projects •timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects •discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur intangible assets related iprd treated indefinitelived intangible assets amortized product approved sale regulatory authorities specified markets time determine useful life asset reclassify asset iprd begin amortization impairment testing also performed least annually triggering event occurs could indicate potential impairment third quarter 2012 recognized impairment charge 26300 writedown iprd asset fair value determined de minimis december 31 2012 carrying value iprd impaired projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions assurance given however underlying assumptions used estimate expected project sales development costs profitability events associated projects clinical results occur estimated goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized single reporting unit therefore goodwill impairment test done using overall market value determined traded share price compared book value net assets completed annual impairment test december 31 2012 determined carrying value goodwill impaired valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors •timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones sales levels specific compound •discount rates contingent consideration liabilities arose connection acquisitions quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material adjustments income tax expense period new accounting pronouncements june 2011 financial accounting standards board fasb issued new standard presentation comprehensive income new standard eliminated current alternative report comprehensive income components statement changes equity new standard companies elect present items net income comprehensive income one continuous statement two separate consecutive statements adopted provisions standard first quarter 2012 july 2012 fasb issued new standard amends guidance testing indefinitelived intangible assets goodwill new standard allows companies option first assess qualitative factors determine whether likely indefinitelived intangible asset impaired basis determining necessary perform quantitative assessment calculate fair value asset new standard company longer required calculate fair value indefinitelived intangible asset unless company determines based qualitative assessment likely impaired new standard effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted adopted provisions guidance 2012 annual impairment test adoption material effect consolidated financial statements results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison year ended december 31 2012 year ended december 31 2011 net product sales net product sales significant geographic region follows increase revenue fiscal year 2012 versus 2011 primarily due increased number patients treated soliris globally increase treated patients due physicians requesting soliris therapy additional patients well reimbursement price approvals additional territories reimbursement ahus united states also recognized 3300 related agreement reached payer second quarter 2012 related product shipped 2011 increase revenues offset negative impact approximately 16566 year ended december 31 2012 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2011 negative impact primarily due euro offset positive impact japanese yen recorded gain loss revenue 12869 6558 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2012 2011 respectively cost sales october 2012 entered settlement nonexclusive license agreement third party terms agreement made upfront payment approximately 38000 fourth quarter 2012 pay royalties sales soliris accordance terms agreement result settlement nonexclusive license agreement reduced estimate probable contingent liabilities recorded gain cost sales 53377 third quarter 2012 exclusive settlement noted cost sales 126214 93140 11 12 product revenue respectively years ended december 31 2012 2011 cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development medical affairs regulatory functions including manufacturing material clinical research activities discovery research costs incurred conducting laboratory studies performing preclinical research uses eculizumab product candidates clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses year ended december 31 2012 incurred research development expenses 222732 increase 85311 62 versus 137421 incurred year ended december 31 2011 increase primarily related following • increase 13294 external clinical development expenses related primarily expansion studies eculizumab asfotase alfa program acquired february 2012 well increase costs related clinical programs see table • increase 33895 external product development expenses related primarily production clinical amounts asfotase alfa • increase 31541 research development payroll benefit expense related primarily global expansion staff supporting increasing number clinical development programs following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs prior january 1 2006 substantially research development expenses related two products eculizumab pexelizumab obtained approval eculizumab treatment pnh 2007 united states european union made decision cease development pexelizumab 2006 successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a risk factors annual report form 10k expect research development expenses increase 2013 due clinical development manufacturing costs related expanding development programs additional information programs please refer “product development programs” item business annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs legal expenses table provides information regarding selling general administrative expense year ended december 31 2012 incurred selling general administrative expenses 384678 increase 76502 25 versus 308176 incurred year ended december 31 2011 increase primarily related following • increase salary benefits labor expenses 38035 increase result increased headcount related commercial development activities including increases payroll benefits costs 25400 related global commercial staff support global expansion increase also due increases payroll benefits 12600 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 38467 increase primarily due costs associated marketing professional services 18400 increased distribution costs 3000 increased charitable contributions 4800 increased occupancy costs 4300 due expansion current facilities united states switzerland new facilities associated acquisition enobia increase 7000 administrative costs incurred connection infrastructure growth expect selling general administrative expenses increase lower rate revenue 2013 reflecting continued growth commercial organization throughout world acquisitionrelated costs incurred following acquisitionrelated costs 2012 2011 associated acquisitions enobia taligen orphatec following table provides information acquisitionrelated costs acquisition included acquisitionrelated costs taligen year ended december 31 2012 gain 4331 related decrease fair value contingent consideration related acquisition decrease fair value result decreased likelihood payments contingent consideration due negative scientific findings decrease value related deprioritization agerelated macular degeneration program impairment intangible asset year ended december 31 2012 reviewed impairment value early stage preclinical indefinitelived intangible asset related taligen acquisition initiated review based evaluation negative scientific findings associated development different asset treatment agerelated macular degeneration likelihood success ophthalmic use value obtained market participant arms length transaction developments led us deprioritize development acquired asset result third quarter 2012 recognized impairment charge 26300 writedown asset fair value determined de minimis interest expense following table provides information regarding interest expense recognize investment income primarily portfolio cash equivalents year ended december 31 2012 investment income decreased 73 4 1838 incur interest term notes revolving credit facility capital lease obligations year ended december 31 2012 interest expense increased 6614 7402 due interest borrowings new credit facility used acquisition enobia february 2012 foreign currency transaction gains losses relate changes fair value monetary assets liabilities denominated foreign currencies year ended december 31 2012 recognized 1208 foreign currency loss decrease 1073 versus loss 2281 incurred year ended december 31 2011 losses recorded periods result costs hedging exposures well fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs income taxes year ended december 31 2012 recorded income tax provision 142744 effective tax rate 359 compared income tax provision 54353 effective tax rate 237 year ended december 31 2011 income tax provision 2012 attributable us federal state foreign income taxes profitable operations well tax expense 21812 associated structuring enobia business tax provision 2011 principally attributable us federal state foreign income taxes profitable operations september 2011 completed assessment impact election claim federal foreign tax credits federal orphan drug credits would historical tax returns based assessment elected claim foreign tax credit tax year ended december 31 2010 orphan drug credit tax years ended december 31 2010 2009 net federal income tax benefit recorded 2011 result election claim federal foreign tax credit 2010 federal orphan drug credit 2010 2009 approximately 15400 company granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 expected renewed additional 5 years impact tax holiday decreased foreign taxes 3173 2012 2506 2011 us federal tax credit research experimentation expenses expired december 31 2011 connection expiration 2012 tax expense include benefit us federal tax credit research experimentation january 2013 american taxpayer relief act 2012 retroactively extends tax credit research experimentation back january 1 2012 end 2013 signed law effects change tax law recognized period includes date enactment therefore tax benefit attributable 2012 us federal tax credit research experimentation recorded first quarter 2013 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized comparison year ended december 31 2011 year ended december 31 2010 net product sales revenues significant geographic region follows increases revenue fiscal year 2011 versus 2010 primarily due increased number patients treated soliris globally increase treated patients due additional patients physicians requesting soliris therapy well reimbursement price approvals additional territories including approval pnh japan third quarter 2010 australia first quarter 2011 certain provinces canada third quarter 2011 approval ahus united states third quarter 2011 increase revenues offset negative impact approximately 815 year ended december 31 2011 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2010 negative impact primarily due euro british pound offset positive impact japanese yen recorded loss gain revenue 6558 8778 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2011 2010 respectively cost sales cost sales 93140 64437 12 product revenue years ended december 31 2011 2010 cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris research development expenses following table provides information regarding research development expenses year ended december 31 2011 incurred research development expenses 137421 increase 39027 40 versus 98394 incurred year ended december 31 2010 increase primarily related following • increase 6434 external clinical development expenses related primarily expansion studies eculizumab nonpnh indications including costs stechus trial initiated second quarter 2011 • increase 12344 external product development expenses related primarily costs associated nephrology clinical programs regulatory affairs supporting clinical programs including ahus • increase 3004 discovery research expenses related primarily costs associated translation medicine group initiated acquisition taligen • increase 16385 research development payroll benefit expense related primarily global expansion staff supporting increasing number clinical development programs following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs selling general administrative expense table provides information regarding selling general administrative expense year ended december 31 2011 incurred selling general administrative expenses 308176 increase 81410 36 versus 226766 incurred year ended december 31 2010 increase primarily related following • increase salaries benefits labor expenses 50483 increase result increased headcount related commercial development activities including increases payroll benefits costs 35943 related global commercial staff support global expansion prepare initiation soliris therapy ahus granted approval united states europe fourth quarter 2011 increase also due increases payroll benefits 14540 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 30927 increase primarily due costs associated marketing professional services 26410 occupancy costs 4528 due expansion current facilities united states switzerland new facilities turkey india china increases 2544 due increased bad debt expense associated declines credit ratings greek receivables quarters subsequent recognition corresponding revenue income expense following table provides information regarding interest income expense recognize investment income primarily portfolio cash equivalents marketable securities year ended december 31 2011 investment income increased 400 26 1911 due primarily higher cash equivalents marketable securities balances year ended december 31 2011 interest expense increased 84 12 788 year ended december 31 2011 recognized 2281 foreign currency loss decrease 153 versus loss 2434 incurred year ended december 31 2010 decrease primarily result fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs income taxes year ended december 31 2011 recorded income tax provision 54353 effective tax rate 237 compared income tax provision 51981 effective tax rate 349 year ended december 31 2010 income tax provision 2011 2010 principally attributable us federal state foreign income taxes profitable operations liquidity capital resources amounts thousands except per share data following table summarizes components financial condition december 31 2012 december 31 2011 increase cash equivalents primarily attributable net proceeds received common stock offering completed may 2012 proceeds new credit facility net proceeds exercise stock options cash generated operations offset cash used enobia acquisition capital expenditures repurchase shares common stock expect continued growth expenditures particularly related research product development clinical trials regulatory approvals international expansion commercialization products capital investment however anticipate cash generated operations existing available cash equivalents provide us adequate resources fund operations currently planned foreseeable future since commercial launch soliris 2007 financed operations capital expenditures primarily positive cash flows operations expect continue able fund foreseeable future operations including principal interest payments credit facility contingent payments acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes financial instruments required use business may invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk limited cash equivalents accounts receivable foreign exchange derivative contracts december 31 2012 two individual customers accounted 18 12 accounts receivable balance december 31 2011 two customers accounted 18 13 accounts receivable balance continue monitor economic conditions including volatility associated international economies sovereign debt crisis europe associated impacts financial markets business credit economic conditions greece italy spain among members european union deteriorated throughout 2011 2012 conditions resulted may continue result increase average length time takes collect outstanding accounts receivable countries substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material exposure sovereign debt crisis greece limited material amount accounts receivable greece december 31 2012 2011 total gross accounts receivable italy spain approximately 82200 77000 respectively december 31 2012 2011 approximately 21100 21300 respectively amounts outstanding greater one year recorded allowance approximately 2000 400 respectively related gross receivables december 31 2012 recorded 21334 accounts receivable spain within noncurrent assets approximates amount receivables estimate collection periods beyond one year ended december 31 2012 2011 recorded expense approximately 1100 350 respectively related expectation delayed payment countries net accounts receivable countries december 31 2012 2011 summarized follows manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2012 foreign exchange forward contracts notional amounts totaling 964189 outstanding foreign exchange forward contracts net fair value 17180 unrealized gain 27240 included assets offset unrealized loss 10060 included liabilities counterparties foreign exchange forward contracts large multinational commercial banks believe risk nonperformance material december 31 2012 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily money market funds foreign exchange forward contracts level 2 liabilities consist also foreign exchange forward contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related acquisitions contingent consideration obligations february 2012 completed business combination enobia acquisition required us make upfront cash payments 623876 paid available cash equivalents proceeds new credit facility 2012 result structuring enobia business recorded income tax expense 21812 income statement structuring require us make cash payment approximately 50000 early 2013 amount fully accrued balance sheet december 31 2012 purchase agreements enobia taligen orphatec acquisitions include contingent payments totaling 470000 367000 42000 respectively certain development commercial milestones achieved milestone amounts 564000 315000 contingent payments relate development commercial milestones respectively expect significant contingent payments made next 12 months accordingly expect amounts impact liquidity nearterm future payments become probable evaluate methods funding payments could made available cash generated operations proceeds financing longterm debt february 2012 whollyowned swiss subsidiary alexion pharma international sàrl entered credit agreement syndicate lenders parties named credit agreement provides 240000 senior secured term loan facility payable equal quarterly installments 12000 starting june 30 2012 200000 senior secured revolving credit facility includes 60000 sublimit letters credit 10000 sublimit swingline loans may also use facilities working capital requirements acquisitions general corporate purposes alexions whollyowned foreign subsidiaries may borrow funds facilities upon satisfaction certain conditions described credit agreement connection acquisition enobia february 2012 borrowed 240000 term loan facility 80000 revolving facility used available cash remaining purchase price second quarter ended 2012 repaid revolving facility full addition required quarterly installments 12000 also prepaid 55000 term loan facility third quarter 2012 149000 outstanding december 31 2012 december 31 2012 open letters credit 9695 borrowing availability revolving facility 190305 december 31 2012 expect cash generated operations sufficient meet debt service obligations contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information changes estimated amounts timing paying potential liabilities could material impact liquidity estimates amounts potentially owed third parties may influenced outcome future litigation claims results uncertain increase estimated amounts owed requirement pay amounts accelerated basis may result material adverse effect liquidity october 2012 entered settlement nonexclusive license agreement third party terms agreement made upfront payment approximately 38000 fourth quarter 2012 pay royalties sales soliris accordance terms agreement december 31 2012 recorded accrued expenses 25450 probable royalties owed third parties taxes record us tax expense undistributed earnings nonus subsidiaries earnings intended permanently reinvested businesses offshore present anticipated future need cash held nonus subsidiaries cash generated us well borrowings expected sufficient meet future us liquidity needs december 31 2012 approximately 128000 cash equivalents held foreign subsidiaries significant portion required liquidity needs foreign subsidiaries connection acquisition enobia certain foreign subsidiaries bank debt remains outstanding december 31 2012 due liability position foreign subsidiaries repay bank debt well outstanding intercompany debt prior excess cash available could used repatriate entities united states expectation foreign undistributed earnings permanently invested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructurings tax law changes currently contemplated december 31 2012 pretax federal state net operating loss carryforwards 453617 97452 respectively nol’s expire 2021 2032 also federal state income tax credit carryforwards 80755 7513 respectively income tax credits expire 2014 2032 due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes within next twelve months expect pay cash taxes various us states foreign jurisdictions operations utilized net operating losses tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period determined limiting provisions triggered prior year additionally connection acquisition enobia acquired 10337 net operating losses subject limitation however believe limitations expected result expiration loss significant amount federal nol’s common stock repurchase program november 2012 announced board directors authorized repurchase 400000 common stock repurchase program expiration date expect cash generated operations existing available cash equivalents sufficient fund share repurchases cash flows following summarizes net change cash equivalents increase cash equivalents primarily due cash generated operations borrowings credit facility stock option exercises offset cash used enobia acquisition repurchases shares common stock operating activities components cash flows operating activities reported consolidated statement cash flows follows • reported net income 254822 175315 year ended december 31 2012 2011 respectively • noncash items included depreciation amortization impairment intangible assets change fair value contingent consideration sharebased compensation expense deferred taxes unrealized foreign currency gain loss gains losses forward contracts currency translation adjustments 177072 111952 year ended december 31 2012 2011 respectively • net cash outflow due changes operating assets liabilities 21281 17183 year ended december 31 2012 2011 respectively 21281 change operating assets liabilities primarily relates • increase accounts receivable 72870 due increased number patients treated soliris globally well reimbursement price approvals additional territories • increase inventory 6265 related increased production inventory support commercial growth • increase prepaid expenses assets 17041 primarily related prepaid taxes prepaid manufacturing costs • increase 61723 accounts payable accrued expenses liabilities primarily related increases accrued income taxes rebates compensation offset decrease accrued royalties decrease accrued royalties related intellectual property settlement • increase 13172 deferred revenue due increased shipments advance recognizing revenue 2013 expect increases cash flow operations highly dependent sales levels related cash collections soliris investing activities components cash flows investing activities consisted following • additions property plant equipment 21846 21982 year ended december 31 2012 2011 respectively •maturities marketable securities 94458 year ended december 31 2011 • payments 605735 105886 year ended december 31 2012 2011 respectively related acquisitions financing activities net cash flows financing activities reflected proceeds exercise stock options 66438 35765 years ended december 31 2012 2011 respectively addition 2012 recognized proceeds 462212 connection sale 5000 shares common stock connection acquisition enobia february 2012 borrowed 240000 term loan facility 80000 revolving facility used available cash remaining purchase price second quarter 2012 repaid revolving facility full addition 2012 made payments 91000 term loan facility fourth quarter 2012 repurchased 11553 worth shares common stock repurchase program approved board directors november 2012 contractual obligations following table summarizes contractual obligations december 31 2012 effect obligations commercial commitments expected liquidity cash flow future fiscal years include milestones assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a risk factors note 9 commitments contingencies consolidated financial statements included annual report form 10k table also include liability unrecognized tax benefits related various federal state foreign income tax matters 12393 december 31 2012 timing settlement amounts reasonably estimable december 31 2012 expect payment amounts related unrecognized tax benefits within next twelve months also include contingent payments related enobia taligen orphatec acquisitions timing payment amounts reasonably estimable december 31 2012 contingent payments associated business combinations total 470000 enobia 367000 taligen 42000 orphatec expect make significant contingent payments next 12 months credit facilities february 7 2012 whollyowned swiss subsidiary alexion pharma international sàrl entered credit agreement syndicate lenders parties named credit agreement provides 240000 senior secured term loan facility payable equal quarterly installments 12000 beginning june 30 2012 200000 senior secured revolving credit facility february 7 2017 may elect loans credit agreement bear interest rate per annum equal libor plus 125 200 depending consolidated leverage ratio calculated accordance credit agreement ii case loans denominated us dollars base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus case b c 025 100 depending consolidated leverage ratio cash liabilities calculated accordance credit agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 7 2017 maturity date obligations credit facilities unconditionally guaranteed jointly severally certain existing domestic subsidiaries required guaranteed certain future domestic subsidiaries obligations alexion pharma international sàrl credit facilities unconditionally guaranteed jointly severally us certain existing domestic subsidiaries certain foreign subsidiaries required guaranteed certain future subsidiaries obligations borrower credit facilities guarantees obligations secured subject certain exceptions substantially borrowers assets certain guarantors including pledge equity interests certain subsidiaries real estate located smithfield rhode island excluding intellectual property assets certain foreign subsidiaries credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions pay dividends repurchase capital stock enter transactions affiliates credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan operating leases operating leases principally facilities equipment currently lease approximately 235300 square feet space headquarters research development facility cheshire connecticut approximately 40000 square feet space regional executive sales offices lausanne switzerland addition locations also lease space us states foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities november 2012 entered new operating lease agreement approximately 328000 square feet office laboratory space constructed new connecticut construction facility expected begin 2013 completed 2015 term new lease commence upon landlords substantial completion building expire 12 years later minimum renewal option 7 years maximum renewal option 20 years provided expand lease include rentable space building lease provides monthly payments ranging 795 907 term lease upon completion new facility relocate headquarters cheshire operations new november 2012 connection planned construction facilities new connecticut also entered agreement state connecticut department economic community development provides forgivable loan grants totaling 26000 tax credits 25000 program requires meet certain criteria order prevent forfeiture repayment loan grants credits include maintaining corporate headquarters connecticut next 10 years ii achieving maintaining 668 fulltime employment positions state connecticut next 6 years unlikely able realize full value available tax credits currently exploring alternatives disposition credits december 31 2012 received grant funds tax credits associated agreement state connecticut commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza agreement supply agreements lonza relating manufacture eculizumab asfotase alfa requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf various agreements lonza remaining total commitments approximately 169000 2018 commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf additional commercial commitments additional payments related commercial commitments licenses aggregating approximately 1350 would required elect continue development current preclinical development programs specified development milestones reached including achievement commercialization amounts included table item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecast forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris first therapeutic approved patients either two severe ultrarare disorders resulting chronic uncontrolled activation complement component immune system paroxysmal nocturnal hemoglobinuria pnh lifethreatening ultrarare genetic blood disorder atypical hemolytic uremic syndrome ahus lifethreatening ultrarare genetic disease also evaluating additional potential indications soliris severe ultrarare diseases believe uncontrolled complement activation underlying mechanism progressing various stages development additional biotechnology product candidates treatments patients severe lifethreatening ultrarare disorders incorporated 1992 began commercial sale soliris 2007 soliris designed inhibit specific aspect complement component immune system thereby treat inflammation associated chronic disorders several therapeutic areas including hematology nephrology transplant rejection neurology soliris humanized monoclonal antibody effectively blocks terminal complement activity doses currently prescribed initial indication received approval soliris pnh debilitating lifethreatening ultrarare genetic blood disorder defined chronic uncontrolled complement activation leading destruction red blood cells hemolysis chronic hemolysis patients pnh may associated lifethreatening thromboses recurrent pain kidney disease disabling fatigue impaired quality life severe anemia pulmonary hypertension shortness breath intermittent episodes darkcolored urine hemoglobinuria soliris approved treatment pnh us food drug administration fda european commission ec 2007 japan’s ministry health labour welfare mhlw 2010 approved several territories additionally soliris granted orphan drug designation treatment pnh united states europe japan several territories september november 2011 soliris approved fda ec respectively treatment pediatric adult patients ahus united states europe september 2013 mhlw approved soliris treatment pediatric adult patients ahus japan ahus severe lifethreatening genetic ultrarare disease characterized chronic uncontrolled complement activation thrombotic microangiopathy tma formation blood clots small blood vessels throughout body causing reduction platelet count thrombocytopenia lifethreatening damage kidney brain heart vital organs addition fda ec granted soliris orphan drug designation treatment patients ahus addition pnh ahus believe soliris may useful treatment variety serious diseases conditions resulting uncontrolled complement activation currently evaluating additional potential indications soliris severe ultrarare diseases uncontrolled complement activation underlying mechanism also progressing various stages development additional biotechnology product candidates target severe lifethreatening ultrarare diseases believe current treatments either nonexistent inadequate therapeutics focus metabolic inflammatory diseases also involved research associated identification development new therapeutics pursuant ongoing license collaboration agreements critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • research development expenses • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition net product sales principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales customers primarily comprised distributors pharmacies hospitals hospital buying groups health care providers cases may also sell soliris governments government agencies factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change provided balances activity rebates payable account years ended december 31 2013 2012 2011 follows record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale continue monitor economic conditions including volatility associated international economies sovereign debt issues europe associated impacts financial markets business additional information related concentration credit risk associated certain international accounts receivable balances refer liquidity capital resources section contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adjustment operating results inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized products approved fda regulatory authorities soliris also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form soliris utilized commercial clinical programs identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased raw materials pass quality inspection obligation pay materials analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values also apply judgments related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required research development expenses accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations cro’s clinical study sites laboratories consultants clinical trial vendors perform activities related contracts vary significantly length may fixed amount variable amount based actual costs incurred capped certain limit combination elements activity levels monitored close communication cro’s clinical trial vendors including detailed invoice task completion review analysis expenses budgeted amounts analysis work performed approved contract budgets payment schedules recognition changes scope services performed certain cro significant clinical trial vendors provide estimate costs incurred invoiced end quarter individual trial estimates reviewed discussed cro vendor necessary included research development expenses related period clinical study sites paid periodically persubject basis institutions performing clinical study accrue estimated amount based subject screening enrollment quarter estimates may differ actual amount subsequently invoiced may result adjustment research development expense several months related services performed adjustments prior period estimates material impact results operations sharebased compensation one sharebased compensation plan known amended restated 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units nonmarket performance conditions stockrelated awards also outstanding sharebased compensation plans granted awards plans since 2004 compensation expense recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary also estimate expected term exercise forfeiture cancellation well reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates factors change employ different assumptions sharebased compensation expense record future periods may differ materially prior recorded amounts valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets iprd related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited •timing costs complete inprocess projects •timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects •discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur 2013 recognized impairment charge 3785 associated purchased technology asset acquired connection taligen acquisition intangible assets related iprd treated indefinitelived intangible assets amortized product approved sale regulatory authorities specified markets time determine useful life asset reclassify asset iprd begin amortization impairment testing performed least annually triggering event occurs could indicate potential impairment 2013 2012 recognized impairment charges 29736 26300 respectively associated early stage indefinitelived intangible assets acquired connection purchase taligen december 31 2013 remaining carrying value iprd impaired projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions however underlying assumptions used estimate expected project sales development costs profitability events associated projects clinical results may occur estimated acquisition date goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets completed annual impairment test december 31 2013 determined carrying value goodwill impaired valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors •timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones estimated future sales levels specific compound •discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material adjustments income tax expense period new accounting pronouncements january 2013 financial accounting standards board issued update clarify scope disclosures offsetting assets liabilities standard effective interim annual periods beginning january 1 2013 requires disclosure comparative periods adopted provisions guidance including additional disclosure noted 2013 february 2013 financial accounting standards board issued new standard improve reporting reclassifications accumulated comprehensive income new standard requires disclosure significant amounts reclassified component accumulated comprehensive income statement line items affected reclassification standard effective prospectively interim annual periods beginning december 15 2012 adopted provisions guidance including additional disclosure noted 2013 results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison year ended december 31 2013 year ended december 31 2012 net product sales net product sales significant geographic region follows increase revenue fiscal year 2013 versus 2012 primarily due increased volume unit shipments partially offset negative impact price foreign exchange increase revenue 37 year ended december 31 2013 due increase unit volumes 40 offset negative price impact 2 negative impact foreign exchange 1 increase volume largely due physicians globally requesting soliris therapy additional patients negative price impact 2 year ended december 31 2013 primarily due increased rebates certain countries europe offset price increase united states negative impact foreign exchange 15876 1 year ended december 31 2013 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2012 negative impact primarily due weakening japanese yen recorded gain revenue 20569 12869 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2013 2012 respectively cost sales october 2013 entered settlement agreement dismissal novartis pursuant alexion granted nonexclusive fully paid license case dismissed prejudice result recorded expense 9181 cost sales third quarter 2013 related litigation settlement agreement third quarter 2012 reduced estimate probable contingent liabilities september 30 2012 due execution settlement nonexclusive license agreement october 2012 third party related third partys intellectual property adjustment reflected actual negotiated royalty rate set forth agreement change estimate resulted positive impact cost sales 53377 third quarter 2012 exclusive changes estimates contingent liabilities settlements noted cost sales 168375 126214 11 product revenue years ended december 31 2013 2012 respectively cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris included cost sales year ended december 31 2013 14277 1 product sales related expected disposal inventory 2014 associated voluntary recall announced november 2013 offsetting increase cost sales decrease ongoing royalty expense result settlement nonexclusive license agreement entered october 2012 research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses research development rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities discovery research costs incurred conducting laboratory studies performing preclinical research uses eculizumab product candidates clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses year ended december 31 2013 incurred research development expenses 317093 increase 94361 42 versus 222732 incurred year ended december 31 2012 increase primarily related following • increase 25570 external clinical development expenses related primarily expansion studies eculizumab asfotase alfa cpmp programs see table • increase 5804 external product development expenses related primarily costs associated preparation regulatory filings asfotase alfa increase manufacturing costs related product development programs offset decrease costs associated production asfotase alfa clinical studies • increase 11775 discovery research expenses primarily related upfront payments 14500 license agreements entered 2013 • increase 48425 rd payroll benefit expense related primarily continued global expansion staff supporting increasing number clinical development programs following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a risk factors annual report form 10k expect research development expenses increase 2014 due clinical development manufacturing costs related expanding development programs additional information programs please refer “product development programs” item business annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs legal expenses table provides information regarding selling general administrative expense year ended december 31 2013 incurred selling general administrative expenses 489720 increase 105042 27 versus 384678 incurred year ended december 31 2012 increase primarily related following • increase salary benefits labor expenses 69828 increase result increased headcount related commercial development activities including increases payroll benefits costs 51700 related global commercial staff support global expansion increase also due increases payroll benefits 18100 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 35214 increase primarily due increase legal costs associated novartis litigation increase consulting fees related global supply chain expansion ireland increase marketing costs support continued growth global sales well increase general administrative expenses due infrastructure growth expect selling general administrative expenses increase lower rate revenue 2014 reflecting continued growth commercial organization throughout world acquisitionrelated costs years ended december 31 2013 2012 acquisitionrelated costs associated business combinations included following table provides information acquisitionrelated costs business combination included acquisitionrelated costs taligen year ended december 31 2013 2012 gain 5973 4331 respectively related decrease fair value contingent consideration related acquisition decrease fair value result decreased likelihood payments contingent consideration due reassessment scientific findings impairment intangible asset fourth quarter 2013 reviewed impairment value early stage phase indefinitelived intangible asset related taligen acquisition initiated review part annual impairment testing based evaluation preliminary scientific findings phase clinical trial led us reassess development acquired asset based factors estimated value obtained market participant arms length transaction 3464 lower carrying amount also reviewed impairment value purchased technology associated taligen acquisition determined estimated fair value de minimis result fourth quarter 2013 recognized impairment charge 33521 writedown assets fair value year ended december 31 2012 reviewed impairment value early stage preclinical indefinitelived intangible asset related taligen acquisition initiated review based evaluation negative scientific findings associated development different asset treatment agerelated macular degeneration likelihood success ophthalmic use value obtained market participant arms length transaction developments led us deprioritize development acquired asset result third quarter 2012 recognized impairment charge 26300 writedown asset fair value determined de minimis income expense following table provides information regarding income expense recognize investment income primarily portfolio cash equivalents marketable securities year ended december 31 2013 investment income increased 1508 82 3346 incur interest term notes revolving credit facility year ended december 31 2013 interest expense decreased 3290 4112 due decrease amounts outstanding credit facility foreign currency transaction gains losses relate changes fair value monetary assets liabilities denominated foreign currencies foreign currency transaction losses totaled 975 1208 years ended december 31 2013 december 31 2012 respectively amounts recorded periods result costs hedging exposures well fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs income taxes year ended december 31 2013 recorded income tax provision 273374 effective tax rate 519 compared income tax provision 142744 effective tax rate 359 year ended december 31 2012 income tax provision 2013 attributable us federal state foreign income taxes profitable operations tax expense resulting centralization global supply chain technical operations ireland undertaken fourth quarter 2013 amount approximately 95800 also impacted tax benefit 2719 attributable 2012 us federal tax credit research experimentation due retroactive extension credit signed law january 2013 tax provision 2012 principally attributable us federal state foreign income taxes profitable operations well tax expense 21812 associated structuring enobia business granted incentive tax holiday canton vaud switzerland effective january 1 2010 tax holiday exempt us local corporate income taxes switzerland end 2014 renewable additional 5 years final expiration 2019 impact tax holiday decreased foreign tax expense 4351 2013 3173 2012 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized comparison year ended december 31 2012 year ended december 31 2011 net product sales net product sales significant geographic region follows increase revenue fiscal year 2012 versus 2011 primarily due increased volume unit shipments partially offset negative impact price foreign exchange also recognized 3300 related agreement reached payer second quarter 2012 related product shipped 2011 increase revenue 45 year ended december 31 2012 due increase unit volumes 49 offset negative price impact 3 negative impact foreign exchange 2 increase volume largely due physicians globally requesting soliris therapy additional patients well reimbursement price approvals additional territories reimbursement ahus united states negative price impact 3 year ended december 31 2012 primarily due increased rebates certain countries europe offset price increase united states negative impact foreign exchange 14629 2 year ended december 31 2012 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2011 negative impact primarily due euro offset positive impact japanese yen recorded gain loss revenue 12869 6558 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2012 2011 respectively cost sales exclusive change estimate contingent liability noted 53377 cost sales 126214 93140 11 12 product revenue respectively years ended december 31 2012 2011 cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris research development expenses following table provides information regarding research development expenses year ended december 31 2012 incurred research development expenses 222732 increase 85311 62 versus 137421 incurred year ended december 31 2011 increase primarily related following • increase 13294 external clinical development expenses related primarily expansion studies eculizumab asfotase alfa program acquired february 2012 well increase costs related clinical programs see table • increase 33895 external product development expenses related primarily production clinical amounts asfotase alfa • increase 31541 research development payroll benefit expense related primarily global expansion staff supporting increasing number clinical development programs following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs selling general administrative expense table provides information regarding selling general administrative expense year ended december 31 2012 incurred selling general administrative expenses 384678 increase 76502 25 versus 308176 incurred year ended december 31 2011 increase primarily related following • increase salaries benefits labor expenses 38035 increase result increased headcount related commercial development activities including increases payroll benefits costs 25400 related global commercial staff support global expansion increase also due increases payroll benefits 12600 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 38467 increase primarily due costs associated marketing professional services 18400 increased distribution costs 3000 increased charitable contributions 4800 increased occupancy costs 4300 due expansion current facilities united states switzerland new facilities associated acquisition enobia increase 7000 administrative costs incurred connection infrastructure growth acquisitionrelated costs years ended december 31 2012 2011 acquisitionrelated costs associated business combinations included following table provides information acquisitionrelated costs business combination included acquisitionrelated costs taligen year ended december 31 2012 gain 4331 related decrease fair value contingent consideration related acquisition decrease fair value result decreased likelihood payments contingent consideration due negative scientific findings decrease value related deprioritization agerelated macular degeneration program income expense following table provides information regarding income expense recognize investment income primarily portfolio cash equivalents year ended december 31 2012 investment income decreased 73 4 1838 year ended december 31 2012 interest expense increased 6614 7402 due interest borrowings credit facility used acquisition enobia february 2012 year ended december 31 2012 recognized 1208 foreign currency loss decrease 1073 versus loss 2281 incurred year ended december 31 2011 losses recorded periods result costs hedging exposures well fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs income taxes year ended december 31 2012 recorded income tax provision 142744 effective tax rate 359 compared income tax provision 54353 effective tax rate 237 year ended december 31 2011 income tax provision 2012 attributable us federal state foreign income taxes profitable operations well tax expense 21812 associated structuring enobia business tax provision 2011 principally attributable us federal state foreign income taxes profitable operations september 2011 completed assessment impact election claim federal foreign tax credits federal orphan drug credits would historical tax returns based assessment elected claim foreign tax credit tax year ended december 31 2010 orphan drug credit tax years ended december 31 2010 2009 net federal income tax benefit recorded 2011 result election claim federal foreign tax credit 2010 federal orphan drug credit 2010 2009 approximately 15400 liquidity capital resources amounts thousands following table summarizes components financial condition december 31 2013 2012 decrease cash equivalents primarily attributable purchase marketable securities repurchase common stock offset cash generated operations proceeds maturity sale availableforsale securities net proceeds exercise stock options reduction income taxes payable due excess tax benefits stock options second quarter 2013 began investing excess cash highquality marketable securities intended use meeting ongoing liquidity needs expect continued growth expenditures particularly related research product development clinical trials regulatory approvals international expansion commercialization products capital investment however anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned foreseeable future financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations foreseeable future including principal interest payments credit facility contingent payments acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes financial instruments required use business may invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable foreign exchange derivative contracts december 31 2013 two individual customers accounted 20 10 accounts receivable balance december 31 2012 two individual customers accounted 18 12 accounts receivable balance year ended december 31 2013 one customer accounted 20 product sales year ended december 31 2012 two customers accounted 21 12 product sales continue monitor economic conditions including volatility associated international economies sovereign debt issues europe associated impacts financial markets business credit economic conditions greece italy spain among members european union deteriorated last several years conditions past resulted increase average length time takes collect outstanding accounts receivable countries substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material exposure sovereign debt issue greece limited material amount accounts receivable greece december 31 2013 2012 gross accounts receivable italy spain totaled approximately 78072 82200 respectively december 31 2013 2012 approximately 17318 21100 respectively amounts outstanding greater one year recorded allowance approximately 1493 2000 respectively related gross receivables december 31 2013 2012 recorded 8052 21334 accounts receivable spain within noncurrent assets approximates amount receivables estimate collection periods beyond one year years ended december 31 2013 2012 recorded income expense approximately 944 1100 respectively related recoveries past due amounts countries expectation delayed payment net accounts receivable countries december 31 2013 2012 summarized follows manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2013 foreign exchange forward contracts notional amounts totaling 1222464 outstanding foreign exchange forward contracts net fair value 3438 unrealized gain 31654 included assets offset unrealized loss 35092 included liabilities counterparties foreign exchange forward contracts large multinational commercial banks believe risk nonperformance material december 31 2013 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily money market funds marketable securities foreign exchange forward contracts level 2 liabilities consist also foreign exchange forward contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related acquisitions business combinations contingent consideration obligations purchase agreements business combinations include contingent payments totaling 876000 become payable certain development commercial milestones achieved milestone amounts 561000 315000 contingent payments relate development commercial milestones respectively next 12 months expect make milestone payments totaling approximately 40000 expect amounts impact liquidity nearterm future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds financing leases november 2012 entered lease agreement office laboratory space constructed new connecticut although legally premises deemed owner building construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlords costs constructing facility required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet december 31 2013 constructioninprocess asset associated new facility offsetting lease obligation totaled 32230 license agreements january 2013 entered license agreement technology provides exclusive research license option exclusive commercial license specific targets products developed due early stage asset recorded expense upfront payment 3000 first quarter 2013 also required pay annual maintenance fees term arrangement addition target maximum six targets develop could required pay additional 70500 license fees development sales milestones specific milestones met time july 2013 entered license collaboration agreement ensemble therapeutics corporation identification development commercialization therapeutic candidates based specific drug targets due early stage assets recorded expense upfront payment 11500 third quarter 2013 also responsible funding research activities program addition drug target maximum four targets could required pay additional 90750 development milestones specific milestones met time agreement also provides royalty payments commercial sales product developed agreement january 2014 entered agreement moderna therapeutics inc moderna provides option purchase drug products clinical development commercialization modernas messenger rna mrna therapeutics treat rare diseases due early stage assets recorded expense upfront payment 100000 2014 also responsible funding research activities program addition drug target maximum ten targets would could required make option exercise payment 15000 pay additional 120000 respect rare disease product 400000 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales addition option agreement purchased 25000 preferred equity moderna llc modernas parent company longterm debt february 2012 entered credit agreement credit agreement syndicate lenders parties named credit agreement provides 240000 senior secured term loan facility payable equal quarterly installments 12000 starting june 30 2012 200000 senior secured revolving credit facility includes 60000 sublimit letters credit 10000 sublimit swingline loans may also use facilities working capital requirements acquisitions general corporate purposes alexions whollyowned foreign subsidiaries may borrow funds facilities upon satisfaction certain conditions described credit agreement december 31 2013 113000 outstanding term loan december 31 2013 open letters credit 17134 borrowing availability revolving facility 182866 december 31 2013 expect cash generated operations sufficient meet debt service obligations lonza agreement supply agreements lonza relating manufacture eculizumab asfotase alfa requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf various agreements lonza remaining total commitments approximately 147000 2019 commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf taxes record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries earnings intended permanently reinvested offshore fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner foreign partnership subsidiary extent us parent company receives allocation partnership taxable income amounts taxable us therefore permanent reinvestment assertion longer apply recognition deferred tax liabilities associated aforementioned partnership resulted tax expense approximately 95800 fourth quarter 2013 also distributed majority earnings profits nonus subsidiaries via dividend amount 152000 fourth quarter 2013 resulted repatriation significant portion unremitted earnings december 31 2013 present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future december 31 2013 approximately 190000 cash equivalents held foreign subsidiaries significant portion required liquidity needs foreign subsidiaries connection acquisition enobia certain foreign subsidiaries bank debt remains outstanding december 31 2013 due liability position foreign subsidiaries repay bank debt well outstanding intercompany debt prior excess cash available could used repatriate entities united states expectation future undistributed earnings cfcs permanently reinvested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructurings tax law changes currently contemplated december 31 2013 pretax federal state net operating loss carryforwards 8809 33969 respectively nol’s expire 2021 2032 also federal state income tax credit carryforwards 184919 6194 respectively income tax credits expire 2014 2033 exhausted much us federal net operating loss credit carryforwards anticipate us federal income tax liability within next twelve months continue pay cash taxes various us states foreign jurisdictions operations utilized net operating losses tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period determined limiting provisions triggered prior year however believe limitations expected result expiration loss significant amount federal nol’s common stock repurchase program november 2012 announced board directors authorized repurchase 400000 common stock repurchase program expiration date expect cash generated operations existing available cash equivalents sufficient fund share repurchases program repurchased 758 130 shares common stock cost 66136 11553 years ended december 31 2013 2012 respectively december 31 2013 total 322311 remaining repurchases program cash flows following summarizes net change cash equivalents decrease cash equivalents primarily attributable purchase marketable securities repurchase common stock offset cash generated operations proceeds maturity sale availableforsale securities net proceeds exercise stock options reduction income taxes payable due excess tax benefits stock options operating activities components cash flows operating activities reported consolidated statements cash flows follows • reported net income 252895 254822 years ended december 31 2013 2012 respectively • noncash items included depreciation amortization impairment intangible assets change fair value contingent consideration sharebased compensation expense premium amortization availableforsale securities deferred taxes unrealized foreign currency gains losses unrealized gains losses forward contracts 240529 177072 years ended december 31 2013 2012 respectively • net cash outflow due changes operating assets liabilities 3925 21281 years ended december 31 2013 2012 respectively 3925 change operating assets liabilities primarily relates • increase accounts receivable 116439 due increased number patients treated soliris globally • increase 39879 prepaid expenses assets primarily related prepaid taxes prepaid manufacturing costs interest receivable investments • increase 136641 accounts payable accrued expenses liabilities primarily related increases accruals income taxes rebates royalties compensation • increase deferred revenue 23476 due increased shipments advance recognizing revenue 2014 expect increases cash flow operations highly dependent sales levels related cash collections soliris investing activities components cash flows investing activities primarily consisted following • purchases availableforsale marketable securities 1048429 year ended december 31 2013 offset proceeds maturity sale availableforsale marketable securities 60917 period • additions property plant equipment 29329 21846 years ended december 31 2013 2012 respectively • payment 605735 year ended december 31 2012 related acquisition enobia first quarter 2012 financing activities net cash flows financing activities reflected proceeds exercise stock options 71281 66438 years ended december 31 2013 2012 respectively net cash flows financing activities years ended december 31 2013 2012 also include 105714 7228 respectively excess tax benefits stock options attributable utilization excess tax benefit portion federal state net operating losses tax credits addition 2012 recognized proceeds 462212 connection sale 5000 shares common stock connection acquisition enobia february 2012 borrowed 240000 term loan facility 80000 revolving facility used available cash remaining purchase price year ended december 31 2012 repaid revolving facility full made payments 91000 term loan facility year ended december 31 2013 made payments 36000 term loan facility 113000 remaining outstanding december 31 2013 years ended december 31 2013 2012 repurchased 66136 11553 worth shares common stock repurchase program approved board directors november 2012 december 31 2013 322311 remains available repurchases program contractual obligations following table summarizes contractual obligations december 31 2013 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a risk factors note 10 commitments contingencies consolidated financial statements included annual report form 10k table also include liability unrecognized tax benefits related various federal state foreign income tax matters 46389 december 31 2013 timing settlement amounts reasonably estimable december 31 2013 expect payment amounts related unrecognized tax benefits within next twelve months also include contingent payments related business acquisitions completed prior years timing payment amounts reasonably estimable december 31 2013 contingent payments associated business combinations total 876000 become payable certain development commercial milestones achieved next 12 months expect make milestone payments totaling approximately 40000 credit facilities february 7 2012 entered credit agreement syndicate lenders parties named credit agreement provides 240000 senior secured term loan facility payable equal quarterly installments 12000 beginning june 30 2012 200000 senior secured revolving credit facility february 7 2017 may elect loans credit agreement bear interest rate per annum equal libor plus 125 200 depending consolidated leverage ratio calculated accordance credit agreement ii case loans denominated us dollars base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus case b c 025 100 depending consolidated leverage ratio cash liabilities calculated accordance credit agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 7 2017 maturity date obligations credit facilities unconditionally guaranteed jointly severally certain existing domestic subsidiaries required guaranteed certain future domestic subsidiaries obligations alexion pharma international sàrl credit facilities unconditionally guaranteed jointly severally us certain existing domestic subsidiaries certain foreign subsidiaries required guaranteed certain future subsidiaries obligations borrower credit facilities guarantees obligations secured subject certain exceptions substantially borrowers assets certain guarantors including pledge equity interests certain subsidiaries real estate located smithfield rhode island excluding intellectual property assets certain foreign subsidiaries credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions pay dividends repurchase capital stock enter transactions affiliates credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan operating leases operating leases principally facilities equipment currently lease office laboratory space headquarters research development facility cheshire connecticut well office space regional executive sales offices lausanne switzerland also lease space global supply chain distribution headquarters dublin ireland addition locations also lease space us states foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities november 2012 entered new operating lease agreement office laboratory space constructed new connecticut construction facility began june 2013 expected completed 2015 term new lease commence upon landlords substantial completion building expire 12 years later minimum renewal option 7 years maximum renewal option 20 years provided expand lease include rentable space building lease provides monthly payments ranging 971 1108 term lease upon completion new facility relocate headquarters cheshire operations new november 2012 connection planned construction facilities new connecticut also entered agreement state connecticut department economic community development provides forgivable loan grants totaling 26000 tax credits 25000 program requires meet certain criteria order prevent forfeiture repayment loan grants credits include maintaining corporate headquarters connecticut next 10 years ii achieving maintaining 668 fulltime employment positions state connecticut next 6 years unlikely able realize full value available tax credits currently exploring alternatives disposition credits december 31 2013 received grant funds tax credits associated agreement state connecticut commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza described additional commercial commitments additional payments related commercial commitments licenses aggregating approximately 4000 would required specified development commercial milestones achieved amounts included table item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecast forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris first therapeutic approved patients either two severe ultrarare disorders resulting chronic uncontrolled activation complement component immune system paroxysmal nocturnal hemoglobinuria pnh lifethreatening ultrarare genetic blood disorder atypical hemolytic uremic syndrome ahus lifethreatening ultrarare genetic disease also evaluating additional potential indications soliris severe devastating diseases believe uncontrolled complement activation underlying mechanism progressing various stages development additional biotechnology product candidates treatments patients severe lifethreatening ultrarare disorders incorporated 1992 began commercial sale soliris 2007 soliris designed inhibit specific aspect complement component immune system thereby treat inflammation associated chronic disorders several therapeutic areas including hematology nephrology transplant rejection neurology soliris humanized monoclonal antibody effectively blocks terminal complement activity doses currently prescribed initial indication received approval soliris pnh debilitating lifethreatening ultrarare genetic blood disorder defined chronic uncontrolled complement activation leading destruction red blood cells hemolysis chronic hemolysis patients pnh may associated lifethreatening thromboses recurrent pain kidney disease disabling fatigue impaired quality life severe anemia pulmonary hypertension shortness breath intermittent episodes darkcolored urine hemoglobinuria soliris approved treatment pnh us food drug administration fda european commission ec 2007 japan’s ministry health labour welfare mhlw 2010 approved several territories additionally soliris granted orphan drug designation treatment pnh united states europe japan several territories september november 2011 soliris approved fda ec respectively treatment pediatric adult patients ahus united states europe september 2013 mhlw approved soliris treatment pediatric adult patients ahus japan ahus severe lifethreatening genetic ultrarare disease characterized chronic uncontrolled complement activation thrombotic microangiopathy tma formation blood clots small blood vessels throughout body causing reduction platelet count thrombocytopenia lifethreatening damage kidney brain heart vital organs addition fda ec granted soliris orphan drug designation treatment patients ahus addition pnh ahus believe soliris may useful treatment variety serious diseases conditions resulting uncontrolled complement activation currently evaluating additional potential indications soliris severe ultrarare diseases uncontrolled complement activation underlying mechanism also progressing various stages development additional biotechnology product candidates target severe lifethreatening ultrarare diseases believe current treatments either nonexistent inadequate therapeutics focus metabolic inflammatory diseases also involved research associated identification development new therapeutics pursuant ongoing license collaboration agreements critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition net product sales principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility regular basis review revenue arrangements distributor relationships determine whether changes criteria impact revenue recognition amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales customers primarily comprised distributors pharmacies hospitals hospital buying groups health care providers cases may also sell soliris governments government agencies factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors certain countries exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may impact period estimates change provided balances activity rebates payable account years ended december 31 2014 2013 2012 follows march 2014 entered agreement french government positively impacts prospective reimbursement soliris also provides reimbursement shipments years prior january 1 2014 result agreement first quarter 2014 reduced rebate payable recognized 87830 net product sales soliris france relating years prior january 1 2014 addition current provisions relating sales current year decreased 86769 2014 primarily due agreement 2013 compared 2012 current provisions relating sales current year increased 69116 primarily due estimated rebates payable france 2013 increase rebates payable france approximately 57900 2013 due increased unit volumes contractual reimbursement limitations remaining increase current provisions related increased unit volumes united states europe subject rebates record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale continue monitor economic conditions including volatility associated international economies associated impacts financial markets business additional information related concentration credit risk associated certain international accounts receivable balances refer financial condition liquidity capital resources section contingent liabilities currently involved various claims lawsuits legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adjustment operating results inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized products approved fda regulatory authorities soliris also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form soliris utilized commercial clinical programs identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased raw materials pass quality inspection obligation pay materials analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout pre postproduction process continually gather information regarding product quality periods manufacturing date soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required sharebased compensation one sharebased compensation plan known amended restated 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions stockrelated awards also outstanding sharebased compensation plans granted awards plans since 2004 compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group factors change employ different assumptions value stockbased awards sharebased compensation expense record future periods may differ materially prior recorded amounts valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets iprd related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited •timing costs complete inprocess projects •timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects •discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets related iprd treated indefinitelived intangible assets amortized product approved sale regulatory authorities specified markets time determine useful life asset reclassify asset iprd begin amortization impairment testing performed least annually triggering event occurs could indicate potential impairment 2014 2013 2012 recognized impairment charges 11514 29736 26300 respectively associated early stage indefinitelived intangible assets acquired connection purchases taligen orphatec december 31 2014 remaining carrying value iprd impaired intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur 2013 also recognized impairment charge 3785 associated purchased technology asset acquired connection taligen acquisition projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions however underlying assumptions used estimate expected project sales development costs profitability events associated projects clinical results may occur estimated acquisition date goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets completed annual impairment test december 31 2014 determined carrying value goodwill impaired valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors •timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones estimated future sales levels specific compound •discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material adjustments income tax expense period new accounting pronouncements may 2014 financial accounting standards board issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2016 allows adoption using full retrospective method modified retrospective method currently assessing method adoption expected impact new standard financial position results operations results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison year ended december 31 2014 year ended december 31 2013 net product sales net product sales significant geographic region follows components increase net product sales year ended december 31 2014 exclusive 87830 recognized related prior years follows increase net product sales fiscal year 2014 compared period 2013 primarily due increase unit volumes 34 due increased physician demand globally soliris therapy patients pnh ahus respective periods price positive impact net product sales 6for year ended december 31 2014 compared period 2013 positive price impact primarily due agreement french government reduction estimated rebates germany positive impacts volume price net product sales offset negative impact foreign exchange 2 year ended december 31 2014 compared period 2013 negative impact foreign exchange 27993 2 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2013 negative impact primarily due weakening japanese yen russian ruble canadian dollar partly offset positive impacts british pound respective period recorded gain revenue 18873 20569 related foreign currency cash flow hedging program years ended december 31 2014 2013 respectively expect strong dollar compared currencies especially euro japanese yen russian ruble continue negative impact revenue 2015 compared 2014 cost sales cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris following table summarizes cost sales year ended december 31 2014 2013 decrease cost sales percentage net product sales year ended december 31 2014 partially due 14277 voluntary recall expense recognized 2013 additionally first quarter 2014 entered settlement agreement third party related calculation royalties payable third party preexisting license agreement based settlement agreement company recorded reversal accrued royalties 5124 reduction cost sales first quarter 2014 also recorded incremental impact cost sales 2055 additional royalties related 87830 net product sales prior year shipments remaining decrease cost sales years ended december 31 2014 percentage net product sales resulted decrease royalties paid sales soliris october 2013 entered settlement agreement dismissal novartis vaccines diagnostics inc pursuant alexion granted nonexclusive fully paid license case dismissed prejudice result recorded expense 9181 cost sales third quarter 2013 related change contingent liabilities resulting litigation settlement agreement research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses research development rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research well costs associated strategic licensing agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities discovery research costs incurred conducting laboratory studies performing preclinical research uses eculizumab product candidates licensing agreement costs include upfront milestone payments made connection strategic licensing arrangements entered third parties clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses year ended december 31 2014 incurred research development expenses 513782 increase 196689 62 versus 317093 incurred year ended december 31 2013 increase primarily related following • increase 39154 external clinical development expenses related primarily expansion studies eculizumab asfotase alfa see table • increase 95425 licensing agreement costs primarily due upfront payment 100000 option agreement entered moderna therapeutics inc first quarter 2014 • increase 7857 discovery research expenses primarily related increases external research expenses associated moderna agreement external research expenses • increase 46635 rd payroll benefit expense related primarily continued global expansion staff supporting increasing number clinical development programs • increases 3285 3930 rd operating occupancy depreciation amortization expenses respectively related primarily continued expansion global supply chain facilities support services following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a risk factors annual report form 10k expect research development expenses increase 2015 due clinical development manufacturing costs related expanding development programs additional information programs please refer “product development programs” item business annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2014 incurred selling general administrative expenses 630209 increase 140489 29 versus 489720 incurred year ended december 31 2013 increase primarily related following • increase salary benefits labor expenses 95857 increase result increased headcount related commercial development activities including increases payroll benefits costs 49023 related global commercial staff support global expansion increase also due increases payroll benefits 46835 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 44632 increase primarily due increase marketing costs support continued growth global sales soliris well increase administrative costs support infrastructure growth expect selling general administrative expenses increase lower rate revenue 2015 reflecting continued growth commercial organization throughout world acquisitionrelated costs years ended december 31 2014 2013 acquisitionrelated costs associated business combinations included following increase expense associated changes fair value contingent consideration year ended december 31 2014 compared prior year resulted primarily increases likelihood payments contingent consideration related decrease discount rates restructuring expenses fourth quarter 2014 announced plans move european headquarters lausanne switzerland zurich switzerland resulting restructuring expenses 15365 relocation european headquarters support growing operational needs based current business forecasts expect incur approximately 10000 15000 additional restructuring related charges 2015 related additional employee costs contract terminations costs expect pay accrued amounts related restructuring activity 2015 impairment intangible asset fourth quarter 2014 reviewed impairment value early stage phase ii indefinitelived intangible asset related orphatec acquisition initiated review part annual impairment testing increased costs associated clinical trial studies although continue develop asset estimated fair value obtained market participant arms length transaction determined de minimis december 31 2014 result fourth quarter 2014 recognized impairment charge 8050 writedown assets fair value first quarter 2014 fourth quarter 2013 reviewed impairment value early stage phase indefinitelived intangible asset related acquisition taligen therapeutics inc initiated review based reassessment scientific findings associated acquired asset fourth quarter 2013 also reviewed impairment value purchased technology associated taligen acquisition result recognized impairment charges 3464 33521 years ended december 31 2014 2013 adjust assets fair value determined de minimis income expense following table provides information regarding income expense income taxes year ended december 31 2014 recorded income tax provision 215195 effective tax rate 247 compared income tax provision 273374 effective tax rate 519 year ended december 31 2013 reduction effective tax rate primarily attributable centralization global supply chain technical operations ireland income tax provision 2014 attributable us federal state foreign income taxes profitable operations additionally included year ended december 31 2014 2128 tax attributable agreement french government provided reimbursement shipments soliris made prior january 1 2014 income tax provision 2013 attributable us federal state foreign income taxes profitable operations well tax expense resulting centralization global supply chain technical operations ireland undertaken fourth quarter 2013 amount approximately 95800 also impacted tax benefit 2719 attributable 2012 us federal tax credit research experimentation due retroactive extension credit signed law january 2013 granted incentive tax holiday canton vaud switzerland effective january 1 2010 tax holiday exempted us local corporate income taxes switzerland end 2014 renewable additional 5 years final expiration 2019 2013 undertook restructuring significantly changed business model switzerland converted principal company distribution service company result significant change business activities switzerland canton vaud switzerland provided final notification us december 2014 structure longer complied conditions incentive tax holiday fourth quarter 2014 made payment 22817 satisfaction clawback previously exempted cantonal income taxes tax years 2010 2013 amount fully accrued balance sheet december 31 2013 prospectively federal cantonal tax based current enacted tax rates switzerland us federal tax credit research experimentation expenses expired december 31 2013 connection expiration 2014 tax expense first three quarters year include benefit us federal tax credit research experimentation december 2014 tax increase prevention act 2014 retroactively extended tax credit research experimentation back january 1 2014 end 2014 signed law effects change tax law recognized period includes date enactment therefore tax benefit attributable 2014 us federal tax credit 3222 research experimentation recorded fourth quarter 2014 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized comparison year ended december 31 2013 year ended december 31 2012 net product sales net product sales significant geographic region follows increase revenue fiscal year 2013 versus 2012 primarily due increased volume unit shipments partially offset negative impact price foreign exchange increase revenue 37 year ended december 31 2013 due increase unit volumes 40 offset negative price impact 2 negative impact foreign exchange 1 increase volume largely due physicians globally requesting soliris therapy additional patients negative price impact 2 year ended december 31 2013 primarily due increased rebates certain countries europe offset price increase united states negative impact foreign exchange 15876 1 year ended december 31 2013 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2012 negative impact primarily due weakening japanese yen recorded gain revenue 20569 12869 related foreign currency cash flow hedging program included revenue outside united states years ended december 31 2013 2012 respectively cost sales october 2013 entered settlement agreement dismissal novartis pursuant alexion granted nonexclusive fully paid license case dismissed prejudice result recorded expense 9181 cost sales third quarter 2013 related litigation settlement agreement third quarter 2012 reduced estimate probable contingent liabilities september 30 2012 due execution settlement nonexclusive license agreement october 2012 third party related third partys intellectual property adjustment reflected actual negotiated royalty rate set forth agreement change estimate resulted positive impact cost sales 53377 third quarter 2012 exclusive changes estimates contingent liabilities settlements noted cost sales 168375 126214 11 product revenue years ended december 31 2013 2012 respectively cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris included cost sales year ended december 31 2013 14277 1 product sales related expected disposal inventory 2014 associated voluntary recall announced november 2013 offsetting increase cost sales decrease ongoing royalty expense result settlement nonexclusive license agreement entered october 2012 research development expense following table provides information regarding research development expenses year ended december 31 2013 incurred research development expenses 317093 increase 94361 42 versus 222732 incurred year ended december 31 2012 increase primarily related following • increase 25570 external clinical development expenses related primarily expansion studies eculizumab asfotase alfa cpmp programs see table • increase 5804 external product development expenses related primarily costs associated preparation regulatory filings asfotase alfa increase manufacturing costs related product development programs offset decrease costs associated production asfotase alfa clinical studies • increase 11775 discovery research expenses primarily related upfront payment 14500 license agreements entered 2013 • increase 48425 rd payroll benefit expense related primarily global expansion staff supporting increasing number clinical development programs following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs selling general administrative expense table provides information regarding selling general administrative expense year ended december 31 2013 incurred selling general administrative expenses 489720 increase 105042 27 versus 384678 incurred year ended december 31 2012 increase primarily related following • increase salary benefits labor expenses 69828 increase result increased headcount related commercial development activities including increases payroll benefits costs 51700 related global commercial staff support global expansion increase also due increases payroll benefits 18100 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 35214 increase primarily due increase legal costs associated novartis litigation increase consulting fees related global supply chain expansion ireland increase marketing costs support continued growth global sales well increase general administrative expenses due infrastructure growth acquisitionrelated costs years ended december 31 2013 2012 acquisitionrelated costs associated business combinations included following table provides information acquisitionrelated costs business combination included acquisitionrelated costs taligen year ended december 31 2013 2012 gain 5973 4331 respectively related decrease fair value contingent consideration related acquisition decrease fair value result decreased likelihood payments contingent consideration due reassessment scientific findings impairment intangible asset fourth quarter 2013 reviewed impairment value early stage phase indefinitelived intangible asset related taligen acquisition initiated review part annual impairment testing based evaluation preliminary scientific findings phase clinical trial led us reassess development acquired asset based factors estimated value obtained market participant arms length transaction 3464 lower carrying amount also reviewed impairment value purchased technology associated taligen acquisition determined estimated fair value de minimis result fourth quarter 2013 recognized impairment charge 33521 writedown assets fair value year ended december 31 2012 reviewed impairment value early stage preclinical indefinitelived intangible asset related taligen acquisition initiated review based evaluation negative scientific findings associated development different asset treatment agerelated macular degeneration likelihood success ophthalmic use value obtained market participant arms length transaction developments led us deprioritize development acquired asset result third quarter 2012 recognized impairment charge 26300 writedown asset fair value determined de minimis income expense following table provides information regarding income expense recognize investment income primarily portfolio cash equivalents year ended december 31 2013 investment income increased 1508 82 3346 incur interest term notes revolving credit facility year ended december 31 2013 interest expense decreased 3290 4112 due decrease amounts outstanding credit facility foreign currency transaction gains losses relate changes fair value monetary assets liabilities denominated foreign currencies foreign currency transaction losses totaled 975 1208 years ended december 31 2013 december 31 2012 respectively amounts recorded periods result costs hedging exposures well fluctuation exchange rates portion monetary assets liabilities fully hedged part hedging programs income taxes year ended december 31 2013 recorded income tax provision 273374 effective tax rate 519 compared income tax provision 142744 effective tax rate 359 year ended december 31 2012 income tax provision 2013 attributable us federal state foreign income taxes profitable operations well tax expense resulting centralization global supply chain technical operations ireland undertaken fourth quarter 2013 amount approximately 95800 also impacted tax benefit 2719 attributable 2012 us federal tax credit research experimentation due retroactive extension credit signed law january 2013 tax provision 2012 principally attributable us federal state foreign income taxes profitable operations well tax expense 21812 associated structuring enobia business granted incentive tax holiday canton vaud switzerland effective january 1 2010 tax holiday exempt us local corporate income taxes switzerland end 2014 renewable additional 5 years final expiration 2019 impact tax holiday decreased foreign tax expense 4351 2013 3173 2012 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized financial condition liquidity capital resources following table summarizes components financial condition december 31 2014 2013 increase cash equivalents primarily attributable cash generated operations proceeds maturity sale availableforsale securities net proceeds exercise stock options offsetting increases cash purchases marketable securities payments outstanding term loan purchases property plant equipment repurchase common stock also paid upfront fee 100000 first quarter 2014 related option agreement entered moderna therapeutics inc additional 37500 purchase moderna llc preferred equity 2014 expect continued growth expenditures particularly related research product development clinical trials regulatory approvals international expansion commercialization products capital investment however anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations including principal interest payments credit facility contingent payments acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes financial instruments required use business may invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable foreign exchange derivative contracts december 31 2014 four individual customers accounted 58 accounts receivable balance individual customers accounting 10 23 accounts receivable balance december 31 2013 two individual customers accounted 30 accounts receivable balance individual customers accounting 10 20 accounts receivable balance years ended december 31 2014 2013 one customer accounted 18 20 respectively product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material although collection accounts receivables certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2014 foreign exchange forward contracts notional amounts totaling 1748931 outstanding foreign exchange forward contracts net fair value 135166 unrealized gain 136046 included assets offset unrealized loss 880 included liabilities counterparties foreign exchange forward contracts large multinational commercial banks believe risk nonperformance material december 31 2014 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily institutional money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit foreign exchange forward contracts level 2 liabilities consist also foreign exchange forward contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related acquisitions business combinations contingent consideration obligations purchase agreements business combinations include contingent payments totaling 876000 become payable certain development commercial milestones achieved milestone amounts 561000 315000 contingent payments relate development commercial milestones respectively expect amounts impact liquidity nearterm next 12 months expect make milestone payments totaling approximately 50000 additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds financing lease obligation november 2012 entered lease agreement office laboratory space constructed new connecticut although legally premises deemed owner building construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlords costs constructing facility required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet december 31 2014 recorded constructioninprocess asset 126566 inclusive landlords costs well costs incurred alexion offsetting facility lease obligation 107099 associated new facility license agreements january 2015 entered license agreement third party obtain certain intellectual property rights technology related specific therapeutic compounds agreement provides exclusive research development commercial license products developed using compounds pursuant terms agreement made upfront payment 50000 first quarter 2015 could required pay additional 213000 development regulatory milestones related product developed agreement single disease indication additional 437000 milestone payments could due certain development regulatory milestones achieved additional disease indications agreement also provides royalty payments potential milestone payments 180000 commercial sales products developed agreement december 2014 entered agreement xchem pharmaceuticals xchem allows us identify novel drug candidates xchems proprietary drug discovery engine alexion exclusive worldwide rights develop commercialize products arising collaboration three program targets due early stage assets recorded expense upfront payment 8000 addition program target maximum three targets could required make additional payments upon achievement specified research development regulatory milestones 75000 well royalties commercial sales january 2014 entered agreement moderna therapeutics inc moderna allows us purchase ten product options develop commercialize treatments rare diseases modernas messenger rna mrna therapeutics platform alexion lead discovery development commercialization treatments produced broad longterm strategic agreement moderna retain responsibility design manufacture messenger rna selected targets due early stage assets recorded expense upfront payment 100000 also responsible funding research activities program addition drug target maximum ten targets could required make option exercise payment 15000 pay additional 120000 respect rare disease product 400000 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales longterm debt february 2012 entered credit agreement credit agreement syndicate lenders parties named credit agreement provides 240000 senior secured term loan facility payable equal quarterly installments 12000 starting june 30 2012 200000 senior secured revolving credit facility includes 60000 sublimit letters credit 10000 sublimit swingline loans may also use facilities working capital requirements acquisitions general corporate purposes alexions whollyowned foreign subsidiaries may borrow funds facilities upon satisfaction certain conditions described credit agreement december 31 2014 57500 outstanding term loan 12000 paid january 2015 december 31 2014 open letters credit 10284 borrowing availability revolving facility 189716 december 31 2014 expect cash generated operations sufficient meet debt service obligations lonza agreement supply agreements lonza 2026 relating manufacture eculizumab asfotase alfa requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf various agreements lonza remaining total noncancellable commitments approximately 383500 2018 agreements lonza also include potential payments totaling 5000 become payable certain milestones achieved commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf payment respect sales soliris manufactured lonza facilities taxes record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries earnings intended permanently reinvested offshore december 31 2014 cumulative amount earnings approximately 359000 fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner foreign partnership subsidiary extent us parent company receives allocation partnership taxable income amounts taxable us therefore permanent reinvestment assertion longer apply present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future december 31 2014 approximately 674000 cash equivalents held foreign subsidiaries significant portion required liquidity needs foreign subsidiaries due liability position foreign subsidiaries repay outstanding intercompany debt prior excess cash available could used repatriate entities united states expectation future undistributed earnings cfcs permanently reinvested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructurings tax law changes currently contemplated common stock repurchase program november 2012 december 2014 announced board directors authorized repurchase 400000 500000 common stock repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time companys discretion expect cash generated operations existing available cash equivalents sufficient fund share repurchases program repurchased 1903 758 shares common stock cost 302599 66136 years ended december 31 2014 2013 respectively december 31 2014 total 519712 remaining repurchases repurchase program subsequent december 31 2014 repurchased 87 shares common stock repurchase program cost 15531 cash flows following summarizes net change cash equivalents increase cash equivalents primarily attributable cash generated operations proceeds maturity sale availableforsale securities net proceeds exercise stock options reduction income taxes payable due excess tax benefits stock options offsetting increases cash purchases marketable securities payments outstanding term loan purchases property plant equipment repurchase common stock also paid upfront fee 100000 first quarter 2014 related option agreement entered moderna therapeutics inc additional 37500 purchase moderna llc preferred equity 2014 operating activities components cash flows operating activities reported consolidated statements cash flows follows • reported net income 656912 252895 years ended december 31 2014 2013 respectively first quarter 2014 recorded expense 100000 upfront payment related option agreement entered moderna therapeutics inc • noncash items included depreciation amortization impairment intangible assets change fair value contingent consideration sharebased compensation expense premium amortization availableforsale securities deferred taxes increases reconcile net income net cash flows operating activities 76869 240529 years ended december 31 2014 2013 respectively • noncash items also included 251136 105714 windfall tax benefits years ended december 31 2014 2013 respectively amount windfall tax benefit significantly higher year ended december 31 2014 due increased stock price increased level stock option exercises • net cash inflows due changes operating assets liabilities 157430 109639 years ended december 31 2014 2013 respectively 157430 change operating assets liabilities primarily relates • increase accounts receivable 28137 due primarily increasing revenue • increase 66812 inventory related increased production inventory support commercial growth capitalization 22005 inventory produced commercial sale products awaiting regulatory approval • increase 18392 prepaid expenses assets related increase prepaid manufacturing costs • increase 264572 accounts payable accrued expenses liabilities primarily related increase trade accounts payable accrued manufacturing accruals purchases property plant equipment clinical costs accrued compensation change accrued income taxes increases offset decrease accruals rebates approximately 87800 resulting agreement french government reimbursement prior year shipments decrease accruals royalties approximately 20100 resulting settlement agreement entered third party related calculation royalties preexisting license agreement 2015 expect increases cash flow operations highly dependent sales levels related cash collections soliris investing activities components cash flows investing activities primarily consisted following • purchases availableforsale marketable securities 664228 1048429 year ended december 31 2014 2013 respectively offset proceeds maturity sale availableforsale marketable securities 619447 60917 periods • purchase 37500 preferred equity moderna llc year ended december 31 2014 • additions property plant equipment 136650 29329 years ended december 31 2014 2013 respectively expect increase spending property plant equipment 2015 due capital projects new headquarters two facilities ireland financing activities net cash flows financing activities reflected proceeds exercise stock options 114350 71281 years ended december 31 2014 2013 respectively net cash flows financing activities years ended december 31 2014 2013 also include 251136 105714 respectively excess tax benefits stock options attributable utilization excess tax benefit portion federal state net operating losses tax credits years ended december 31 2014 2013 made payments 55500 36000 term loan facility december 31 2014 facility 57500 remaining outstanding years ended december 31 2014 2013 repurchased 302599 66136 worth shares common stock repurchase program approved board directors november 2012 december 2014 board directors approved additional 500000 repurchase shares december 31 2014 total 519712 remaining repurchases repurchase program contractual obligations following table summarizes contractual obligations december 31 2014 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a risk factors note 9 commitments contingencies consolidated financial statements included annual report form 10k table also include liability unrecognized tax benefits related various federal state foreign income tax matters 28675 december 31 2014 timing settlement amounts reasonably estimable december 31 2014 expect payment amounts related unrecognized tax benefits within next twelve months also include contingent payments related business acquisitions completed prior years timing payment amounts reasonably estimable december 31 2014 contingent payments associated business combinations total 876000 become payable certain development commercial milestones achieved next 12 months expect make milestone payments totaling approximately 50000 credit facilities february 2012 entered credit agreement amended credit agreement syndicate lenders parties named credit agreement provides 240000 senior secured term loan facility payable equal quarterly installments 12000 beginning june 30 2012 200000 senior secured revolving credit facility february 7 2017 may elect loans credit agreement bear interest rate per annum equal libor plus 125 200 depending consolidated leverage ratio calculated accordance credit agreement ii case loans denominated us dollars base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus case b c 025 100 depending consolidated leverage ratio cash liabilities calculated accordance credit agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 7 2017 maturity date obligations credit facilities unconditionally guaranteed jointly severally certain existing domestic subsidiaries required guaranteed certain future domestic subsidiaries obligations nonus subsidiaries credit facilities unconditionally guaranteed jointly severally us certain existing domestic subsidiaries certain foreign subsidiaries required guaranteed certain future subsidiaries obligations borrower credit facilities guarantees obligations secured subject certain exceptions substantially borrowers assets certain guarantors including pledge equity interests certain subsidiaries real estate located smithfield rhode island excluding intellectual property assets certain foreign subsidiaries credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions pay dividends repurchase capital stock enter transactions affiliates credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan operating leases operating leases principally facilities equipment currently lease office laboratory space headquarters research development facility cheshire connecticut well office space regional executive sales offices lausanne switzerland also lease space global supply chain distribution headquarters dublin ireland addition locations also lease space us states foreign countries support operations global organization january 2015 entered new lease agreement office space zurich switzerland support relocation european headquarters currently located lausanne switzerland term lease 10 years minimum renewal option 5 years maximum renewal option 10 years annual lease payments approximately 2600 commence second quarter 2015 believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza described item 7aitem 7 management’s discussion analysis financial condition results operations amounts thousands except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecast forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview biopharmaceutical company focused serving patients devastating ultrarare disorders innovation development commercialization lifetransforming therapeutic products complement franchise soliris first therapeutic approved patients either pnh lifethreatening ultrarare genetic blood disorder defined chronic uncontrolled complement activation leading destruction red blood cells ahus lifethreatening ultrarare genetic disease characterized chronic uncontrolled complement activation thrombotic microangiopathy pnh ahus two severe ultrarare disorders resulting chronic uncontrolled activation complement component immune system metabolic franchise market strensiq treatment patients hpp kanuma treatment patients lald hpp genetic ultrarare disease characterized defective bone mineralization lead deformity bones skeletal abnormalities lald serious life threatening ultrarare disease genetic mutations result decreased activity lal enzyme leading marked accumulation lipids vital organs blood vessels tissues also evaluating additional potential indications eculizumab severe devastating diseases uncontrolled complement activation underlying mechanism progressing various stages development additional product candidates potential treatments patients severe lifethreatening rare disorders business highlights june 2015 acquired outstanding shares common stock synageva biopharma corp synageva publiclyheld clinicalstage biotechnology company transaction accounted acquisition method accounting business combinations merger consideration consisted shares common stock cash financed existing cash proceeds new credit facility 2015 fda approved strensiq patients perinatal infantile juvenileonset hpp ec granted marketing authorization strensiq treatment patients pediatriconset hpp japan’s mhlw approved strensiq treatment patients hpp 2015 fda approved kanuma treatment patients ages lald ec granted marketing authorization kanuma longterm enzyme replacement therapy patients ages lald critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k accounting principles generally accepted united states required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition net product sales principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility regular basis review revenue arrangements distributor relationships determine whether changes criteria impact revenue recognition amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales customers primarily comprised distributors pharmacies hospitals hospital buying groups health care providers cases may also sell product governments government agencies factors price products limited number patients short period product sale patient infusion lack contractual return rights customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors certain countries exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change addition sales countries product commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis product received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may impact period estimates change provided balances activity rebates payable account years ended december 31 2015 2014 2013 follows 2015 compared 2014 current provisions relating sales current year increased 26851 primarily due increased unit volumes united states europe subject rebates march 2014 entered agreement french government positively impacts prospective reimbursement soliris also provides reimbursement shipments years prior january 1 2014 result agreement first quarter 2014 reduced rebate payable recognized 87830 net product sales soliris france relating years prior january 1 2014 addition current provisions relating sales current year decreased 86769 2014 primarily due agreement record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale continue monitor economic conditions including volatility associated international economies associated impacts financial markets business additional information related concentration credit risk associated certain international accounts receivable balances refer financial condition liquidity capital resources section contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adjustment operating results liquidity inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized products approved fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form product utilized commercial clinical programs identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased raw materials pass quality inspection obligation pay materials analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout pre postproduction process continually gather information regarding product quality periods manufacturing date products currently maximum estimated life range 36 48 months based sales forecasts expect realize carrying value product inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required sharebased compensation two sharebased compensation plans pursuant awards currently made amended restated 2004 incentive plan 2004 plan ii 2015 employee stock purchase plan espp 2004 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp stockrelated awards also outstanding sharebased compensation plans granted awards plans since 2004 compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 85 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 15 discount recognized compensation expense 6 month purchase period factors change employ different assumptions value stockbased awards sharebased compensation expense record future periods may differ materially prior recorded amounts valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets iprd related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited • timing costs complete inprocess projects • timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects • discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions however underlying assumptions used estimate expected project sales development costs profitability events associated projects clinical results may occur estimated acquisition date goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors • timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones estimated future sales levels specific compound • discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material adjustments income tax expense period new accounting pronouncements may 2014 financial accounting standards board fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2017 allows adoption using full retrospective method modified retrospective method entities may elect early adopt standard annual periods beginning december 15 2016 currently assessing method adoption expected impact new standard financial position results operations april 2015 fasb issued new standard simplifying presentation debt issuance costs new standard aligns treatment debt issuance costs debt discounts premiums requires debt issuance costs presented direct deduction carrying amount related debt standard effective interim annual periods beginning december 15 2015 early adoption permitted requires retrospective method adoption adopt provisions new standard balance sheet disclosures debt issuance costs beginning first quarter 2016 september 2015 fasb issued new standard simplifying accounting measurementperiod adjustments new standard eliminates requirement restate prior period financial statements measurement period adjustments new standard requires cumulative impact measurement period adjustment including impact prior periods recognized reporting period adjustment identified standard effective interim annual periods beginning december 15 2015 expected material impact financial condition results operations november 2015 fasb issued new standard simplifying classification deferred tax assets liabilities new standard requires deferred tax assets liabilities along related valuation allowance classified noncurrent balance sheet standard effective interim annual periods beginning december 15 2016 allows early adoption using full retrospective method prospective method elected early adopt provisions new standard using prospective method result deferred taxes december 31 2015 classified noncurrent consolidated balance sheet prior periods remain previously reported results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison year ended december 31 2015 year ended december 31 2014 net product sales net product sales significant geographic region follows net product sales product follows components increase net product sales year ended december 31 2015 exclusive 87830 recognized 2014 related prior years follows increase net product sales fiscal year 2015 compared period 2014 primarily due increase unit volumes 29 due increased demand globally soliris therapy patients pnh ahus respective periods positive impact volume net product sales offset negative impact foreign exchange 8 year ended december 31 2015 compared period 2014 negative impact foreign exchange 165280 8 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2014 negative impact primarily due weakening euro japanese yen russian ruble recorded gain revenue 117915 18873 related foreign currency cash flow hedging program years ended december 31 2015 2014 respectively expect strong dollar compared currencies continue negative impact revenue 2016 cost sales cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris following table summarizes cost sales year ended december 31 2015 2014 recorded expense 24352 first quarter 2015 associated portion single manufacturing campaign third party manufacturer strensiq costs comprised raw materials internal overhead external production costs expect expense impact clinical supply inventory commercial launch strensiq expect material financial impact related campaign exclusive item mentioned cost sales percentage net product sales 8 years ended december 31 2015 2014 research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses research development rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research well costs associated strategic licensing agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities discovery research costs incurred conducting laboratory studies performing preclinical research uses products product candidates licensing agreement costs include upfront milestone payments made connection strategic licensing arrangements entered third parties clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses year ended december 31 2015 incurred research development expenses 709472 increase 195690 38 versus 513782 incurred year ended december 31 2014 increase primarily related following • increase 38848 external clinical development expenses related primarily expansion studies eculizumab alxn 1007 alxn 1210 programs see table • increase 61960 external product development expenses related primarily increase costs associated manufacturing material increased clinical research activities clinical studies • increase 19825 licensing agreement expenses related achievement additional license milestones • increase 31075 discovery research expenses primarily related increases external research expenses associated moderna agreement external research expenses • increase 28250 rd payroll benefit expense related additional headcount acquired part synageva acquisition second quarter 2015 continued global expansion staff supporting increasing number clinical development programs • increases 15732 rd facilities costs related additional rd facilities part synageva acquisition second quarter 2015 additional costs associated continued expansion global supply chain facilities support services following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a risk factors annual report form 10k expect research development expenses increase 2016 due clinical development manufacturing costs related expanding development programs additional information programs please refer “product development programs” item business annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2015 incurred selling general administrative expenses 862595 increase 232386 37 versus 630209 incurred year ended december 31 2014 increase primarily related following • increase salary benefits labor expenses 161206 increase result increased staff costs related commercial development activities increases payroll benefits within general administrative functions support infrastructure growth global commercial entity increase also attributable additional global commercial staff costs due acquisition synageva second quarter 2015 additional stockbased compensation expense 29634 related acceleration alexion stock awards former synageva employees • increase external selling general administrative expenses 71180 increase primarily due increase external marketing costs support global launches strensiq kanuma professional services support continuing growth company expect selling general administrative expenses increase lower rate revenue 2016 reflecting continued growth commercial organization throughout world amortization purchase intangible assets third quarter 2015 received regulatory approval strensiq kanuma result year ended december 31 2015 recorded amortization expense 116584 associated intangible assets related strensiq kanuma acquisitionrelated costs years ended december 31 2015 2014 acquisitionrelated costs associated business combinations included following increase acquisition related costs due synageva acquisition occurred 2015 change fair value contingent consideration years ended december 31 2015 2014 change fair value contingent consideration expense associated prior business combinations 64257 20295 respectively increase fair value contingent consideration year ended december 31 2015 compared prior year primarily due increases likelihood payments contingent consideration net decrease discount rates restructuring expenses connection relocation corporate headquarters new connecticut entered lease termination agreement december 2015 previous corporate headquarters located cheshire connecticut recorded contract termination fees 11236 restructuring expense fourth quarter 2015 conjunction acquisition integration synageva recorded restructuring expense 13335 primarily related employee costs 2015 expect pay remaining accrued amounts related restructuring activity end 2016 fourth quarter 2014 announced plans move european headquarters lausanne switzerland zurich switzerland resulting restructuring expenses 15365 relocation european headquarters supports growing operational needs based current business forecasts year ended december 31 2015 incurred additional restructuring costs 17598 expect pay remaining accrued amounts related restructuring activity end 2016 impairment intangible asset fourth quarter 2014 reviewed impairment value early stage phase ii indefinitelived intangible asset related orphatec acquisition initiated review part annual impairment testing increased costs associated clinical trial studies although continue develop asset estimated fair value obtained market participant arms length transaction determined de minimis december 31 2014 result fourth quarter 2014 recognized impairment charge 8050 writedown assets fair value income expense following table provides information regarding income expense increase interest expense year ended december 31 2015 compared prior year due us borrowing 3500000 term loan facility conjunction acquisition synageva income taxes year ended december 31 2015 recorded income tax provision 353757 effective tax rate 710 compared income tax provision 215195 effective tax rate 247 year ended december 31 2014 increase effective tax rate primarily attributable integration synageva assets captive foreign partnership onetime charge increased effective tax rate 2015 approximately 630 exclusive onetime charges expect continue benefit reduced tax ratecompared periods prior january 1 2014 result centralizing global supply chain technical operations ireland fourth quarter 2013 income tax provision 2015 attributable us federal state foreign income taxes profitable operations well tax impact associated integration synageva business alexion business third quarter 2015 contributed certain supply chain assets commercial operation rights intellectual property acquired synageva acquisition captive foreign partnership contribution resulted revaluation captive foreign partnership increase outside basis difference us parent company captive foreign partnership corresponding onetime deferred tax expense 315569 cash tax payment associated deferred expense income tax provision 2014 attributable us federal state foreign income taxes profitable operations additionally included year ended december 31 2014 2128 tax attributable agreement french government provided reimbursement shipments soliris made prior january 1 2014 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized comparison year ended december 31 2014 year ended december 31 2013 net product sales net product sales significant geographic region follows components increase net product sales year ended december 31 2014 exclusive 87830 recognized related prior years follows increase net product sales fiscal year 2014 compared period 2013 primarily due increase unit volumes 34 due increased physician demand globally soliris therapy patients pnh ahus respective periods price positive impact net product sales 6 year ended december 31 2014 compared period 2013 positive price impact primarily due agreement french government reduction estimated rebates germany positive impacts volume price net product sales offset negative impact foreign exchange 2 year ended december 31 2014 compared period 2013 negative impact foreign exchange 27993 2 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2013 negative impact primarily due weakening japanese yen russian ruble canadian dollar partly offset positive impacts british pound respective period recorded gain revenue 18873 20569 related foreign currency cash flow hedging program years ended december 31 2014 2013 respectively expect strong dollar compared currencies especially euro japanese yen russian ruble continue negative impact revenue 2015 compared 2014 cost sales cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris following table summarizes cost sales year ended december 31 2014 2013 decrease cost sales percentage net product sales year ended december 31 2014 partially due 14277 voluntary recall expense recognized 2013 additionally first quarter 2014 entered settlement agreement third party related calculation royalties payable third party preexisting license agreement based settlement agreement company recorded reversal accrued royalties 5124 reduction cost sales first quarter 2014 also recorded incremental impact cost sales 2055 additional royalties related 87830 net product sales prior year shipments remaining decrease cost sales years ended december 31 2014 percentage net product sales resulted decrease royalties paid sales soliris october 2013 entered settlement agreement dismissal novartis vaccines diagnostics inc pursuant alexion granted nonexclusive fully paid license case dismissed prejudice result recorded expense 9181 cost sales third quarter 2013 related change contingent liabilities resulting litigation settlement agreement research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses research development rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research well costs associated strategic licensing agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities discovery research costs incurred conducting laboratory studies performing preclinical research uses eculizumab product candidates licensing agreement costs include upfront milestone payments made connection strategic licensing arrangements entered third parties clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses year ended december 31 2014 incurred research development expenses 513782 increase 196689 62 versus 317093 incurred year ended december 31 2013 increase primarily related following • increase 41719 external clinical development expenses related primarily expansion studies eculizumab asfotase alfa see table • increase 95425 licensing agreement costs primarily due upfront payment 100000 option agreement entered moderna therapeutics inc first quarter 2014 • increase 7857 discovery research expenses primarily related increases external research expenses associated moderna agreement external research expenses • increase 46635 rd payroll benefit expense related primarily continued global expansion staff supporting increasing number clinical development programs • increases 3285 3930 rd operating occupancy depreciation amortization expenses respectively related primarily continued expansion global supply chain facilities support services following table summarizes external direct expenses related clinical development programs please refer item 1 business description programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a risk factors annual report form 10k expect research development expenses increase 2015 due clinical development manufacturing costs related expanding development programs additional information programs please refer “product development programs” item business annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2014 incurred selling general administrative expenses 630209 increase 140489 29 versus 489720 incurred year ended december 31 2013 increase primarily related following • increase salary benefits labor expenses 95857 increase result increased headcount related commercial development activities including increases payroll benefits costs 49023 related global commercial staff support global expansion increase also due increases payroll benefits 46835 within general administrative functions support infrastructure growth global commercial entity • increase external selling general administrative expenses 44632 increase primarily due increase marketing costs support continued growth global sales soliris well increase administrative costs support infrastructure growth expect selling general administrative expenses increase lower rate revenue 2015 reflecting continued growth commercial organization throughout world contingent consideration years ended december 31 2014 2013 change fair value contingent consideration associated prior business combinations 20295 4006 respectively change fair value contingent consideration year ended december 31 2014 compared prior year primarily due increases likelihood payments contingent consideration decrease discount rates restructuring expenses fourth quarter 2014 announced plans move european headquarters lausanne switzerland zurich switzerland resulting restructuring expenses 15365 relocation european headquarters support growing operational needs based current business forecasts impairment intangible asset fourth quarter 2014 reviewed impairment value early stage phase ii indefinitelived intangible asset related orphatec acquisition initiated review part annual impairment testing increased costs associated clinical trial studies although continue develop asset estimated fair value obtained market participant arms length transaction determined de minimis december 31 2014 result fourth quarter 2014 recognized impairment charge 8050 writedown assets fair value first quarter 2014 fourth quarter 2013 reviewed impairment value early stage phase indefinitelived intangible asset related acquisition taligen therapeutics inc initiated review based reassessment scientific findings associated acquired asset fourth quarter 2013 also reviewed impairment value purchased technology associated taligen acquisition result recognized impairment charges 3464 33521 years ended december 31 2014 2013 adjust assets fair value determined de minimis income expense following table provides information regarding income expense income taxes year ended december 31 2014 recorded income tax provision 215195 effective tax rate 247 compared income tax provision 273374 effective tax rate 519 year ended december 31 2013 reduction effective tax rate primarily attributable centralization global supply chain technical operations ireland income tax provision 2014 attributable us federal state foreign income taxes profitable operations additionally included year ended december 31 2014 2128 tax attributable agreement french government provided reimbursement shipments soliris made prior january 1 2014 income tax provision 2013 attributable us federal state foreign income taxes profitable operations well tax expense resulting centralization global supply chain technical operations ireland undertaken fourth quarter 2013 amount approximately 95800 also impacted tax benefit 2719 attributable 2012 us federal tax credit research experimentation due retroactive extension credit signed law january 2013 granted incentive tax holiday canton vaud switzerland effective january 1 2010 tax holiday exempted us local corporate income taxes switzerland end 2014 renewable additional 5 years final expiration 2019 2013 undertook restructuring significantly changed business model switzerland converted principal company distribution service company result significant change business activities switzerland canton vaud switzerland provided final notification us december 2014 structure longer complied conditions incentive tax holiday fourth quarter 2014 made payment 22817 satisfaction clawback previously exempted cantonal income taxes tax years 2010 2013 amount fully accrued balance sheet december 31 2013 prospectively federal cantonal tax based current enacted tax rates switzerland us federal tax credit research experimentation expenses expired december 31 2013 connection expiration 2014 tax expense first three quarters year include benefit us federal tax credit research experimentation december 2014 tax increase prevention act 2014 retroactively extended tax credit research experimentation back january 1 2014 end 2014 signed law effects change tax law recognized period includes date enactment therefore tax benefit attributable 2014 us federal tax credit 3222 research experimentation recorded fourth quarter 2014 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized financial condition liquidity capital resources following table summarizes components financial condition december 31 2015 2014 increase cash equivalents primarily attributable cash generated operations proceeds maturity sale availableforsale securities net proceeds exercise stock options offsetting increases cash purchases marketable securities payments outstanding term loan purchases property plant equipment repurchase common stock decrease marketable securities primarily attributable sales marketable securities used partially fund acquisition synageva 2015 increase longterm debt attributable borrowing 3500000 connection acquisition synageva 2015 expect continued growth expenditures particularly related research product development clinical trials regulatory approvals international expansion commercialization products capital investment however anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations including principal interest payments credit facility contingent payments acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes financial instruments required use business may invest cash reserves money market funds bank deposits highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable foreign exchange derivative contracts december 31 2015 three customers accounted 51 accounts receivable balance individual customers accounting 14 22 accounts receivable balance december 31 2014 four customers accounted 58 accounts receivable balance individual customers accounting 10 23 accounts receivable balance year ended december 31 2015 3 customers accounted 38 product sales individual customers ranging 10 18 product sales year ended december 31 2014 one customer accounted 18 product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantial portion accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material although collection accounts receivables certain countries may extend beyond credit terms expect delays material impact financial condition results operations manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2015 foreign exchange forward contracts notional amounts totaling 2535490 outstanding foreign exchange forward contracts net fair value 147633 unrealized gain 158054 included assets offset unrealized loss 10421 included liabilities counterparties foreign exchange forward contracts large domestic multinational commercial banks believe risk nonperformance material december 31 2015 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily institutional money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit foreign exchange forward contracts level 2 liabilities consist also foreign exchange forward contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related acquisitions business combinations contingent consideration obligations purchase agreements business combinations include contingent payments totaling 826000 become payable certain development commercial milestones achieved milestone amounts 511000 315000 contingent payments relate development commercial milestones respectively expect amounts impact liquidity nearterm next 12 months expect make milestone payments approximately 60000 associated prior business combinations additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds financing lease obligations november 2012 entered lease agreement office laboratory space constructed new connecticut although legally premises deemed owner building construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlords costs constructing facility required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet december 31 2015 recorded constructioninprocess asset 226696 inclusive landlords costs well costs incurred alexion offsetting facility lease obligation 132866 associated new facility third quarter 2015 entered new agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion existing portsmouth new hampshire facility result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement construction period december 31 2015 recorded constructioninprocess asset 19259 associated manufacturing facility offsetting facility lease obligation 15229 license agreements march 2015 entered collaboration agreement third party allows us identify optimize drug candidates alexion exclusive worldwide rights develop commercialize products arising collaboration due early stage assets licensing connection collaboration recorded expense upfront payment 15000 first quarter 2015 addition could required pay additional 250750 certain development regulatory commercial milestones met time well royalties commercial sales january 2015 entered license agreement third party obtain exclusive research development commercial license specific therapeutic molecules due early stage assets recorded expense upfront payment 50000 first quarter 2015 addition could required pay additional 822000 certain development regulatory commercial milestones met time well royalties commercial sales december 2014 entered agreement xchem pharmaceuticals xchem allows us identify novel drug candidates xchems proprietary drug discovery engine alexion exclusive worldwide rights develop commercialize products arising collaboration three program targets due early stage assets recorded expense upfront payment 8000 addition program target maximum three targets could required make additional payments upon achievement specified research development regulatory milestones 75000 well royalties commercial sales january 2014 entered agreement moderna therapeutics inc moderna allows us purchase ten product options develop commercialize treatments rare diseases modernas messenger rna mrna therapeutics platform alexion lead discovery development commercialization treatments produced broad longterm strategic agreement moderna retain responsibility design manufacture messenger rna selected targets due early stage assets recorded expense upfront payment 100000 also responsible funding research activities program addition drug target maximum ten targets could required make option exercise payment 15000 pay additional 120000 respect rare disease product 400000 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales addition entered license agreements would required pay additional 785500 certain development regulatory commercial milestones met license agreements include contingent payments become payable certain development regulatory commercial milestones achieved expect payments associated milestones significant impact liquidity nearterm next 12 months expect make milestone payments related license agreements approximately 26400 longterm debt june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 3500000 term loan facility 500000 revolving facility borrowings term loan facility payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan draw revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 100000 form letters credit borrowings sameday notice referred swingline loans 25000 borrowings used working capital requirements acquisitions general corporate purposes connection acquisition synageva june 2015 borrowed 3500000 term loan facility 200000 revolving facility used available cash remaining cash consideration june 2015 repaid revolving facility full december 31 2015 3456250 outstanding term loan december 31 2015 open letters credit 13784 borrowing availability revolving facility 486216 manufacturing obligations supply agreements lonza 2028 relating manufacture eculizumab asfotase alfa requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf various agreements lonza remaining total noncancellable commitments approximately 1156980 2028 certain commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf payment respect sales soliris manufactured lonza facilities addition lonza noncancellable commitments approximately 36400 2019 third party manufacturers taxes record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries earnings relate ongoing operations approximately 1012000 december 31 2015 intend reinvest earnings permanently outside us repatriate earnings tax efficient accordingly believe us tax earnings might repatriated would substantially offset realizing benefit tax attributes us foreign tax credits utilizing deficits foreign earnings profits account fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner foreign partnership subsidiary extent us parent company receives allocation partnership taxable income amounts taxable us therefore permanent reinvestment assertion longer apply present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future december 31 2015 approximately 758000 cash equivalents held foreign subsidiaries significant portion required liquidity needs foreign subsidiaries settle outstanding intercompany trade payables prior excess cash available could repatriated entities united states intend reinvest cfc earnings permanently outside us repatriate earnings tax efficient certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructurings tax law changes currently contemplated common stock repurchase program november 2012 board directors authorized share repurchase program may 2015 board directors increased authorization shares 1000000 future purchases repurchase program superseded prior repurchase programs repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time companys discretion expect cash generated operations existing available cash equivalents sufficient fund share repurchases program repurchased 1963 1903 shares common stock cost 327699 302599 years ended december 31 2015 2014 respectively company repurchase shares pendency synageva acquisition company began repurchasing shares third quarter 2015 subsequent december 31 2015 repurchased 648 shares common stock repurchase program cost 98206 february 8 2016 total 657658 remaining repurchases repurchase program cash flows following summarizes net change cash equivalents operating activities cash flows provided operations 2015 675199 compared 640075 2014 increase primarily due following • increase gross margin product sales 309572 resulting primarily increase global demand soliris partially offset following • additional cash needs associated synageva acquisition including approximately 98314 additional operating expenses 39210 acquisition costs 13335 restructuring costs well increase interest expense 42968 new credit facility • increase cash outflows related licensing arrangements totaled 129750 109925 years ended december 31 2015 2014 respectively 2016 expect increases cash flow operations highly dependent sales levels related cash collections sales products also expect cash outflows approximately 26400 related milestone payments license agreements investing activities cash used investing activities 2015 3585173 compared 222869 2014 increase primarily due following • payment 3939307 2015 related synageva acquisition • purchases property plant equipment 286335 year ended december 31 2015 compared 136650 year ended december 31 2014 due increased capital spending associated construction new headquarters two facilities ireland partially offset following • purchases availableforsale marketable securities 519723 year ended december 31 2015 compared 664228 year ended december 31 2014 • proceeds maturity sale availableforsale marketable securities 1159459 year ended december 31 2015 used fund acquisition synageva proceeds maturity sale availableforsale marketable securities 619447 year ended december 31 2014 expect continue significant spending property plant equipment 2016 related construction new biologics manufacturing facility ireland financing activities cash flows provided financing activities 2015 2985077 compared 7126 2014 increase primarily due following • proceeds new term loan facility 3500000 year ended december 31 2015 • proceeds issuance stock sharebased compensation arrangements 81982 year ended december 31 2015 compared 114350 2014 partially offset following • change excess tax benefits stock options attributable utilization excess tax benefit portion federal state net operating losses tax credits 89655 year ended december 31 2015 compared 251136 2014 due election deduct rather capitalize research development expenses pursuant internal revenue code section 59e 2014 federal income tax return higher 2014 excess tax benefit deductions stock option exercises restricted stock vestings • milestone payments 50000 year ended december 31 2015 associated business combinations completed prior years • payments debt issuance costs 45492 year ended december 31 2015 connection new debt facility • principal payments 43750 related new credit facility contractual obligations following table summarizes contractual obligations december 31 2015 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a risk factors note 9 commitments contingencies consolidated financial statements included annual report form 10k table also include liability unrecognized tax benefits related various federal state foreign income tax matters 113945 december 31 2015 timing settlement amounts reasonably estimable december 31 2015 expect payment amounts related unrecognized tax benefits within next twelve months also include contingent payments related business acquisitions completed prior years license agreements timing payment amounts reasonably estimable december 31 2015 contingent payments associated business combinations total 826000 become payable certain development commercial milestones achieved next 12 months expect make milestone payments approximately 60000 associated prior business combinations license commitments include contingent payments become payable certain development regulatory commercial milestones achieved would required pay additional amounts certain development regulatory commercial milestones met next 12 months expect make milestone payments related license agreements approximately 26400 credit facilities june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 3500000 term loan facility 500000 revolving credit facility maturing five years borrowings term loan payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 100000 form letters credit borrowings day notice referred swingline loans 25000 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility amount cause consolidated net leverage ratio exceed maximum allowable amount credit agreement may elect loans credit agreement bear interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement obligations credit facilities guaranteed certain alexions foreign domestic subsidiaries secured liens certain alexions subsidiaries equity interests subject certain exceptions credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan operating leases operating leases principally facilities equipment currently lease office laboratory space previous headquarters research development facility cheshire connecticut well office space regional executive sales offices zurich switzerland addition locations also lease space us states foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza described commitments lonza include amounts estimated cpi adjustments item 7aitem 7 management’s discussion analysis financial condition results operations amounts millions except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecast forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview biopharmaceutical company focused serving patients devastating ultrarare disorders innovation development commercialization lifetransforming therapeutic products complement franchise soliris first therapeutic approved patients either pnh lifethreatening ultrarare genetic blood disorder ahus lifethreatening ultrarare genetic disease pnh ahus result chronic uncontrolled activation complement component immune system metabolic franchise commercialize strensiq treatment patients hpp kanuma treatment patients lald hpp ultrarare genetic disease characterized defective bone mineralization lead deformity bones skeletal abnormalities lald serious life threatening ultrarare disease genetic mutations result decreased activity lal enzyme leading marked accumulation lipids vital organs blood vessels tissues also evaluating additional potential indications eculizumab severe devastating diseases uncontrolled complement activation underlying mechanism progressing various stages development additional product candidates potential treatments patients devastating ultrarare disorders recent developments previously reported audit finance committee company’s board directors audit committee commenced investigation allegations made former employee concerning company’s soliris sales practices former employee alleged certain practices resulted certain customers placing orders shipments soliris earlier fiscal quarter fiscal quarter otherwise would referred pullin advanced sales fully described former employee alleged practices used company order meet certain financial targets times involved inappropriate business conduct audit committee conducted investigation audit committee investigation assistance outside counsel forensic accountants accounting firm advisors audit committee investigation substantially complete investigative procedures currently planned except necessary respond regulatory inquiries matters arise ordinary course company’s future business activities audit committee concluded based facts investigation company’s previously issued financial results require restatement addition audit committee investigation identify instances improper revenue recognition associated pullin sales instances soliris orders placed customers patients order fulfill actual need instances soliris sold build stock unwanted product however management concluded audit committee concurred material weakness company’s internal control financial reporting maintain effective control environment senior management failed set appropriate “tone top” specifically senior management failed reinforce need compliance company’s policies procedures resulted inappropriate business conduct audit committee investigation found senior management applied pressure personnel use pullin sales meet targets pressure particularly significant fourth quarter 2015 audit committee investigation also found certain company personnel engaged inappropriate business conduct realize pullin sales result pressure senior management purposes annual report form 10k “pullin” “advanced” sales certain soliris sales transactions coordinated company personnel primarily personnel customer operations department capacity coordinators shipment orders customers increase revenue recognized earlier fiscal quarter one sale otherwise would occurred result corresponding decrease revenue recognized subsequent fiscal quarter company able forecast estimated date certain shipments soliris due customer order history known infusion dates similar data support operations business patient needs pullin sales may occur example customer result encouragement company employee places order patient earlier customer might otherwise place order pullin sales inherently problematic impermissible accordance us gaap audit committee investigation included review sales transactions evidence pullin sales reasons pullin sales whether transactions conducted accordance company’s policies procedures whether revenue pullin sales properly recognized accordance us gaap audit committee investigation concluded revenue pullin sales review appropriately recognized quarter sales actually occurred financial statement errors related pullin sales however audit committee investigation found certain revenue pulled fourth quarter 2015 first quarter 2016 realized result employee actions involved inappropriate business conduct including conduct inconsistent violation company policies procedures pullin sales fourth quarter 2015 estimated approximately 10 17 significantly higher quarters portion estimated sales involve inappropriate business conduct estimated pullin sales represented less 1 total revenue 2015 past two completed fiscal years fourth quarter 2016 excluding fourth quarter 2015 pullin sales estimated 1 7 aggregate representing 0 1 total revenue although pullin sales inherently problematic impermissible must realized violations company’s policies procedures must accordance us gaap conclusions concerning material weakness company’s internal controls financial reporting discussed item 9a “controls procedures” form 10k critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k accounting principles generally accepted us required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition net product sales principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product end customer typically hospital physician’s office private government pharmacy healthcare facility regular basis review revenue arrangements distributor relationships determine whether changes criteria impact revenue recognition amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell product governments government agencies factors price products limited number patients short period product sale patient infusion lack contractual return rights customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors ability estimate returns certain countries exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change addition sales countries product commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis product received final approval commercial sale record estimated rebates payable governmental programs including medicaid us programs outside us reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may impact period estimates change provided balances activity rebates payable account years ended december 31 2016 2015 2014 follows 2016 compared 2015 current provisions relating sales current year increased 25 primarily due increased unit volumes us europe subject rebates 2015 compared 2014 current provisions relating sales current year increased 27 primarily due increased unit volumes us europe subject rebates march 2014 entered agreement french government positively impacts prospective reimbursement soliris also provides reimbursement shipments years prior january 1 2014 result agreement first quarter 2014 reduced rebate payable recognized 88 net product sales soliris france relating years prior january 1 2014 record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale continue monitor economic conditions including volatility associated international economies associated impacts financial markets business additional information related concentration credit risk associated certain international accounts receivable balances refer “financial condition liquidity capital resources” section contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adjustment operating results liquidity inventories stated lower cost estimated realizable value determine cost inventory standard cost basis approximates average costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized products approved fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form product utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” products development yet approved regulatory authorities purchased drug product charged research development expense inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased raw materials pass quality inspection obligation pay materials analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout pre postproduction process continually gather information regarding product quality periods manufacturing date products currently maximum estimated life range 36 48 months based sales forecasts expect realize carrying value product inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required sharebased compensation two sharebased compensation plans pursuant awards currently made amended restated 2004 incentive plan 2004 plan ii 2015 employee stock purchase plan espp 2004 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp stockrelated awards also outstanding sharebased compensation plans granted awards plans since 2004 compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 85 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 15 discount recognized compensation expense 6 month purchase period factors change employ different assumptions value stockbased awards sharebased compensation expense record future periods may differ materially prior recorded amounts valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets iprd related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited • timing costs complete inprocess projects • timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects • discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions however underlying assumptions used estimate expected project sales development costs profitability events associated projects clinical results may occur estimated acquisition date goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors • timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones estimated future sales levels specific compound • discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse estimate tax effect reversing temporary differences reflective actual outcomes modified reflect new developments interpretations tax law revised incorporate new accounting principles changes expected timing manner reversal results operations could materially impacted provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken internal revenue service taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material adjustments income tax expense period new accounting pronouncements may 2014 financial accounting standards board fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2017 allows adoption using full retrospective method modified retrospective method entities may elect early adopt standard annual periods beginning december 15 2016 currently anticipate adopting standard using modified retrospective method expect implementation new standard material impact financial position results operations april 2015 fasb issued new standard simplifying presentation debt issuance costs new standard aligns treatment debt issuance costs debt discounts premiums requires debt issuance costs presented direct deduction carrying amount related debt adopted provisions standard first quarter 2016 reclassified 9 deferred financing costs prepaid expenses current assets current portion longterm debt 27 assets longterm debt less current portion consolidated balance sheets december 31 2015 april 2015 fasb issued new standard clarifying accounting customer’s fees paid cloud computing arrangement standard cloud computing arrangement includes software license customer would account software license consistent software licenses cloud computing arrangement include software license customer would account arrangement service contract adopted provisions standard first quarter 2016 adoption material effect financial condition results operations february 2016 fasb issued new standard requiring rights obligations arising leases recognized balance sheet recording rightofuse asset corresponding lease liability new standard also requires qualitative quantitative disclosures understand amount timing uncertainty cash flows arising leases well significant management estimates utilized standard effective interim annual periods beginning december 15 2018 requires modified retrospective adoption currently assessing impact standard financial condition results operations march 2016 fasb issued new standard intended simplify certain aspects accounting employee sharebased payments elected early adopt standard third quarter 2016 one aspect standard requires entity recognize excess tax benefits deficiencies associated stockbased compensation reduction increase tax expense income statement previously amounts recognized additional paidin capital aspect new standard adopted prospectively accordingly recorded tax benefits 10 within income tax expense year ended december 31 2016 amendments require recognition excess tax benefits regardless whether benefit reduces taxes payable current period result 238 associated previously unrecognized excess tax benefits recorded deferred tax asset increase retained earnings beginning 2016 furthermore amendment requires excess tax benefits classified operating activity statement cash flows instead financing activity elected adopt provision standard prospectively thus prior periods adjusted also elected continue estimate impact forfeitures determining amount compensation cost recognized period rather account forfeitures occur october 2016 fasb issued new standard eliminates prohibition immediate recognition current deferred income tax impacts intraentity asset transfer inventory new standard entities recognize income tax consequences intraentity transfer asset inventory transfer occurs new standard effective interim periods beginning december 15 2017 requires modified retrospective adoption cumulativeeffect adjustment directly retained earnings beginning period adoption currently assessing impact standard financial condition results operations results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison year ended december 31 2016 year ended december 31 2015 net product sales net product sales significant geographic region follows net product sales product follows components increase net product sales year ended december 31 2016 follows increase net product sales fiscal year 2016 compared period 2015 primarily due increase unit volumes 22 due increased demand globally soliris therapy patients pnh ahus sales strensiq kanuma 2016 positive impact volume net product sales partially offset negative impact foreign exchange 3 year ended december 31 2016 compared period 2015 negative impact foreign exchange 74 3 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2015 negative impact primarily due weakening euro japanese yen russian ruble british pound recorded gain revenue 73 118 related foreign currency cash flow hedging program years ended december 31 2016 2015 respectively expect strong dollar compared currencies continue negative impact revenue 2017 cost sales cost sales includes manufacturing costs well actual estimated royalty expenses associated sales products following table summarizes cost sales year ended december 31 2016 2015 research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses research development rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research well costs associated strategic licensing agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates including alx1210 product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities discovery research costs incurred conducting laboratory studies performing preclinical research uses products product candidates licensing agreement costs include upfront milestone payments made connection strategic licensing arrangements entered third parties clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses year ended december 31 2016 incurred research development expenses 757 increase 48 7 versus 709 incurred year ended december 31 2015 increase primarily related following • increase 53 external clinical development expenses related primarily expansion studies alxn1210 sebelipase alfa eculizumab see table • increase 48 external product development expenses related primarily increase costs associated manufacturing material increased clinical research activities clinical studies • decrease 120 licensing agreement expenses primarily related upfront payments made first quarter 2015 • increase 10 discovery research expenses primarily related increases external research expenses associated collaboration agreements • increase 55 payroll benefits expense primarily related additional headcount acquired part synageva acquisition june 22 2015 continued global expansion staff supporting increasing number clinical development programs following table summarizes external direct expenses related clinical development programs please refer item 1 “business” description programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a “risk factors” annual report form 10k expect research development expenses increase 2017 due clinical development manufacturing costs related expanding development programs additional information programs please refer “product development programs” item “business” annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support products human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2016 incurred selling general administrative expenses 954 increase 91 11 versus 863 incurred year ended december 31 2015 increase primarily related following • increase external selling general administrative expenses 85 increase primarily due increase legal expenses investigations overseen audit finance committee relating sec doj investigations well audit committee investigation occurred fourth quarter 2016 increase also attributable additional facilities costs result continuing growth operations worldwide expect selling general administrative expenses increase 2017 reflecting continued growth commercial organization throughout world amortization purchase intangible assets third quarter 2015 received regulatory approval strensiq kanuma result year ended december 31 2016 2015 recorded amortization expense 322 117 respectively primarily associated intangible assets related strensiq kanuma change fair value contingent consideration years ended december 31 2016 2015 change fair value contingent consideration expense associated prior business combinations 36 64 respectively change fair value contingent consideration years ended december 31 2016 2015 primarily due increases likelihood payments contingent consideration acquisitionrelated costs years ended december 31 2016 2015 acquisitionrelated costs associated business combinations included following restructuring expenses connection relocation corporate headquarters new connecticut entered lease termination agreement december 2015 previous corporate headquarters located cheshire connecticut recorded contract termination fees 11 restructuring expense fourth quarter 2015 conjunction acquisition integration synageva recorded restructuring expense 13 primarily related employee costs 2015 synageva restructuring charges material year ended december 31 2016 fourth quarter 2014 announced plans relocate european headquarters lausanne zurich switzerland relocation european headquarters supports operational needs based growth european region result action recorded restructuring expenses 15 related employee costs fourth quarter 2014 years ended december 31 2016 2015 incurred additional restructuring costs 4 18 respectively impairment intangible asset fourth quarter 2016 reviewed sbc103 early stage clinical indefinitelived intangible asset related synageva acquisition part annual impairment testing estimated fair value obtained asset market participant arm’s length transaction 31 lower carrying amount asset result fourth quarter 2016 recognized impairment charge 85 writedown asset fair value income expense following table provides information regarding income expense increase interest expense year ended december 31 2016 compared prior year due us borrowing 3500 term loan facility conjunction acquisition synageva june 22 2015 increase also attributable increases interest expense associated facility lease obligations income taxes year ended december 31 2016 recorded income tax expense 177 effective tax rate 307 compared income tax expense 354 effective tax rate 710 year ended december 31 2015 decrease effective tax rate primarily attributable tax charge recorded 2015 related integration synageva assets captive foreign partnership onetime charge increased effective tax rate 2015 approximately 630 decrease partially offset deferred tax expense recognized 2016 attributable first quarter distributions foreign captive partnership distribution increased 2016 effective tax rate 207 exclusive charges expect continue benefit reduced tax rate compared periods prior january 1 2014 result centralizing global supply chain technical operations ireland fourth quarter 2013 income tax expense 2016 attributable us federal state foreign income taxes profitable operations additionally included year ended december 31 2016 impact deferred tax attributable first quarter distributions captive foreign partnership 119 third quarter 2015 contributed certain supply chain assets commercial operation rights intellectual property acquired synageva acquisition captive foreign partnership contribution resulted revaluation captive foreign partnership increase outside basis difference us parent company captive foreign partnership corresponding onetime deferred tax expense 316 cash tax payment associated deferred expense continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized comparison year ended december 31 2015 year ended december 31 2014 net product sales net product sales significant geographic region follows net product sales product follows components increase net product sales year ended december 31 2015 exclusive 88 recognized related prior years follows increase net product sales fiscal year 2015 compared period 2014 primarily due increase unit volumes 29 due increased demand globally soliris therapy patients pnh ahus respective periods positive impact volume net product sales offset negative impact foreign exchange 8 year ended december 31 2015 compared period 2014 negative impact foreign exchange 165 8 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2014 negative impact primarily due weakening euro japanese yen russian ruble recorded gain revenue 118 19 related foreign currency cash flow hedging program years ended december 31 2015 2014 respectively cost sales cost sales includes manufacturing costs well actual estimated royalty expenses associated sales soliris following table summarizes cost sales year ended december 31 2015 2014 recorded expense 24 first quarter 2015 associated portion single manufacturing campaign third party manufacturer strensiq cost comprised raw materials internal overhead external production costs expense impact clinical supply inventory commercial launch strensiq exclusive item mentioned cost sales percentage net product sales 8 years ended december 31 2015 2014 research development expense research development expense includes personnel facility external costs associated research development product candidates well product development costs group research development expenses two major categories external direct expenses research development rd expenses external direct expenses comprised costs paid outside parties clinical development product development discovery research well costs associated strategic licensing agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities discovery research costs incurred conducting laboratory studies performing preclinical research uses products product candidates licensing agreement costs include upfront milestone payments made connection strategic licensing arrangements entered third parties clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facility equipment overhead similar costs research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following table provides information regarding research development expenses year ended december 31 2015 incurred research development expenses 709 increase 195 38 versus 514 incurred year ended december 31 2014 increase primarily related following • increase 39 external clinical development expenses related primarily expansion studies eculizumab alxn1007 alxn1210 programs see table • increase 62 external product development expenses related primarily increase costs associated manufacturing material increased clinical research activities clinical studies • increase 20 licensing agreement expenses related achievement additional license milestones • increase 30 discovery research expenses primarily related increases external research expenses associated moderna agreement external research expenses • increase 28 rd payroll benefit expense related additional headcount acquired part synageva acquisition second quarter 2015 continued global expansion staff supporting increasing number clinical development programs • increases 16 rd facilities costs related additional rd facilities part synageva acquisition second quarter 2015 additional costs associated continued expansion global supply chain facilities support services following table summarizes external direct expenses related clinical development programs please refer item 1 “business” description programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a “risk factors” annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support soliris human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2015 incurred selling general administrative expenses 863 increase 233 37 versus 630 incurred year ended december 31 2014 increase primarily related following • increase salary benefits labor expenses 161 increase result increased staff costs related commercial development activities increases payroll benefits within general administrative functions support infrastructure growth global commercial entity increase also attributable additional global commercial staff costs due acquisition synageva second quarter 2015 additional stockbased compensation expense 30 related acceleration alexion stock awards former synageva employees • increase external selling general administrative expenses 72 increase primarily due increase external marketing costs support global launches strensiq kanuma professional services support continuing growth company amortization purchase intangible assets third quarter 2015 received regulatory approval strensiq kanuma result year ended december 31 2015 recorded amortization expense 117 associated intangible assets related strensiq kanuma acquisitionrelated costs years ended december 31 2015 2014 acquisitionrelated costs associated business combinations included following increase acquisition related costs due synageva acquisition occurred 2015 change fair value contingent consideration years ended december 31 2015 2014 change fair value contingent consideration expense associated prior business combinations 64 20 respectively increase fair value contingent consideration year ended december 31 2015 compared prior year primarily due increases likelihood payments contingent consideration net decrease discount rates restructuring expenses connection relocation corporate headquarters new connecticut entered lease termination agreement december 2015 previous corporate headquarters located cheshire connecticut recorded contract termination fees 11 restructuring expense fourth quarter 2015 conjunction acquisition integration synageva recorded restructuring expense 13 primarily related employee costs 2015 fourth quarter 2014 announced plans move european headquarters lausanne switzerland zurich switzerland resulting restructuring expenses 15 relocation european headquarters supports growing operational needs based current business forecasts year ended december 31 2015 incurred additional restructuring costs 18 impairment intangible asset fourth quarter 2014 reviewed impairment value early stage phase ii indefinitelived intangible asset related orphatec acquisition initiated review part annual impairment testing increased costs associated clinical trial studies although continue develop asset estimated fair value obtained market participant arm’s length transaction determined de minimis december 31 2014 result fourth quarter 2014 recognized impairment charge 8 writedown assets fair value income expense following table provides information regarding income expense increase interest expense year ended december 31 2015 compared prior year due us borrowing 3500 term loan facility conjunction acquisition synageva income taxes year ended december 31 2015 recorded income tax expense 354 effective tax rate 710 compared income tax expense 215 effective tax rate 247 year ended december 31 2014 increase effective tax rate primarily attributable integration synageva assets captive foreign partnership onetime charge increased effective tax rate 2015 approximately 630 exclusive onetime charges expect continue benefit reduced tax rate compared periods prior january 1 2014 result centralizing global supply chain technical operations ireland fourth quarter 2013 income tax expense 2015 attributable us federal state foreign income taxes profitable operations well tax impact associated integration synageva business alexion business third quarter 2015 contributed certain supply chain assets commercial operation rights intellectual property acquired synageva acquisition captive foreign partnership contribution resulted revaluation captive foreign partnership increase outside basis difference us parent company captive foreign partnership corresponding onetime deferred tax expense 316 cash tax payment associated deferred expense income tax expense 2014 attributable us federal state foreign income taxes profitable operations additionally included year ended december 31 2014 2 tax attributable agreement french government provided reimbursement shipments soliris made prior january 1 2014 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized financial condition liquidity capital resources following table summarizes components financial condition december 31 2016 2015 aggregate decrease cash equivalents marketable securities primarily attributable cash utilized repurchase shares principal payments term loan payments contingent consideration purchases property plant equipment partially offsetting decreases cash generated operations expect continued growth expenditures particularly related research product development clinical trials regulatory approvals international expansion commercialization products capital investment however anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations including principal interest payments credit facility contingent payments acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes financial instruments required use business may invest cash reserves money market funds bank deposits highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable derivative contracts december 31 2016 three customers accounted 47 accounts receivable balance individual customers accounting 14 19 accounts receivable balance december 31 2015 three customers accounted 51 accounts receivable balance individual customers accounting 14 22 accounts receivable balance year ended december 31 2016 three customers accounted 37 product sales individual customers ranging 10 16 product sales year ended december 31 2015 three customers accounted 38 product sales individual customers ranging 10 18 product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantial portion accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material although collection accounts receivables certain countries may extend beyond credit terms expect delays material impact financial condition results operations manage foreign currency transaction risk interest rate risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2016 foreign exchange forward contracts notional amounts totaling 2389 outstanding foreign exchange forward contracts net fair value 140 156 included current assets noncurrent assets 16 included current liabilities noncurrent liabilities december 31 2016 interest rate swap contracts notional amounts totaling 656 outstanding interest rate swap contracts net fair value 10 included noncurrent assets counterparties contracts large domestic multinational commercial banks believe risk nonperformance material december 31 2016 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments equity securities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily institutional money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit derivative contracts level 2 liabilities consist also derivative contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related acquisitions business combinations contingent consideration obligations purchase agreements business combinations include contingent payments totaling 766 become payable certain development commercial milestones achieved milestone amounts 451 315 contingent payments relate development commercial milestones respectively expect amounts impact liquidity nearterm next 12 months expect make milestone payments approximately 25 associated prior business combinations additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds financing fourth quarter 2016 criteria met achievement milestone payment associated acquisition enobia pharma corp connection 60 paid december 2016 financing lease obligations november 2012 entered lease agreement office laboratory space constructed new connecticut term lease commenced 2015 expire 2030 renewal option ten years although legally premises deemed owner building due substantial improvements directly funded construction period based applicable accounting guidance buildtosuit leases accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet construction new facility completed building placed service first quarter 2016 december 31 2016 2015 total facility lease obligation 136 133 respectively recorded within current liabilities facility lease obligation consolidated balance sheets third quarter 2015 entered new agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion one existing facilities result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement construction period december 31 2016 2015 recorded constructioninprocess asset 118 19 respectively offsetting facility lease obligation 107 15 respectively within current liabilities facility lease obligation consolidated balance sheets license agreements march 2015 entered collaboration agreement third party allows us identify optimize drug candidates alexion exclusive worldwide rights develop commercialize products arising collaboration due early stage assets licensing connection collaboration recorded expense upfront payment 15 first quarter 2015 addition december 31 2016 could required pay additional 249 certain development regulatory commercial milestones met time well royalties commercial sales january 2015 entered license agreement third party obtain exclusive research development commercial license specific therapeutic molecules due early stage assets recorded expense upfront payment 50 first quarter 2015 addition december 31 2016 could required pay additional 822 certain development regulatory commercial milestones met time well royalties commercial sales december 2014 entered agreement xchem pharmaceuticals xchem allows us identify novel drug candidates xchem’s proprietary drug discovery engine alexion exclusive worldwide rights develop commercialize products arising collaboration three program targets due early stage assets recorded expense upfront payment 8 addition program target maximum three targets could required make additional payments upon achievement specified research development regulatory milestones 75 well royalties commercial sales january 2014 entered agreement moderna therapeutics inc moderna allows us purchase ten product options develop commercialize treatments rare diseases moderna’s messenger rna mrna therapeutics platform alexion lead discovery development commercialization treatments produced broad longterm strategic agreement moderna retain responsibility design manufacture messenger rna selected targets due early stage assets recorded expense upfront payment 100 also responsible funding research activities program addition drug target maximum ten targets could required make option exercise payment 15 pay additional 120 respect rare disease product 400 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales addition entered license agreements would required pay additional 415 certain development regulatory commercial milestones met license agreements include contingent payments become payable certain development regulatory commercial milestones achieved expect payments associated milestones significant impact liquidity nearterm next 12 months expect make milestone payments related license agreements approximately 51 longterm debt june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 3500 term loan facility 500 revolving facility borrowings term loan facility payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan draw revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 100 form letters credit borrowings sameday notice referred swingline loans 25 borrowings used working capital requirements acquisitions general corporate purposes credit agreement required deliver administrative agent later 50 days fiscal quarter quarterly financial statements within 5 days thereafter compliance certificate november 2016 obtained waiver necessary lenders requirement due date delivery third quarter 2016 financial statements compliance certificate extended january 18 2017 posting third quarter report form 10q website january 4 2017 satisfied financial statement covenant simultaneously delivered required compliance certificate required lenders connection acquisition synageva june 2015 borrowed 3500 term loan facility 200 revolving facility used available cash remaining cash consideration june 2015 repaid revolving facility full december 31 2016 3081 outstanding term loan december 31 2016 open letters credit 15 borrowing availability revolving facility 485 manufacturing obligations supply agreements lonza 2028 relating manufacture soliris strensiq requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf various agreements lonza remaining total noncancellable commitments approximately 1148 2028 certain commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf payment respect sales soliris manufactured lonza facilities addition lonza noncancellable commitments approximately 27 2019 third party manufacturers taxes record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries earnings relate ongoing operations approximately 1462 december 31 2016 intend reinvest earnings permanently outside us repatriate earnings tax efficient accordingly believe us tax earnings might repatriated would substantially offset realizing benefit tax attributes us foreign tax credits utilizing deficits foreign earnings profits account fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner foreign partnership subsidiary extent us parent company receives allocation partnership taxable income amounts taxable us therefore permanent reinvestment assertion longer apply present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future december 31 2016 approximately 445 cash equivalents held foreign subsidiaries significant portion required liquidity needs foreign subsidiaries settle outstanding intercompany trade payables prior excess cash available could repatriated entities us intend reinvest cfc earnings permanently outside us repatriate earnings tax efficient certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructurings tax law changes currently contemplated common stock repurchase program november 2012 board directors authorized share repurchase program may 2015 board directors increased authorization acquire shares aggregate value 1000 future purchases repurchase program superseded prior repurchase programs repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time company’s discretion expect cash generated operations existing available cash equivalents sufficient fund share repurchases program repurchased 3 2 shares common stock cost 430 328 years ended december 31 2016 2015 respectively december 31 2016 total 325 remaining repurchases program company repurchase shares pendency synageva acquisition company began repurchasing shares third quarter 2015 february 2017 board directors increased authorization acquire shares aggregate value 1000 future purchases repurchase program superseded prior repurchase programs february 16 2017 total 1000 remaining repurchases repurchase program cash flows following summarizes net change cash equivalents operating activities cash flows provided operations 2016 1086 compared 675 2015 increase primarily due increase gross margin product sales 454 resulting primarily increase global demand soliris launch strensiq kanuma well decrease cash outflows relates licensing arrangements 120 increase gross margin offset increase clinical development costs interest expense selling general administrative expenses 2016 2017 expect increases cash flow operations highly dependent sales levels related cash collections sales products also expect cash outflows approximately 51 related milestone payments license agreements investing activities cash used investing activities 2016 287 compared 3585 2015 decrease cash used primarily due payment 3939 2015 related synageva acquisition net cash flows related purchase maturities availableforsale securities 51 2016 compared 640 2015 expect continue significant spending property plant equipment 2017 related construction new biologics manufacturing facilities ireland financing activities cash flows used provided financing activities 2016 836 compared 2985 2015 decrease primarily due following • borrowing 3655 net issuance costs credit facility connection acquisition synageva june 2015 • principal payments credit facility 375 2016 compared 301 2015 • repurchased common stock 430 2016 compared 328 2015 contractual obligations following table summarizes contractual obligations december 31 2016 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a “risk factors” note 9 “commitments contingencies” consolidated financial statements included annual report form 10k liability unrecognized tax benefits related various federal state foreign income tax matters 139 december 31 2016 included within table timing settlement amounts reasonably estimable december 31 2016 expect payment amounts related unrecognized tax benefits within next twelve months contingent payments related business acquisitions completed prior years license agreements included within table timing payment amounts reasonably estimable december 31 2016 contingent payments associated business combinations total 766 become payable certain development commercial milestones achieved next 12 months expect make milestone payments approximately 25 associated prior business combinations license commitments include contingent payments become payable certain development regulatory commercial milestones achieved would required pay additional amounts certain development regulatory commercial milestones met next 12 months expect make milestone payments related license agreements approximately 51 future obligations related defined benefit plans included within table timing amounts payments reasonably estimable december 31 2016 total unfunded obligation defined benefit plans december 31 2016 20 unfunded obligation impacted changes laws regulations interest rates investment returns variables credit facilities june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 3500 term loan facility 500 revolving credit facility maturing five years borrowings term loan payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 100 form letters credit borrowings sameday notice referred swingline loans 25 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility amount cause consolidated net leverage ratio exceed maximum allowable amount credit agreement may elect loans credit agreement bear interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement obligations credit facilities guaranteed certain alexion’s foreign domestic subsidiaries secured liens certain alexion’s subsidiaries’ equity interests subject certain exceptions credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan operating leases operating leases principally facilities equipment currently lease office space us foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facility together third party manufacturing facilities adequate ongoing activities commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza described commitments lonza include amounts estimated cpi adjustments item 7aitem 7 management’s discussion analysis financial condition results operations amounts millions except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecast forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview alexion pharmaceuticals inc alexion company us global biopharmaceutical company focused serving patients families affected rare diseases innovation development commercialization lifechanging therapies global leader complement inhibition developed commercialize first approved complement inhibitor treat patients paroxysmal nocturnal hemoglobinuria pnh atypical hemolytic uremic syndrome ahus antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg addition alexion two highly innovative enzyme replacement therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald leader complement biology 20 years alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders recent developments first half 2017 announced following key additions executive leadership team • ludwig n hantson phd chief executive officer • paul clancy chief financial officer • indrani franchini jd chief compliance officer • brian goff chief commercial officer • annemarie law chief human resource officer • john orloff md head research development first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases initial restructuring activities primarily focused reduction companys global workforce september 2017 committed operational plan realign global organization refocused corporate strategy realignment focuses investments priority growth areas maximize leadership complement grow rare disease business realignment also includes relocation companys headquarters boston massachusetts 2018 new connecticut site continue support employees working research process development laboratories clinical supply quality teams nurse case management number important enterprise business services plan expected reduce companys global workforce approximately 200 next twelve months restructuring achieve cost savings focusing development portfolio simplifying business structures processes across companys global operations closing multiple alexion sites including companys rhode island manufacturing facility arimf certain regional countrybased offices march 2013 received warning letter warning letter us food drug administration fda regarding compliance current good manufacturing practices cgmp arimf october 2017 alexion received notification fda warning letter resolved previously announced plan close arimf align manufacturing facilities ongoing multiproduct network manufacturing strategy utilizes manufacturing operations us ireland manufacturing capacity manufacturing partners october 2017 fda approved soliris treatment adult patients generalized myasthenia gravis gmg antiacetylcholine receptor achr antibodypositive additionally august 2017 european commission ec approved extension indication soliris include treatment refractory gmg adults achr antibodypositive december 2017 ministry health labour welfare mhlw japan approved soliris treatment patients gmg achr antibodypositive whose symptoms difficult control highdose intravenous immunoglobulin therapy plasmapheresis critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k accounting principles generally accepted us required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition net product sales principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell governments government agencies addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale factors price products limited number patients short period product sale patient infusion lack contractual return rights customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors ability estimate returns cases exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change historically deferred revenue recognition sales certain international customers mainly distributors product received end customer due various factors including inability estimate product returns regular basis review revenue arrangements including distributor relationships determine whether changes arrangements historical experience customers impact revenue recognition first quarter 2017 determined sufficient sales experience certain customers estimate product returns customers accounted prospectively change estimate began recognize revenue customers title product associated risk loss passed customer customers purchase larger quantities product less frequently may result revenue fluctuations quarter believe buying patterns increase risk product returns ability estimate returns record estimated rebates payable governmental programs including medicaid us programs outside us reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change provided balances activity rebates payable account years ended december 31 2017 2016 2015 follows current provisions relating sales current year increased 792 2017 compared 2016 253 2016 compared 2015 increases primarily due increased unit volumes us europe subject rebates increase 2017 also attributable increases rebate rates certain geographical regions certain product sales compared prior year record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale continue monitor economic conditions including volatility associated international economies associated impacts financial markets business additional information related concentration credit risk associated certain international accounts receivable balances refer “financial condition liquidity capital resources” section contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adjustment operating results liquidity inventories stated lower cost estimated realizable value determine cost inventory standard cost basis approximates average costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized products approved fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form product utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” products development yet approved regulatory authorities purchased drug product charged research development expense inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased raw materials pass quality inspection obligation pay materials analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout pre postproduction process continually gather information regarding product quality periods manufacturing date products currently maximum estimated life range 36 48 months based sales forecasts expect realize carrying value product inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required sharebased compensation two sharebased compensation plans pursuant awards currently made 2017 incentive plan 2017 plan ii 2015 employee stock purchase plan espp 2017 plan replaced amended restated 2004 incentive plan effective may 10 2017 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 85 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 15 discount recognized compensation expense 6 month purchase period factors change employ different assumptions value stockbased awards sharebased compensation expense record future periods may differ materially prior recorded amounts valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets iprd related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited • timing costs complete inprocess projects • timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects • discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions however underlying assumptions used estimate expected project sales development costs profitability events associated projects clinical results may occur estimated acquisition date goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors • timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones estimated future sales levels specific compound • discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse december 22 2017 tax cuts jobs act tax act enacted law tax act decreased us statutory corporate tax rate years beginning december 31 2017 included domestic international tax provisions affect measurement deferred tax assets liabilities result revalued deferred tax assets liabilities december 31 2017 recorded deferred tax benefit 2924 impacts tax act recorded provisional basis see note 11 “income taxes” additional information estimate tax effect reversing temporary differences reflective actual outcomes modified reflect new developments interpretations tax law revised incorporate new accounting principles changes expected timing manner reversal results operations could materially impacted follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken irs taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record material adjustments income tax expense period new accounting pronouncements may 2014 financial accounting standards board fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2017 allows adoption using full retrospective method modified retrospective method adopt new standard first quarter 2018 using modified retrospective method reviewed new standard identified accounting changes materially impact recognition net product sales also completed review analysis customer contracts determined impact adopting new standard first quarter 2018 material financial position results operations implementing changes accounting policies internal controls disclosures support new standard however changes significant january 2016 fasb issued new standard changes accounting equity investments financial liabilities fair value option presentation disclosure requirements financial instruments addition fasb clarified guidance related valuation allowance assessment recognizing deferred tax assets resulting unrealized losses availableforsale debt securities equity investments readily determinable fair values measured fair value changes fair value recognized net income companies option either measure equity investments without readily determinable fair values fair value cost adjusted changes observable prices minus impairment elected measure equity investments without readily determinable fair values cost adjusted changes observable prices minus impairment recognized net income standard effective interim annual periods beginning december 15 2017 guidance related equity investments without readily determinable fair values applied prospectively equity investments exist date adoption standard may increase volatility net income changes observable prices equity investments without readily determinable fair values recorded net income could material impact consolidated financial statements related disclosures february 2016 fasb issued new standard requiring rights obligations arising leases recognized balance sheet recording rightofuse asset corresponding lease liability new standard also requires qualitative quantitative disclosures understand amount timing uncertainty cash flows arising leases well significant management estimates utilized standard effective interim annual periods beginning december 15 2018 requires modified retrospective adoption currently assessing impact standard financial condition results operations march 2016 fasb issued new standard intended simplify certain aspects accounting employee sharebased payments one aspect standard requires entity recognize excess tax benefits deficiencies associated stockbased compensation reduction increase tax expense income statement previously amounts recognized additional paidin capital amendments also require recognition excess tax benefits regardless whether benefit reduces taxes payable current period furthermore amendment requires excess tax benefits classified operating activity statement cash flows instead financing activity elected early adopt standard third quarter 2016 also elected continue estimate impact forfeitures determining amount compensation cost recognized period rather account forfeitures occur october 2016 fasb issued new income tax standard eliminates exception intraentity asset transfer inventory new standard entities recognize income tax consequences intraentity transfer asset inventory transfer occurs deferred tax asset arises buyers jurisdiction would also recognized time transfer elected early adopt standard first quarter 2017 result adoption first quarter 2017 recorded 188 decrease retained earnings primarily resulting elimination previously recorded prepaid tax assets january 2017 fasb issued new standard clarifies definition business determines integrated set assets activities business framework requires substantially fair value gross assets acquired disposed concentrated single asset group similar identifiable assets would represent business standard effective interim annual periods beginning december 15 2017 early adoption permitted anticipate adoption new standard result transactions accounted asset acquisitions august 2017 fasb issued new standard intended improve simplify certain aspects accounting hedges new standard intended closely align hedge accounting companies’ risk management strategies simplify application hedge accounting increase transparency scope results hedging programs also amends presentation disclosure requirements changes companies assess effectiveness standard effective interim annual periods beginning december 15 2018 early adoption permitted currently assessing impact standard financial condition results operations results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison years ended december 31 2017 2016 2015 net product sales net product sales product significant geographic region follows percentages meaningful net product sales consolidated soliris net product sales strensiq net product sales kanuma net product sales components increase net product sales december 31 2017 compared 2016 follows increase net product sales fiscal year 2017 compared period 2016 primarily due increase unit volumes 168 increase unit volumes due increased global demand soliris therapy patients pnh ahus well increased sales strensiq kanuma 2017 result continuing efforts identify reach patients hpp lald globally components increase revenues year ended december 31 2016 compared period 2015 follows increase net product sales fiscal year 2016 compared period 2015 primarily due increase unit volumes 218 due increased demand globally soliris therapy patients pnh ahus sales strensiq kanuma 2016 positive impact volume net product sales offset negative impact foreign exchange 29 year ended december 31 2016 compared period 2015 negative impact foreign exchange 742 29 due changes foreign currency exchange rates inclusive hedging activity versus us dollar year ended december 31 2015 negative impact primarily due weakening euro japanese yen russian ruble british pound recorded gain revenue 730 1179 related foreign currency cash flow hedging program years ended december 31 2016 2015 respectively historically deferred revenue recognition sales certain international customers mainly distributors product received end customer due various factors including inability estimate product returns regular basis review revenue arrangements including distributor relationships determine whether changes arrangements historical experience customers impact revenue recognition first quarter 2017 determined sufficient sales experience certain customers estimate product returns customers result began recognize revenue customers title product associated risk loss passed customer customers may purchase larger quantities product less frequently may result revenue fluctuations quarter cost sales cost sales includes manufacturing costs well actual estimated royalty expenses associated sales products following table summarizes cost sales years ended december 31 2017 2016 2015 increase cost sales year ended december 31 2017 compared periods 2016 primarily due additional asset related charges 1521 associated planned closure arimf facility announced third quarter 2017 part restructuring charges primarily relate accelerated depreciation impairment manufacturing assets first quarter 2015 recorded expense 244 associated portion single manufacturing campaign third party manufacturer strensiq cost comprised raw materials internal overhead external production costs exclusive items mentioned cost sales percentage net product sales 85 84 80 years ended december 31 2017 2016 2015 respectively expect cost sales decrease percentage sales 2018 compared 2017 due impact restructuring related additional asset charges 2017 research development expense research development expense includes personnel facility direct costs associated research development rd product candidates well product development costs direct expenses comprised costs paid clinical development product development discovery research well costs associated strategic licensing agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab alxn1210 product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities administrative costs incurred product development discovery research costs incurred conducting laboratory studies performing preclinical research uses products product candidates licensing agreement costs include upfront milestone payments made connection strategic licensing arrangements entered third parties clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facilities equipment occupancy costs associated research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following graph provides information regarding research development expenses year ended december 31 2017 incurred rd expenses 8784 increase 1212 160 versus 7572 incurred year ended december 31 2016 increase primarily related following • increase 230 direct clinical development expenses relates primarily expansion studies alxn1210 • increase 372 direct product development expenses related primarily increase costs associated manufacturing material alxn1210 alxn6000 clinical research activities • increase 399 licensing agreement expenses related upfront payments made fourth quarter 2017 related collaboration license agreement halozyme therapeutics inc • increase 169 payroll benefits related primarily increased bonus performance stock compensation expense • increase 174 facilities expenses related primarily accelerated depreciation assets support rd activities associated 2017 restructuring activities year ended december 31 2016 incurred research development expenses 7572 increase 477 67 versus 7095 incurred year ended december 31 2015 increase primarily related following • increase 526 direct clinical development expenses related primarily expansion studies alxn1210 sebelipase alfa eculizumab • increase 478 direct product development expenses related primarily increase costs associated manufacturing material increased clinical research activities clinical studies • increase 98 discovery research expenses primarily related increases external research expenses associated collaboration agreements • increase 557 payroll benefit expense primarily related additional headcount acquired part synageva acquisition june 22 2015 continued global expansion staff supporting increasing number clinical development programs • decrease 1202 licensing agreement expenses related upfront payments made first quarter 2015 following graph summarizes expenses related clinical development programs please refer item 1 “business” description programs following graph summarizes accumulated direct expenses related clinical development programs please refer item 1 “business” description programs 1992 2006 substantially research development expenses related two products eculizumab pexelizumab obtained approval us eculizumab pnh 2007 ahus 2010 ceased development pexelizumab 2006 b unallocated costs shared across various development programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a “risk factors” annual report form 10k expect research development expenses decrease percentage sales 2018 compared 2017 additional information development programs please refer “product development programs” item “business” annual report form 10k selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support products human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2017 incurred selling general administrative expenses 10944 increase 1414 148 versus 9530 incurred year ended december 31 2016 increase primarily related following • increase salary benefits labor expenses 815 primarily related increase commercial activities support continued global launches strensiq kanuma launch soliris gmg employee related costs associated executive leadership changes incentive compensation also increased • increase external selling general administrative expenses 599 increase primarily due increase charitable contributions additional professional services offset part decreases advertising promotional cost compared 2016 increase also due asset impairment charges recorded 2017 related restructuring activities year ended december 31 2016 incurred selling general administrative expenses 9530 increase 904 105 versus 8626 incurred year ended december 31 2015 increase primarily related following • increase external selling general administrative expenses 839 increase primarily due increase legal expenses investigations overseen audit finance committee relating sec doj investigations well audit committee investigation occurred fourth quarter 2016 increase also attributable additional facilities costs result continuing growth operations worldwide expect selling general administrative expenses decrease percentage sales 2018 compared 2017 amortization purchased intangible assets amortization expense associated purchased intangible assets 3201 3222 1166 years ended december 31 2017 2016 2015 respectively amortization expense primarily associated intangible assets related strensiq kanuma third quarter 2015 received regulatory approval strensiq kanuma change fair value contingent consideration years ended december 31 2017 2016 2015 change fair value contingent consideration expense associated prior business combinations 410 357 642 respectively change fair value contingent consideration fluctuate based timing recognition changes probability achieving expected timing milestone payments year ended december 31 2017 changes fair value contingent consideration expense primarily reflect changes expected timing payments contingent consideration well interest component contingent consideration related passage time acquisitionrelated costs years ended december 31 2017 2016 2015 acquisitionrelated costs associated business combinations included following acquisitionrelated costs years ended december 31 2016 2015 resulted acquisition synageva 2015 restructuring expenses first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases initial restructuring activities primarily focused reduction companys global workforce september 2017 committed operational plan realign global organization refocused corporate strategy realignment focuses investments priority growth areas maximize leadership complement grow rare disease business realignment also includes relocation companys headquarters boston massachusetts 2018 new connecticut site continue support employees working research process development laboratories clinical supply quality teams nurse case management number important enterprise business services plan expected reduce companys global workforce approximately 200 restructuring achieve cost savings focusing development portfolio simplifying business structures processes across companys global operations closing multiple alexion sites including arimf certain regional countrybased offices year ended december 31 2017 recorded restructuring expenses 1046 expect pay substantially accrued amounts related 2017 restructuring activities end 2018 currently estimate incurring additional restructuring related expenses approximately 300 700 2018 related 2017 restructuring activities primarily related costs continue execute strategic business plan global footprint may incur restructuring expenses 2018 materially different current estimate connection previous relocation corporate headquarters new connecticut entered lease termination agreement december 2015 previous corporate headquarters located cheshire connecticut recorded contract termination fees 112 restructuring expense fourth quarter 2015 conjunction acquisition integration synageva recorded restructuring expense 133 primarily related employee costs 2015 synageva restructuring charges material year ended december 31 2016 fourth quarter 2014 announced plans relocate european headquarters lausanne switzerland zurich switzerland relocation european headquarters supports operational needs based growth european region years ended december 31 2016 2015 incurred restructuring costs 36 176 respectively related event impairment intangible assets fourth quarter 2016 reviewed sbc103 early stage clinical indefinitelived intangible asset related synageva acquisition part annual impairment testing estimated fair value obtained asset market participant arm’s length transaction determined 310 lower carrying amount asset result fourth quarter 2016 recognized impairment charge 850 writedown asset fair value second quarter 2017 due clinical results recognized impairment charge 310 related sbc103 acquired inprocess research development asset writedown asset fair value determined de minimis december 31 2017 reviewed kanuma asset impairment determined indicators impairment continue review related valuation accounting asset future quarters new information becomes available us changes assumptions used net cash flow projections may result impairment charges subsequent periods net book value kanuma intangible asset december 31 2017 35128 income expense following table provides information regarding income expense increase interest expense year ended december 31 2016 compared year ended december 31 2015 due us borrowing 35000 term loan facility conjunction acquisition synageva june 22 2015 increase also attributable increases interest expense associated facility lease obligations income taxes income tax expense years ended december 31 2017 2016 2015 attributable us federal state foreign income taxes profitable operations year ended december 31 2017 recorded income tax expense 1045 effective tax rate 191 compared income tax expense 1768 3537 effective tax rate 307 710 years ended december 31 2016 2015 respectively december 2017 tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings incorporated onetime transition tax previously unremitted foreign earnings incorporated impact tax act results operations calculated provisional amounts tax effects tax act reasonably estimated year ended december 31 2017 tax act resulted increase tax expense 458 year ended december 31 2017 increase includes transition tax expense 1779 deferred tax expense related new gilti minimum tax 1654 partially offset 2975 benefit remeasuring balance sheet taxes new 210 us federal tax rate remeasurement benefit includes 2924 related decreases net deferred tax liability 51 related decreases income taxes payable deferred tax expense related gilti minimum tax includes incremental deferred tax 2369 net related 715 decrease uncertain tax positions decrease effective tax rate 2017 307 year ended december 31 2016 191 year ended december 31 2017 primarily attributable net increase tax expense 2017 458 attributable tax act offset decreases attributable deferred tax cost 1193 associated distribution earnings captive foreign partnership 2016 conclusion irs examination 2013 2014 tax years 2017 impact enactment tax act increased effective tax rate 2017 84 2016 distribution increased 2016 effective tax rate 207 conclusion irs examination resulted decrease 2017 effective tax rate approximately 36 year ended december 31 2017 decrease effective tax rate 2016 710 year ended december 31 2015 307 year ended december 31 2016 primarily attributable 3156 tax charge recorded 2015 related integration synageva assets captive foreign partnership onetime charge increased effective tax rate 2015 approximately 630 decrease partially offset 1193 deferred tax expense recognized 2016 attributable first quarter distributions foreign captive partnership increased 2016 effective tax rate 207 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realizing deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized financial condition liquidity capital resources following table summarizes components financial condition december 31 2017 2016 aggregate increase cash equivalents marketable securities primarily attributable cash generated operations net proceeds issuance common stock sharebased compensation arrangements partially offsetting increases cash utilized repurchase shares common stock principal payments term loan purchases property plant equipment expect operating expenses decrease percentage sales 2018 also expect reduced capital investment 2018 compared 2017 anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations including principal interest payments credit facility contingent payments acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes financial instruments required use business may invest cash reserves money market funds bank deposits reverse repurchase agreements highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable derivative contracts december 31 2017 four customers accounted 577 accounts receivable balance individual customers accounting 102 189 accounts receivable balance december 31 2016 three customers accounted 470 accounts receivable balance individual customers accounting 137 191 accounts receivable balance year ended december 31 2017 three customers accounted 370 product sales individual customers ranging 108 150 product sales year ended december 31 2016 three customers accounted 367 product sales individual customers ranging 100 160 product sales year ended december 31 2015 three customers accounted 382 product sales individual customers ranging 100 175 product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods continue monitor conditions assess possible impact business date experienced significant losses respect collection accounts receivable manage foreign currency transaction risk interest rate risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2017 foreign exchange forward contracts notional amounts totaling 27081 outstanding foreign exchange forward contracts net fair value liability 475 270 included current assets noncurrent assets 745 included current liabilities noncurrent liabilities december 31 2017 interest rate swap contracts notional amounts totaling 23313 outstanding interest rate swap contracts net fair value 218 included current assets noncurrent assets counterparties contracts large domestic multinational commercial banks believe risk nonperformance material december 31 2017 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments equity securities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily institutional money market funds commercial paper municipal bonds reverse repurchase agreements us foreign governmentrelated debt corporate debt securities certificates deposit derivative contracts level 2 liabilities consist also derivative contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related acquisitions business combinations contingent consideration obligations purchase agreements business combinations include contingent payments totaling 7410 become payable certain development commercial milestones achieved milestone amounts 4510 2900 contingent payments relate development commercial milestones respectively expect amounts impact liquidity nearterm next 12 months expect make milestone payments associated prior business combinations additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds financing license agreements december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets due early stage assets licensing recorded expense upfront payment 400 fourth quarter 2017 addition december 31 2017 could required pay additional 1600 target developed subject achievement specified development regulatory salesbased milestones well royalties commercial sales january 2015 entered license agreement third party obtain exclusive research development commercial license specific therapeutic molecules due early stage assets recorded expense upfront payment 500 first quarter 2015 addition december 31 2017 could required pay additional 8220 certain development regulatory commercial milestones met time well royalties commercial sales march 2015 entered agreement third party allowed us exercise option another third party exclusive worldwide perpetual license rights specialized technology intellectual property simultaneously exercised option due early stage assets recorded expense payments 470 first quarter 2015 march 2015 entered collaboration agreement third party allows us identify optimize drug candidates alexion exclusive worldwide rights develop commercialize products arising collaboration due early stage assets licensing connection collaboration recorded expense upfront payment 150 first quarter 2015 third quarter 2017 terminated agreement third party addition entered license agreements would required pay additional 4880 certain development regulatory commercial milestones met expect payments associated milestones licensing agreements significant impact liquidity nearterm next 12 months expect make milestone payments related license agreements approximately 200 financing lease obligations november 2012 entered lease agreement office laboratory space constructed new connecticut term lease commenced 2015 expire 2030 renewal option ten years although legally premises deemed owner building due substantial improvements directly funded construction period based applicable accounting guidance buildtosuit leases accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet construction new facility completed building placed service first quarter 2016 associated arrangement recognized interest expense 142 140 49 year ended december 31 2017 2016 2015 respectively december 31 2017 2016 total facility lease obligation 1346 1365 respectively recorded within current liabilities facility lease obligation consolidated balance sheets third quarter 2015 entered agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion one existing facilities result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet completion facility including obtaining regulatory approval expected first half 2019 december 31 2017 2016 recorded constructioninprocess asset 1806 1184 respectively offsetting facility lease obligation 1591 1069 respectively within current liabilities facility lease obligation consolidated balance sheets september 2017 entered lease agreement approximately 150000 square feet office space currently constructed boston massachusetts term lease commence upon landlords substantial completion premises expire thirteenth anniversary commencement option renew additional ten years although legally premises due involvement construction period deemed owner portion building lease based applicable accounting guidance buildtosuit leases accordingly landlords costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet landlords construction building process expected completed first half 2018 december 31 2017 recorded constructioninprocess asset 641 offsetting facility lease obligation 596 associated relative portion building within consolidated balance sheets longterm debt june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 35000 term loan facility 5000 revolving facility borrowings term loan facility payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan draw revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 1000 form letters credit borrowings sameday notice referred swingline loans 250 borrowings used working capital requirements acquisitions general corporate purposes december 31 2017 29063 outstanding term loan december 31 2017 open letters credit 22 offset borrowing availability revolving facility manufacturing obligations supply agreements lonza relating manufacture soliris strensiq requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf various agreements lonza remaining total noncancellable commitments approximately 10989 2028 certain commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf payment respect sales soliris manufactured lonza facilities addition lonza noncancellable commitments approximately 273 2019 third party manufacturers taxes recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries fourth quarter 2017 recorded onetime us federal transition tax 1779 imposed undistributed earnings cfc subsidiaries required tax act addition recorded immaterial tax expense related incremental withholding foreign local us state taxes would expect incur dividend distribution earnings us extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential tax impacts tax act recorded provisional basis see note 11 “income taxes” additional information common stock repurchase program november 2012 board directors authorized share repurchase program repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time company’s discretion february 2017 board directors authorized future acquisition shares aggregate value 10000 repurchase program superseded prior repurchase programs program repurchased 40 31 shares common stock cost 4636 4306 years ended december 31 2017 2016 respectively december 31 2017 total 5364 remaining repurchases program cash flows following summarizes net change cash equivalents operating activities cash flows provided operations 2017 11156 compared 10863 2016 increase driven increase gross margin product sales 4240 resulting primarily increase global demand soliris well increased sales strensiq kanuma 2017 result continuing efforts identify reach patients hpp lald globally partially offsetting increase employee separation payments connection 2017 restructuring activities well increases clinical rd product development selling general administrative expenses 2017 expect increases cash flows operations highly dependent sales levels related cash collections sales products investing activities cash used investing activities 2017 9183 compared 2876 2016 increase cash used investing activities primarily attributable purchases maturities availableforsale marketable securities resulted net cash outflow 5589 2017 compared net cash inflow 507 2016 2017 also higher cash outlays associated purchase property plant equipment 3573 compared 3327 2016 significant spending property plant equipment 2017 relates primarily construction new biologics manufacturing facilities ireland financing activities cash flows used financing activities 2017 5966 compared 8362 2016 decrease cash used financing activities primarily due principal payments credit facility 1750 2017 compared 3750 2016 contractual obligations following table summarizes contractual obligations december 31 2017 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a “risk factors” note 9 “commitments contingencies” consolidated financial statements included annual report form 10k liability unrecognized tax benefits related various federal state foreign income tax matters 609 december 31 2017 included within table timing settlement amounts reasonably estimable december 31 2017 expect payment amounts related unrecognized tax benefits within next twelve months contingent payments related business acquisitions completed prior years license agreements included within table timing payment amounts reasonably estimable december 31 2017 contingent payments associated business combinations total 7410 become payable certain development commercial milestones achieved next 12 months expect make milestone payments associated prior business combinations license commitments include contingent payments become payable certain development regulatory commercial milestones achieved next 12 months expect make milestone payments related license agreements approximately 200 future obligations related defined benefit plans included within table timing amounts payments reasonably estimable december 31 2017 total unfunded obligation defined benefit plans december 31 2017 192 unfunded obligation impacted changes laws regulations interest rates investment returns variables credit facilities june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 35000 term loan facility 5000 revolving credit facility maturing five years borrowings term loan payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 1000 form letters credit borrowings sameday notice referred swingline loans 250 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility amount cause consolidated net leverage ratio exceed maximum allowable amount credit agreement may elect loans credit agreement bear interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement obligations credit facilities guaranteed certain alexion’s foreign domestic subsidiaries secured liens certain alexion’s subsidiaries’ equity interests subject certain exceptions credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan operating leases operating leases principally facilities equipment currently lease office space us foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facilities together third party manufacturing facilities adequate ongoing activities addition minimum rental commitments operating leases may also required pay amounts taxes insurance maintenance operating expenses commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreement lonza described commitments lonza include amounts estimated cpi adjustments item 7aitem 7 management’s discussion analysis financial condition results operations amounts millions except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially plans results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecast forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview alexion global biopharmaceutical company focused serving patients families affected rare diseases innovation development commercialization lifechanging therapies global leader complement inhibition developed commercialize two approved complement inhibitors treat patients paroxysmal nocturnal hemoglobinuria pnh well first approved complement inhibitor treat atypical hemolytic uremic syndrome ahus antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg addition alexion two highly innovative enzyme replacement therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald leader complement biology 20 years alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders recent developments fourth quarter 2018 completed acquisition syntimmune inc syntimmune clinicalstage biotechnology company developing antibody therapy targeting neonatal fc receptor fcrn lead candidate acquisition alxn1830 synt001 monoclonal antibody inhibits interaction fcrn immunoglobulin g igg immune complexes studied phase 1b2a trials treatment iggmediated autoimmune diseases terms agreement alexion acquired syntimmune upfront payment 4000 potential additional milestonedependent payments 8000 total value 12000 december 2018 ultomiris™ approved fda new treatment option adult patients living paroxysmal nocturnal hemoglobinuria pnh ultomiris first longacting c5 inhibitor provides immediate complete inhibition eight weeks january 2019 submitted filings fda eu marketing clearance soliris potential treatment nmosd january 21 2019 opposition division european patent office determined following multiparty opposition proceedings revoke european patent 2359834 relates formulation soliris subject review final written decision european patent office currently expect appeal decision appeal pending european patent office claims originally granted patent remain force january 2019 announced results phase iii study ultomiris alxn1210 meeting primary objective complement inhibitornaïve patients ahus initial 26 week treatment period study 536 percent patients demonstrated complete thrombotic microangiopathy tma response january 2019 entered collaboration agreement caelum biosciences caelum develop cael101 light chain al amyloidosis terms agreement acquired minority equity interest caelum exclusive option acquire remaining equity company based phase ii data prenegotiated economics made upfront payment 300 could required pay additional 300 contingent milestonedependent option fees collaboration also provides potential additional payments event alexion exercises acquisition option 5000 includes upfront option exercise payment potential regulatory commercial milestone payments critical accounting policies use estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k accounting principles generally accepted us required make estimates judgments assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates differences may material believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition may 2014 financial accounting standards board fasb issued comprehensive new standard amends revenue recognition principles adopted new standard january 1 2018 applying modified retrospective method contracts completed date new guidance revenue recognized customer obtains control promised goods services amount reflects consideration expected received exchange goods services revenue recognized fivestep process identify contracts customer ii identify performance obligations contract iii determine transaction price iv allocate transaction price performance obligations contract v recognize revenue performance obligation satisfied company applies fivestep model contracts probable company collect consideration entitled exchange goods services transfers customer contract inception company assesses goods services promised within contract determines performance obligations revenue recognized applicable performance element distinct performance obligation satisfied results reporting periods beginning january 1 2018 presented new guidance prior period amounts adjusted continue reported accounting standards effect prior period accounting policy revenue recognition periods prior january 1 2018 described note 1 notes consolidated financial statements included annual report form 10k year ended december 31 2017 nature products principal source revenue product sales contracts customers generally contain single performance obligation recognize revenue product sales satisfied performance obligation transferring control product customers control product generally transfers customer upon delivery certain countries sell distributors consignment basis record revenue control product transfers customer upon sale end user customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell governments government agencies addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale revenue recognized amount expect entitled exchange sale products amount includes fixed variable consideration excludes amounts collected customers remitted governmental authorities valueadded taxes foreign jurisdictions shipping handling costs associated outbound freight control product transferred customers accounted fulfillment cost included operating expenses cost shipping handling activities including customs clearance activities associated transactions revenue recognized accrued completed respective period end timing recognition revenue product sales receipt payment significant standard credit terms vary based country sale generally range 30 120 days arrangements generally payable within one year transfer product assess whether contract significant financing component expectation contract inception period transfer promised good customer receipt payment one year less evaluate creditworthiness customers regular basis length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility probable time sale december 31 2018 december 31 2017 allowances receivables material variable consideration pay distribution fees distributors offer rebates andor discounts enter volumebased reimbursement arrangements certain customers reduce transaction price sales amounts variable amounts estimate amount consideration expect entitled based available historic current forecast information primarily use expected value method estimate variable payments limited circumstances apply likely method based type variable consideration method better predicts amount consideration expect entitled consideration received customer expect need refunded future recorded refund liability customer within accrued expenses actual amounts consideration ultimately received refunded may differ estimates difference may material actual results future vary estimates adjust estimates would affect net product sales earnings period variances become known variances may material variability transaction price products pursuant contracts customers primarily arises following discounts rebates offer discounts rebates certain distributors customers arrangements many cases amounts fixed time sale transaction price reduced accordingly also provide rebates certain governmental programs including medicaid us programs outside us payable based actual claim data estimate rebates based analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made impact may material generally length time product sale processing reporting rebates three six months volumebased arrangements entered volumebased arrangements governments certain countries customers reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid customer rebate estimate incremental discounts resulting contractual limitations based forecasted sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change provided balances activity rebates payable account years ended december 31 2018 2017 2016 follows current provisions relating sales current year increased 416 2018 compared 2017 792 2017 compared 2016 increase 2018 primarily due increased unit volumes us subject rebates well increases rebate rates us certain product sales increase 2017 attributable increased unit volumes us europe subject rebates well increases rebate rates certain geographical regions certain product sales compared prior year distribution fees pay distribution fees certain customers connection sales products record distribution fees paid customers reduction revenue unless payment distinct good service customer reasonably estimate fair value goods services received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale product returns contracts customers generally provide returns product damaged defective upon delivery assess sales transactions arrangements customers monitor inventory within sales channels determine whether provision returns warranted resulting adjustment transaction price necessary assessment based historical experience assumptions date sale changes estimates could impact period change occurs impact may material factors price products limited number patients short period product sale patient infusion limited contractual return rights customers often carry limited inventory amount variable consideration included transaction price constrained amount probable result significant reversal revenue consider experience similar transactions expectations regarding contract estimating amount variable consideration expect entitled determining whether estimated variable consideration constrained material constraints variable consideration included within transaction price current revenue arrangements continue monitor economic conditions including volatility associated international economies associated impacts financial markets business additional information related concentration credit risk associated certain international accounts receivable balances refer “financial condition liquidity capital resources” “quantitative qualitative disclosures market risk” sections contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims offers settlement may reassess potential liability related matters may revise estimates could result material adjustment operating results liquidity inventories stated lower cost net realizable value cost determined manner approximates average costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized products approved fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form product utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout pre postproduction process continually gather information regarding product quality periods manufacturing date products currently maximum estimated life range 36 48 months based sales forecasts expect realize carrying value product inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required writeoffs may material sharebased compensation two sharebased compensation plans pursuant awards currently made 2017 incentive plan 2017 plan ii 2015 employee stock purchase plan espp 2017 plan replaced amended restated 2004 incentive plan effective may 10 2017 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life actual volatility lives options may significantly different estimates nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 85 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 15 discount recognized compensation expense 6 month purchase period factors change employ different assumptions value stockbased awards sharebased compensation expense record future periods may differ materially prior recorded amounts valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets iprd related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited • timing costs complete inprocess projects • timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects • discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment certain events occur intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets projects successfully developed sales profitability may adversely affected future periods additionally value acquired intangible assets including iprd may become impaired underlying projects progress initially estimated believe assumptions used developing estimates intangible asset values reasonable time respective acquisitions however underlying assumptions used estimate expected project sales development costs profitability events associated projects clinical results may occur estimated acquisition date goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors • timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones estimated future sales levels specific compound • discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse december 22 2017 tax cuts jobs act tax act enacted law tax act decreased us statutory corporate tax rate years beginning december 31 2017 included domestic international tax provisions affect measurement deferred tax assets liabilities result revalued deferred tax assets liabilities december 31 2017 recorded deferred tax benefit 2924 recorded impacts tax act provisional basis 2017 december 22 2018 accounting impact tax act complete see note 12 “income taxes” consolidated financial statements included elsewhere annual report form 10k additional information estimate tax effect reversing temporary differences reflective actual outcomes modified reflect new developments interpretations tax law revised incorporate new accounting principles changes expected timing manner reversal results operations could materially impacted follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken irs taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record adjustments income tax expense period adjustments may material new accounting pronouncements february 2016 fasb issued new standard requires lessees recognize leases onbalance sheet disclose key information leasing arrangements new standard establishes rightofuse rou model requires lessee recognize rou asset lease liability balance sheet leases term longer 12 months leases classified finance operating classification affecting pattern classification expense recognition income statement standard effective january 1 2019 early adoption permitted adopted new standard january 1 2019 use effective date initial application july 2018 fasb issued update provided additional transition option allows companies continue applying guidance lease standard effect time comparative periods presented consolidated financial statements companies elect option would record cumulativeeffect adjustment opening balance retained earnings date adoption elected optional transition method also elected “package practical expedients” permits us reassess new standard prior conclusions lease identification lease classification initial direct costs continue evaluate practical expedients available standard substantially completed assessment standard well implementation leasing software including data upload test procedures continue finalize calculations including discount rate assumptions related new standard also continuing establish new processes internal controls may required comply new lease accounting disclosure requirements set new standard expect impact standard adoption decrease assets liabilities retained earnings within consolidated balance sheet decreases result derecognition existing assets financing obligations related build suit leases offset recognition new rou assets liabilities result leasing standard june 2016 fasb issued new standard intended improve reporting requirements specific loans receivables financial instruments new standard requires credit losses reported based expected losses compared current incurred loss model new standard also requires enhanced disclosure credit risk associated respective assets standard effective interim annual periods beginning december 15 2019 early adoption permitted currently assessing impact standard financial condition results operations february 2018 fasb issued new standard would permit entities make one time reclassification accumulated comprehensive income aoci retained earnings stranded tax effects resulting newly enacted corporate tax rates tax act effective year ended december 31 2017 amount reclassification calculated basis difference historical tax rate newly enacted tax rate standard effective interim annual periods beginning december 15 2018 early adoption permitted currently assessing impact standard financial condition august 2018 fasb issued new standard customers accounting implementation setup upfront costs incurred cloud computing arrangement cca new guidance customers assess cca includes software license cca include software license implementation setup costs accounted consistent existing internaluse software implementation guidance implementation costs associated cca include software license would expensed operating expenses standard also provides classification guidance implementation costs well additional quantitative qualitative disclosures standard effective public business entities fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted including adoption interim periods entities choose adopt new guidance prospectively retrospectively currently assessing impact standard statement financial condition results operations recently adopted accounting pronouncements may 2014 fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides fivestep framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services adopted new standard january 1 2018 january 2017 fasb issued new standard clarifies definition business determines integrated set assets activities business framework requires substantially fair value gross assets acquired disposed concentrated single asset group similar identifiable assets would represent business adopted new standard january 1 2018 applied new guidance prospectively transactions occurring adoption anticipate adoption new standard likely result transactions extent transactions undertaken company accounted asset acquisitions january 2016 fasb issued new standard changes accounting equity investments financial liabilities fair value option presentation disclosure requirements financial instruments addition fasb clarified guidance related valuation allowance assessment recognizing deferred tax assets resulting unrealized losses availableforsale debt securities equity investments readily determinable fair values measured fair value changes fair value recognized net income companies option either measure equity investments without readily determinable fair values fair value cost adjusted changes observable prices minus impairment adopted new standard january 1 2018 elected measure existing equity investments without readily determinable fair values cost adjusted changes observable prices minus impairment connection adoption new standard reclassified immaterial amount unrealized gains equity securities accumulated comprehensive income retained earnings guidance related equity investments without readily determinable fair values applied prospectively equity investments existed date adoption assess equity investments without readily determinable fair values observable price changes impairment quarterly basis see note 7 “other investments” consolidated financial statements included elsewhere annual report form 10k details march 2017 fasb issued new standard improves presentation net periodic pension cost net periodic post retirement benefit cost requiring bifurcation net benefit cost new standard service cost component net benefit cost presented employee costs operating expenses components reported separately income expense adopted new standard january 1 2018 adoption standard material impact consolidated statements operations november 2016 fasb issued new standard clarifies entities present restricted cash statement cash flows new standard changes total cash inclusive restricted cash reflected statement cash flows result transfers cash restricted cash longer reflected activity within statement cash flows adopted new standard january 1 2018 adoption standard material impact consolidated statements cash flows august 2017 fasb issued new standard intended improve simplify certain aspects accounting hedges new standard intended closely align hedge accounting companies’ risk management strategies simplify application hedge accounting increase transparency scope results hedging programs also amends presentation disclosure requirements changes companies assess effectiveness standard effective interim annual periods beginning december 15 2018 early adoption permitted early adopted new standard second quarter 2018 using modified retrospective method adoption standard material impact consolidated financial statements results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison years ended december 31 2018 2017 2016 net product sales net product sales product significant geographic region follows percentages meaningful net product sales consolidated soliris net product sales strensiq net product sales kanuma net product sales components increase net product sales december 31 2018 compared 2017 follows increase net product sales fiscal year 2018 compared fiscal year 2017 primarily due increase unit volumes 201 increase unit volumes primarily due increased global demand soliris therapy including sales patients gmg received regulatory approval second half 2017 additional unit volume increases due increased sales strensiq kanuma 2018 result continuing efforts identify reach patients hpp lald globally increase net product sales fiscal year 2018 compared fiscal year 2017 partially offset price decreases 39 due part price change turkey resulting formalized reimbursement agreement subsequent marketing authorization third quarter 2018 addition rebates us reimbursement agreements outside us metabolic products also contributed decrease net product sales components increase revenues year ended december 31 2017 compared period 2016 follows increase net product sales fiscal year 2017 compared fiscal year 2016 primarily due increase unit volumes 168 due increased demand globally soliris therapy patients pnh ahus increased sales strensiq kanuma 2017 cost sales cost sales includes manufacturing costs actual estimated royalty expenses associated sales products amortization licensing rights following table summarizes cost sales years ended december 31 2018 2017 2016 cost sales year ended december 31 2018 december 31 2017 included asset related charges 58 1521 respectively associated closure arimf facility announced third quarter 2017 facility sold 2018 charges primarily relate accelerated depreciation impairment manufacturing assets exclusive items mentioned cost sales percentage net product sales 89 85 84 years ended december 31 2018 2017 2016 respectively research development expense research development expense includes personnel facility direct costs associated research development rd product candidates well product development costs additional information development programs please refer product development programs item business annual report form 10k rd expenses comprised costs paid clinical development product development discovery research well costs associated certain strategic licensing agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab alxn1210 product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities milestone expenses related licensing agreements collaborations administrative costs incurred product development discovery research costs incurred conducting laboratory studies performing preclinical research uses products product candidates milestone expenses related licensing agreements collaborations discovery stage upfront payments include upfront payments related licenses collaborations clinical development costs accumulated allocated programs product development discovery research costs allocated facilities rd expenses consist costs compensate personnel maintain facilities equipment occupancy costs associated research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following graph provides information regarding research development expenses year ended december 31 2018 incurred rd expenses 7304 decrease 1480 168 versus 8784 incurred year ended december 31 2017 decrease primarily related following • decrease 709 direct clinical development expenses related primarily decreases various eculizamab clinical studies offset expansion studies alxn1210 • increase 130 direct product development expenses related primarily increase costs associated manufacturing material alxn1210 offset decrease alxn6000 clinical research activities alxn6000 program discontinued • decrease 222 upfront payments due nature timing licensing collaborations agreements executed 2018 compared 2017 • decrease 129 discovery primarily related deprioritized preclinical arrangements moderna therapeutics blueprint medicines longer conduct development efforts entities • decrease 260 payroll benefits primarily related headcount reductions resulting restructuring activities initiated 2017 • decrease 290 facilities related expenses primarily related decreased facilities expenses primarily resulting impact 2017 restructuring year ended december 31 2017 incurred research development expenses 8784 increase 1212 160 versus 7572 incurred year ended december 31 2016 increase primarily related following • increase 230 direct clinical development expenses related primarily expansion alxn 1210 studies • increase 362 direct product development expenses related primarily increase costs associated manufacturing material alxn1210 alxn6000 clinical research activities • increase 489 upfront payments made fourth quarter 2017 related collaboration license agreement halozyme therapeutics inc • increase 169 payroll benefits related primarily increased bonus performance stock compensation expense • increase 174 facilities expenses related primarily accelerated depreciation assets support rd activities associated 2017 restructuring activities following graph summarizes expenses related clinical development programs following graph summarizes accumulated direct expenses related clinical development programs january 1 2006 december 31 2018 1992 2006 substantially research development expenses related two products eculizumab pexelizumab obtained approval us eculizumab pnh 2007 ahus 2010 ceased development pexelizumab 2006 b unallocated costs shared across various development programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals product development programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding development programs please refer item 1a “risk factors” annual report form 10k expect research development expenses remain consistent percentage sales 2019 compared 2018 selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support products human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2018 incurred selling general administrative expenses 11118 increase 174 16 versus 10944 incurred year ended december 31 2017 increase primarily related following • increase external selling general administrative expenses 202 increase primarily due increase professional services asset related charges associated previously announced restructuring programs increases partially offset decreased distribution expenses compared period 2017 year ended december 31 2017 incurred selling general administrative expenses 10944 increase 1414 148 versus 9530 incurred year ended december 31 2016 increase primarily related following • increase salary benefits labor expenses 815 primarily related increase commercial activities support continued global launches strensiq kanuma launch soliris gmg employee related costs associated executive leadership changes incentive compensation also increased • increase external selling general administrative expenses 599 increase primarily due increase charitable contributions additional professional services offset part decreases advertising promotional cost compared 2016 increase also due asset impairment charges recorded 2017 related restructuring activities expect selling general administrative expenses decrease percentage sales 2019 compared 2018 acquired inprocess research development year ended december 31 2018 recorded acquired inprocess research development iprd expense 11830 increase acquired iprd year ended december 31 2018 compared 2017 2016 due wilson therapeutics acquisition completed second quarter 2018 syntimmune acquisition completed fourth quarter 2018 iprd assets associated acquisitions principal assets acquired transaction reached technological feasibility alternative future use acquisition date therefore expensed 2018 amortization purchased intangible assets amortization expense associated purchased intangible assets 3201 3222 years ended december 31 2018 2017 2016 respectively amortization expense primarily associated intangible assets related strensiq kanuma change fair value contingent consideration years ended december 31 2018 2017 2016 change fair value contingent consideration expense associated prior business combinations 1165 410 357 respectively change fair value contingent consideration fluctuate based timing recognition changes probability achieving expected timing milestone payments connection previous acquisitions september 2018 amended terms certain contingent milestone payments due prior merger agreement enobia pharma corp enobia dated december 28 2011 agreement removed obligations respect regulatory milestone redistributed contingent payment associated milestone various sales milestones result agreement probability achieving various sales milestones contingent consideration liability increased 487 third quarter 2018 year ended december 31 2018 changes fair value contingent consideration expense primarily reflect impact agreement enobia amend milestones changes expected timing payments contingent consideration well interest component contingent consideration related passage time restructuring expenses years ended december 31 2018 2017 recorded 255 1046 respectively restructuring expenses charges year ended 2018 mainly attributable relocation corporate headquarters new connecticut boston massachusetts related costs charges year ended 2017 mainly attributable employee separation costs connection 2017 restructuring described first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases initial restructuring activities primarily focused reduction companys global workforce september 2017 committed operational plan realign global organization refocused corporate strategy realignment focused investments priority growth areas maximize leadership complement grow rare disease business realignment also included relocation companys headquarters boston massachusetts 2018 new connecticut site continues support employees working research process development laboratories clinical supply quality teams nurse case management number important enterprise business services 2017 restructuring plan reduced companys global workforce approximately 200 restructuring achieved cost savings focusing development portfolio simplifying business structures processes across companys global operations closing multiple alexion sites including arimf certain regional countrybased offices first quarter 2019 undertaken corporate restructuring activities realign global organization refocused strategy reduce costs realize operational efficiencies expect incur estimated expenses 250 associated recent restructuring end 2019 additional information 2019 corporate restructuring activity see item 1 “business sales marketing” elsewhere annual report form 10k impairment intangible assets fourth quarter 2016 reviewed sbc103 early stage clinical indefinitelived intangible asset related synageva acquisition part annual impairment testing estimated fair value obtained asset market participant arm’s length transaction determined 310 lower carrying amount asset result fourth quarter 2016 recognized impairment charge 850 writedown asset fair value second quarter 2017 due clinical results recognized impairment charge 310 related sbc103 acquired inprocess research development asset writedown asset fair value determined de minimis december 31 2018 reviewed kanuma asset impairment determined indicators impairment continue review related valuation accounting asset future quarters new information becomes available us changes assumptions used net cash flow projections may result impairment charges subsequent periods net book value kanuma intangible asset december 31 2018 32526 income expense following table provides information regarding income expense year ended december 31 2018 experienced increase investment income primarily due recognition unrealized gains 444 moderna therapeutics equity investment income taxes income tax expense years ended december 31 2018 2017 2016 attributable us federal state foreign income taxes profitable operations year ended december 31 2018 recorded income tax expense 1646 effective tax rate 680 compared income tax expense 1045 1768 effective tax rate 191 307 years ended december 31 2017 2016 respectively increase effective tax rate 2018 191 year ended december 31 2017 680 year ended december 31 2018 primarily attributable acquisitions syntimmune wilson therapeutics absent successful clinical results regulatory approval alternative future use inprocess research assets acquired acquisitions accordingly value assets acquired 11830 expensed acquired inprocess research development tax benefit recognized syntimmune wilson therapeutics acquisitions resulted increase effective tax rate approximately 1026 increase partially offset decrease us statutory rate related adjustments result tax act items resulted decrease approximately 457 december 2017 tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings incorporated onetime transition tax previously unremitted foreign earnings incorporated impact tax act results operations calculated provisional amounts tax effects tax act could reasonably estimated year ended december 31 2017 recorded adjustments provisional accounting 2018 resulted decrease tax expense 565 completed accounting tax act fourth quarter 2018 tax act resulted increase tax expense year ended december 31 2017 458 increase included transition tax expense 1779 deferred tax expense related new gilti minimum tax 1654 partially offset 2975 benefit remeasuring balance sheet taxes new 210 us federal tax rate remeasurement benefit included 2924 related decreases net deferred tax liability 51 related decreases income taxes payable deferred tax expense related gilti minimum tax included incremental deferred tax 2369 net related 715 decrease uncertain tax positions decrease effective tax rate 2017 307 year ended december 31 2016 191 year ended december 31 2017 primarily attributable net increase tax expense 2017 458 attributable tax act offset decreases attributable deferred tax cost 1193 associated distribution earnings captive foreign partnership 2016 conclusion irs examination 2013 2014 tax years 2017 impact enactment tax act increased effective tax rate 2017 84 2016 distribution earnings increased 2016 effective tax rate 207 conclusion irs examination resulted decrease 2017 effective tax rate approximately 36 year ended december 31 2017 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realizing deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized financial condition liquidity capital resources following table summarizes components financial condition december 31 2018 2017 aggregate increase cash equivalents marketable securities 897 december 31 2018 compared december 31 2017 primarily attributable cash generated operations net proceeds issuance common stock sharebased compensation arrangements partially offsetting increases cash utilized repurchase shares common stock principal payments term loan connection entering amended restated credit agreement june 2018 purchases property plant equipment excluding impact future asset acquisitions expect annual operating expenses decrease percentage sales 2019 compared 2018 also expect reduced capital investment 2019 compared 2018 anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned least next twelve months financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations including principal interest payments amended restated credit agreement contingent payments acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes new sources financing equity andor debt financings may always available acceptable terms may required obtain certain consents connection completing financings financial instruments required use business may invest cash reserves money market funds bank deposits reverse repurchase agreements highquality marketable debt securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable derivative contracts december 31 2018 three customers accounted 487 accounts receivable balance individual customers accounting 140 191 accounts receivable balance december 31 2017 four customers accounted 577 accounts receivable balance individual customers accounting 102 189 accounts receivable balance year ended december 31 2018 four customers accounted 503 product sales individual customers ranging 100 164 product sales year ended december 31 2017 three customers accounted 370 product sales individual customers ranging 108 150 product sales year ended december 31 2016 three customers accounted 367 product sales individual customers ranging 100 160 product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods continue monitor conditions assess possible impact business date experienced significant losses respect collection accounts receivable manage foreign currency transaction risk interest rate risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2018 foreign exchange forward contracts notional amounts totaling 25230 outstanding foreign exchange forward contracts net fair value liability 189 408 included current assets noncurrent assets 219 included current liabilities noncurrent liabilities december 31 2018 interest rate swap contracts notional amounts totaling 38813 outstanding interest rate swap contracts net fair value 20 201 included current assets 181 included current liabilities noncurrent liabilities counterparties contracts large domestic multinational commercial banks believe risk nonperformance material december 31 2018 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments equity securities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily money market funds commercial paper municipal bonds reverse repurchase agreements us foreign governmentrelated debt corporate debt securities certificates deposit equity securities subject holding period restrictions derivative contracts level 2 liabilities consist also derivative contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related acquisitions business combinations contingent consideration obligations december 31 2018 purchase agreements business combinations include contingent payments totaling 7020 become payable certain development commercial milestones achieved milestone amounts 3670 3350 contingent payments relate development commercial milestones respectively expect amounts impact liquidity nearterm next 12 months expect make milestone payments approximately 1000 associated prior business combinations additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds sale equity securities debt asset acquisitions license agreements fourth quarter 2018 alexion acquired syntimmune clinicalstage biotechnology company developing antibody therapy targeting neonatal fc receptor fcrn upfront payment 4000 terms agreement could also required pay 8000 upon achievement specified research development regulatory commercial milestones october 2018 entered collaboration agreement dicerna pharmaceuticals inc dicerna provides us exclusive worldwide licenses development commercial rights two preclinical rna interference rnai subcutaneously delivered molecules complementmediated diseases well exclusive option preclinical rnai molecules two additional targets within complement pathway addition collaboration agreement made equity investment dicerna terms agreements made upfront payment 370 exclusive licenses equity investment market value equity investment 103 date acquisition recorded assets consolidated balance sheets due early stage assets licensing recorded expense upfront license payment 267 fourth quarter 2018 addition december 31 2018 could also required pay approximately 6250 option exercise fees amounts due upon achievement specified research development regulatory commercial milestones well royalties commercial sales december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets due early stage assets licensing recorded expense upfront payment 400 fourth quarter 2017 addition december 31 2018 could required pay additional 1600 target developed subject achievement specified development regulatory salesbased milestones well royalties commercial sales addition entered license agreements may required pay additional 1372 certain development regulatory commercial milestones met expect payments associated milestones asset acquisitions licensing agreements significant impact liquidity nearterm next 12 months may make milestone payments related arrangements approximately 2550 financing lease obligations november 2012 entered lease agreement office laboratory space constructed new connecticut term lease commenced 2015 expire 2030 renewal option ten years although legally premises deemed owner building due substantial improvements directly funded construction period based applicable accounting guidance buildtosuit leases accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet construction new facility completed building placed service first quarter 2016 associated arrangement recognized interest expense 133 142 140 years ended december 31 2018 2017 2016 respectively december 31 2018 2017 total facility lease obligation 1335 1346 respectively recorded within current liabilities facility lease obligation consolidated balance sheets third quarter 2015 entered agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion one existing facilities result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet expect completion facility including obtaining regulatory approval 2019 december 31 2018 2017 recorded constructioninprocess asset 2039 1806 respectively offsetting facility lease obligation 1551 1591 respectively within current liabilities facility lease obligation consolidated balance sheets september 2017 entered lease agreement approximately 150000 square feet office space constructed boston massachusetts construction facility completed building placed service second quarter 2018 term lease commenced upon landlords substantial completion facility second quarter 2018 expire thirteenth anniversary commencement option renew additional 10 years although legally premises due involvement construction period deemed owner portion building lease based applicable accounting guidance buildtosuit leases accordingly landlords costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet interest expense recognized 2018 material december 31 2018 2017 total facility lease obligation 836 596 respectively recorded within facility lease obligation consolidated balance sheets facility lease obligations derecognized 2019 upon adoption new lease accounting standard replaced rou liabilities going forward see note 1 business overview summary significant accounting policies consolidated financial statements included elsewhere annual report form 10k information longterm debt june 7 2018 alexion entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amends restates credit agreement dated june 22 2015 prior credit agreement credit agreement provides 26125 term loan facility 10000 revolving facility borrowings used working capital requirements acquisitions general corporate purposes beginning quarter ending june 30 2019 required make amortization payments 500 aggregate principal amount term loan facility annually payable equal quarterly installments december 31 2018 26125 outstanding term loan 2500 borrowings outstanding revolving credit facility 2500 proceeds revolving credit facility used refinance amounts outstanding prior credit agreement december 31 2018 open letters credit 17 offset borrowing availability revolving facility january 2019 paid outstanding revolving credit facility 2500 full manufacturing obligations supply agreements lonza relating manufacture soliris strensiq requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs various agreements lonza remaining total noncancellable commitments approximately 10846 2029 certain commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf prior sale payment respect sales soliris manufactured lonza facilities addition lonza noncancellable commitments approximately 1041 2020 third party manufacturers taxes recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential withholding foreign local us state income taxes common stock repurchase program november 2012 board directors authorized share repurchase program repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time company’s discretion february 2017 board directors increased amount authorized expend future repurchases 1000 repurchase program superseded prior repurchase programs program repurchased 07 40 shares common stock cost 850 4636 years ended december 31 2018 2017 respectively december 31 2018 total 4515 remaining repurchases program cash flows following summarizes net change cash equivalents operating activities cash flows provided operations 2018 4260 compared 11156 2017 decrease cash provided operating activities primarily due acquisition wilson therapeutics syntimmune higher cash payments restructuring incentive compensation well impact timing cash receipts payments year ended 2018 compared period prior year decrease partially offset increase operating income excluding impact iprd charge associated wilson therapeutics syntimmune acquisitions investing activities cash provided used investing activities 2018 4705 compared 9183 2017 increase cash provided investing activities primarily attributable proceeds maturities availableforsale marketable securities resulted net cash inflows 6908 2018 compared net cash outflows 5589 2017 2018 also lower cash outlays associated purchase property plant equipment 2130 compared 3573 2017 significant spending property plant equipment 2017 related primarily construction new biologics manufacturing facilities ireland financing activities cash flows used financing activities 2018 1024 compared 5966 2017 decrease cash used financing activities primarily due repurchasing 3786 less common stock 2018 2017 additionally cash used financing activities decreased result reduced net payments outstanding credit facility 438 2018compared 1750 2017 contractual obligations following table summarizes contractual obligations december 31 2018 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts december 31 2018 subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a “risk factors” note 11 “commitments contingencies” consolidated financial statements included elsewhere annual report form 10k liability unrecognized tax benefits related various federal state foreign income tax matters 927 december 31 2018 included within table timing settlement amounts reasonably estimable december 31 2018 expect payment amounts related unrecognized tax benefits within next twelve months contingent payments related business acquisitions asset acquisitions license agreements included within table satisfaction contingent consideration obligations uncertain december 31 2018 satisfied timing payment amounts reasonably estimable december 31 2018 contingent payments associated business combinations total 7020 become payable certain development commercial milestones achieved next 12 months expect make milestone payments approximately 1000 associated prior business combinations commitments related asset acquisitions license agreements include contingent payments become payable certain development regulatory commercial milestones achieved next 12 months may make milestone payments related asset acquisitions license agreements approximately 2550 future obligations related defined benefit plans included within table timing amounts payments reasonably estimable december 31 2018 total unfunded obligation defined benefit plans december 31 2018 176 unfunded obligation impacted changes laws regulations interest rates investment returns variables credit facilities june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amends restates agreement dated june 22 2015 prior agreement credit agreement provides 10000 revolving credit facility 26125 term loan facility revolving credit facility term loan facility mature june 7 2023 beginning quarter ending june 30 2019 required make amortization payments 500 aggregate principal amount term loan facility annually payable equal quarterly installments loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement obligations credit agreement guaranteed certain foreign domestic subsidiaries secured liens certain subsidiaries’ equity interests subject certain exceptions terms credit agreement must maintain ratio total net debt ebitda 350 100 subject certain limited adjustments ebitda cash interest expense ratio least 350 100 case calculated accordance credit agreement credit agreement contains certain representations warranties affirmative negative covenants events default negative covenants credit agreement restrict alexion’s subsidiaries’ ability subject certain baskets exceptions among things incur liens indebtedness make investments enter mergers fundamental changes make dispositions pay dividends restriction dividend payments includes exception permits us pay dividends make restricted payments regardless dollar amount long giving pro forma effect thereto consolidated net leverage ratio defined credit agreement within predefined ranges subject certain increases following designated material acquisitions operating leases operating leases principally facilities equipment currently lease office space us foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facilities together third party manufacturing facilities adequate ongoing activities addition minimum rental commitments operating leases may also required pay amounts taxes insurance maintenance operating expenses commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreements lonza described commitments lonza include amounts estimated consumer price index cpi adjustments obligated pay lonza item 7aitem 7management’s discussion analysis financial condition results operations amounts millions except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially expectations plans anticipated results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecasted forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview alexion global biopharmaceutical company focused serving patients families affected rare diseases devastating conditions discovery development commercialization lifechanging medicines leader rare diseases 25 years alexion developed commercializes two approved complement inhibitors treat patients paroxysmal nocturnal hemoglobinuria pnh atypical hemolytic uremic syndrome ahus well first approved complement inhibitor treat antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg neuromyelitis optica spectrum disorder nmosd patients antiaquaporin4 aqp4 antibody positive alexion also two highly innovative enzyme replacement therapies first approved therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald acquisition portola pharmaceuticals inc portola july 2020 added first approved factor xa inhibitor reversal agent patients treated rivaroxaban apixaban reversal anticoagulation needed due lifethreatening uncontrolled bleeding addition marketed therapies diverse pipeline resulting internal innovation business development alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders cardiology ophthalmology acute care merger agreement astrazeneca december 12 2020 entered agreement plan merger agreement astrazeneca plc public limited company incorporated laws england wales astrazeneca delta omega sub holdings inc delaware corporation wholly owned subsidiary astrazeneca bidco delta omega sub holdings inc 1 delaware corporation direct wholly owned subsidiary bidco merger sub delta omega sub holdings llc 2 delaware limited liability company direct wholly owned subsidiary bidco merger sub ii merger agreement provides among things subject satisfaction waiver conditions set forth therein 1 merger sub merge alexion “first merger” alexion surviving first merger wholly owned subsidiary bidco 2 immediately following effective time first merger effective time alexion merge merger sub ii second merger together first merger mergers merger sub ii surviving second merger wholly owned subsidiary bidco indirect wholly owned subsidiary astrazeneca merger agreement effective time defined merger agreement share common stock par value 00001 per share alexion issued outstanding immediately prior effective time certain excluded shares described merger agreement converted right receive 1 21243 american depositary shares astrazeneca election holder thereof number ordinary shares astrazeneca equal number underlying ordinary shares represented american depositary shares 2 6000 cash without interest collectively “merger consideration” boards directors companies unanimously approved acquisition respective obligations alexion astrazeneca consummate transactions contemplated merger agreement subject satisfaction waiver number customary conditions including 1 adoption merger agreement alexion’s stockholders 2 approval transactions contemplated merger agreement astrazeneca’s shareholders 3 absence law order prohibiting consummation mergers 4 astrazeneca’s registration statement form declared effective securities exchange commission 5 astrazeneca’s shareholder circular required prospectus approved uk financial conduct authority 6 american depository shares astrazeneca issuable mergers ordinary shares astrazeneca represented thereby approved listing nasdaq 7 expiration early termination applicable waiting period hartscottrodino antitrust improvements act 1976 amended approval mergers antitrust foreign investment laws specified jurisdictions 8 accuracy party’s representations warranties subject certain materiality standards set forth merger agreement 9 compliance party material respects party’s obligations merger agreement without limiting generality foregoing subject variety specified restrictions merger agreement unless obtain astrazeneca’s prior written consent may unreasonably withheld conditioned delayed except required expressly contemplated merger agreement ii required applicable law iii set forth confidential disclosure schedule delivered alexion astrazeneca may among things subject certain exceptions aggregate limitations incur additional indebtedness issue additional shares common stock outside equity incentive plans repurchase common stock pay dividends acquire assets securities property dispose businesses assets enter material contracts make certain additional capital expenditures transaction subject financing condition support financing offer consideration astrazeneca entered new committed 175000 bridgefinancing facility provided morgan stanley jp morgan securities plc goldman sachs merger agreement alexion required make payment astrazeneca equal 11800 merger agreement terminated certain circumstances including alexion board directors changed recommendation favor mergers terminated merger agreement order enter agreement providing company superior proposal defined merger agreement alexion required make payment astrazeneca equal 2700 merger agreement terminated alexion’s stockholders fail adopt merger agreement astrazeneca required make payment alexion equal 14150 merger agreement terminated certain circumstances including astrazeneca board directors changed recommendation favor mergers astrazeneca’s shareholders fail approve transactions contemplated merger agreement acquisition expected close third quarter 2021 upon completion alexion stockholders approximately 150 combined company recent developments november 20 2020 announced european commission ec approved ultomiris ravulizumab 100 mgml intravenous iv formulation treatment paroxysmal nocturnal hemoglobinuria pnh atypical hemolytic uremic syndrome ahus ultomiris 100 mgml advancement treatment experience patients ahus pnh reduces average annual infusion times approximately 60 percent compared ultomiris 10 mgml delivering safety efficacy consistent ultomiris 10 mgml formulation january 2021 alexion entered definitive asset purchase agreement rhythm pharmaceuticals inc “rhythm” acquire rare pediatric disease priority review voucher prv 1000 alexion’s acquisition rhythm’s prv subject satisfaction customary closing conditions approval relevant regulatory agencies including expiration early termination applicable waiting period hartscott rodino antitrust improvements act upon closing make 1000 cash payment expect capitalize prv acquired inprocess research development iprd intangible asset covid19 pandemic first quarter 2020 world health organization declared covid19 public health crisis pandemic recommended containment mitigation measures worldwide march 13 2020 former us president trump announced national emergency relating pandemic government authorities worldwide recommended imposed various social distancing quarantine isolation measures large portions population impact covid19 pandemic date business less initially forecast evolving rapidly future effects difficult predict meaningful precision impact depend many factors beyond company’s control knowledge pandemic continues continue take steps designed respond proactively evolving events planning covid19 uncertainties remain focused continuing serve patients protecting health safety employees communities live work supporting patients clinical trials early march 2020 activated task force designed assess mitigate manage risks related covid19 avoid minimize business disruption including safeguarding facilities ensure safety sense security staff early march 2020 alexion closed sites nonessential employees company suspended travel indefinitely early june 2020 alexion gradually allowed reentry certain sites geographies pilot program including switzerland germany australia japan accordance local government laws regulations restrictions safety procedures checklists september 2020 extended global guidance employees strongly encourage working remotely least july 2021 offering limited access physical sites pilot programs office sites reconfigured maintain physical distancing expect adopt implement additional precautions commensurate expansion employees returning worksites date remote working arrangements significantly affected ability maintain critical business operations focused protecting patient customer safety well providing uninterrupted supply medicines patients around world taken proactive measures designed mitigate risk potential supply interruptions strive maintain sufficient inventory levels continue serving current new patients receiving medicines approved indications well participating ongoing clinical trials thirdparty contract manufacturing partners continue operate manufacturing facilities near normal levels monitoring demand products due quarantines travel restrictions hospital policies patient concerns regarding exposure covid19 observed fewer patientdoctor interactions also noted new patient productivity initiation queue decreased since covid19 outbreak particularly neurological indications representatives fewer inperson visits health care providers including infusion products adversely impacted revenue growth current year may continue affect revenue growth future proactively engaging healthcare professionals virtually enhanced digital channels effort mitigate risk additionally continue actively monitor potential impacts business growth unemployment loss commercial insurance coverage andor growth medicaid higher discounts preclinical studies clinical testing ongoing across globe business continuity plan preclinical clinical trials including pandemic response plan number clinical trial sites restricting site visits imposing restrictions initiation new trials patient visits protect site staff patients possible covid19 exposure given safety concerns around covid19 associated risk maintaining normal clinical trial operations making decisions studybystudy countrybycountry minimize risk patients facilities may continue impact timing trials active enrollment majority clinical trials paused onset pandemic resumed however continuing experience impact enrollment studies actively implementing remote local procedures per guidance fda may 2020 alexion initiated global phase iii study investigate ultomiris® ravulizumabcwvz subset adult patients covid19 hospitalized severe covid19 requiring mechanical ventilation january 2021 paused enrollment trial due lack efficacy pending analysis data decision made based recommendation independent data monitoring committee following review data prespecified interim analysis extent covid19 pandemic impacts business including commercial results clinical trials depend future developments highly uncertain cannot predicted confidence ultimate geographic spread virus duration outbreak governmental regulations restrictions travel restrictions actions contain outbreak treat impact continue responsive everchanging situation remaining true core values critical accounting policies estimates significant accounting policies basis preparation consolidated financial statements described note 1 business overview summary significant accounting policies consolidated financial statements included annual report form 10k preparation financial statements conformity gaap requires management make estimates judgments assumptions affect reported amounts assets liabilities revenues expenses related disclosures judgments subjective complex therefore actual results could differ materially estimates different assumptions conditions believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements •revenue recognition •contingent liabilities •sharebased compensation •valuation acquired assets including goodwill intangible assets inventory •valuation contingent consideration •income taxes revenue recognition principal source revenue product sales contracts customers generally contain single performance obligation recognize revenue product sales satisfied performance obligation transferring control product customers control product generally transfers customer upon delivery certain countries sell distributors consignment basis record revenue control product transfers customer upon sale end user revenue recognized amount expect entitled exchange sale products amount includes fixed variable consideration excludes amounts collected customers remitted governmental authorities valueadded taxes foreign jurisdictions variability transaction price products pursuant contracts customers primarily arises following discounts rebates offer discounts rebates certain distributors customers arrangements many cases amounts fixed time sale transaction price reduced accordingly also provide rebates certain governmental programs including medicaid us programs outside us payable based actual claim data estimate rebates based analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates generally length time product sale processing reporting rebates three six months volumebased arrangements entered volumebased arrangements governments certain countries customers reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid customer rebate estimate incremental discounts resulting contractual limitations based forecasted sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period believe methodology used accrue discounts rebates reasonable appropriate given current facts circumstances actual results may differ provided balances activity rebates payable account years ended december 31 2020 2019 2018 follows 1 included adjustments related prior years accrual recorded 2019 related pmprb matter refer note 11 commitments contingencies additional information current provisions relating sales current year increased 728 2020 compared 2019 873 2019 compared 2018 increase 2020 2019 2018 primarily due increased unit volumes us subject rebates well increases rebate rates us certain product sales contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss significant judgment required determination probability determination whether exposure reasonably estimable uncertainties related claims litigation accruals based best information available time assessment including legal facts circumstances case status proceedings applicable law likelihood settlement periodic basis additional information becomes available based specific events outcome litigation settlement claims offers settlement may reassess potential liability related matters may revise estimates facts circumstances indicate need change sharebased compensation company recognizes compensation expense associated issuance equity instruments may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method significant judgments assumptions used estimating compensation cost restricted stock units containing marketbased performance conditions well nonmarket performance conditions relating achievement operational metrics use payout simulation models estimate grant date fair value awards marketbased performance conditions payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary changes estimates probability achieving performance targets could material impact results operations valuation acquired assets including goodwill intangible assets inventory recorded goodwill acquired intangible assets inventory related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date income approach generally relies upon forecasted cash flow models typically used valuations quoted market prices available valuations require use significant estimates assumptions including limited •timing costs complete inprocess projects •timing probability success clinical events regulatory approvals •estimated future cash flows product sales resulting completed products inprocess projects consider competitive trends impacting assets •tax rates •discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets indefinite lives amortized tested impairment least annually triggering event occurs could indicate potential impairment intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment triggering events occur performing impairment assessment definitelived intangible assets rely upon cash flow projections attributable asset determine carrying value asset recoverable undiscounted cash flow basis carrying value definite lived intangible asset recoverable indicator impairment indefinitelived intangible asset recognize impairment amount carrying value asset exceeds fair value calculate fair value assets using discounted cash flow models require use significant estimates judgements include limited probability success clinical events regulatory approvals discount rates estimated future cash flows product sales changes assumptions used cash flow projections could result impairment impairments recorded within impairment intangible assets consolidated statements operations quarter ended june 30 2020 based continued challenges expanding patient growth new alternative commercial opportunities revised strategic view kanuma determined exhausted commercially viable initiatives related kanuma difficulty expanding patient growth long term focus promoting commercial programs growing pipeline result longer expect increase number kanuma patients long term rate previously assumed determination resulted reduced cash flow projections kanuma indicated related intangible asset value fully recoverable undiscounted cash flows basis june 30 2020 utilized market participant assumptions determine best estimate fair value intangible asset related kanuma compared related carrying value resulted impairment charge 20423 estimated fair value kanuma asset june 30 2020 determined using excess earnings method variation income approach excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset remaining economic life long term cash flow projections asset require use significant estimates judgements including forecasted revenue growth rates forecasted cost goods sold discount rate based recent strategic plan fair value asset determined using estimated weighted average cost capital 100 reflects risks inherent future cash flow projections represents rate return market participant would expect asset estimated revenue growth rates fluctuate life asset weighted average growth rate low single digits believe assumptions consistent plans estimates market participant would use manage business estimated fair value kanuma intangible asset june 30 2020 8200 continue amortized remaining estimated useful life carrying value kanuma intangible asset december 31 2020 7827 inventory acquired connection acquisition business measured fair value acquisition date requires use significant estimates include expected selling price inventory estimated costs complete manufacturing process dispose inventory reasonable profit allowance remaining manufacturing selling effort estimated holding periods based internal forecasts demand discount rates exclude value acquired inventory excess quantities expect salable based future projected inventory requirements future demand market conditions lower projections acquisition date may required write value inventory charge cost sales period revision made goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors •timing probability success clinical events regulatory approvals •timing probability success meeting commercial milestones estimated future sales levels specific compound •discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse december 22 2017 tax cuts jobs act tax act enacted law tax act decreased us statutory corporate tax rate years beginning december 31 2017 included domestic international tax provisions affect measurement deferred tax assets liabilities december 22 2018 accounting impact tax act complete refer note 12 income taxes consolidated financial statements included elsewhere annual report form 10k additional information estimate tax effect reversing temporary differences reflective actual outcomes modified reflect new developments interpretations tax law revised incorporate new accounting principles changes expected timing manner reversal results operations could materially impacted follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken irs taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period record adjustments income tax expense period adjustments may material fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership corporate structure derives income multiple jurisdictions requires us interpret related tax laws regulations within jurisdictions develop estimates assumptions regarding significant future events amount timing character deductions applicability foreign tax credits time execute intercompany transactions may impact valuation captive foreign partnership corresponding interest allocated partner resulting change deferred taxes transactions related valuations require application transfer pricing guidelines issued relevant taxing authorities significant estimates assumptions within discounted cash flow models also required calculate valuations estimates assumptions include limited estimated future operating cash flows revenue growth rate assumptions longrange pricing expectations patientrelated assumptions significant inputs discount rates return new accounting pronouncements accounting standards update asu 201912 “income taxes simplifying accounting income taxes” december 2019 financial accounting standards board fasb issued new standard intended simplify accounting income taxes eliminating certain exceptions related approach intraperiod tax allocation methodology calculating income taxes interim period recognition deferred tax liabilities outside basis differences new standard also simplifies aspects accounting franchise taxes enacted changes tax laws rates clarifies accounting transactions result stepup tax basis goodwill standard effective annual periods beginning december 15 2020 interim periods within early adoption permitted adoption standard requires certain changes made prospectively changes made retrospectively adopted new standard january 1 2021 substantially completed assessment standard expect adoption standard material impact financial condition results operations asu 202001 “investments equity securities investments equity method joint ventures derivatives hedging clarifying interactions topic 321 topic 323 topic 815” january 2020 fasb issued new standard intended clarify interactions accounting standards codification asc 321 asc 323 asc 815 new standard addresses accounting transition equity method measurement certain purchased options forward contracts acquire investments standard effective annual interim periods beginning december 15 2020 early adoption permitted adoption standard requires changes made prospectively adopted new standard january 1 2021 adoption standard impact financial condition results operations asu 202004 “reference rate reform facilitation effects reference rate reform financial reporting response concerns structural risks interbank offered rates particularly risk cessation london interbank offered rate libor regulators around world undertaken reference rate reform initiatives identify alternative reference rates observable transactionbased less susceptible manipulation march 2020 fasb issued new standard provides optional guidance limited time ease potential burden accounting effects reference rate reform including optional expedients exceptions accounting implications contracts hedging relationships transactions affected reference rate reform certain criteria met amendments new standard apply contracts hedging relationships reference libor another reference rate expected discontinued due reference rate reform expedients exceptions provided standard apply contract modifications made hedging relationships entered evaluated december 31 2022 currently reviewing contracts impacted reference rate reform assessing impact standard financial condition results operations recently adopted accounting pronouncements asu 201815 customers accounting implementation costs incurred cloud computing arrangement service contract august 2018 fasb issued new standard customers accounting implementation setup upfront costs incurred cloud computing arrangement cca aligns requirements capitalizing implementation costs cca service contract existing internaluse software guidance standard also provides classification guidance implementation costs well additional quantitative qualitative disclosures standard effective interim annual periods beginning december 15 2019 early adoption permitted adopted prospectively retrospectively adopted new standard january 1 2020 prospective basis adoption standard impact financial statements date adoption however anticipate adoption standard result increase capitalized assets related qualifying cca implementation costs future periods qualifying cca implementation setup upfront costs incurred january 1 2020 capitalized assets consolidated balance sheets assets expensed term hosting arrangement expense presented within line item consolidated statements operations expense fees associated hosting arrangement capitalized costs evaluated impairment events changes circumstances indicate carrying value capitalized implementation costs recoverable year ended december 31 2020 capitalized cca implementation costs material asu 201613 measurement credit losses financial instruments june 2016 fasb issued new standard intended improve reporting requirements specific loans receivables financial instruments new standard requires credit losses financial assets measured amortized cost determined using expected loss model instead current incurred loss model requires credit losses related availableforsale debt securities recorded allowance credit losses limited amount carrying value exceeds fair value new standard also requires enhanced disclosure credit risk associated financial assets standard effective interim annual periods beginning december 15 2019 early adoption permitted adopted new standard january 1 2020 completed assessment standard based composition portfolio financial instruments current forecasted economic conditions date significant financial assets within scope new standard consist trade accounts receivable available sale debt securities historically experienced material credit losses associated trade accounts receivable available debt securities monitor economic conditions including volatility associated international economies associated impacts financial markets business disaggregate trade accounts receivable population pools similar risk characteristics based underlying customer type geographical location current expected credit loss allowances estimated risk pool based available information including historical credit loss experience ii current economic conditions iii reasonable supportable forecasts future economic conditions may affect collectibility recorded amounts based relevant facts economic conditions date adoption concluded expected credit losses trade accounts receivable immaterial additionally unrealized losses available sale investment portfolio immaterial december 31 2020 reassessed estimated credit losses trade accounts receivable including consideration potential impacts covid19 global pandemic based relevant facts economic conditions december 31 2020 concluded expected credit losses trade accounts receivable continued immaterial results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison years ended december 31 2020 2019 2018 net product sales net product sales product significant geographic region follows percentages meaningful net product sales consolidated soliris net product sales ultomiris net product sales strensiq net product sales andexxa net product sales kanuma net product sales increase net product sales year ended december 31 2020 compared period 2019 primarily due increase unit volumes increase unit volumes primarily due increased global demand soliris therapy sales patients gmg nmosd largest drivers result continued patient conversion ultomiris unit volumes pnh ahus also increased due increase pnh ahus patients ultomiris therapy inclusive loading dose impact required patients first year therapy partially offsetting increase continued conversion pnh ahus patients soliris ultomiris resulting decrease soliris pnh ahus revenues year ended december 31 2020 compared year ended december 31 2019 additional unit volume increases due primarily increased demand strensiq 2020 contributions 785 andexxa result portola acquisition closed july 2 2020 result patient conversion soliris ultomiris expect variability revenues future quarters due extended ultomiris dosing interval infusion timing may result either one two infusions quarter ultomiris loading doses pnh patients result increased revenues patient’s first year therapy ultomiris annual maintenance dose pnh ahus requires fewer vials compared annual dose soliris due decision price ultomiris lower soliris annual basis anticipate us revenues unfavorably impacted lower annual cost per patient maintenance years impact pronounced ahus due greater decrease vials ahus ultomiris patients increase net product sales year ended december 31 2019 compared period 2018 primarily due increase unit volumes increase unit volumes primarily due increased global demand soliris therapy sales patients gmg largest driver well ultomiris volumes due loading doses required patients first year therapy partially offsetting soliris increase conversion pnh patients soliris ultomiris contributed 2019 ultomiris volumes primarily attributable pnh patient conversion soliris us additional unit volume increases due increased demand strensiq kanuma 2019 result continued efforts identify reach patients hpp lald globally increase net product sales year ended december 31 2019 compared period 2018 partially offset price decreases largest driver 298 07 result judicial order issued second quarter 2019 related soliris pricing canada decision led reduction revenue second quarter 2019 reductions subsequent quarters appeals process concludes reduction revenue recorded year ended december 31 2019 includes impact period september 2017 december 2019 response covid19 pandemic taken proactive measures designed mitigate risk potential supply interruptions strive maintain sufficient inventory levels continue serving current new patients receiving medicines approved indications due quarantines travel restrictions hospital policies patient concerns regarding exposure covid19 observed fewer patientdoctor interactions also noted new patient productivity initiation queue decreased since covid19 outbreak particularly neurological indications representatives fewer inperson visits health care providers including infusion products adversely impacted revenue growth current year may continue affect revenue growth future however proactively engaging healthcare professionals virtually enhanced digital channels effort mitigate risk cost sales exclusive amortization purchased intangible assets cost sales includes manufacturing costs actual estimated royalty expenses associated sales products amortization licensing rights following table summarizes cost sales years ended december 31 2020 2019 2018 increase cost sales percentage net product sales year ended december 31 2020 compared period 2019 primarily due amortization andexxa inventory fair value stepup recognized purchase accounting portola inventory obsolescence reserves recorded charge associated excess manufacturing capacity due covid19 impact exclusive items mentioned cost sales percentage net product sales 82 79 years ended december 31 2020 2019 respectively result portola acquisition completed july 2 2020 expect cost goods sold increase future periods compared prior periods due amortization andexxa inventory fair value stepup adjustments recognized acquired andexxa inventory sold decrease cost sales percentage net product sales year ended december 31 2019 compared period 2018 primarily due decreases royalty expenses due contract expiration occurred fourth quarter 2018 additionally cost sales year ended december 31 2018 included asset related charges 58 associated closure arimf facility announced third quarter 2017 facility sold 2018 charges primarily relate impairment manufacturing assets research development expense research development expense includes personnel facility direct costs associated research development rd product candidates well product development costs additional information development programs please refer product development programs item business annual report form 10k rd expenses comprised costs paid clinical development product development discovery research well costs associated certain strategic licensing agreements rdrelated asset purchase agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities administrative costs incurred product development discovery research costs incurred conducting laboratory studies performing preclinical research uses current products new product candidates upfront payments include upfront payments related strategic licensing agreements rdrelated asset purchase agreements subsequent milestone payments incurred agreements relate rd activities classified clinical discovery product development costs based nature underlying milestone event rd expenses consist costs compensate personnel maintain facilities equipment occupancy costs associated research development efforts costs relate efforts clinical preclinical candidates product development discovery research efforts costs allocated directly program following graph provides information regarding research development expenses year ended december 31 2020 incurred rd expenses 10029 increase 1169 132 versus 8860 incurred year ended december 31 2019 increase primarily related following •increase 1421 clinical development primarily driven increased clinical expenses related alxn1210 multiple ongoing studies shared expenses related investments enhanced systems processes support clinical trial expansion clinical expenses related assets acquired achillion portola 2020 see chart additional details program •increase 667 payroll benefits primarily related increases headcount partially offset decreases travel entertainment expenses result covid19 pandemic •increase 343 product development expenses primarily related increased costs associated manufacturing material alxn2070 alxn1850 product development programs partially offset decrease costs associated manufacturing material alxn1210 •decrease 1034 upfront payments relating license payments made year ended december 31 2019 connection arrangements entered zealand pharma zealand affibody ab affibody eidos therapeutics inc eidos stealth biotherapeutics corp stealth upfront payments related licensing arrangements made year ended december 31 2020 •decrease 286 discovery primarily driven decrease target option exercise fees research milestones associated agreement dicerna pharmaceuticals inc dicerna year ended december 31 2019 incurred research development expenses 8860 increase 1556 213 versus 7304 incurred year ended december 31 2018 increase primarily related following •increase 767 upfront payments primarily related license payments made connection arrangements entered zealand affibody eidos stealth 2019 upfront payments made 2018 related agreement entered dicerna •increase 371 payroll benefits primarily related headcount increases •increase 348 discovery mainly driven target option exercise fees research milestones associated agreement dicerna •increase 236 direct clinical development expenses related primarily increases various studies see graph following page summarizing expenses related clinical development programs •decrease 182 direct product development expenses related primarily decrease costs associated manufacturing material alxn1210 partially offset increase material related alxn1830 alxn1840 following graph summarizes expenses related clinical development programs following graph summarizes accumulated direct expenses related clinical development programs january 1 2006 december 31 2020 1992 2006 substantially research development expenses related two products eculizumab pexelizumab obtained approval us eculizumab pnh 2007 ahus 2010 ceased development pexelizumab 2006 b unallocated costs shared across various development programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals product development programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding research development programs please refer item 1a “risk factors” annual report form 10k expect research development expenses increase percentage sales 2021 compared 2020 selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support products human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2020 incurred selling general administrative expenses 13999 increase 1388 110 versus 12611 incurred year ended december 31 2019 increase primarily related following •increase salary benefits labor expenses 1022 primarily related increases headcount partially offset decreases travel entertainment expenses result covid19 pandemic •increase external selling general administrative expenses 366 primarily related increased costs relating businesses acquired marketing services litigation charges 215 recorded first quarter 2020 connection legal proceedings partially offset decrease professional services year ended december 31 2019 incurred selling general administrative expenses 12611 increase 1493 134 versus 11118 incurred year ended december 31 2018 increase primarily related following •increase salary benefits labor expenses 1123 increase primarily related headcount increases driven increase commercial activities related soliris gmg increased staff costs associated commercial support activities including nmosd prelaunch efforts employee related costs associated sharebased compensation plans also increased •increase external selling general administrative expenses 370 increase primarily driven increase charitable contributions professional services expect selling general administrative expenses remain consistent percentage sales 2021 compared 2020 acquired inprocess research development year ended december 31 2019 recorded benefit 41 acquired inprocess research development iprd associated previously acquired iprd related syntimmune acquisition result agreement final working capital adjustment second quarter 2019 year ended december 31 2018 recorded acquired iprd expense 11830 related wilson therapeutics acquisition completed second quarter 2018 syntimmune acquisition completed fourth quarter 2018 iprd assets associated acquisitions principal assets acquired transaction reached technological feasibility alternative future use acquisition date therefore expensed 2018 amortization purchased intangible assets amortization expense associated purchased intangible assets 2537 3096 3201 years ended december 31 2020 2019 2018 respectively amortization expense primarily associated intangible assets related strensiq kanuma andexxa decrease amortization purchased intangible assets year ended december 31 2020 compared years ended 2019 2018 primarily associated kanuma strensiq intangible assets explained decrease partially offset increase amortization associated andexxa intangible asset acquired connection portola acquisition closed third quarter 2020 second quarter 2020 recorded impairment charge 20423 writedown kanuma intangible asset fair value lower asset value contributing lower amortization expense year ended december 31 2020 compared years ended december 31 2019 2018 third quarter 2019 us patent term extension composition matter patent strensiq granted resulted increase estimated useful life strensiq intangible asset contributing lower amortization expense year ended december 31 2020 compared years ended december 31 2019 2018 expect amortization finitelived intangible assets decrease future periods compared prior periods result kanuma impairment charge recognized second quarter 2020 offset amortization expense associated andexxa intangible asset change fair value contingent consideration years ended december 31 2020 2019 2018 change fair value contingent consideration expense associated prior business combinations 612 116 1165 respectively change fair value contingent consideration fluctuate based timing recognition changes probability achieving contingent milestones expected timing milestone payments connection previous acquisitions discount rates used calculate fair value changes fair value contingent consideration primarily relate contingent amounts due connection acquisition enobia 2012 achillion 2020 year ended december 31 2020 changes fair value contingent consideration expense reflected changes expected timing probability achieving contingent milestone payments interest component contingent consideration related changes discount rates passage time year ended december 31 2019 changes fair value contingent consideration expense reflected changes expected timing achieving contingent milestones interest component related passage time september 2018 amended terms certain contingent milestone payments due prior merger agreement enobia pharma corp enobia dated december 28 2011 agreement removed obligations respect regulatory milestone redistributed contingent payment associated milestone various sales milestones result agreement probability achieving various sales milestones contingent consideration liability increased 487 third quarter 2018 year ended december 31 2018 changes fair value contingent consideration expense primarily reflect impact agreement enobia amend milestones changes expected timing payments contingent consideration well interest component contingent consideration related passage time restructuring expenses years ended december 31 2020 2019 2018 recorded 103 120 255 respectively restructuring expenses charges year ended december 31 2020 relate restructuring activities initiated third quarter 2020 primarily within commercial organization part initiative intended redefine operating model actions intended reallocate resources necessary align organization diversifying portfolio new products strategic objectives include investments digital capabilities technologies solutions support virtual digital customer experience tailored markets operate actions expected substantially completed 2021 cumulative pretax costs incurred company implement program estimated approximately 100 expect pretax costs primarily result cash outlays costs primarily relate employee separation expenses charges year ended december 31 2019 relate restructuring activities initiated first quarter 2019 realign international commercial organization charges year ended december 31 2018 mainly attributable relocation corporate headquarters new connecticut boston massachusetts related costs impairment intangible assets year ended december 31 2020 recorded impairment charges 20533 relating kanuma achn4471 alxn2040 impairment charges incurred years ended december 31 2019 2018 quarter ended june 30 2020 based continued challenges expanding patient growth new alternative commercial opportunities company revised strategic view kanuma determined exhausted commercially viable initiatives related kanuma difficulty expanding patient growth long term focus promoting commercial programs growing pipeline result longer expect increase number kanuma patients long term rate previously assumed determination resulted reduced cash flow projections kanuma indicated related intangible asset value fully recoverable undiscounted cash flows basis june 30 2020 company utilized market participant assumptions determine best estimate fair value intangible asset related kanuma compared related carrying value resulted impairment charge 20423 quarter ended june 30 2020 recognized impairment charge 110 write cost basis achn4471 alxn2040 acquired inprocess research development asset due clinical results received quarter acquisitionrelated costs year ended december 31 2020 recorded 1176 acquisitionrelated costs acquisitionrelated costs primarily recorded connection achillion portola acquisitions acquisitionrelated costs consist primarily transaction costs associated accelerated vesting equity awards previously granted achillion portola employees achillion portola employee separation costs acquisitionrelated costs incurred years ended december 31 2019 2018 income expense following table provides information regarding income expense years ended december 31 2020 2019 recognized income expense 33 359 respectively decrease income primarily related gain 320 resulting amendment terms option agreement caelum fourth quarter 2019 years ended december 31 2020 2019 2018 recognized investment income 447 1003 653 respectively primarily related unrealized realized gains losses strategic equity investments recorded fair value year ended december 31 2020 recorded gains 765 strategic equity investments primarily driven unrealized gain 454 eidos equity investment realized gain 297 portola equity investment derecognized included fair value consideration transferred connection portola acquisition gains recorded strategic equity investments partially offset 490 impairment caelum investment option reduce carrying value investment option fair value year ended december 31 2019 recorded unrealized gains 269 strategic equity investments recognized net realized gain 328 related sale moderna therapeutics inc moderna equity investment year ended december 31 2018 recorded unrealized gains 430 strategic equity investments primarily related moderna equity investment years ended december 31 2020 2019 2018 recorded 1047 778 982 respectively interest expense increase interest expense year ended december 31 2020 compared period 2019 driven increase average interest rates associated interest rate swaps partially offset lower term loan borrowings lower interest rates based market rates unhedged portion outstanding term loan decrease interest expense year ended december 31 2019 compared period 2018 driven derecognition certain previously recorded buildtosuit arrangements first quarter 2019 due adoption new lease accounting standard income taxes income tax expense benefit years ended december 31 2020 2019 2018 attributable us federal state foreign income taxes profitable operations year ended december 31 2020 recorded income tax benefit expense 344 effective tax rate 60 compared income tax benefit expense 2255 1646 effective tax rate 103 680 years ended december 31 2019 2018 respectively second quarter 2020 recognized impairment charge 20423 related kanuma intangible asset resulting deferred tax benefit 3773 refer note 4 intangible assets goodwill additional information impairment charge deferred tax benefits decreased effective tax rate year ended december 31 2020 approximately 192 april 2020 became aware european withholding tax regulation could interpreted apply certain previous intragroup transactions continue evaluate whether interpretation regulation applies facts circumstances based preliminary analysis recorded immaterial reserve related matter second quarter 2020 august 2020 received notice examination dutch tax authorities “dta” regarding certain matters relating 2014 2017 tax years entered agreement dta december 2020 agreed pay approximately 738 connection settlement inclusive 2018 2019 tax years taking account 561 us foreign tax credit claimed settlement net cash outflow 177 representing 31 net increase effective tax rate 2017 internal revenue service irs commenced examination us income tax returns 2015 second quarter 2020 received revenue agent report rar held discussions irs regarding proposed adjustment related valuation certain intellectual property contributed captive partnership 2015 company agreed adjustment outlined rar recognized previously unrecognized tax benefit second quarter 2020 result significant impact financial statements irs concluded examination third quarter 2020 without additional adjustments year ended december 31 2019 recognized certain onetime deferred tax benefits including 957 303 associated tax election made respect intellectual property wilson therapeutics valuation allowance release corresponding recognition net operating losses respectively deferred tax benefits offset income tax expense 102 associated july 1 2019 integration wilson therapeutics intellectual property alexion corporate structure comprehensive analysis prior year estimate related foreignderived intangible income “fdii” completed third quarter 2019 based additional guidance provided proposed regulations issued us treasury department 2019 analysis resulted income tax benefit 170 related prior year recorded change estimate income tax expense 2019 consolidated statements operations resulting decrease approximately 08 effective tax rate fourth quarter 2019 completed intraentity asset transfer certain intellectual property irish subsidiary within captive foreign partnership recognized deferred tax benefits 22215 represents difference basis intellectual property financial statement purposes basis intellectual property tax purposes applying appropriate enacted statutory tax rates receive future tax deductions associated amortization intellectual property amortization deducted tax purposes carried forward indefinitely irish tax law offsetting deferred tax expense 18393 recognized reflect reduction future foreign tax credits associated foreign local tax amortization deductions net deferred tax benefits resulted decrease approximately 175 effective tax rate income tax expense year ended december 31 2018 includes increase effective tax rate 1026 attributable acquisitions syntimmune wilson therapeutics absent successful clinical results regulatory approval alternative future use inprocess research assets acquired acquisitions accordingly value assets acquired 11830 expensed acquired inprocess research development tax benefit recognized december 2017 tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings incorporated onetime transition tax previously unremitted foreign earnings recorded adjustments tax act provisional accounting 2018 resulted decrease tax expense 565 completed accounting tax act fourth quarter 2018 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realizing deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized financial condition liquidity capital resources following table summarizes components financial condition december 31 2020 2019 aggregate increase cash equivalents marketable securities 2499 december 31 2020 compared december 31 2019 primarily attributable cash generated operations proceeds maturity sale availableforsale debt securities partially offsetting increases 20230 cash utilized fund achillion portola acquisitions net 4809 cash equivalents marketable securities acquired transactions 1969 cash paid settle preexisting debt held portola cash utilized repurchase shares common stock payments term loan facility purchases property plant equipment strategic equity investments options excluding impact significant future asset acquisitions licenses collaboration agreements expect annual operating expenses decrease percentage sales 2021 compared 2020 primarily due impairments intangible assets 20533 recorded second quarter 2020 expect increased capital investment 2021 compared 2020 anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned least next twelve months without limiting generality foregoing subject variety specified restrictions merger agreement unless obtain astrazeneca’s prior written consent may unreasonably withheld conditioned delayed except required expressly contemplated merger agreement ii required applicable law iii set forth confidential disclosure schedule delivered alexion astrazeneca may among things subject certain exceptions aggregate limitations incur additional indebtedness issue additional shares common stock outside equity incentive plans repurchase common stock pay dividends acquire assets securities property dispose businesses assets enter material contracts make certain additional capital expenditures financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations including principal interest payments amended restated credit agreement royaltybased debt contingent payments associated inlicenses acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes new sources financing equity andor debt financings especially light increased volatility within global financial markets result covid19 pandemic may always available acceptable terms may required obtain certain consents connection completing financings financial instruments required use business may invest cash reserves money market funds bank deposits high quality marketable debt securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable derivative contracts december 31 2020 four customers accounted 668 accounts receivable balance individual customers accounting 117 221 accounts receivable balance december 31 2019 four customers accounted 669 accounts receivable balance individual customers accounting 116 203 accounts receivable balance year ended december 31 2020 three customers accounted 474 net product sales individual customers accounting 147 167 net product sales year ended december 31 2019 four customers accounted 564 net product sales individual customers accounting 100 168 net product sales year ended december 31 2018 four customers accounted 503 net product sales individual customers accounting 100 164 net product sales continue monitor economic conditions including volatility associated international economies covid19 pandemic associated impacts financial markets business substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods continue monitor conditions assess possible impact business result covid19 pandemic experienced increase requests extended payment terms certain customers date experienced significant losses respect collection accounts receivable currently anticipate material credit losses accounts receivable result pandemic manage foreign currency transaction risk interest rate risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2020 foreign exchange forward contracts notional amounts totaling 32535 outstanding foreign exchange forward contracts net fair value liability 552 261 included current assets 813 included current liabilities noncurrent liabilities december 31 2020 interest rate swap contracts notional amounts totaling 17500 outstanding interest rate swap contracts net fair value liability 913 included current liabilities noncurrent liabilities counterparties contracts large domestic multinational commercial banks believe risk nonperformance material december 31 2020 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments equity securities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily money market funds equity securities subject holding period restrictions derivative contracts level 2 liabilities consist also derivative contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related business acquisitions business combinations contingent consideration obligations january 28 2020 completed acquisition achillion terms agreement acquired outstanding common stock achillion 630 per share aggregate 9262 inclusive settlement achillions outstanding equity awards acquisition funded cash hand transaction includes potential additional consideration form nontradeable contingent value rights paid achillion shareholders certain clinical regulatory milestones achieved within specified periods include 100 per share us food drug administration fda approval danicopan 100 per share initiation phase iii clinical trial ach5228 alxn2050 july 2 2020 completed acquisition portola terms agreement acquired outstanding common stock portola 1800 per share aggregate approximately 13808 including settlement certain portolas outstanding equity awards excluding shares portola stock held alexion closing acquisition funded cash hand connection acquisition also paid 1969 settle certain debt held portola subject preexisting change control provisions repayment portolas debt funded cash acquired portola additionally assumed royaltybased debt requires repayment tiered royalties future net worldwide sales andexxa december 31 2020 purchase agreements business combinations including achillion include contingent payments totaling 9056 become payable certain development commercial milestones achieved milestone amounts 6706 contingent payments relate development regulatory milestones 2350 contingent payments relate commercial milestones respectively expect amounts significant impact liquidity nearterm next 12 months expect make milestone payments 1200 associated prior business combinations additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds sale equity securities debt asset acquisitions inlicense agreements january 2019 entered agreement caelum biotechnology company developing cael101 al amyloidosis terms agreement acquired minority equity interest preferred stock caelum exclusive option acquire remaining equity caelum based phase ii data prenegotiated economics paid 300 first quarter 2019 agreed pay additional 300 contingent development milestones prior exercising option acquire remaining equity caelum following discussions fda caelum changed clinical development plan cael101 fourth quarter 2019 december 2019 amended terms agreement caelum modify option acquire remaining equity caelum based data modified phase iiiii trials amendment also modified developmentrelated milestone events associated initial 300 contingent payments provided additional 200 upfront funding well funding 600 exchange additional equity interest fair value upon achievement specific developmentrelated milestone event paid additional 200 upfront funding initial 300 contingent payments 2020 agreement caelum also provides additional payments event alexion exercises purchase option 5000 includes upfront option exercise payment potential regulatory commercial milestone payments march 2019 entered agreement zealand provides us exclusive worldwide licenses well development commercial rights subcutaneously delivered preclinical peptide therapies directed four complement pathway targets pursuant agreement zealand lead joint discovery research efforts preclinical stage alexion lead development efforts beginning investigational new drug filing phase studies addition agreement made equity investment zealand refer note 7 investments terms agreement made upfront payment 400 exclusive license lead target equity investment well preclinical research services performed zealand relation lead target december 31 2020 could required pay 6100 lead target upon achievement specified development regulatory commercial milestones well royalties commercial sales addition could required pay additional 1150 development regulatory milestones longacting shortacting product developed respect lead target three subsequent targets selected option fee 150 potential additional development regulatory commercial milestones well royalty payments reduced price lead target september 2019 entered agreement eidos alexion obtained exclusive license develop commercialize ag10 japan ag10 small molecule designed treat root cause transthyretin amyloidosis attr currently phase iii study us europe japan attr cardiomyopathy attrcm addition made equity investment eidos refer note 7 investments terms agreement made upfront payment 500 exclusive license ag10 japan equity investment december 31 2020 could also required pay 300 upon achievement japanesebased regulatory milestone well royalties commercial sales october 2018 entered collaboration agreement dicerna provides us exclusive worldwide licenses development commercial rights two preclinical rna interference rnai subcutaneously delivered molecules complementmediated diseases well exclusive option preclinical rnai molecules two additional targets within complement pathway addition collaboration agreement made equity investment dicerna terms agreements made upfront payment 370 exclusive licenses equity investment december 2019 exercised option exclusive rights two additional targets within complement pathway existing agreement dicerna expands existing research collaboration license agreement dicerna include total four targets within complement pathway connection option exercise paid dicerna 200 fourth quarter 2019 december 31 2020 excluding accrued milestones could required pay 6041 amounts due upon achievement specified research development regulatory commercial milestones four licensed targets well royalties commercial sales december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets terms agreement made upfront payment 400 exclusive license two four potential targets fourth quarter 2017 second quarter 2020 forfeited rights one two targets initially licensed december 31 2020 could required pay 1550 remaining licensed target upon achievement specified development regulatory salesbased milestones well royalties commercial sales two subsequent targets licensed option fee 80 contingent payments 1600 per target subject development regulatory commercial milestones well royalties commercial sales connection prior acquisition syntimmune inc clinicalstage biotechnology company developing antibody therapy targeting fcrn could required pay 8000 upon achievement specified development regulatory commercial milestones 1300 specific subcutaneous formulation currently subject claim litigation connection syntimmune acquisition alleging alexion failed meet obligations merger agreement use commercially reasonable efforts achieve milestones plaintiff requested payment full earnout amount outcome litigation may impact results operations future addition excluding accrued milestones december 31 2020 license agreements may required pay additional 1140 currently licensed targets certain development regulatory commercial milestones met including 715 development cerdulatinib multiple indications pursuant inlicensing agreement astellas pharma inc assumed acquisition portola third quarter 2020 additional amounts may payable elect acquire licenses additional targets applicable terms agreements expect payments associated milestones asset acquisitions option inlicense agreements significant impact liquidity nearterm next 12 months may make milestone payments related arrangements approximately 711 excluding milestones accrued december 31 2020 additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds sale equity securities debt operating financing lease liabilities operating financing lease liabilities recorded lease commencement upon remeasurement events applicable based present value fixed substance fixed lease payments expected lease term lease liabilities amortized lease term december 31 2020 2781 total financing operating lease liabilities recorded consolidated balance sheets total undiscounted lease commitments december 31 2020 3293 434 payable next 12 months refer note 10 leases summary maturity lease liabilities year expect payments associated maturity lease liabilities significant impact liquidity nearterm longterm debt june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amended restated credit agreement dated june 22 2015 credit agreement provides 10000 revolving credit facility 26125 term loan facility revolving credit facility term loan facility mature june 7 2023 beginning quarter ending june 30 2019 required make payments 50 original principal amount term loan facility annually payable equal quarterly installments december 31 2020 23839 outstanding term loan outstanding borrowings revolving credit facility december 31 2020 december 31 2020 open letters credit 10 offset borrowing availability revolving credit facility connection acquisition portola third quarter 2020 assumed royaltybased debt relating royalty sales agreement portola entered healthcare royalty partners hcr whereby hcr acquired tiered royalty interest future worldwide net sales andexxa portola received 500 upon closing agreement february 2017 additional 1000 following us regulatory approval andexxa may 2018 tiered royalties ranging 42 85 required paid hcr based net worldwide sales andexxa applicable rate decreases worldwide net annual sales levels increase defined thresholds total potential royalty payments capped 1950 funding received less certain transaction expenses 2906 december 31 2020 royaltybased debt carrying value 1870 net unamortized debt discount 849 155 recorded within current portion longterm debt maximum remaining royalty payments capped 2719 december 31 2020 manufacturing obligations supply agreements lonza relating manufacture soliris strensiq ultomiris andexxa require payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs various agreements lonza remaining total noncancellable commitments approximately 11378 2030 certain commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza pay lonza royalty sales soliris ultomiris manufactured lonza facilities addition lonza noncancellable commitments approximately 1756 2023 third party manufacturers taxes recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential withholding foreign local us state income taxes common stock repurchase program november 2012 board directors authorized share repurchase program february 2017 board directors increased amount authorized expend future repurchases 10000 repurchase program superseded prior repurchase programs entire amount authorized pursuant february 2017 board approval utilized october 22 2019 board directors approved share repurchase authorization 10000 july 28 2020 board directors approved new share repurchase authorization additional 15000 repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time discretion program repurchased 49 38 shares common stock cost 5108 4160 years ended december 31 2020 2019 respectively december 31 2020 total 20247 remaining repurchases repurchase programs cash flows following summarizes net change cash equivalents operating activities cash flows provided operations 2020 30029 compared 20849 2019 increase cash provided operating activities primarily due cash generated operations including timing cash receipts payments changes working capital 2020 compared 2019 additionally prior year included upfront payments made connection agreements entered zealand affibody eidos stealth biotherapeutics corp payment salesbased milestone former equity holders enobia pharma corp investing activities cash used investing activities 2020 20995 compared cash provided investing activities 97 2019 increase cash used investing activities compared prior year primarily due payments acquisition achillion portola net cash acquired 21119 partially offsetting impacts decreases purchases property plant equipment purchases strategic equity investments options 2020 compared 2019 financing activities cash flows used financing activities 2020 6119 compared 7391 2019 decrease cash used financing activities primarily due decrease payments revolving credit facility partially offset increase 948 common stock repurchases increase 326 payments term loan 2020 compared 2019 contractual obligations following table summarizes contractual obligations december 31 2020 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts december 31 2020 subject change except royaltybased debt contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a risk factors note 11 commitments contingencies consolidated financial statements included elsewhere annual report form 10k liability unrecognized tax benefits related various federal state foreign income tax matters 1634 december 31 2020 included within table timing settlement amounts reasonably estimable december 31 2020 contingent payments related business acquisitions asset acquisitions option inlicense agreements included within table satisfaction contingent consideration obligations satisfied timing payment amounts uncertain december 31 2020 contingent payments associated prior business combinations total 9056 become payable certain development commercial milestones achieved next 12 months expect make milestone payments 1200 associated prior business combinations commitments related asset acquisitions option inlicense agreements include contingent payments become payable certain development regulatory commercial milestones achieved next 12 months may make milestone payments related asset acquisitions option inlicense agreements approximately 711 excluding milestones accrued december 31 2020 future obligations related defined benefit plans included within table timing amounts payments reasonably estimable december 31 2020 total unfunded obligation defined benefit plans december 31 2020 336 unfunded obligation impacted changes laws regulations interest rates investment returns variables credit facilities june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amends restates agreement dated june 22 2015 credit agreement provides 10000 revolving credit facility 26125 term loan facility revolving credit facility term loan facility mature june 7 2023 beginning quarter ending june 30 2019 required make amortization payments 50 aggregate original principal amount term loan facility annually payable equal quarterly installments loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement obligations credit agreement guaranteed certain foreign domestic subsidiaries secured liens certain subsidiaries’ equity interests subject certain exceptions terms credit agreement must maintain ratio total net debt ebitda 350 100 subject certain limited adjustments ebitda cash interest expense ratio least 350 100 case calculated accordance credit agreement compliance applicable covenants credit agreement december 31 2020 credit agreement contains certain representations warranties affirmative negative covenants events default negative covenants credit agreement restrict alexion’s subsidiaries’ ability subject certain baskets exceptions among things incur liens indebtedness make investments enter mergers fundamental changes make dispositions pay dividends restriction dividend payments includes exception permits us pay dividends make restricted payments regardless dollar amount long giving pro forma effect thereto consolidated net leverage ratio defined credit agreement within predefined ranges subject certain increases following designated material acquisitions royaltybased debt connection acquisition portola third quarter 2020 assumed royaltybased debt relating royalty sales agreement portola entered healthcare royalty partners hcr whereby hcr acquired tiered royalty interest future worldwide net sales andexxa portola received 500 upon closing agreement february 2017 additional 1000 following us regulatory approval andexxa may 2018 tiered royalties ranging 42 85 required paid hcr based net worldwide sales andexxa applicable rate decreases worldwide net annual sales levels increase defined thresholds total potential royalty payments capped 1950 funding received less certain transaction expenses 2906 interest expense recognized using effective interest rate method estimated period related debt paid requires estimation timing amount future royalty payments generated future sales andexxa reassess expected royalty payments reporting period account changes adjustment effective interest rate prospective basis assumptions used determining expected repayment term debt require make estimates could impact short long term classification debt carrying values operating financing leases operating financing leases principally facilities equipment currently lease office space us foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facilities together third party manufacturing facilities adequate ongoing activities addition minimum rental commitments operating leases may also required pay amounts taxes insurance maintenance operating expenses commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreements lonza described commitments lonza include amounts estimated consumer price index cpi adjustments obligated pay lonza item 7aitem 7 managements discussion analysis financial condition results operations report contains forwardlooking statements involve risks uncertainties statements subject certain factors may cause plans results differ significantly plans results discussed forwardlooking statements factors might cause contribute differences include limited discussed important factors regarding forwardlooking statements attached hereto exhibit 99 overview engaged development biopharmaceutical products treatment patients cardiovascular autoimmune disorders inflammation cancer since inception january 1992 devoted substantially resources drug discovery research product clinical development since mid 1996 focused resources increasingly clinical manufacturing clinical development currently examining two lead genetically altered antibody product candidates eight different clinical development programs one lead genetically altered antibody product candidates 5g11sc development collaboration procter gamble completed enrolling approximately 1000 patient phase iib study treatment inflammation caused cardiopulmonary bypass surgery two additional phase ii studies progress myocardial infarction patients one study patients receiving thrombolytic therapy patients receiving angioplasty lead genetically altered antibody product candidate 5g11 clinical development treatment variety chronic autoimmune diseases august 2000 enrollment completed phase ii clinical study rheumatoid arthritis patients phase ii study membranous nephritis patients ongoing indications enrollment commenced additional 12 month openlabel extension study test safety addition commenced three separate phase ib pilot trials study 5g11 patients psoriasis dermatomyositis bullous pemphigoid date received revenues sale products incurred operating losses since inception july 31 2000 accumulated deficit 672 million expect incur substantial increasing operating losses next several years due expenses associated product research development preclinical studies clinical testing regulatory activities manufacturing development scaleup manufacturing developing sales marketing force september 2000 acquired prolifaron inc privately held biopharmaceutical company located san diego california prolifaron developing therapeutic antibodies addressing multiple diseases including cancer acquisition form merger new wholly owned subsidiary alexion antibody technologies inc prolifaron merger obligated issue 400000 shares common stock value approximately 41 million stockholders prolifaron acquisition accounted using purchase method accounting results operations fiscal years ended july 31 2000 1999 1998 earned contract research revenues 214 million fiscal year ended july 31 2000 188 million fiscal year ended july 31 1999 50 million fiscal year ended july 31 1998 increase fiscal year ended july 31 2000 compared fiscal year ended july 31 1999 primarily due increased contract revenues collaborative research development agreement procter gamble increase fiscal year ended july 31 1999 compared fiscal year ended july 31 1998 primarily due nonrefundable upfront license fee 100 million received procter gamble february 1999 connection entering collaboration agreement procter gamble develop commercialize 5g11sc additionally fiscal year ended july 31 1999 received 78 million contract revenues procter gamble collaborative research development agreement fiscal year ended july 31 2000 incurred expenses 402 million research development activities fiscal year ended july 31 1999 incurred expenses 237 million fiscal year ended july 31 1998 incurred expenses 123 million research development activities increase research development expenses fiscal year ended july 31 2000 compared fiscal year ended july 31 1999 primarily attributable continued expansion clinical trials lead c5 inhibitor product candidates cost manufacturing development manufacturing c5 inhibitors clinical trials fiscal year ended july 31 1999 increase compared fiscal year ended july 31 1998 primarily attributable expansion clinical trials lead c5 inhibitor product candidates process manufacturing development c5 inhibitor product candidates general administrative expenses 42 million fiscal year ended july 31 2000 30 million fiscal year ended july 31 1999 27 million fiscal year ended july 31 1998 increase general administrative expenses fiscal year ended july 31 2000 compared fiscal year ended july 31 1999 principally due higher payrollrelated costs well higher facilities expenses related increased rent expense space professional fees related public relations patentlegal costs increase general administrative expenses fiscal year ended july 31 1999 compared fiscal year ended july 31 1998 primarily related higher recruiting expenses legal expenses related business development patent costs fiscal year ended july 31 1999 income net 27 million fiscal year ended july 31 2000 15 million fiscal year ended july 31 1999 21 million fiscal year ended july 31 1998 increase fiscal year ended july 31 2000 due increased interest income higher cash balances resulting net proceeds obtained issuance subordinated convertible notes followon public offering common stock fiscal 2000 decrease income net fiscal year ended july 31 1999 due lower cash balances available investment compared amounts available fiscal year ended july 31 1998 result factors incurred net losses 202 million fiscal year ended july 31 2000 64 million fiscal year ended july 31 1999 79 million fiscal year ended july 31 1998 liquidity capital resources since inception january 1992 financed operations capital expenditures principally private placements common preferred stock initial public offering common stock subsequent followon offering convertible subordinated notes debt financing payments corporate collaborations grants equipment leasehold improvements financing march 2000 completed 120 million private placement 575 convertible subordinated notes due march 15 2007 notes bear interest semiannually september 15 march 15 year beginning september 15 2000 holders may convert portion notes common stock time march 15 2007 conversion price 106425 per share incurred issuance costs related offering approximately 40 million amortized interest expense sevenyear term notes may 2000 pursuant registration rights agreement filed registration statement securities act 1933 sec register resales notes shares common stock notes convertible november 1999 sold 3415 million shares common stock price 1400 per share followon public offering resulting net proceeds approximately 444 million company february 1999 acquired manufacturing assets principally land buildings laboratory equipment xenotransplantation program developed us surgical financed purchase manufacturing assets 39 million term note payable us surgical interest 60 per annum payable quarterly principal balance note due may 2005 security term note manufacturing assets purchased fiscal year ended july 31 1998 financed purchase laboratory process development equipment leasehold improvements 12 million secured term loan commercial bank principal payments 92000 payable quarterly august 2001 july 31 2000 outstanding balance term loan 369000 principal due interest variable rate reset quarterly july 31 2000 annualized interest rate 846 term loan agreement requires us maintain restricted cash balance equal outstanding loan balance divided 85 plus accrued interest earning money market account collateral note july 31 2000 cash equivalents marketable securities totaled 1745 million july 31 2000 cash equivalents consisted 919 million cash hold shortterm highly liquid investments original maturities less three months increase cash equivalents marketable securities compared july 31 1999 due increase available cash sale 575 convertible subordinated notes followon public offering common stock november 1999 july 31 2000 invested 130 million property equipment support research development efforts anticipate research development expense increase significantly foreseeable future support clinical manufacturing development product candidates lease administrative research development facilities operating lease 25 science park new connecticut consisting approximately 80000 square feet fixed monthly rate approximately 70000 expect relocate administrative research development facilities end calendar year 2000 pilot manufacturing plant encompassing approximately 21000 square feet labs office space currently utilized producing compounds current clinical trials remain currently new connecticut current facilities addition whollyowned subsidiary transgenic manufacturing facility located northeast believe laboratory space adequate current research development activities may 2000 entered new lease headquarters research development facility cheshire connecticut lease commenced august 2000 term ten years six months occupancy lease contingent upon timely departure current tenant subsequent additional work completed landlord site lease occupy total 82000 square feet space expect incur initial leasehold improvements relocation costs aggregating approximately 25 million 16000 incurred july 31 2000 option landlord required fund 25 million lease improvements financing arrangement payable term lease 11 per annum addition required pay pro rata percentage real estate taxes operating expenses monthly fixed rent starts approximately 80000 increasing approximately 95500 term lease issued 200000 open letter credit secure lease september 2000 acquired prolifaron inc privately held biopharmaceutical company located san diego california merger wholly owned subsidiary alexion antibody technologies inc prolifaron alexion antibody technologies inc leases approximately 3400 square feet labs office space monthly fixed rent starts approximately 3100 increasing approximately 3400 term lease terminates august 2002 procter gamble agreed fund clinical testing c5 inhibitor 5g11sc initially use cardiopulmonary bypass surgery myocardial infarction angioplasty procter gamble collaboration involve product candidates anticipate existing available capital resources proceeds sale 120 million 575 convertible subordinated notes together anticipated funding collaboration agreement procter gamble provide us adequate funding clinical testing c5 inhibitor product 5g11sc cardiopulmonary bypass acute coronary syndromes addition interest earned available cash marketable securities sufficient fund operating expenses capital requirements currently planned least next 30 months currently material commitments capital expenditures leasehold improvements cheshire facility future capital requirements depend many factors including progress research development programs progress results clinical trials time costs involved obtaining regulatory approvals costs involved obtaining enforcing patents necessary licenses ability establish marketing sales capabilities ability establish development commercialization relationships costs manufacturing scaleup expect incur substantial additional costs research preclinical studies clinical testing manufacturing process development additional capital expenditures related personnel facilities expansion clinical commercial manufacturing requirements marketing sales addition funds may receive collaboration procter gamble need raise generate substantial additional funding order complete development commercialization product candidates addition achieve contractual milestones related product development product license applications approvals additional payments would required elect continue maintain licenses licensors aggregating maximum 55 million additional financing may include public private debt equity offerings equity line facilities bank loans andor collaborative research development arrangements corporate partners assurance funds available terms acceptable us discussions potential strategic collaborative partners results agreements timely basis unavailability additional financing could require us delay scale back eliminate certain research product development programs license third parties commercialize products technologies would otherwise undertake ourself could material adverse effect tax reporting purposes july 31 2000 approximately 646 million federal net operating loss carryforwards expire 2020 56 million tax credit carryforwards expire commencing fiscal 2008 provisions tax reform act 1986 may limit ability utilize net operating loss tax credit carryforwards given year certain events occur including provision relating cumulative changes ownership interests excess 50 threeyear period cannot assure ability utilize net operating loss tax credit carryforwards future years limited result change ownership item 7aitem 7 management’s discussion analysis financial condition results operations amounts millions except percentages per share data addition historical information report contains forwardlooking statements involve risks uncertainties may cause actual results differ materially expectations plans anticipated results discussed forwardlooking statements encourage review risks uncertainties discussed section entitled item 1a “risk factors” “note regarding forwardlooking statements” included beginning annual report form 10k risks uncertainties cause actual results differ significantly forecasted forwardlooking statements implied historical results trends following discussion read conjunction consolidated financial statements related notes appearing elsewhere annual report form 10k overview alexion global biopharmaceutical company focused serving patients families affected rare diseases discovery development commercialization lifechanging therapies global leader complement biology inhibition 20 years alexion developed commercializes two approved complement inhibitors treat patients paroxysmal nocturnal hemoglobinuria pnh atypical hemolytic uremic syndrome ahus well first approved complement inhibitor treat antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg neuromyelitis optica spectrum disorder nmosd patients antiaquaporin4 aqp4 antibody positive alexion also two highly innovative enzyme replacement therapies first approved therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald addition marketed therapies diverse pipeline resulting internal innovation business development alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders cardiology recent developments november 2019 japan’s ministry health labour welfare mhlw approved extension current marketing authorization soliris® eculizumab include prevention relapse patients antiaquaporin4 aqp4 antibodypositive neuromyelitis optica spectrum disorder nmosd including neuromyelitis optica december 2019 exercised option exclusive rights two additional targets within complement pathway existing agreement dicerna pharmaceuticals inc expands alexion’s existing research collaboration license agreement dicerna include total four targets within complement pathway connection option exercise paid dicerna 200 fourth quarter 2019 december 2019 following fda feedback resulted redesign expansion caelum’s planned clinical development program cael101 amended terms existing option agreement caelum amendment modified terms option acquire remaining equity caelum based data expanded phase iiiii trials amendment also modified developmentrelated milestone events associated initial 300 contingent payments provided additional 200 upfront funding well funding 600 exchange additional equity interest fair value upon achievement specific developmentrelated milestone event january 28 2020 completed acquisition achillion pharmaceuticals inc achillion clinicalstage biopharmaceutical company focused development oral factor inhibitors achillion developing oral small molecule factor inhibitors treat complement alternative pathwaymediated rare diseases pnh c3 glomerulopathy c3g company currently two clinical stage medicines development phase 3 development initiated danicopan addon therapy pnh patients extravascular hemolysis danicopan also phase 2 development c3g ach5228 phase 2 development pnh terms agreement acquired outstanding common stock achillion 630 per share approximately 9260 inclusive settlement achillion’s outstanding equity awards acquisition funded cash hand transaction includes potential additional consideration form nontradeable contingent value rights cvrs paid achillion shareholders certain clinical regulatory milestones achieved within specified periods include 100 per share us fda approval danicopan 100 per share initiation phase 3 ach5228 critical accounting policies estimates significant accounting policies basis preparation consolidated financial statements described note 1 “business overview summary significant accounting policies” consolidated financial statements included annual report form 10k preparation financial statements conformity gaap requires management make estimates judgments assumptions affect reported amounts assets liabilities revenues expenses related disclosures judgments subjective complex therefore actual results could differ materially estimates different assumptions conditions believe judgments estimates assumptions associated following critical accounting policies greatest potential impact consolidated financial statements • revenue recognition • contingent liabilities • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes revenue recognition principal source revenue product sales contracts customers generally contain single performance obligation recognize revenue product sales satisfied performance obligation transferring control product customers control product generally transfers customer upon delivery certain countries sell distributors consignment basis record revenue control product transfers customer upon sale end user revenue recognized amount expect entitled exchange sale products amount includes fixed variable consideration excludes amounts collected customers remitted governmental authorities valueadded taxes foreign jurisdictions variability transaction price products pursuant contracts customers primarily arises following discounts rebates offer discounts rebates certain distributors customers arrangements many cases amounts fixed time sale transaction price reduced accordingly also provide rebates certain governmental programs including medicaid us programs outside us payable based actual claim data estimate rebates based analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates generally length time product sale processing reporting rebates three six months volumebased arrangements entered volumebased arrangements governments certain countries customers reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid customer rebate estimate incremental discounts resulting contractual limitations based forecasted sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period believe methodology used accrue discounts rebates reasonable appropriate given current facts circumstances actual results may differ provided balances activity rebates payable account years ended december 31 2019 2018 2017 follows 1 included adjustments related prior years accrual recorded 2019 related pmprb matter see note 11 commitments contingencies additional information current provisions relating sales current year increased 873 2019 compared 2018 416 2018 compared 2017 increase 2019 2018 primarily due increased unit volumes us subject rebates well increases rebate rates us certain product sales increase 2017 attributable increased unit volumes us europe subject rebates well increases rebate rates certain geographical regions certain product sales compared prior year contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss significant judgment required determination probability determination whether exposure reasonably estimable uncertainties related claims litigation accruals based best information available time assessment including legal facts circumstances case status proceedings applicable law likelihood settlement periodic basis additional information becomes available based specific events outcome litigation settlement claims offers settlement may reassess potential liability related matters may revise estimates facts circumstances indicate need change sharebased compensation company recognizes compensation expense associated issuance equity instruments may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method significant judgments assumptions used estimating compensation cost restricted stock units containing marketbased performance conditions well nonmarket performance conditions relating achievement operational metrics use payout simulation models estimate grant date fair value awards marketbased performance conditions payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary changes estimates probability achieving performance targets could material impact results operations valuation goodwill acquired intangible assets inprocess research development iprd recorded goodwill acquired intangible assets related business combinations identifiable intangible assets including iprd acquired determine fair values assets acquisition date discounted cash flow models typically used valuations quoted market prices available models require use significant estimates assumptions including limited • timing costs complete inprocess projects • timing probability success clinical events regulatory approvals • estimated future cash flows product sales resulting completed products inprocess projects • discount rates may also utilize cost approach estimates costs would incurred replace assets purchased significant inputs cost approach include estimated rates return historical costs market participant would expect pay assets intangible assets definite useful lives amortized estimated residual values estimated useful lives reviewed impairment triggering events occur december 31 2019 net book value purchased technology includes 29924 associated kanuma intangible asset acquired acquisition synageva biopharma corp part standard procedures reviewed kanuma asset december 31 2019 determined indicators impairment cash flow models used assessments based commercial experience date kanuma require use significant estimates include limited longrange pricing expectations patientrelated assumptions including patient identification conversion retention rates continue review related valuation accounting asset new information becomes available us goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets valuation contingent consideration record contingent consideration resulting business combination fair value acquisition date determine fair value contingent consideration based primarily following factors • timing probability success clinical events regulatory approvals • timing probability success meeting commercial milestones estimated future sales levels specific compound • discount rates contingent consideration liabilities arose connection business combinations quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse december 22 2017 tax cuts jobs act tax act enacted law tax act decreased us statutory corporate tax rate years beginning december 31 2017 included domestic international tax provisions affect measurement deferred tax assets liabilities result revalued deferred tax assets liabilities december 31 2017 recorded deferred tax benefit 2924 recorded impacts tax act provisional basis 2017 december 22 2018 accounting impact tax act complete see note 12 income taxes consolidated financial statements included elsewhere annual report form 10k additional information estimate tax effect reversing temporary differences reflective actual outcomes modified reflect new developments interpretations tax law revised incorporate new accounting principles changes expected timing manner reversal results operations could materially impacted follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return unrecognized tax benefits relate primarily issues common among multinational corporations industry apply variety methodologies making estimates include studies performed independent economists advice industry subject experts evaluation public actions taken irs taxing authorities well industry experience provide estimates unrecognized tax benefits may subject material adjustments matters resolved taxing authorities statutes expire estimates representative actual outcomes results operations could materially impacted continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized consider many factors assessing likelihood future realization deferred tax assets including recent cumulative earnings experience taxing jurisdiction expectations future taxable income carryforward periods available us tax reporting purposes various income tax strategies relevant factors significant judgment required making assessment extent future expectations change would assess recoverability deferred tax assets time determine deferred tax assets realizable future period would record adjustments income tax expense period adjustments may material fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership corporate structure derives income multiple jurisdictions requires us interpret related tax laws regulations within jurisdictions develop estimates assumptions regarding significant future events amount timing character deductions applicability foreign tax credits time execute intercompany transactions may impact valuation captive foreign partnership corresponding interest allocated partner resulting change deferred taxes transactions related valuations require application transfer pricing guidelines issued relevant taxing authorities significant estimates assumptions within discounted cash flow models also required calculate valuations estimates assumptions include limited estimated future operating cash flows revenue growth rate assumptions longrange pricing expectations patientrelated assumptions significant inputs discount rates return new accounting pronouncements accounting standards update asu 201613 “measurement credit losses financial instruments” june 2016 financial accounting standards board fasb issued new standard intended improve reporting requirements specific loans receivables financial instruments new standard requires credit losses financial assets measured amortized cost determined using expected loss model instead current incurred loss model requires credit losses related availableforsale debt securities recorded allowance credit losses limited amount carrying value exceeds fair value new standard also requires enhanced disclosure credit risk associated financial assets standard effective interim annual periods beginning december 15 2019 early adoption permitted adopted new standard january 1 2020 substantially completed assessment standard based composition portfolio financial instruments current forecasted economic conditions january 1 2020 continuing finalize calculations credit losses establish processes internal controls may required comply new credit loss standard related disclosure requirements expect adoption standard significant impact consolidated financial statements asu 201815 “customer’s accounting implementation costs incurred cloud computing arrangement service contract” august 2018 fasb issued new standard customers accounting implementation setup upfront costs incurred cloud computing arrangement cca aligns requirements capitalizing implementation costs cca service contract existing internaluse software guidance standard also provides classification guidance implementation costs well additional quantitative qualitative disclosures standard effective interim annual periods beginning december 15 2019 early adoption permitted adopted prospectively retrospectively adopted new standard january 1 2020 prospective basis continuing establish new processes internal controls may required comply new cloud computing standard expect adoption standard significant impact financial statements however adoption standard result increase capitalized assets related qualifying cca implementation costs incurred adoption date asu 201912 “income taxes simplifying accounting income taxes” december 2019 fasb issued new standard intended simplify accounting income taxes eliminating certain exceptions related approach intraperiod tax allocation methodology calculating income taxes interim period recognition deferred tax liabilities outside basis differences new guidance also simplifies aspects accounting franchise taxes enacted changes tax laws rates clarifies accounting transactions result stepup tax basis goodwill standard effective annual periods beginning december 15 2020 interim periods within early adoption permitted adoption standard requires certain changes primarily made prospectively changes made retrospectively currently assessing impact standard financial condition results operations asu 202001 “investments equity securities investments equity method joint ventures derivatives hedging clarifying interactions topic 321 topic 323 topic 815” january 2020 fasb issued new standard intended clarify interactions asc 321 asc 323 asc 815 new standard addresses accounting transition equity method measurement certain purchased options forward contracts acquire investments standard effective annual interim periods beginning december 15 2020 early adoption permitted adoption standard requires changes made prospectively currently assessing impact standard financial condition results operations recently adopted accounting pronouncements asu 201602 “leases” february 2016 fasb issued new standard requires lessees recognize leases onbalance sheet disclose key information leasing arrangements new standard establishes right use rou model requires lessee recognize rou asset lease liability balance sheet leases term longer 12 months leases classified financing operating classification affecting pattern classification expense recognition statement operations adopted new standard january 1 2019 using modified retrospective approach elected apply transition method allows companies continue applying guidance lease standard effect time comparative periods presented consolidated financial statements recognize cumulativeeffect adjustment opening balance retained earnings date adoption also elected “package practical expedients” permits us reassess new standard prior conclusions lease identification lease classification initial direct costs results reporting periods beginning january 1 2019 presented new standard prior period amounts adjusted continue reported accounting standards effect prior period upon adoption new lease standard january 1 2019 derecognized 4728 property plant equipment assets 3722 facility lease obligations associated previously existing buildtosuit arrangements capitalized rou assets 3261 inclusive opening adjustments 708 primarily related prepaid rent existing transition 2553 lease liabilities within consolidated balance sheets upon adoption transition recorded decrease 903 retained earnings net tax primarily related derecognition previously recorded buildtosuit arrangements asu 201802 “reclassification certain tax effects accumulated comprehensive income” february 2018 fasb issued new standard permits entities make onetime reclassification accumulated comprehensive income aoci retained earnings stranded tax effects resulting newly enacted corporate tax rates tax cuts jobs act tax act effective year ended december 31 2017 adopted new standard january 1 2019 elected reclassify income tax effects tax act aoci retained earnings continue release disproportionate income tax effects aoci based aggregate portfolio approach adoption standard impact consolidated financial statements results operations following table sets forth consolidated statements operations data periods indicated information derived consolidated financial statements included elsewhere annual report form 10k comparison years ended december 31 2019 2018 2017 net product sales net product sales product significant geographic region follows percentages meaningful net product sales consolidated soliris net product sales ultomiris net product sales strensiq net product sales kanuma net product sales increase net product sales fiscal year 2019 compared fiscal year 2018 primarily due increase unit volumes increase unit volumes primarily due increased global demand soliris therapy sales patients gmg largest driver well ultomiris volumes due loading doses required patients first year therapy partially offsetting soliris increase conversion pnh patients soliris ultomiris contributed 2019 ultomiris volumes primarily attributable pnh patient conversion soliris us additional unit volume increases due increased demand strensiq kanuma 2019 result continued efforts identify reach patients hpp lald globally increase net product sales fiscal year 2019 compared fiscal year 2018 partially offset price decreases largest driver 298 07 result judicial order issued second quarter 2019 related soliris pricing canada decision led reduction revenue second quarter 2019 reductions subsequent quarters appeals process concludes reduction revenue recorded year ended december 31 2019 includes impact period september 2017 december 2019 result patient conversion soliris ultomiris expect variability revenues future quarters due extended ultomiris dosing interval infusion timing may result either one two infusions quarter ultomiris loading doses pnh patients result increased revenues patient’s first year therapy ultomiris annual maintenance dose pnh ahus requires fewer vials compared annual dose soliris due decision price ultomiris lower soliris annual basis anticipate us revenues unfavorably impacted lower annual cost per patient maintenance years impact pronounced ahus due greater decrease vials ahus ultomiris patients result strategic pricing decisions implemented strensiq us limit annual treatment costs given weight based dosing expect price unfavorably impacted strensiq us future periods compared prior periods increase net product sales fiscal year 2018 compared fiscal year 2017 primarily due increase unit volumes increase unit volumes primarily due increased global demand soliris therapy including sales patients gmg received regulatory approval second half 2017 additional unit volume increases due increased sales strensiq kanuma 2018 result continued efforts identify reach patients hpp lald globally increase net product sales fiscal year 2018 compared fiscal year 2017 partially offset price decreases 39 due part price change turkey resulting formalized reimbursement agreement subsequent marketing authorization third quarter 2018 addition rebates us reimbursement agreements outside us metabolic products also contributed decrease net product sales cost sales cost sales includes manufacturing costs actual estimated royalty expenses associated sales products amortization licensing rights following table summarizes cost sales years ended december 31 2019 2018 2017 decrease cost sales percentage net product sales year ended december 31 2019 compared periods 2018 2017 primarily due decreases royalty expenses due contract expiration occurred fourth quarter 2018 additionally cost sales year ended december 31 2018 december 31 2017 included asset related charges 58 1521 respectively associated closure arimf facility announced third quarter 2017 facility sold 2018 charges primarily relate accelerated depreciation impairment manufacturing assets exclusive items mentioned cost sales percentage net product sales 87 89 85 years ended december 31 2019 2018 2017 respectively research development expense research development expense includes personnel facility direct costs associated research development rd product candidates well product development costs additional information development programs please refer product development programs item business annual report form 10k rd expenses comprised costs paid clinical development product development discovery research well costs associated certain strategic licensing agreements rdrelated asset purchase agreements entered third parties clinical development costs comprised costs conduct manage clinical trials related eculizumab alxn1210 product candidates product development costs incurred performing duties related manufacturing development regulatory functions including manufacturing material clinical research activities administrative costs incurred product development discovery research costs incurred conducting laboratory studies performing preclinical research uses products product candidates upfront payments include upfront payments related strategic licensing agreements rdrelated asset purchase agreements subsequent milestone payments incurred agreements relate rd activities classified clinical discovery product development costs based nature underlying milestone event clinical development costs accumulated allocated programs product development discovery research costs allocated rd expenses consist costs compensate personnel maintain facilities equipment occupancy costs associated research development efforts costs relate efforts clinical preclinical products product development discovery research efforts costs allocated directly program following graph provides information regarding research development expenses year ended december 31 2019 incurred rd expenses 8860 increase 1556 213 versus 7304 incurred year ended december 31 2018 increase primarily related following • increase 767 upfront payments primarily related license payments made connection arrangements entered zealand pharma zealand affibody ab affibody eidos therapeutics inc eidos stealth biotherapeutics corp stealth 2019 upfront payments made 2018 related agreement entered dicerna pharmaceuticals inc dicerna • increase 371 payroll benefits primarily related headcount increases • increase 348 discovery mainly driven target option exercise fees research milestones associated agreement dicerna • increase 236 direct clinical development expenses related primarily increases various studies see graph following page summarizing expenses related clinical development programs • decrease 182 direct product development expenses related primarily decrease costs associated manufacturing material alxn1210 partially offset increase material related alxn1830 alxn1840 year ended december 31 2018 incurred research development expenses 7304 decrease 1480 168 versus 8784 incurred year ended december 31 2017 decrease primarily related following • decrease 709 direct clinical development expenses related primarily decreases various eculizumab clinical studies offset expansion studies alxn1210 • increase 130 direct product development expenses related primarily increase costs associated manufacturing material alxn1210 offset decrease alxn6000 clinical research activities alxn6000 program discontinued • decrease 222 upfront payments due nature timing licensing agreements executed 2018 compared 2017 • decrease 129 discovery primarily related deprioritized preclinical arrangements moderna therapeutics blueprint medicines longer conduct development efforts entities • decrease 260 payroll benefits primarily related headcount reductions resulting restructuring activities initiated 2017 • decrease 290 facilities related expenses primarily related decreased facilities expenses primarily resulting impact 2017 restructuring following graph summarizes expenses related clinical development programs following graph summarizes accumulated direct expenses related clinical development programs january 1 2006 december 31 2019 1992 2006 substantially research development expenses related two products eculizumab pexelizumab obtained approval us eculizumab pnh 2007 ahus 2010 ceased development pexelizumab 2006 b unallocated costs shared across various development programs successful development drug candidates uncertain subject number risks cannot guarantee results clinical trials favorable sufficient support regulatory approvals product development programs could decide abandon development required spend considerable resources otherwise contemplated additional discussion regarding risks uncertainties regarding research development programs please refer item 1a “risk factors” annual report form 10k expect research development expenses increase percentage sales 2020 compared 2019 selling general administrative expense selling general administrative expense includes commercial administrative personnel corporate facility external costs required support marketing sales commercialized products selling general administrative costs include corporate facility operating expenses depreciation marketing sales operations support products human resources finance legal information technology support personnel expenses corporate costs telecommunications insurance audit government affairs global corporate compliance program table provides information regarding selling general administrative expense year ended december 31 2019 incurred selling general administrative expenses 12611 increase 1493 134 versus 11118 incurred year ended december 31 2018 increase primarily related following • increase salary benefits labor expenses 1123 increase primarily related headcount increases driven increase commercial activities related soliris gmg increased staff costs associated commercial support activities including nmosd prelaunch efforts employee related costs associated sharebased compensation plans also increased • increase external selling general administrative expenses 370 increase primarily driven increase charitable contributions professional services year ended december 31 2018 incurred selling general administrative expenses 11118 increase 174 16 versus 10944 incurred year ended december 31 2017 increase primarily related following • increase external selling general administrative expenses 202 increase primarily due increase professional services asset related charges associated previously announced restructuring programs increases partially offset decreased distribution expenses compared period 2017 expect selling general administrative expenses decrease percentage sales 2020 compared 2019 acquired inprocess research development year ended december 31 2019 recorded benefit 41 acquired inprocess research development iprd associated previously acquired iprd related syntimmune acquisition result agreement final working capital adjustment second quarter 2019 year ended december 31 2018 recorded acquired iprd expense 11830 related wilson therapeutics acquisition completed second quarter 2018 syntimmune acquisition completed fourth quarter 2018 iprd assets associated acquisitions principal assets acquired transaction reached technological feasibility alternative future use acquisition date therefore expensed 2018 amortization purchased intangible assets amortization expense associated purchased intangible assets 3096 3201 years ended december 31 2019 2018 2017 respectively amortization expense primarily associated intangible assets related strensiq kanuma third quarter 2019 us patent term extension composition matter patent strensiq granted resulted increase estimated useful life strensiq intangible asset result lower amortization expense future periods change fair value contingent consideration years ended december 31 2019 2018 2017 change fair value contingent consideration expense associated prior business combinations 116 1165 410 respectively change fair value contingent consideration fluctuate based timing recognition changes probability achieving contingent milestones expected timing milestone payments connection previous acquisitions year ended december 31 2019 changes fair value contingent consideration expense include impact changes expected timing achieving contingent milestones addition interest component related passage time september 2018 amended terms certain contingent milestone payments due prior merger agreement enobia pharma corp enobia dated december 28 2011 agreement removed obligations respect regulatory milestone redistributed contingent payment associated milestone various sales milestones result agreement probability achieving various sales milestones contingent consideration liability increased 487 third quarter 2018 year ended december 31 2018 changes fair value contingent consideration expense primarily reflect impact agreement enobia amend milestones changes expected timing payments contingent consideration well interest component contingent consideration related passage time restructuring expenses years ended december 31 2019 2018 2017 recorded 120 255 1046 respectively restructuring expenses charges year ended december 31 2019 relate restructuring activities initiated first quarter 2019 realign international commercial organization charges year ended december 31 2018 mainly attributable relocation corporate headquarters new connecticut boston massachusetts related costs charges year ended 2017 mainly attributable employee separation costs connection 2017 restructuring first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases initial restructuring activities primarily focused reduction companys global workforce september 2017 committed operational plan realign global organization refocused corporate strategy realignment focused investments priority growth areas maximize leadership complement grow rare disease business realignment also included relocation companys headquarters boston massachusetts 2018 new connecticut site continues support employees working research process development laboratories clinical supply quality teams patient support program number important enterprise business services 2017 restructuring plan reduced companys global workforce approximately 200 restructuring achieved cost savings focusing development portfolio simplifying business structures processes across companys global operations closing multiple alexion sites including arimf certain regional countrybased offices impairment intangible assets second quarter 2017 due clinical results recognized impairment charge 310 related sbc103 acquired inprocess research development asset writedown asset fair value determined de minimis december 31 2019 reviewed kanuma asset impairment determined indicators impairment continue review related valuation accounting asset future quarters new information becomes available us changes assumptions used net cash flow projections may result impairment charges subsequent periods net book value kanuma intangible asset december 31 2019 29924 income expense following table provides information regarding income expense years ended december 31 2019 2018 recognized income 359 55 respectively increase income primarily related gain 320 resulting amendment terms option agreement caelum fourth quarter 2019 years ended december 31 2019 2018 2017 recognized investment income 1003 653 185 respectively increase primarily related unrealized gains losses strategic equity investments recorded fair value year ended december 31 2019 recorded unrealized gains 269 strategic equity investments recognized net realized gain 328 related sale moderna therapeutics inc moderna equity investment year ended december 31 2018 recorded unrealized gains 430 strategic equity investments primarily related moderna equity investment years ended december 31 2019 2018 2017 recorded 778 982 984 respectively interest expense decrease interest expense driven derecognition certain previously recorded buildtosuit arrangements first quarter 2019 due adoption new lease accounting standard income taxes income tax benefit expense years ended december 31 2019 2018 2017 attributable us federal state foreign income taxes profitable operations year ended december 31 2019 recorded income tax benefit 2255 effective tax rate 103 compared income tax expense 1646 1045 effective tax rate 680 191 years ended december 31 2018 2017 respectively year ended december 31 2019 recognized certain onetime deferred tax benefits including 957and 303 associated tax election made respect intellectual property wilson therapeutics valuation allowance release corresponding recognition net operating losses respectively deferred tax benefits offset income tax expense 102 associated july 1 2019 integration wilson therapeutics intellectual property alexion corporate structure completed comprehensive analysis prior year estimate related foreignderived intangible income “fdii” based additional guidance provided proposed regulations issued us treasury department 2019 analysis resulted income tax benefit 170 related prior year recorded change estimate income tax expense 2019 consolidated statements operations resulting decrease approximately 08 effective tax rate fourth quarter 2019 completed intraentity asset transfer certain intellectual property irish subsidiary within captive foreign partnership recognized deferred tax benefits 22215 represents difference basis intellectual property financial statement purposes basis intellectual property tax purposes applying appropriate enacted statutory tax rates receive future tax deductions associated amortization intellectual property amortization deducted tax purposes carried forward indefinitely irish tax law offsetting deferred tax expense 18393 recognized reflect reduction future foreign tax credits associated foreign local tax amortization deductions net deferred tax benefits resulted decrease approximately 175 effective tax rate income tax expense year ended december 31 2018 includes increase effective tax rate 1026 attributable acquisitions syntimmune wilson therapeutics absent successful clinical results regulatory approval alternative future use inprocess research assets acquired acquisitions accordingly value assets acquired 11830 expensed acquired inprocess research development tax benefit recognized december 2017 tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings incorporated onetime transition tax previously unremitted foreign earnings incorporated impact tax act results operations calculated provisional amounts tax effects tax act could reasonably estimated year ended december 31 2017 recorded adjustments provisional accounting 2018 resulted decrease tax expense 565 completed accounting tax act fourth quarter 2018 tax act resulted increase tax expense year ended december 31 2017 458 increase included transition tax expense 1779 deferred tax expense related new gilti minimum tax 1654 partially offset 2975 benefit remeasuring balance sheet taxes new 210 us federal tax rate remeasurement benefit included 2924 related decreases net deferred tax liability 51 related decreases income taxes payable deferred tax expense related gilti minimum tax included incremental deferred tax 2369 net related 715 decrease uncertain tax positions addition conclusion irs examination 2013 2014 tax years resulted decrease 2017 effective tax rate approximately 36 continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realizing deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized financial condition liquidity capital resources following table summarizes components financial condition december 31 2019 2018 aggregate increase cash equivalents marketable securities 11857 december 31 2019 compared december 31 2018 primarily attributable cash generated operations net proceeds issuance common stock sharebased compensation arrangements proceeds received sale investment moderna therapeutics inc partially offsetting increases cash utilized repurchase shares common stock payments revolving credit facility term loan facility upfront payments related licensing agreements payment salesbased milestone enobia pharma corp purchases property plant equipment excluding impact significant future asset acquisitions licenses collaboration agreements expect annual operating expenses increase percentage sales 2020 compared 2019 also expect reduced capital investment 2020 compared 2019 anticipate cash generated operations existing available cash equivalents marketable securities provide us adequate resources fund operations currently planned least next twelve months financed operations capital expenditures primarily positive cash flows operations expect continue able fund operations including principal interest payments amended restated credit agreement contingent payments associated inlicenses acquisitions principally cash flows operations may time also seek additional funding combination equity debt financings sources necessary future acquisitions strategic purposes new sources financing equity andor debt financings may always available acceptable terms may required obtain certain consents connection completing financings financial instruments required use business may invest cash reserves money market funds bank deposits high quality marketable debt securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions financial instruments potentially expose us concentrations credit risk cash equivalents marketable securities accounts receivable derivative contracts december 31 2019 four customers accounted 669 accounts receivable balance individual customers accounting 116 203 accounts receivable balance december 31 2018 three customers accounted 487 accounts receivable balance individual customers accounting 140 191 accounts receivable balance year ended december 31 2019 four customers accounted 564 net product sales individual customers accounting 100 168 net product sales year ended december 31 2018 four customers accounted 503 net product sales individual customers accounting 100 164 net product sales year ended december 31 2017 three customers accounted 370 net product sales individual customers accounting 108 150 net product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods continue monitor conditions assess possible impact business date experienced significant losses respect collection accounts receivable manage foreign currency transaction risk interest rate risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes december 31 2019 foreign exchange forward contracts notional amounts totaling 30785 outstanding foreign exchange forward contracts net fair value asset 28 305 included current assets noncurrent assets 277 included current liabilities noncurrent liabilities december 31 2019 interest rate swap contracts notional amounts totaling 17500 outstanding interest rate swap contracts net fair value liability 614 included current liabilities noncurrent liabilities counterparties contracts large domestic multinational commercial banks believe risk nonperformance material december 31 2019 financial assets liabilities recorded fair value classified financial assets liabilities level 1 2 3 within fair value hierarchy level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 1 assets consist mutual fund investments equity securities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 2 assets consist primarily money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit equity securities subject holding period restrictions derivative contracts level 2 liabilities consist also derivative contracts level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value level 3 liabilities consist contingent consideration related business acquisitions derivative liabilities associated contingent payments business combinations contingent consideration obligations december 31 2019 purchase agreements business combinations include contingent payments totaling 6020 become payable certain development commercial milestones achieved milestone amounts 3670 2350 contingent payments relate development commercial milestones respectively expect amounts significant impact liquidity nearterm next 12 months expect make milestone payments associated prior business combinations additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds sale equity securities debt january 28 2020 completed acquisition achillion terms agreement acquired outstanding common stock achillion 630 per share approximately 9260 inclusive settlement achillion’s outstanding equity awards acquisition funded cash hand transaction includes potential additional consideration form nontradeable contingent value rights cvrs paid achillion shareholders certain clinical regulatory milestones achieved within specified periods include 100 per share us fda approval danicopan 100 per share initiation phase 3 ach5228 asset acquisitions inlicense agreements december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets terms agreement made upfront payment 400 fourth quarter 2017 addition december 31 2019 could required pay additional 1600 target developed subject achievement specified development regulatory salesbased milestones well royalties commercial sales october 2018 entered collaboration agreement dicerna provides us exclusive worldwide licenses development commercial rights two preclinical rna interference rnai subcutaneously delivered molecules complementmediated diseases well exclusive option preclinical rnai molecules two additional targets within complement pathway addition collaboration agreement made equity investment dicerna terms agreements made upfront payment 370 exclusive licenses equity investment december 2019 exercised option exclusive rights two additional targets within complement pathway existing agreement dicerna expands alexion’s existing research collaboration license agreement dicerna include total four targets within complement pathway connection option exercise paid dicerna 200 fourth quarter 2019 december 31 2019 could required pay 6291 amounts due upon achievement specified research development regulatory commercial milestones four licensed targets well royalties commercial sales january 2019 entered agreement caelum biotechnology company developing cael101 al amyloidosis terms agreement acquired minority equity interest caelum exclusive option acquire remaining equity caelum based phase ii data prenegotiated economics paid 300 first quarter 2019 agreed pay additional 300 contingent development milestones following discussions fda caelum changed design clinical development program plans initiate expanded phase iiiii trials second quarter 2020 december 2019 amended terms agreement caelum modify option acquire remaining equity caelum based data expanded phase iiiii trials amendment also modified developmentrelated milestone events associated initial 300 contingent payments provided additional 200 upfront funding accrued december 31 2019 well funding 600 exchange additional equity interest fair value upon achievement specific developmentrelated milestone event agreement also provides potential additional payments event alexion exercises purchase option 5000 includes upfront option exercise payment potential regulatory commercial milestone payments march 2019 entered agreement zealand provides us exclusive worldwide licenses well development commercial rights preclinical peptide therapies subcutaneously delivered four complement pathway targets zealand lead joint discovery research efforts preclinical stage alexion lead development efforts beginning investigational new drug filing phase studies addition agreement made equity investment zealand terms agreement made upfront payment 400 exclusive license lead target equity investment well preclinical research services performed zealand relation lead target could required pay 6100 lead target upon achievement specified development regulatory commercial milestones well royalties commercial sales addition could required pay additional 1150 development regulatory milestones longacting shortacting product developed respect lead target three subsequent targets selected option fee 150 potential additional development regulatory commercial milestones well royalty payments reduced price lead target march 2019 entered agreement affibody provides us exclusive worldwide license well development commercial rights aby039 bivalent antibodymimetic targets neonatal fc receptor fcrn currently phase 1 development agreement affibody subject clearance hartscott rodino antitrust improvements act following receipt approval closed april 2019 pursuant agreement alexion lead clinical development commercial activities aby039 rare immunoglobulin g iggmediated autoimmune diseases affibody option copromote aby039 us lead clinical development aby039 undisclosed indication terms agreement made upfront payment 250 exclusive license aby039 december 31 2019 could also required pay 6250 amounts due upon achievement specific development regulatory commercial milestones well royalties commercial sales september 2019 entered agreement eidos provides us exclusive license develop commercialize ag10 japan ag10 orally administered small molecule designed bind stabilize ttr blood addition made equity investment eidos terms agreement made upfront payment 500 exclusive license ag10 japan equity investment december 31 2019 could also required pay 300 upon achievement japanesebased regulatory milestone well royalties commercial sales october 2019 entered option agreement stealth alexion received exclusive option codevelop subcutaneous elamipretide us well obtain exclusive rights develop commercialize subcutaneous elamipretide outside us based final results phase iii study pmm terms agreement made upfront payment 300 option equity investment stealth december 2019 stealth announced based topline data phase iii study pmm study meet primary endpoints following review phase iii data released december 2019 notified stealth exercise codevelopment option agreement connection prior acquisition syntimmune clinicalstage biotechnology company developing antibody therapy targeting neonatal fc receptor fcrn could required pay 8000 upon achievement specified development regulatory commercial milestones addition december 31 2019 license collaboration agreements may required pay additional 540 currently licensed targets certain development regulatory commercial milestones met additional amounts may payable elect acquire licenses additional targets applicable terms agreements expect payments associated milestones asset acquisitions licensing agreements significant impact liquidity nearterm next 12 months may make milestone payments related arrangements approximately 2200 excluding milestones accrued december 31 2019 additional future payments become probable evaluate methods funding payments could made available cash marketable securities cash generated operations proceeds sale equity securities debt operating financing lease liabilities operating financing lease liabilities recorded lease commencement based present value fixed substance fixed lease payments expected lease term lease liabilities amortized lease term december 31 2019 2610 total financing operating lease liabilities recorded consolidated balance sheets total undiscounted lease commitments december 31 2019 3238 344 payable next 12 months refer note 10 leases summary maturity lease liabilities year expect payments associated maturity lease liabilities significant impact liquidity nearterm longterm debt june 7 2018 alexion entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amended restated credit agreement dated june 22 2015 prior credit agreement credit agreement provides 26125 term loan facility 10000 revolving facility borrowings used working capital requirements acquisitions general corporate purposes beginning quarter ending june 30 2019 required make amortization payments 500 aggregate original principal amount term loan facility annually payable equal quarterly installments december 31 2019 25145 outstanding term loan december 31 2019 open letters credit 10 offset borrowing availability revolving facility january 2019 paid outstanding revolving credit facility 2500 full outstanding borrowings revolving credit facility december 31 2019 manufacturing obligations supply agreements lonza relating manufacture soliris strensiq ultomiris requires payments lonza inception contract upon initiation completion product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs various agreements lonza remaining total noncancellable commitments approximately 10999 2030 certain commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured alexion rhode island manufacturing facility arimf prior sale payment respect sales soliris manufactured lonza facilities also pay lonza royalty sales ultomiris addition lonza noncancellable commitments approximately 606 2020 third party manufacturers taxes recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential withholding foreign local us state income taxes common stock repurchase program november 2012 board directors authorized share repurchase program february 2017 board directors increased amount authorized expend future repurchases 10000 repurchase program superseded prior repurchase programs october 22 2019 board directors approved additional share repurchase authorization 10000 repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time discretion program repurchased 38 07 shares common stock cost 4160 850 years ended december 31 2019 2018 respectively december 31 2019 total 10355 remaining repurchases program subsequent december 31 2019 repurchased immaterial number shares common stock repurchase program cost 16 january 29 2020 total 10339 remaining repurchases repurchase program cash flows following summarizes net change cash equivalents operating activities cash flows provided operations 2019 20849 compared 4260 2018 increase cash provided operating activities primarily due acquisition wilson therapeutics syntimmune 2018 higher cash payments restructuring 2018 increases due timing cash receipts payments changes working capital 2019 compared 2018 increase partially offset upfront option payments made connection agreements zealand affibody eidos stealth dicerna payment salesbased milestone enobia pharma corp investing activities cash provided investing activities 2019 97 compared 4705 2018 decrease cash provided investing activities compared prior year primarily attributable purchases sales availableforsale debt securities resulted net cash inflow 1420 2019 compared net cash inflow 6908 2018 purchases strategic equity investments zealand caelum eidos stealth resulted 733 cash outflows 2019 compared 103 cash outflows 2018 dicerna addition received net cash proceeds 1147 connection sale moderna investment partially offsetting impacts decreases purchases property plant equipment 2019 compared 2018 financing activities cash flows used financing activities 2019 7391 compared 1024 2018 increase cash used financing activities primarily due decrease payments term loan 1958 well 2500 proceeds revolving credit facility 2018 repaid current year additionally increase 3310 common stock repurchases 2019 compared 2018 contractual obligations following table summarizes contractual obligations december 31 2019 effect obligations commercial commitments expected liquidity cash flow future fiscal years include potential milestone payments assume nontermination agreements obligations commitments supporting arrangements represent payments based current operating forecasts december 31 2019 subject change contractual obligations table include contingent royalties contingent contractual payments may owe third parties future payments contingent future sales products existence scope third party intellectual property rights factors described item 1a risk factors note 11 commitments contingencies consolidated financial statements included elsewhere annual report form 10k liability unrecognized tax benefits related various federal state foreign income tax matters 1338 december 31 2019 included within table timing settlement amounts reasonably estimable december 31 2019 contingent payments related business acquisitions asset acquisitions option inlicense agreements included within table satisfaction contingent consideration obligations satisfied timing payment amounts uncertain december 31 2019 contingent payments associated business combinations total 6020 become payable certain development commercial milestones achieved next 12 months expect make milestone payments associated prior business combinations commitments related asset acquisitions option inlicense agreements include contingent payments become payable certain development regulatory commercial milestones achieved next 12 months may make milestone payments related asset acquisitions license agreements approximately 2200 excluding milestones accrued december 31 2019 future obligations related defined benefit plans included within table timing amounts payments reasonably estimable december 31 2019 total unfunded obligation defined benefit plans december 31 2019 277 unfunded obligation impacted changes laws regulations interest rates investment returns variables credit facilities june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amends restates agreement dated june 22 2015 prior agreement credit agreement provides 10000 revolving credit facility 26125 term loan facility revolving credit facility term loan facility mature june 7 2023 beginning quarter ending june 30 2019 required make amortization payments 500 aggregate original principal amount term loan facility annually payable equal quarterly installments loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement obligations credit agreement guaranteed certain foreign domestic subsidiaries secured liens certain subsidiaries’ equity interests subject certain exceptions terms credit agreement must maintain ratio total net debt ebitda 350 100 subject certain limited adjustments ebitda cash interest expense ratio least 350 100 case calculated accordance credit agreement compliance applicable covenants credit agreement december 31 2019 credit agreement contains certain representations warranties affirmative negative covenants events default negative covenants credit agreement restrict alexion’s subsidiaries’ ability subject certain baskets exceptions among things incur liens indebtedness make investments enter mergers fundamental changes make dispositions pay dividends restriction dividend payments includes exception permits us pay dividends make restricted payments regardless dollar amount long giving pro forma effect thereto consolidated net leverage ratio defined credit agreement within predefined ranges subject certain increases following designated material acquisitions operating financing leases operating financing leases principally facilities equipment currently lease office space us foreign countries support operations global organization believe administrative office space adequate meet needs foreseeable future also believe research development facilities manufacturing facilities together third party manufacturing facilities adequate ongoing activities addition minimum rental commitments operating leases may also required pay amounts taxes insurance maintenance operating expenses commercial commitments commercial commitments consist research development license operational clinical development manufacturing cost commitments along anticipated supporting arrangements subject certain limitations cancellation clauses timing level commercial scale manufacturing costs may realized contingent upon progress clinical development programs commercialization plans commercial commitments represented principally supply agreements lonza described commitments lonza include amounts estimated consumer price index cpi adjustments obligated pay lonza item 7aitem 7 managements discussion analysis financial condition results operations since inception january 1992 alexion devoted substantially resources drug discovery research product development programs date alexion received revenues sale products company unprofitable since inception expects incur substantial increasing operating losses next several years due expenses associated product research development preclinical clinical testing regulatory activities manufacturing development scaleup july 31 1996 company incurred cumulative net loss 246 million companys plan develop commercialize product candidates clinical trial marketing requirements funded company certain companys c5 inhibitor apogen products greater resources required alexions strategy form corporate partnerships major pharmaceutical companies product development commercialization assurance terms future corporate partnerships licensed applications corporate partner would likely expected bear substantial cost much manpowerintensive effort clinical development scaleup production seeking fda approval marketing alexion entered strategic alliance us surgical respect companys unigraft program intends seek additional strategic alliances major pharmaceutical companies company recognizes research development revenues development expenses incurred related work performed terms contracts revenue contingent upon future expenditures company deferred recognized expenditures incurred revenues contingent upon achievement milestones recognized milestones achieved results operations years ended july 31 1996 1995 1994 company earned contract research revenues 26 million 136000 fiscal years ended july 31 1996 1995 respectively comparable revenue fiscal year ended july 31 1994 increase fiscal 1996 primarily due revenues companys collaborative research development agreement us surgical companys two sbir grants nih funding received nists atp revenues fiscal 1995 resulted receipt funds two sbir grants nih see item 1 businessstrategic alliances collaborations licenses fiscal years ended july 31 1996 1995 1994 company expended 66 million 56 million 55 million respectively research development activities increases research development spending attributable expanded preclinical development companys research programs manufacturing process development companys c5 inhibitor product candidates initiation clinical trials following authorization fda companys ind lead c5 inhibitor product candidate general administrative expenses increased 18 million fiscal 1996 16 million fiscal 1995 19 million fiscal 1994 increase fiscal 1996 1995 resulted primarily increased outside professional services related business development recruiting patent legal activities decline fiscal 1995 compared 1994 due primarily reduction costs outside professional services income net 397000 fiscal 1996 compared expense net 29000 period year ago fiscal 1994 income net 94000 fluctuation past three years due primarily greater interest income higher cash balances available investment favorable investment market fiscal 1996 compared prior two fiscal years result factors company incurred net losses 54 million 71 million 73 million fiscal years ended july 31 1996 1995 1994 respectively liquidity capital resources since inception company financed operations capital expenditures primarily initial public offering private placements equity securities resulting aggregate approximately 415 million net proceeds company financed purchase certain equipment 12 million secured notes payable financing institution 378000 capital lease obligations company also received 30 million research development support collaboration us surgical received 582000 sbir grants nih 246000 atp nist proceeds companys initial public offering private placements notes payable capital leases cash generated corporate collaboration sbir atp grants used fund operating activities approximately 208 million investments approximately 22 million equipment approximately 952000 licensed technology rights patents july 31 1996 fiscal year ended july 31 1996 companys capital expenditures totalled 332000 primarily acquisition laboratory equipment july 31 1996 company working capital approximately 170 million total cash equivalents marketable securities amounted approximately 186 million company leases administrative research development facilities three operating leases expiring june 1998 december 1997 march 1999 respectively option additional three years company obligated make payments pursuant certain licensing research development agreements company scheduled pay assuming nontermination agreements 453000 228000 pursuant licensing research development agreements fiscal years ending july 31 1997 1998 1999 respectively see item 1 businessstrategic alliances collaborations licenses company anticipates existing available capital resources interest earned available cash marketable securities sufficient fund operating expenses capital requirements currently planned least calendar year 1997 companys future capital requirements depend many factors progress companys research development programs progress clinical trials time costs involved obtaining regulatory approvals costs involved obtaining enforcing patents necessary licenses ability company establish development commercialization relationships costs manufacturing scaleup see item 1 businessalexions drug development strategy company expects incur substantial additional costs including costs associated research preclinical clinical testing manufacturing process development additional capital expenditures associated facility expansion manufacturing requirements order commercialize products currently development company need raise substantial additional funds additional financings including public private equity offerings collaborative research development arrangements corporate partners assurance funds available terms acceptable company discussions potential collaborative partners result agreements unavailability additional financing could require company delay scale back eliminate certain research product development programs license third parties commercialize products technologies company would otherwise undertake could material adverse effect company july 31 1996 company approximately 230 million 1190000 net operating loss tax credit carryforwards respectively expire various dates fiscal 2008 2011 tax reform act 1986 tax act contains certain provisions may limit companys ability utilize net operating loss tax credit carryforwards given year certain events occur including cumulative changes ownership interests excess 50 threeyear period assurance ownership changes future periods significantly limit companys use existing net operating loss tax credit carryforwards item 8 nanitem 7a qualitative quantitative disclosures market risk applicable item 8item 7a quantitative qualitative disclosures market risk interest income companys marketable securities carried income expense company accounts marketable securities accordance statement financial accounting standards 115 accounting certain investments debt equity securities sfas 115 cash equivalents marketable securities treated availableforsale sfas 115 investments fixed rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted due rise interest rates due part factors companys future investment income may fall short expectations due changes interest rates company may suffer losses principal forced sell securities seen decline market value due changes interest rates companys marketable securities held purposes trading marketable securities july 31 1999 maturities less two years weightedaverage interest rate marketable securities july 31 1999 57 fair value marketable securities held july 31 1999 41 million item 8item 7a quantitative qualitative disclosures market risk account marketable securities accordance statement financial accounting standards 115 accounting certain investments debt equity securities sfas 115 cash equivalents marketable securities treated availableforsale sfas 115 investments fixed rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted due rise interest rates due part factors future investment income may fall short expectations due changes interest rates may suffer losses principal forced sell securities seen decline market value due changes interest rates marketable securities held purposes trading believe currently material adverse market risk exposure marketable securities july 31 2001 maturities less two years weightedaverage interest rate marketable securities july 31 2001 2000 42 69 respectively fair value marketable securities held july 31 2001 2201 million july 31 2001 aggregate fixed rate debt approximately 124 million interest rates associated debt increased 10 corresponding increase annual interest expense approximately 700000 would occur item 8item 7a quantitative qualitative disclosures market risk account marketable securities accordance statement financial accounting standards 115 “accounting certain investments debt equity securities” “sfas 115” cash equivalents marketable securities treated availableforsale sfas 115 investments fixed rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted due rise interest rates due part factors future investment income may fall short expectations due changes interest rates may suffer losses principal forced sell securities seen decline market value due changes interest rates marketable securities held purposes trading believe currently material adverse market risk exposure marketable securities july 31 2002 maturities less two years weightedaverage interest rate marketable securities july 31 2002 2001 24 42 respectively fair value marketable securities held july 31 2002 2610 million july 31 2002 aggregate fixed rate debt approximately 124 million interest rates associated debt increased 10 corresponding increase annual interest expense approximately 700000 would occur item 8item 7a quantitative qualitative disclosures market risk part investment portfolio financial instruments sensitive market risks investment portfolio used preserve capital required fund operations including research development activities shortterm investments consist us government obligations highgrade corporate notes commercial paper investments debt securities classified “availableforsale” recorded fair value investments subject interest rate risk could decline value interest rates increase due conservative nature shortterm investments policy believe material exposure interest rate risk although investments subject credit risk investment policies specify credit quality standards investments limit amount credit exposure single issue issuer type investment “availableforsale” marketable securities sensitive changes interest rates interest rate changes would result change fair value financial instruments due difference market interest rate date purchase financial instrument 10 decrease yearend market interest rates would result material impact net fair value interestsensitive financial instruments 10 increase decrease market interest rates 575 subordinated convertible notes would result material impact notes item 8item 7a quantitative qualitative disclosures market risk part investment portfolio financial instruments sensitive market risks investment portfolio used preserve capital required fund operations including research development activities shortterm investments consist us government obligations highgrade corporate notes commercial paper investments debt securities classified “availableforsale” recorded fair value investments subject interest rate risk could decline value interest rates increase due conservative nature shortterm investments policy believe material exposure interest rate risk although investments subject credit risk investment policies specify credit quality standards investments limit amount credit exposure single issue issuer type investment “availableforsale” marketable securities sensitive changes interest rates interest rate changes would result change fair value financial instruments due difference market interest rate date purchase financial instrument 10 decrease yearend market interest rates would result material impact net fair value interestsensitive financial instruments 10 increase decrease market interest rates would result material impact 575 subordinated convertible notes item 8item 7a quantitative qualitative disclosures market risk currently maintain approximately 20 cash investments financial instruments original maturity dates three months less 15 financial instruments original maturity dates greater three months less one year remaining 65 financial instruments original maturity dates equal greater one year less two years financial instruments subject interest rate risk decline value interest rates increase estimate change 100 basis points interest rates weighted average duration approximately 4 months july 31 2005 would result 600000 decrease increase fair value cash investments outstanding longterm liabilities july 31 2005 consisted 1500 million 1375 convertible senior notes due february 1 2012 notes bear interest fixed rate results operations would affected interest rate changes although future borrowings may bear interest floating rate would therefore affected interest rate changes cannot reasonably estimate effect therefore believe change 100 basis points interest rates would material effect financial condition accordingly believe material market risk exposure respect derivative financial instruments would require disclosure item july 31 2005 market value 1500 million 1375 convertible senior notes due february 1 2012 based quoted market prices estimated 1530 million item 8item 7a quantitative qualitative disclosures market risk amounts thousands except per share data december 31 2006 held approximately 77 cash investments financial instruments original maturity dates three months less includes restricted cash 6 financial instruments original maturity dates greater three months less one year remaining 17 financial instruments original maturity dates equal greater one year less two years financial instruments subject interest rate risk decline value interest rates increase estimate change 100 basis points interest rates would result increase decrease approximately 257 fair value cash investments weighted average duration approximately 1 month december 31 2006 outstanding longterm liabilities december 31 2006 included 150000 1375 convertible senior notes due february 1 2012 notes bear interest fixed rate results operations would affected interest rate changes december 31 2006 market value 150000 1375 convertible senior notes due february 1 2012 based quoted market prices estimated 217125 july 2006 alexion manufacturing borrowed 26000 purchase finance construction smithfield rhode island manufacturing facility loan bears interest fixed rate accordingly changes interest rate affect future payments loan accordingly believe material market risk exposure respect derivative financial instruments would require disclosure item 8item 7a quantitative qualitative disclosures market risk amounts thousands except per share data interest rate risk december 31 2007 held approximately 90 cash investments including restricted cash financial instruments primarily money market funds original maturity dates three months less remaining 10 held financial instruments original maturity dates equal greater one year less two years financial instruments subject interest rate risk decline value interest rates increase however expect hold timebased investments corporate bonds maturity estimate change 100 basis points interest rates would result increase decrease approximately 11 fair value cash investments weighted average duration approximately 1 month december 31 2007 outstanding longterm liabilities december 31 2006 included 150000 1375 convertible senior notes due february 1 2012 notes bear interest fixed rate results operations would impacted interest rate changes december 31 2006 market value 150000 1375 convertible senior notes due february 1 2012 based quoted market prices estimated 217125 july 2006 borrowed 26000 finance purchase construction smithfield rhode island manufacturing facility july 2007 amended existing mortgage loan agreement istar financial inc increase loan amount 18000 resulting aggregate principal balance 44000 effective date amendment mortgage loan bears interest new fixed annual rate 912 accordingly changes interest rate impact statement operations first quarter 2008 entered credit agreement bank america may borrow 25000 may elect loans agreement bear interest rate per annum equal libor plus 175 225 depending alexions liquidity calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 plus 0 025 depending alexions liquidity calculated accordance agreement february 25 2008 borrowed amounts related facility exposure market risk changes interest rates relates revolving credit facility effective increase decrease 10 interest rates would material effect results operations cash flows believe material market risk exposure respect derivative financial instruments would require disclosure item foreign exchange market risk result european operations may face exposure adverse movements foreign currency exchange rates primarily euro current exposures arise primarily monetary instruments primarily accounts receivable intercompany receivables payables denominated foreign currencies future may elect limit exposure hedging programs december 31 2007 estimate potential loss fair value foreign currency exposure would result hypothetical 10 adverse change exchange rates 1265 addition balance sheet risk revenues costs denominated currencies us dollar accordingly future results may impacted changes foreign exchange rates item 8item 7a quantitative qualitative disclosures market risk amounts thousands except per share data interest rate risk december 31 2008 held cash equivalents investments money market funds original maturity dates three months less outstanding longterm liabilities december 31 2008 included 97222 1375 convertible senior notes due february 1 2012 notes bear interest fixed rate results operations would impacted interest rate changes july 2006 borrowed 26000 finance purchase construction smithfield rhode island manufacturing facility july 2007 amended mortgage loan agreement istar financial inc increase loan amount 18000 resulting aggregate principal balance 44000 effective date amendment mortgage loan bears interest fixed annual rate 912 accordingly changes interest rate impact financial statements first quarter 2008 entered revolving credit facility bank america may borrow 25000 may elect loans agreement bear interest rate per annum equal libor plus 175 225 depending alexion’s liquidity calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 plus 0 025 depending alexion’s liquidity calculated accordance agreement expect changes interest rates related revolving credit facility material effect financial statements conjunction purchase patents omrf agreed pay aggregate principal amount 7000 representing balance 10000 purchase price omrf patent rights interest shall accrue unpaid amount rate 50 sum prime rate published money rates section wall street journal new york edition plus 1 per annum expect changes interest rates related payable material effect financial statements foreign exchange market risk result foreign operations face exposure movements foreign currency exchange rates primarily euro british pound current exposures arise primarily cash accounts receivable intercompany receivables payables product sales denominated foreign currencies positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses first quarter 2008 began program limit foreign currency exposure monetary assets liabilities balance sheet third quarter 2008 commenced program hedge portion forecasted product sales mitigate fluctuations foreign exchange rates programs utilize forward foreign exchange contracts intended reduce eliminate impact fluctuations foreign currency rates december 31 2008 foreign currency forward contracts notional amounts totaling 128876 december 31 2008 outstanding foreign currency forward contracts fair value 5409 included current assetsliabilities use derivative financial instruments speculative trading purposes counterparty forward contracts multinational commercial bank company believes risk counterparty nonperformance material since foreign currency hedges designed offset gains losses monetary assets liabilities expect hypothetical 10 adverse change fluctuation exchange rates would result material change fair value foreign currency sensitive assets include monetary assets liabilities forward contracts analysis consider impact hypothetical changes foreign currency exchange rates would future transactions anticipated sales item 8item 7a quantitative qualitative disclosures market risk amounts thousands except per share data interest rate risk december 31 2009 held cash equivalents bank accounts money market funds subject significant interest rate risk december 31 2009 held 18916 marketable securities maturity dates less one year financial instruments subject interest rate risk decline value interest rates increase however expect hold timebased investments corporate bonds maturity estimate change 100 basis points interest rates would result increase decrease approximately 19 fair value cash investments weighted average duration approximately 62 months december 31 2009 outstanding longterm liabilities december 31 2009 included 9918 1375 convertible senior notes due february 1 2012 notes bear interest fixed rate results operations would impacted interest rate changes first quarter 2008 entered revolving credit facility financial institution borrow 25000 january 2010 amended restated credit agreement amended credit agreement among things increase revolving credit facility 50000 may elect loans agreement bear interest rate per annum equal libor plus 250 300 depending ratio cash liabilities calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 1 plus 050 100 depending ratio cash liabilities calculated accordance agreement expect changes interest rates related revolving credit facility material effect financial statements foreign exchange market risk result foreign operations face exposure movements foreign currency exchange rates primarily euro japanese yen swiss franc british pound current exposures arise primarily cash accounts receivable intercompany receivables payables product sales denominated foreign currencies positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses currently derivative program place achieve two goals 1 limit foreign currency exposure monetary assets liabilities balance sheet 2 hedge portion forecasted product sales using contracts duration 24 months mitigate fluctuations foreign exchange rates programs utilize forward foreign exchange contracts intended reduce eliminate impact fluctuations foreign currency rates december 31 2009 held foreign currency forward contracts notional amounts totaling 284895 december 31 2009 outstanding foreign currency forward contracts net fair value 2528 use derivative financial instruments speculative trading purposes counterparty forward contracts multinational commercial bank believe risk counterparty nonperformance material since foreign currency hedges designed offset gains losses monetary assets liabilities expect hypothetical 10 adverse change fluctuation exchange rates would result material change fair value foreign currency sensitive assets include monetary assets liabilities forward contracts analysis consider impact hypothetical changes foreign currency exchange rates would future transactions anticipated sales item 8item 7a quantitative qualitative disclosures market risk amounts thousands except per share data interest rate risk december 31 2010 held cash equivalents bank accounts money market funds subject significant interest rate risk december 31 2010 held 94460 marketable securities maturity dates less one year financial instruments subject interest rate risk decline value interest rates increase however expect hold timebased investments corporate bonds commercial paper maturity estimate change 100 basis points interest rates would result increase decrease approximately 29 fair value cash investments weighted average duration approximately 46 months december 31 2010 january 2010 entered 50000 amended restated revolving credit facility amended credit agreement may elect loans agreement bear interest rate per annum equal libor plus 250 300 depending ratio cash liabilities calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 1 plus 050 100 depending ratio cash liabilities calculated accordance agreement expect changes interest rates related revolving credit facility material effect financial statements foreign exchange market risk result foreign operations face exposure movements foreign currency exchange rates primarily euro japanese yen swiss franc british pound us dollar current exposures arise primarily cash accounts receivable intercompany receivables payables product sales denominated foreign currencies positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses substantial operations based switzerland support business outside us canada accordingly expenses impacted fluctuations value swiss franc us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 30 days 2 hedge portion forecasted intercompany product sales using contracts durations 36 months objective programs reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues programs utilize foreign exchange forward contracts intended reduce eliminate impact fluctuations foreign currency rates december 31 2010 held foreign exchange forward contracts notional amounts totaling 445476 december 31 2010 outstanding foreign exchange forward contracts net fair value 5273 use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts multinational commercial banks believe risk counterparty nonperformance material since foreign currency hedges designed offset gains losses monetary assets liabilities expect hypothetical 10 adverse fluctuation exchange rates would result material change fair value foreign currency sensitive assets include monetary assets liabilities foreign exchange forward contracts analysis consider impact hypothetical changes foreign currency exchange rates would future transactions anticipated sales item 8item 7a quantitative qualitative disclosures market risk amounts thousands except per share data interest rate risk december 31 2011 held cash equivalents bank accounts money market funds subject significant interest rate risk certain debt instruments variable interest rate instruments interest expense associated instruments therefore subject changes market interest rates december 31 2011 2010 100 basispoint adverse movement increase libor would material effect annual interest expense february 2012 entered credit agreement alexion may elect loans credit agreement bear interest rate per annum equal libor plus 125 200 depending alexions consolidated leverage ratio calculated accordance credit agreement ii case borrowings us dollars base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 1 plus case b c 025 100 depending alexions consolidated leverage ratio calculated accordance agreement expect changes interest rates related credit agreement material effect financial statements foreign exchange market risk result foreign operations face exposure movements foreign currency exchange rates primarily euro japanese yen swiss franc british pound canadian dollar australian dollar us dollar current exposures arise primarily cash accounts receivable intercompany receivables payables product sales denominated foreign currencies positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses substantial operations based switzerland support business outside us accordingly expenses impacted fluctuations value swiss franc us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 30 days 2 hedge portion forecasted intercompany product sales using contracts durations 36 months objectives program reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues program utilizes foreign exchange forward contracts intended reduce eliminate impact fluctuations foreign currency rates december 31 2011 held foreign exchange forward contracts notional amounts totaling 692577 december 31 2011 outstanding foreign exchange forward contracts net fair value 14854 use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts multinational commercial banks believe risk counterparty nonperformance material since foreign currency hedges designed offset gains losses monetary assets liabilities expect hypothetical 10 adverse fluctuation exchange rates would result material change fair value foreign currency sensitive net assets include monetary assets liabilities foreign exchange forward contracts analysis consider impact hypothetical changes foreign currency exchange rates would future transactions anticipated sales credit risk result foreign operations exposed changes general economic conditions countries conduct business continue monitor economic conditions including volatility associated international economies associated impacts financial markets business sovereign debt crisis europe credit economic conditions greece italy spain ireland portugal among members european union deteriorated throughout 2011 conditions resulted may continue result increase average length time takes collect outstanding accounts receivable countries december 31 2011 accounts receivable greece italy spain ireland portugal approximately 83400 approximately 24000 amount outstanding greater one year recorded allowance approximately 3500 related receivables december 31 2011 july 2011 received noninterest bearing bonds issued greek government mature 2012 2013 payment receivables 2008 2009 part greek governments plan repayment debt international pharmaceutical companies sold bonds july 2011 year ended december 31 2011 recorded bad debt expense approximately 4100 related reduction value greek bonds reduction realizable value accounts receivable countries item 8item 7a quantitative qualitative disclosures market risk amounts thousands except per share data interest rate risk december 31 2012 held cash equivalents bank accounts money market funds believe change interest rates would material impact consolidated statements operations february 2012 entered credit agreement floating rate interest based libor prime rate federal funds rate eurodollar rate election plus applicable credit spread expect changes interest rates related credit agreement material effect financial statements december 31 2012 approximately 149000 variable rate debt outstanding interest rates increase decrease 1 year annual interest expense would increase decrease approximately 1490 foreign exchange market risk result foreign operations face exposure movements foreign currency exchange rates primarily euro japanese yen swiss franc us dollar current exposures arise primarily cash accounts receivable intercompany receivables payables product sales denominated foreign currencies positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses substantial operations based switzerland support business outside us accordingly expenses impacted fluctuations value swiss franc us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 30 days 2 hedge portion forecasted intercompany product sales using contracts durations 36 months objectives program reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues program utilizes foreign exchange forward contracts intended reduce eliminate impact fluctuations foreign currency rates december 31 2012 2011 held foreign exchange forward contracts notional amounts totaling 964189 692577 respectively december 31 2012 2011 outstanding foreign exchange forward contracts net fair value 17180 14854 respectively increase outstanding foreign exchange forward contracts resulted primarily increases forecasted intercompany revenues use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts multinational commercial banks believe risk counterparty nonperformance material since foreign currency hedges designed offset gains losses monetary assets liabilities expect hypothetical 10 adverse fluctuation exchange rates would result material change fair value foreign currency sensitive net assets include monetary assets liabilities foreign exchange forward contracts analysis consider impact hypothetical changes foreign currency exchange rates would future transactions anticipated sales credit risk result foreign operations exposed changes general economic conditions countries conduct business continue monitor economic conditions including volatility associated international economies sovereign debt crisis europe associated impacts financial markets business credit economic conditions greece italy spain among members european union deteriorated throughout 2011 2012 conditions resulted may continue result increase average length time takes collect outstanding accounts receivable countries substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material exposure sovereign debt crisis greece limited material amount accounts receivable greece december 31 2012 2011 total gross accounts receivable italy spain approximately 82200 77000 respectively net accounts receivable countries december 31 2012 2011 summarized follows item 8item 7a quantitative qualitative disclosures market risk amounts thousands except percentages interest rate risk december 31 2013 invested cash variety financial instruments principally money market funds corporate bonds municipal bonds commercial paper governmentrelated obligations interestbearing securities subject interest rate risk could decline value interest rates fluctuate investment portfolio comprised marketable securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments based type securities invest believe change interest rates would material impact financial statements interest rates increase decrease 1 fair value investment portfolio would decrease increase approximately 11376 6459 respectively february 2012 entered credit agreement floating rate interest based libor prime rate federal funds rate eurodollar rate election plus applicable credit spread expect changes interest rates related credit agreement material effect financial statements december 31 2013 approximately 113000 variable rate debt outstanding interest rates increase decrease 1 year annual interest expense would increase decrease approximately 1130 foreign exchange market risk result foreign operations exposure movements foreign currency exchange rates primarily euro japanese yen swiss franc british pound us dollar current exposures arise primarily cash accounts receivable intercompany receivables payables product sales denominated foreign currencies positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses operations based switzerland accordingly expenses impacted fluctuations value swiss franc us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 30 days 2 hedge portion forecasted product sales including intercompany sales using contracts durations 36 months objectives program reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues program utilizes foreign exchange forward contracts intended reduce eliminate impact fluctuations foreign currency rates december 31 2013 2012 held foreign exchange forward contracts notional amounts totaling 1222464 964189 respectively december 31 2013 2012 outstanding foreign exchange forward contracts net fair value 3438 17180 respectively increase outstanding foreign exchange forward contracts resulted primarily increases forecasted intercompany revenues use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2013 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 109000 december 31 2013 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset increase value underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business continue monitor economic conditions including volatility associated international economies sovereign debt issues europe associated impacts financial markets business credit economic conditions greece italy spain among members european union deteriorated last several years conditions past resulted increase average length time takes collect outstanding accounts receivable countries substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material exposure sovereign debt issue greece limited material amount accounts receivable greece provided detail amounts outstanding italy spain liquidity capital resources section item 7 item 8item 7a quantitative qualitative disclosures market risk amounts thousands except percentages interest rate risk december 31 2014 invested cash variety financial instruments principally money market funds corporate bonds municipal bonds commercial paper governmentrelated obligations interestbearing securities subject interest rate risk could decline value interest rates fluctuate investment portfolio comprised marketable securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments based type securities hold believe change interest rates would material impact financial statements interest rates increase decrease 1 fair value investment portfolio would decrease increase approximately 11195 8455 respectively february 2012 entered credit agreement floating rate interest based libor prime rate federal funds rate eurodollar rate election plus applicable credit spread expect changes interest rates related credit agreement material effect financial statements december 31 2014 approximately 57500 variable rate debt outstanding interest rates increase decrease 1 year annual interest expense would increase decrease approximately 575 foreign exchange market risk operations include activities many countries outside united states including countries europe latin america asia pacific result financial results impacted factors changes foreign currency exchange rates weak economic conditions foreign markets operate exposure movements foreign currency exchange rates significant euro japanese yen us dollar net receiver many foreign currencies consolidated financial results benefit weaker us dollar adversely impacted stronger us dollar relative foreign currencies sell product monetary exposures balance sheet arise primarily cash accounts receivable intercompany receivables payables denominated foreign currencies approximately 60 product sales denominated foreign currencies 2014 revenues also exposed fluctuations foreign currency exchange rates time certain foreign countries may sell us dollar customers may impacted adversely fluctuations foreign currency exchange rates may also impact us future positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses additionally operations based switzerland accordingly expenses impacted fluctuations value swiss franc us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 30 days 2 hedge portion forecasted product sales currencies including intercompany sales using contracts durations 60 months objectives program reduce volatility operating results due fluctuation foreign exchange increase visibility foreign exchange impact forecasted revenues program utilizes foreign exchange forward contracts intended reduce eliminate volatility operating results due fluctuations foreign exchange rates december 31 2014 2013 held foreign exchange forward contracts notional amounts totaling 1748931 1222464 respectively increase outstanding foreign exchange forward contracts resulted primarily increases forecasted revenues certain currencies extended duration hedges december 31 2014 2013 outstanding foreign exchange forward contracts net fair value 135166 3438 respectively increase net fair value outstanding foreign exchange forward contracts primarily due strengthening us dollar 2014 use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2014 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 136500 december 31 2014 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset positive impact underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material continue monitor economic conditions including volatility associated international economies associated impacts financial markets business although collection accounts receivables certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations item 8item 7a quantitative qualitative disclosures market risk amounts thousands except percentages interest rate risk december 31 2015 invested cash variety financial instruments principally money market funds corporate bonds municipal bonds commercial paper governmentrelated obligations interestbearing securities subject interest rate risk could decline value interest rates fluctuate investment portfolio comprised marketable securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments based type securities hold believe change interest rates would material impact financial statements interest rates increase decrease 1 fair value investment portfolio would decrease increase approximately 4805 4593 respectively june 2015 entered credit agreement interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement changes interest rates related credit agreement could material effect financial statements december 31 2015 approximately 3456250 variable rate debt outstanding interest rates increase decrease 1 year annual interest expense would increase decrease approximately 34563 foreign exchange market risk operations include activities many countries outside united states including countries europe latin america asia pacific result financial results impacted factors changes foreign currency exchange rates weak economic conditions foreign markets operate exposure movements foreign currency exchange rates significant euro japanese yen us dollar net receiver many foreign currencies consolidated financial results benefit weaker us dollar adversely impacted stronger us dollar relative foreign currencies sell product monetary exposures balance sheet arise primarily cash accounts receivable intercompany receivables payables denominated foreign currencies approximately 524 product sales denominated foreign currencies 2015 revenues also exposed fluctuations foreign currency exchange rates time certain foreign countries may sell us dollar customers may impacted adversely fluctuations foreign currency exchange rates may also impact timing amount revenue positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses additionally operations based switzerland ireland accordingly expenses impacted fluctuations value swiss franc euro us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 30 days 2 hedge portion forecasted product sales currencies including intercompany sales using contracts durations 60 months objectives program reduce volatility operating results due fluctuation foreign exchange increase visibility foreign exchange impact forecasted revenues program utilizes foreign exchange forward contracts intended reduce eliminate volatility operating results due fluctuations foreign exchange rates december 31 2015 2014 held foreign exchange forward contracts notional amounts totaling 2535490 1748931 respectively increase outstanding foreign exchange forward contracts resulted primarily increases forecasted revenues certain currencies extended duration hedges december 31 2015 2014 outstanding foreign exchange forward contracts net fair value 147633 135166 respectively increase net fair value outstanding foreign exchange forward contracts primarily due strengthening us dollar 2014 use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts large domestic multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2015 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 183713 december 31 2015 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset positive impact underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business substantial portion accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material continue monitor economic conditions including volatility associated international economies associated impacts financial markets business although collection accounts receivables certain countries may extend beyond credit terms expect delays material impact financial condition results operations item 8item 7a quantitative qualitative disclosures market risk amounts millions except percentages interest rate risk december 31 2016 invested cash variety financial instruments principally money market funds corporate bonds municipal bonds commercial paper governmentrelated obligations interestbearing securities subject interest rate risk could decline value interest rates fluctuate investment portfolio comprised marketable securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments based type securities hold believe change interest rates would material impact financial statements interest rates increase decrease 1 fair value investment portfolio would decrease increase approximately 4 respectively june 2015 entered credit agreement interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement changes interest rates related credit agreement could material effect financial statements achieve desired mix floating fixed interest rates term loan entered two interest rate swap agreements june 2016 qualified designated cash flow hedges first agreement notional amount 3281 effective june 30 2016 december 30 2016 agreement hedged contractual floating interest rate term loan result agreement interest rate term loan fixed 0535 plus borrowing spread december 30 2016 second agreement notional amount 656 effective december 31 2016 december 31 2019 second agreement converts floating rate portion term loan fixed rate 098 plus borrowing spread december 31 2016 december 2019 impact hypothetical increase decrease interest rates fair value interest rate swap contract would offset change value underlying liability interest rates increase decrease 1 annual interest expense beginning 2017 would increase decrease 24 based unhedged portion outstanding term loan foreign exchange market risk operations include activities many countries outside us including countries europe latin america asia pacific result financial results impacted factors changes foreign currency exchange rates weak economic conditions foreign markets operate exposure movements foreign currency exchange rates significant euro japanese yen us dollar net receiver many foreign currencies consolidated financial results benefit weaker us dollar adversely impacted stronger us dollar relative foreign currencies sell product monetary exposures balance sheet arise primarily cash accounts receivable intercompany receivables payables denominated foreign currencies approximately 51 product sales denominated foreign currencies 2016 revenues also exposed fluctuations foreign currency exchange rates time certain foreign countries may sell us dollar customers may impacted adversely fluctuations foreign currency exchange rates may also impact timing amount revenue positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses additionally operations based switzerland ireland accordingly expenses impacted fluctuations value swiss franc euro us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations approximately 90 days 2 hedge portion forecasted product sales currencies including intercompany sales using contracts durations 60 months objectives program reduce volatility operating results due fluctuation foreign exchange increase visibility foreign exchange impact forecasted revenues program utilizes foreign exchange forward contracts intended reduce eliminate volatility operating results due fluctuations foreign exchange rates december 31 2016 2015 held foreign exchange forward contracts notional amounts totaling 2389 2536 respectively decrease outstanding foreign exchange forward contracts resulted primarily increases forecasted revenues certain currencies extended duration hedges december 31 2016 2015 outstanding foreign exchange forward contracts net fair value 140 148 respectively use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts large domestic multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2016 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 162 december 31 2016 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset positive impact underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business majority receivables due wholesale distributors public hospitals government entities monitor financial performance creditworthiness large customers properly assess respond changes credit profile continue monitor conditions including volatility associated international economies relevant financial markets assess possible impact business although collection accounts receivables certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations item 8item 7aquantitative qualitative disclosures market risk amounts millions except percentages interest rate risk december 31 2017 invested cash variety financial instruments principally money market funds corporate bonds repurchase agreements municipal bonds commercial paper governmentrelated obligations interestbearing securities subject interest rate risk could decline value interest rates fluctuate investment portfolio comprised marketable securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments based type securities hold believe change interest rates would material impact financial statements interest rates increase decrease 100 fair value investment portfolio would decrease increase approximately 19 respectively june 2015 entered credit agreement interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement changes interest rates related credit agreement could material effect financial statements achieve desired mix floating fixed interest rates term loan entered number interest rate swap agreements qualified designated cash flow hedges currently cash flow hedges aggregate amounts approximately 700 current outstanding term loan covering periods next twelve months interest rates increase decrease 100 interest expense next year would increase decrease 88 based unhedged portion outstanding term loan foreign exchange market risk operations include activities many countries outside us result financial results impacted factors changes foreign currency exchange rates weak economic conditions foreign markets operate exposure movements foreign currency exchange rates significant euro ruble japanese yen us dollar net receiver many foreign currencies consolidated financial results benefit weaker us dollar adversely impacted stronger us dollar relative foreign currencies sell product monetary exposures balance sheet arise primarily cash accounts receivable payables denominated foreign currencies approximately 490 net product sales denominated foreign currencies 2017 revenues also exposed fluctuations foreign currency exchange rates time certain foreign countries may sell us dollar customers may impacted adversely fluctuations foreign currency exchange rates may also impact timing amount revenue positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses additionally operations based europe accordingly expenses impacted fluctuations value euro us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 6 months 2 hedge portion forecasted product sales currencies including intercompany sales certain forecasted expenses using contracts durations 60 months objective program reduce volatility operating results due fluctuation foreign exchange program utilizes foreign exchange forward contracts intended reduce eliminate volatility operating results due fluctuations foreign exchange rates december 31 2017 2016 held foreign exchange forward contracts notional amounts totaling 27081 23892 respectively december 31 2017 2016 outstanding foreign exchange forward contracts net fair value 475 1402 respectively use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts large domestic multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2017 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 1496 december 31 2017 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset positive impact underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business majority receivables due wholesale distributors public hospitals government entities monitor financial performance creditworthiness large customers properly assess respond changes credit profile continue monitor conditions including volatility associated international economies relevant financial markets assess possible impact business although collection accounts receivables certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations item 8item 7aquantitative qualitative disclosures market risk amounts millions except percentages interest rate risk december 31 2018 invested cash variety financial instruments principally money market funds corporate bonds repurchase agreements municipal bonds commercial paper governmentrelated obligations interestbearing securities subject interest rate risk could decline value interest rates fluctuate investment portfolio comprised marketable debt securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments based type securities hold believe change interest rates would material impact financial statements interest rates increase decrease 100 fair value investment portfolio would decrease increase approximately 05 respectively june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amends restates agreement dated june 22 2015 prior agreement loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement changes interest rates related credit agreement could material effect financial statements achieve desired mix floating fixed interest rates term loan entered number interest rate swap agreements qualified designated cash flow hedges december 31 2018 cash flow hedges aggregate amounts approximately 870 current outstanding term loan covering periods next twelve months interest rates increase decrease 100 interest expense next year would increase decrease 30 based unhedged portion outstanding term loan december 31 2018 foreign exchange market risk operations include activities many countries outside us result financial results impacted factors changes foreign currency exchange rates weak economic conditions foreign markets operate exposure movements foreign currency exchange rates significant euro japanese yen us dollar net receiver many foreign currencies consolidated financial results benefit weaker us dollar adversely impacted stronger us dollar relative foreign currencies sell products monetary exposures balance sheet arise primarily cash accounts receivable payables denominated foreign currencies approximately 490 net product sales denominated foreign currencies 2018 revenues also exposed fluctuations foreign currency exchange rates time certain foreign countries may sell us dollar customers may impacted adversely fluctuations foreign currency exchange rates may also impact timing amount revenue positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses additionally operations based europe accordingly expenses impacted fluctuations value euro us dollar currently derivative program place achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 6 months 2 hedge portion forecasted product sales currencies including intercompany sales certain forecasted expenses using contracts durations 60 months objective program reduce volatility operating results due fluctuation foreign exchange program utilizes foreign exchange forward contracts intended reduce eliminate volatility operating results due fluctuations foreign exchange rates december 31 2018 2017 held foreign exchange forward contracts notional amounts totaling 25230 27081 respectively december 31 2018 2017 outstanding foreign exchange forward contracts net fair value 189 475 respectively use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts large domestic multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2018 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 1015 december 31 2018 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset positive impact underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business majority receivables due wholesale distributors public hospitals government entities monitor financial performance creditworthiness large customers properly assess respond changes credit profile continue monitor conditions including volatility associated international economies relevant financial markets assess possible impact business although collection accounts receivables certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations item 8item 7aquantitative qualitative disclosures market risk amounts millions except percentages interest rate risk historically invested cash variety financial instruments principally money market funds bank deposits corporate bonds municipal bonds commercial paper governmentrelated obligations subject interest rate risk could decline value interest rates fluctuate investment portfolio historically comprised marketable debt securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments second quarter 2020 liquidated availableforsale debt securities fund acquisition portola december 31 2020 investment portfolio primarily consists money market funds mutual funds based type securities hold believe change interest rates would material impact financial statements interest rates increase decrease 1 fair value investment portfolio would increase decrease insignificant amount june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amended restated credit agreement dated june 22 2015 loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement changes interest rates related credit agreement could material effect financial statements achieve desired mix floating fixed interest rates term loan entered number interest rate swap agreements qualified designated cash flow hedges december 31 2020 cash flow hedges aggregate amounts approximately 734 current outstanding term loan covering periods next twelve months interest rates increase decrease 100 interest expense next year would increase decrease 57 based unhedged portion outstanding term loan december 31 2020 foreign exchange market risk operations include activities many countries outside us result financial results impacted factors changes foreign currency exchange rates weak economic conditions foreign markets operate exposure movements foreign currency exchange rates significant euro japanese yen us dollar net receiver many foreign currencies consolidated financial results benefit weaker us dollar adversely impacted stronger us dollar relative foreign currencies sell products monetary exposures balance sheet arise primarily cash accounts receivable payables denominated foreign currencies approximately 390 net product sales denominated foreign currencies 2020 revenues also exposed fluctuations foreign currency exchange rates time certain foreign countries may sell us dollar customers may impacted adversely fluctuations foreign currency exchange rates may also impact timing amount revenue positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses additionally operations based europe accordingly expenses impacted fluctuations value euro us dollar currently derivative program place intended achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 6 months 2 hedge portion forecasted product sales currencies including intercompany sales certain forecasted expenses using contracts durations 60 months objective program reduce volatility operating results due fluctuation foreign exchange program utilizes foreign exchange forward contracts intended reduce eliminate volatility operating results due fluctuations foreign exchange rates december 31 2020 2019 held foreign exchange forward contracts notional amounts totaling 32535 30785 respectively december 31 2020 2019 outstanding foreign exchange forward contracts net fair value 552 28 respectively use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts large domestic multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2020 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 1275 december 31 2020 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset positive impact underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business majority receivables due wholesale distributors public hospitals government entities monitor financial performance creditworthiness large customers properly assess respond changes credit profile continue monitor conditions including volatility associated international economies covid19 pandemic relevant financial markets assess possible impact business although collection accounts receivables certain countries may extend beyond standard credit terms begun see increase requests extended payment terms certain customers result covid19 pandemic experienced significant losses respect collection accounts receivable expect delays material impact financial condition results operations item 8item 7a quantitative qualitative disclosures market risk company accounts marketable securities accordance statement financial accounting standards 115 accounting certain investments debt equity securities sfas 115 cash equivalents marketable securities treated availableforsale sfas 115 investments fixed rate interest earning instruments carry degree interest rate risk fixed rate securities may fair market value adversely impacted due rise interest rates due part factors companys future investment income may fall short expectations due changes interest rates company may suffer losses principal forced sell securities seen decline market value due changes interest rates companys marketable securities held purposes trading believe currently material adverse market risk exposure marketable securities july 31 2000 maturities less two years weightedaverage interest rate marketable securities july 31 2000 1999 69 57 respectively fair value marketable securities held july 31 2000 827 million july 31 2000 aggregate fixed rate debt approximately 124 million interest rates associated debt increased 10 corresponding increase annual interest expense approximately 700000 would occur item 8item 7aquantitative qualitative disclosures market risk amounts millions except percentages interest rate risk december 31 2019 invested cash variety financial instruments principally money market funds corporate bonds municipal bonds commercial paper governmentrelated obligations interestbearing securities subject interest rate risk could decline value interest rates fluctuate investment portfolio comprised marketable debt securities highly rated financial institutions investmentgrade debt instruments guidelines limit termtomaturity investments based type securities hold believe change interest rates would material impact financial statements december 31 2019 interest rates increase decrease 100 fair value investment portfolio would increase decrease approximately 04 respectively june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amended restated credit agreement dated june 22 2015 prior agreement loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement changes interest rates related credit agreement could material effect financial statements achieve desired mix floating fixed interest rates term loan entered number interest rate swap agreements qualified designated cash flow hedges december 31 2019 cash flow hedges aggregate amounts approximately 696 current outstanding term loan covering periods next twelve months interest rates increase decrease 100 interest expense next year would increase decrease 70 based unhedged portion outstanding term loan december 31 2019 foreign exchange market risk operations include activities many countries outside us result financial results impacted factors changes foreign currency exchange rates weak economic conditions foreign markets operate exposure movements foreign currency exchange rates significant euro japanese yen us dollar net receiver many foreign currencies consolidated financial results benefit weaker us dollar adversely impacted stronger us dollar relative foreign currencies sell products monetary exposures balance sheet arise primarily cash accounts receivable payables denominated foreign currencies approximately 424 net product sales denominated foreign currencies 2019 revenues also exposed fluctuations foreign currency exchange rates time certain foreign countries may sell us dollar customers may impacted adversely fluctuations foreign currency exchange rates may also impact timing amount revenue positive negative impacts international product sales movements foreign currency exchange rates partially mitigated natural opposite impact foreign currency exchange rates international operating expenses additionally operations based europe accordingly expenses impacted fluctuations value euro us dollar currently derivative program place intended achieve following 1 limit foreign currency exposure monetary assets liabilities balance sheet using contracts durations 8 months 2 hedge portion forecasted product sales currencies including intercompany sales certain forecasted expenses using contracts durations 60 months objective program reduce volatility operating results due fluctuation foreign exchange program utilizes foreign exchange forward contracts intended reduce eliminate volatility operating results due fluctuations foreign exchange rates december 31 2019 2018 held foreign exchange forward contracts notional amounts totaling 30785 25230 respectively december 31 2019 2018 outstanding foreign exchange forward contracts net fair value 28 189 respectively use derivative financial instruments speculative trading purposes counterparties foreign exchange forward contracts large domestic multinational commercial banks believe risk counterparty nonperformance material based foreign currency exchange rate exposures december 31 2019 hypothetical 10 adverse fluctuation exchange rates would decrease fair value foreign exchange forward contracts designated cash flow hedges approximately 1130 december 31 2019 resulting loss forward contracts would offset gain underlying transactions therefore would minimal impact future anticipated earnings cash flows similarly adverse fluctuations exchange rates would decrease fair value foreign exchange forward contracts designated hedge instruments would offset positive impact underlying monetary assets liabilities credit risk result foreign operations exposed changes general economic conditions countries conduct business majority receivables due wholesale distributors public hospitals government entities monitor financial performance creditworthiness large customers properly assess respond changes credit profile continue monitor conditions including volatility associated international economies relevant financial markets assess possible impact business although collection accounts receivables certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations item 8nan item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 15a1 item 9aitem 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page item 9item 8financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page annual report form 10k item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth beginning page annual report form 10k item 9item 8 financial statements supplementary data consolidated financial statements supplementary data company required item set forth pages indicated item 14a1 item 9 nannannannannanitem 15 exhibits financial statement schedules reports form 8k 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits previously filed 1 incorporated reference report form 8k filed october 3 2000 2 incorporated reference registration statement form s1 reg 33300202 3 incorporated reference quarterly report form 10q quarter ended april 30 2000 4 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 5 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 6 incorporated reference registration statement form s8 reg 333106854 filed july 7 2003 7 incorporated reference registration statement form s8 reg 33371985 filed february 8 1999 8 incorporated reference annual report form 10k fiscal year ended july 31 1996 9 incorporated reference annual report form 10k fiscal year ended july 31 1999 10 incorporated reference quarterly report form 10q quarter ended january 31 2002 11 incorporated reference quarterly report form 10q quarter ended january 31 2003  confidential treatment granted portions document b reports form 8k none c exhibits see 3 financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized alexion pharmaceuticals inc leonard bell leonard bell md chief executive officer secretary treasurer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents july 31 2003 2002 pages report independent auditors consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive loss consolidated statements cash flows notes consolidated financial statements report independent auditors board directors stockholders alexion pharmaceuticals inc opinion accompanying consolidated balance sheets related consolidated statements operations changes stockholders’ equity comprehensive loss cash flows present fairly material respects financial position alexion pharmaceuticals inc subsidiaries july 31 2003 2002 results operations cash flows two years ended conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements company year ended july 31 2001 audited independent accountants ceased operations independent accountants expressed unqualified opinion financial statements revisions described note 2 report dated august 31 2001 discussed financial statements alexion pharmaceuticals inc year ended july 31 2001 audited independent accountants ceased operations described note 2 financial statements revised include transitional disclosures required statement financial accounting standards 142 “goodwill intangible assets” adopted company august 1 2001 audited transitional disclosures described note 2 opinion transitional disclosures 2001 note 2 appropriate however engaged audit review apply procedures 2001 financial statements company respect disclosures accordingly express opinion form assurance 2001 financial statements taken whole discussed note 4 consolidated financial statements company changed method revenue recognition relating nonrefundable upfront licensing fees accordance staff accounting bulletin 101 fiscal 2001 pricewaterhousecoopers llp hartford connecticut september 17 2003 alexion pharmaceuticals inc consolidated balance sheets thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive loss years ended july 31 2003 2002 2001 thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements july 31 2003 2002 1 organization operations alexion pharmaceuticals inc “alexion” “company” organized 1992 engaged development therapeutic products treatment wide array severe diseases including cardiovascular autoimmune hemotologic disorders inflammation cancer company’s two lead product candidates therapeutic antibodies address specific diseases arise human immune system produces inflammation human body company incurred consolidated losses since inception made product sales date company continue seek financing obtain regulatory approvals product candidates fund operations losses deemed appropriate establish manufacturing sales marketing distribution capabilities company expects incur substantial expenditures foreseeable future research development commercialization product candidates company seek raise necessary funds public private equity debt financings bank loans collaborative arrangements corporate sources financing 2 summary significant accounting policies principles consolidation accompanying consolidated financial statements include alexion pharmaceuticals inc whollyowned subsidiaries alexion antibody technologies “aat” columbus farming corporation “cfc” results operations aat included company’s consolidated statements operations since september 23 2000 effective date prolifaron acquisition see note 3 cfc formed february 9 1999 acquire certain research development assets us surgical corporation subsidiary tyco healthcare see notes 5 7 significant intercompany balances transactions eliminated consolidation cash equivalents cash equivalents stated cost approximates market includes shortterm highly liquid investments original maturities less 90 days marketable securities company invests marketable debt securities highly rated financial institutions investmentgrade debt instruments limits amount credit exposure one entity company classified marketable securities “available sale” accordingly carries securities aggregate fair value unrealized gains losses included accumulated comprehensive loss component stockholders’ equity year ended july 31 2002 company realized gain sales marketable securities approximately 19 million realized gains losses recorded years ended july 31 2003 2001 company utilizes specific identification method computing alexion pharmaceuticals inc notes consolidated financial statementscontinued realized gains losses july 31 2003 company’s marketable securities maximum maturity less two years average approximately nine months weighted average interest rate associated marketable debt securities 14 percent 24 percent july 31 2003 2002 respectively following summary marketable securities july 31 2003 2002 amounts thousands goodwill july 2001 financial accounting standards board “fasb” issued statement financial accounting standard “sfas” 141 “business combinations” sfas 142 “goodwill intangible assets” together significantly change accounting disclosures required activities related assets primary changes resulting standards consist cessation “pooling interests” method accounting goodwill intangible assets segregated amortized reviewed impairment disclosed within footnotes financial statements company adopted sfas 142 effective august 1 2001 adoption sfas 142 caused amortization relates 229 million goodwill acquired connection acquisition prolifaron see note 3 cease effective august 1 2001 prior adoption standard annual amortization expected approximately 33 million annually sevenyear period prospective basis goodwill subject annual impairment reviews conditions warrant interim reviews based upon estimated fair value impairment charges recorded component operating expenses period impairment determined impairment charge resulted upon adoption standard result company’s annual impairment assessment alexion pharmaceuticals inc notes consolidated financial statementscontinued reconciliation reported net loss adjusted net loss amortization goodwill follows dollars thousands except per share amounts includes noncash charge iprd 21000 cumulative effect adoption sab 101 9118 b includes noncash charges iprd 121 cumulative effect adoption sab 101 052 longlived assets property plant equipment august 2001 fasb issued sfas 144 “accounting impairment disposal longlived assets” effective fiscal years beginning december 15 2001 sfas 144 establishes single accounting model based framework established sfas 121 longlived assets held use sfas 144 retains fundamental provisions sfas 121 recognition measurement impairment longlived assets company assesses impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable see note 5 factors company considers important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets company determines carrying value longlived assets may recoverable based upon existence one indicators impairment company compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows company compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value amount recognized impairment charge alexion pharmaceuticals inc notes consolidated financial statementscontinued prepaid manufacturing costs cash advances paid company secure future long term manufacturing production thirdparty contract manufacturers recorded prepaid manufacturing costs amortized period manufacturing production cash advances subject refund manufacturing facility unavailable scheduled forfeiture company terminates scheduled production see note 11 revenue recognition contract research revenues recorded company consist research development support payments license fees collaborations third parties amounts received various government grants result company’s adoption sab 101 see note 4 upfront nonrefundable license fees received connection collaboration deferred amortized revenue based upon terms collaborative arrangement revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts see notes 4 9 research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside contractor costs research license fees depreciation amortization lab facilities leasehold improvements building facilities utilities related costs related research space lab supplies company entered certain research agreements shares costs collaborator company records costs research development expenses certain costs reimbursed company’s collaborator recorded reduction research development expense accrued research development expenses include amounts owed suppliers research development work performed behalf company period end company evaluates accrued expense balance related activities based upon information received supplier estimated progress toward completion research development objectives ensure balance appropriately stated estimates subject changes additional information becomes available comprehensive loss company reports presents comprehensive loss accordance sfas 130 “reporting comprehensive income” establishes standards reporting display comprehensive income loss alexion pharmaceuticals inc notes consolidated financial statementscontinued components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income loss company’s comprehensive loss arises net unrealized gains losses marketable securities company elected display comprehensive loss component statements changes stockholders’ equity comprehensive loss stock options july 31 2003 company two stockbased compensation plans employees directors consultants company accounts stock options granted employees accordance accounting principles board opinion “apb” 25 company accounts stock options granted consultants accordance emerging issues task force “eitf” 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” company may incur charges operations connection awards stock option plans accordance apb 25 related interpretations company records compensation expense employee stockbased awards certain conditions generally terms award amount employee must pay acquire stock fixed compensation expense options total grant date intrinsic value amortized vesting period december 2002 fasb issued sfas 148 “accounting stockbased compensationtransition disclosurean amendment sfas 123” sfas 148 provides additional transition guidance entities elect voluntarily adopt accounting provisions sfas 123 “accounting stockbased compensation” sfas 148 also mandates certain new disclosures incremental required sfas 123 provisions sfas 148 effective fiscal years ending december 15 2002 interim periods beginning december 15 2002 company adopted disclosure provisions sfas 148 year ended july 31 2003 following table illustrates effect net income earnings per share company applied fair value recognition provisions sfas 123 stockbased employee compensation years ended july 31 2003 2002 2001 dollars thousands except per share amounts alexion pharmaceuticals inc notes consolidated financial statementscontinued purposes pro forma disclosure estimated value employee nonemployee option grant calculated date grant using blackscholes optionpricing model blackscholes optionpricing model developed use estimating fair value traded options vesting restrictions fully transferable addition optionpricing models require use subjective assumptions including expected stock price volatility effects applying fair value recognition provisions sfas 123 pro forma disclosure indicative future amounts additional disclosures required sfas 123 included note 13 net loss per common share company computes presents net loss per common share accordance sfas 128 “earnings per share” basic net loss per common share based weighted average shares common stock outstanding period diluted net loss per common share assumes addition dilutive effect common shares equivalents outstanding period common share equivalents represent dilutive stock options convertible subordinated debt outstanding stock options convertible subordinated debt entitled holders acquire 5148365 4685160 4689075 shares prior application treasury stock method common stock july 31 2003 2002 2001 respectively difference basic diluted net loss per common share effect common share equivalents antidilutive periods presented pro forma net loss per share reported accompanying statements operations year ended july 31 2001 assumes retroactive adoption sab 101 see note 4 segment reporting sfas 131 “disclosure segments enterprise related information” establishes annual interim reporting standards enterprise’s operating segments related disclosures products services geographic areas major customers company determined operates one segment addition revenues generated united states “us” entities longlived assets maintained us fair value financial instruments financial instruments include cash equivalents marketable securities reimbursable contract costs accounts payable notes payable convertible subordinated notes cash equivalents marketable securities carried fair value reimbursable contract costs accounts payable notes payable convertible subordinated notes carried cost management believes reimbursable contract costs accounts payable approximate fair value carrying value convertible subordinated notes exceeded fair value approximately 349 million based upon trading values reported july 31 2003 management believes fair value note payable approximates estimated fair value underlying collateral approximately 12 million see note 7 alexion pharmaceuticals inc notes consolidated financial statementscontinued use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently issued accounting standards june 2002 fasb issued sfas 146 “accounting costs associated exit disposal activities” statement addresses financial accounting reporting costs associated exit disposal activities nullifies eitf issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” provisions sfas 146 effective exit disposal activities initiated december 31 2002 early application encouraged adoption new standard material impact either operating results financial position company november 2002 fasb issued fasb interpretation “fin” 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation fasb statements 5 57 107 rescission fasb interpretation 34” fin 45 clarifies requirements sfas 5 “accounting contingencies” relating guarantor’s accounting disclosure issuance certain types guarantees adoption fin 45 material impact either operating results financial position company complied disclosure provisions fin 45 november 2002 eitf issued abstract 0021 “revenue arrangements multiple deliverables” eitf 0021 addresses certain aspects accounting arrangements vendor perform multiple revenuegenerating activities guidance issue effective revenue arrangements entered fiscal periods beginning june 15 2003 adoption eitf 0021 material impact company’s operating results financial position company may 2003 fasb issued sfas 150 “accounting certain financial instruments characteristics liabilities equity” sfas 150 establishes standards issuer classifies measures financial instruments standard effective new modified contracts may 31 2003 otherwise effective beginning first interim period beginning june 15 2003 adoption sfas 150 material impact either operating results financial position company 3 alexion antibody technologies inc september 23 2000 company acquired prolifaron inc “prolifaron” privatelyheld biopharmaceutical company extensive combinatorial human antibody library technologies expertise acquisition accomplished prolifaron merged wholly owned subsidiary alexion renamed alexion antibody technologies inc consideration thereof company issued 355594 shares alexion pharmaceuticals inc notes consolidated financial statementscontinued company’s common stock fully vested options purchase 44364 shares company’s common stock weighted average exercise price 4435 per share exchange outstanding equity prolifaron including fully vested options stock option plan fair value company’s common stock options issued date acquisition approximately 439 million prolifaron acquisition accounted purchase accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values date acquisition company allocated 210 million purchase price inprocess research development projects allocation represented estimated fair value based riskadjusted cash flows related incomplete research development projects date acquisition development projects yet reached technological feasibility research development progress alternative future use accordingly costs expensed acquisition date merger date prolifaron conducting preclinical development testing activities goal develop technologies antibody discovery engineering identify new fully human therapeutic antibodies addressing multiple disease areas drug candidates development represent innovative technologies addressing autoimmune inflammatory disorders cancer acquisition date prolifaron incurred approximately 57 million expenses development projects since inception 1998 expected spend approximately 85 million next seven years complete animal testing developmental drug candidates management anticipates inprocess projects would successful marketed us five nine years making purchase price allocation management considered present value calculations income analysis project accomplishments remaining outstanding items assessment overall contributions well technological regulatory risks value assigned purchased inprocess technology determined estimating costs develop acquired technology commercially viable products estimating resulting net cash flows projects discounting net cash flows present value revenue projection used value inprocess research development based estimates relevant market sizes growth factors expected trends technology nature expected timing new product introductions prolifaron competitors rates utilized discount net cash flows present value based estimated cost capital calculations due risks associated projected cash flow forecast discount rate 40 percent considered appropriate inprocess research development selected rate reflects inherent uncertainties surrounding successful development purchased inprocess technology useful life technology uncertainty technological advances unknown time projects successfully developed sales profitability combined companies may adversely affected future periods additionally value acquired intangible assets may become impaired management believes research development projects acquired connection acquisition prolifaron expected continue line estimates described excess cost fair value net assets acquired amounted approximately 229 million reflected goodwill amortized approximately 7 years fiscal 2001 see alexion pharmaceuticals inc notes consolidated financial statementscontinued goodwill note 2 following table summarizes allocation purchase price net assets acquired amounts thousands following unaudited pro forma condensed consolidated information prepared give effect acquisition transaction occurred beginning period presented historical results adjusted reflect elimination onetime charge operations purchase acquired process research development ii amortization goodwill arising transaction iii elimination income tax benefits expenses would realized combined basis amounts thousands except per share amounts unaudited pro forma condensed consolidated financial information necessarily indicative actual results would transaction occurred dates indicated purport indicate results future operations 4 cumulative effect accounting change december 1999 securities exchange commission staff issued staff accounting bulletin 101 “revenue recognition financial statements” sab 101 company adopted sab 101 fiscal 2001 therefore changed revenue recognition policy upfront nonrefundable payments immediate recognition deferral revenue upfront fee amortized revenue life agreement alexion pharmaceuticals inc notes consolidated financial statementscontinued fiscal 1999 company recognized 10 million revenue nonrefundable upfront licensing fee received procter gamble pharmaceuticals “pg” see note 10 adoption sab 101 company required recognize 10 million license fee revenue average remaining patent lives underlying technologies 17 years agreement pg provided ongoing collaborative services funding specified clinical development manufacturing costs company’s pexelizumab product candidate license recognized lives patents agreement specified contractual term part change accounting method company recognized noncash cumulative effect adjustment 91 million august 1 2000 income tax effects related accounting change company provided pro forma operating loss net loss net loss per share information company adopted sab 101 beginning fiscal 2001 accompanying consolidated statements operations fiscal year ended july 31 2001 5 property plant equipment property plant equipment recorded cost depreciated estimated useful lives assets involved depreciation amortization commences time assets placed service computed using straightline method estimated useful lives assets maintenance repairs charged expense incurred depreciation amortization fixed assets approximately 3108000 2953000 2095000 years ended july 31 2003 2002 2001 respectively summary property plant equipment follows amounts thousand year ended july 31 2003 company determined conditions arisen triggered need review certain company’s longlived assets potential impairment see note 2 alexion pharmaceuticals inc notes consolidated financial statementscontinued company concluded investment unigraft program meet sufficient criteria continued development compared internal programs consequently company suspended financial commitment program’s suspension led significant change manner company’s subsidiary cfc utilizes xenotransplantation facility related assets termination unigraft program following inability secure collaboration share future funding program resulted impairment cfc’s unigraft manufacturing assets principally real estate building improvements capital lab farm equipment resulting write approximately 27 million assets july 31 2003 carrying value assets approximately 12 million write assets continue classified held use time cfc ability dispose 6 accrued expenses summary accrued expenses follows amounts thousands 7 note payable february 1999 company’s wholly owned subsidiary columbus farming corporation cfc purchased substantially assets xenotransplantation program including principally land buildings laboratory equipment partner program us surgical corporation division tyco healthcare tyco purchase financed issuance cfc 39 million note payable tyco interest 39 million note payable 6 per annum payable quarterly cfc xenotransplantation manufacturing assets cfc purchased us surgical including real estate pledged security note principal balance note stated due may 2005 classified longterm obligation however upon default note would classified current liability accordingly july 31 2003 note classified longterm obligation subsequent july 31 2003 company notified tyco cfc operations suspended cfc seeking liquidate fulfill debt obligation best possible cfc notified tyco funds assets satisfy 39 million note cfc failed make quarterly interest payment due tyco august 2003 accordingly subsequent july 31 2003 note classified current cfc discussions tyco regarding sale cfc assets application proceeds cfc’s obligations note well regard satisfaction note generally event default note requires note classified current liability time default cfc’s alexion pharmaceuticals inc notes consolidated financial statementscontinued assets consisting property plant equipment current estimated fair value 12 million see note 5 insufficient satisfy 39 million note obligations cfc unpaid amount note may discharged debt recognized income future period cfc 8 convertible subordinated notes march 2000 company completed 120 million private placement 575 percent convertible subordinated notes due march 15 2007 notes bear interest payable semiannually september 15 march 15 year beginning september 15 2000 holders may convert portion notes common stock time march 15 2007 conversion price 106425 per share would result issuance 1127555 shares common stock aggregate notes subordinated company’s existing future senior indebtedness effectively subordinated indebtedness liabilities including trade payables company subsidiaries indenture governing notes limit amount indebtedness including senior indebtedness company may incur noteholders may require company repurchase notes upon repurchase event defined loan agreement cash option company common stock 105 percent principal amount notes plus accrued unpaid interest notes entitled sinking fund time march 20 2003 ending march 14 2007 company may elect redeem solely discretion notes least 30 days notice whole time part certain premiums principal amount plus accrued interest company incurred deferred financing costs related offering approximately 40 million recorded consolidated balance sheet amortized component interest expense sevenyear term notes amortization expense associated financing costs approximately 573000 years ended july 31 2003 2002 2001 accumulated amortization associated costs approximately 1897000 1324000 july 31 2003 2002 respectively 9 contract research revenues three years ended july 31 2003 company recorded contract research revenues research development support payments license fees collaboration agreement third parties amounts received various government grants company procter gamble pharmaceuticals “pg” entered exclusive collaboration january 1999 develop commercialize pexelizumab company granted pg exclusive license company’s intellectual property related pexelizumab right sublicense company recognizing nonrefundable upfront license fee 10 million related company’s january 1999 alexion pharmaceuticals inc notes consolidated financial statementscontinued collaboration pg revenue 17 years representing average remaining patent lives underlying technologies time payment received fiscal 1999 see note 4 december 2001 company pg entered binding memorandum understanding “mou” pursuant revised january 1999 collaboration revised structure per mou company pg share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts prior december 2001 pg generally funding clinical development manufacturing costs pexelizumab revised collaboration per mou provides company pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us company receive approximately 50 gross margin us sales pg agreed retain responsibility future development commercialization costs outside us company receiving royalty sales rest world company responsible paying royalties licensing fees certain third party intellectual property worldwide intellectual property necessary additionally part mou company receive milestone payments achieving specified development steps regulatory filings approvals costs company agreed bear first 50 projected costs associated us coronary artery bypass graft surgery “cabg”phase iii clinical trial called “primocabg” costs pg bear second 50 previously agreed sales milestones company generally forgo research development support payments pg final adjustment make even 50 sharing costs january 31 2003 company completed obligation associated first 50 projected costs company anticipates pg complete obligation respect second 50 projected costs end company’s first quarter fiscal 2004 phase iii primocabg completion final adjustment make even 50 sharing costs occur fiscal 2004 reimbursements received pg company connection company’s services related personnel pg’s 50 cost share recorded reduction research development market research expenses part revised collaboration per mou pg agreed continue fund 100 costs two acute myocardial infarction ami phase ii clinical trials myocardial infarction heart attack patients company pg agreed share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well future amiphase iii clinical trial costs pg right terminate collaboration sublicense collaboration rights time pg terminates collaboration pg required contribute share agreed upon obligations costs incurred prior termination may required contribute towards costs incurred termination event pg terminate collaboration rights exclusive license company’s intellectual property related pexelizumab revert back company entitled future pexelizumab revenues without sharing revenues pg company awarded various grants agencies us government fund specific research projects july 31 2003 company additional funding available grants alexion pharmaceuticals inc notes consolidated financial statementscontinued summary revenues generated contract research collaboration grant awards follows amounts thousands 10 license research development agreements company entered number license research development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies necessary services management believes important company’s overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies research development agreements generally provide company fund future research projects based upon agreements company may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research clinical manufacturing development agreements generally provide company fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrollment company’s clinical trials manufacturing development agreements include clinical manufacturing development scaleup company executed largescale product supply agreement lonza biologics plc longterm commercial scale manufacture eculizumab see note 11 “purchase commitments” order maintain rights agreements company may required provide minimum level funding support company may elect terminate arrangements accordingly company recognizes expense related obligation related arrangements period performance alexion pharmaceuticals inc notes consolidated financial statementscontinued minimum fixed payments assuming nontermination agreements july 31 2003 next five years follows amounts thousands company achieve certain milestones related product development product license applications approvals additional payments would required addition payments july 31 2003 agreements contain milestone payment provisions aggregating approximately 49 million agreements also require company fund certain future costs associated filing patent applications 11 commitments contingencies operating leases july 31 2003 company leases headquarters primary research development facilities lease commenced august 2000 term ten years six months company required pay pro rata percentage real estate taxes operating expenses monthly fixed rent started approximately 80000 increasing approximately 104000 term lease company issued 200000 open letter credit secure lease company entered lease agreement january 2003 pilot manufacturing plant used producing compounds clinical trials monthly fixed rent started approximately 36000 increasing approximately 50000 term lease expires 2007 company option extend lease additional three years company leases additional research facility starting monthly fixed rent approximately 35000 increasing approximately 90000 facility expanded lease expires 2012 aggregate lease expense company’s facilities 1998000 1373000 1536000 years ended july 31 2003 2002 2001 respectively lease expense recorded straightline basis applicable lease terms alexion pharmaceuticals inc notes consolidated financial statementscontinued aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment follows amounts thousands years ended july 31 2186 2257 2354 2454 2057 2009 thereafter 6118 purchase commitments january 2003 company remitted cash advance 725 million lonza biologics plc lonza pursuant largescale product supply agreement longterm commercial scale manufacture company’s c5 inhibitor antibody eculizumab advance along previously paid commitment fee 275 million amortized cost manufacture company largescale product manufacturing production amounts advanced subject refund forfeiture pursuant contractual terms related cancellation termination failure purchase minimum manufacturing capacity usage amounts included within prepaid manufacturing costs within accompanying balance sheets terms agreement lonza manufacture commercial supplies eculizumab company could owe penalties failure purchase minimum manufacturing capacity volume company terminates agreement prior expiration company plans proceed production agreement planned commercial scale manufacture depends upon clinical development program progress well commercialization plans company terminates agreement company could required pay unused contractual scheduled manufacturing capacity usage 18 months following termination company’s election make termination payment 25 million less partial return unused portion prepaid manufacturing costs indemnifications company enters indemnification provisions agreements companies ordinary course business typically business partners clinical sites suppliers pursuant agreements company generally indemnifies holds harmless agrees reimburse indemnified parties losses suffered incurred indemnified parties connection us patent copyright intellectual property infringement claim third party respect company’s products use company’s product candidates term indemnification agreements generally perpetual time execution agreement maximum potential amount future payments company could required make indemnification agreements unlimited company incurred material costs defend lawsuits settle claims related indemnification agreements result estimated fair value agreements minimal accordingly company liabilities recorded agreements july 31 2003 alexion pharmaceuticals inc notes consolidated financial statementscontinued 12 common stock fiscal 2001 common stock sale october 2000 company filed shelf registration statement offer 300 million equity securities november 2000 company sold 23 million shares common stock price 9075 per share resulting proceeds approximately 2085 million net fees expenses approximately 201000 related transaction 13 stock options company two stockbased compensation plans described 2000 stock option plan “2000 plan” incentive nonqualified stock options may granted maximum 2400000 shares common stock directors officers key employees consultants company stock options granted 2000 plan maximum term ten years date grant exercise price less fair value stock grant date generally vest four years december 2002 stockholders approved amendments 2000 plan 1 increasing number shares common stock available grant 900000 2400000 1500000 2 prohibiting repricing options granted pursuant 2000 plan 3 prohibiting grant options pursuant 2000 plan exercise price less fair market value common stock date grant december 2000 stockholders approved adoption 2000 plan elected terminate previous 1992 plan july 31 2003 663502 options available grant 2000 plan 1992 stock option plan “1992 plan” terminated december 2000 stock options acquire 2087305 shares common stock outstanding july 31 2003 1992 stock option plan outside directors “1992 outside directors’ plan” nonqualified stock options granted initially 12000 options qualifying directors well upon annual reelection 7500 options board directors options granted fair market value common stock date grant generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions december 2002 stockholders approved amendments 1992 outside director’s plan 1 extending term 1992 outside director’s plan additional five years august 26 2007 2 prohibiting repricing options granted pursuant 1992 outside directors’ plan december 2000 stockholders approved amendment 1992 outside directors’ plan increasing initial option grant qualifying directors 12000 options 7500 options additional grants upon annual reelection board directors 7500 options 2000 options pursuant 1992 outside directors’ plan july 31 2003 stock options acquire 158734 shares common stock outstanding 1992 outside directors’ plan sfas 123 “accounting stockbased compensation” amended sfas 148 requires measurement fair value stock options warrants disclosed notes financial statements alexion pharmaceuticals inc notes consolidated financial statementscontinued company computed required pro forma disclosure options granted using blackscholes option pricing model prescribed sfas 123 assumptions used follows summary status company’s stock option plans july 31 2003 2002 2001 changes years ended presented table narrative fiscal 2003 options purchase 662500 shares common stock granted employees directors consultant company exercise price equal fair value stock date grant company recording compensation expense based upon fair value options granted consultant vesting term compensation expense related options 4000 year ended july 31 2003 aggregate compensation expense approximately 41000 associated option grant expected recognized next four years fiscal 2002 options purchase 203855 shares common stock granted employees directors exercise prices equal fair value stock date grant fiscal 2001 options purchase 1220800 shares common stock granted employees directors exercise prices equal fair value stock date grant weighted average exercise price options 2916 per share weighted average fair value options date grant 2240 per option addition options purchase 10000 shares common stock granted employee exercise prices less fair value common stock date grant accordingly company recording compensation expense based upon difference vesting period associated options alexion pharmaceuticals inc notes consolidated financial statementscontinued compensation expense associated options 65000 121000 years ended july 31 2003 2002 2001 respectively aggregate compensation expense approximately 73000 associated option grants expected recognized next year weighted average exercise price options 7551 per share weighted average fair value options date grant 9227 per option fiscal 2001 connection acquisition prolifaron see note 3 company also issued fully vested options purchase 44364 shares common stock weighted average exercise price 4435 per share weighted average fair value options date grant 10146 per option value options included component purchase price prolifaron date acquisition company also records compensation expense certain options purchase common stock granted prior fiscal 2001 employees consultants compensation expense associated options 78000 116000 287000 years ended july 31 2003 2002 2001 respectively aggregate compensation expense approximately 9000 associated option grants expected recognized next year following table presents weighted average price life information significant option groups outstanding july 31 2003 14 rights purchase preferred stock february 1997 board directors company declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 see subject adjustment rights may exercised public announcement party acquired 20 percent company’s common stock commencement public announcement make tender offer 20 percent company’s common stock rights voting rights expire march 6 2007 may redeemed company price 001 per right time prior expiration acquisition 20 percent company’s stock preferred stock purchasable upon exercise rights minimum alexion pharmaceuticals inc notes consolidated financial statementscontinued preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock september 18 2000 board directors company amended purchase price preferred stock purchase rights purchase price one onehundredth share preferred stock issued upon exercise preferred stock purchase right increased 7500 72500 except increase purchase price terms conditions rights remain unchanged event company acquired merger business combination transaction 50 percent assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 15 401k plan company 401k plan employees may contribute maximum 12000 per employee calendar year 2003 company matches contributions rate 050 dollar deferred first 6 percent compensation company made matching contributions approximately 291000 207000 177000 years ended july 31 2003 2002 2001 respectively 16 income taxes july 31 2003 company available federal tax reporting purposes net operating loss carryforwards approximately 2456 million expire 2022 approximately 182 million resulted exercise nonqualified stock options discussed company also federal state research development credit carryforwards approximately 95 million begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions limits company’s ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period company believes triggered limitation provisions result recent legislation state connecticut provides companies opportunity exchange certain research development tax credit carryforwards cash exchange foregoing carryforward research development credit program provides exchange research development credits rate 65 percent annual incremental research development credits defined year ended july 31 2003 company filed claims exchange fiscal 2003 2002 incremental researched development credit net minimum capital taxes result recognized state tax benefit 764000 net estimated capitalbased state taxes approximately 248000 year ended alexion pharmaceuticals inc notes consolidated financial statementscontinued july 31 2002 company filed claim exchange fiscal 2001 incremental research development credit result recognized state tax benefit 700000 company follows sfas 109 “accounting income taxes” statement requires deferred income tax assets liabilities reflect impact “temporary differences” amount assets liabilities financial reporting purposes amounts measured tax laws regulations components deferred income tax assets follows amounts thousands exercise price nonqualified stock options gives rise compensation included taxable income applicable employees deducted company federal state income tax purposes result exercise nonqualified stock options company related net operating loss carryforwards approximately 182 million used offset future taxable income realized related tax benefits net operating loss carryforwards credited directly paid capital reconciliation statutory federal income tax rate company’s effective income tax rate follows alexion pharmaceuticals inc notes consolidated financial statementscontinued company yet achieved profitable operations accordingly management believes tax benefits july 31 2003 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax assets 17 unaudited quarterly financial information following condensed quarterly financial information amounts thousands except per share amounts 18 subsequent eventsale common stock september 2003 company sold 36 million shares common stock net proceeds approximately 44 millionitem 15 exhibits financial statement schedules 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto 3 exhibits 1 incorporated reference report form 8k filed october 3 2000 2 incorporated reference registration statement form s1 reg 33300202 3 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 4 incorporated reference registration statement form s8 reg 33371985 filed february 8 1999 5 incorporated reference annual report form 10k fiscal year ended july 31 1996 6 incorporated reference annual report form 10k fiscal year ended july 31 1999 7 incorporated reference annual report form 10k fiscal year ended july 31 2002 8 incorporated reference quarterly report form 10q quarter ended january 31 2002 9 incorporated reference quarterly report form 10q quarter ended january 31 2003 10 incorporated reference annual report form 10k fiscal year ended july 31 2003 11 incorporated reference report form 8ka filed march 22 2004 12 incorporated reference quarterly report form 10q quarter ended january 31 2004 13 incorporated reference quarterly report form 10q quarter ended april 30 2004 confidential treatment granted portions document b exhibits see 3 c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc consolidated financial statements july 31 2004 2003 alexion pharmaceuticals inc contents july 31 2004 2003 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion accompanying consolidated balance sheets related consolidated statements operations stockholders’ equity cash flows present fairly material respects financial position alexion pharmaceuticals inc subsidiaries july 31 2004 2003 results operations cash flows three years period ended july 31 2004 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp pricewaterhousecoopers hartford ct september 15 2004 alexion pharmaceuticals inc consolidated balance sheets july 31 2004 2003 thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations years ended july 31 2004 2003 2002 thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive loss years ended july 31 2004 2003 2002 thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows years ended july 31 2004 2003 2002 thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 1 organization operations alexion pharmaceuticals inc “alexion” organized 1992 engaged development therapeutic products treatment wide array severe diseases including hematologic cardiovascular autoimmune disorders two lead product candidates therapeutic antibodies address specific diseases arise human immune system produces inflammation human body incurred consolidated losses since inception made product sales date continue seek financing obtain regulatory approvals product candidates fund operations losses deemed appropriate establish manufacturing sales marketing distribution capabilities expect incur substantial expenditures foreseeable future research development commercialization product candidates seek raise necessary funds public private equity debt financings bank loans collaborative arrangements corporate sources financing reclassification made presentation operating expenses twelve months ended july 31 2003 order conform current year expense classifications connecticut capitalbased tax prior fiscal year reclassified state tax benefit operating expense addition certain reclassifications made prior year balance sheet items conform current year classifications reimbursable contract costs previously netted accounts payable 2003 disclosed separate item balance sheet 2 summary significant accounting policies principles consolidation accompanying consolidated financial statements include alexion pharmaceuticals inc whollyowned subsidiaries alexion antibody technologies “aat” columbus farming corporation “cfc” results operations aat included consolidated statements operations since september 23 2000 effective date prolifaron acquisition see note 5 cfc formed february 9 1999 acquire certain research development assets us surgical corporation subsidiary tyco international ltd “tyco” significant intercompany balances transactions eliminated consolidation abandonment unigraft xenotransplantation research development program fiscal 2003 cfc activities terminated see notes 4 6 cash equivalents cash equivalents stated cost approximates market includes shortterm highly liquid investments original maturities less 90 days marketable securities invest marketable debt securities highly rated financial institutions investmentgrade debt instruments limit amount credit exposure one entity classified marketable securities “available sale” accordingly carry securities aggregate fair value unrealized gains losses included accumulated comprehensive loss component stockholders’ equity realized gains losses recorded years ended july 31 2004 2003 year ended july 31 2002 realized gain sales marketable securities approximately 19 million utilize alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 specific identification method computing realized gains losses july 31 2004 marketable securities maximum maturity less 2 years average approximately 8 months weighted average interest rate associated marketable debt securities 19 percent 14 percent july 31 2004 2003 respectively following summary marketable securities july 31 2004 2003 amounts thousands per eitf 031 review periodically investment securities whose unrealized losses remained unrealized six months determine unrealized losses temporary gross unrealized losses individual investment securities aggregated 411000 269000 july 31 2004 2003 respectively intend hold related investment securities maturity ability result consider losses temporary recorded loss consolidated statements operations goodwill adopted sfas 142 “goodwill intangible assets” effective august 1 2001 adoption sfas 142 caused amortization related 229 million goodwill acquired connection acquisition prolifaron see note 5 cease effective august 1 2001 goodwill reviewed impairment least annually whenever events changes circumstances indicate carrying amount goodwill might recoverable conduct annual impairment review march year first step annual review compare fair market capitalization alexion date net stockholders’ equity fair market capitalization greater net stockholders’ equity impairment charges necessary analysis impacted price stock date test impairment charges recorded component operating expenses period impairment determined impairment charge resulted upon adoption standard result company’s annual impairment assessment longlived assets account longlived assets including property plant equipment pursuant sfas 144 “accounting impairment disposal longlived assets” accordingly assess impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable see note 4 factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 • significant adverse change business climate could affect value longlived asset • significant decrease market value assets determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value amount recognized impairment charge prepaid manufacturing costs cash advances paid us secure future long term manufacturing production thirdparty contract manufacturers recorded prepaid manufacturing costs recognized period manufacturing production units production method cash advances subject refund manufacturing facility unavailable scheduled forfeiture terminate scheduled production see note 3 revenue recognition record contract research revenues research development support payments license fees milestone payments collaboration third parties amounts received various government grants eitf0021 requires evaluation deliverables collaborative agreements determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value upfront nonrefundable license fees received connection collaboration deferred amortized revenue life agreement underlying technologies revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts see note 3 research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 outside contractor costs research license fees depreciation amortization lab facilities leasehold improvements building facilities utilities related costs related research space lab supplies entered certain research agreements share costs collaborator record costs research development expenses certain costs reimbursed collaborator recorded reduction research development expense accrued research development expenses include amounts owed suppliers research development work performed behalf us period end evaluate accrued expense balance related activities based upon information received supplier estimated progress toward completion research development objectives ensure balance appropriately stated estimates subject change additional information becomes available fiscal year 2004 incurred research development expenses 598 million fiscal years 2003 2002 incurred research development expenses 710 million 600 million respectively comprehensive loss report present comprehensive loss accordance sfas 130 “reporting comprehensive income” establishes standards reporting display comprehensive income loss components full set general purpose financial statements objective statement report measure changes equity enterprise result transactions economic events period transactions owners comprehensive income loss comprehensive loss arises net unrealized gains losses marketable securities elected display comprehensive loss component statements changes stockholders’ equity comprehensive loss stock options july 31 2004 two stockbased compensation plans employees directors consultants account stock options granted employees accordance accounting principles board opinion “apb” 25 account stock options granted consultants accordance emerging issues task force “eitf” 9618 “accounting equity instruments issued employees acquiring conjunction selling goods services” may incur charges operations connection awards stock option plans accordance apb 25 related interpretations record compensation expense employee stockbased awards certain conditions generally terms award amount employee must pay acquire stock fixed compensation expense options total grant date intrinsic value amortized vesting period alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 additionally required sfas 148 “accounting stockbased compensationtransition disclosure amendment sfas 123” provide following table illustrates effect net income earnings per share applied fair value recognition provisions sfas 123 stockbased employee compensation years ended july 31 2004 2003 2002 dollars thousands except per share amounts purposes pro forma disclosure estimated value employee nonemployee option grant calculated date grant using blackscholes optionpricing model blackscholes optionpricing model developed use estimating fair value traded options vesting restrictions fully transferable addition optionpricing models require use subjective assumptions including expected stock price volatility effects applying fair value recognition provisions sfas 123 pro forma disclosure indicative future amounts additional disclosures required sfas 123 included note 11 net loss per common share compute present net loss per common share accordance sfas 128 “earnings per share” basic net loss per common share based weighted average shares common stock outstanding period diluted net loss per common share assumes addition dilutive effect common share equivalents outstanding period common share equivalents represent dilutive stock options convertible subordinated debt outstanding stock options convertible subordinated debt entitled holders acquire 5669764 5148365 4685160 shares prior application treasury stock method common stock july 31 2004 2003 2002 respectively difference basic diluted net loss per common share effect common share equivalents antidilutive periods presented segment reporting sfas 131 “disclosure segments enterprise related information” establishes annual interim reporting standards enterprise’s operating segments related disclosures products services geographic areas major customers determined operate one segment addition revenues generated united states entities longlived assets maintained united states fair value financial instruments financial instruments include cash equivalents marketable securities milestone receivable reimbursable contract costs accounts payable notes payable convertible subordinated notes cash equivalents marketable securities carried fair value milestone receivable reimbursable contract costs alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 accounts payable notes payable convertible subordinated notes carried cost believe milestone receivable reimbursable contract costs accounts payable approximate fair value carrying value convertible subordinated notes approximated fair value based upon trading values reported july 31 2004 see note 8 believe fair value cfc note payable approximates estimated fair value underlying collateral approximately 450000 july 31 2004 see note 6 use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates recently issued accounting standards november 2003 emerging issues task force “eitf” reached consensus eitf issue 031 “the meaning otherthantemporary impairment application certain investments” regarding issue disclosures marketable securities debt securities accounted sfas 115 “accounting certain investments debt equity securities” eitf requires additional quantitative disclosure related unrealized losses specifically presentation aging losses also requires additional qualitative disclosures help users understand quantitative disclosures otherthantemporarily impaired adoption disclosure requirements effective companies years ending december 15 2003 adoption standard material impact either operating results financial position december 2003 sec issued staff accounting bulletin 104 “sab 104” “revenue recognition” supersedes sab 101 “revenue recognition financial statements” sab 104’s primary purpose rescind accounting guidance contained sab 101 related multiple element revenue arrangements superseded result issuance eitf 0021 “accounting revenue arrangements multiple deliverables” eitf0021 requires evaluation deliverables collaborative agreements determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value issuance sab 104 reflects concepts contained eitf 0021 revenue recognition concepts contained sab 101 remain unchanged issuance sab 104 material impact results operations financial position april 2004 eitf reached consensus eitf issue 036 “participating securities two class method fasb statement 128” “eitf 036” eitf 036 addresses number questions regarding computation earnings per share companies issued securities common stock contractually entitle holder participate dividends earnings company declares dividends common stock eitf 036 also provides guidance applying twoclass method calculating earnings per share clarifying constitutes participating security apply twoclass method computing earnings per share determined security participating including allocate undistributed earnings security eitf 036 effective fiscal periods beginning march 31 2004 requires retroactive restatement prior earnings per share amounts adoption standard material impact either operating results financial position alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 3 research development collaborations procter gamble pharmaceuticals collaboration january 1999 procter gamble pharmaceuticals “pg” entered exclusive collaboration develop commercialize pexelizumab granted pg exclusive license intellectual property related pexelizumab right sublicense recognizing nonrefundable upfront license fee 10 million related pg collaboration revenue 17 years representing average remaining patent lives underlying technologies time payment received fiscal 1999 recorded payment deferred revenue balance july 31 2004 2003 68 million 74 million respectively concurrent dosing first patient apexami trial fourth quarter 2004 also recognized 4 million milestone payment pg milestone receivable december 2001 pg entered binding memorandum understanding “mou” pursuant january 1999 collaboration revised structure per mou pg share decisionmaking responsibility future us development commercialization costs pexelizumab including clinical manufacturing marketing sales efforts prior december 2001 original collaboration pg generally funding clinical development manufacturing costs relating pexelizumab treatment inflammation associated cardiopulmonary bypass surgery heart attack revised collaboration per mou provides pg incur approximately 50 phase iii clinical trial product development manufacturing commercialization costs necessary potential approval marketing pexelizumab us receive approximately 50 gross margin us sales pg agreed retain responsibility future development commercialization costs outside us receiving royalty sales outside us responsible royalties certain third party intellectual property worldwide intellectual property necessary additionally part mou receive milestone payments achieving specified development steps regulatory filings approvals agreed bear first 50 projected costs associated completed phase iii clinical trial called “primocabg” coronary artery bypass graft surgery “cabg” pg agreed bear second 50 part revised collaboration quarter ended october 31 2003 pg completed obligations respect originally projected costs additional costs incurred original projected costs shared equally us pg reimbursements received us pg connection pg’s 50 share services related personnel recorded reduction research development expense part revised collaboration per mou pg funded 100 costs two acute myocardial infarction “ami” phase ii clinical trials myocardial infarction heart attack patients pg agreed per mou share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well ami cabg phase iii clinical trial costs alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 pg right terminate collaboration sublicense rights time pg terminates collaboration per mou pg required contribute share agreed obligations costs incurred prior termination may required contribute towards obligations incurred termination circumstance per mou rights exclusive license intellectual property related pexelizumab would revert back us would entitled future pexelizumab revenues without sharing revenues pg sublicense rights sublicensee would required assume pg’s obligations collaboration terms mou may obligated reimburse pg 50 cancellation costs pg’s thirdparty pexelizumab manufacturing contract portion cancellation costs could amount much 98 million xoma ltd collaboration december 2003 xoma us llc “xoma” entered collaborative agreement development commercialization rationally designed human cmpl agonist antibody treat chemotherapyinduced thrombocytopenia abnormal blood condition number platelets reduced potentially leading bleeding complications compound discovered aat preclinical development cmpl antibody designed mimic activity human thrombopoietin naturally occurring protein responsible platelet production collaboration initially focus preclinical process development scaleup work preparation future clinical testing terms agreement xoma jointly develop commercialize cmpl agonist antibody chemotherapyinduced thrombocytopenia share development commercialization expenses clinical development manufacturing marketing costs worldwide well revenues generally 70 30 basis us retaining larger portion addition received 15 million upfront nonrefundable payment upon initiation collaboration receive similar sized payment upon achievement regulatory milestone recorded payment deferred research development payments balance july 31 2004 2003 14 million 0 respectively recognizing payment reduction research development expenses 8 years represents estimated length time achieve commercial viability xoma entitled royalty payments milestones alexion related bacterial cell expression technology license research development agreements entered number license research development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies necessary services management believes important overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed milestones limited investigational new drug ind application product license approval pla agreements require minimum royalty payments based upon sales developed applicable technologies alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 research development agreements generally provide us fund future research projects based upon agreements may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrollment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza biologics plc longterm commercial scale manufacture eculizumab see note 9 order maintain rights agreements may required provide minimum level funding support may elect terminate arrangements accordingly recognize expense related obligation related arrangements period performance minimum fixed payments assuming nontermination agreements july 31 2004 next five years follows amounts thousands achieve certain milestones related product development product license applications approvals additional payments would required addition payments july 31 2004 agreements contain milestone payment provisions aggregating approximately 24 million agreements also require us fund certain future costs associated filing patent applications 4 property plant equipment property plant equipment recorded cost depreciated estimated useful lives assets involved depreciation amortization commences time assets placed service computed using straightline method estimated useful lives assets maintenance repairs charged expense incurred depreciation amortization fixed assets approximately 2865000 3108000 2953000 years ended july 31 2004 2003 2002 respectively alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 estimated useful life asset building improvements 15 years leasehold improvements life lease laboratory equipment 5 years furniture office equipment 3 years summary property plant equipment follows amounts thousand year ended july 31 2003 determined conditions arisen triggered need review certain longlived assets potential impairment see note 2 quarter ended october 31 2003 notified tyco unigraft xenotransplantation program cfc activities terminated cfc’s assets pledged security 39 million note issued cfc tyco purchase assets see note 6 cfc seeking liquidate fulfill debt obligation whole part cfc notified tyco funds assets satisfy 39 million note unpaid interest quarter ended january 31 2004 tyco initiated plan sell liquidate cfc’s assets present condition anticipate tyco retain proceeds sale cfc’s assets discharge note unpaid interest august 2004 written offer 450000 accepted tyco cfc’s assets used accepted offer basis determining fairmarket value cfc’s assets accordingly written fairmarket value assets 12 million 450000 july 31 2004 classified property plant equipment cfc property plant equipment held sale july 31 2004 per guidelines set forth sfas 144 “accounting impairment disposal longlived assets” 5 goodwill september 23 2000 acquired prolifaron inc “prolifaron” privatelyheld biopharmaceutical company extensive combinatorial human antibody library technologies expertise acquisition accomplished prolifaron merged wholly owned subsidiary alexion renamed alexion antibody technologies inc fair value common stock options issued date acquisition approximately 439 million prolifaron acquisition accounted purchase accordingly purchase price allocated assets acquired liabilities assumed based estimated fair values date acquisition allocated 210 million purchase price inprocess alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 research development projects allocation represented estimated fair value based riskadjusted cash flows related incomplete research development projects date acquisition development projects yet reached technological feasibility research development progress alternative future use accordingly costs expensed acquisition date merger date prolifaron conducting preclinical development testing activities goal develop technologies antibody discovery engineering identify new fully human therapeutic antibodies addressing multiple disease areas drug candidates development represent innovative technologies addressing autoimmune inflammatory disorders cancer excess cost fair value net assets acquired amounted approximately 229 million reflected goodwill amortized approximately 7 years fiscal 2001 july 31 2004 goodwill balance 200 million representing 29 million amortization recorded fiscal 2001 adoption sfas 142 see note 2 required cessation amortization goodwill 6 note payable february 1999 cfc purchased substantially assets unigraft xenotransplantation program including principally land buildings laboratory equipment partner program us surgical corporation division tyco purchase financed issuance cfc 39 million note payable tyco interest 39 million note payable 6 per annum payable quarterly cfc xenotransplantation manufacturing assets cfc purchased tyco including real estate pledged security note principal balance note due may 2005 upon cfc’s failure make quarterly interest payment due tyco august 2003 cfc defaulted note continue recognize cfc’s interest expense note payable obligations discharged quarter ended october 31 2003 conjunction event default notified tyco unigraft xenotransplantation program cfc activities terminated cfc seeking liquidate fulfil debt obligation whole part cfc notified tyco funds assets satisfy 39 million note unpaid interest quarter ended january 31 2004 tyco initiated plan sell liquidate cfc’s assets present condition anticipate tyco retain proceeds sale cfc’s assets discharge note unpaid interest august 2004 written offer 450000 accepted tyco cfc’s assets used accepted offer basis determining fairmarket value cfc’s assets accordingly written fairmarket value assets 12 million 450000 july 31 2004 see note 4 since cfc’s assets consisting property plant equipment insufficient satisfy 39 million note unpaid interest obligations cfc expect unpaid amount note interest discharged debt recognized income fiscal 2005 cfc july 31 2004 classified property plant equipment cfc property plant equipment held sale per guidelines set forth sfas 144 “accounting impairment disposal longlived assets” alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 7 accrued expenses summary accrued expenses follows amounts thousands 8 convertible subordinated notes march 2000 completed 120 million private placement 575 percent convertible subordinated notes due march 15 2007 notes bear interest payable semiannually september 15 march 15 year beginning september 15 2000 holders may convert portion notes common stock time march 15 2007 conversion price 106425 per share would result issuance 1127554 shares common stock aggregate notes subordinated existing future senior indebtedness effectively subordinated indebtedness liabilities including trade payables us subsidiaries indenture governing notes limit amount indebtedness including senior indebtedness may incur noteholders may require us repurchase notes upon repurchase event defined loan agreement cash option common stock 105 percent principal amount notes plus accrued unpaid interest notes entitled sinking fund time march 20 2003 ending march 14 2007 may elect redeem solely discretion notes least 30 days notice whole time part certain premiums principal amount plus accrued interest incurred deferred financing costs related offering approximately 40 million recorded consolidated balance sheet amortized component interest expense sevenyear term notes amortization expense associated financing costs approximately 573000 years ended july 31 2004 2003 2002 accumulated amortization associated costs approximately 2470000 1897000 july 31 2004 2003 respectively 9 commitments contingencies operating leases july 31 2004 lease headquarters primary research development facilities lease commenced august 2000 term ten years six months required pay pro rata percentage real estate taxes operating expenses monthly fixed rent started approximately 80000 increasing approximately 104000 term lease issued 200000 open letter credit secure lease alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 entered lease agreement january 2003 pilot manufacturing plant associated labs offices used producing compounds clinical trials monthly fixed rent started approximately 36000 increasing approximately 50000 term lease expires 2007 option extend lease additional three years lease additional research facility starting monthly fixed rent approximately 35000 increasing approximately 90000 facility expanded lease expires 2012 aggregate lease expense facilities 2176000 1998000 1373000 years ended july 31 2004 2003 2002 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment follows amounts thousands purchase commitments largescale product supply agreement dated december 18 2002 “lonza agreement” lonza biologics plc “lonza” alexion pharmaceuticals inc relating manufacture product candidate eculizumab amended “lonza amendment” april 2004 per lonza agreement remitted cash advances aggregating 10 million july 31 2004 longterm commercial manufacture c5 inhibitor antibody eculizumab lonza amendment facility lonza manufacture eculizumab changed manufacturing capacity required purchase reduced future potential payments 10 million us lonza relating achievement eculizumab sales milestones 15 million us relating manufacturing yields achieved lonza eliminated subsequent yearend august 2004 paid lonza additional 35 million nonrefundable advance lonza amendment addition amounts would required pay connection voluntary termination lonza agreement us changed lonza agreement amended lonza amendment terminate lonza agreement prior september 30 2006 may required pay different amounts depending lonza agreement terminated zero approximately 10 million terminate lonza agreement september 30 2006 may required pay batches product scheduled manufacture 12 months following termination alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 amounts paid lonza consideration lonza agreement reflected prepaid manufacturing costs within accompanying balance sheet recognized additional manufacturing costs batches manufactured quarterly basis evaluate plans proceed production agreement depends upon clinical development programs’ progress well commercialization plans addition evaluate prepaid manufacturing costs estimated net realizable value “nrv” estimated nrv positive portion prepaid manufacturing cost may recognized expense indemnifications enter indemnification provisions agreements companies ordinary course business typically business partners clinical sites suppliers pursuant agreements generally indemnify hold harmless agree reimburse indemnified parties losses suffered incurred indemnified parties connection us patent copyright intellectual property infringement claim third party respect products use testing product candidates term indemnification agreements generally perpetual potential amount future payments could required make indemnification agreements unlimited incurred material costs defend lawsuits settle claims related indemnification agreements result estimated fair value agreements minimal accordingly liabilities recorded agreements july 31 2004 10 common stock fiscal 2004 common stock sales september 2003 sold 36 million shares common stock price 1300 per share resulting net proceeds approximately 439 million net underwriting discounts fees expenses approximately 29 million related transaction july 2004 sold 55 million shares common stock price 1550 per share resulting net proceeds approximately 809 million net underwriting discounts fees expenses approximately 44 million related transaction 11 stock options alexion two stockbased compensation plans described 2000 stock option plan “2000 plan” incentive nonqualified stock options may granted maximum 3400000 shares common stock directors officers key employees consultants stock options granted 2000 plan maximum term ten years date grant exercise price less fair value stock grant date generally vest four years december 2003 stockholders approved amendment 2000 plan increase number shares common stock available grant 1000000 3400000 2400000 previously december 2002 stockholders approved amendments 2000 plan 1 increased number shares common stock available grant 900000 2400000 1500000 2 prohibited repricing options granted pursuant 2000 plan 3 prohibited grant options pursuant 2000 plan alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 exercise price less fair market value common stock date grant december 2000 stockholders approved adoption 2000 plan elected terminate previous 1992 plan july 31 2004 948921 options available grant 2000 plan 1992 stock option plan “1992 plan” terminated december 2000 stock options acquire 1911666 shares common stock outstanding july 31 2004 1992 stock option plan outside directors “1992 outside directors’ plan” nonqualified stock options granted initially 12000 options qualifying directors well upon annual reelection 7500 options board directors options granted fair market value common stock date grant generally become exercisable equal proportions three four years remain exercisable ten years grant date subject certain conditions december 2002 stockholders approved amendments 1992 outside director’s plan 1 extending term 1992 outside director’s plan additional five years august 26 2007 2 prohibiting repricing options granted pursuant 1992 outside directors’ plan december 2000 stockholders approved amendment 1992 outside directors’ plan increasing initial option grant qualifying directors 12000 options 7500 options additional grants upon annual reelection board directors 7500 options 2000 options july 31 2004 stock options acquire 200067 shares common stock outstanding 1992 outside directors’ plan sfas 123 “accounting stockbased compensation” amended sfas 148 requires measurement fair value stock options warrants disclosed notes financial statements computed required pro forma disclosure options granted using blackscholes option pricing model prescribed sfas 123 assumptions used follows alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 summary status stock option plans july 31 2004 2003 2002 changes years ended presented table narrative fiscal 2004 options purchase 972000 shares common stock granted employees directors exercise price equal fair value stock date grant fiscal 2003 options purchase 662500 shares common stock granted employees directors consultant exercise prices equal fair value stock date grant recording compensation expense based upon fair value options granted consultant vesting term compensation expense related options 22000 4000 years ended july 31 2004 2003 respectively aggregate compensation expense approximately 20000 associated option grant expected recognized next three years fiscal 2002 options purchase 203855 shares common stock granted employees directors exercise prices equal fair value stock date grant fiscal 2001 options purchase 10000 shares common stock granted employee exercise prices less fair value common stock date grant accordingly recording compensation expense based upon difference vesting period associated options compensation expense associated options 67000 65000 years ended july 31 2004 2003 2002 respectively aggregate compensation expense approximately 5000 associated option grants expected recognized next year weighted average exercise price options 7551 per share weighted average fair value options date grant 9227 per option also record compensation expense certain options purchase common stock granted prior fiscal 2001 employees consultants compensation expense associated options 17000 78000 116000 years ended july 31 2004 2003 2002 respectively compensation expense associated options recognized alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 following table presents weighted average price life information significant option groups outstanding july 31 2004 12 rights purchase preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 see subject adjustment rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2007 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock september 18 2000 board directors amended purchase price preferred stock purchase rights purchase price one onehundredth share preferred stock issued upon exercise preferred stock purchase right increased 7500 72500 except increase purchase price terms conditions rights remain unchanged event acquired merger business combination transaction 50 percent assets cashflow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 13 401k plan 401k plan employees may contribute maximum 13000 per employee calendar year 2004 match contributions rate 050 dollar deferred first 6 percent compensation made matching contributions approximately 330000 291000 207000 years ended july 31 2004 2003 2002 respectively 14 contract research revenues fiscal 2004 revenue primarily reflects milestone receivable 40 million pg concurrent dosing first patient apexami clinical trial amortization deferred revenue resulting cash received pg see note 3 prior fiscal year includes deferred revenue pg revenue government grants awarded various grants agencies us government fund specific research projects july 2004 received approval grant amounting approximately 07 million national institutes health fund specific research project summary revenues generated contract research collaboration grant awards follows amounts thousands 15 income taxes july 31 2004 available federal tax reporting purposes net operating loss carryforwards approximately 3199 million expire 2024 approximately 196 million resulted exercise nonqualified stock options discussed also federal state research development credit carryforwards approximately 146 million begin expire commencing fiscal 2008 tax reform act 1986 contains certain provisions limit ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period believe triggered limitation provisions state connecticut provides companies opportunity exchange certain research development tax credit carryforwards cash exchange foregoing carryforward research development credits program provides exchange research development credits rate 65 percent annual incremental nonincremental research development credits defined tax year ended july 31 2004 plan file claims exchange fiscal 2004 research tax development credits therefore recognized state tax benefit 691000 state tax benefit excluded estimated capitalbased state taxes approximately 113000 recorded operating expense alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 year ended july 31 2003 filed claims exchange fiscal 2003 2002 research development credits recognized state tax benefit 1012000 excluded estimated capitalbased state taxes approximately 248000 reclassified operating expense year ended july 31 2002 filed claim exchange fiscal 2001 research development credits result recognized state tax benefit 700000 follow sfas 109 “accounting income taxes” statement requires deferred income tax assets liabilities reflect impact “temporary differences” amount assets liabilities financial reporting purposes amounts measured tax laws regulations components deferred income tax assets follows amounts thousands exercise nonqualified stock options gives rise compensation included taxable income applicable employees deducted us federal state income tax purposes result exercise nonqualified stock options related net operating loss carryforwards approximately 196 million used offset future taxable income realized related tax benefits net operating loss carryforwards credited directly paidin capital reconciliation statutory federal income tax rate effective income tax rate follows alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 yet achieved profitable operations accordingly management believes tax benefits july 31 2004 satisfy realization criteria set forth sfas 109 recorded valuation allowance entire deferred tax assets alexion pharmaceuticals inc notes consolidated financial statements july 31 2004 2003 16 unaudited quarterly financial information following condensed quarterly financial information amounts thousands except per share amountsnanitem 15 exhibits financial statement schedules 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed october 3 2000 2 incorporated reference registration statement form s1 reg 33300202 3 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 4 incorporated reference registration statement form s8 reg 33371985 filed february 8 1999 5 incorporated reference annual report form 10k fiscal year ended july 31 1996 6 incorporated reference annual report form 10k fiscal year ended july 31 1999 7 incorporated reference annual report form 10k fiscal year ended july 31 2002 8 incorporated reference quarterly report form 10q quarter ended january 31 2002 9 incorporated reference quarterly report form 10q quarter ended january 31 2003 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference report form 8ka filed march 22 2004 12 incorporated reference quarterly report form 10q quarter ended january 31 2004 13 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 14 incorporated reference report form 8k filed december 16 2004 15 incorporated reference report form 8k filed september 2 2005 16 incorporated reference amendment 1 form s3 reg 333114449 filed may 10 2004 17 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 18 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 19 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 20 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 21 incorporated reference report form 8k reg 00027756 filed january 25 2005 22 incorporated reference quarterly report form 10q quarter ended january 31 2005 23 incorporated reference report form 8k reg 00027756 filed march 14 2005 24 incorporated reference report form 8k reg 00027756 filed november 14 2005 25 incorporated reference quarterly report form 10q quarter ended september 30 2006 confidential treatment granted portions document item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc completed integrated audits alexion pharmaceuticals inc’s year ended december 31 2006 fivemonth period ended december 31 2005 year ended july 31 2005 consolidated financial statements internal control financial reporting december 31 2006 audit july 31 2004 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries “company” december 31 2006 december 31 2005 july 31 2005 results operations cash flows year ended december 31 2006 five month period ended december 31 2005 two years period ended july 31 2005 conformity accounting principles generally accepted united states america financial statements responsibility company’s management responsibility express opinion financial statements based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed notes 1 11 financial statements effective august 1 2005 company adopted statement financial accounting standards 123 revised 2004 “sharebased payment” internal control financial reporting also opinion management’s assessment included management’s annual report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal controlintegrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp hartford connecticut february 23 2007 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive loss amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands supplemental schedule noncash financing activities capital lease obligation 357 incurred company entered new leasing arrangements office equipment accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts 1 organization summary significant accounting policies business alexion pharmaceuticals inc “alexion” incorporated 1992 engaged development biologic therapeutic products treatment severe diseases year ending december 31 2006 filed biologics license application bla us food drug administration fda european marketing authorization application maa europe lead product candidate soliris™ eculizumab treatment rare lifethreatening blood disorder known paroxysmal nocturnal hemoglobinuria pnh incurred operating losses since inception product sales date continue seek financing establish manufacturing sales marketing distribution capabilities product candidates expect incur substantial expenditures foreseeable future research development commercialization product candidates may seek raise necessary funds public private equity debt financings bank loans collaborative arrangements corporate sources financing december 31 2005 consolidated financial statements alexion pharmaceuticals inc included alexion pharmaceuticals inc alexion antibody technologies inc columbus farming corporation alexion europe sas year ended december 31 2006 established several new entities support planned growth preparation commercialization alexion manufacturing llc alexion delaware holding llc wholly owned alexion pharmaceuticals inc delaware limited liability companies partnership alexion bermuda lp ninety percent owned alexion pharmaceuticals inc ten percent owned alexion delaware holding llc formed laws bermuda limited partnership alexion international sarl ninetyfive percent owned alexion bermuda lp five percent owned alexion pharmaceuticals inc incorporated laws switzerland alexion holding bv registered corporation netherlands wholly owned alexion delaware holding llc alexion pharma uk alexion pharma france wholly owned alexion holding bv incorporated laws united kingdom france respectively principles consolidation accompanying consolidated financial statements include accounts alexion pharmaceuticals inc whollyowned subsidiaries intercompany balances transactions eliminated consolidation use estimates preparation financial statements preparation financial statements conformity accounting principles generally accepted united states america requires management make estimates assumptions affect reported alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates change fiscal year december 9 2005 board directors approved change fiscal year july 31 december 31 commencing 2005 included accompanying consolidated financial statements five month transitional period august 1 2005 december 31 2005 foreign currency translation foreign subsidiaries functional currency different us dollars translate financial statements us dollars using current exchange rate balance sheet date assets liabilities average exchange rate prevailing period revenues expenses historical exchange rate investments foreign subsidiaries adjustments translating financial statements us dollars included accumulated comprehensive loss cash equivalents cash equivalents stated fair value approximates market include shortterm highly liquid investments original maturities less 90 days restricted cash terms mortgage loan see note 7 agreed maintain restricted cash balance equal amount required mortgage loan agreement december 31 2006 33594 cash restricted purpose marketable securities invest marketable debt securities highly rated financial institutions investmentgrade debt instruments limit amount credit exposure one entity classified marketable securities “available sale” accordingly carry securities aggregate fair value unrealized gains losses included accumulated comprehensive loss separate component stockholders’ equity inventories stated lower cost estimated realizable value cost determined firstin firstout fifo method alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts policy capitalize inventory costs associated products subsequent filing biologics license application bla prior regulatory approval based management’s judgment future commercialization considered probable future economic benefit expected realized assess regulatory approval process particular product stands relation approval process assessment includes known constraints impediments approval including safety efficacy potential labeling restrictions evaluate anticipated research development initiatives constraints relating product indication used consider manufacturing environment including supply chain determining logistical constraints could possibly hamper approval commercialization consider shelf life product relation expected timeline approval estimated demand consider patent related contract issues may prevent cause delay commercialization also base judgment viability commercialization trends marketplace market acceptance criteria finally consider reimbursement strategies may prevail respect product assess economic benefit likely realize risk inherent judgments would required expense previously capitalized costs related preapproval inventory upon change judgment due among potential factors denial delay approval necessary regulatory bodies periodically review inventories excess obsolete inventory writedown obsolete otherwise unmarketable inventory estimated net realizable value actual realizable value less estimated us determinations inventory marketable based estimates demand additional inventory writedowns may required writedowns based management’s estimates based review writedowns value inventory december 31 2006 december 31 2006 inventory consists entirely finished goods submitted marketing authorization application european union biologics license application united states september 2006 anticipate european union united states approvals 2007 preparing commercial launch thereafter product supply largescale product supply agreement dated december 18 2002 lonza agreement lonza biologics plc lonza us relating manufacture product candidate soliris™ amended lonza amendment april 2004 lonza amendment facility lonza manufacture soliris™ changed manufacturing capacity required purchase reduced future potential payments 10000 us lonza relating achievement soliris™ sales milestones 15000 payable us relating manufacturing yields achieved lonza eliminated august 2004 paid lonza additional 3500 advance lonza amendment addition amounts would required pay connection voluntary termination lonza agreement us changed alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts lonza agreement terminate lonza agreement september 30 2006 may required pay batches product scheduled manufacture 12 months following termination amounts paid lonza consideration lonza agreement reflected prepaid manufacturing costs within accompanying balance sheet recognized additional manufacturing costs batches manufactured quarterly basis evaluate plans proceed production agreement depends upon clinical development programs’ progress well commercialization plans addition evaluate prepaid manufacturing costs estimated net realizable value nrv estimated nrv positive portion prepaid manufacturing cost may recognized expense prepaid manufacturing costs cash advances paid us secure future longterm manufacturing production thirdparty contract manufacturers recorded prepaid manufacturing costs recognized period manufacturing production unit production method cash advances subject refund manufacturing facility unavailable scheduled forfeiture terminate scheduled production property plant equipment property equipment carried original cost subject review impairment significant assets whenever events changes circumstances indicate carrying amount asset may recoverable depreciation calculated straightline basis estimated useful lives assets leasehold improvements amortized lesser useful life term respective lease maintenance costs expensed incurred construction progress reflects amounts incurred property plant equipment construction improvements products expect commercialize capitalize constructioninprogress certain incremental costs associated validation effort required licensing fda manufacturing equipment production commercially approved drug costs include primarily direct labor materials incurred preparing equipment intended use validation costs amortized life related equipment longlived assets assess potential impairment longlived assets whenever events changes circumstances indicate carrying value may recoverable factors consider important could trigger impairment review include among others following • significant adverse change extent manner longlived asset used • significant adverse change business climate could affect value longlived asset • significant decrease market value assets alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts event cash flows expected sufficient recover carrying amount assets writtendown estimated fair values longlived assets disposed carried fair value less costs sell determine carrying value longlived assets may recoverable based upon existence one indicators impairment compare carrying value asset group undiscounted cash flows expected generated group carrying value exceeds undiscounted cash flows compare carrying value asset group fair value determine whether impairment charge required fair value less carrying value asset written fair value difference fair value carrying value recognized impairment charge intangible assets identifiable intangible assets recorded original cost intangible assets finite lives amortized evenly estimated useful lives intangible assets indefinite lives amortized goodwill represents difference purchase price acquired businesses fair value net assets amortized test goodwill impairment least annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charges occurred result annual impairment assessment revenue recognition record contract research revenues research development support payments license fees milestone payments collaboration third parties amounts received various government grants evaluate deliverables collaborative agreement determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value undelivered item upfront nonrefundable license fees received connection collaboration deferred amortized revenue life agreement period performance obligations revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts deferred revenue results cash received amounts receivable advance revenue recognition research development contracts research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies theses costs expensed incurred entered research agreement share costs collaborator record costs research development expenses incurred portion costs reimbursed collaborator recorded reduction research development expense stockbased compensation adopted statement financial accounting standards 123 revised 2004 “sharebased payment” sfas 123r effective august 1 2005 sfas 123r requires recognition fair value stockbased compensation net earnings one stockbased compensation plan known 2004 incentive plan restricted stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date stockbased compensation issued plan consists incentive nonqualified stock options restricted stock options granted employees exercise prices equal fair market value stock dates grant generally stock options restricted stock granted employees fully vest four years grant date stock options term 10 years recognize stockbased compensation expense straightline basis requisite service period individual grants generally service period equals vesting period prior august 1 2005 accounted 2004 incentive plan preceding plans intrinsic value method described accounting principles board opinion 25 “accounting stock issued employees” apb 25 related interpretations permitted financial accounting standards 123 “accounting stockbased compensation” sfas 123 applying intrinsic value method generally record stockbased compensation cost exercise price stock options equalled market price underlying stock date grant elected utilize modified prospective transition method adopting sfas 123r method provisions sfas 123r apply awards granted modified date adoption addition unrecognized expense awards yet vested date adoption determined original provisions sfas 123 shall recognized periods date adoption alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts sfas 123r requires us present pro forma information periods prior adoption accounted stockbased compensation fair value method sfas 123 purposes pro forma disclosure estimated fair value options date grant amortized expense requisite service period generally equals vesting period following table illustrates effect net loss per share applied fair value recognition provisions sfas 123 stockbased employee compensation stockbased compensation grants stock options presented include restricted stock expense reported part net loss upon adoption sfas 123r recognized compensation expense associated awards granted august 1 2005 unvested portion previously granted awards remain outstanding august 1 2005 year ended december 31 2006 five month period ended december 31 2005 recognized total compensation expense 17601 4054 stock options 3014 260 restricted stock respectively due net loss position windfall tax benefit realized period balance deferred stockbased compensation july 31 2005 related restricted stock grants noted approximately 1938 upon adoption sfas 123r eliminated deferred stockbased compensation account 1938 corresponding adjustments additional paidincapital compensation expense related restricted stock recognized statement operations vesting period earnings loss per share eps basic eps computed dividing net loss weighted average number shares common stock outstanding period diluted eps reflects potential dilution could occur options contracts issue common stock exercised converted common stock due net loss alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts convertible debt unvested restricted stock options granted stock option plan yet exercised antidilutive therefore considered diluted eps calculations convertible debt unvested restricted stock options entitled holders acquire 10473462 shares 9994295 shares 9604003 shares 5669764 shares common stock year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively difference basic diluted net loss per common share effect potential common share equivalents antidilutive periods presented income taxes deferred income taxes provided differences income tax financial reporting bases assets liabilities statutory tax rates effect differences expected reverse valuation allowance deferred tax assets recorded extent cannot determine ultimate realization net deferred tax assets likely making determination may consider estimated future reversals existing temporary differences estimated future earnings available tax planning strategies extent estimates items reduced realized amount deferred tax assets considered realizable could adversely affected segment reporting sfas 131 “disclosure segments enterprise related information” establishes annual interim reporting standards enterprise’s operating segments related disclosures products services geographic areas major customers determined operate single segment addition revenues generated united states entities longlived assets maintained united states recently issued accounting standards july 2006 fasb approved issuance fasb interpretation fin 48 “accounting uncertainty income taxes amended” interpretation clarifies accounting uncertain income tax positions income taxes recognized enterprise’s financial statements accordance fasb statement 109 accounting income taxes additionally interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition interpretation effective reporting periods beginning december 15 2006 earlier application permitted alexion pharmaceuticals inc effective date first quarter 2007 evaluating impact adopting accounting standard financial position results operations alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts 2 collaboration license agreements procter gamble pharmaceuticals collaboration january 1999 procter gamble pharmaceuticals pg entered exclusive collaboration develop commercialize pexelizumab granted pg exclusive license intellectual property related pexelizumab right sublicense december 2001 pg entered binding memorandum understanding mou pursuant january 1999 collaboration revised pg agreed per mou share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well ami cabg phase iii clinical trial costs pg right terminate collaboration sublicense rights time pg terminates collaboration per mou pg required contribute share agreed obligations costs incurred prior termination may required contribute towards obligations incurred termination circumstance rights exclusive license intellectual property related pexelizumab would revert back us would entitled future pexelizumab revenues without sharing revenues pg sublicense rights sublicensee would required assume pg’s obligations collaboration recognizing nonrefundable upfront license fee 10000 related pg collaboration revenue 17 years representing average remaining patent lives underlying technologies time payment received fiscal 1999 recorded payment deferred revenue recorded revenue related upfront payment 588 245 588 year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively additionally recognized milestone payment 4000 year ended july 31 2004 net share total expense related collaboration 13816 17805 36358 15902 year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively majority costs incurred collaboration paid pg turn obtained reimbursement us based cost sharing arrangement noted costs incurred collaboration received reimbursements pg amounts 24 269 1470 1551 year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively 2006 completed final phase iii trial pexelizumab reviewing results trial along pg determined pursue development pexelizumab terms mou may obligated reimburse pg 50 cancellation costs pg’s thirdparty pexelizumab manufacturing contract portion cancellation costs amounts approximately 2000 alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts license research development agreements entered number license research development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies necessary services management believes important overall business strategy license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based upon sales developed applicable technologies research development agreements generally provide us fund future research projects based upon agreements may obtain exclusive nonexclusive rights options applicable technologies developed result applicable research clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrolment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza biologics plc longterm commercial manufacture soliris™ order maintain rights agreements may required provide minimum level funding support may elect terminate arrangements accordingly recognize expense related obligation related arrangements period performance minimum fixed payments assuming nontermination agreements december 31 2006 next five years follows achieve certain milestones related product development product license applications approvals additional payments would required addition payments december 31 2006 alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts agreements contain milestone payment provisions aggregating approximately 8200 agreements also require us fund certain future costs associated filing patent applications 3 marketable securities following table summarizes marketable securities unrealized losses 2 4 3 related holdings cash equivalents included accumulated comprehensive income year ended december 31 2006 five month period ended december 31 2005 year ended july 31 2005 respectively realized gains approximately 101 recorded year ended july 31 2005 realized gains recorded year ended december 31 2006 five month period ended december 31 2005 year ended july 31 2004 realized losses recorded year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively utilize specific identification method computing realized gains losses december 31 2006 marketable securities maximum maturity approximately 2 years average approximately 15 months weighted average interest rate associated marketable debt securities 53 percent 44 percent 37 percent 19 percent december 31 2006 2005 july 31 2005 2004 respectively alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts following table summarizes investment maturities december 31 2006 periodically review impairment investment securities unrealized losses twelve months determine unrealized losses temporary gross unrealized losses individual investment securities aggregated 54 312 566 411 december 31 2006 2005 july 31 2005 2004 respectively intend hold related investment securities maturity ability result consider unrealized losses temporary recorded loss consolidated statements operations following tables shows gross unrealized losses fair value investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 2006 december 31 2005 alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts july 31 2005 investments categories shown table unrealized losses caused primarily interest rate increases 4 assets prepaid expenses current assets consist following noncurrent assets consist following alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts 5 property plant equipment summary property plant equipment follows leasehold improvements amortized term lease estimated useful life asset whichever shorter depreciation amortization fixed assets approximately 3028 1359 2996 2865 year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively july 2006 began construction manufacturing facility smithfield rhode island expect facility substantially complete 2007 2006 capitalized construction progress approximately 28814 related purchase construction smithfield manufacturing facility included construction progress 2006 capitalized approximately 928 interest costs related development smithfield manufacturing facility capitalized interest prior 2006 see note 7 description terms related mortgage payable year ended july 31 2005 utilized services third party appraisers perform inventory fixed assets performance inventory found assets cost approximately 4600 accumulated depreciation approximately 4500 included accounting records time longer service held us consequently recorded loss disposal assets approximately 100 year ended july 31 2005 year ended july 31 2003 concluded investment unigraft program meet sufficient criteria continued development termination unigraft program resulted impairment columbus farming corporation’s cfc unigraft manufacturing assets causing write approximately 760 assets year ended july 31 2004 alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts february 1999 cfc purchased substantially assets unigraft xenotransplantation program including principally land buildings laboratory equipment partner program us surgical corporation division tyco international ltd tyco purchase financed issuance cfc 3900 note payable tyco upon cfc’s failure make quarterly interest payment due tyco august 2003 cfc defaulted note quarter ended october 31 2003 conjunction event default notified tyco unigraft xenotransplantation program cfc activities terminated quarter ended october 31 2004 offer 450 thirdparty accepted tyco cfc’s assets tyco retained proceeds sale cfc’s assets extinguished note unpaid interest transferred assets tyco october 31 2004 since cfc’s assets consisting property plant equipment insufficient satisfy 3900 note unpaid interest 300 obligations cfc tyco formally discharged cfc obligations result extinguished 3900 note unpaid interest 300 offset transfer cfc’s assets 450 tyco consequently recorded resulting gain 3804 gain extinguishment note payable august 2004 6 accrued expenses accrued expenses consist following alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts exit activities december 2006 initiated integration plan subsidiary alexion antibody technologies inc consolidate certain functions operations including termination alexion antibody personnel closure alexion antibody facilities impairment equipment facility costs recognized liabilities included general administrative expenses year ended december 31 2006 following table summarizes liabilities established exit activities employee benefits consist expenses severance compensation well accelerated vesting sharebased grants facility lease costs associated lease san diego california facility described note 8 exit activities consist impairment charges equipment expect pay employee related benefits former employees first half 2007 currently exploring options facility lease year ended december 31 2006 obligated fulfill terms operating lease agreement expires 2012 7 debt convertible notes january 2005 sold 150000 principal amount 1375 convertible senior notes due february 1 2012 “1375 notes” private placement qualified institutional buyers pursuant rule 144a securities act 1933 amended interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 317914 shares common stock equivalent conversion price approximately 3146 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity incurred deferred financing costs related offering approximately 4800 recorded consolidated balance sheet amortized component interest expense sevenyear term notes alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts shelf registration statement covering resale notes common stock issuable upon conversion notes declared effective sec may 25 2005 net proceeds approximately 145200 offering used redeem entire outstanding 120000 principal amount 575 convertible subordinated notes due march 2007 “575 notes” general corporate purposes march 15 2005 redeemed 575 notes outstanding redemption price 101643 1 principal amount 575 notes paid redemption premium related notes approximately 2000 year ended july 31 2005 incurred deferred financing costs related offering approximately 4000 amortized component interest expense term notes remaining balance deferred financing costs approximately 1200 redemption date difference amount paid including redemption premium carrying value notes including remaining deferred financing costs recognized 3185 loss early extinguishment convertible notes amortization expense associated deferred financing costs year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 approximately 0 282 686 573 respectively mortgage loan july 2006 wholly owned affiliate alexion manufacturing llc entered mortgage loan agreement borrow 26000 finance purchase construction smithfield rhode island manufacturing facility mortgage loan bears interest fixed annual rate 917 obligations loan agreement guaranteed alexion pharmaceuticals inc loan principal required repaid equal monthly instalments approximately 289 starting march 2009 august 2016 time outstanding balances due loan may prepaid whole part prior july 2009 date loan prepaid whole part must include prepayment premium described loan agreement terms agreement among things alexion manufacturing llc restricted respect additional borrowings leasing arrangements mergers event approval market soliris™ eculizumab obtained december 31 2007 alexion manufacturing llc must deliver acceptable letter credit lender amount 13000 also included loan agreement certain provisions satisfied would allow additional borrowings 9000 terms agreement among things alexion manufacturing restricted respect additional borrowings leasing arrangements mergers alexion manufacturing also may modify amend waive material obligations respect terminate material agreements proprietary rights engage business ownership operation facility alexion pharmaceuticals inc may among things liquidate windup dissolve long guarantee remains effect alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts condition loan alexion manufacturing llc required maintain restricted cash accounts must used specifically purchase construction manufacturing facility lender first priority security interest right approve disbursements accounts holding restricted cash agreement required maintain balance restricted cash accounts sufficient complete project covenants financial covenants related debt however convertible senior notes certain designated events could occur liquidation tender offer consolidation merger recapitalization otherwise connection 50 common stock exchanged converted acquired constitutes solely right receive consideration least 90 common stock listed us national exchange market holder elects convert 1375 notes upon occurrence designated event holder entitled receive additional number shares common stock conversion date additional shares intended compensate holders loss time value conversion option set according table within offering document capped event shares issuable upon conversion note exceed 429100 per 1 principal amount interest expense cash paid interest expense loan obligations approximately 2081 0 7966 6901 year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively 8 leases capital leases lease office equipment capital lease agreements expiring 2010 assets liabilities capital lease recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives amortization assets capital lease included depreciation expense december 31 2006 cost equipment capital lease 357 net book value 342 alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts minimum future lease payments capital lease december 31 2006 interest rate capital leases approximately 221 imputed based incremental borrowing rate inception lease operating leases december 31 2006 lease headquarters primary research development facilities cheshire connecticut lease commenced august 2000 extended august 2006 term seventeen years required pay pro rata percentage real estate taxes operating expenses monthly fixed rent started approximately 80 increasing approximately 167 term lease issued 200 open letter credit secure lease january 2003 entered lease agreement pilot manufacturing plant associated labs offices new connecticut pilot plant used producing compounds clinical trials monthly fixed rent started approximately 36 increasing approximately 50 term lease expires 2007 option extend lease additional three years also lease additional research space san diego california starting monthly fixed rent approximately 35 increasing approximately 55 connection closure alexion antibody technologies accrued fair value future payments lease currently exploring options facility lease year ended december 31 2006 obligated fulfill terms operating lease agreement expires 2012 furthermore rent office space paris france monthly fixed rent approximately 28 rental agreement expires december 2008 aggregate lease expense facilities 2592 1094 2296 2176 year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively lease expense recorded straightline basis applicable lease terms alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2006 9 commitments contingencies indemnifications enter indemnification provisions agreements companies ordinary course business typically business partners clinical sites suppliers pursuant agreements generally indemnify hold harmless agree reimburse indemnified parties losses suffered incurred indemnified parties connection us patent copyright intellectual property infringement claim third party respect products use testing product candidates term indemnification agreements generally perpetual potential amount future payments could required make indemnification agreements unlimited incurred material costs defend lawsuits settle claims related indemnification agreements result estimated fair value agreements minimal accordingly liabilities recorded agreements december 31 2006 10 income taxes december 31 2006 available federal tax reporting purposes net operating loss carry forwards approximately 618061 expire 2007 2026 also federal state research development credit carry forwards approximately 21891 expire 2008 2026 exercise nonqualified stock options gives rise compensation included taxable income applicable employees deducted us federal state income tax purposes result exercise nonqualified stock options net operating loss carry forwards approximately 46880 attributable excess tax benefits stock compensation deductions used offset future taxable income realized related tax benefits net operating losses carry forwards credited directly paidin capital tax reform act 1986 contains certain provisions limit taxpayer’s ability utilize net operating loss tax credit carry forwards given year resulting cumulative changes ownership alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts interests excess 50 percent threeyear period determined limiting provisions triggered however limitation expected result loss federal net operating loss research development credit state connecticut provides companies opportunity exchange certain research development tax credit carry forwards cash exchange foregoing carry forward research development credits program provides exchange research development credits rate 65 percent annual incremental nonincremental research development credits defined year ended december 31 2006 plan file claims exchange research tax development credits therefore recognized state tax benefit 372 state tax benefit excludes estimated capitalbased state taxes 139 recorded operating expense components deferred income tax assets follows yet achieved profitable operations accordingly management believes tax benefits december 31 2006 satisfy realization criteria recorded valuation allowance total deferred tax asset alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts reconciliation statutory federal income tax rate effective income tax rate follows 11 stock options restricted stock options december 31 2006 one stock option plan 2004 incentive plan “2004 plan” 2000 stock option plan “2000 plan” 1992 stock option plan outside directors “1992 outside directors’ plan” terminated december 2004 adoption 2004 plan june 2006 shareholders approved amendments 2004 plan increasing 775000 shares available equity awards 2004 plan common stock well incentive nonqualified stock options may granted maximum 3868519 shares common stock directors officers key employees consultants amount shares authorized granting includes 2500000 initially authorized plan 593519 shares transferred 2000 plan additional 775000 shares authorized 2006 stock options granted plans maximum term ten years date grant exercise price less fair value stock grant date generally vest four years purpose 2004 plan aid us attracting retaining motivating rewarding employees nonemployee directors consultants us subsidiaries affiliates provide equitable competitive compensation opportunities recognize individual contributions reward achievement goals promote creation longterm value stockholders closely aligning interests participants stockholders plan authorizes stockbased cashbased incentives participants year ended july 31 2001 options purchase 10000 shares common stock granted employee exercise prices less fair value date grant accordingly recorded compensation expense based upon difference exercise price fair value vesting period associated options compensation expense associated options 5 67 years ended july 31 2005 2004 respectively compensation expense recorded year ended alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts december 31 2006 five month period ended december 31 2005 options fully vested weighted average exercise price options 7551 per share weighted average fair value options date grant 9227 per option also record compensation expense certain options purchase common stock granted prior july 31 2001 employees consultants compensation expense associated options 17 year ended july 31 2004 compensation expense related options issued consultants 8 3 132 22 years ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively weighted average fair value date grant options granted year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 1987 1721 1427 1325 per option respectively options exercisable december 31 2006 aggregate intrinsic value 47130 weighted average remaining contractual life 62 years intrinsic value options exercised year ended december 31 2006 20375 fair market value options vested year ended december 31 2006 14065 december 31 2006 30713 total unrecognized compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 2 years alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts summary status stock option plans december 31 2006 2005 july 31 2005 2004 2003 changes periods ended presented table narrative following table presents weighted average price life information significant option groups outstanding december 31 2006 alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts fair value options date grant estimated using blackscholes model following weighted average assumptions expected stock price volatility rates based historical volatilities common stock risk free interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding giving consideration vesting schedules historical exercise patterns year ended december 31 2006 average expected life determined using simplified approach permitted staff accounting bulletin 107 sab 107 previously noted adopted sfas 123r august 1 2005 estimated expected term related period expected volatility calculated accordance sab 107 restricted stock summary status nonvested restricted stock changes periods ended restricted stock generally vests four years grant date issued certain key employees consultants compensation expense related restricted stock year ended december 31 2006 five month period ended december 31 2005 year ended july 31 2005 approximately 3014 260 238 respectively prior year ended july 31 2005 restricted stock issued upon alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts adoption sfas 123r immaterial cumulative effect compensation expense restricted stock grants 12 common preferred stock common stock november 2006 sold 3450000 shares common stock public offering 4300 per share resulting gross proceeds sale 148350 incurred underwriting discounts commissions 8121 234 per share well expenses resulting net proceeds 140229 year ended december 31 2006 increased holdings common stock treasury 6919 shares lieu withholding taxes exercise restricted stock shares exchanged fair market value 279 total five month period ended december 31 2005 increased holdings common stock treasury 13713 stockbased exercise employee options shares exchanged fair market value 381 total august 2005 sold 2500000 shares common stock public offering 2675 per share resulting gross proceeds sale 66875 incurred underwriting discounts commissions 2145 086 per share well expenses resulting net proceeds 64530 preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 see subject adjustment rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2007 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock september 18 2000 board directors amended purchase price preferred stock purchase rights purchase price one onehundredth share preferred stock issued upon alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts exercise preferred stock purchase right increased 7500 72500 except increase purchase price terms conditions rights remain unchanged event acquired merger business combination transaction 50 percent assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 13 accumulated comprehensive loss components accumulated comprehensive losses 14 401k plan qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions rate 050 dollar deferred first 6 percent compensation made matching contributions approximately 406 202 390 330 year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 respectively alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts 15 revenues awarded various grants agencies us government fund specific research projects july 2004 received approval grant amounting approximately 700 national institutes health fund specific research project november 2004 department defense awarded us grant approximately 700 fund additional specific research august 2005 department health human services awarded us grant approximately 297 fund additional specific research grant research revenues year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 approximately 870 419 476 21 respectively 16 financial instruments following methods assumptions used us estimating fair value disclosures financial instruments • cash equivalents marketable securities carried approximate fair value • reimbursable contract costs accounts payable notes payable carried cost believe approximate fair value short term maturity period • fair market value convertible notes determined based upon trading values reported december 31 2006 alexion pharmaceuticals inc notes consolidated financial statementscontinued year ended december 31 2006 five month period ended december 31 2005 years ended july 31 2005 2004 amounts thousands except share per share amounts 17 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2006 july 31 2005 following condensed quarterly financial information three month period ended october 31 2005 following table outlines condensed financial information two month period ended december 31 2005 2004 significant increases operating expenses incurred 2 months ending december 31 2005 compared period 2004 primarily caused clinical development activities labor expenses manufacturing development activities increased level activity reflects progress core development programs soliris™ pexelizumabitem 15 exhibits financial statement schedules 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 1 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 2 incorporated reference quarterly report form 10q quarter ended january 31 2004 3 incorporated reference registration statement form s1 reg 33300202 4 incorporated reference amendment 1 form s3 reg 333114449 filed may 10 2004 5 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 6 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 7 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 8 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 9 incorporated reference annual report form 10k year ended december 31 2007 filed february 23 2007 10 incorporated reference report form 8k filed january 25 2005 11 incorporated reference report form 8k filed february 16 2006 12 incorporated reference report form 8k filed november 14 2005 13 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 14 incorporated reference quarterly report form 10q quarter ended january 31 2003 15 incorporated reference annual report form 10k fiscal year ended july 31 1996 16 incorporated reference quarterly report form 10q quarter ended january 31 2002 17 incorporated reference report form 8k filed december 16 2004 18 incorporated reference quarterly report form 10q quarter ended january 31 2005 19 incorporated reference report form 8k filed march 14 2005 20 incorporated reference quarterly report form 10q quarter ended september 30 2006 21 incorporated reference report form 8k filed july 23 2007 confidential treatment granted portions document item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2007 december 31 2006 results operations cash flows years ended december 31 2007 december 31 2006 five month period ended december 31 2005 year ended july 31 2005 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements annual report internal control financial reporting appearing item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts uncertain tax positions 2007 manner accounts sharebased compensation 2005 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp hartford connecticut february 28 2008 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive loss amounts thousands alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive losscontinued amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc “alexion” “we” “our” “us” “company” biopharmaceutical company engaged discovery development delivery biologic therapeutic products aimed treating patients severe lifethreatening disease states including hematologic neurologic diseases cancer autoimmune disorders inception january 1992 early 2007 devoted substantially resources drug discovery research product clinical development march 2007 us food drug administration fda granted approval lead product soliris® eculizumab treatment rare lifethreatening blood disorder known paroxysmal nocturnal hemoglobinuria pnh june 2007 european commission ec also approved soliris treatment pnh december 31 2007 product sales solely attributable sales soliris generated three sources commercial sales united states beginning second quarter 2007 preapproval “namedpatient” sales certain european countries beginning first quarter 2007 commercial sales certain european countries beginning fourth quarter 2007 incurred operating losses since inception december 31 2007 accumulated deficit 729279 expect incur operating losses negative cash flow additional future periods due costs associated commercialization soliris united states europe precommercialization activities anticipated commercialization activities territories development manufacturing plant rhode island including engineering validation runs product research development preclinical studies clinical testing regulatory activities commercialscale manufacturing third party contractor manufacturing plant site approved manufacture soliris infrastructure support costs generate sufficient levels cash operations expect continue finance future cash needs primarily use available cash equivalents shortterm investments extent necessary proceeds equity debt financings loans collaborative agreements basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion pharmaceuticals inc whollyowned subsidiaries intercompany balances transactions eliminated consolidation dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts use estimates accounting principles generally accepted united states america required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income stockholders’ equity foreign currency transaction gains losses included results operations income expense segment reporting sfas 131 “disclosure segments enterprise related information” establishes annual interim reporting standards enterprises operating segments related disclosures products services geographic areas major customers operate single segment discovery development commercialization biopharmaceutical products see note 14 geographic information cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less restricted cash terms mortgage loan see note 7 maintain restricted cash balance equal amount required mortgage loan agreement december 31 2007 2006 958 33594 respectively cash restricted purpose fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable current assets accounts payable accrued expenses approximate fair value due shortterm maturities marketable securities availableforsale carried fair value based quoted market prices convertible notes mortgage loan carried historical cost see note 7 fair value disclosures alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments limit amount investment exposure institution maturity investment type classify marketable securities “availableforsale” accordingly record securities fair value unrealized gains losses deemed temporary included accumulated comprehensive loss separate component stockholders equity adjustment fair value reflects decline value security consider available evidence evaluate extent decline “other temporary” mark security market charge statement operations accounts receivable make judgements ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful record allowances reduce accounts receivable amounts expected collected year ended december 31 2007 three individual customers accounted 39 26 12 accounts receivable balance year ended december 31 2007 three individual customers accounted 40 25 11 net product sales inventories stated lower cost estimated realizable value determine cost inventory using average cost method components inventories december 31 follows capitalization inventory costs capitalize inventory produced commercial sale including capitalization inventory costs prior regulatory approval subsequent filing biologics license application bla company determined inventory probable future economic benefit inventory capitalized alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts prior completion phase iii clinical trial cost product sold year ended december 31 2007 expensed rd prior submission bla therefore included cost sales period previously expensed inventory fully depleted fourth quarter 2007 inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 42 months based sales forecasts expect carrying value soliris inventory prepaid manufacturing costs fully realized date workinprocess finished goods inventory purchased third party contract arrangement lonza sales ag continue sell inventory purchased arrangement manufacturing facility smithfield rhode island obtains regulatory approval time expect inventory purchases contract arrangement lonza significantly reduced prepaid manufacturing costs cash advances paid us secure future manufacturing production thirdparty contract manufacturers well advances paid prior receipt inventory recorded prepaid manufacturing costs recognized period manufacturing production unitofproduction method cash advances subject forfeiture terminate scheduled production expect carrying value prepaid manufacturing costs fully realized property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • laboratory equipmentfive seven years • furniture office equipmentthree five years leasehold improvements assets capital lease arrangements amortized lesser estimated useful life term respective lease maintenance costs expensed incurred alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service products expect commercialize capitalize constructioninprogress certain incremental costs associated validation effort required licensing manufacturing equipment government regulators production commercially approved drug date costs primarily include direct labor materials overhead related smithfield rhode island manufacturing facility incurred preparing equipment intended use begin depreciating property plant equipment related facility assets substantially complete ready intended use longlived assets evaluate longlived assets primarily comprised property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated assets group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets company recognize impairment loss longlived assets year ended december 31 2007 see note 6 information related exit activities year ended december 31 2006 goodwill represents difference purchase price acquired businesses fair value identifiable tangible intangible net assets amortized goodwill reviewed impairment annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charges occurred result annual impairment assessments revenue recognition principal sources revenue product sales contract research revenues research development support payments applied following principles recognizing revenue net product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations amounts collected customers remitted governmental authorities primarily comprised valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers cases also sell soliris government agencies soliris generally shipped directly third party warehouse patients’ healthcare provider typically direct customer revenue recorded upon receipt product patients’ healthcare provider typically hospital physician’s office december 31 2007 recorded revenue sales individual patients namedpatient programs certain european countries relevant authorities countries agreed reimburse product sold namedpatient basis soliris received formal approval commercial sales europe entered transitional agreements distributor distribute soliris namedpatient basis specified european countries continue engage appropriate authorities operational reimbursement price approval funding processes separately required european country complete processes certain countries germany earlier stages countries united kingdom european countries soliris currently commercially available commercially available future customers expected primarily hospitals hospital buying groups pharmacies health care providers exception united kingdom primary product sales distributor sales within europe recorded upon receipt product healthcare provider date actual refunds returns negligible pricing soliris limited number patients short period sale product patient infusion lack return rights soliris customers generally carry limited inventory monitor inventory within distribution channel determine whether reserves required based inventory sales channel record estimated rebates payable governmental programs including medicaid programs europe reduction revenue time product sales recorded calculations related rebate accruals require estimates including estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments generally length time product sale processing reporting rebates three nine months upon reconciliation government reporting sales records revise estimates rebates payable resulting adjustment revenue also record distribution fees paid customers reduction revenue costs typically known time sale resulting minimal adjustments subsequent period sale alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts contract research revenue record contract research revenues research development support payments license fees milestone payments collaborations third parties amounts received various government grants evaluate deliverables collaborative agreements determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value undelivered item upfront nonrefundable license fees received connection collaboration agreements deferred amortized revenue life agreement period performance obligations revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts effective march 30 2007 procter gamble pharmaceuticals pg agreed terminate 1999 collaboration agreement development commercialization pexelizumab see note 2 agreement terminated obligations remain remaining portion 10000 nonrefundable upfront license fee 5343 recognized revenue three months ended march 31 2007 royalties cost sales year ended december 31 2007 consists actual estimated royalties third parties related sale commercial manufacture soliris estimate royalties potentially owed third parties based contractual arrangements certain parties well assessment possible royalty amounts owed third parties estimates may influenced changes status current litigation see note 9 results uncertain periodic basis based events outcome litigation may reassess estimates resulting adjustments cost sales research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced vendors perform services march 30 2007 research agreement shared costs collaborator pg recorded costs research development expenses incurred portion costs reimbursed collaborator recorded reduction research development expense stockbased compensation one stockbased compensation plan known 2004 incentive plan restricted stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date stockbased compensation issued plan consists incentive nonqualified stock options restricted stock options granted employees exercise prices equal fair market value stock dates grant generally stock options restricted stock granted employees fully vest four years grant date stock options contractual term 10 years recognize stockbased compensation expense based fair value stock awards straightline basis requisite service period individual grants typically equals vesting period adopted statement financial accounting standards 123 revised 2004 “sharebased payment” sfas 123r effective august 1 2005 sfas 123r requires compensation costs relating stockbased payment transactions recognized financial statements using fairvalue measurement method prior august 1 2005 accounted 2004 incentive plan preceding plans intrinsic value method described accounting principles board opinion 25 “accounting stock issued employees” apb 25 related interpretations permitted financial accounting standards 123 “accounting stockbased compensation” sfas 123 applying intrinsic value method generally record stockbased compensation cost exercise price stock options equalled market price underlying stock date grant earnings loss per share eps basic eps computed dividing net loss weighted average number shares common stock outstanding purposes calculating diluted eps net loss adjusted aftertax amount interest deferred financing costs associated convertible debt denominator reflects potential dilution using treasury stock method could occur options contracts issue common stock exercised converted common stock due net loss convertible debt unvested restricted stock options granted stock option plan yet exercised antidilutive therefore considered diluted eps calculations alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts potentially dilutive securities include difference basic diluted net loss per common share effect potential common share equivalents antidilutive periods presented income taxes provision income taxes includes federal state local foreign taxes income taxes accounted liability method deferred tax assets liabilities recognized estimated future tax consequences temporary differences financial statement carrying amounts respective tax basis statutory tax rates effect differences expected recovered settled valuation allowance net deferred tax assets recorded extent cannot determine ultimate realization net deferred tax assets likely ordinary course business inherent uncertainty quantifying income tax positions assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting dates tax positions morelikelythannot tax benefit sustained recorded largest amount tax benefit greater 50 likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions morelikelythannot tax benefit sustained tax benefit recognized financial statements applicable associated interest penalties also recognized adopted provisions financial accounting standards board fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 result adoption recognized benefit 591 january 1 2007 accumulated deficit balance comprehensive income loss sfas 130 “reporting comprehensive income” requires us display comprehensive income loss components part financial statements comprehensive income loss comprised net income alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts loss comprehensive income loss comprehensive income loss includes changes equity excluded net income loss translation adjustments unrealized holding gains losses availableforsale marketable securities changes equity reflected net tax appropriate recently issued accounting standards december 2007 statement financial accounting standards 141r business combinations sfas 141r issued standard require acquiring company measure assets acquired liabilities assumed including contingent considerations contractual contingencies fair value acquisition date addition acquiring company required capitalize inprocess research development either amortize life product writeoff costs project abandoned impaired standard effective transactions occurring january 1 2009 february 2007 statement financial accounting standards 159 fair value option financial assets financial liabilities including amendment fasb statement 115 sfas 159 issued standard permits us choose measure many financial instruments certain items fair value also establishes presentation disclosure requirements standard effective january 1 2008 company september 2006 statement financial accounting standards 157 fair value measurement sfas 157 issued standard defines fair value establishes framework measuring fair value generally accepted accounting principles gaap expands disclosure fair value measurements standard effective january 1 2008 company expect standards material impact financial statements 2 collaboration license agreements procter gamble pharmaceuticals collaboration january 1999 procter gamble pharmaceuticals pg entered exclusive collaboration develop commercialize pexelizumab granted pg exclusive license intellectual property related pexelizumab right sublicense december 2001 pg entered agreement pursuant january 1999 collaboration revised pg agreed share concurrently 50 ongoing us preproduction development manufacturing costs pexelizumab well acute myocardial infarction coronary artery bypass graft phase iii clinical trial costs recognizing nonrefundable upfront license fee 10000 related pg collaboration revenue 17 years beginning 1999 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts 2006 completed final phase iii trial pexelizumab reviewing results trial along pg determined pursue development pexelizumab effective march 30 2007 pg mutually agreed terminate collaboration agreement relevant agreement terminated march 2007 remaining portion 10000 nonrefundable upfront license fee 5343 recognized revenue year ended december 31 2007 included contract research revenues license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrolment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris see note 9 order maintain rights agreements may required provide minimum level funding support may elect terminate arrangements accordingly recognize expense related obligation related arrangements period performance minimum fixed payments assuming nontermination agreements december 31 2007 next five years follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts 3 marketable securities following table summarizes marketable securities realized gains approximately 101 recorded year ended july 31 2005 realized gains recorded year ended december 31 2007 2006 five month period ended december 31 2005 realized losses recorded year ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 respectively utilize specific identification method computing realized gains losses december 31 2007 marketable securities maximum maturity approximately nine months average approximately two months weighted average interest rate associated marketable debt securities 47 percent 53 percent 44 percent 37 percent december 31 2007 2006 2005 july 31 2005 respectively december 31 2007 marketable securities maturity less one year periodically review impairment investment securities unrealized losses twelve months determine unrealized losses temporary intend hold related investment securities maturity ability result consider unrealized losses temporary recorded loss consolidated statements operations alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts following tables show gross unrealized losses fair value investments unrealized losses deemed otherthantemporarily impaired aggregated investment category length time individual securities continuous unrealized loss position december 31 2007 december 31 2006 investments categories shown table unrealized losses caused primarily increases market interest rates 4 assets prepaid expenses current assets consist following alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts noncurrent assets consist following july 2007 amended existing license agreement university iowa research foundation uirf buy royalty payable uirf respect sales soliris treatment pnh terms amended license agreement agreed pay uirf 1000 exchange elimination royalty payable net sales soliris treatment pnh payment made july 2007 recorded prepaid royalty amount amortized cost sales estimated useful life payment affect product marketed alexion license net sales product covered uirf license agreement shall subject royalties 5 property plant equipment summary property plant equipment follows depreciation amortization property plant equipment approximately 4243 3028 1359 2996 year ended december 31 2007 2006 five month period ended december 31 2005 years ended july 31 2005 respectively july 2006 acquired manufacturing plant smithfield rhode island future commercial production soliris manufacturing development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related activities including engineering runs necessary obtain approval facility government regulators alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts december 31 2007 capitalized 91231 related facility includes costs associated construction renovation upgrades labor materials overhead engineering runs capitalized interest december 31 2007 nonconstruction validation costs incurred seeking regulatory approval including engineering runs 21999 capitalized interest 4328 see note 7 description terms related mortgage payable 6 accrued expenses accrued expenses consist following exit activities december 2006 initiated integration plan subsidiary alexion antibody technologies inc consolidate certain functions operations including termination alexion antibody personnel closure alexion antibody facilities impairment equipment facility costs recognized liabilities included selling general administrative expenses year ended december 31 2006 following table summarizes liabilities established exit activities december 31 2006 subsequent cash payments revision estimates made year ended december 31 2007 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts employee benefits consist expenses severance compensation well accelerated vesting sharebased grants facility lease costs associated lease san diego california facility described note 6 exit activities consist impairment charges equipment company remains obligated lease payments 2012 september 2007 company signed sublease aat facility provides sublease payments term lease 2012 accrual restructuring activities reflects present value lease obligations reduced estimated sublease income december 31 2007 remaining costs associated employee related benefits exit activities paid settled 7 debt convertible notes january 2005 sold 150000 principal amount 1375 convertible senior notes due february 1 2012 “1375 notes” private placement qualified institutional buyers pursuant rule 144a securities act 1933 amended interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 317914 shares common stock equivalent conversion price approximately 3146 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity convertible notes payable require compliance covenants related financial performance net proceeds approximately 145200 offering used redeem entire outstanding 120000 principal amount 575 convertible subordinated notes due march 2007 “575 notes” general corporate purposes march 15 2005 redeemed 575 notes outstanding redemption price 101643 1 principal amount 575 notes paid redemption premium related notes approximately 2000 year ended july 31 2005 difference amount paid including redemption premium carrying value notes including remaining deferred financing costs recognized 3185 loss early extinguishment convertible notes capitalized deferred financing costs related offering approximately 4800 amortized component interest expense sevenyear term notes amortization expense associated deferred financing costs year ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 approximately 677 0 282 686 respectively december 31 2007 market value 150000 1375 convertible notes due february 1 2012 based quoted market prices estimated 375000 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts convertible senior notes require certain designated events could occur liquidation change control consideration least 90 common stock listed us national exchange market holder elects convert 1375 notes upon occurrence designated event holder entitled receive additional number shares common stock conversion date additional shares intended compensate holders loss time value conversion option set according table within offering document capped event shares issuable upon conversion note exceed 429100 per 1 principal amount mortgage loan july 2006 entered mortgage loan agreement borrow 26000 finance purchase construction smithfield rhode island manufacturing facility july 2007 amended existing mortgage loan agreement istar financial inc increase loan amount 18000 resulting aggregate principal balance 44000 effective date amendment mortgage loan bears interest fixed annual rate 912 obligations loan agreement guaranteed alexion pharmaceuticals inc loan principal required repaid equal monthly installments 489 starting march 2010 august 2017 time outstanding balances due loan may prepaid whole part prior july 2009 date loan prepaid whole part must include prepayment premium described loan agreement loan collateralized assets smithfield ri facility proceeds loans used primarily finance construction manufacturing facility mortgage loan require compliance covenants related financial performance condition loan required maintain restricted cash accounts must used specifically purchase construction manufacturing facility maintain required operating escrow balances lender first priority security interest right approve disbursements accounts holding restricted cash agreement required maintain balance restricted cash accounts maintain required operating escrow balances fair value mortgage loan approximates carrying amount december 31 2007 interest rate loan represents approximate rates available company loans similar terms 8 leases capital leases lease office equipment capital lease agreements expiring 2010 assets liabilities capital lease recorded lower present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives amortization assets capital lease included depreciation expense december 31 2007 cost equipment capital lease 940 accumulated amortization 234 weightedaverage interest rate capital leases approximately 95 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts minimum future lease payments capital lease december 31 2007 operating leases december 31 2007 lease headquarters primary research development facilities cheshire connecticut lease commenced august 2000 extended august 2006 revised june 2007 lease set expire may 2017 monthly fixed rent started approximately 162 increasing approximately 193 term lease january 2003 entered lease agreement pilot manufacturing plant associated labs offices new connecticut lease expired october 2007 pilot manufacturing operations transferred manufacturing facility located smithfield rhode island lease additional research space san diego california starting monthly fixed rent approximately 35 increasing approximately 55 connection closure alexion antibody technologies “aat” 2006 accrued fair value future payments lease see note 6 september 2007 company signed sublease aat facility provides sublease payments term lease 2012 rent office space various european cities monthly rent approximately 121 certain renewable monthly rental agreements begin expire december 2008 many agreements builtin renewal features aggregate lease expense facilities 4021 2592 1094 2296 years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 respectively lease expense recorded straightline basis applicable lease terms alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2007 9 commitments contingencies legal proceedings march 16 2007 pdl biopharma inc pdl filed civil action alexion us district court district delaware pdl claims willful infringement alexion pdl patents due sales soliris pdl seeks unspecified damages less reasonable royalty plus attorney’s fees alexion denied pdls claims addition filed counterclaims seeking declarations noninfringement invalidity certain us patents held pdl alexion believes good valid defenses pdls claims intends vigorously defend case pursue counterclaims february 4 2008 sb2 inc filed civil action alexion united states district court northern district california sb2 inc claims willfull infringement alexion sb2 inc patents due sales soliris sb2 inc seeks unspecified monetary damages equitable relief attorneys fees alexion believes good valid defenses sb2s claims intends vigorously defend case pursue counterclaims results civil actions cannot predicted certainty due early stages however depending outcome legal matters operating results company could materially impacted adjustments cost sales see notes 2 6 15 additional information related royalties product supply largescale product supply agreement dated december 18 2002 lonza agreement lonza sales ag lonza us relating manufacture soliris amended june 2007 amended supply agreement provide additional purchase commitments soliris 30000 35000 2013 commitments may cancelled limited circumstances alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts 10 income taxes currently record full valuation allowance deferred tax assets determined morelikelythannot benefit assets realized accordingly record tax benefit related significant net operating losses deferred tax assets record benefit certain research development tax credits subject cash exchange state connecticut addition record current tax expense related certain state income taxes december 31 2007 available federal tax reporting purposes net operating loss carry forwards approximately 732653 expire 2008 2027 also federal state research development credit carry forwards approximately 25088 expire 2008 2027 exercise nonqualified stock options gives rise compensation included taxable income applicable employees deducted us federal state income tax purposes result exercise nonqualified stock options net operating loss carry forwards approximately 99972 attributable excess tax benefits stock compensation deductions used offset future taxable income realized related tax benefits net operating losses carry forwards credited directly paidin capital tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carry forwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered however limitation expected result loss federal net operating loss research development credit result implementation fin 48 recognized benefit 591 january 1 2007 accumulated deficit balance addition also decreased fully reserved deferred tax assets 6671 consequence implementing fin 48 total amount unrecognized tax benefits january 1 2007 including cumulative effect adoption fin 48 6671 record changes unrecognized tax benefits 2007 none amount recognized would affect effective tax rate due full valuation allowance deferred tax assets believe adequately provided tax positions amounts asserted tax authorities could differ estimate aware events could occur within next 12 months could cause significant change unrecognized tax benefits state connecticut provides companies ability exchange certain research development tax credit carry forwards cash exchange foregoing carry forward research development credits program provides exchange research development credits rate 65 percent annual incremental nonincremental research development credits defined year ended december 31 2007 plan file claims exchange research tax development credits therefore recognized state tax benefit 686 state tax benefit excludes estimated capitalbased taxes recorded operating expense alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts components deferred income tax assets follows reconciliation statutory federal income tax rate effective income tax rate follows 11 stock options restricted stock options december 31 2007 one stock option plan 2004 incentive plan “2004 plan” 2004 plan common stock well incentive nonqualified stock options may granted maximum 5068519 shares directors officers key employees consultants amount shares authorized granting includes 2500000 initially authorized plan 593519 shares transferred 2000 plan additional 1975000 shares authorized shareholders 2006 2007 stock options granted plans maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts selected modified prospective method prescribed sfas 123r therefore prior periods restated modified prospective application sfas 123r applied new grant awards august 1 2005 unvested portion previously granted awards remain outstanding august 1 2005 addition unrecognized expense awards yet vested date adoption determined original provisions sfas 123 shall recognized periods date adoption years ended december 31 2007 2006 five month period ended december 31 2005 recognized total stock compensation expense 16438 17601 4054 stock options 3736 3014 260 restricted stock respectively year ended december 31 2007 capitalized 1526 325 towards rhode island manufacturing facility inventory respectively deductions resulting exercise stock options used reduce current taxes payable therefore windfall tax benefit recognized period balance deferred stockbased compensation july 31 2005 related restricted stock grants noted approximately 1938 upon adoption sfas 123r eliminated deferred stockbased compensation account 1938 corresponding adjustments additional paidincapital weighted average fair value date grant options granted years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 2294 1987 1721 1427 per option respectively options exercisable december 31 2007 aggregate intrinsic value 94947 weighted average remaining contractual life 525 years aggregate intrinsic value options exercised year ended december 31 2007 68942 fair market value options vested year ended december 31 2007 41083 december 31 2007 37014 total unrecognized compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 134 years alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts summary status stock option plans december 31 2007 2006 changes years ended presented table narrative following table presents weighted average price life information significant option groups outstanding december 31 2007 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts fair value options date grant estimated using blackscholes model following weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding year ended december 31 2006 2005 five month period ended december 31 2005 year ended july 31 2005 average expected life determined using simplified approach permitted staff accounting bulletin 107 sab 107 year ended december 31 2007 estimated expected life stock options based historical experience exercises cancellations forfeitures stock options restricted stock summary status nonvested restricted stock changes periods ended restricted stock generally vests four years grant date issued certain key employees compensation expense related restricted stock year ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 approximately 4051 3014 260 238 respectively alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts 12 common preferred stock common stock november 2006 sold 3450000 shares common stock public offering 4300 per share resulting gross proceeds sale 148350 incurred underwriting fees commissions 8121 well costs resulting net proceeds 140229 year ended december 31 2006 increased holdings common stock treasury 6919 shares lieu withholding taxes exercise restricted stock shares exchanged fair market value 279 total five month period ended december 31 2005 increased holdings common stock treasury 13713 stockbased exercise employee options shares exchanged fair market value 381 total august 2005 sold 2500000 shares common stock public offering 2675 per share resulting gross proceeds sale 66875 incurred underwriting fees commissions 2145 well costs resulting net proceeds 64530 preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 see subject adjustment rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2007 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock september 18 2000 board directors amended purchase price preferred stock purchase rights purchase price one onehundredth share preferred stock issued upon exercise preferred stock purchase right increased 7500 72500 except increase purchase price terms conditions rights remain unchanged alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts event acquired merger business combination transaction 50 percent assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 13 401k plan qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions rate 100 dollar contributed first 3 percent 050 dollar contributed next 2 percent compensation years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 made matching contributions approximately 1535 406 202 390 respectively 14 segment information accordance sfas 131 “disclosures segments enterprise related information” present segment information manner consistent method use report information management determined operate single segment revenues tangible longlived assets significant geographic region follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts 15 subsequent events february 2008 agreed purchase certain patents related complementinhibition technology oklahoma medical research foundation omrf pay 10000 omrf rights patents 7500 remitted 2008 remaining 2500 first half 2009 amounts including royalties owed omrf respect sales soliris use omrf patents accordingly previously announced claims filed omrf counterclaims filed alexion us district court northern district oklahoma dismissed february sb2 inc filed civil action alexion see note 9 information regarding litigation sb2 inc february 2008 entered credit agreement bank america na agreement provides available 25000 revolving credit facility used working capital requirements general corporate purposes loan collateralized substantially assets including pledge equity interests certain direct subsidiaries excluding intellectual property assets foreign subsidiaries assets related manufacturing facility smithfield rhode island borrowing base limited 80 eligible domestic receivables defined revolving credit facility requires comply quarterly financial covenants related liquidity profitability ratios well revenue may elect loans agreement bear interest rate per annum equal libor plus 175 225 depending liquidity defined ii base rate equal higher prime rate effect b federal funds rate effect plus 050 plus 0 025 depending liquidity defined interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 28 2011 maturity date alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2007 2006 five month period ended december 31 2005 year ended july 31 2005 amounts thousands except share per share amounts 16 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2007 2006item 15 exhibits financial statement schedules 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 1 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 2 incorporated reference quarterly report form 10q quarter ended january 31 2004 3 incorporated reference registration statement form s1 reg 33300202 4 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 5 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 6 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 7 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 8 incorporated reference annual report form 10k year ended december 31 2006 filed february 23 2007 9 incorporated reference report form 8k filed january 25 2005 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference report form 8k filed november 14 2005 12 incorporated reference annual report form 10k fiscal year ended december 31 2007 13 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 14 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 15 incorporated reference quarterly report form 10q quarter ended january 31 2003 16 incorporated reference annual report form 10k fiscal year ended july 31 1996 17 incorporated reference quarterly report form 10q quarter ended january 31 2002 18 incorporated reference report form 8k filed december 16 2004 19 incorporated reference quarterly report form 10q quarter ended january 31 2005 20 incorporated reference report form 8k filed march 14 2005 21 incorporated reference quarterly report form 10q quarter ended september 30 2006 22 incorporated reference report form 8k filed july 23 2007 23 incorporated reference report form 8k filed february 14 2008 24 incorporated reference quarterly report form 10q quarter ended march 31 2008 confidential treatment granted portions exhibit certain portions exhibit omitted pursuant request order granting confidential treatment securities exchange commission omitted nonpublic information filed securities exchange commission item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2008 2007 2006 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2008 december 31 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts uncertain tax positions 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hartford connecticut february 23 2009 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive loss amounts thousands alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive losscontinued amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2008 2007 2006 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc “alexion” “company” biopharmaceutical company engaged discovery development delivery biologic therapeutic products aimed treating patients severe lifethreatening disease states including hematologic neurologic diseases transplant rejection cancer autoimmune disorders marketed product soliris® eculizumab first therapy approved treatment patients paroxysmal nocturnal hemoglobinuria pnh incorporated 1992 began commercial sale soliris united states europe 2007 stock split july 2008 company’s board directors approved twoforone stock split effected form 100 percent stock dividend additional shares distributed august 22 2008 stockholders record close trading august 12 2008 share per share data presented accompanying consolidated financial statements throughout notes retroactively restated reflect stock split basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion pharmaceuticals inc whollyowned subsidiaries intercompany balances transactions eliminated consolidation dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future use estimates accounting principles generally accepted united states america required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income stockholders’ equity foreign currency transaction gains losses included results operations income expense segment reporting sfas 131 “disclosure segments enterprise related information” establishes annual interim reporting standards enterprise’s operating segments related disclosures products services geographic areas major customers operate single segment discovery development commercialization biopharmaceutical products see note 17 geographic information cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less restricted cash terms mortgage loan note 9 maintain restricted cash balance payment taxes insurance required amounts equal amount required mortgage loan agreement december 31 2008 2007 restricted cash balance mortgage loan 619 958 respectively december 31 2008 also recorded 1100 restricted cash related facility operating lease fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable current assets accounts payable accrued expenses approximate fair value due shortterm maturities marketable securities availableforsale carried fair value based quoted market prices convertible notes debt obligations carried historical cost see notes 9 15 fair value information marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments limit amount investment exposure institution maturity investment type classify marketable securities “availableforsale” accordingly record securities fair value unrealized gains losses deemed temporary included accumulated comprehensive loss separate component stockholders’ equity adjustment fair value reflects alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts decline value security consider available evidence evaluate extent decline “other temporary” mark security market charge statement operations accounts receivable standard credit terms vary based country sale range 30 90 days’ sales outstanding ranges 80 100 days sell soliris limited number customers evaluate creditworthiness customer regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy experience length time sale receipt payment countries typically exceeds credit terms make judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful year ended december 31 2008 two individual customers accounted 20 accounts receivable balance year ended december 31 2007 three individual customers accounted 39 26 12 accounts receivable balance year ended december 31 2008 single individual customer accounted 21 net product sales year ended december 31 2007 three individual customers accounted 40 25 11 net product sales customer accounted 10 net product sales inventories stated lower cost estimated realizable value determine cost inventory using average cost method components inventories december 31 follows capitalization inventory costs capitalize inventory produced commercial sale including capitalization inventory products initial clinical development costs prior regulatory approval subsequent filing biologics license application bla company determined inventory probable alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts future economic benefit inventory capitalized prior completion phase iii clinical trial also capitalize cost inventory manufactured manufacturing plant property plant equipment prior validation facility fda receive approval fda cost inventory reclassified property plant equipment inventory cost product sold year ended december 31 2007 expensed rd prior submission bla therefore included cost sales period previously expensed inventory fully depleted fourth quarter 2007 inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect carrying value soliris inventory prepaid manufacturing costs fully realized date workinprocess finished goods inventory purchased third party contract arrangement lonza sales ag continue sell inventory purchased arrangement manufacturing facility smithfield rhode island obtains regulatory approval time expect inventory purchases contract arrangement lonza may reduced derivative instruments follow provisions sfas 133 accounting derivative instruments hedging activities related interpretations sfas 133 sfas 133 establishes accounting reporting standards derivative instruments hedging activities requires company recognize either assets liabilities balance sheet measure fair value accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash flows within meaning sfas 133 qualifying hedge effectiveness qualifying hedge contract assessed quarterly ensure compliance sfas 133 record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts prepaid manufacturing costs cash advances paid us secure future manufacturing production thirdparty contract manufacturers well advances paid prior receipt inventory recorded prepaid manufacturing costs recognized period manufacturing production unitofproduction method cash advances subject forfeiture terminate scheduled production expect carrying value prepaid manufacturing costs fully realized property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfive thirty two years • laboratory equipmentfive fifteen years • furniture office equipmentthree five years leasehold improvements assets capital lease arrangements amortized lesser estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service products expect commercialize capitalize constructioninprogress certain incremental costs associated validation effort required licensing manufacturing equipment government regulators production commercially approved drug date costs primarily include direct labor materials overhead prevalidation inventory related smithfield rhode island manufacturing facility incurred preparing equipment intended use begin depreciating property plant equipment related facility assets substantially complete ready intended use occur upon regulatory approval plant production commercial quantities eculizumab longlived assets evaluate longlived assets primarily comprised intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated assets group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets company recognize impairment loss longlived assets years ended december 31 2008 2007 see note 8 information related exit activities year ended december 31 2006 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts goodwill represents difference purchase price acquired businesses fair value identifiable tangible intangible net assets amortized goodwill reviewed impairment annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charges occurred result annual impairment assessments revenue recognition principal sources revenue product sales contract research revenues research development support payments applied following principles recognizing revenue net product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product patients’ healthcare provider typically hospital physician’s office pharmacy health care facility amounts collected customers remitted governmental authorities primarily comprised valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers cases also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors december 31 2008 recorded revenue sales individual patients namedpatient programs certain european countries relevant authorities countries agreed reimburse product sold namedpatient basis soliris received formal approval commercial sales pricing soliris limited number patients short period sale product patient infusion lack contractual return rights soliris customers generally carry limited inventory monitor inventory within distribution channel determine whether deferral sales required based inventory sales channel date actual refunds returns negligible record estimated rebates payable governmental programs including medicaid programs europe reduction revenue time product sales recorded calculations related rebate accruals require estimates including estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts necessary adjustments generally length time product sale processing reporting rebates three nine months upon reconciliation government reporting sales records revise estimates rebates payable may impact revenue period adjustment made also record distribution fees paid customers reduction revenue costs typically known time sale resulting minimal adjustments subsequent period sale also record effective portion cash flow hedges revenue period derivative contract settled contract research revenue record contract research revenues research development support payments license fees milestone payments collaborations third parties amounts received various government grants evaluate deliverables collaborative agreements determine whether represent separate units accounting deliverables qualify separate accounting treatment standalone value customer objective evidence fair value undelivered item upfront nonrefundable license fees received connection collaboration agreements deferred amortized revenue life agreement period performance obligations revenues derived achievement milestones recognized milestone achieved provided milestone substantive culmination earnings process occurred revenues derived achievement milestones recognition related work performed terms contract may cause operating results vary considerably period research development support revenues recognized related work performed expenses incurred terms contracts development activities deferred revenue results cash received amounts receivable advance revenue recognition research development contracts effective march 30 2007 procter gamble pharmaceuticals pg agreed terminate 1999 collaboration agreement development commercialization pexelizumab agreement terminated obligations remain remaining portion 10000 nonrefundable upfront license fee 5343 recognized revenue 2007 royalties cost sales year ended december 31 2008 2007 includes royalties third parties related sale commercial manufacture soliris estimate royalty obligations based existing alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts contractual obligations assessment estimated royalties owed third parties estimates may influenced outcome litigation claims results uncertain see note 11 periodic basis based specific events outcome litigation may reassess estimates resulting adjustments cost sales research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced vendors perform services march 30 2007 research agreement shared costs collaborator pg recorded costs research development expenses incurred portion costs reimbursed collaborator recorded reduction research development expense stockbased compensation one stockbased compensation plan known 2004 incentive plan restricted stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date stockbased compensation issued plan consists incentive nonqualified stock options restricted stock options granted employees exercise prices equal fair market value stock dates grant generally stock options restricted stock granted employees fully vest four years grant date stock options contractual term 10 years recognize stockbased compensation expense based fair value stock awards straightline basis requisite service period individual grants typically equals vesting period net income loss per common share basic earnings per share eps computed dividing net income loss weightedaverage number shares common stock outstanding purposes calculating diluted eps net income loss adjusted aftertax amount interest deferred financing costs associated convertible debt denominator reflects potential dilution using treasury stock method could occur options convertible debt contracts issue common stock exercised converted common stock alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts following table summarizes calculation basic diluted eps years ended december 31 2008 2007 2006 following table represents potentially dilutive shares excluded calculation eps years ended december 31 2008 2007 2006 effect antidilutive income taxes provision income taxes includes federal state local foreign taxes income taxes accounted using asset liability method accordance sfas 109 accounting income taxes fas 109 deferred tax assets liabilities recognized estimated future tax consequences temporary differences financial statement carrying amounts respective tax basis statutory tax rates effect differences expected recovered settled valuation allowance alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts net deferred tax assets recorded extent cannot determine ultimate realization net deferred tax assets likely ordinary course business inherent uncertainty quantifying income tax positions assess income tax positions record tax benefits years subject examination based upon management’s evaluation facts circumstances information available reporting dates tax positions morelikelythannot tax benefit sustained recorded largest amount tax benefit greater 50 likelihood realized upon ultimate settlement taxing authority full knowledge relevant information income tax positions morelikelythannot tax benefit sustained tax benefit recognized financial statements applicable associated interest penalties also recognized adopted provisions financial accounting standards board fasb interpretation 48 “accounting uncertainty income taxes” fin 48 january 1 2007 result adoption recognized benefit 592 january 1 2007 accumulated deficit balance comprehensive income loss sfas 130 “reporting comprehensive income” requires us display comprehensive income loss components part financial statements comprehensive income loss comprised net income loss comprehensive income loss comprehensive income loss includes changes equity excluded net income loss translation adjustments unrealized holding gains losses availableforsale marketable securities unrealized hedging gains losses changes equity reflected net tax appropriate recently issued accounting standards march 2008 fasb issued sfas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” sfas 161 statement intended improve transparency financial reporting requiring enhanced disclosures entity’s derivative instruments hedging activities effects entity’s financial position financial performance cash flows sfas 161 applies derivative instruments within scope sfas 133 “accounting derivative instruments hedging activities” sfas 133 well related hedged items bifurcated derivatives nonderivative instruments designated qualify hedging instruments entities instruments subject sfas 161 must provide robust qualitative disclosures expanded quantitative disclosures sfas 161 effective prospectively financial statements issued fiscal years interim periods beginning november 15 2008 early application permitted currently evaluating disclosure implications statement expect include expanded disclosures derivative instruments result adoption sfas 161 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts april 2008 fasb issued fsp fas 1423 “determination useful life intangible assets” fsp amends factors considered developing renewal extension assumptions used determine useful life recognized intangible asset sfas 142 “goodwill intangible assets” sfas 142 objective fsp improve consistency useful life recognized intangible asset sfas 142 period expected cash flows used measure fair value asset sfas 141r us generally accepted accounting principles gaap fsp applies intangible assets whether acquired business combination otherwise shall effective financial statements issued fiscal years beginning december 15 2008 interim periods within fiscal years applied prospectively intangible assets acquired effective date early adoption prohibited evaluated new statement determined significant impact determination reporting financial results reclassifications adjustments certain prior year amounts reclassified conform current presentation 2 collaboration license agreements procter gamble pharmaceuticals collaboration january 1999 procter gamble pharmaceuticals pg entered exclusive collaboration develop commercialize pexelizumab 2006 completed final phase iii trial pexelizumab reviewing results trial along pg determined pursue development pexelizumab effective march 30 2007 pg mutually agreed terminate collaboration agreement relevant agreement terminated march 2007 remaining portion 10000 nonrefundable upfront license fee 5343 recognized revenue year ended december 31 2007 included contract research revenues license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business license agreements generally provide initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrolment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris note 11 order maintain rights agreements may required provide minimum level funding support may elect terminate arrangements accordingly recognize expense related obligation related arrangements period performance minimum fixed payments assuming nontermination agreements december 31 2008 next five years follows table include amounts owed omrf pdl biopharma license patents rights note 6 3 marketable securities following table summarizes marketable securities december 31 2007 marketable securities december 31 2008 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts realized gains losses recorded year ended december 31 2008 2007 utilize specific identification method computing realized gains losses periodically review impairment investment securities unrealized losses twelve months determine unrealized losses temporary intend hold related investment securities maturity ability result consider unrealized losses temporary recorded loss consolidated statements operations 4 assets prepaid expenses current assets consist following noncurrent assets consist following alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts 5 property plant equipment summary property plant equipment follows depreciation amortization property plant equipment approximately 5688 4243 3028 year ended december 31 2008 2007 2006 respectively july 2006 acquired manufacturing plant smithfield rhode island future commercial production soliris manufacturing development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related activities including engineering runs necessary obtain approval facility government regulators december 31 2008 capitalized 116364 related manufacturing facility pilot plant includes costs associated construction renovation upgrades engineering runs capitalized interest december 31 2008 costs incurred seeking regulatory approval including engineering runs 42416 capitalized interest 9045 see note 9 description terms related mortgage payable transferred pilot manufacturing capabilities new connecticut smithfield rhode island facility 2007 time assets related pilot plant placed service cost assets related pilot plant 16354 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts 6 intangible assets intangible assets goodwill net accumulated amortization follows amortization intangible assets approximately 1176 264 0 years ended december 31 2008 2007 2006 respectively assuming changes gross costs basis intangible assets estimated amortization intangible assets next five fiscal years follows july 2007 amended existing license agreement university iowa research foundation uirf prepay royalty owed uirf respect sales soliris treatment pnh terms amended license agreement agreed pay uirf 1000 exchange elimination royalty payable net sales soliris treatment pnh payment made july 2007 amount amortized proportion product sales 2009 represents expiration underlying patent payment affect product marketed alexion license net sales product covered uirf license agreement shall subject royalties february 2008 agreed purchase certain patents related complementinhibition technology oklahoma medical research foundation omrf agreed pay total 10000 plus interest omrf rights patents addition initial payment 3000 paid february 2008 4500 december 2008 required make final payment 2500 july 2009 interest accrues unpaid amount rate 50 sum prime rate plus 1 per annum 2125 december 31 2008 recorded 10000 intangible asset amortized proportion product sales 2014 represents expiration acquired patents alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts december 2008 entered definitive license agreement pdl biopharma inc patent portfolio relating humanization antibodies 25000 see note 11 initial payment 12500 paid january 2009 final payment 12500 due june 30 2009 additional payments owed alexion pdl patents respect soliris sales indication result settlement recorded intangible asset amortized proportion product sales november 2014 represents expiration pdl patents based settlement evaluation potential royalties recorded reduction cost goods sold approximately 1800 fourth quarter 2008 related adjustment estimated accrued royalties sales soliris prior fourth quarter december 2008 acquired outstanding shares legend kk 100000 japanese yen 1124 acquisition date acquisition treated acquisition asset substantially purchase price allocated license amortized remaining useful life 28 months 7 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables denominated currencies us dollar primarily euro british pound manage foreign currency transaction risk within specified guidelines use derivatives use derivatives speculative trading purposes beginning third quarter 2008 entered foreign exchange contracts durations 12 months less hedge exposures resulting portions forecasted revenues denominated currencies us dollar hedges designated cash flow hedges upon inception december 31 2008 open contracts notional amounts totalling 100675 qualified hedge accounting 4935 accumulated comprehensive income representing anticipated gain reclassified revenue next twelve months forecasted transactions occur year ended december 31 2008 recognized gain 4141 revenue relating hedged transactions occurred year ended december 31 2008 gain 345 recognized associated ineffectiveness cash flow hedges beginning first quarter 2008 entered foreign exchange contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities foreign subsidiaries derivative instruments qualify hedge accounting sfas 133 december 31 2008 notional settlement amount forward foreign exchange contracts relating monetary assets liabilities 28201 recognized gain 3177 year ended december 31 2008 associated derivative instruments alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts 8 accrued expenses accrued expenses consist following exit activities december 2006 initiated integration plan subsidiary alexion antibody technologies inc consolidate certain functions operations including termination alexion antibody personnel closure alexion antibody facilities impairment equipment facility costs recognized liabilities included selling general administrative expenses year ended december 31 2006 following table summarizes liabilities established exit activities subsequent cash payments revision estimates employee benefits consist expenses severance compensation well accelerated vesting sharebased grants facility lease costs associated lease san diego california facility described note 10 exit activities consist impairment charges equipment company remains obligated alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts lease payments 2012 september 2007 company signed sublease aat facility provides sublease payments term lease 2012 accrual restructuring activities reflects present value lease obligations reduced estimated sublease income december 31 2008 remaining costs associated employee related benefits exit activities paid settled 9 debt convertible notes january 2005 sold 150000 principal amount 1375 convertible senior notes due february 1 2012 “1375 notes” private placement qualified institutional buyers pursuant rule 144a securities act 1933 amended interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 158957 shares common stock equivalent conversion price approximately 1573 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity convertible notes payable covenants related financial performance capitalized deferred financing costs related offering approximately 4800 amortized component interest expense sevenyear term notes october 2008 certain holders convertible notes exercised conversion rights respect aggregate principal amount 52778 notes resulting issuance 3356 shares common stock shares issued november 2008 result conversion 52778 notes reclassified 775 deferred financing costs equity amortization expense associated deferred financing costs year ended december 31 2008 2007 2006 approximately 733 677 respectively december 31 2008 market value 97222 1375 convertible notes due february 1 2012 based quoted market prices estimated 211106 holder elects convert 1375 notes upon occurrence designated event liquidation change control holder entitled receive additional number shares common stock conversion date additional shares intended compensate holders loss time value conversion option set according table within offering document capped event shares issuable upon conversion note exceed 214550 per 1 principal amount alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts mortgage loan july 2006 entered mortgage loan agreement borrow 26000 finance purchase construction smithfield rhode island manufacturing facility july 2007 amended existing mortgage loan agreement istar financial inc increase loan amount 18000 resulting aggregate principal balance 44000 effective date amendment mortgage loan bears interest fixed annual rate 912 obligations loan agreement guaranteed alexion pharmaceuticals inc loan principal required repaid equal monthly installments 489 starting march 2010 august 2017 time outstanding balances due loan may prepaid whole part prior july 2009 date loan prepaid whole part must include prepayment premium described loan agreement loan collateralized assets smithfield ri facility proceeds loans used primarily finance construction manufacturing facility condition loan required maintain restricted cash accounts must used specifically purchase construction manufacturing facility maintain required operating escrow balances lender first priority security interest right approve disbursements accounts holding restricted cash mortgage loan require covenants related financial performance revolving credit facility february 2008 entered credit agreement bank america na provide available 25000 revolving credit facility used working capital requirements general corporate purposes loan collateralized substantially alexion pharmaceuticals inc’s assets including pledge equity interests certain direct subsidiaries excluding intellectual property assets foreign subsidiaries assets related manufacturing facility smithfield ri borrowing base limited lesser 25000 80 eligible domestic receivables december 31 2008 outstanding balance revolving credit facility open letters credit 4165 december 31 2008 may elect loans agreement bear interest rate per annum equal libor plus 175 225 depending alexion’s liquidity calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 plus additional 0 025 depending alexion’s liquidity interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 28 2011 maturity date revolving credit facility requires comply quarterly financial covenants related liquidity profitability ratios well minimum revenue requirements agreement includes negative alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions enter transactions affiliates agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan 10 leases capital leases lease office equipment software licenses capital lease agreements expiring 2010 assets liabilities capital leases recorded lesser present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives amortization assets capital lease included depreciation expense december 31 2008 cost equipment capital lease 940 accumulated amortization 517 weightedaverage interest rate capital leases approximately 947 minimum future lease payments capital lease december 31 2008 operating leases december 31 2008 lease headquarters primary research development facilities cheshire connecticut lease set expire may 2017 monthly fixed rent started approximately 162 increasing approximately 193 term lease additional research space san diego california starting monthly fixed rent approximately 35 increasing approximately 55 connection closure alexion antibody technologies “aat” 2006 accrued fair value future payments lease see note 8 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts september 2007 company signed sublease aat facility provides sublease payments term lease 2012 aggregate lease expense facilities 4728 4021 2592 years ended december 31 2007 2006 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2008 11 commitments contingencies legal proceedings march 16 2007 pdl biopharma inc pdl filed civil action us district court district delaware claiming wilful infringement certain pdl patents pdl patents due sales soliris denied claims filed counterclaims fourth quarter 2008 entered patent license agreement settlement agreement pdl purpose resolving claims previously filed pdl counterclaims previously filed alexion pursuant license agreement acquired fully paid nonexclusive irrevocable perpetual worldwide license claims pdl patents covenant sue pdl claims pdl patents case commercialization soliris indications agreement requires payments totaling 25000 pdl 12500 paid first quarter 2009 12500 due june 2009 royalties amounts owed pdl respect sales soliris indication upon receipt 25000 license payment previously announced claims filed pdl counterclaims filed us dismissed terms license agreement pdl separately granted us right take worldwide royaltybearing license pdl patents commercialize additional alexion humanized antibodies may covered pdl patents future terms settlement agreement alexion pdl agreed resolve settle claims filed pdl counterclaims filed alexion us district court district delaware alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts product supply largescale product supply agreement dated december 18 2002 lonza agreement lonza sales ag lonza us relating manufacture soliris amended june 2007 amended supply agreement provide additional purchase commitments soliris 30000 35000 2009 2013 commitments may cancelled limited circumstances 12 income taxes income tax provision benefit based income loss income taxes follows components income tax provision benefit follows maintain full valuation allowance substantially us certain foreign deferred tax assets realization assets uncertain accordingly reported tax benefit relating remaining net operating loss carryforwards nols income tax credit carryforwards related jurisdictions change valuation allowance 7213 primarily related realization net operating losses 2008 income tax expense 2008 income tax benefit 2007 includes benefits alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts realized exchange federal state research development income tax credits cash 522 686 respectively addition income tax expense 2008 includes foreign income tax expense 1700 foreign income tax expense related foreign subsidiaries became profitable year utilized nols due amount nols income tax credit carryforwards anticipate paying substantial us federal income taxes foreseeable future expect pay cash taxes number foreign jurisdictions well certain states net operating losses fully utilized 2008 subject alternative minimum tax 2008 expect continue subject alternative minimum tax near term payment alternative minimum tax amount generates credit may carried forward indefinitely used offset regular income tax liability december 31 2008 federal state foreign net operating loss carryforwards 745102 713040 20310 respectively included nols federal state nols 142812 147432 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nols credited directly additional paid capital realized nols expire 2009 2027 also federal state research development income tax credit carryforwards approximately 18826 8834 respectively income tax credits expire 2009 2027 additionally included research development carryforwards federal state research development credit carryforwards 3430 4514 respectively attributable excess tax benefits exercise nonqualified stock options certain stock option exercises resulted tax deductions excess previously recorded benefits based option value time grant although additional tax benefits “windfalls” reflected net operating loss carryforwards pursuant sfas 123r additional tax benefit associated windfall recognized deduction reduces taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards “windfall” tax benefits reflected net operating losses deferred tax assets periods presented december 31 2007 federal state foreign nol carryforwards 732653 707718 29845 respectively included nols federal state nols 99972 105873 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nols would credited directly additional paid capital realized nols expire 2008 2027 nols subject annual limitation section 382 internal revenue code 1986 amended also federal state research development credit carryforwards 18689 8443 respectively income tax credits expire 2008 2027 tax reform act 1986 contains certain provisions limit taxpayer’s ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts triggered prior year however believe limitation expected result expiration loss federal nols income tax credit carryforwards provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows june 2006 fasb issued fasb interpretation 48 “accounting uncertainty income taxesan interpretation fasb statement 109” “interpretation” “fin 48” interpretation clarifies accounting uncertainty income taxes recognized enterprise’s financial statements accordance sfas 109 interpretation prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition interpretation effective fiscal years beginning december 15 2006 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts applied provisions fin 48 effective january 1 2007 recognized benefit 592 january 1 2007 accumulated deficit balance addition decreased fully reserved deferred tax assets 6671 point time beginning ending amounts unrecognized tax benefits reconciles follows recognize interest penalties related unrecognized tax benefits component income tax expense due amount nol income tax credit carryforwards accrued interest relating unrecognized tax benefits accrued interest penalties however would disclosed within related liabilities lines consolidated balance sheet unrecognized tax benefits recognized would impact effective tax rate file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however statute limitation could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods statute limitation previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse portion unrecognized tax benefits within next year cumulative foreign earnings december 31 2008 provided us deferred income taxes undistributed earnings nonus subsidiaries 13 stock options restricted stock options december 31 2008 one stock option plan 2004 incentive plan “2004 plan” 2004 plan common stock well incentive nonqualified stock options may granted maximum 14937 shares directors officers key employees consultants amount shares authorized granting includes 5000 initially authorized plan 1187 shares transferred 2000 plan additional 1550 2400 4800 shares authorized shareholders june 2006 may 2007 may 2008 stock options granted plans maximum contractual term ten years alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts date grant exercise price less fair value stock grant date generally vest four years ended december 31 2008 2007 2006 recognized total stock compensation expense 18054 16438 17601 stock options 5628 3736 3014 restricted stock respectively year ended december 31 2008 capitalized 1626 1215 towards rhode island manufacturing facility inventory respectively year ended december 31 2007 capitalized 1526 325 towards rhode island manufacturing facility inventory respectively weighted average fair value date grant options granted years ended december 31 2008 2007 2006 1693 1147 991 per option respectively december 31 2008 42115 total unrecognized compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 123 years summary status stock option plans december 31 2008 2007 changes years ended presented table narrative alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions year ended december 31 2006 average expected life determined using simplified approach permitted staff accounting bulletin 107 sab 107 year ended december 31 2008 2007 estimated expected life stock options based historical experience exercises cancellations forfeitures stock options alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts restricted stock summary status nonvested restricted stock restricted stock units changes periods ended 14 common preferred stock preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 subject adjustment see rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2017 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock february 23 2007 board directors amended purchase price preferred stock purchase rights result twoforone stock split company’s outstanding shares common stock effected august 22 2008 number shares preferred stock purchasable upon proper exercise preferred stock purchase right automatically adjusted one onehundredth share preferred stock one twohundredth share preferred stock therefore purchase price one twohundredth share preferred stock issued upon exercise preferred stock purchase right 30000 except increase purchase price terms conditions rights remain unchanged alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts event acquired merger business combination transaction 50 percent assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 15 fair value measurement sfas 157 establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following table presents information assets liabilities measured fair value recurring basis december 31 2008 indicates fair value hierarchy valuation techniques utilized determine fair value valuation techniques cash equivalents classified level 2 within valuation hierarchy consist entirely institutional money market fund held multinational financial institution valued based upon pricing securities similar investment characteristics holdings derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy based continued ability trade securities enter forward contracts consider markets fair value instruments active december 31 2008 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts 16 employee benefit plans defined contribution plans two qualified 401k plans covering eligible employees plans employees may contribute statutory allowable amount calendar year make matching contributions equal • 100 dollar contributed first 3 percent • 050 dollar contributed next 2 percent compensation years ended december 31 2008 2007 2006 recorded matching contributions approximately 2336 1535 406 respectively defined benefit plan maintain defined benefit plans employees switzerland assets funded plan held independently assets legally distinct independent collective trust fund serves various unrelated employers plan valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments following table sets forth funded status amounts recognized defined benefit plans alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts december 31 2008 recorded liability 477 noncurrent liabilities accumulated comprehensive amount 471 related additional minimum liability weighted average assumptions used determine net pension expense shown components net pension expense follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts investment objective collective trust maximize overall return investment income capital appreciation without resorting high risk investment strategy weighted average asset allocations pension plan follows estimated future benefit payment expect pay following benefit payments defined pension benefit plans outside united states reflect future service appropriate 17 segment information accordance sfas 131 “disclosures segments enterprise related information” present segment information manner consistent method use report information management determined operate single segment alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts revenues tangible longlived assets significant geographic region follows 18 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2008 2007 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2008 2007 2006 amounts thousands except per share amounts 1 three months ended september 30 2008 certain government payors agreed reimburse soliris shipments delivered prior periods accordingly recognized 5300 net product sales third quarter associated prior shipments 2 fourth quarter 2008 entered patent license agreement settlement agreement pdl biopharma fully paid perpetual license result settlement evaluation potential royalties recorded reduction cost goods sold approximately 1800 related adjustment estimated accrued royalties sales soliris prior fourth quarter 3 product sold year ended december 31 2007 included inventory previously expensed prior submission bla therefore included cost sales period fourth quarter 2007 exhausted supply previously expensed inventoryitem 15 exhibits financial statement schedules 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 1 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 2 incorporated reference quarterly report form 10q quarter ended january 31 2004 3 incorporated reference registration statement form s1 reg 33300202 4 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 5 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 6 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 7 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 8 incorporated reference annual report form 10k year ended december 31 2006 filed february 23 2007 9 incorporated reference report form 8k filed january 25 2005 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference report form 8k filed november 14 2005 12 incorporated reference annual report form 10k fiscal year ended december 31 2007 13 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 14 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 15 incorporated reference annual report form 10k fiscal year ended december 31 2008 16 incorporated reference annual report form 10k fiscal year ended july 31 1996 17 incorporated reference quarterly report form 10q quarter ended january 31 2002 18 incorporated reference quarterly report form 10q quarter ended january 31 2003 19 incorporated reference report form 8k filed december 16 2004 20 incorporated reference quarterly report form 10q quarter ended january 31 2005 21 incorporated reference report form 8k filed march 14 2005 22 incorporated reference report form 8k filed february 14 2008 confidential treatment granted portions exhibit item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized alexion pharmaceuticals inc leonard bell leonard bell md chief executive officer secretary treasurer dated february 23 2010 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2009 2008 2007 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive income loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2009 december 31 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hartford connecticut february 23 2010 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive income loss amounts thousands alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive income losscontinued amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2009 2008 2007 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc “alexion” “company” biopharmaceutical company engaged discovery development commercialization biologic therapeutic products aimed treating patients severe lifethreatening disease states including hematologic kidney neurologic diseases transplant rejection cancer autoimmune disorders marketed product soliris® eculizumab first therapy approved treatment patients paroxysmal nocturnal hemoglobinuria pnh incorporated 1992 began commercial sale soliris 2007 stock split july 2008 company’s board directors approved twoforone stock split effected form 100 percent stock dividend additional shares distributed august 22 2008 stockholders record close trading august 12 2008 share per share data presented accompanying consolidated financial statements throughout notes retroactively restated reflect stock split basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion pharmaceuticals inc whollyowned subsidiaries intercompany balances transactions eliminated consolidation evaluated subsequent events february 23 2010 material subsequent events disclosed note 8 occurred since december 31 2009 required recognition disclosure financial statements dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future use estimates accounting principles generally accepted united states america required make estimates assumptions affect reported amounts assets liabilities revenues expenses disclosure contingent assets liabilities financial statements actual results could differ estimates alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss stockholders’ equity foreign currency transaction gains losses included results operations income expense segment reporting authoritative guidance establishes annual interim reporting standards enterprise’s operating segments related disclosures products services geographic areas major customers operate single segment discovery development commercialization biologic therapeutic products see note 16 geographic information cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less restricted cash december 31 2009 2008 held 1088 1699 respectively restricted cash december 31 2009 2008 maintained 1088 1100 restricted cash related facility operating lease guarantee terms mortgage loan note 8 maintained restricted cash balance payment taxes insurance required amounts equal amount required mortgage loan agreement association full prepayment mortgage loan restricted cash amounts reclassified unrestricted cash equivalents fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable current assets accounts payable accrued expenses approximate fair value due shortterm maturities derivative financial instruments carried fair value based quoted prices similar assets liabilities marketable securities availableforsale carried fair value based quoted market prices convertible notes debt obligations carried historical cost see notes 8 14 fair value information marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments limit amount investment exposure institution maturity investment type classify marketable securities “availableforsale” accordingly record securities fair value alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders’ equity adjustment fair value reflects significant decline value security consider available evidence evaluate extent decline “other temporary” would mark security market charge statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss accounts receivable standard credit terms vary based country sale range 30 120 days average days’ sales outstanding ranges 80 100 days sell soliris limited number customers evaluate creditworthiness customer regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payor governmentowned governmentfunded consider creditworthy experience length time sale receipt payment countries typically exceeds credit terms make judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful year ended december 31 2009 one individual customer accounted 20 accounts receivable balance year ended december 31 2008 two individual customers accounted 20 accounts receivable balance year ended december 31 2009 single individual customer accounted 20 net product sales year ended december 31 2008 single individual customer accounted 21 net product sales customer accounted 10 net product sales accounts receivable inventories stated lower cost estimated realizable value determine cost inventory using weighted average cost method components inventories december 31 follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts capitalization inventory costs capitalize inventory produced commercial sale including costs incurred prior regulatory approval subsequent filing biologics license application bla company determined inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial included inventory raw materials purchased drug product associated clinical development programs inventory charged research development expense consumed also capitalize cost inventory manufactured manufacturing plant property plant equipment prior approval facility regulatory authorities cost product sold year ended december 31 2007 expensed rd prior submission bla therefore included cost sales period previously expensed inventory fully depleted fourth quarter 2007 inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash flows within meaning authoritative guidance qualifying hedge effectiveness qualifying hedge contract assessed quarterly ensure compliance authoritative guidance record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense march 2008 financial accounting standards board “fasb” revised authoritative guidance disclosures derivative instruments hedging activities requires entities provide enhanced disclosures entity uses derivative instruments related hedged alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts items accounted instruments related hedged items affect financial position results operations cash flows entity company adopted provisions guidance three month period ended march 31 2009 prepaid manufacturing costs cash advances paid us prior receipt inventory recorded prepaid manufacturing costs cash advances subject forfeiture terminate scheduled production expect carrying value prepaid manufacturing costs fully realized property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfive thirty years • machinery laboratory equipmentthree fifteen years • computer hardware softwarethree five years • furniture office equipmentthree five years leasehold improvements assets capital lease arrangements amortized lesser estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service longlived assets evaluate longlived assets primarily comprised intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated assets group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets company recognize impairment loss longlived assets years ended december 31 2009 2008 2007 goodwill represents difference purchase price acquired businesses fair value identifiable tangible intangible net assets amortized goodwill reviewed impairment alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charges occurred result annual impairment assessments revenue recognition principal sources revenue product sales contract research revenues applied following principles recognizing revenue net product sales principal source revenue product sales applied following principles recognizing revenue recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product patients’ health care provider typically hospital physician’s office pharmacy health care facility amounts collected customers remitted governmental authorities primarily comprised valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors addition sales soliris commercially available also recorded revenue sales individual patients namedpatient programs outside united states relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sales pricing soliris limited number patients short period sale product patient infusion lack contractual return rights soliris customers generally carry limited inventory monitor inventory within distribution channel determine whether deferral sales required date actual refunds returns negligible record estimated rebates payable governmental programs including medicaid programs europe reduction revenue time product sales recorded calculations related rebate accruals require estimates including estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments generally length time product sale processing reporting rebates alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts three six months upon review historical rebate payments compared accruals revise estimates rebates payable may impact revenue period adjustment made record distribution fees paid customers reduction revenue costs typically known time sale resulting minimal adjustments subsequent period sale record effective portion cash flow hedges revenue period derivative contract settled contract research revenue january 1999 procter gamble pharmaceuticals pg entered exclusive collaboration develop commercialize pexelizumab 2006 completed final phase iii trial pexelizumab reviewing results trial along pg determined pursue development pexelizumab effective march 30 2007 pg mutually agreed terminate 1999 collaboration agreement relevant agreement terminated march 2007 remaining portion 10000 nonrefundable upfront license fee 5343 recognized revenue year ended december 31 2007 included contract research revenues research development expenses research development expenses comprised costs incurred performing research development activities including salaries benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced vendors perform services stockbased compensation one stockbased compensation plan known 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date stockbased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units stock options granted employees exercise prices equal fair market value stock dates grant generally stock options restricted stock restricted stock units granted employees fully vest four years grant date stock options contractual term 10 years recognize stockbased compensation expense based fair value stock awards straightline basis requisite service period individual grants typically equals vesting period alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts earnings loss per common share basic earnings per share eps computed dividing net income loss weightedaverage number shares common stock outstanding purposes calculating diluted eps net income loss adjusted aftertax amount interest deferred financing costs associated convertible debt denominator reflects potential dilution could occur options unvested restricted stock contracts issue common stock exercised converted common stock using treasury stock method well potential dilution remaining convertible notes converted common stock following table summarizes calculation basic diluted eps years ended december 31 2009 2008 2007 years ended december 31 2009 2008 2007 amounts thousands except per share amounts alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts following table represents potentially dilutive shares excluded calculation eps years ended december 31 2009 2008 2007 effect antidilutive income taxes company utilizes asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse valuation allowance provided likely portion deferred tax asset realized company recognizes benefit uncertain tax position taken expects take income tax returns files tax position likely sustained comprehensive income loss comprehensive income loss comprised net income loss comprehensive income loss comprehensive income loss includes changes equity excluded net income loss translation adjustments changes pension liability unrealized holding gains losses availableforsale marketable securities unrealized hedging gains losses changes equity reflected net tax 2 marketable securities following table summarizes marketable securities december 31 2009 marketable securities december 31 2008 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts realized gains losses recorded year ended december 31 2009 2008 2007 utilize specific identification method computing realized gains losses 3 assets prepaid expenses current assets consist following noncurrent assets consist following 4 property plant equipment summary property plant equipment follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts depreciation amortization property plant equipment approximately 7566 5688 4243 year ended december 31 2009 2008 2007 respectively december 31 2009 2008 computer software costs included property plant equipment net 4440 4427 respectively depreciation amortization expense capitalized computer software costs 2091 1318 730 years ended december 31 2009 2008 2007 respectively july 2006 acquired manufacturing plant smithfield rhode island commercial production soliris development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related validation activities including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug december 2009 received final regulatory approval production commercial quantities eculizumab european commission accordingly plant substantially complete ready intended use result approval placed plant service based approval expect sell certain preapproval inventory therefore reclassified 4514 property plant equipment inventory fourth quarter 2009 fda commenced inspection rhode island manufacturing facility requested additional information regarding manufacturing process december 31 2009 capitalized 143822 related facility includes costs associated construction renovation upgrades engineering runs preapproval inventory production capitalized interest capitalized interest 3427 4717 3400 years ended december 31 2009 2008 2007 respectively 5 intangible assets intangible assets goodwill net accumulated amortization follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts amortization intangible assets approximately 4663 1176 264 years ended december 31 2009 2008 2007 respectively assuming changes gross costs basis intangible assets estimated amortization intangible assets next five fiscal years follows february 2008 agreed purchase certain patents related complementinhibition technology oklahoma medical research foundation omrf agreed pay total 10000 plus interest omrf rights patents addition initial payment 3000 paid february 2008 4500 december 2008 made final payment 2500 july 2009 recorded 10000 intangible asset amortized proportion product sales 2014 represents expiration acquired patents december 2008 entered definitive license agreement pdl biopharma inc patent portfolio relating humanization antibodies 25000 initial payment 12500 paid january 2009 final payment 12500 made june 2009 additional payments owed alexion pdl patents respect soliris sales indication result settlement recorded intangible asset amortized proportion product sales november 2014 represents expiration pdl patents based settlement evaluation potential royalties recorded reduction cost goods sold approximately 1800 fourth quarter 2008 related adjustment estimated accrued royalties sales soliris prior fourth quarter december 2008 acquired outstanding shares legend kk 100 million japanese yen 1090 acquisition date also recorded deferred tax liability 791 representing difference book versus tax basis assets acquired acquisition treated acquisition asset substantially purchase price 1881 allocated license amortized remaining useful life 28 months 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables costs denominated currencies us dollar primarily euro japanese yen swiss franc british pound manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts enter foreign exchange contracts durations 24 months hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar purpose hedges revenue reduce volatility exchange rate fluctuations operating results increase visibility forecasted revenues hedges designated cash flow hedges upon inception december 31 2009 open contracts notional amounts totaling 211546 qualified hedge accounting impact comprehensive income oci earnings foreign exchange contracts qualified cash flow hedges years ended december 30 2009 2008 follows gains losses derivative contracts qualify cash flow hedges year ended december 31 2007 initiated derivative program year ended december 31 2008 assuming change foreign currency rates market rates december 31 2009 2103 loss recognized comprehensive income expected reclassified revenue next twelve months enter foreign exchange contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities foreign subsidiaries enter hedges reduce impact fluctuating exchange rates operating results derivative instruments qualify hedge accounting guidance however gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2009 notional settlement amount forward foreign exchange contracts relating monetary assets liabilities 73349 recognized gain loss 3820 3177 income expense years ended december 31 2009 2008 respectively associated foreign exchange contracts designated hedging instruments guidance amounts largely offset gains losses monetary assets liabilities alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts 7 accrued expenses accrued expenses consist following exit activities december 2006 initiated integration plan subsidiary alexion antibody technologies inc consolidate certain functions operations including termination alexion antibody personnel closure alexion antibody facilities impairment equipment facility following table summarizes liabilities established exit activities subsequent cash payments revision estimates employee benefits consist expenses severance compensation well accelerated vesting sharebased grants facility lease costs associated lease san diego california facility exit activities consist impairment charges equipment company remains obligated lease payments 2012 september 2007 company entered sublease aat facility provides sublease payments term lease 2012 accrual restructuring activities reflects present value lease obligations reduced estimated sublease income alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts 8 debt convertible notes january 2005 sold 150000 principal amount 1375 convertible senior notes due february 1 2012 “1375 notes” interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 635828 shares common stock equivalent conversion price approximately 1573 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity convertible notes payable covenants related financial performance october 2008 certain holders convertible notes exercised conversion rights respect aggregate principal amount 52778 notes resulting issuance 3356 shares common stock shares issued november 2008 result conversion 52778 notes reclassified 775 deferred financing costs equity april may 2009 issued aggregate 5644 shares common stock exchange 87304 principal amount 1375 convertible senior notes due 2012 owned certain note holders issuance shares made solely exchange notes pursuant exemption registration requirements securities act 1933 amended section 3a9 act receive cash proceeds result exchange notes retired cancelled note holders received shares exchange excess amount would received pursuant conversion rights notes second quarter 2009 recorded noncash expense 3395 fair value additional shares stated conversion rate reclassified 1105 deferred financing costs equity 2009 result exchange remaining balance 272 december 31 2009 december 31 2009 9918 convertible notes remains outstanding fair value based quoted market prices estimated 30732 amortization expense associated deferred financing costs year ended december 31 2009 2008 2007 approximately 260 733 677 respectively mortgage loan july 2006 entered mortgage loan agreement borrow 26000 finance purchase construction smithfield rhode island manufacturing facility july 2007 amended existing mortgage loan agreement increase loan amount 18000 resulting aggregate principal balance 44000 mortgage loan accrued interest rate 912 per annum june 30 2009 amended mortgage loan agreement permit prepayment mortgage loan without penalty prepaid portion mortgage loan month beginning july 2009 made final payment remaining principal balance october 2009 alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts revolving credit facility february 2008 entered credit agreement financial institution provide available 25000 revolving credit facility could used working capital requirements general corporate purposes loan collateralized substantially alexion pharmaceuticals inc’s assets including pledge equity interests certain direct subsidiaries excluding intellectual property assets foreign subsidiaries assets related manufacturing facility smithfield ri borrowing base limited lesser 25000 80 eligible domestic receivables december 31 2009 outstanding balance revolving credit facility open letters credit 5263 december 31 2009 second quarter 2009 determined compliance negative covenant relating investments subsidiaries revolving credit facility july 2009 lender waived noncompliance amended credit agreement modify negative covenant september 2009 amended credit agreement modify financial nonfinancial negative covenants modified address company’s expanding operations since credit agreement originally executed early 2008 january 2010 amended restated credit agreement amended credit agreement among things increase revolving credit facility 25000 amended credit agreement provides 50000 facility 20000 sublimit letters credit used working capital requirements general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase facility 75000 accordance amended credit agreement loan secured substantially alexion pharmaceuticals inc’s assets including pledge equity interests certain direct subsidiaries real estate owned alexion manufacturing llc wholly owned subsidiary excluding intellectual property assets foreign subsidiaries may elect loans agreement bear interest rate per annum equal libor plus 250 300 depending ratio cash liabilities calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 1 plus 050 100 depending ratio cash liabilities calculated accordance agreement may prepay loans whole part minimum amounts without premium penalty customary breakage costs respect libor borrowings interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due january 22 2013 maturity date may borrow repay reborrow facility january 22 2013 amended credit agreement requires us comply certain financial covenants quarterly basis agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts investment acquisition disposition transactions enter transactions affiliates agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan 9 capital leases lease office equipment software licenses capital lease agreements expiring 2013 assets liabilities capital leases recorded lesser present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives amortization assets capital lease included depreciation expense december 31 2009 cost equipment capital lease 1663 accumulated amortization 853 weightedaverage interest rate capital leases approximately 376 minimum future lease payments capital lease december 31 2009 10 commitments contingencies royalties cost sales year ended december 31 2009 2008 2007 includes royalties third parties related sale commercial manufacture soliris estimate royalty obligations based existing contractual obligations assessment estimated royalties owed third parties estimates may influenced outcome future litigation claims results uncertain periodic basis based specific events outcome litigation settlement claims may reassess estimates resulting adjustments cost sales alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts operating leases december 31 2009 lease headquarters primary research development facilities cheshire connecticut lease set expire may 2017 monthly fixed rent started approximately 162 increasing approximately 193 term lease additional research space san diego california starting monthly fixed rent approximately 35 increasing approximately 55 connection closure alexion antibody technologies “aat” 2006 accrued fair value future payments lease note 7 september 2007 company signed sublease aat facility provides sublease payments term lease 2012 also lease space regional executive sales offices lausanne switzerland well certain countries facilitate operations global organization aggregate lease expense facilities 6817 4728 4021 years ended december 31 2009 2008 2007 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2009 amounts listed reduced estimated sublease income 1085 related aat facility sublease see note 7 license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts license agreements generally provide us pay initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrolment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris order maintain rights agreements may required provide minimum level funding support accordingly recognize expense related obligation related arrangements period performance minimum fixed payments assuming nontermination agreements december 31 2009 next five years follows product supply largescale product supply agreement dated december 18 2002 lonza agreement lonza sales ag lonza us relating manufacture soliris amended june 2007 amended supply agreement provide additional purchase commitments soliris 30000 35000 2009 2013 commitments may cancelled limited circumstances alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts 11 income taxes income tax provision benefit based income loss income taxes follows change valuation allowance 264595 related realization net operating losses nol’s utilized 2009 taxable income including 215516 associated release valuation allowance certain deferred tax assets fourth quarter 2009 reversed valuation allowance recorded significant portion deferred tax assets united states decision reverse valuation allowance made management determined based assessment historical profitability forecasts future taxable income likely deferred tax assets would realized continue maintain valuation allowance certain deferred tax assets realizability certain including valuation allowance 872 related foreign deferred tax assets continue evaluate necessity valuation allowance deferred tax assets 2010 based factors historical profitability levels forecasts future taxable income due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes foreseeable future expect pay cash taxes various us states foreign alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts jurisdictions operations utilized net operating losses subject alternative minimum tax 2009 expect continue subject cash payments alternative minimum tax near term payment alternative minimum tax amount generates credit may carried forward indefinitely used offset regular income tax liability december 31 2009 federal state net operating loss carryforwards 665740 117778 respectively included nol’s federal state nol’s 174545 72070 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable nol’s expire 2010 2028 also federal state income tax credit carryforwards approximately 34208 7689 respectively income tax credits expire 2010 2028 additionally included income tax credit carryforwards federal income tax credit carryforwards 4767 attributable excess tax benefits exercise nonqualified stock options certain stock option exercises resulted tax deductions excess previously recorded benefits based option value time grant although additional tax benefits “windfalls” reflected net operating loss carryforwards pursuant authoritative guidance additional tax benefit associated windfall recognized deduction reduces taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards “windfall” tax benefits reflected net operating losses deferred tax assets periods presented december 31 2008 federal state foreign net operating loss carryforwards 745102 713040 20310 respectively included nol’s federal state nol’s 142812 147432 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable also federal state research development income tax credit carryforwards approximately 18826 8834 respectively additionally included research development carryforwards federal state research development credit carryforwards 3430 4514 respectively attributable excess tax benefits exercise nonqualified stock options company granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 subject renewal additional 5 years tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered prior year however believe limitation expected result expiration loss federal nol’s income tax credit carryforwards alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition interpretation effective fiscal years beginning december 15 2006 beginning ending amounts unrecognized tax benefits reconciles follows due amount nol’s income tax credit carryforwards accrued interest relating unrecognized tax benefits accrued interest penalties however would disclosed within related liabilities lines consolidated balance sheet unless related excess tax benefits stock options unrecognized tax benefits recognized would impact effective tax rate file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however statute limitations could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods statute limitation previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse portion unrecognized tax benefits within next year cumulative foreign earnings december 31 2009 provided us deferred income taxes undistributed earnings nonus subsidiaries 12 stock options restricted stock december 31 2009 one stock option plan 2004 incentive plan “2004 plan” 2004 plan restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards may granted maximum 14937 shares directors officers key employees consultants stock options granted plans maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts years ended december 31 2009 2008 2007 recognized stock compensation expense 19751 18054 16438 stock options 8980 5628 3736 restricted stock respectively following table summarizes stockbased compensation capitalized inventory fixed assets weighted average fair value date grant options granted years ended december 31 2009 2008 2007 1494 1693 1147 per option respectively december 31 2009 28969 total unrecognized compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 133 years alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts summary status stock option plans december 31 2009 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2009 2008 2007 33335 52082 68927 respectively company primarily utilizes newly issued shares satisfy exercise stock options total fair value shares vested years ended december 31 2009 2008 2007 20734 20034 15816 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts summary status nonvested restricted stock changes periods ended 13 common preferred stock preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 subject adjustment see rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2017 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock february 23 2007 board directors amended purchase price preferred stock purchase rights result twoforone stock split companys outstanding shares common stock effected august 22 2008 number shares preferred stock purchasable upon proper exercise preferred stock purchase right automatically adjusted one onehundredth share preferred stock one twohundredth share preferred stock therefore purchase price one twohundredth share preferred stock issued upon exercise preferred stock purchase right 30000 except increase purchase price terms conditions rights remain unchanged alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts event acquired merger business combination transaction 50 percent assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 14 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following table presents information assets liabilities measured fair value recurring basis december 31 2009 indicates fair value hierarchy valuation techniques utilized determine fair value valuation techniques cash equivalents classified level 2 within valuation hierarchy consist institutional money market fund held multinational financial institution corporate bonds valued based upon pricing securities similar investment characteristics holdings derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy based continued ability trade securities enter forward contracts consider markets fair value instruments active alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts december 31 2009 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks 15 employee benefit plans defined contribution plans two qualified 401k plans covering eligible employees plans employees may contribute statutory allowable amount calendar year make matching contributions equal • 100 dollar contributed first 3 percent • 050 dollar contributed next 2 percent compensation years ended december 31 2009 2008 2007 recorded matching contributions approximately 3150 2336 1535 respectively defined benefit plan maintain defined benefit plans employees switzerland assets funded plan held independently assets legally distinct independent collective trust fund serves various unrelated employers plan valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments following table sets forth funded status amounts recognized defined benefit plan switzerland alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts following table provides information fair value plan assets per asset category december 31 december 31 2009 recorded liability 908 noncurrent liabilities accumulated comprehensive amount 886 related additional minimum liability following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category considers historical estimated future risk free rates return well risk premiums relevant investment categories alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts components net pension expense follows investment objective collective trust maximize overall return investment income capital appreciation considering investment strategies asset allocation limits determined swiss pension law targeted allocation funds follows changes plan assets benefit obligations recognized comprehensive income oci year ended december 31 2009 follows alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts estimate pay employer contributions approximately 645 2010 expected future cash flows paid respect pension plans december 31 follows 16 revenue assets geography revenues tangible longlived assets significant geographic region follows 1 longlived assets consist property plant equipment alexion pharmaceuticals inc notes consolidated financial statementscontinued years ended december 31 2009 2008 2007 amounts thousands except per share amounts 17 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2009 2008 1 three months ended september 30 2008 certain government payors agreed reimburse soliris shipments delivered prior periods accordingly recognized 5300 net product sales third quarter associated prior shipments 2 fourth quarter 2008 entered patent license agreement settlement agreement pdl biopharma fully paid perpetual license result settlement evaluation potential royalties recorded reduction cost goods sold approximately 1800 related adjustment estimated accrued royalties sales soliris prior fourth quarter 3 fourth quarter 2009 determined likely significant portion deferred tax assets united states primarily net operating losses research development credits would realized accordingly recorded tax benefit 215516 result reversing valuation allowance deferred tax assetsitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 2 incorporated reference quarterly report form 10q quarter ended january 31 2004 3 incorporated reference registration statement form s1 reg 33300202 4 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 5 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 6 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 7 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 8 incorporated reference annual report form 10k year ended december 31 2006 filed february 23 2007 9 incorporated reference report form 8k filed january 25 2005 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference annual report form 10k fiscal year ended december 31 2009 12 incorporated reference report form 8k filed november 14 2005 13 incorporated reference annual report form 10k fiscal year ended december 31 2007 14 incorporated reference report form 8k filed september 17 2010 15 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 16 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 17 incorporated reference report form 8k filed may 14 2010 18 incorporated reference annual report form 10k fiscal year ended july 31 1996 19 incorporated reference quarterly report form 10q quarter ended january 31 2002 20 incorporated reference quarterly report form 10q quarter ended january 31 2003 21 incorporated reference annual report form 10k fiscal year ended december 31 2008 22 incorporated reference report form 8k filed december 16 2004 23 incorporated reference quarterly report form 10q quarter ended january 31 2005 24 incorporated reference report form 8k filed march 14 2005 25 incorporated reference report form 8k filed february 14 2008 confidential treatment granted portions exhibit confidential treatment requested portions exhibit item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2010 2009 2008 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive income loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2010 december 31 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hartford connecticut february 17 2011 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive income loss amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc “alexion” “company” biopharmaceutical company engaged discovery development commercialization innovative therapeutic products aimed treating patients severe lifethreatening disease states including therapeutic areas hematology nephrology including transplant rejection neurology ophthalmology cancer marketed product soliris® eculizumab first therapy approved treatment patients paroxysmal nocturnal hemoglobinuria pnh ultrarare lifethreatening blood disorder incorporated 1992 began commercial sale soliris 2007 stock split july 2008 company’s board directors approved twoforone stock split effected form 100 percent stock dividend additional shares distributed august 22 2008 stockholders record close trading august 12 2008 share per share data presented accompanying consolidated financial statements throughout notes retroactively restated reflect stock split basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation reclassified certain balance sheet amounts prior period conform current year presentation dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted united states america requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts • contingent liabilities • inventories • research development expenses • sharebased compensation • income taxes foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense segment reporting managed operated one business entire business managed single management team reporting chief executive officer operate separate lines business separate business entities respect products product candidates accordingly company prepare discrete financial information respect separate product areas location one reportable segment cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks marketable securities availableforsale valued based upon pricing securities similar investment characteristics holdings convertible notes debt obligations carried historical cost see notes 8 14 fair value information marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments limit amount investment exposure institution maturity investment type classify marketable securities “availableforsale” accordingly record securities fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders equity adjustment fair value reflects significant decline value security consider available evidence evaluate extent decline “other temporary” would mark security market charge statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss accounts receivable standard credit terms vary based country sale range 30 120 days average days’ sales outstanding ranges 80 100 days sell soliris limited number customers evaluate creditworthiness customer regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payor governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries typically exceeds credit terms make judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful second quarter 2010 greek government announced plan repayment debt international pharmaceutical companies plan calls majority pharmaceutical industry receivables 2007 2009 settled noninterest bearing bonds issued greek government maturity dates ranging 1 4 years countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected year ended december 31 2010 one individual customer accounted 18 accounts receivable balance year ended december 31 2009 one individual customer accounted 20 accounts receivable balance year ended december 31 2010 one individual customer accounted 21 net product sales year ended december 31 2009 one individual customer accounted 20 net product sales customer accounted 10 net product sales accounts receivable inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method components inventory follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts capitalization inventory costs capitalize inventory produced commercial sale including costs incurred prior regulatory approval subsequent filing biologics license application bla company determined inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial raw materials purchased drug product associated clinical development programs included inventory charged research development expense consumed also capitalize cost inventory manufactured manufacturing plant property plant equipment prior approval facility regulatory authorities inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash flows within meaning authoritative guidance qualifying hedge effectiveness qualifying hedge contract assessed quarterly ensure compliance authoritative guidance record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense prepaid manufacturing costs cash advances paid us prior receipt inventory recorded prepaid manufacturing costs cash advances subject forfeiture terminate scheduled production expect carrying value prepaid manufacturing costs fully realized property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfive thirty years • machinery laboratory equipmentthree fifteen years alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts • computer hardware softwarethree five years • furniture office equipmentthree five years leasehold improvements assets capital lease arrangements amortized lesser estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service longlived assets evaluate longlived assets primarily comprised intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated assets group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets company recognize impairment loss longlived assets years ended december 31 2010 2009 2008 goodwill represents difference purchase price acquired businesses fair value identifiable tangible intangible net assets amortized goodwill reviewed impairment annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charges occurred result annual impairment assessments revenue recognition principal source revenue product sales applied following principles recognizing revenue recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis company’s statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors addition sales countries soliris commercially available also recorded revenue sales individual patients namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sales alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts factors pricing soliris limited number patients short period sale product patient infusion lack contractual return rights soliris customers generally carry limited inventory monitor inventory within distribution channel determine whether deferral sales required date actual refunds returns negligible record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months march 2010 united states government healthcare legislation contains several provisions impact rebates payable enacted provisions legislation relate rebates payable include increase minimum medicaid rebate percentages also extended discount 340b institutions extension medicaid rebate managed care organizations dispense drugs medicaid recipients recorded estimated rebates payable according new legislation provisions legislation change may revise estimates rebates payable may impact revenue period adjustment made record distribution fees paid customers reduction revenue costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced vendors perform services sharebased compensation one sharebased compensation plan known 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units stock options granted employees exercise prices equal fair market value stock dates grant generally stock options restricted stock restricted stock units granted alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts employees fully vest four years grant date stock options contractual term 10 years recognize sharebased compensation expense based fair value stock awards straightline basis requisite service period individual grants typically equals vesting period earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps net income adjusted aftertax amount interest deferred financing costs associated convertible debt denominator reflects potential dilution could occur stock options unvested restricted stock contracts issue common stock exercised converted common stock using treasury stock method well potential dilution remaining convertible notes converted common stock following table summarizes calculation basic diluted eps years ended december 31 2010 2009 2008 following table represents potentially dilutive shares excluded calculation eps years ended december 31 2010 2009 2008 effect antidilutive alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized company recognizes benefit uncertain tax position taken expects take income tax returns files tax position likely sustained comprehensive income loss comprehensive income loss comprised net income loss comprehensive income loss comprehensive income loss includes changes equity excluded net income loss foreign currency translation adjustments changes pension liabilities unrealized holding gains losses available sale securities unrealized gains losses hedge contracts certain changes equity reflected net tax 2 marketable securities following tables summarize marketable securities december 31 2010 2009 realized gains losses recorded year ended december 31 2010 2009 utilize specific identification method computing realized gains losses 3 prepaid expenses assets prepaid expenses current assets consist following alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 4 property plant equipment net summary property plant equipment follows depreciation amortization property plant equipment approximately 11003 7566 5688 year ended december 31 2010 2009 2008 respectively december 31 2010 2009 computer software costs included property plant equipment net 7368 4440 respectively depreciation amortization expense capitalized computer software costs 2883 2091 1318 years ended december 31 2010 2009 2008 respectively july 2006 acquired manufacturing plant smithfield rhode island commercial production soliris development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related validation activities including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug december 2009 received final regulatory approval production commercial quantities eculizumab european commission accordingly plant considered substantially complete ready intended use result approval placed plant service based approval expected sell certain preapproval inventory therefore reclassified 4514 property plant equipment inventory august 2010 us food drug administration fda approved rhode island manufacturing facility production soliris capitalized interest 3427 4717 years ended december 31 2009 2008 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 5 intangible assets net intangible assets goodwill net accumulated amortization follows amortization intangible assets approximately 4552 4663 1176 years ended december 31 2010 2009 2008 respectively assuming changes gross cost basis intangible assets estimated amortization intangible assets next five fiscal years follows december 2008 entered definitive license agreement pdl biopharma inc patent portfolio relating humanization antibodies 25000 additional payments owed alexion pdl patents respect soliris sales indication result settlement recorded intangible asset amortized proportion product sales november 2014 represents expiration pdl patents based settlement evaluation potential royalties recorded reduction cost goods sold approximately 1800 fourth quarter 2008 related adjustment estimated accrued royalties sales soliris prior fourth quarter 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen swiss franc british pound manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 36 months hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar purpose hedges intercompany revenue reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues hedges designated cash flow hedges upon contract inception december 31 2010 open contracts notional amounts totaling 330019 qualified hedge accounting alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts impact comprehensive income oci earnings foreign exchange contracts qualified cash flow hedges years ended december 31 2010 2009 follows assuming change foreign exchange rates market rates december 31 2010 55 gain recognized comprehensive income expected reclassified revenue next twelve months enter foreign exchange forward contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities foreign subsidiaries enter hedges reduce impact fluctuating exchange rates operating results derivative instruments qualify hedge accounting guidance however gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2010 notional settlement amount foreign exchange contracts relating monetary assets liabilities 115457 recognized gain loss 9443 3820 income expense years ended december 31 2010 2009 respectively associated foreign exchange contracts designated hedging instruments guidance amounts largely offset gains losses monetary assets liabilities following table summarizes company’s fair value outstanding derivatives december 31 2010 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 7 accrued expenses accrued expenses consist following see note 10 additional information accrued royalties 8 debt convertible notes january 2005 sold 150000 principal amount 1375 convertible senior notes due february 1 2012 “1375 notes” interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 635828 shares common stock equivalent conversion price approximately 1573 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity convertible notes payable contain covenants related financial performance second quarter 2009 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 87304 resulting issuance 5644 shares common stock second quarter 2009 recorded noncash expense 3395 fair value additional shares stated conversion rate reclassified 1105 deferred financing costs equity 2009 result exchange remaining balance 272 december 31 2009 first quarter 2010 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 1000 resulting issuance 63582 shares common stock second quarter 2010 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 5200 resulting issuance 330629 shares common stock december 31 2010 3718 convertible notes remains outstanding fair value based quoted market prices estimated 18892 amortization expense associated deferred financing costs year ended december 31 2010 2009 2008 approximately 239 260 733 respectively revolving credit facility january 2010 entered amended restated credit agreement amended credit agreement provides available 50000 revolving credit facility january 22 2013 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 20000 sublimit letters credit used working capital requirements general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase facility 75000 loan collateralized substantially alexion pharmaceuticals incs assets including pledge equity interests certain direct subsidiaries rhode island facility excluding intellectual property assets foreign subsidiaries may elect loans agreement bear interest rate per annum equal libor plus 250 300 depending ratio cash liabilities calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus 050 100 depending ratio cash liabilities calculated accordance agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due january 22 2013 maturity date amended credit agreement requires us comply certain financial covenants quarterly basis agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions enter transactions affiliates agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan december 31 2010 outstanding amounts revolving credit facility open letters credit 6647 december 31 2010 9 capital leases lease office equipment software licenses capital lease agreements expiring 2013 assets liabilities capital leases recorded lesser present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives amortization assets capital lease included depreciation expense december 31 2010 cost equipment capital lease 2642 accumulated amortization 958 weightedaverage interest rate capital leases approximately 402 minimum future lease payments capital lease december 31 2010 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 10 commitments contingencies contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results january 26 2011 novartis filed civil action alexion pharmaceuticals inc biopharmaceuticals companies us district court district delaware novartis claims willful infringement alexion us patent 5688688 novartis seeks among things monetary damages finally determined infringe novartis patent may required pay royalties novartis sales soliris regarding certain manufacturing technology although believe manufacture soliris infringes valid patent claim owned novartis cannot guarantee successful defending action given early stages litigation management believe loss related matter probable potential magnitude loss reasonably estimated addition novartiss claim third parties may claim manufacture use sale soliris drugs development infringes patents owned granted third parties aware broad patents owned others relating manufacture use sale recombinant humanized antibodies recombinant human antibodies recombinant human single chain antibodies soliris many product candidates genetically engineered antibodies including recombinant humanized antibodies recombinant human antibodies recombinant human single chain antibodies addition action described received notices owners patents claiming patents may infringed development manufacture sale soliris drug candidates also aware patents owned third parties might claimed third parties infringed development commercialization soliris drug candidates respect patents obtained licenses expect obtain licenses estimate obligations probable contingent liabilities based assessment estimated royalties potentially owed third parties costly license inability obtain necessary license could material adverse effect business however amount loss beyond amounts currently accrued cannot reasonably estimated december 31 2010 recorded 50133 accrued royalties includes amounts related existing royalty agreements amounts recorded contingent liabilities described cost sales years ended december 31 2010 2009 2008 also includes amounts recorded existing royalty agreements contingent liabilities operating leases december 31 2010 lease headquarters primary research development facilities cheshire connecticut lease set expire may 2017 monthly fixed rent started approximately 162 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts increasing approximately 193 term lease also lease space regional executive sales offices lausanne switzerland well certain countries facilitate operations global organization aggregate lease expense facilities 6980 6817 4728 years ended december 31 2010 2009 2008 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2010 license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business license agreements generally provide us pay initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrolment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris order maintain rights agreements may required provide minimum level funding support accordingly recognize expense related obligation related arrangements period performance alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts minimum fixed payments assuming nontermination agreements december 31 2010 next five years follows product supply largescale product supply agreement dated december 18 2002 lonza agreement lonza sales ag lonza us relating manufacture soliris amended june 2007 amended supply agreement provide additional purchase commitments soliris 2009 2013 amendment remaining commitments 39000 december 31 2010 commitments may cancelled limited circumstances 11 income taxes income tax provision benefit based income taxes follows components income tax provision benefit follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts reversed valuation allowance certain nonus deferred tax assets second quarter 2010 realization assets likely fourth quarter 2009 also reversed valuation allowance recorded substantial portion deferred tax assets united states continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes foreseeable future expect pay cash taxes various us states foreign jurisdictions operations utilized net operating losses subject alternative minimum tax 2010 expect continue subject cash payments alternative minimum tax near term payment alternative minimum tax amount generates credit may carried forward indefinitely used offset regular income tax liability december 31 2010 federal state net operating loss carryforwards 579308 86138 respectively included nol’s federal state nol’s 225574 49644 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable nol’s expire 2011 2029 also federal state income tax credit carryforwards approximately 37913 4199 respectively income tax credits expire 2011 2030 additionally included income tax credit carryforwards federal income tax credit carryforwards 5350 attributable excess tax benefits exercise nonqualified stock options certain stock option exercises resulted tax deductions excess previously recorded benefits based option value time grant although additional tax benefits “windfalls” reflected net operating loss carryforwards pursuant authoritative guidance additional tax benefit associated windfall recognized deduction reduces regular taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards “windfall” tax benefits reflected net operating losses credit carryforward deferred tax assets periods presented december 31 2009 federal state net operating loss carryforwards 665740 117778 respectively included nol’s federal state nol’s 174545 72070 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable also federal state income tax credit carryforwards approximately 34208 7689 respectively additionally included income tax credit carryforwards federal income tax credit carryforwards 4767 attributable excess tax benefits exercise nonqualified stock options company granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 expected renewed additional 5 years tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts triggered prior year however believe limitation expected result expiration loss federal nol’s income tax credit carryforwards provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows company recognizes interest accrued penalties related unrecognized tax benefits component tax expense total amount accrued interest penalties tax expense december 31 2010 52 unless related excess tax benefits stock options unrecognized tax benefits recognized would impact effective tax rate file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however statute limitations could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods statute limitation previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse portion unrecognized tax benefits within next year company provided us income taxes undistributed earnings nonus subsidiaries earnings permanently reinvested earnings would taxable repatriated us practicable estimate amount additional tax might payable earnings remitted us 12 stock options restricted stock december 31 2010 one stock option plan 2004 incentive plan “2004 plan” 2004 plan restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards may granted maximum 14937 shares directors officers key employees consultants stock options granted plans maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years following table summarizes components sharebased compensation expense consolidated statements operations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts year ended december 31 2010 1266 sharebased compensation expense recognized cost sales previously capitalized inventory corresponding amounts recognized 2009 2008 material results operations following table summarizes sharebased compensation capitalized inventory fixed assets weighted average fair value date grant options granted years ended december 31 2010 2009 2008 1700 1494 1693 per option respectively december 31 2010 55354 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 257 years summary status stock option plans december 31 2010 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2010 2009 2008 64656 33335 52082 respectively company primarily utilizes newly issued shares satisfy exercise stock options total fair value shares vested years ended december 31 2010 2009 2008 20039 20734 20034 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options summary status nonvested restricted stock changes period ended follows 13 common preferred stock preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one onehundredth share new series preferred stock exercise price 7500 subject adjustment see rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2017 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock february 23 2007 board directors amended purchase price preferred stock purchase rights result twoforone stock split companys outstanding shares common stock effected august 22 2008 number shares preferred stock purchasable upon proper exercise preferred stock purchase right automatically adjusted one onehundredth share preferred stock one twohundredth share preferred stock therefore purchase price one twohundredth share preferred stock issued upon exercise preferred stock purchase right 30000 except increase purchase price terms conditions rights remain unchanged alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts event acquired merger business combination transaction 50 percent assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 14 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following tables present information assets liabilities measured fair value recurring basis december 31 2010 2009 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts valuation techniques items classified level 2 within valuation hierarchy consisting institutional money market fund held multinational financial institution corporate federal agency bonds commercial paper valued based upon pricing securities similar investment characteristics holdings derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy december 31 2010 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks 15 employee benefit plans defined contribution plan one qualified 401k plans covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal • 100 dollar contributed first 3 percent individual’s base salary incentive cash bonus • 050 dollar contributed next 2 percent compensation years ended december 31 2010 2009 2008 recorded matching contributions approximately 1893 1552 1298 respectively defined benefit plan maintain defined benefit plans employees outside united states including retirement benefit plan required local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments following table sets forth funded status amounts recognized defined benefit plans alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts following table provides information fair value plan assets per asset category december 31 2010 recorded liability 3816 noncurrent liabilities charge accumulated comprehensive income 3018 related additional minimum liability following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category considers historical estimated future risk free rates return well risk premiums relevant investment categories alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts components net pension expense follows investment objective collective trust maximize overall return investment income capital appreciation considering investment strategies asset allocation limits determined pension law targeted allocation funds follows changes plan assets benefit obligations recognized comprehensive income oci year ended december 31 2010 follows estimate pay employer contributions approximately 2372 2011 expected future cash flows paid respect pension plans december 31 follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 16 revenue assets geography revenues tangible longlived assets significant geographic region follows 1 longlived assets consist property plant equipment 17 subsequent events january 28 2011 alexion acquired taligen therapeutics inc taligen privately held developmentstage biotechnology company based cambridge massachusetts transaction accounted business combination acquisition intended broaden alexions portfolio preclinical compounds expand alexions capabilities translational medicine taligen’s preclinical compounds include product candidates potential treatment patients ophthalmic diseases agerelated macular degeneration amd well novel antibody protein regulators complement inflammatory pathways alexion made upfront cash payment 111000 100 percent taligens equity interests additional contingent payments would earned upon reaching various clinical efficacy product approval milestones us european union six product candidates clinical efficacy product approval milestones achieved us european union six product candidates total payments would 367000 february 10 2011 alexion acquired patents assets germanybased orphatec pharmaceuticals gmbh orphatec related investigational therapy patients type molybdenum cofactor deficiency mocd ultrarare disorder characterized severe brain damage rapid death newborn infants acquisition accounted business combination orphatec privately held developmentstage biotechnology company headquarters cologne germany alexion made upfront cash payment approximately 3000 additional contingent payments 42000 would earned upon reaching various development regulatory commercial milestones alexion also established research collaboration key mocd researchers orphatec accelerate development investigational therapy alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2010 2009 2008 amounts thousands except per share amounts 18 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2010 2009 1 fourth quarter 2009 determined likely significant portion deferred tax assets united states primarily net operating losses research development credits would realized accordingly recorded tax benefit 215516 result reversing valuation allowance deferred tax assetsitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 5 incorporated reference report form 8k filed december 2 2011 6 incorporated reference registration statement form s1 reg 33300202 7 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 8 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 9 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 10 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 11 incorporated reference annual report form 10k year ended december 31 2006 filed february 23 2007 12 incorporated reference report form 8k filed february 16 2006 13 incorporated reference annual report form 10k fiscal year ended december 31 2009 14 incorporated reference report form 8k filed november 14 2005 15 incorporated reference annual report form 10k fiscal year ended december 31 2007 16 incorporated reference report form 8k filed september 17 2010 17 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 18 incorporated reference quarterly report form 10q quarter ended january 31 2004 19 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 20 incorporated reference annual report form 10ka fiscal year ended july 31 1996 21 incorporated reference quarterly report form 10q quarter ended january 31 2002 22 incorporated reference quarterly report form 10q quarter ended january 31 2003 23 incorporated reference annual report form 10k fiscal year ended december 31 2008 24 incorporated reference report form 8k filed december 16 2004 25 incorporated reference quarterly report form 10q quarter ended january 31 2005 26 incorporated reference report form 8k filed march 14 2005 27 incorporated reference annual report form 10k fiscal year ended december 31 2010 28 incorporated reference report form 8k filed february 14 2008 29 incorporated reference report form 8k filed february 7 2012 confidential treatment granted portions exhibit confidential treatment requested portions exhibit indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2011 2010 2009 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements changes stockholders’ equity comprehensive income loss consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2011 december 31 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america addition opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hartford connecticut february 17 2012 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts reflects may 20 2011 twoforone stock split refer note 1 discussion accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts reflects may 20 2011 twoforone stock split refer note 1 discussion accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity comprehensive income loss amounts thousands reflects may 20 2011 twoforone stock split refer note 1 discussion accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc “alexion” “company” “we” “our” “us” biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris® eculizumab first therapeutic approved patients two ultrarare severe disorders resulting chronic uncontrolled activation complement component immune system paroxysmal nocturnal hemoglobinuria pnh ultrarare lifethreatening blood disorder atypical hemolytic uremic syndrome ahus ultrarare lifethreatening genetic disease also evaluating potential indications soliris diseases chronic uncontrolled complement activation underlying mechanism progressing biotechnology product candidates ultrarare severe disorders various stages development incorporated 1992 began commercial sale soliris 2007 stock split may 20 2011 effected twoforone stock split paid form 100 stock dividend stockholders record close trading may 2 2011 issued one additional share common stock share owned shareholder share per share data presented accompanying consolidated financial statements notes retroactively restated reflect stock split basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation january 28 2011 acquired taligen therapeutics inc accordingly assets acquired liabilities assumed recorded respective fair values date acquisition taligens results operations included consolidated financial statements date acquisition february 8 2011 acquired certain patents assets orphatec pharmaceuticals gmbh accordingly assets acquired recorded respective fair values date acquisition see note 2 additional information regarding acquisitions reclassified certain disclosure amounts prior period conform current year presentation dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted united states requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • research development expenses alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks marketable securities availableforsale valued based upon pricing securities similar investment characteristics holdings convertible notes debt obligations carried historical cost contingent consideration liabilities related taligen orphatec acquisitions valued based various estimates including probability success discount rates amount time conditions milestone payments met see notes 9 15 fair value information marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments limit amount investment exposure institution maturity investment type classify marketable securities “availableforsale” accordingly record securities fair value unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders equity adjustment fair value reflects significant decline value security consider available evidence evaluate extent decline “other temporary” would mark security market charge statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss accounts receivable standard credit terms vary based country sale range 30 120 days consolidated average days’ sales outstanding ranges 80 100 days sell soliris limited number customers evaluate creditworthiness customer regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payor governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries typically exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts continue monitor economic conditions including volatility associated international economies associated impacts financial markets business sovereign debt crisis europe credit economic conditions greece italy spain portugal among members european union deteriorated throughout 2011 conditions resulted may continue result increase average length time takes collect outstanding accounts receivable countries december 31 2011 accounts receivable greece italy spain ireland portugal approximately 83400 approximately 24000 amount outstanding greater one year recorded allowance approximately 3500 related receivables december 31 2011 july 2011 received noninterest bearing bonds issued greek government mature 2012 2013 payment receivables 2008 2009 part greek governments plan repayment debt international pharmaceutical companies sold bonds july 2011 year ended december 31 2011 recorded bad debt expense approximately 4100 related reduction value greek bonds reduction realizable value accounts receivable countries year ended december 31 2011 two individual customers accounted 18 13 accounts receivable balance 19 12 net product sales year ended december 31 2010 one individual customer accounted 18 accounts receivable balance 21 net product sales customers accounted 10 net product sales accounts receivable inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method components inventory follows capitalization inventory costs capitalize inventory produced commercial sale including costs incurred prior regulatory approval subsequent filing biologics license application bla company determined inventory probable future economic benefit inventory capitalized prior completion phase iii clinical trial products approved indication raw materials purchased drug product associated clinical development programs included inventory charged research development expense consumed products without approved indication purchased drug product charged research development expense upon final quality release also capitalize cost inventory manufactured manufacturing plant property plant equipment prior approval facility regulatory authorities inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may period time longer meet quality specifications may expire point would adjust inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash effectiveness qualifying hedge contract assessed quarterly record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense prepaid manufacturing costs cash advances paid us prior receipt inventory recorded prepaid manufacturing costs cash advances subject forfeiture terminate scheduled production expect carrying value prepaid manufacturing costs fully realized property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfive thirty years • machinery laboratory equipmentthree twenty years • computer hardware softwaretwo five years • furniture office equipmentthree seven years leasehold improvements assets capital lease arrangements amortized lesser estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service intangible assets intangible assets consist licenses patents purchased technology acquired inprocess research development iprd intangible assets definite lives amortized estimated useful lives reviewed impairment certain events occur described impairment longlived assets intangible assets amortized include acquired iprd amortization acquired iprd commence upon completion associated research development efforts goodwill represents difference purchase price acquired businesses fair value identifiable tangible intangible net assets amortized goodwill reviewed impairment annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charges occurred result annual impairment assessments test goodwill annually impairment december 31 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts impairment longlived assets evaluate longlived assets primarily comprised intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition iprd reviewed annually impairment comparing fair value carrying value iprd recognize impairment loss longlived assets years ended december 31 2011 2010 2009 contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time updates assumed achievement timing development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes assumptions could material impact amount contingent consideration expense recorded given period revenue recognition principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels contractual terms financial strength distributors date actual refunds returns negligible entered volumebased arrangements governments certain countries reimbursement limited contractual amount estimate incremental discounts resulting contractual limitations based estimated sales limited period apply discount percentage product shipments reduction revenue addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts agreed reimburse product sold namedpatient basis soliris received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced vendors perform services sharebased compensation one sharebased compensation plan known 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units stock options granted employees exercise prices equal fair market value stock dates grant generally stock options restricted stock restricted stock units granted employees fully vest four years grant date stock options contractual term 10 years recognize sharebased compensation expense based fair value stock awards straightline basis requisite service period individual grants typically equals vesting period earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps net income adjusted aftertax amount interest deferred financing costs associated convertible debt denominator reflects potential dilution could occur stock options unvested restricted stock unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method well potential dilution remaining convertible notes converted common stock alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts following table summarizes calculation basic diluted eps years ended december 31 2011 2010 2009 following table represents potentially dilutive shares excluded calculation eps years ended december 31 2011 2010 2009 effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained comprehensive income loss comprehensive income loss comprised net income loss comprehensive income loss comprehensive income loss includes changes equity excluded net income loss foreign currency translation adjustments changes pension liabilities unrealized holding gains losses available sale securities unrealized gains losses hedge contracts certain changes equity reflected net tax alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts summary accumulated comprehensive income loss summarized follows new accounting pronouncements may 2011 financial accounting standards board fasb issued new standard fair value measurement disclosure requirements new standard changes fair value measurement principles disclosure requirements including measuring fair value financial instruments managed within portfolio application applying premiums discounts fair value measurement additional disclosure fair value measurements new standard effective interim annual periods beginning december 15 2011 expect material impact adoption new standard june 2011 fasb issued new standard presentation comprehensive income new standard eliminated current option report comprehensive income components statement changes equity new standard companies elect present items net income comprehensive income one continuous statement two separate consecutive statements new standard effective beginning fiscal years beginning december 15 2011 comply requirement first quarter 2012 september 2011 fasb issued new standard simplify entity tests goodwill impairment new standard allows companies option first assess qualitative factors determine whether likely fair value reporting unit less carrying amount basis determining necessary perform twostep quantitative goodwill impairment test new standard company longer required calculate fair value reporting unit unless company determines based qualitative assessment likely fair value less carrying amount new standard effective annual interim goodwill impairment tests performed fiscal years beginning december 15 2011 2 acquisitions acquisition taligen therapeutics inc january 28 2011 acquired outstanding capital stock taligen therapeutics inc taligen transaction accounted acquisition method accounting business combinations acquisition method accounting assets acquired liabilities assumed taligen recorded acquisition date respective fair values reported consolidated financial condition completion acquisition reflects fair values taligens results operations included consolidated financial statements date acquisition made initial payments 111773 cash may make additional future payments 367000 contingent milestone payments prior acquisition taligen privately held developmentstage biotechnology company involved development preclinical compounds including product candidates potential treatment patients ophthalmic diseases agerelated macular degeneration amd well novel antibody protein regulators complement inflammatory pathways acquired taligen broaden portfolio preclinical compounds expand capabilities translational medicine alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts year ended december 31 2011 incurred approximately 10375 costs related taligen acquisition acquisitionrelated costs include following taligen acquisition included contingent consideration would obligate us make 367000 cash milestone payments former taligen shareholders upon achievement various development commercial milestones initial fair value contingent consideration estimated 11634 recorded noncurrent liability determined fair value obligations pay additional milestone payments using various estimates including probability success discount rates amount time conditions milestone payments met fair value measurement based significant inputs observable market representing level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using 10year bbb industrial index rate 49 representative market participant assumption range estimated milestone payments zero clinical milestones achieved product 367000 six products gain us european marketing approval subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect passage time development work progresses towards achievement milestones december 31 2011 fair value contingent consideration taligen 12684 reconciliation upfront payments accordance purchase agreement total purchase price presented assets acquired liabilities assumed acquisition date based upon respective fair values summarized alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts asset categories acquired taligen acquisition included working capital fixed assets purchased technology inprocess research development iprd fair value working capital determined approximate book values subsequent acquisition date adjusted fair value contingent consideration deferred tax liabilities purchase allocation 908 related circumstances effect acquisition date corresponding increase goodwill purchased technology includes platform technology used development compounds estimated fair value determined using relief royalty method approach fair value estimated present value royalties saved intangible asset therefore pay royalty use estimated useful life purchased technology 12 years intangible assets associated iprd projects relate two preclinical taligen product candidates management estimated acquisitiondate fair value intangible assets related iprd 59500 estimated fair value determined using cost approach cost approach estimates costs would incurred replace assets purchased fair value using cost approach dependent estimated rate return historical costs incurred 25 represents rate return market participant would expect assets intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment annual basis well annual tests become aware events occurring changes circumstances would indicate reduction fair value iprd projects respective carrying amounts development complete generally occurs regulatory approval market product obtained associated assets would deemed finitelived would amortized based respective estimated useful lives point time excess purchase price fair value amounts assigned assets acquired liabilities assumed represents goodwill amount resulting acquisition expect portion goodwill deductible tax purposes goodwill attributable acquisition taligen recorded noncurrent asset amortized subject annual review impairment factors contributed recognition goodwill included synergies specific business available market participants including unique ability leverage knowledge areas complement inhibition rare diseases development taligen compounds technology acquisition talented workforce brings translational medicine expertise preclinical compounds ability utilize research capacity development additional compounds using acquired technology recorded deferred tax liability 9707 amount primarily comprised 21545 related iprd offset acquired net operating losses research credit carryovers totaling 11838 determined separate presentation taligens results operations impracticable year ended december 31 2011 results separately tracked due integration taligen operations upon acquisition pro forma financial information unaudited following unaudited pro forma information presents combined results operations years ended december 31 2011 2010 acquisition taligen completed january 1 2010 pro forma results reflect material adjustments operating efficiencies potential cost savings may result consolidation operations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts acquisition orphatec pharmaceuticals gmbh assets february 8 2011 acquired certain patents assets orphatec pharmaceuticals gmbh orphatec related investigational therapy patients molybdenum cofactor deficiency mocd type ultrarare genetic disorder characterized severe brain damage rapid death newborns acquisition accounted acquisition method accounting business combinations orphatec privately held developmentstage biotechnology company headquarters cologne germany made initial payments 3050 cash may make additional future payments 42000 contingent milestone payments also make future payments orphatec manufacturing development services estimate rate approximates fair value acquired assets advance mission provide lifetransforming treatments patients severe lifethreatening disease states year ended december 31 2011 incurred approximately 1072 costs related orphatec acquisition acquisitionrelated costs include following orphatec acquisition included contingent consideration would obligate us make 42000 cash milestone payments former orphatec shareholders upon various development regulatory commercial milestones initial fair value contingent consideration 5086 recorded noncurrent liability determined fair value obligations pay additional milestone payments using various estimates including probability success discount rates amount time conditions milestone payments met fair value measurement based significant inputs observable market representing level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted rate 49 development milestones 21 commercial milestones representative market participant assumption range estimated milestone payments zero products gain market approval 42000 indications two products gain us european marketing approval reach applicable sales levels subsequent acquisition date measured contingent consideration arrangement fair value changes fair value recognized operating earnings changes pertaining facts circumstances existed acquisition date recognized adjustments goodwill changes fair values reflect new information iprd assets passage time absence new information changes fair value reflect passage time development work progresses towards achievement milestones december 31 2011 fair value contingent consideration orphatec 5436 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts reconciliation upfront payments accordance purchase agreement total purchase price presented purchase price allocation resulted following amounts allocated assets acquired liabilities assumed acquisition date based upon respective fair values summarized intangible assets associated iprd projects relate preclinical product candidate management estimated acquisitiondate fair value intangible assets related iprd 8050 estimated fair value determined using income approach discounts expected future cash flows present value estimated fair value using present value discount rate 23 based estimated weightedaverage cost capital companies substantially similar orphatec comparable estimated internal rate return operations represents rate market participants would use value intangible assets projected cash flows iprd projects based key assumptions estimates revenues operating profits related project considering stage development time resources needed complete development approval product candidate life potential commercialized product associated risks including inherent difficulties uncertainties developing drug compound obtaining marketing approval fda regulatory agencies risks related viability potential alternative treatments future target markets consider acquisition orphatec material business combination therefore disclosed pro forma results operations 3 marketable securities hold investments marketable securities december 31 2011 following table summarizes marketable securities december 31 2010 realized gains losses recorded years ended december 31 2011 2010 2009 utilize specific identification method computing realized gains losses alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts 4 prepaid expenses assets prepaid expenses current assets consist following 5 property plant equipment net summary property plant equipment follows depreciation amortization property plant equipment approximately 12236 11003 7566 year ended december 31 2011 2010 2009 respectively december 31 2011 2010 computer software costs included property plant equipment 10303 7368 respectively depreciation amortization expense capitalized computer software costs 3642 2883 2091 years ended december 31 2011 2010 2009 respectively july 2006 acquired arimf commercial production soliris development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related validation activities including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug december 2009 received final regulatory approval production commercial quantities eculizumab european commission accordingly plant considered substantially complete ready intended use result approval placed plant service based approval reclassified 4514 property plant equipment inventory august 2010 us food drug administration fda approved arimf production soliris recorded capitalized interest 3427 year ended december 31 2009 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts 6 intangible assets goodwill intangible assets goodwill net accumulated amortization follows amortization intangible assets approximately 5087 4552 4663 years ended december 31 2011 2010 2009 respectively assuming changes gross cost basis intangible assets estimated amortization intangible assets next five fiscal years follows december 31 2011 recorded indefinitelived intangible assets 67550 consisted 59500 8050 purchased iprd acquisitions taligen orphatec respectively following table summarizes changes carrying amount goodwill 7 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen swiss franc british pound canadian dollar australian dollar manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 36 months hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar purpose hedges intercompany revenue reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues hedges designated cash flow hedges upon contract inception december 31 2011 open contracts notional amounts totaling 520743 qualified hedge accounting alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts impact accumulated comprehensive income aoci earnings foreign exchange contracts qualified cash flow hedges years ended december 31 2011 2010 follows assuming change foreign exchange rates market rates december 31 2011 8046 gain recognized accumulated comprehensive income expected reclassified revenue next 12 months enter foreign exchange forward contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results derivative instruments qualify hedge accounting however gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2011 notional amount foreign exchange contracts qualify hedge accounting 171834 recognized gain 790 9443 income expense years ended december 31 2011 2010 respectively associated foreign exchange contracts designated hedging instruments guidance amounts largely offset gains losses monetary assets liabilities following tables summarize fair value outstanding derivatives december 31 2011 2010 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts 8 accrued expenses accrued expenses consist following see note 11 additional information accrued royalties 9 debt convertible notes january 2005 sold 150000 principal amount 1375 convertible senior notes due february 1 2012 “1375 notes” interest rate notes 1375 per annum principal amount january 25 2005 payable semiannually arrears cash february 1 august 1 year beginning august 1 2005 1375 notes convertible common stock initial conversion rate 1271656 shares common stock equivalent conversion price approximately 787 per share per 1 principal amount 1375 notes subject adjustment time prior close business final maturity date notes right redeem 1375 notes prior maturity convertible notes payable contain covenants related financial performance second quarter 2009 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 87304 resulting issuance 5644 shares common stock second quarter 2009 recorded noncash expense 3395 fair value additional shares stated conversion rate reclassified 1105 deferred financing costs equity 2009 result exchange remaining balance 272 december 31 2009 first quarter 2010 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 1000 resulting issuance 63582 shares common stock second quarter 2010 certain holders 1375 notes exercised conversion rights respect aggregate principal amount 5200 resulting issuance 330629 shares common stock second quarter 2011 certain holders 1375 notes exercised conversion rights respect alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts aggregate principal amount 3000 resulting issuance 190747 shares common stock december 31 2011 718 convertible notes remains outstanding fair value approximately 6612 february 2012 remaining notes converted additional 91 shares prior maturity amortization expense associated deferred financing costs year ended december 31 2011 2010 2009 approximately 283 239 260 respectively revolving credit facility march 2011 entered second amended restated credit agreement amended credit agreement provides available 100000 revolving credit facility march 7 2014 20000 sublimit letters credit used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase facility 150000 loan collateralized substantially alexion pharmaceuticals incs assets including pledge equity interests certain direct subsidiaries real estate located rhode island excluding intellectual property assets foreign subsidiaries may elect loans amended credit agreement bear interest rate per annum equal libor plus 175 225 depending ratio cash liabilities calculated accordance agreement ii base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus 075 125 depending ratio cash liabilities calculated accordance agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due march 7 2014 maturity date amended credit agreement requires us comply certain financial covenants quarterly basis amended credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions enter transactions affiliates amended credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan december 31 2011 outstanding amounts revolving credit facility open letters credit 3754 borrowing availability approximately 96000 december 31 2011 february 2012 credit facility terminated replaced new fiveyear 440000 credit facility see note 18 10 capital leases lease office equipment software licenses capital lease agreements expiring 2014 assets liabilities capital leases recorded lesser present value minimum lease payments fair value asset assets amortized lower related lease terms estimated useful lives amortization assets capital lease included depreciation expense cost equipment capital lease 2692 2642 accumulated amortization 1524 958 december 31 2011 2010 respectively weightedaverage interest rate capital leases approximately 404 minimum future lease payments capital lease december 31 2011 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts 11 commitments contingencies commitments supply agreements lonza relating manufacture eculizumab requires payments lonza inception contract product manufactured ongoing basis evaluate plans future levels manufacturing lonza depends upon commercial requirements progress clinical development programs production levels arimf various agreements lonza remaining total commitments approximately 136000 2018 commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results january 26 2011 novartis vaccines diagnostics inc novartis filed civil action us biopharmaceutical companies us district court district delaware novartis claims willful infringement us patent 5688688 novartis seeks among things monetary damages finally determined infringe novartis patent may required pay royalties novartis sales soliris regarding certain manufacturing technology although believe manufacture soliris infringes valid patent claim owned novartis cannot guarantee successful defending action given early stages litigation management currently believe loss related matter probable potential magnitude loss range loss reasonably estimated addition novartis claim third parties may claim manufacture use sale soliris drugs development infringes patents owned granted third parties aware broad patents owned others relating manufacture use sale recombinant humanized antibodies recombinant human antibodies recombinant human single chain antibodies soliris many product candidates genetically engineered antibodies including recombinant humanized antibodies recombinant human antibodies recombinant human single chain antibodies addition action described received notices owners patents claiming patents may infringed development manufacture sale soliris drug candidates also aware patents owned third parties might claimed third parties infringed development commercialization soliris drug candidates respect patents obtained licenses expect obtain licenses estimate obligations probable contingent liabilities based assessment estimated royalties potentially owed third parties costly license inability obtain necessary license could material adverse effect business however amount loss range loss beyond amounts currently accrued cannot reasonably estimated december 31 2011 2010 recorded 82010 50133 respectively accrued expenses royalties cost sales years ended december 31 2011 2010 2009 includes amounts recorded changes contingent liabilities described existing royalty agreements operating leases december 31 2011 lease headquarters primary research development facilities cheshire connecticut lease set expire september 2020 monthly fixed rent started approximately 162 increasing approximately 232 term lease also lease space regional executive sales offices lausanne switzerland well countries support operations global organization alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts aggregate lease expense facilities 10424 6980 6817 years ended december 31 2011 2010 2009 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2011 license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business license agreements generally provide us pay initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrolment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris order maintain rights agreements may required provide minimum level funding support accordingly recognize expense related obligation related arrangements period performance minimum fixed payments assuming nontermination agreements december 31 2011 next five years follows 12 income taxes income tax provision benefit based income taxes follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts components income tax provision benefit follows reversed valuation allowance certain nonus deferred tax assets second quarter 2010 realization assets likely fourth quarter 2009 also reversed valuation allowance recorded substantial portion deferred tax assets united states continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes near future currently paying cash taxes various us states foreign jurisdictions operations utilized net operating losses december 31 2011 federal state net operating loss carryforwards 464918 109095 respectively nols inclusive federal state net operating losses approximately 36500 28300 respectively acquisition taligen included nol’s federal state nol’s 315689 49911 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable nol’s expire 2012 2031 also federal state income tax credit carryforwards approximately 72278 1361 respectively income tax credits expire 2012 2031 additionally included income tax credit carryforwards federal income tax credit carryforwards 8473 attributable excess tax benefits exercise nonqualified stock options certain stock option exercises resulted tax deductions excess previously recorded benefits based option value time grant although additional tax benefits “windfalls” reflected net operating loss carryforwards pursuant authoritative guidance additional tax benefit associated windfall recognized deduction reduces regular taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards “windfall” tax benefits reflected net operating losses credit carryforward deferred tax assets periods presented granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 expected renewed additional 5 years alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 percent threeyear period determined limiting provisions triggered prior year however believe limitation expected result expiration loss significant amount federal nol’s income tax credit carryforwards september 2011 completed assessment impact election claim federal foreign tax credits federal orphan drug credits would historical tax returns based assessment management elected claim foreign tax credit tax year ended december 31 2010 orphan drug credit tax years ended december 31 2010 2009 net federal income tax benefit recorded 2011 result election claim federal foreign tax credit 2010 federal orphan drug credit 2010 2009 approximately 15400 provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities exclude windfall tax benefits follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows recognize interest accrued penalties related unrecognized tax benefits component tax expense total amount accrued interest penalties tax expense december 31 2011 442 unless related excess tax benefits stock options unrecognized tax benefits recognized would favorable impact effective tax rate file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however statute limitations could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods statute limitation previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse significant portion unrecognized tax benefits within next year internal revenue service irs commenced examination us income tax returns 2008 2009 second quarter 2011 anticipated completed within next twelve months result audit possible amount liability unrecognized tax benefits could change next twelve months impact unrecognized tax benefits difficult determine based preliminary stage audit december 31 2011 notified significant proposed adjustments irs alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts provided us income taxes undistributed earnings nonus subsidiaries earnings intended either permanently reinvested subject tax free liquidation give rise significant incremental us taxes practical estimate amount additional taxes might payable undistributed earnings due variety factors including timing extent nature repatriation 13 stock options restricted stock december 31 2011 one stock option plan 2004 incentive plan “2004 plan” 2004 plan restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards may granted maximum 29874 shares directors officers key employees consultants stock options granted plans maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years following table summarizes components sharebased compensation expense consolidated statements operations following table summarizes sharebased compensation capitalized inventory fixed assets weighted average fair value date grant options granted years ended december 31 2011 2010 2009 1546 850 748 per option respectively december 31 2011 78817 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 269 years summary status stock option plans december 31 2011 changes year ended presented table narrative alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts total intrinsic value stock options exercised years ended december 31 2011 2010 2009 114712 64656 33335 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value shares vested years ended december 31 2009 2010 2009 23485 20039 20734 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options summary status nonvested restricted stock changes period ended follows 14 common preferred stock preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one hundredth share new series preferred stock exercise price 7500 subject adjustment see rights may exercised public announcement party acquired 20 percent common stock commencement public announcement make tender offer 20 percent common stock rights voting rights expire march 6 2017 may redeemed us price 001 per right time prior expiration acquisition 20 percent stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock february 23 2007 board directors amended purchase price preferred stock purchase rights result twoforone stock split companys outstanding shares common stock effected august 22 2008 number shares preferred stock purchasable upon proper exercise preferred stock purchase right automatically adjusted one hundredth share preferred stock two hundredths share preferred stock therefore purchase price two hundredths share preferred stock issued upon exercise ea alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts ch preferred stock purchase right 30000 except increase purchase price terms conditions rights remain unchanged event acquired merger business combination transaction 50 percent assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right 15 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following tables present information assets liabilities measured fair value recurring basis december 31 2011 2010 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts following table represents rollforward fair value level 3 instruments comprised solely acquisitionrelated contingent consideration valuation techniques items classified level 2 within valuation hierarchy consisting institutional money market fund held multinational financial institution corporate federal agency bonds commercial paper valued based upon pricing securities similar investment characteristics holdings derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy items classified level 3 within valuation hierarchy consisting contingent consideration liabilities related taligen orphatec acquisitions valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2011 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks 16 employee benefit plans defined contribution plan one qualified 401k plans covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal • 100 dollar contributed first 4 individual’s base salary incentive cash bonus • 050 dollar contributed next 2 compensation years ended december 31 2011 2010 2009 recorded matching contributions approximately 2882 1893 1552 respectively defined benefit plan maintain defined benefit plans employees outside united states including retirement benefit plan required local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments following table sets forth funded status amounts recognized defined benefit plans alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts following table provides information fair value plan assets per asset category december 31 2011 recorded liability 6151 noncurrent liabilities charge accumulated comprehensive income net tax 4183 related additional minimum liability following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows investment objective collective trust maximize overall return investment income capital appreciation consistent preservation capital considering investment strategies asset allocation limits determined pension law targeted allocation funds follows changes plan assets benefit obligations recognized comprehensive income oci year ended december 31 2011 follows estimate pay employer contributions approximately 2560 2012 expected future cash flows paid respect pension plans december 31 follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts 17 segment information operate one business segment business focusing serving patients severe ultrarare disorders though innovation development commercialization lifetransforming therapeutic products therefore chief operating decisionmaker manages operations company single operating segment revenues tangible longlived assets significant geographic region follows 1 longlived assets consist property plant equipment 18 subsequent events february 7 2012 acquired enobia pharma corp enobia privately held clinicalstage biotechnology company based montreal canada cambridge massachusetts transaction expected accounted business combination acquisition intended broaden objective develop deliver therapies patients ultrarare severe lifethreatening disorders enobias lead product candidate enb0040 asfotase alfa human recombinant targeted alkaline phosphatase enzymereplacement therapy patients suffering hypophosphatasia hpp ultrarare lifethreatening genetic metabolic disease approved treatments made upfront cash payment 610000 subject purchase price adjustments 100 enobias capital stock additional contingent payments would earned upon reaching various regulatory sales milestones regulatory sales milestones achieved total additional payments would 470000 financed acquisition available cash proceeds new credit facility noted december 31 2011 incurred 2039 acquisitionrelated costs comprised primarily professional fees conjunction acquisition enobia entered fiveyear 440000 credit facility syndication banks credit facility consists 240000 term loan payable equal quarterly installments 12000 starting june 30 2012 200000 revolving line credit facility bears interest per annum rate libor plus 125 200 depending certain leverage ratios calculated accordance agreement borrowed 80000 revolving line credit connection enobia acquisition alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2011 2010 2009 amounts thousands except per share amounts 19 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2011 2010 1 included within operating expenses first quarter 2011 acquisitionrelated costs 9928 associated taligen orphatec acquisitions 2 may 20 2011 effected twoforone stock split paid form 100 stock dividend stockholders record close trading may 2 2011 issued one additional share common stock share owned shareholder per share data presented accompanying table retroactively restated reflect stock splititem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits following materials alexion pharmaceuticals inc annual report form 10k year ended december 31 2012 formatted extensible business reporting language xbrl condensed consolidated statements operations ii condensed consolidated statements comprehensive income iii condensed consolidated balance sheets iv condensed consolidated statements cash flows v related notes tagged blocks text 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 5 incorporated reference annual report form 10k fiscal year ended december 31 2011 6 incorporated reference report form 8k filed december 2 2011 7 incorporated reference registration statement form s1 reg 33300202 8 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 9 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 10 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 11 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 12 incorporated reference annual report form 10k year ended december 31 2006 filed february 23 2007 13 incorporated reference report form 8k filed february 16 2006 14 incorporated reference annual report form 10k fiscal year ended december 31 2009 15 incorporated reference report form 8k filed november 14 2005 16 incorporated reference annual report form 10k fiscal year ended december 31 2007 17 incorporated reference report form 8k filed september 17 2010 18 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 19 incorporated reference quarterly report form 10q quarter ended january 31 2004 20 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 21 incorporated reference annual report form 10ka fiscal year ended july 31 1996 22 incorporated reference quarterly report form 10q quarter ended january 31 2003 23 incorporated reference annual report form 10k fiscal year ended december 31 2008 24 incorporated reference report form 8k filed december 16 2004 25 incorporated reference quarterly report form 10q quarter ended january 31 2005 26 incorporated reference report form 8k filed march 14 2005 27 incorporated reference annual report form 10k fiscal year ended december 31 2010 28 incorporated reference report form 8k filed february 14 2008 confidential treatment granted portions exhibit indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2012 2011 2010 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements changes stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2012 december 31 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america addition opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate hartford connecticut february 19 2013 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc “alexion” “company” “we” “our” “us” biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris® eculizumab first therapeutic approved patients two ultrarare severe disorders resulting chronic uncontrolled activation complement component immune system paroxysmal nocturnal hemoglobinuria pnh ultrarare lifethreatening blood disorder atypical hemolytic uremic syndrome ahus ultrarare lifethreatening genetic disease also evaluating potential indications soliris diseases chronic uncontrolled complement activation underlying mechanism progressing biotechnology product candidates ultrarare severe disorders various stages development incorporated 1992 began commercial sale soliris 2007 basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation february 7 2012 acquired enobia pharma corp enobia assets acquired liabilities assumed recorded respective fair values date acquisition enobias results operations included consolidated financial statements date acquisition dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted united states requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • research development expenses • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions valued based various estimates including probability success discount rates amount time conditions milestone payments met accounts receivable standard credit terms vary based country sale range 30 120 days consolidated average days’ sales outstanding ranges 80 100 days sell soliris limited number customers evaluate creditworthiness customer regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions year ended december 31 2012 two individual customers accounted 18 12 accounts receivable balance 21 12 net product sales year ended december 31 2011 two individual customers accounted 18 13 accounts receivable balance 19 12 net product sales customers accounted 10 net product sales accounts receivable continue monitor economic conditions including volatility associated international economies sovereign debt crisis europe associated impacts financial markets business credit economic conditions greece italy spain among members european union deteriorated throughout 2011 2012 conditions resulted may continue result increase average length time takes collect outstanding accounts receivable countries substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material exposure sovereign debt crisis greece limited material amount accounts receivable greece december 31 2012 2011 total gross accounts receivable italy spain approximately 82200 77000 respectively december 31 2012 2011 approximately 21100 21300 respectively amounts outstanding greater one year recorded allowance approximately 2000 400 respectively related gross receivables december 31 2012 recorded 21334 accounts receivable spain alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts within noncurrent assets approximates amount receivables estimate collections periods beyond one year ended december 31 2012 2011 recorded expense approximately 1100 350 respectively related expectation delayed payment countries net accounts receivable countries december 31 2012 2011 summarized follows inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method components inventory follows capitalization inventory costs capitalize inventory produced commercial sale including costs incurred prior regulatory approval subsequent filing biologics license application bla company determined inventory probable future economic benefit products approved us food drug administration fda regulatory authorities soliris also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form soliris utilized commercial clinical programs identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials also capitalize cost inventory manufactured manufacturing plant property plant equipment prior approval facility regulatory authorities inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash effectiveness qualifying hedge contract assessed quarterly record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense prepaid manufacturing costs cash advances paid us prior receipt inventory recorded prepaid manufacturing costs cash advances subject forfeiture terminate scheduled production expect carrying value prepaid manufacturing costs fully realized property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfive thirty years • machinery laboratory equipmentthree twenty years • computer hardware softwaretwo five years • furniture office equipmentthree seven years leasehold improvements assets capital lease arrangements amortized lesser estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service intangible assets intangible assets consist licenses patents purchased technology acquired inprocess research development iprd intangible assets definite lives amortized estimated useful lives reviewed impairment certain events occur described impairment longlived assets intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment development complete generally occurs regulatory approval market product obtained associated assets would deemed finitelived would amortized based estimated useful lives point time goodwill represents difference purchase price acquired businesses fair value identifiable tangible intangible net assets amortized goodwill reviewed impairment annually whenever events changes circumstances indicate carrying amount goodwill might recoverable impairment charges occurred result annual impairment assessments test goodwill annually impairment december 31 impairment longlived assets evaluate longlived assets primarily comprised intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts recoverable recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value iprd third quarter 2012 recognized impairment charge 26300 associated indefinitelived intangible asset acquired connection purchase taligen recognize impairment loss longlived assets years ended december 31 2012 2011 2010 contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion discount rates due passage time updates assumed achievement timing development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes assumptions could material impact amount contingent consideration expense recorded given period contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders equity revenue recognition principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis statements operations impact net product sales united states customers primarily specialty distributors specialty pharmacies supply physician office clinics hospital outpatient clinics infusion clinics home health care providers also sell soliris government agencies outside united states customers primarily hospitals hospital buying groups pharmacies health care providers distributors factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels contractual terms financial strength distributors addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sale alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limited period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may impact period adjustment made record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced vendors perform services sharebased compensation one sharebased compensation plan known 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units stock options granted employees exercise prices equal fair market value stock dates grant generally stock options restricted stock restricted stock units granted employees fully vest four years grant date stock options contractual term 10 years recognize sharebased compensation expense based fair value stock awards straightline basis requisite service period individual grants typically equals vesting period earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps net income adjusted aftertax amount interest deferred financing costs associated convertible debt denominator reflects potential dilution could occur stock options unvested restricted stock unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method well potential dilution remaining convertible notes converted common stock alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts following table summarizes calculation basic diluted eps years ended december 31 2012 2011 2010 following table represents potentially dilutive shares excluded calculation eps years ended december 31 2012 2011 2010 effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse provide valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained comprehensive income loss comprehensive income loss comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income foreign currency translation adjustments changes pension liabilities unrealized holding gains losses available sale securities unrealized gains losses hedge contracts certain changes equity reflected net tax alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts summary accumulated comprehensive income loss component summarized follows new accounting pronouncements june 2011 financial accounting standards board fasb issued new standard presentation comprehensive income new standard eliminated current alternative report comprehensive income components statement changes equity new standard companies elect present items net income comprehensive income one continuous statement two separate consecutive statements adopted provisions standard first quarter 2012 july 2012 fasb issued new standard amends guidance testing indefinitelived intangible assets goodwill new standard allows companies option first assess qualitative factors determine whether likely indefinitelived intangible asset impaired basis determining necessary perform quantitative assessment calculate fair value asset new standard company longer required calculate fair value indefinitelived intangible asset unless company determines based qualitative assessment likely impaired new standard effective annual interim impairment tests performed fiscal years beginning september 15 2012 early adoption permitted adopted provisions guidance 2012 annual impairment test adoption material effect consolidated financial statements 2 acquisitions acquisition enobia pharma corp february 7 2012 acquired enobia privately held clinicalstage biotechnology company based montreal canada cambridge massachusetts transaction accounted acquisition method accounting business combinations acquisition method accounting assets acquired liabilities assumed enobia recorded alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts acquisition date respective fair values reported consolidated financial condition completion acquisition reflects fair values enobias results operations included consolidated financial statements date acquisition intended objective develop commercialize therapies patients severe ultrarare lifethreatening disorders enobias lead product candidate asfotase alfa human recombinant targeted alkaline phosphatase enzymereplacement therapy patients suffering hypophosphatasia hpp ultrarare lifethreatening genetic metabolic disease approved treatments made upfront cash payment 623876 100 enobias capital stock additional contingent payments aggregate 470000 would due upon reaching various regulatory sales milestones financed acquisition existing cash proceeds new credit facility reconciliation upfront payments accordance purchase agreement total purchase price presented initial estimate fair value contingent consideration 117000 recorded noncurrent liability determined fair value obligations pay additional milestone payments using various estimates including probabilities success discount rates amount time conditions milestone payments met fair value measurement based significant inputs observable market representing level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt rate 52 developmental milestones weighted average cost capital rate 130 commercial milestones rates representative market participant assumptions range estimated milestone payments zero clinical milestones achieved product 470000 various regulatory sales milestones achieved subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time development work progresses towards achievement milestones december 31 2012 fair value contingent consideration enobia 124411 changes fair value consideration enobia 7411 year ended december 31 2012 fair values acquired assets liabilities based preliminary estimates subject change following table summarizes estimated fair values assets acquired liabilities assumed alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts asset categories acquired enobia acquisition included working capital fixed assets deferred tax assets iprd fair value working capital determined approximate book values fair value assigned assets acquired liabilities assumed prepared preliminary basis changes allocation may occur additional information becomes available related indemnification assets deferred taxes intangible assets associated iprd projects relate enobias lead product candidate asfotase alfa estimated fair value 587000 determined using multiperiod excess earnings method variation income approach multiperiod excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset fair value using multiperiod excess earnings method dependent estimated weighted average cost capital enobia 130 represents rate return market participant would expect assets excess purchase price fair value amounts assets acquired liabilities assumed represents goodwill amount resulting acquisition expect portion goodwill deductible tax purposes goodwill attributable acquisition enobia recorded noncurrent asset amortized subject annual review impairment factors contributed recognition goodwill included synergies specific business available market participants including unique ability commercialize therapies rare diseases skills relationships related biologics manufacturing existing relationships specialty physicians identify patients hpp global distribution network facilitate immediate drug delivery recorded net deferred tax liability 31471 amount primarily comprised 78527 related iprd offset acquired net operating losses research credit carryovers totaling 47056 year ended december 31 2012 recorded 6794 expenses associated operations enobia february 7 2012 march 31 2012 condensed consolidated statement comprehensive income effective april 1 2012 operations enobia integrated operations pro forma financial information unaudited following unaudited pro forma information presents combined results operations years ended december 31 2012 2011 acquisition enobia completed january 1 2011 pro forma results reflect operating efficiencies potential cost savings may result consolidation operations pro forma results adjusted remove costs associated changes fair value enobias preferred stock included pro forma net income year ended december 31 2012 approximately 23673 7900 alexion enobia acquisitionrelated costs respectively expected ongoing impact acquisitions taligen therapeutics inc january 28 2011 acquired outstanding capital stock taligen therapeutics inc taligen transaction accounted acquisition method accounting business combinations made initial payments 111773 cash may make additional future payments 367000 contingent milestone payments upon achievement various development commercial milestones range estimated milestone payments zero clinical milestones achieved product 367000 six products gain us european marketing approval alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts initial estimate fair value contingent consideration 11634 subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings december 31 2012 fair value contingent consideration taligen 9736 changes fair value consideration taligen 2948 1050 years ended december 31 2012 2011 respectively included change fair value year ended december 31 2012 gain 4331 related decrease fair value contingent consideration related acquisition decrease fair value result decreased likelihood payments contingent consideration due negative scientific findings decrease value related deprioritization agerelated macular degeneration program note 5 orphatec pharmaceuticals gmbh february 8 2011 acquired certain patents assets orphatec pharmaceuticals gmbh orphatec related investigational therapy patients molybdenum cofactor deficiency mocd type ultrarare genetic disorder characterized severe brain damage rapid death newborns made initial payments 3050 cash may make additional future payments 42000 contingent milestone payments upon various development regulatory commercial milestones range estimated milestone payments zero products gain market approval 42000 indications two products gain us european marketing approval reach applicable sales levels initial estimate fair value contingent consideration 5086 subsequent acquisition date measured contingent consideration arrangement fair value changes fair value recognized operating earnings december 31 2012 fair value contingent consideration orphatec 7523 changes fair value consideration orphatec 2087 350 years ended december 31 2012 2011 respectively acquisitionrelated costs acquisitionrelated costs years ended december 31 2012 2011 include following years ended december 31 2012 2011 incurred approximately 23673 2039 respectively costs related enobia acquisition included table 3 prepaid expenses current assets prepaid expenses current assets consist following alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts 4 property plant equipment net summary property plant equipment follows depreciation amortization property plant equipment approximately 15192 12236 11003 years ended december 31 2012 2011 2010 respectively december 31 2012 2011 computer software costs included property plant equipment 9628 10303 respectively depreciation amortization expense capitalized computer software costs 4228 3642 2883 years ended december 31 2012 2011 2010 respectively july 2006 acquired manufacturing plant smithfield rhode island commercial production soliris development manufacturing future products since date incurred costs related construction plant support fullscale commercial manufacturing also capitalized costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug december 2009 received final regulatory approval production commercial quantities eculizumab european commission accordingly plant considered substantially complete ready intended use result approval placed plant service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated assets useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold research development expenses product sold utilized rd activities respectively abnormal production costs incurred validation process expensed incurred alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts 5 intangible assets goodwill intangible assets goodwill net accumulated amortization follows amortization intangible assets approximately 5660 5087 4552 years ended december 31 2012 2011 2010 respectively assuming changes gross cost basis intangible assets estimated amortization intangible assets next five fiscal years follows december 31 2012 recorded indefinitelived intangible assets 628250 consists 587000 33200 8050 purchased iprd acquisitions enobia taligen orphatec respectively december 31 2012 except noted significant changes would impact carrying value iprd since date acquisition third quarter 2012 reviewed impairment value early stage preclinical indefinitelived intangible asset related taligen acquisition initiated review based evaluation negative scientific findings associated development different asset treatment agerelated macular degeneration likelihood success ophthalmic use value obtained market participant arms length transaction developments led us deprioritize development acquired asset result recognized impairment charge 26300 writedown asset fair value determined de minimis based value asset market participant arms length transaction fair value iprd asset determined using income approach used significant unobservable level 3 inputs unobservable inputs included among things riskadjusted forecast future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted average cost capital 220 applied calculating present value future cash flows impairment charge recorded operating expenses consolidated statement operations year ended december 31 2012 following table summarizes changes carrying amount goodwill alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen swiss franc manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 36 months hedge exposures resulting portions forecasted intercompany revenues denominated currencies us dollar purpose hedges intercompany revenue reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues hedges designated cash flow hedges upon contract inception december 31 2012 open contracts notional amounts totaling 801835 qualified hedge accounting impact accumulated comprehensive income aoci earnings foreign exchange contracts qualified cash flow hedges years ended december 31 2012 2011 follows assuming change foreign exchange rates market rates december 31 2012 11200 gain recognized accumulated comprehensive income expected reclassified revenue next 12 months enter foreign exchange forward contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2012 notional amount foreign exchange contracts hedge accounting applied 162354 recognized gain 3518 790 income expense years ended december 31 2012 2011 respectively associated foreign exchange contracts designated hedging instruments guidance amounts largely offset gains losses monetary assets liabilities alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts following tables summarize fair value outstanding derivatives december 31 2012 2011 7 accrued expenses accrued expenses consist following 8 debt february 7 2012 whollyowned swiss subsidiary alexion pharma international sàrl entered credit agreement credit agreement syndicate banks provides 240000 senior secured term loan facility alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts payable equal quarterly installments 12000 starting june 30 2012 200000 senior secured revolving credit facility february 7 2017 addition borrowings upon prior notice revolving credit facility includes borrowing capacity form letters credit 60000 borrowings sameday notice referred swingline loans 10000 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility aggregate amount exceed 150000 may elect loans credit agreement bear interest rate per annum equal libor plus 125 200 depending consolidated leverage ratio calculated accordance credit agreement ii case loans denominated us dollars base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus case b c 025 100 depending consolidated leverage ratio calculated accordance credit agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 7 2017 maturity date obligations credit facilities unconditionally guaranteed jointly severally certain existing domestic subsidiaries required guaranteed certain future domestic subsidiaries obligations alexion pharma international sàrl credit facilities unconditionally guaranteed jointly severally us certain existing domestic subsidiaries certain foreign subsidiaries required guaranteed certain future subsidiaries obligations borrower credit facilities guarantees obligations secured subject certain exceptions substantially borrowers assets certain guarantors including pledge equity interests certain subsidiaries real estate located smithfield rhode island excluding intellectual property assets certain foreign subsidiaries credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions pay dividends repurchase capital stock enter transactions affiliates credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan connection entering credit agreement paid 6184 financing costs amortized interest expense life debt connection acquisition enobia february 2012 borrowed 240000 term loan facility 80000 revolving facility used available cash remaining purchase price 2012 repaid revolving facility full made payments 91000 term loan december 31 2012 149000 outstanding term loan december 31 2012 open letters credit 9695 borrowing availability revolving facility 190305 fair value long term debt measured using level 2 inputs approximates book value february 7 2012 second amended restated credit agreement prior credit agreement dated march 7 2011 terminated outstanding borrowings prior credit agreement canceled prior credit agreement terminated connection simultaneously execution credit agreement described amortization expense associated deferred financing costs year ended december 31 2012 2011 2010 approximately 3035 283 239 respectively contractual maturities longterm debt obligations due subsequent december 31 2012 48000 2013 2014 2015 5000 2016 9 commitments contingencies commitments rely lonza group ag affiliates lonza third party manufacturer produce portion commercial clinical quantities soliris clinical quantities asfotase alfa contracted expect continue contracting product finishing vial filling packaging third parties various agreements lonza alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts remaining total commitments approximately 169000 2018 commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results october 2012 entered settlement nonexclusive license agreement third party terms agreement made upfront payment approximately 38000 fourth quarter 2012 pay royalties sales soliris accordance terms agreement result settlement nonexclusive license agreement reduced estimate probable contingent liabilities recorded gain cost sales 53377 third quarter 2012 december 31 2012 2011 recorded 25450 82010 respectively accrued expenses probable contingent liabilities royalties owed third parties january 26 2011 novartis vaccines diagnostics inc novartis filed civil action us biopharmaceutical companies us district court district delaware novartis claims willful infringement us patent 5688688 novartis seeks among things monetary damages finally determined infringe novartis patent may required pay royalties novartis sales soliris regarding certain manufacturing technology although believe manufacture soliris infringes valid patent claim owned novartis cannot guarantee successful defending action given early stages litigation management currently believe loss related matter probable potential magnitude loss range loss reasonably estimated addition novartis claim third parties may claim development manufacture use commercialization soliris drugs development infringes patents owned granted third parties aware broad patents owned others relating manufacture use sale recombinant humanized antibodies recombinant human antibodies recombinant human single chain antibodies soliris many product candidates genetically engineered antibodies including recombinant humanized antibodies recombinant human antibodies recombinant human single chain antibodies respect patents obtained licenses expect obtain licenses estimate obligations probable contingent liabilities based assessment estimated royalties potentially owed third parties costly license inability obtain necessary license could material adverse effect business however amount loss range loss beyond amounts currently accrued cannot reasonably estimated operating leases december 31 2012 lease headquarters primary research development facilities cheshire connecticut leases set expire 2016 2020 would subject contractual penalties approximately 3800 leases terminate early monthly fixed rent started approximately 287 increasing approximately 294 term lease also lease space regional executive sales offices lausanne switzerland well us states foreign countries support operations global organization aggregate lease expense 16758 10424 6980 years ended december 31 2012 2011 2010 respectively lease expense recorded straightline basis applicable lease terms november 2012 entered new operating lease agreement approximately 328000 square feet office laboratory space constructed new connecticut construction facility expected begin 2013 completed 2015 term new lease commence upon landlords substantial completion building expire 12 years completion date minimum renewal option 7 years maximum renewal option 20 years provided expand lease include rentable space building lease provides monthly payments ranging 795 907 term lease upon completion new facility relocate alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts headquarters cheshire operations new november 2012 connection planned construction facilities new connecticut also entered agreement state connecticut department economic community development provides forgivable loan grants totaling 26000 tax credits 25000 program requires meet certain criteria order prevent forfeiture repayment loan grants credits include maintaining corporate headquarters connecticut next 10 years ii achieving maintaining 668 fulltime employment positions state connecticut next 6 years unlikely able realize full value available tax credits currently exploring alternatives disposition credits december 31 2012 received grant funds tax credits associated agreement state connecticut aggregate future minimum annual rental payments exclusive costs related new operating lease facilities constructed new connecticut contingent upon construction facility next five years thereafter noncancellable operating leases including facilities equipment december 31 2012 license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business license agreements generally provide us pay initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrollment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris minimum fixed payments assuming nontermination agreements december 31 2012 next five years follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts 10 income taxes income tax provision based income taxes follows components income tax provision follows reversed valuation allowance certain nonus deferred tax assets second quarter 2010 realization assets likely continue maintain valuation allowance certain deferred tax assets realization certain periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance extent believe portion realized due amount nol’s credit carryforwards anticipate paying substantial us federal income taxes next twelve months currently paying cash taxes various us states foreign jurisdictions operations utilized net operating losses december 31 2012 federal state net operating loss carryforwards 453617 97452 respectively nols inclusive federal state net operating losses 10337 acquisition enobia included nol’s federal state nol’s 436893 45850 respectively attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable nol’s expire 2021 2032 also federal state income tax credit carryforwards 80755 7513 respectively income tax credits expire 2014 2032 additionally included income tax credit carryforwards federal income tax credit carryforwards 59881 attributable excess tax benefits exercise nonqualified stock options certain stock option exercises resulted tax deductions excess previously recorded benefits based option value time grant although additional tax benefits “windfalls” reflected net operating loss carryforwards pursuant authoritative guidance additional tax benefit associated windfall recognized deduction reduces regular taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards “windfall” tax benefits reflected net operating losses credit carryforward deferred tax assets periods presented alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts granted incentive tax holiday canton vaud switzerland effective january 1 2010 final expiration date 2019 tax holiday exempt company local corporate income taxes switzerland end 2014 expected renewed additional 5 years impact tax holiday decreased foreign taxes 3173 2012 2506 2011 tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period determined limiting provisions triggered prior year additionally connection acquisition enobia acquired 10337 net operating losses subject limitation however believe limitations expected result expiration loss significant amount federal nol’s income tax credit carryforwards provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows 2012 result structuring enobia business recorded income tax expense 21812 income statement structuring require us make cash payment approximately 50000 early 2013 amount fully accrued balance sheet december 31 2012 september 2011 completed assessment impact election claim federal foreign tax credits federal orphan drug credits would historical tax returns based assessment management elected claim foreign tax credit tax year ended december 31 2010 orphan drug credit tax years ended december 31 2010 2009 net federal income tax benefit recorded 2011 result election claim federal foreign tax credit 2010 federal orphan drug credit 2010 2009 approximately 15400 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities exclude windfall tax benefits follows follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows recognize interest accrued penalties related unrecognized tax benefits component tax expense total amount accrued interest penalties tax expense significant december 31 2012 unless related excess tax benefits stock options unrecognized tax benefits recognized would favorable impact effective tax rate file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however statute limitations could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods statute limitation previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse significant portion unrecognized tax benefits within next year internal revenue service irs commenced examination us income tax returns 2008 2009 second quarter 2011 anticipated completed within next twelve months result audit alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts possible amount liability unrecognized tax benefits could change next twelve months impact unrecognized tax benefits difficult determine based preliminary stage discussions irs december 31 2012 paid us income taxes 184321 undistributed earnings nonus subsidiaries earnings intended either permanently reinvested subject tax free liquidation give rise significant incremental us taxes practicable estimate amount additional taxes might payable undistributed earnings due variety factors including timing extent nature repatriation expectation foreign undistributed earnings permanently invested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructuring tax law changes currently contemplated fourth quarter 2012 applied received favorable tax incentive state rhode island based increasing employment levels manufacturing plant additionally received favorable ruling state rhode island related state apportionment deferred tax benefit attributable items recorded fourth quarter 4240 11 stock options restricted stock december 31 2012 one stock option plan 2004 incentive plan “2004 plan” 2004 plan restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards may granted maximum 35874 shares directors officers key employees consultants stock options granted plans maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years following table summarizes components sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2012 2011 2010 2838 2954 2785 respectively weighted average fair value date grant options granted years ended december 31 2012 2011 2010 2404 1546 850 per option respectively december 31 2012 112216 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 274 years alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts summary status stock option plans december 31 2012 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2012 2011 2010 308009 114712 64656 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value shares vested years ended december 31 2012 2011 2010 27301 23485 20039 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options summary status nonvested restricted stock changes period ended follows 12 stockholders equity preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts purchase one hundredth share new series preferred stock exercise price 7500 subject adjustment see rights may exercised public announcement party acquired 20 common stock commencement public announcement make tender offer 20 common stock rights voting rights expire march 6 2017 may redeemed us price 001 per right time prior expiration acquisition 20 stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock february 23 2007 board directors amended purchase price preferred stock purchase rights result twoforone stock split companys outstanding shares common stock effected august 22 2008 number shares preferred stock purchasable upon proper exercise preferred stock purchase right automatically adjusted one hundredth share preferred stock two hundredths share preferred stock therefore purchase price two hundredths share preferred stock issued upon exercise preferred stock purchase right 30000 except increase purchase price terms conditions rights remain unchanged event acquired merger business combination transaction 50 assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right common stock may 2012 conjunction addition sp 500 index completed sale 5000 shares common stock public offering net proceeds sale shares offering 462212 share repurchases november 2012 board directors authorized repurchase 400000 common stock repurchase program expiration date obligated acquire particular number shares program may discontinued time companys discretion program repurchased 130 shares common stock cost 11553 fourth quarter 2012 13 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts following tables present information assets liabilities measured fair value recurring basis december 31 2012 2011 indicate fair value hierarchy valuation techniques utilized determine fair value following table represents rollforward fair value level 3 instruments comprised solely acquisitionrelated contingent consideration alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts valuation techniques items classified level 2 within valuation hierarchy consisting institutional money market fund held multinational financial institution valued based upon pricing securities similar investment characteristics holdings derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy items classified level 3 within valuation hierarchy consisting contingent consideration liabilities related acquisitions valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2012 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks 14 employee benefit plans defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal • 100 dollar contributed first 4 individual’s base salary incentive cash bonus • 050 dollar contributed next 2 compensation years ended december 31 2012 2011 2010 recorded matching contributions approximately 3700 2882 1893 respectively defined benefit plans maintain defined benefit plans employees outside united states including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments following table sets forth funded status amounts recognized defined benefit plans alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date following table presents total plan assets investment category december 31 2012 classification investment category within fair value hierarchy respect inputs used measure fair value plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active investment objective maximize overall return investment income capital appreciation consistent preservation capital considering investment strategies asset allocation limits determined pension law targeted allocation funds follows december 31 2012 recorded liability 8478 noncurrent liabilities charge accumulated comprehensive income net tax 5712 related additional minimum liability alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows changes plan assets benefit obligations recognized accumulated comprehensive income aoci follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts amount accumulated comprehensive income december 31 2012 expected recognized component net periodic pension costs 2013 424 estimate pay employer contributions approximately 4285 2013 expected future cash flows paid respect pension plans december 31 2012 follows 15 segment information operate one business segment business serving patients severe ultrarare disorders though innovation development commercialization lifetransforming therapeutic products therefore chief operating decisionmaker manages operations single operating segment revenues tangible longlived assets significant geographic region follows 1 longlived assets consist property plant equipment 16 subsequent events january 2013 entered license agreement providing exclusive research license option exclusive commercial license specific targets products developed platform technology terms agreement made upfront payment 3000 also required pay annual maintenance fees addition product develop could required pay additional 70500 license fees development sales milestones specific milestones met time alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2012 2011 2010 amounts thousands except per share amounts 17 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2012 2011 1 included within cost sales third quarter 2012 gain 53377 recognized result execution settlement nonexclusive license agreement third party october 2012 2 included within operating expenses quarter 2012 acquisitionrelated employee costs professional fees 10765 2840 1509 1148 respectively associated acquisition enobia 3 included within operating expenses third quarter 2012 impairment charge 26300 writedown value early stage preclinical indefinitelived intangible asset related taligen acquisition 4 included within operating expenses first quarter 2011 acquisitionrelated employee costs professional fees 9792 associated taligen orphatec acquisitionsitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 5 incorporated reference annual report form 10k fiscal year ended december 31 2011 6 incorporated reference report form 10q filed october 25 2013 7 incorporated reference registration statement form s1 reg 33300202 8 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 9 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 10 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 11 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 12 incorporated reference annual report form 10k year ended december 31 2006 13 incorporated reference report form 8k filed february 16 2006 14 incorporated reference annual report form 10k fiscal year ended december 31 2009 15 incorporated reference report form 8k filed september 17 2010 16 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 17 incorporated reference quarterly report form 10q quarter ended march 31 2013 18 incorporated reference quarterly report form 10q quarter ended january 31 2004 19 incorporated reference registration statement form s8 reg 33371879 filed february 5 199920 incorporated reference annual report form 10ka fiscal year ended july 31 1996 21 incorporated reference quarterly report form 10q quarter ended january 31 2003 22 incorporated reference annual report form 10k fiscal year ended december 31 2008 23 incorporated reference report form 8k filed december 16 2004 24 incorporated reference quarterly report form 10q quarter ended january 31 2005 25 incorporated reference report form 8k filed march 14 2005 26 incorporated reference annual report form 10k fiscal year ended december 31 2010 confidential treatment granted portions exhibit indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2013 2012 2011 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements changes stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2013 december 31 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america addition opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp hartford connecticut february 10 2014 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris first therapeutic approved patients either two severe ultrarare disorders resulting chronic uncontrolled activation complement component immune system paroxysmal nocturnal hemoglobinuria pnh lifethreatening ultrarare genetic blood disorder atypical hemolytic uremic syndrome ahus lifethreatening ultrarare genetic disease also evaluating additional potential indications soliris severe ultrarare diseases uncontrolled complement activation underlying mechanism progressing various stages development additional product candidates potential treatments patients severe lifethreatening ultrarare disorders incorporated 1992 began commercial sale soliris 2007 basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted united states requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • research development expenses • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable securities availableforsale accordingly record securities fair value classify marketable securities current assets investments intended available company use funding current operations unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders equity adjustment fair value reflects significant decline value security evaluate extent decline determined otherthantemporary would mark security market charge consolidated statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss offer nonqualified deferred compensation plan allows participants elect defer income future periods participants plan earn return deferrals based several investments options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan securities classified trading securities carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses accounts receivable standard credit terms vary based country sale range 30 120 days consolidated average days’ sales outstanding ranges 70 80 days evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions year ended december 31 2013 two individual customers accounted 20 10 accounts receivable balance one customer accounted 20 net product sales year ended december 31 2012 two individual customers accounted 18 12 accounts receivable balance 21 12 net product sales customers accounted 10 net product sales accounts receivable continue monitor economic conditions including volatility associated international economies sovereign debt issues europe associated impacts financial markets business credit economic conditions greece italy spain among members european union deteriorated last several years conditions past resulted increase average length time takes collect outstanding accounts receivable countries substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material exposure sovereign debt issue greece limited material amount accounts receivable greece december 31 2013 2012 gross accounts receivable italy spain totaled approximately 78072 82200 respectively december 31 2013 2012 approximately 17318 21100 respectively amounts outstanding greater one year recorded allowance approximately 1493 2000 respectively related gross receivables december 31 2013 2012 recorded 8052 21334 accounts receivable spain within noncurrent assets approximates amount receivables estimate collection periods beyond one year years ended december 31 2013 2012 recorded income expense approximately 944 1100 respectively related recoveries past due amounts countries expectation delayed payment net accounts receivable countries december 31 2013 2012 summarized follows inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method components inventory follows capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized december 31 2013 inventory capitalized associated products awaiting regulatory approval products approved us food drug administration fda regulatory authorities soliris also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form soliris utilized commercial clinical programs identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire would require adjustments inventory values also apply judgments related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory actual results differ estimates additional inventory writeoffs may required derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash effectiveness qualifying hedge contract assessed quarterly record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts prepaid manufacturing costs cash advances paid us prior receipt inventory recorded prepaid manufacturing costs cash advances subject forfeiture terminate scheduled production expect carrying value prepaid manufacturing costs fully realized property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfive thirty years • machinery laboratory equipmentthree thirty years • computer hardware softwaretwo five years • furniture office equipmentthree seven years leasehold improvements assets capital lease arrangements amortized lesser assets estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated assets useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable managed purpose providing return form dividends lower costs economic benefits consists inputs processes provide ability provide outputs acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill acquisition net assets constitute business goodwill recognized consolidated financial statements include results operations acquired business completion acquisition intangible assets intangible assets consist licenses patents purchased technology acquired inprocess research development iprd intangible assets definite lives amortized estimated useful lives reviewed impairment certain events occur described impairment longlived assets alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment development complete generally occurs regulatory approval market product obtained associated assets would deemed finitelived would amortized based estimated useful lives point time goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets completed annual impairment test december 31 2013 determined carrying value goodwill impaired impairment longlived assets longlived assets primarily comprised intangible assets property plant equipment evaluate finitelived intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset recognized impairment charges associated assets acquired connection purchase taligen 33521 2013 associated early state indefinitelived intangible asset purchased technology asset 26300 2012 associated early stage indefinitelived intangible asset recognize impairment loss longlived assets years ended december 31 2013 2012 2011 contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval assumptions related determining value contingent consideration include significant amount judgment changes underlying estimates could material impact amount contingent consideration expense recorded given period contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adjustment operating results treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders equity alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts revenue recognition principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations revenue recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales customers primarily comprised distributors pharmacies hospitals hospital buying groups health care providers cases may also sell soliris governments government agencies factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis soliris received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may impact period adjustment made record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation one sharebased compensation plan known amended restated 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts employees consultants advisors company subsidiary date sharebased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units nonmarket performance conditions compensation expense recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest recognized straightline basis requisite service period individual grants typically equals vesting period generally stock options restricted stock restricted stock units granted employees fully vest four years grant date performancebased restricted stock units three year vesting period stock options contractual term 10 years compensation expense awards performance conditions recognized using gradedvesting method estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps net income adjusted aftertax amount interest deferred financing costs associated convertible debt denominator reflects potential dilution could occur stock options unvested restricted stock unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method well potential dilution remaining convertible notes converted common stock following table summarizes calculation basic diluted eps years ended december 31 2013 2012 2011 following table represents potentially dilutive shares excluded calculation eps years ended december 31 2013 2012 2011 effect antidilutive alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrued potential interest penalties related unrecognized tax benefits component tax expense comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable securities unrealized gains losses hedge contracts foreign currency translation adjustments certain changes equity reflected net tax new accounting pronouncements january 2013 financial accounting standards board issued update clarify scope disclosures offsetting assets liabilities standard effective interim annual periods beginning january 1 2013 requires disclosure comparative periods adopted provisions guidance 2013 february 2013 financial accounting standards board issued new standard improve reporting reclassifications accumulated comprehensive income new standard requires disclosure significant amounts reclassified component accumulated comprehensive income statement line items affected reclassification standard effective prospectively interim annual periods beginning december 15 2012 adopted provisions guidance including additional disclosure noted 2013 2 acquisitions acquisition enobia pharma corp february 2012 acquired enobia pharma corp enobia privately held clinicalstage biotechnology company based montreal canada cambridge massachusetts transaction accounted acquisition method accounting business combinations acquisition method accounting assets acquired liabilities assumed enobia recorded acquisition date respective fair values reported consolidated financial condition completion acquisition reflects fair values enobias results operations included consolidated financial statements date acquisition intended objective develop commercialize therapies patients severe ultrarare lifethreatening disorders enobias lead product candidate asfotase alfa human recombinant targeted alkaline phosphatase enzymereplacement therapy patients suffering hypophosphatasia hpp ultrarare lifethreatening genetic metabolic disease approved treatments made upfront cash payment 623876 100 enobias capital stock additional contingent payments aggregate 470000 would due upon reaching various regulatory sales milestones financed acquisition existing cash proceeds new credit facility alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts reconciliation upfront payments accordance purchase agreement total purchase price presented initial estimate fair value contingent consideration 117000 recorded noncurrent liability determined fair value obligations pay additional milestone payments using various estimates including probabilities success discount rates amount time conditions milestone payments met fair value measurement based significant inputs observable market representing level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt rate 52 developmental milestones weighted average cost capital rate 130 commercial milestones rates representative market participant assumptions range estimated milestone payments zero clinical milestones achieved product 470000 various regulatory sales milestones achieved subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time development work progresses towards achievement milestones december 31 2013 fair value contingent consideration enobia 133013 changes fair value consideration enobia 8602 7411 years ended december 31 2013 2012 respectively following table summarizes estimated fair values assets acquired liabilities assumed asset categories acquired enobia acquisition included working capital fixed assets deferred tax assets iprd fair value working capital determined approximate book values intangible assets associated iprd projects relate enobias lead product candidate asfotase alfa estimated fair value 587000 determined using multiperiod excess earnings method variation income approach multiperiod excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset fair value using multiperiod excess earnings method dependent estimated weighted average cost capital enobia 130 represents rate return market participant would expect assets excess purchase price fair value amounts assets acquired liabilities assumed represents goodwill amount resulting acquisition expect portion goodwill deductible tax purposes goodwill attributable acquisition enobia recorded noncurrent asset amortized subject annual review impairment factors contributed recognition goodwill included synergies specific business available market participants including unique ability alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts commercialize therapies rare diseases skills relationships related biologics manufacturing existing relationships specialty physicians identify patients hpp global distribution network facilitate immediate drug delivery recorded net deferred tax liability 31471 amount primarily comprised 78527 related iprd offset acquired net operating losses research credit carryovers totaling 47056 year ended december 31 2012 recorded 6794 expenses associated operations enobia february 7 2012 march 31 2012 condensed consolidated statement comprehensive income effective april 1 2012 operations enobia integrated operations pro forma financial information unaudited following unaudited pro forma information presents combined results operations years ended december 31 2012 2011 acquisition enobia completed january 1 2011 pro forma results reflect operating efficiencies potential cost savings may result consolidation operations pro forma results adjusted remove costs associated changes fair value enobias preferred stock included pro forma net income year ended december 31 2012 approximately 23673 7900 alexion enobia acquisitionrelated costs respectively expected ongoing impact acquisitions orphatec pharmaceuticals gmbh february 2011 acquired certain patents assets orphatec pharmaceuticals gmbh orphatec related investigational therapy patients molybdenum cofactor deficiency mocd type ultrarare genetic disorder characterized severe brain damage rapid death newborns made initial payments 3050 cash may make additional future payments 42000 contingent milestone payments upon various development regulatory commercial milestones range estimated milestone payments zero products gain market approval 42000 indications two products gain us european marketing approval reach applicable sales levels addition 2013 made milestone payments 3000 related acquisition initial estimate fair value contingent consideration 5086 subsequent acquisition date measured contingent consideration arrangement fair value changes fair value recognized operating earnings december 31 2013 fair value contingent consideration orphatec 5704 changes fair value consideration orphatec 1181 2087 350 years ended december 31 2013 2012 2011 respectively taligen therapeutics inc january 2011 acquired outstanding capital stock taligen therapeutics inc taligen transaction accounted acquisition method accounting business combinations made initial payments 111773 cash may make additional future payments 367000 contingent milestone payments upon achievement various development commercial milestones range estimated milestone payments zero clinical milestones achieved product 367000 six products gain us european marketing approval alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts initial estimate fair value contingent consideration 11634 subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings december 31 2013 fair value contingent consideration taligen 3959 changes fair value consideration taligen 5777 2948 1050 years ended december 31 2013 2012 2011 respectively included change fair value years ended december 31 2013 2012 gain 5973 4331 respectively related decrease fair value contingent consideration related acquisition decrease fair value result decreased likelihood payments contingent consideration due reassessment scientific findings acquisitionrelated costs acquisitionrelated costs associated business combinations years ended december 31 2013 2012 2011 include following years ended december 31 2013 2012 2011 incurred approximately 9625 23673 2039 respectively costs related enobia acquisition included table 3 prepaid expenses current assets prepaid expenses current assets consist following 4 property plant equipment net summary property plant equipment follows included constructioninprogress december 31 2013 32230 costs associated construction new facility new connecticut november 2012 entered lease agreement office laboratory space constructed new although legally premises deemed owner building construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlords costs constructing facility required capitalized non alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts cash transaction offset corresponding facility lease obligation consolidated balance sheet construction new facility began june 2013 expected completed 2015 depreciation amortization property plant equipment approximately 19084 15192 12236 years ended december 31 2013 2012 2011 respectively december 31 2013 2012 computer software costs included property plant equipment 9691 9628 respectively depreciation amortization expense capitalized computer software costs 4503 4228 3642 years ended december 31 2013 2012 2011 respectively 5 intangible assets goodwill intangible assets goodwill net accumulated amortization follows amortization intangible assets approximately 8257 5660 5087 years ended december 31 2013 2012 2011 respectively assuming changes gross cost basis intangible assets estimated amortization intangible assets next five fiscal years follows december 31 2013 recorded indefinitelived intangible assets 598514 purchased iprd prior business acquisitions december 31 2013 except noted significant changes would impact carrying value iprd since date acquisition fourth quarter 2013 reviewed impairment value early stage phase indefinitelived intangible asset related taligen acquisition initiated review part annual impairment testing based evaluation preliminary scientific findings phase clinical trial led us reassess development acquired asset fair value iprd asset determined using income approach used significant unobservable level 3 inputs unobservable inputs included among things riskadjusted forecast future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted average cost capital 215 applied calculating present value future cash flows based factors estimated value obtained market participant arms length transaction 3464 lower carrying amount also reviewed impairment value purchased technology associated taligen acquisition determined estimated value de minimis result recognized impairment charge 33521 writedown assets fair value recorded operating expenses consolidated statement operations year ended december 31 2013 third quarter 2012 reviewed impairment value early stage preclinical indefinitelived intangible asset related taligen acquisition initiated review based evaluation negative scientific findings associated development different asset treatment agerelated macular degeneration likelihood success ophthalmic use value obtained market participant arms length transaction developments led us deprioritize development acquired asset result recognized alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts impairment charge 26300 writedown asset fair value determined de minimis based value asset market participant arms length transaction fair value iprd asset determined using income approach used significant unobservable level 3 inputs unobservable inputs included among things riskadjusted forecast future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted average cost capital 220 applied calculating present value future cash flows impairment charge recorded operating expenses consolidated statement operations year ended december 31 2012 following table summarizes changes carrying amount goodwill 6 marketable securities amortized cost gross unrealized holding gains gross unrealized holding losses estimated fair value availableforsale investments type security december 31 2013 follows aggregate fair value availableforsale securities unrealized loss position december 31 2013 461634 investments continuous unrealized loss position less 12 months december 31 2013 believe cost basis availableforsale investments recoverable fair values availableforsale securities classification consolidated balance sheet follows fair values availableforsale debt securities december 31 2013 contractual maturity summarized follows december 31 2013 fair value trading securities 1017 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts utilize specific identification method computing realized gains losses realized gains losses availableforsale trading securities material year ended december 31 2013 held marketable securities december 31 2012 7 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen british pound swiss franc manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 36 months hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar purpose hedges revenue reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues hedges designated cash flow hedges upon contract inception december 31 2013 open contracts notional amounts totaling 1084418 qualified hedge accounting impact accumulated comprehensive income aoci earnings foreign exchange contracts qualified cash flow hedges years ended december 31 2013 2012 follows assuming change foreign exchange rates market rates december 31 2013 1197 gains recognized aoci reclassified revenue next 12 months enter foreign exchange forward contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2013 notional amount foreign exchange contracts hedge accounting applied 138046 recognized gain 8306 3518 790 income expense years ended december 31 2013 2012 2011 respectively associated foreign exchange contracts designated hedging instruments guidance amounts largely offset gains losses monetary assets liabilities alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts following tables summarize fair value outstanding derivatives december 31 2013 2012 although offset derivative assets liabilities within consolidated balance sheets international swap derivatives association isda agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect consolidated balance sheets offsetting foreign exchange forward contracts subject provisions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts 8 accrued expenses liabilities accrued expenses consist following current liabilities consist following liabilities consist following 9 debt february 7 2012 entered credit agreement credit agreement syndicate banks provides 240000 senior secured term loan facility payable equal quarterly installments 12000 starting june 30 2012 200000 senior secured revolving credit facility february 7 2017 addition borrowings upon prior notice revolving credit facility includes borrowing capacity form letters credit 60000 borrowings sameday notice referred swingline loans 10000 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility aggregate amount exceed 150000 may elect loans credit agreement bear interest rate per annum equal libor plus 125 200 depending consolidated leverage ratio calculated accordance credit agreement ii case loans denominated us dollars base rate equal higher prime rate effect b federal alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts funds rate effect plus 050 c eurodollar rate effect plus 100 plus case b c 025 100 depending consolidated leverage ratio calculated accordance credit agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 7 2017 maturity date december 31 2013 2012 interest rate outstanding loans credit agreement 141 146 respectively obligations credit facilities unconditionally guaranteed jointly severally certain existing domestic subsidiaries required guaranteed certain future domestic subsidiaries obligations alexion pharma international sàrl credit facilities unconditionally guaranteed jointly severally us certain existing domestic subsidiaries certain foreign subsidiaries required guaranteed certain future subsidiaries obligations borrower credit facilities guarantees obligations backed subject certain exceptions substantially borrowers assets certain guarantors including pledge equity interests certain subsidiaries real estate located smithfield rhode island excluding intellectual property assets certain foreign subsidiaries credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions pay dividends repurchase capital stock enter transactions affiliates credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan connection entering credit agreement paid 6184 financing costs amortized interest expense life debt amortization expense associated deferred financing costs years ended december 31 2013 2012 2011 approximately 1351 3035 283 respectively connection acquisition enobia february 2012 borrowed 240000 term loan facility 80000 revolving facility used available cash remaining purchase price 2012 repaid revolving facility full made payments 91000 term loan december 31 2013 113000 outstanding term loan december 31 2013 open letters credit 17134 borrowing availability revolving facility 182866 fair value long term debt measured using level 2 inputs approximates book value contractual maturities longterm debt obligations due subsequent december 31 2013 5000 2014 48000 2015 2016 12000 2017 december 31 2013 recorded 48000 due term loan current liabilities based intent ability make payments amount 2014 10 commitments contingencies commitments license agreements january 2013 entered license agreement technology provides exclusive research license option exclusive commercial license specific targets products developed due early stage asset recorded expense upfront payment 3000 first quarter 2013 also required pay annual maintenance fees term arrangement addition target maximum six targets develop could required pay additional 70500 license fees development sales milestones specific milestones met time july 2013 entered license collaboration agreement ensemble therapeutics corporation identification development commercialization therapeutic candidates based specific drug targets due early stage assets recorded expense upfront payment 11500 third quarter 2013 also responsible funding research activities program addition drug target maximum four targets could required pay additional 90750 development milestones specific milestones met time agreement also provides royalty payments commercial sales product developed agreement alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts lonza agreement rely lonza group ag affiliates lonza third party manufacturer produce portion commercial clinical quantities soliris clinical quantities asfotase alfa contracted expect continue contracting product finishing vial filling packaging third parties various agreements lonza remaining total commitments approximately 147000 2019 commitments may canceled limited circumstances terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured alexion rhode island manufacturing facility arimf contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results past received may future receive notices third parties claiming patents may infringed development manufacture sale soliris guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales soliris could required pay owners patents technology used manufacture sale soliris costly license inability obtain necessary license could material adverse effect business however amount loss range loss beyond amounts currently accrued cannot reasonably estimated january 2011 novartis vaccines diagnostics inc novartis filed action us biopharmaceutical companies us district court district delaware claiming willful infringement us patent 5688688 688 patent third quarter 2013 parties engaged discussions resolve matter october 2013 novartis agreed resolve claims asserted novartis action october 2013 parties entered settlement agreement dismissal pursuant novartis granted alexion nonexclusive fully paid license 688 patent products dismissed case prejudice result recorded expense 9181 cost sales third quarter 2013 related litigation settlement agreement previously reported third quarter 2012 reduced estimate probable contingent liabilities due execution settlement nonexclusive license agreement october 2012 third party related third partys intellectual property adjusted liability reflect actual negotiated royalty rate set forth agreement change estimate resulted positive impact cost sales 53377 third quarter 2012 march 2013 received warning letter us food drug administration fda regarding compliance current good manufacturing practices cgmp arimf warning letter followed fda inspection concluded august 2012 conclusion inspection fda issued form 483 inspectional observations responded august 2012 provided additional information fda september december 2012 observations relate commercial clinical manufacture soliris arimf responded warning letter fda dated april 2013 continue manufacture products including soliris facility resolution warning letter difficult predict currently believe loss related matter probable potential magnitude loss range loss reasonably estimated operating leases december 31 2013 lease headquarters primary research development facilities cheshire connecticut leases set expire 2016 2020 would subject contractual penalties approximately 3800 leases terminate early monthly fixed rent started approximately 315 increasing approximately 324 term lease also lease space regional executive sales offices lausanne switzerland global supply chain distribution headquarters dublin ireland well us locations foreign countries support operations global organization aggregate lease expense 19094 16758 10424 years ended december 31 2013 2012 2011 respectively lease expense recorded straightline basis applicable lease terms alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts november 2012 entered new operating lease agreement office laboratory space constructed new connecticut construction facility began june 2013 expected completed 2015 term new lease commence upon landlords substantial completion building expire 12 years completion date minimum renewal option 7 years maximum renewal option 20 years provided expand lease include rentable space building lease provides monthly payments ranging 971 1108 term lease upon completion new facility relocate headquarters cheshire operations new november 2012 connection planned construction facilities new connecticut also entered agreement state connecticut department economic community development provides forgivable loan grants totaling 26000 tax credits 25000 program requires meet certain criteria order prevent forfeiture repayment loan grants credits include maintaining corporate headquarters connecticut next 10 years ii achieving maintaining 668 fulltime employment positions state connecticut next 6 years unlikely able realize full value available tax credits currently exploring alternatives disposition credits december 31 2013 received grant funds tax credits associated agreement state connecticut aggregate future minimum annual rental payments exclusive costs related new operating lease facilities constructed new connecticut contingent upon construction facility next five years thereafter noncancellable operating leases including facilities equipment december 31 2013 license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business license agreements generally provide us pay initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrollment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts minimum fixed payments assuming nontermination agreements december 31 2013 next five years follows 11 income taxes income tax provision based income taxes follows components income tax provision follows continue maintain valuation allowance certain deferred tax assets realization certain due exhaustion us federal net operating losses anticipate paying us federal income taxes next twelve months continue pay cash taxes various us states foreign jurisdictions operations utilized net operating losses alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts december 31 2013 federal state net operating loss carryforwards 8809 33969 respectively included nol’s state nol’s 23660 attributable excess tax benefits exercise nonqualified stock options tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable nol’s expire 2021 2032 also federal state income tax credit carryforwards 184919 6194 respectively income tax credits expire 2014 2033 additionally included income tax credit carryforwards federal income tax credit carryforwards 6049 attributable excess tax benefits exercise nonqualified stock options certain stock option exercises resulted tax deductions excess previously recorded benefits based option value time grant although additional tax benefits “windfalls” reflected net operating loss carryforwards pursuant authoritative guidance additional tax benefit associated windfall recognized deduction reduces taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards credit carryforwards “windfall” tax benefits reflected net operating losses credit carryforwards deferred tax assets periods presented granted incentive tax holiday canton vaud switzerland effective january 1 2010 tax holiday exempt company local corporate income taxes switzerland end 2014 renewable additional 5 years final expiration 2019 impact tax holiday decreased foreign tax expense 4351 2013 3173 2012 2506 2011 tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period determined limiting provisions triggered prior year however believe limitations expected result expiration loss significant amount federal nol’s income tax credit carryforwards provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows described recorded 95800 tax expense result centralization global supply chain technical operations ireland related recognition deferred tax liabilities us federal tax credit research experimentation expenses expired december 31 2011 connection expiration 2012 tax expense include benefit us federal tax credit research experimentation january 2013 american taxpayer relief act 2012 retroactively extended tax credit research experimentation back january 1 2012 end 2013 signed law effects change tax law recognized period includes date enactment therefore tax benefit attributable 2012 us federal tax credit 2719 research experimentation recorded first quarter 2013 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts 2012 result structuring enobia business recorded income tax expense 21812 income statement structuring also required us make cash payment 47200 early 2013 amount fully accrued balance sheet december 31 2012 september 2011 completed assessment impact election claim federal foreign tax credits federal orphan drug credits would historical tax returns based assessment management elected claim foreign tax credit tax year ended december 31 2010 orphan drug credit tax years ended december 31 2010 2009 net federal income tax benefit recorded 2011 result election claim federal foreign tax credit 2010 federal orphan drug credit 2010 2009 approximately 15400 provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities exclude windfall tax benefits follows follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2013 total amount tax expense recorded 2013 related unrecognized tax benefits 7897 amounts recognized 2012 2011 material unless related excess tax benefits stock options unrecognized tax benefits recognized would favorable impact effective tax rate alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts expect 24812 total unrecognized tax benefits reverse within next twelve months file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however statute limitations could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods statute limitation previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse significant portion unrecognized tax benefits 24812 mentioned within next year internal revenue service irs commenced examination us income tax returns 2008 2009 second quarter 2011 examination completed fourth quarter 2013 result audit material change liability unrecognized tax benefits record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries earnings intended permanently reinvested offshore fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership extent us parent company receives allocation partnership income amounts taxable us year therefore permanent reinvestment assertion longer apply earnings recognition deferred tax liabilities associated aforementioned partnership resulted tax expense approximately 95800 fourth quarter 2013 also distributed majority earnings profits nonus subsidiaries via dividend amount 152000 fourth quarter 2013 dividend give rise us cash tax liability resulted repatriation significant portion unremitted earnings december 31 2013 present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future practicable estimate amount additional taxes might payable cfcs’ undistributed earnings due variety factors including timing extent nature repatriation expectation foreign undistributed earnings us parent companys share foreign partnership profits permanently invested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructuring tax law changes currently contemplated 12 stock options restricted stock december 31 2013 one stock option plan amended restated 2004 incentive plan “2004 plan” 2004 plan restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards may granted maximum 47874 shares directors officers key employees consultants stock options granted 2004 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vests four years however performancebased restricted stock units threeyear vesting period following table summarizes components sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2013 2012 2011 3978 2838 2954 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts december 31 2013 169965 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 267 years stock options summary status stock option plans december 31 2013 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2013 2012 2011 204470 308009 114712 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2013 2012 2011 32249 27301 23485 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options weighted average fair value date grant options granted years ended december 31 2013 2012 2011 2399 2404 1546 per option respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts restricted stock summary status nonvested restricted stock changes period ended follows restricted stock awards granted 2013 include 81 restricted stock units granted senior management performancebased servicebased vesting conditions weighted average grant date fair value awards 9707 number performancebased restricted stock units granted represents number shares earned performance period ended december 31 2013 based specific preestablished performance goals awards vest three year period subject employees continued employment company fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2013 2012 2011 9506 8213 4425 per share respectively total fair value restricted stock vested years ended december 31 2013 2012 2011 26679 18573 13028 respectively 13 stockholders equity preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one hundredth share new series preferred stock exercise price 7500 subject adjustment see rights may exercised public announcement party acquired 20 common stock commencement public announcement make tender offer 20 common stock rights voting rights expire march 6 2017 may redeemed us price 001 per right time prior expiration acquisition 20 stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock february 23 2007 board directors amended purchase price preferred stock purchase rights result twoforone stock split companys outstanding shares common stock effected august 22 2008 number shares preferred stock purchasable upon proper exercise preferred stock purchase right automatically adjusted one hundredth share preferred stock two hundredths share preferred stock therefore purchase price two hundredths share preferred stock issued upon exercise preferred stock purchase right 30000 except increase purchase price terms conditions rights remain unchanged event acquired merger business combination transaction 50 assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right common stock may 2012 conjunction addition sp 500 index completed sale 5000 shares common stock public offering net proceeds sale shares offering 462212 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts share repurchases november 2012 board directors authorized repurchase 400000 common stock repurchase program expiration date obligated acquire particular number shares program may discontinued time companys discretion program repurchased 758 130 shares common stock cost 66136 11553 years ended december 31 2013 2012 respectively december 31 2013 total 322311 remaining repurchases program 14 comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2013 2012 2011 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts table provides details regarding significant reclassifications aoci years ended december 31 2013 2012 2011 aoci component included computation net periodic pension benefit cost see note 16 additional details 15 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts following tables present information assets liabilities measured fair value recurring basis december 31 2013 2012 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts valuation techniques classify mutual fund investments valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy items classified level 2 within valuation hierarchy consist institutional money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources understanding models used obtaining market values pricing sources analyzing pricing data certain instances derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy items classified level 3 within valuation hierarchy consisting contingent consideration liabilities related acquisitions valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2013 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks contingent consideration connection prior acquisitions may required pay future consideration contingent upon achievement specified development regulatory approval salesbased milestone events determine fair value obligations acquisition date using various estimates observable market represent level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt ranging 53 62 developmental milestones weighted average cost capital ranging 14 21 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time development work progresses towards achievement milestones alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts estimated contingent milestone payments related prior business combinations range zero milestone events achieved maximum 876000 development regulatory salesbased milestones reached december 31 2013 fair value acquisitionrelated contingent consideration 142676 following table represents rollforward acquisitionrelated contingent consideration 16 employee benefit plans deferred compensation plan effective june 15 2013 began sponsoring nonqualified deferred compensation plan allows certain highlycompensated employees make voluntary deferrals 80 base salary incentive bonuses plan designed work conjunction 401k plan provides total combined employer match 6 employees eligible earnings irs annual 401k contribution limitations employee deferrals employer matching contributions plan began third quarter 2013 material year ended december 31 2013 defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal 100 dollar contributed first 6 individuals base salary incentive cash bonus years ended december 31 2013 2012 2011 recorded matching contributions approximately 6360 3700 2882 respectively defined benefit plans maintain defined benefit plans employees certain countries outside united states including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments following table sets forth funded status amounts recognized defined benefit plans alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date following table presents total plan assets investment category december 31 2013 classification investment category within fair value hierarchy respect inputs used measure fair value plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active investment objective maximize overall return investment income capital appreciation consistent preservation capital considering investment strategies asset allocation limits determined pension law targeted allocation funds follows december 31 2013 recorded liability 14839 noncurrent liabilities charge accumulated comprehensive income net tax 11502 related additional minimum liability alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows changes plan assets benefit obligations recognized aoci follows amount accumulated comprehensive income december 31 2013 expected recognized component net periodic pension costs 2014 886 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts estimate pay employer contributions approximately 3886 2014 expected future cash flows paid respect pension plans december 31 2013 follows 17 segment information operate one business segment innovation development commercialization lifetransforming therapeutic products therefore chief operating decisionmaker manages operations single operating segment revenues tangible longlived assets significant geographic region follows 1 longlived assets consist property plant equipment 18 subsequent events january 2014 entered agreement moderna therapeutics inc moderna provides option purchase drug products clinical development commercialization modernas messenger rna mrna therapeutics treat rare diseases due early stage assets recorded expense upfront payment 100000 2014 also responsible funding research activities program addition drug target maximum ten targets would could required make option exercise payment 15000 pay additional 120000 respect rare disease product 400000 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales addition option agreement purchased 25000 preferred equity moderna llc modernas parent company january 2014 agreed purchase vialing facility athlone ireland closing acquisition expected occur first quarter 2014 upon satisfaction agreed upon closing conditions following closing refurbishment facility successful completion appropriate validation processes regulatory approvals facility become first companyowned vialing facility soliris clinical commercial products alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2013 2012 2011 amounts thousands except per share amounts 19 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2013 2012 1 included within cost sales third quarter 2013 expense 9181 resulting execution settlement agreement novartis october 2013 2 included within operating expenses fourth quarter 2013 impairment charge 33521 writedown value early stage phase indefinitelived intangible asset purchased technology asset related taligen acquisition 3 included within cost sales third quarter 2012 positive impact 53377 recognized reduced estimate probable contingent liabilities result execution settlement nonexclusive license agreement third party october 2012 4 included within operating expenses quarter 2012 acquisitionrelated employee costs professional fees 10765 2840 1509 1148 respectively associated acquisition enobia 5 included within operating expenses third quarter 2012 impairment charge 26300 writedown value early stage preclinical indefinitelived intangible asset related taligen acquisitionitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 5 incorporated reference annual report form 10k fiscal year ended december 31 2011 6 incorporated reference report form 10q filed october 25 2013 7 incorporated reference registration statement form s1 reg 33300202 8 incorporated reference registration statement form 8a reg 00027756 filed february 21 1997 9 incorporated reference amendment 1 registration statement form 8a reg 00027756 filed october 6 2000 10 incorporated reference amendment 2 registration statement form 8a reg 00027756 filed february 12 2002 11 incorporated reference amendment 3 registration statement form 8a reg 00027756 filed november 17 2004 12 incorporated reference annual report form 10k year ended december 31 2006 13 incorporated reference report form 8k filed february 16 2006 14 incorporated reference annual report form 10k fiscal year ended december 31 2009 15 incorporated reference report form 8k filed september 17 2010 16 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 17 incorporated reference quarterly report form 10q quarter ended march 31 2013 18 incorporated reference quarterly report form 10q quarter ended january 31 2004 19 incorporated reference registration statement form s8 reg 33371879 filed february 5 199920 incorporated reference annual report form 10ka fiscal year ended july 31 1996 21 incorporated reference annual report form 10k fiscal year ended december 31 2008 22 incorporated reference report form 8k filed december 16 2004 23 incorporated reference quarterly report form 10q quarter ended january 31 2005 24 incorporated reference report form 8k filed march 14 2005 25 incorporated reference annual report form 10k fiscal year ended december 31 2010 confidential treatment granted portions exhibit confidential treatment requested 17 cfr §§20080b4 24b2 confidential portions exhibit omitted marked accordingly confidential portions filed separately sec pursuant confidential treatment request indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized alexion pharmaceuticals inc leonard bell leonard bell md chairman chief executive officer dated february 6 2015 vikas sinha vikas sinha mba ca executive vice president chief financial officer dated february 6 2015 pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2014 2013 2012 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements changes stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion consolidated financial statements listed accompanying index present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2014 december 31 2013 results operations cash flows three years period ended december 31 2014 conformity accounting principles generally accepted united states america addition opinion company maintained material respects effective internal control financial reporting december 31 2014 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp hartford connecticut february 6 2015 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us biopharmaceutical company focused serving patients severe ultrarare disorders innovation development commercialization lifetransforming therapeutic products marketed product soliris first therapeutic approved patients either two severe ultrarare disorders resulting chronic uncontrolled activation complement component immune system paroxysmal nocturnal hemoglobinuria pnh lifethreatening ultrarare genetic blood disorder atypical hemolytic uremic syndrome ahus lifethreatening ultrarare genetic disease also evaluating additional potential indications soliris severe devastating diseases uncontrolled complement activation underlying mechanism progressing various stages development additional product candidates potential treatments patients severe lifethreatening ultrarare disorders incorporated 1992 began commercial sale soliris 2007 basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted united states requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • research development expenses • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable securities availableforsale accordingly record securities fair value classify marketable securities current assets investments intended available company use funding current operations unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders equity adjustment fair value reflects significant decline value security evaluate extent decline determined otherthantemporary would mark security market charge consolidated statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investments options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan securities classified trading securities carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses accounts receivable standard credit terms vary based country sale range 30 120 days consolidated average days’ sales outstanding ranges 60 70 days evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions december 31 2014 four individual customers accounted 58 accounts receivable balance individual customers ranging 10 23 accounts receivable balance december 31 2013 two individual customers accounted 30 accounts receivable balance individual customers accounting 10 20 years ended december 31 2014 2013 one customer accounted 18 20 respectively product sales customers accounted 10 net product sales accounts receivable result foreign operations exposed changes general economic conditions countries conduct business substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material continue monitor economic conditions including volatility associated international economies associated impacts financial markets business adverse credit economic conditions italy spain among members european union improved recent periods although collection accounts receivables due countries may extend beyond standard credit terms expect delays material impact financial condition results operations inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method components inventory follows capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized december 31 2014 capitalized 22005 inventory produced commercial sale products awaiting regulatory approval december 31 2013 capitalize inventory associated products approved us food drug administration fda regulatory authorities soliris also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form soliris utilized commercial clinical programs identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire requires adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout preand postproduction process continually gather additional information regarding product quality periods manufacture date soliris currently maximum estimated life 48 months based sales forecasts expect realize carrying value soliris inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash effectiveness qualifying hedge contract assessed quarterly record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfive thirty years • machinery laboratory equipmentthree ten years • computer hardware softwarethree five years • furniture office equipmentthree years leasehold improvements assets capital lease arrangements amortized lesser assets estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated assets useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable managed purpose providing return form dividends lower costs economic benefits consists inputs processes provide ability provide outputs acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill acquisition net assets constitute business goodwill recognized consolidated financial statements include results operations acquired business completion acquisition intangible assets intangible assets consist licenses patents purchased technology acquired inprocess research development iprd intangible assets definite lives amortized estimated useful lives reviewed periodically impairment intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized based estimated useful lives point time goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets completed annual impairment test december 31 2014 determined carrying value goodwill impaired impairment longlived assets longlived assets primarily comprised intangible assets property plant equipment evaluate finitelived intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset recognized impairment charges associated early stage indefinitelived intangible assets acquired connection purchase taligen orphatec 11514 2014 recognized impairment charges associated early stage indefinitelived intangible asset purchased technology asset acquired connection purchase taligen 33521 2013 recognized impairment charges associated early stage indefinitelived intangible asset acquired connection purchase taligen 26300 2012 recognize impairment loss longlived assets years ended december 31 2014 2013 2012 contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders equity revenue recognition principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility regular basis review revenue arrangements distributor relationships determine whether changes criteria impact revenue recognition amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales customers primarily comprised distributors pharmacies hospitals hospital buying groups health care providers cases may also sell soliris governments government agencies factors pricing soliris limited number patients short period product sale patient infusion lack contractual return rights soliris customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors cases exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change addition sales countries soliris commercially available also recorded revenue sales patients receiving soliris treatment namedpatient programs relevant authorities institutions countries alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts agreed reimburse product sold namedpatient basis soliris received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation one sharebased compensation plan known amended restated 2004 incentive plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary date sharebased compensation issued plan consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps denominator reflects potential dilution could occur stock options unvested restricted stock unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method following table summarizes calculation basic diluted eps years ended december 31 2014 2013 2012 exclude eps weightedaverage number securities whose effect antidilutive excluded calculation eps years ended december 31 2014 2013 2012 1099 2243 1899 shares common stock respectively effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrued potential interest penalties related unrecognized tax benefits component tax expense comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable securities unrealized gains losses hedge contracts foreign currency translation adjustments certain changes equity reflected net tax alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts investments invest companies securities publicly traded fair value readily available investments include investment preferred stock nonpublic entity moderna llc 2014 purchased 37500 preferred equity moderna llc recorded investment cost within assets condensed consolidated balance sheets regularly monitor investments evaluate whether otherthantemporary decline fair value based implied value recent company financings public market prices comparable companies general market conditions carrying value investments impaired december 31 2014 new accounting pronouncements may 2014 financial accounting standards board issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2016 allows adoption using full retrospective method modified retrospective method currently assessing method adoption expected impact new standard financial position results operations 2 acquisitions acquisition enobia pharma corp february 2012 acquired enobia pharma corp enobia privately held clinicalstage biotechnology company based montreal canada cambridge massachusetts transaction accounted acquisition method accounting business combinations acquisition method accounting assets acquired liabilities assumed enobia recorded acquisition date respective fair values reported consolidated financial condition completion acquisition reflects fair values enobias results operations included consolidated financial statements date acquisition intended objective develop commercialize therapies patients severe ultrarare lifethreatening disorders enobias lead product candidate asfotase alfa human recombinant targeted alkaline phosphatase enzymereplacement therapy patients suffering hypophosphatasia hpp ultrarare lifethreatening genetic metabolic disease approved treatments made upfront cash payment 623876 100 enobias capital stock additional contingent payments aggregate 470000 would due upon reaching various regulatory sales milestones financed acquisition existing cash proceeds new credit facility reconciliation upfront payments accordance purchase agreement total purchase price presented initial estimate fair value contingent consideration 117000 recorded noncurrent liability determined fair value obligations pay additional milestone payments using various estimates including probabilities success discount rates amount time conditions milestone payments met fair value measurement based significant inputs observable market representing level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt rate 52 developmental milestones weighted average cost capital rate 130 commercial milestones rates alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts representative market participant assumptions range estimated milestone payments zero clinical milestones achieved product 470000 various regulatory sales milestones achieved subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time development work progresses towards achievement milestones december 31 2014 fair value contingent consideration enobia 155299 changes fair value consideration enobia 22286 8602 years ended december 31 2014 2013 respectively following table summarizes estimated fair values assets acquired liabilities assumed asset categories acquired enobia acquisition included working capital fixed assets deferred tax assets iprd fair value working capital determined approximate book values intangible assets associated iprd projects relate enobias lead product candidate asfotase alfa estimated fair value 587000 determined using multiperiod excess earnings method variation income approach multiperiod excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset fair value using multiperiod excess earnings method dependent estimated weighted average cost capital enobia 130 represents rate return market participant would expect assets excess purchase price fair value amounts assets acquired liabilities assumed represents goodwill amount resulting acquisition expect portion goodwill deductible tax purposes goodwill attributable acquisition enobia recorded noncurrent asset amortized subject annual review impairment factors contributed recognition goodwill included synergies specific business available market participants including unique ability commercialize therapies rare diseases skills relationships related biologics manufacturing existing relationships specialty physicians identify patients hpp global distribution network facilitate immediate drug delivery recorded net deferred tax liability 31471 amount primarily comprised 78527 related iprd offset acquired net operating losses research credit carryovers totaling 47056 year ended december 31 2012 recorded 6794 expenses associated operations enobia february 7 2012 march 31 2012 condensed consolidated statement comprehensive income effective april 1 2012 operations enobia integrated operations pro forma financial information unaudited following unaudited pro forma information presents combined results operations years ended december 31 2012 acquisition enobia completed january 1 2012 pro forma results reflect operating efficiencies potential cost savings may result consolidation operations pro forma results adjusted remove costs associated changes fair value enobias preferred stock included pro forma net income year ended december 31 2012 approximately 23673 7900 alexion enobia acquisitionrelated costs respectively expected ongoing impact alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts acquisitions orphatec pharmaceuticals gmbh february 2011 acquired certain patents assets orphatec pharmaceuticals gmbh orphatec related investigational therapy patients molybdenum cofactor deficiency mocd type ultrarare genetic disorder characterized severe brain damage rapid death newborns made initial payments 3050 cash may make additional future payments 42000 contingent milestone payments upon various development regulatory commercial milestones range estimated milestone payments zero products gain market approval 42000 indications two products gain us european marketing approval reach applicable sales levels initial estimate fair value contingent consideration 5086 subsequent acquisition date measured contingent consideration arrangement fair value changes fair value recognized operating earnings december 31 2014 made milestone payment 3000 related acquisition december 31 2014 fair value contingent consideration orphatec 5936 changes fair value consideration orphatec 232 1181 2087 years ended december 31 2014 2013 2012 respectively taligen therapeutics inc january 2011 acquired outstanding capital stock taligen therapeutics inc taligen transaction accounted acquisition method accounting business combinations made initial payments 111773 cash may make additional future payments 367000 contingent milestone payments upon achievement various development commercial milestones range estimated milestone payments zero clinical milestones achieved product 367000 six products gain us european marketing approval initial estimate fair value contingent consideration 11634 subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings december 31 2014 fair value contingent consideration taligen 1736 changes fair value consideration taligen 2223 5777 2948 years ended december 31 2014 2013 2012 respectively included change fair value years ended december 31 2014 2013 benefit 2458 5973 respectively related decrease fair value contingent consideration related acquisition decrease fair value result decreased likelihood payments contingent consideration due reassessment scientific findings acquisitionrelated costs acquisitionrelated costs associated business combinations years ended december 31 2014 2013 2012 include following years ended december 31 2014 2013 2012 incurred costs approximately 22286 9625 23673 respectively related enobia acquisition included amounts alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts 3 property plant equipment net summary property plant equipment follows included constructioninprogress december 31 2014 2013 126566 32230 respectively costs associated construction new facility new connecticut november 2012 entered lease agreement office laboratory space constructed new although legally premises deemed owner building construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlords costs constructing facility required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet construction new facility began june 2013 expected completed 2015 depreciation amortization property plant equipment approximately 34901 19084 15192 years ended december 31 2014 2013 2012 respectively december 31 2014 2013 computer software costs included property plant equipment 16292 9691 respectively depreciation amortization expense capitalized computer software costs 7016 4503 4228 years ended december 31 2014 2013 2012 respectively 4 intangible assets goodwill intangible assets goodwill net accumulated amortization follows amortization intangible assets approximately 11159 8257 5660 years ended december 31 2014 2013 2012 respectively assuming changes gross cost basis intangible assets amortization 46 occur 2015 december 31 2014 recorded indefinitelived intangible assets 587000 purchased iprd prior business acquisitions december 31 2014 except noted significant changes would impact carrying value iprd since date acquisition fourth quarter 2014 reviewed impairment value early stage phase ii indefinitelived intangible asset related orphatec acquisition initiated review part annual impairment testing increased costs associated clinical trial studies estimated value obtained market participant arms length transaction determined de minimis december 31 2014 result fourth quarter 2014 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts recognized impairment charge 8050 writedown assets fair value addition first quarter 2014 reviewed impairment value early stage phase indefinitelived intangible asset related acquisition taligen therapeutics inc initiated review based reassessment scientific findings associated acquired asset result recognized impairment 3464 year ended december 31 2014 adjust asset fair value determined de minimis 2013 reviewed impairment value early stage phase indefinitelived intangible asset related taligen acquisition initiated review part annual impairment testing based evaluation preliminary scientific findings phase clinical trial led us reassess development acquired asset fair value iprd asset determined using income approach used significant unobservable level 3 inputs unobservable inputs included among things riskadjusted forecast future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted average cost capital 215 applied calculating present value future cash flows based factors estimated value obtained market participant arms length transaction 3464 lower carrying amount also reviewed impairment value purchased technology associated taligen acquisition determined estimated value de minimis result recognized impairment charge 33521 writedown assets fair value recorded operating expenses consolidated statement operations year ended december 31 2013 2012 reviewed impairment value early stage preclinical indefinitelived intangible asset related taligen acquisition initiated review based evaluation negative scientific findings associated development different asset treatment agerelated macular degeneration likelihood success ophthalmic use value obtained market participant arms length transaction developments led us deprioritize development acquired asset result recognized impairment charge 26300 writedown asset fair value determined de minimis based value asset market participant arms length transaction fair value iprd asset determined using income approach used significant unobservable level 3 inputs unobservable inputs included among things riskadjusted forecast future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted average cost capital 220 applied calculating present value future cash flows impairment charge recorded operating expenses consolidated statement operations year ended december 31 2012 following table summarizes changes carrying amount goodwill alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts 5 marketable securities amortized cost gross unrealized holding gains gross unrealized holding losses estimated fair value availableforsale investments type security december 31 2014 december 31 2013 follows aggregate fair value availableforsale securities unrealized loss position december 31 2014 december 31 2013 472241 461634 investments continuous unrealized loss position 12 months material december 31 2014 believe cost basis availableforsale investments recoverable fair values availableforsale securities classification consolidated balance sheet follows fair values availableforsale debt securities december 31 2014 contractual maturity summarized follows december 31 2014 december 31 2013 fair value trading securities 4277 1017 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts utilize specific identification method computing realized gains losses realized gains losses availableforsale trading securities material year ended december 31 2014 2013 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 60 months hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar purpose hedges revenue reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues hedges designated cash flow hedges upon contract inception december 31 2014 open contracts notional amounts totaling 1524521 qualified hedge accounting impact accumulated comprehensive income aoci earnings foreign exchange contracts qualified cash flow hedges years ended december 31 2014 2013 follows assuming change foreign exchange rates market rates december 31 2014 74142 gains recognized aoci reclassified revenue next 12 months enter foreign exchange forward contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2014 notional amount foreign exchange contracts hedge accounting applied 224410 recognized gain 26295 8306 3518 income expense years ended december 31 2014 2013 2012 respectively associated foreign exchange contracts designated hedging instruments amounts largely offset gains losses monetary assets liabilities following tables summarize fair value outstanding derivatives december 31 2014 2013 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts fair value foreign exchange forward contracts designated hedging instruments zero december 31 2014 december 31 2013 although offset derivative assets liabilities within condensed consolidated balance sheets international swap derivatives association isda agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect condensed consolidated balance sheets offsetting foreign exchange forward contracts subject provisions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts 7 accrued expenses accrued expenses consist following 8 debt february 2012 entered credit agreement amended credit agreement syndicate banks provides 240000 senior secured term loan facility payable equal quarterly installments 12000 starting june 30 2012 200000 senior secured revolving credit facility february 7 2017 addition borrowings upon prior notice revolving credit facility includes borrowing capacity form letters credit 60000 borrowings sameday notice referred swingline loans 10000 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility aggregate amount exceed 150000 may elect loans credit agreement bear interest rate per annum equal libor plus 125 200 depending consolidated leverage ratio calculated accordance credit agreement ii case loans denominated us dollars base rate equal higher prime rate effect b federal funds rate effect plus 050 c eurodollar rate effect plus 100 plus case b c 025 100 depending consolidated leverage ratio calculated accordance credit agreement interest payable quarterly base rate loans case liborbased loans end applicable interest period principal due february 7 2017 maturity date december 31 2014 2013 interest rate outstanding loans credit agreement 141 obligations credit facilities unconditionally guaranteed jointly severally certain existing domestic subsidiaries required guaranteed certain future domestic subsidiaries obligations nonus subsidiaries credit facilities unconditionally guaranteed jointly severally us certain existing domestic subsidiaries certain foreign subsidiaries required guaranteed certain future subsidiaries obligations borrower credit facilities guarantees obligations backed subject certain exceptions substantially borrowers assets certain guarantors including pledge equity interests certain subsidiaries real estate located smithfield rhode island excluding intellectual property assets certain foreign subsidiaries credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions pay dividends repurchase capital stock enter transactions affiliates credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan years ended december 31 2014 2013 2012 made payments 55500 36000 91000 term loan respectively december 31 2014 57500 outstanding term loan december 31 2014 open letters credit 10284 borrowing availability revolving facility 189716 fair value long term debt measured using level 2 inputs approximates book value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts contractual maturities longterm debt obligations due subsequent december 31 2014 10000 2015 38000 2016 9500 2017 december 31 2014 recorded 48000 due term loan current liabilities based intent ability make payments amount 2015 january 2015 made payment 12000 9 commitments contingencies commitments license agreements december 2014 entered agreement xchem pharmaceuticals xchem allows us identify novel drug candidates xchems proprietary drug discovery engine alexion exclusive worldwide rights develop commercialize products arising collaboration three program targets due early stage assets recorded expense upfront payment 8000 addition program target maximum three targets could required make additional payments upon achievement specified research development regulatory milestones 75000 well royalties commercial sales january 2014 entered agreement moderna therapeutics inc moderna allows us purchase ten product options develop commercialize treatments rare diseases modernas messenger rna mrna therapeutics platform alexion lead discovery development commercialization treatments produced broad longterm strategic agreement moderna retain responsibility design manufacture messenger rna selected targets due early stage assets recorded expense upfront payment 100000 also responsible funding research activities program addition drug target maximum ten targets could required make option exercise payment 15000 pay additional 120000 respect rare disease product 400000 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales july 2013 entered license collaboration agreement ensemble therapeutics corporation identification development commercialization therapeutic candidates based specific drug targets due early stage assets recorded expense upfront payment 11500 third quarter 2013 also responsible funding research activities program addition drug target maximum four targets could required pay additional 90750 development milestones specific milestones met time agreement also provides royalty payments commercial sales product developed agreement january 2013 entered license agreement technology provides exclusive research license option exclusive commercial license specific targets products developed due early stage asset recorded expense upfront payment 3000 first quarter 2013 also required pay annual maintenance fees term arrangement addition target maximum six targets develop could required pay additional 70500 license fees development sales milestones specific milestones met time lonza agreement rely lonza group ag affiliates lonza third party manufacturer produce portion commercial clinical quantities soliris clinical quantities asfotase alfa contracted expect continue contracting product finishing filling packaging third parties various agreements lonza remaining total noncancellable future commitments approximately 383500 agreements lonza also include potential payments totaling 5000 become payable certain milestones achieved terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured alexion rhode island manufacturing facility arimf payment respect sales soliris manufactured lonza facilities contingent liabilities currently involved various claims lawsuits legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results past received may future receive notices third parties claiming patents may infringed development manufacture sale soliris guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales soliris could required pay owners patents technology used manufacture sale soliris costly license inability obtain necessary license could material adverse effect financial results january 2011 novartis vaccines diagnostics inc novartis filed action us biopharmaceutical companies us district court district delaware claiming willful infringement us patent 5688688 688 patent third quarter 2013 parties engaged discussions resolve matter october 2013 novartis agreed resolve claims asserted novartis action october 2013 parties entered settlement agreement dismissal pursuant novartis granted alexion nonexclusive fully paid license 688 patent products dismissed case prejudice result recorded expense 9181 cost sales third quarter 2013 related litigation settlement agreement previously reported third quarter 2012 reduced estimate probable contingent liabilities due execution settlement nonexclusive license agreement october 2012 third party related third partys intellectual property adjusted liability reflect actual negotiated royalty rate set forth agreement change estimate resulted positive impact cost sales 53377 third quarter 2012 march 2013 received warning letter warning letter us food drug administration fda regarding compliance current good manufacturing practices cgmp arimf warning letter followed fda inspection concluded august 2012 conclusion inspection fda issued form 483 inspectional observations responded august 2012 provided additional information fda september december 2012 observations relate commercial clinical manufacture soliris arimf responded warning letter fda dated april 2013 conclusion another inspection arimf august 2014 fda issued form 483 three inspectional observations none designated repeat observation warning letter observations inspectional represent final fda determination compliance continue manufacture products including soliris arimf resolution issues raised warning letter difficult predict currently believe loss related matter probable potential magnitude loss range loss reasonably estimated extent circumstances related matter change impact could material adverse effect financial operations unrelated warning letter initiated voluntary recalls replacements certain lots soliris 2013 2014 due presence visible particles detected limited number vials lots recalls interrupt supply soliris patients following investigation believe identified filling process step third party fillfinish provider resulted presence visible particles implemented changes necessary modify process step fourth quarter 2013 recorded expense 14277 cost sales resulting expected disposal inventory 2014 expenses associated recalls material 2014 operating leases december 31 2014 lease headquarters primary research development facilities cheshire connecticut leases set expire 2016 2020 monthly fixed rent started approximately 315 increasing approximately 324 term lease also lease space regional executive sales offices lausanne switzerland global supply chain distribution headquarters dublin ireland well us locations foreign countries support operations global organization aggregate lease expense 22738 19094 16758 years ended december 31 2014 2013 2012 respectively lease expense recorded straightline basis applicable lease terms alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2014 january 2015 entered new lease agreement office space zurich switzerland support relocation european headquarters new lease estimated commence second quarter 2015 expire 10 years later minimum renewal option 5 years maximum renewal option 10 years lease provides annual payments 2600 term lease facility lease obligation november 2012 entered new lease agreement office laboratory space constructed new connecticut term new lease commence upon landlords substantial completion building expire 12 years later minimum renewal option 7 years maximum renewal option 20 years provided expand lease include rentable space building although legally premises deemed owner building construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlords costs constructing facility required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet december 31 2014 recorded constructioninprocess asset 126566 inclusive landlords costs well costs incurred alexion offsetting facility lease obligation 107099 associated new facility also entered agreement state connecticut department economic community development provides forgivable loan grants totaling 26000 tax credits 25000 related lease agreement new connecticut program requires meet certain criteria order prevent forfeiture repayment loan grants credits include maintaining corporate headquarters connecticut next 10 years ii achieving maintaining 668 fulltime employment positions state connecticut next 6 years proceeds forgivable loan grants reduce basis cost building december 31 2014 received grant funds tax credits associated agreement state connecticut aggregate future minimum noncancellable commitments facility lease obligation assuming substantial completion date november 2015 december 31 2014 follows license research development agreements entered number license research development manufacturing development agreements since inception agreements made various research institutions universities contractors collaborators government agencies order advance obtain technologies services related business license agreements generally provide us pay initial fee followed annual minimum royalty payments additionally certain agreements call future payments upon attainment agreed upon milestones alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts limited investigational new drug ind application approval biologics license application agreements require minimum royalty payments based sales products developed applicable technologies clinical manufacturing development agreements generally provide us fund manufacturing development ongoing clinical trials clinical trial development agreements include contract services outside contractor services including contracted clinical site services related patient enrollment clinical trials manufacturing development agreements include clinical manufacturing development scaleup executed largescale product supply agreement lonza sales ag longterm commercial manufacture soliris minimum fixed payments assuming nontermination agreements december 31 2014 next five years follows 10 income taxes income tax provision based income taxes follows components income tax provision follows continue maintain valuation allowance certain deferred tax assets realization certain continue pay cash taxes us federal various us states foreign jurisdictions operations utilized net operating losses alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts december 31 2014 federal state net operating loss carryforwards 7718 12377 respectively included nol’s state nol’s 6593 attributable excess tax benefits exercise nonqualified stock options vests restricted stock tax benefits attributable nol’s credited directly additional paid capital utilized offset taxes payable nol’s expire 2022 2033 also federal state income tax credit carryforwards 117109 2609 respectively income tax credits expire 2015 2034 us federal state income tax credit carryforwards attributable excess tax benefits exercise nonqualified stock options vests restricted stock certain stock option exercises restricted stock vestings resulted tax deductions excess previously recorded benefits based value time grant although additional tax benefits “windfalls” reflected us state net operating loss carryforwards us federal state income tax credit carryforwards pursuant authoritative guidance additional tax benefit associated windfall recognized deduction reduces taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards credit carryforwards “windfall” tax benefits reflected net operating losses credit carryforwards deferred tax assets periods presented granted incentive tax holiday canton vaud switzerland effective january 1 2010 tax holiday exempted us local corporate income taxes switzerland end 2014 renewable additional 5 years final expiration 2019 2013 undertook restructuring significantly changed business model switzerland converted principal company distribution service company result significant change business activities switzerland canton vaud switzerland provided final notification us december 2014 structure longer complied conditions incentive tax holiday fourth quarter 2014 made payment 22817 satisfaction clawback previously exempted cantonal income taxes tax years 2010 2013 amount fully accrued balance sheet december 31 2013 prospectively federal cantonal tax based current enacted tax rates switzerland tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period determined limiting provisions triggered prior year however believe limitations expected result expiration loss significant amount federal nol’s income tax credit carryforwards provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows us federal tax credit research experimentation expenses expired december 31 2013 connection expiration 2014 tax expense first three quarters year include benefit us federal alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts tax credit research experimentation december 2014 tax increase prevention act 2014 retroactively extended tax credit research experimentation back january 1 2014 end 2014 signed law effects change tax law recognized period includes date enactment therefore tax benefit attributable 2014 us federal tax credit 3222 research experimentation recorded fourth quarter 2014 us federal tax credit research experimentation expenses previously expired december 31 2011 connection expiration 2012 tax expense include benefit us federal tax credit research experimentation january 2013 american taxpayer relief act 2012 retroactively extended tax credit research experimentation back january 1 2012 end 2013 signed law effects change tax law recognized period includes date enactment therefore tax benefit attributable 2012 us federal tax credit 2719 research experimentation recorded first quarter 2013 2012 result structuring enobia business recorded income tax expense 21812 income statement structuring also required us make cash payment 47200 early 2013 amount fully accrued balance sheet december 31 2012 provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities exclude windfall tax benefits follows follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2014 total amount tax benefit recorded 2014 related unrecognized tax benefits 17012 expense recognized 2013 7897 2012 material unless related excess tax benefits stock options unrecognized tax benefits recognized would favorable impact effective tax rate expect none total unrecognized tax benefits reverse within next twelve months file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however statute limitations could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods statute limitation previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse significant portion unrecognized tax benefits internal revenue service irs commenced examination us income tax returns 2008 2009 second quarter 2011 examination completed fourth quarter 2013 result audit material change liability unrecognized tax benefits record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries earnings intended permanently reinvested offshore december 31 2014 cumulative amount earnings approximately 359000 fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership extent us parent company receives allocation partnership income amounts taxable us year therefore permanent reinvestment assertion longer apply earnings recognition deferred tax liabilities associated aforementioned partnership resulted tax expense approximately 95800 fourth quarter 2013 also distributed majority earnings profits non us subsidiaries via dividend amount 152000 fourth quarter 2013 dividend give rise us cash tax liability resulted repatriation significant portion remitted earnings december 31 2013 present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future practicable estimate amount additional taxes might payable cfcs’ undistributed earnings due variety factors including timing extent nature repatriation expectation foreign undistributed earnings us parent companys share foreign partnership profits permanently invested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructuring tax law changes currently contemplated 11 sharebased compensation december 31 2014 one stock option plan amended restated 2004 incentive plan “2004 plan” 2004 plan restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards may granted maximum 47874 shares directors officers key employees consultants stock options granted 2004 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vest four years performancebased restricted stock units threeyear vesting period alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts following table summarizes components sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2014 2013 2012 10211 3978 2838 respectively december 31 2014 249511 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted plan expense expected recognized weightedaverage period 270 years stock options summary status stock option plans december 31 2014 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2014 2013 2012 459940 204470 308009 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2014 2013 2012 35859 32249 27301 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options weighted average fair value date grant options granted years ended december 31 2014 2013 2012 5122 2399 2404 per option respectively restricted stock summary status nonvested restricted stock changes period ended follows restricted stock awards granted 2014 2013 include 129 81 restricted stock units granted senior management nonmarket performancebased servicebased vesting conditions weighted average grant date fair value awards granted 2014 2013 17604 9707 respectively number nonmarket performancebased restricted stock units granted represents number shares earned performance period ended december 31 2014 2013 respectively based specific preestablished performance goals awards vest three year period subject employees continued employment company fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2014 2013 2012 including restricted stock units nonmarket performance conditions 17422 9506 8213 per share respectively total fair value restricted stock vested years ended december 31 2014 2013 2012 41304 26679 18573 respectively 2014 granted marketbased performance awards senior management provides recipient right receive restricted stock end three year performance period based preestablished marketbased performance goals used payout simulation models estimate grant date fair value awards recognized expense 301 2014 12 stockholders equity preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right may exercised purchase one hundredth share new series preferred stock exercise price 7500 subject adjustment see rights may exercised public announcement party acquired 20 common stock commencement public announcement make tender offer 20 common stock rights voting rights expire march 6 2017 may redeemed us price 001 per right time prior expiration acquisition 20 stock preferred stock purchasable upon exercise rights minimum preferential dividend 1000 per year entitled receive aggregate dividend 100 times dividend declared share common stock event liquidation holders shares preferred stock entitled receive minimum liquidation payment 100 per share entitled receive aggregate liquidation payment equal 100 times payment made per share common stock february 23 2007 board directors amended purchase price preferred stock purchase rights result twoforone stock split companys outstanding shares common stock effected august 22 2008 number shares preferred stock purchasable upon proper exercise preferred stock purchase right automatically adjusted one hundredth share preferred stock two hundredths share preferred stock therefore purchase price two hundredths share preferred stock issued upon exercise alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts preferred stock purchase right 30000 except increase purchase price terms conditions rights remain unchanged event acquired merger business combination transaction 50 assets cash flow earning power sold proper provision shall made holder right shall right receive upon exercise thereof current exercise price number shares common stock surviving company time transaction would market value two times exercise price right common stock may 2012 conjunction addition sp 500 index completed sale 5000 shares common stock public offering net proceeds sale shares offering 462212 share repurchases november 2012 announced board directors authorized repurchase 400000 common stock december 2014 board directors authorized repurchase additional 500000 common stock repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time companys discretion program repurchased 1903 758 shares common stock cost 302599 66136 years ended december 31 2014 2013 respectively december 31 2014 total 519712 remaining repurchases repurchase program 13 comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2014 2013 2012 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts table provides details regarding significant reclassifications aoci years ended december 31 2014 2013 2012 aoci component included computation net periodic pension benefit cost see note 15 additional details 14 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts following tables present information assets liabilities measured fair value recurring basis december 31 2014 2013 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts securities transferred level 1 2 3 year ended december 31 2014 valuation techniques classify mutual fund investments valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy cash equivalents marketable securities classified level 2 within valuation hierarchy consist institutional money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources understanding models used obtaining market values pricing sources analyzing pricing data certain instances alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk well evaluation counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy contingent consideration liabilities related acquisitions classified level 3 within valuation hierarchy valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2014 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks contingent consideration connection prior acquisitions may required pay future consideration contingent upon achievement specified development regulatory approval salesbased milestone events determine fair value obligations acquisition date using various estimates observable market represent level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt 48 developmental milestones weighted average cost capital ranging 12 21 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time development work progresses towards achievement milestones estimated future contingent milestone payments related prior business combinations range zero milestone events achieved maximum 876000 development regulatory salesbased milestones reached december 31 2014 fair value acquisitionrelated contingent consideration 162971 following table represents rollforward acquisitionrelated contingent consideration 15 employee benefit plans defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal 100 dollar contributed first 6 individuals base salary incentive cash bonus annual irs maximum years ended december 31 2014 2013 2012 recorded matching contributions approximately 8782 6360 3700 respectively defined benefit plans maintain defined benefit plans employees certain countries outside united states including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts following table sets forth funded status amounts recognized defined benefit plans company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date following table presents total plan assets investment category december 31 2014 classification investment category within fair value hierarchy respect inputs used measure fair value plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active investment objective maximize overall return investment income capital appreciation consistent preservation capital considering investment strategies asset allocation limits determined pension law targeted allocation funds follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts december 31 2014 recorded liability 23925 noncurrent liabilities charge accumulated comprehensive income net tax 16570 related additional minimum liability following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts changes plan assets benefit obligations recognized aoci follows amount accumulated comprehensive income december 31 2014 expected recognized component net periodic pension costs 2015 1216 estimate pay employer contributions approximately 4238 2014 expected future cash flows paid respect pension plans december 31 2014 follows 16 restructuring fourth quarter 2014 announced plans move european headquarters lausanne zurich switzerland relocation european headquarters support growing operational needs based current business forecasts activities lausanne site relocated zurich cheshire connecticut dublin ireland locations result action recorded restructuring expenses 15365 related employee costs fourth quarter 2014 expect incur approximately 10000 15000 additional restructuring related charges 2015 related contract termination additional employee costs expect pay accrued amounts related restructuring activity end fiscal year 2015 restructuring reserve 15365 included within accrued expenses liabilities companys consolidated balance sheet december 31 2014 17 segment information operate one business segment innovation development commercialization lifetransforming therapeutic products therefore chief operating decisionmaker manages operations single operating segment alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts revenues tangible longlived assets significant geographic region follows 2 longlived assets consist property plant equipment 18 subsequent events january 2015 entered license agreement third party obtain certain intellectual property rights technology related specific therapeutic compounds agreement provides exclusive research development commercial license products developed using compounds pursuant terms agreement made upfront payment 50000 first quarter 2015 could required pay additional 213000 development regulatory milestones related product developed agreement single disease indication additional 437000 milestone payments could due certain development regulatory milestones achieved additional disease indications agreement also provides royalty payments potential milestone payments 180000 commercial sales products developed agreement january 2015 entered new lease agreement approximately 44000 square feet office space zurich switzerland support relocation european headquarters lease estimated commence second quarter 2015 expire 10 years later minimum renewal option 5 years maximum renewal option 10 years lease provides annual payments 2600 term lease alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2014 2013 2012 amounts thousands except per share amounts 19 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2014 2013 1 included within revenues first quarter 2014 reimbursement shipments made years prior january 1 2014 result agreement french government positively impacted reimbursement soliris result agreement first quarter 2014 recognized 87830 net product sales soliris france relating years prior january 1 2014 also included within cost sales first quarter 2014 incremental impact cost sales 2055 additional royalties related 87830 net product sales prior year shipments 2 included within operating expenses fourth quarter 2014 15365 restructuring expenses recognized connection relocation european headquarters 3 included within operating expenses fourth quarter 2013 impairment charge 33521 writedown value early stage phase indefinitelived intangible asset purchased technology asset related taligen acquisitionitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference report form 8k filed may 6 2015 5 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 6 incorporated reference annual report form 10k fiscal year ended december 31 2011 7 incorporated reference report form 8k filed january 8 2016 8 incorporated reference registration statement form s1 reg 33300202 9 incorporated reference report form 8k filed april 7 2015 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference annual report form 10k fiscal year ended december 31 2009 12 incorporated reference report form 8k filed september 17 2010 13 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 14 incorporated reference quarterly report form 10q quarter ended march 31 2013 15 incorporated reference quarterly report form 10q quarter ended january 31 2004 16 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 17 incorporated reference annual report form 10k fiscal year ended december 31 2013 18 incorporated reference annual report form 10ka fiscal year ended july 31 1996 19 incorporated reference annual report form 10k fiscal year ended december 31 2008 20 incorporated reference report form 8k filed december 16 2004 21 incorporated reference quarterly report form 10q quarter ended january 31 2005 22 incorporated reference report form 8k filed march 14 2005 23 incorporated reference annual report form 10k fiscal year ended december 31 2010 24 incorporated reference report form 10k fiscal year ended december 31 2014 25 incorporated reference report form 8k filed june 23 2015 confidential treatment granted portions exhibit confidential treatment requested 17 cfr §§20080b4 24b2 confidential portions exhibit omitted marked accordingly confidential portions filed separately sec pursuant confidential treatment request indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2015 2014 2013 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements changes stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income changes stockholders equity cash flows present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2015 december 31 2014 results operations cash flows three years period ended december 31 2015 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2015 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso companys management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting responsibility express opinions financial statements companys internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described managements report internal control financial reporting management excluded synageva biopharma corp assessment internal control financial reporting december 31 2015 acquired company purchase business combination 2015 also excluded synageva biopharma corp audit internal control financial reporting synageva biopharma corp whollyowned subsidiary whose total assets total revenues represent 1 less 1 respectively related consolidated financial statement amounts year ended december 31 2015 pricewaterhousecoopers llp hartford connecticut february 8 2016 alexion pharmaceuticals inc consolidated balance sheets amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts thousands except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts thousands accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us biopharmaceutical company focused serving patients devastating ultrarare disorders innovation development commercialization lifetransforming therapeutic products complement franchise soliris® first therapeutic approved patients either paroxysmal nocturnal hemoglobinuria pnh lifethreatening ultrarare genetic blood disorder atypical hemolytic uremic syndrome ahus lifethreatening ultrarare genetic disease pnh ahus two severe ultrarare disorders resulting chronic uncontrolled activation complement component immune system metabolic franchise market strensiq® treatment patients hypophasphatasia hpp kanuma™ treatment patients lysosomal acid lipase deficiency lald hpp genetic ultrarare disease characterized defective bone mineralization lead deformity bones skeletal abnormalities lald serious life threatening ultrarare disease genetic mutations result decreased activity lal enzyme leading marked accumulation lipids vital organs blood vessels tissues initiated sales products third quarter 2015 also evaluating additional potential indications eculizumab severe devastating diseases uncontrolled complement activation underlying mechanism progressing various stages development additional product candidates potential treatments patients severe lifethreatening rare disorders basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted united states requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable securities availableforsale accordingly record securities fair value classify marketable securities current assets investments intended available company use funding current operations unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders equity adjustment fair value reflects significant decline value security evaluate extent decline determined otherthantemporary would mark security market charge consolidated statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investments options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan securities classified trading securities carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses accounts receivable standard credit terms vary based country sale range 30 120 days consolidated average days’ sales outstanding ranges 60 80 days evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions december 31 2015 three customers accounted 51 accounts receivable balance individual customers ranging 14 22 accounts receivable balance december 31 2014 four customers accounted 58 accounts receivable balance individual customers accounting 10 23 year ended december 31 2015 three customers accounted 38 product sales individual customers ranging 10 18 product sales year ended december 31 2014 one customer accounted 18 product sales customers accounted 10 net product sales accounts receivable result foreign operations exposed changes general economic conditions countries conduct business substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material continue monitor economic conditions including volatility associated international economies associated impacts financial markets business although collection accounts receivables due certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations inventories stated lower cost estimated realizable value determine cost inventory using weightedaverage cost method components inventory follows capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized december 31 2014 capitalized 22005 inventory produced commercial sale products awaiting regulatory approval result regulatory approval inventory capitalized products awaiting regulatory approval december 31 2015 products approved us food drug administration fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form products utilized commercial clinical programs alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts identical result inventory alternative future use defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore alternative future use products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire requires adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout preand postproduction process continually gather additional information regarding product quality periods manufacture date products currently maximum estimated life ranging 36 48 months based sales forecasts expect realize carrying value inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash effectiveness qualifying hedge contract assessed quarterly record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue nonqualifying portion gains losses resulting changes fair value reported income expense property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfifteen thirty five years • machinery laboratory equipmentfive fifteen years • computer hardware softwarethree seven years • furniture office equipment five ten years leasehold improvements assets capital lease arrangements amortized lesser assets estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated assets useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable managed purpose providing return form dividends lower costs economic benefits consists inputs processes provide ability provide outputs acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill acquisition net assets constitute business goodwill recognized consolidated financial statements include results operations acquired business completion acquisition intangible assets intangible assets consist licenses patents purchased technology acquired inprocess research development iprd intangible assets definite lives amortized based pattern economic benefit estimated useful lives reviewed periodically impairment intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets impairment longlived assets longlived assets primarily comprised intangible assets property plant equipment evaluate finitelived intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders equity revenue recognition principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product end customer typically hospital physician’s office private government pharmacy health care facility regular basis review revenue arrangements distributor relationships determine whether changes criteria impact revenue recognition amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales customers primarily comprised distributors pharmacies hospitals hospital buying groups health care providers cases may also sell governments government agencies factors price products limited number patients short period product sale patient infusion lack contractual return rights customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors cases exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale record estimated rebates payable governmental programs including medicaid united states programs outside united states reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation two sharebased compensation plans pursuant awards currently made amended restated 2004 incentive plan 2004 plan ii 2015 employee stock purchase plan espp 2004 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 85 lower market value per share common stock first business day offering period ii market value per share common stock alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 15 discount recognized compensation expense 6 month purchase period earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps denominator reflects potential dilution could occur stock options unvested restricted stock unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method following table summarizes calculation basic diluted eps years ended december 31 2015 2014 2013 exclude eps weightedaverage number securities whose effect antidilutive excluded calculation eps years ended december 31 2015 2014 2013 2450 1099 2243 shares common stock respectively effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrued potential interest penalties related unrecognized tax benefits component tax expense comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable securities unrealized gains losses hedge contracts foreign currency translation adjustments certain changes equity reflected net tax alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts investments invest companies securities publicly traded fair value readily available investments include investment preferred stock nonpublic entity moderna llc 2014 purchased 37500 preferred equity moderna llc recorded investment cost within assets condensed consolidated balance sheets regularly monitor investments evaluate whether otherthantemporary decline fair value based implied value recent company financings public market prices comparable companies general market conditions carrying value investments impaired december 31 2015 reclassifications adjustments certain items prior years consolidated financial statements reclassified conform current presentation new accounting pronouncements may 2014 financial accounting standards board fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2017 allows adoption using full retrospective method modified retrospective method entities may elect early adopt standard annual periods beginning december 15 2016 currently assessing method adoption expected impact new standard financial position results operations april 2015 fasb issued new standard simplifying presentation debt issuance costs new standard aligns treatment debt issuance costs debt discounts premiums requires debt issuance costs presented direct deduction carrying amount related debt standard effective interim annual periods beginning december 15 2015 early adoption permitted requires retrospective method adoption adopt provisions new standard balance sheet disclosures debt issuance costs beginning first quarter 2016 september 2015 fasb issued new standard simplifying accounting measurementperiod adjustments new standard eliminates requirement restate prior period financial statements measurement period adjustments new standard requires cumulative impact measurement period adjustment including impact prior periods recognized reporting period adjustment identified standard effective interim annual periods beginning december 15 2015 expected material impact financial condition results operations november 2015 fasb issued new standard simplifying classification deferred tax assets liabilities new standard requires deferred tax assets liabilities along related valuation allowance classified noncurrent balance sheet standard effective interim annual periods beginning december 15 2016 allows early adoption using full retrospective method prospective method elected early adopt provisions new standard using prospective method result deferred taxes december 31 2015 classified noncurrent consolidated balance sheet prior periods remain previously reported 2 acquisitions may 6 2015 announced entered definitive agreement acquire synageva biopharma corp synageva publiclyheld clinicalstage biotechnology company based lexington massachusetts per share consideration 115 cash 06581 shares alexion stock date announced purchase consideration estimated approximately 8400000 net synageva cash based closing price alexion stock may 5 2015 16855 june 22 2015 completed acquisition synageva transaction accounted acquisition method accounting business combinations acquisition method accounting assets acquired liabilities assumed synageva recorded acquisition date respective fair values synagevas results operations included consolidated financial statements date acquisition furthers objective alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts develop commercialize lifetransforming therapies increasing number patients devastating rare diseases synagevas lead product candidate kanuma enzyme replacement therapy patients suffering lald lifethreatening ultrarare disease approved treatments acquired outstanding shares common stock synageva 4565524 cash 26125 shares common stock closing business combination june 22 2015 purchase consideration approximately 8860000 net synageva cash based alexions closing share price date acquisition 18824 financed cash consideration existing cash proceeds new credit facility described note 8 aggregate consideration acquire synageva consisted following table summarizes estimated fair values assets acquired liabilities assumed accounting acquisition preliminary fair value estimates assets acquired liabilities assumed based upon preliminary calculations estimates assumptions subject change obtain additional information estimates measurement period one year acquisition date areas preliminary estimates yet finalized relate primarily taxrelated items 2015 recorded approximately 40744 adjustments amounts initially recorded assets acquired liabilities assumed acquisition date adjustments related primarily valuation acquired inventory assessment inventoryrelated items acquired 23880 kanuma inventory estimated fair value workinprocess finished goods inventory determined utilizing comparative sales method based expected selling price inventory adjusted incremental costs complete manufacturing process direct selling efforts well reasonable profit allowance estimated fair value raw material inventory valued replacement cost equal value market participant would pay acquire inventory intangible assets associated iprd projects primarily relate synagevas lead product candidate kanuma estimated fair value iprd assets 4236000 determined using multiperiod excess earnings method variation income approach multiperiod excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset fair value using multiperiod excess earnings method dependent estimated weighted average cost capital synageva 100 represents rate return market participant would expect assets excess purchase price fair value amounts assets acquired liabilities assumed represents goodwill amount resulting acquisition goodwill taxdeductible recorded noncurrent asset amortized subject annual review impairment goodwill represents future economic benefits arising assets acquired could individually identified separately recognized expected synergies specific business available market participants including unique ability commercialize therapies rare diseases existing relationships specialty physicians identify patients lald global distribution network facilitate drug delivery benefits believe result combining operations synageva within operations recorded net deferred tax liability 171638 amount primarily comprised 594226 8661 deferred tax liabilities related iprd inventory acquired respectively offset 231585 177128 22536 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts deferred tax assets related net operating loss carryforwards nols tax credits temporary differences respectively expect utilize year ended december 31 2015 recorded 96433 pretax operating losses associated continuing operations synageva consolidated statements operations pro forma financial information unaudited following unaudited pro forma information presents combined results alexion synageva acquisition synageva completed january 1 2014 adjustments give effect pro forma events directly attributable acquisition including impact acquisition financing related tax effects unaudited pro forma results reflect operating efficiencies potential cost savings may result consolidation operations accordingly unaudited pro forma financial information necessarily indicative results operations would recognized completed transaction january 1 2014 unaudited pro forma consolidated results include following pro forma adjustments related nonrecurring activity • alexion synageva expenses 33150 127290 respectively associated accelerated vesting stock based compensation result acquisition excluded net income year ended december 31 2015 expenses included net income year ended december 31 2014 • alexion synageva acquisitionrelated restructuring costs 52545 62071 respectively excluded income year ended december 31 2015 expenses included net income year ended december 31 2014 acquisitionrelated costs acquisitionrelated costs associated business combinations years ended december 31 2015 2014 2013 include following acquisition synageva also resulted 13335 restructuring related charges year ended december 31 2015 see note 17 additional details 3 property plant equipment net summary property plant equipment follows included constructioninprogress december 31 2015 2014 226696 126566 respectively costs associated construction new facility new connecticut 19259 december 31 2015 associated construction new manufacturing facility although legally premises deemed owner buildings construction period based applicable accounting guidance buildtosuit leases see note 9 facility lease obligations additional information connection construction facilities new connecticut entered agreement state connecticut department economic community development provides forgivable loan grants totaling 26000 tax credits 25000 program requires meet certain criteria order prevent forfeiture repayment loan grants credits include maintaining corporate headquarters connecticut 10 years ii satisfying minimum employment obligations iii minimum capital spending requirements third quarter 2015 received 26000 forgivable loan grants proceeds reduce costs constructioninprocess asset associated project december 31 2015 received tax credits associated agreement state connecticut depreciation amortization property plant equipment approximately 43618 34901 19084 years ended december 31 2015 2014 2013 respectively december 31 2015 2014 computer software costs included property plant equipment 19530 16292 respectively depreciation amortization expense capitalized computer software costs 10037 7016 4503 years ended december 31 2015 2014 2013 respectively 4 intangible assets goodwill intangible assets goodwill net accumulated amortization follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts third quarter 2015 received regulatory approval strensiq kanuma result 587000 4120000 acquired iprd assets associated strensiq kanuma respectively reclassified acquired iprd purchased technology amortization expense 116627 11159 8257 years ended december 31 2015 2014 2013 respectively assuming changes gross cost basis intangible assets total estimated amortization expense finitelived intangible assets 320223 year ending december 31 2016 320142 years ending december 31 2017 december 31 2020 fourth quarter 2014 reviewed impairment value early stage phase ii indefinitelived intangible asset related orphatec acquisition initiated review part annual impairment testing increased costs associated clinical trial studies estimated value obtained market participant arms length transaction determined de minimis december 31 2014 result fourth quarter 2014 recognized impairment charge 8050 writedown assets fair value addition first quarter 2014 reviewed impairment value early stage phase indefinitelived intangible asset related acquisition taligen therapeutics inc initiated review based reassessment scientific findings associated acquired asset result recognized impairment 3464 year ended december 31 2014 adjust asset fair value determined de minimis 2013 reviewed impairment value early stage phase indefinitelived intangible asset related taligen acquisition initiated review part annual impairment testing based evaluation preliminary scientific findings phase clinical trial led us reassess development acquired asset fair value iprd asset determined using income approach used significant unobservable level 3 inputs unobservable inputs included among things riskadjusted forecast future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted average cost capital 215 applied calculating present value future cash flows based factors estimated value obtained market participant arms length transaction 3464 lower carrying amount also reviewed impairment value purchased technology associated taligen acquisition determined estimated value de minimis result recognized impairment charge 33521 writedown assets fair value recorded operating expenses consolidated statement operations year ended december 31 2013 following table summarizes changes carrying amount goodwill alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts 5 marketable securities amortized cost gross unrealized holding gains gross unrealized holding losses estimated fair value availableforsale investments type security december 31 2015 december 31 2014 follows aggregate fair value availableforsale securities unrealized loss position december 31 2015 december 31 2014 293947 472241 investments continuous unrealized loss position 12 months material december 31 2015 believe cost basis availableforsale investments recoverable fair values availableforsale securities classification consolidated balance sheet follows fair values availableforsale debt securities december 31 2015 contractual maturity summarized follows december 31 2015 december 31 2014 fair value trading securities 8817 4277 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts utilize specific identification method computing realized gains losses realized gains losses availableforsale trading securities material year ended december 31 2015 2014 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen manage foreign currency transaction risk within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 60 months hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar purpose hedges revenue reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues hedges designated cash flow hedges upon contract inception december 31 2015 open contracts notional amounts totaling 1978737 qualified hedge accounting impact accumulated comprehensive income aoci earnings foreign exchange contracts qualified cash flow hedges years ended december 31 2015 2014 follows assuming change foreign exchange rates market rates december 31 2015 82223 gains recognized aoci reclassified revenue next 12 months enter foreign exchange forward contracts durations approximately 30 days designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2015 notional amount foreign exchange contracts hedge accounting applied 556753 recognized gain 5226 26295 8306 income expense years ended december 31 2015 2014 2013 respectively associated foreign exchange contracts designated hedging instruments amounts largely offset gains losses monetary assets liabilities alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts following tables summarize fair value outstanding derivatives december 31 2015 2014 fair value foreign exchange forward contracts designated hedging instruments zero december 31 2014 although offset derivative assets liabilities within condensed consolidated balance sheets international swap derivatives association isda agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect consolidated balance sheets offsetting foreign exchange forward contracts subject provisions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts 7 accrued expenses accrued expenses consist following 8 debt june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 3500000 term loan facility 500000 revolving credit facility maturing five years borrowings term loan facility payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan draw revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 100000 form letters credit borrowings sameday notice referred swingline loans 25000 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility amount cause consolidated net leverage ratio exceed maximum allowable amount credit agreement may elect loans credit agreement bear interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement december 31 2015 interest rate outstanding loans credit agreement 198our obligations credit facilities guaranteed certain alexions foreign domestic subsidiaries secured liens certain alexions subsidiaries equity interests subject certain exceptions credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan connection entering credit agreement paid 45492 financing costs amortized interest expense life debt amortization expense associated deferred financing costs year ended december 31 2015 6376 amortization expense associated deferred financing costs years ended december 31 2014 2013 material alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts connection acquisition synageva june 2015 borrowed 3500000 term loan facility 200000 revolving facility used available cash remaining cash consideration december 31 2015 3456250 outstanding term loan zero outstanding revolving facility december 31 2015 open letters credit 13784 borrowing availability revolving facility 486216 fair value long term debt measured using level 2 inputs approximates book value june 22 2015 connection simultaneously execution credit agreement described 2012 credit agreement prior credit agreement dated february 7 2012 terminated outstanding borrowings 33500 repaid contractual maturities longterm debt obligations due subsequent december 31 2015 follows 9 facility lease obligations new facility lease obligation november 2012 entered new lease agreement office laboratory space constructed new connecticut term new lease commenced 2015 expire 2030 renewal option 10 years although legally premises deemed owner building construction period based applicable accounting guidance buildtosuit leases substantial amount tenant improvements directly funded construction period due substantial tenant improvements directly funded construction continue deemed owner building construction complete accordingly landlords costs constructing facility construction required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet construction new facility began june 2013 completed january 2016 monthly lease payments began 2015 imputed interest rate facility lease obligation approximately 9 year ended december 31 2015 recognized 4862 interest expense december 31 2015 2014 facility lease obligation 132866 107099 respectively aggregate future minimum noncancellable commitments new facility lease obligation december 31 2015 follows lonza facility lease obligation third quarter 2015 entered new agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion existing portsmouth new hampshire facility agreement requires us make certain payments construction new manufacturing facility annual payments ten years thereafter result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts construction period december 31 2015 recorded constructioninprocess asset 19259 offsetting facility lease obligation 15229 associated manufacturing facility payments made lonza agreement allocated purchases inventory repayment facility lease obligation relative fair value basis 2015 made 31000 payments lonza agreement 4030 applied outstanding facility lease obligation 26970 recognized prepayment inventory see note 10 minimum fixed payments due lonza agreements 10 commitments contingencies commitments license agreements entered number license agreements since inception order advance obtain technologies services related business license agreements generally provide us pay initial fee followed milestone royalty payments certain conditions met certain agreements call future payments upon attainment agreed upon development andor commercial milestones agreements may also require minimum royalty payments based sales products developed applicable technologies march 2015 entered agreement third party allowed us exercise option another third party exclusive worldwide perpetual license rights specialized technology intellectual property simultaneously exercised option due early stage assets recorded expense payments 47000 first quarter 2015 march 2015 entered collaboration agreement third party allows us identify optimize drug candidates alexion exclusive worldwide rights develop commercialize products arising collaboration due early stage assets licensing connection collaboration recorded expense upfront payment 15000 first quarter 2015 addition could required pay additional 250750 certain development regulatory commercial milestones met time well royalties commercial sales january 2015 entered license agreement third party obtain exclusive research development commercial license specific therapeutic molecules due early stage assets recorded expense upfront payment 50000 first quarter 2015 addition could required pay additional 822000 certain development regulatory commercial milestones met time well royalties commercial sales december 2014 entered agreement xchem pharmaceuticals xchem allows us identify novel drug candidates xchems proprietary drug discovery engine alexion exclusive worldwide rights develop commercialize products arising collaboration three program targets due early stage assets recorded expense upfront payment 8000 addition program target maximum three targets could required make additional payments upon achievement specified research development regulatory milestones 75000 well royalties commercial sales january 2014 entered agreement moderna therapeutics inc moderna allows us purchase ten product options develop commercialize treatments rare diseases modernas messenger rna mrna therapeutics platform alexion lead discovery development commercialization treatments produced broad longterm strategic agreement moderna retain responsibility design manufacture messenger rna selected targets due early stage assets recorded expense upfront payment 100000 also responsible funding research activities program addition drug target maximum ten targets could required make option exercise payment 15000 pay additional 120000 respect rare disease product 400000 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales july 2013 entered license collaboration agreement ensemble therapeutics corporation identification development commercialization therapeutic candidates based specific drug targets due early stage assets recorded expense upfront payment 11500 third quarter 2013 also responsible funding research activities program addition drug target maximum four targets could required pay additional 90750 development milestones specific milestones met time agreement also provides royalty payments commercial sales product developed agreement alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts january 2013 entered license agreement technology provides exclusive research license option exclusive commercial license specific targets products developed due early stage asset recorded expense upfront payment 3000 first quarter 2013 also required pay annual maintenance fees term arrangement addition target maximum six targets develop could required pay additional 70500 license fees development sales milestones specific milestones met time manufacturing agreements manufacturing development agreements provide us fund manufacturing development support clinical commercial product needs rely lonza third party manufacturer produce portion commercial clinical quantities soliris strensiq various agreements lonza remaining total noncancellable future commitments approximately 1156980 terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured alexion rhode island manufacturing facility arimf payment respect sales soliris manufactured lonza facilities addition lonza noncancellable commitments 36400 third party manufacturers contingent liabilities currently involved various claims lawsuits legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results past received may future receive notices third parties claiming patents may infringed development manufacture sale soliris guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales soliris could required pay owners patents technology used manufacture sale soliris costly license inability obtain necessary license could material adverse effect financial results may 2015 received subpoena connection investigation enforcement division us securities exchange commission sec requesting information related grantmaking activities compliance foreign corrupt practices act fcpa various countries sec also seeks information related alexion’s recalls specific lots soliris related securities disclosures addition october 2015 alexion received request us department justice voluntary production documents information pertaining alexions compliance fcpa alexion cooperating investigations time alexion unable predict duration scope outcome investigations given ongoing nature investigations management currently believe loss related matters probable potential magnitude loss range loss reasonably estimated march 2013 received warning letter warning letter us food drug administration fda regarding compliance current good manufacturing practices cgmp arimf warning letter followed receipt form 483 inspectional observations fda connection fda inspection concluded august 2012 observations relate commercial clinical manufacture soliris arimf responded warning letter fda dated april 2013 previously announced fda issued form 483s august 2014 august 2015 relating observations arimf inspectional observations august 2015 letter since closed fda observations inspectional represent final fda determination compliance continue manufacture products including soliris facility resolution issues raised warning letter difficult predict currently believe loss related matter probable potential magnitude loss range loss reasonably estimated unrelated warning letter initiated voluntary recalls replacements certain lots soliris 2013 2014 due presence visible particles detected limited number vials lots recalls interrupt alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts supply soliris patients following investigation believe identified filling process step third party fillfinish provider resulted presence visible particles implemented changes necessary modify process step fourth quarter 2013 recorded expense 14277 cost sales resulting expected disposal inventory 2014 expenses associated recalls material 2014 operating leases december 31 2015 operating leases office laboratory space cheshire connecticut regional executive sales offices zurich switzerland well offices usand foreign locations support operations global organization aggregate lease expense 27839 22738 19094 years ended december 31 2015 2014 2013 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2015 11 income taxes income tax provision based income taxes follows fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership income derived foreign jurisdictions classified “nonus income” purposes financial reporting substantially nonus income years ended december 31 2015 2014 relates income captive foreign partnership alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts components income tax provision follows continue maintain valuation allowance certain deferred tax assets realization certain continue pay cash taxes us federal various us state foreign jurisdictions operations utilized net operating losses december 31 2015 federal state net operating loss carryforwards 423665 13571 respectively nol’s expire 2018 2035 also federal state income tax credit carryforwards 463796 13380 respectively income tax credits expire 2016 2035 us federal state income tax credit carryforwards 262216 3501 respectively attributable excess tax benefits exercise nonqualified stock options vestings restricted stock certain stock option exercises restricted stock vestings resulted tax deductions excess previously recorded benefits based value time grant although additional tax benefits “windfalls” reflected us state net operating loss carryforwards us federal state income tax credit carryforwards pursuant authoritative guidance additional tax benefit associated windfall recognized deduction reduces taxes payable accordingly since tax benefit reduce current taxes payable due net operating loss carryforwards credit carryforwards “windfall” tax benefits reflected net operating losses credit carryforwards deferred tax assets periods presented granted incentive tax holiday canton vaud switzerland effective january 1 2010 tax holiday exempted us local corporate income taxes switzerland end 2014 renewable additional 5 years final expiration 2019 2013 undertook restructuring significantly changed business model switzerland converted principal company distribution service company result significant change business activities switzerland canton vaud switzerland provided final notification us december 2014 structure longer complied conditions incentive tax holiday fourth quarter 2014 made payment 22817 satisfaction clawback previously exempted cantonal income taxes tax years 2010 2013 amount fully accrued balance sheet december 31 2013 prospectively federal cantonal tax based current enacted tax rates switzerland tax reform act 1986 contains certain provisions limit taxpayers ability utilize net operating loss tax credit carryforwards given year resulting cumulative changes ownership interests excess 50 threeyear period determined limiting provisions triggered prior year connection acquisition synageva change ownership triggered new limitation currently process determining impact limitation synageva tax attributes including net operating losses expect reduction amounts recorded attributes date acquisition reasonably possible however based ongoing assessment amounts recorded attributes increase foreseeable future provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership starting 2014 significant portion nonus income flows partnership portion partnership income attributable us parent company’s ownership percentage taxed us remainder nonus income taxed based tax rate enacted local foreign jurisdictions income earned operations many foreign tax jurisdictions impose income taxes different rates united states impact rate differences included foreign income tax rate differential disclose reconciliation us statutory income tax rate effective tax rate additionally included foreign income tax rate differential line item impact asc 74010253e attributable intercompany transactions amount approximately 24000 23000 tax expense 2015 2014 respectively 45000 tax benefit 2013 usbased multinational corporation benefit us income tax credits taxes assessed foreign jurisdictions foreign income tax credit 2013 included approximately 157000 credits generated repatriation majority earnings profits nonus subsidiaries via onetime dividend 2013 nondeductible permanent differences includes expense relating intercompany transaction approximately 46500 2014 rate reconciliation include similar transaction alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities exclude windfall tax benefits follows decrease research development deferred tax assets primarily attributable election deduct rather capitalize research development expenses pursuant internal revenue code section 59e 2014 federal income tax return increase investment foreign partnership deferred tax liability due contribution certain assets acquired synageva acquisition captive foreign partnership increase depreciable assets deferred tax liability primarily attributable construction corporate headquarters new connecticut increase substantially offset increase accruals allowances deferred tax asset primarily attributable lease liability corporate headquarters new connecticut increase net operating losses income tax credit deferred tax assets primarily attributed acquisition synageva decrease accrued royalties deferred tax asset primarily attributable realization tax deductions technical operations center ireland previously accrued unpaid royalties increase intangible assets deferred tax liability attributable intellectual property acquired synageva acquisition follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2015 total amount tax benefit recorded 2015 related unrecognized tax benefits 82717 expense recognized 2014 2013 17012 7897 respectively unless related excess tax benefits stock options unrecognized tax benefits recognized would favorable impact effective tax rate expect none total unrecognized tax benefits reverse within next twelve months file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statute limitations ranging 3 5 years however limitation period could extended due nol carryforward position number jurisdictions tax authorities generally ability review income tax returns periods limitation period previously expired subsequently adjust nol carryforward tax credit amounts accordingly expect reverse significant portion unrecognized tax benefits internal revenue service irs commenced examination us income tax return 2013 third quarter 2015 anticipated completed within next twelve months result audit possible amount liability unrecognized tax benefits could change next twelve months impact unrecognized benefits difficult determine based preliminary stage audit december 31 2015 notified significant proposed adjustments irs record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries intend reinvest earnings permanently outside us repatriate earnings tax efficient accordingly believe us tax earnings might repatriated would substantially offset tax attributes december 31 2015 cumulative amount earnings approximately 1012000 fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership extent us parent company receives allocation partnership income amounts taxable us year therefore permanent reinvestment assertion longer apply earnings recognition deferred tax liabilities associated aforementioned partnership resulted tax expense approximately 95800 fourth quarter 2013 also distributed majority earnings profits non us subsidiaries via dividend amount 152000 fourth quarter 2013 dividend give rise us cash tax liability resulted repatriation significant portion remitted earnings december 31 2013 present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future practicable estimate amount additional taxes might payable cfcs’ undistributed earnings due variety factors including timing extent nature repatriation expectation foreign undistributed earnings us parent companys share foreign partnership profits permanently invested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructuring tax law changes currently contemplated 12 sharebased compensation amended restated 2004 incentive plan 2004 plan approved stockholders may 2013 broad based plan provides grant equity awards including restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards directors officers key employees consultants alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts maximum 47874 shares stock options granted 2004 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vest four years performancebased restricted stock units threeyear vesting period stock options summary status stock option plans december 31 2015 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2015 2014 2013 168287 459940 204470 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2015 2014 2013 50964 35859 32249 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options weighted average fair value date grant options granted years ended december 31 2015 2014 2013 5303 5122 2399 per option respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts restricted stock summary status nonvested restricted stock changes period ended follows restricted stock awards granted 2015 include 460 restricted stock units granted senior management nonmarket performancebased servicebased vesting conditions weighted average grant date fair value awards granted 2015 19101 number nonmarket performancebased restricted stock units granted represents number shares earned performance period ended december 31 2015 based specific preestablished performance goals awards vest three year period subject employees continued employment company fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2015 2014 2013 including restricted stock units nonmarket performance conditions 18409 17422 9506 per share respectively total weighted average grant date fair value restricted stock vested years ended december 31 2015 2014 2013 135337 41304 26679 respectively 2015 2014 granted marketbased performance awards senior management provides recipient right receive restricted stock end three year performance period based preestablished marketbased performance goals used payout simulation models estimate grant date fair value awards recognized expense 526 301 years ended december 31 2015 2014 respectively employee stock purchase plan 2015 company adopted espp employees purchase shares common stock based percentage compensation subject certain limits purchase price per share equal lower 85 fair market value common stock offering date purchase date six month lookback feature espp 1000 shares common stock may issued eligible employees elect participate purchase plan shares issued compensation expense espp year ended december 31 2015 material sharebased compensation expense following table summarizes sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2015 2014 2013 7809 10211 3978 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts december 31 2015 343301 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted 2004 plan expense expected recognized weightedaverage period 245 years 13 stockholders equity preferred stock february 1997 board directors declared dividend one preferred stock purchase right outstanding share common stock including future issuances common stock certain conditions right could exercised purchase one hundredth share new series preferred stock subject adjustmentthe rights voting rights expired march 23 2015 common stock june 2015 connection acquisition synageva issued 26125 shares common stock former synageva stockholders employees fair value stock 4913754 incurred 4053 issuance costs share repurchases november 2012 board directors authorized share repurchase program repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time companys discretion may 2015 board directors increased authorization shares 1000000 future purchases repurchase program superseded prior repurchase programs program repurchased 1963 1903 shares common stock cost 327699 302599 years ended december 31 2015 2014 respectively company repurchase shares pendency synageva acquisition second quarter 2015 company began repurchasing shares third quarter 2015 subsequent december 31 2015 repurchased 648 shares common stock repurchase program cost 98206 february 8 2016 total 657658 remaining repurchases repurchase program alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts 14 comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2015 2014 2013 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts table provides details regarding significant reclassifications aoci years ended december 31 2015 2014 2013 aoci component included computation net periodic pension benefit cost see note 16 additional details 15 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts following tables present information assets liabilities measured fair value recurring basis december 31 2015 2014 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts securities transferred level 1 2 3 year ended december 31 2015 valuation techniques classify mutual fund investments valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy cash equivalents marketable securities classified level 2 within valuation hierarchy consist institutional money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts understanding models used obtaining market values pricing sources analyzing pricing data certain instances derivative assets liabilities include foreign exchange derivatives measured fair value using observable market inputs forward rates interest rates credit risk well evaluation counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy contingent consideration liabilities related acquisitions classified level 3 within valuation hierarchy valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2015 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks contingent consideration connection prior acquisitions may required pay future consideration contingent upon achievement specified development regulatory approval salesbased milestone events determine fair value obligations acquisition date using various estimates observable market represent level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt ranging 48to 55 developmental milestones weighted average cost capital ranging 10 21 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time development work progresses towards achievement milestones estimated future contingent milestone payments related prior business combinations range zero milestone events achieved maximum 826000 development regulatory salesbased milestones reached december 31 2015 fair value acquisitionrelated contingent consideration 177228 following table represents rollforward acquisitionrelated contingent consideration 16 employee benefit plans deferred compensation plan nonqualified deferred compensation plan allows certain highlycompensated employees make voluntary deferrals 80 base salary incentive bonuses plan designed work conjunction 401k plan provides total combined employer match 6 employees eligible earnings irs annual 401k contribution limitations deferred compensation amounts plan december 31 2015 2014 8817 4277 respectively included liabilities within consolidated balance sheets employer matching contributions plan years ended december 31 2015 2014 2013 material defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal 100 dollar contributed first 6 individuals base salary incentive cash bonus annual irs maximum years ended december 31 2015 2014 2013 recorded matching contributions approximately 11478 8782 6360 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts defined benefit plans maintain defined benefit plans employees certain countries outside united states including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments 2015 recorded impacts curtailment related swiss plan result reduction employees due relocation european headquarters discussed note 17 restructuring following table sets forth funded status amounts recognized defined benefit plans including impacts 2015 curtailment company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date following table presents total plan assets investment category december 31 2015 classification investment category within fair value hierarchy respect inputs used measure fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active plan assets managed independent investment fiduciary primarily invested debt equity securities real estate funds order maximize overall return investment income considering asset allocation limits determined pension law december 31 2015 recorded liability 23473 noncurrent liabilities charge accumulated comprehensive income net tax 9589 related additional minimum liability following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts changes plan assets benefit obligations recognized aoci follows amount accumulated comprehensive income december 31 2015 expected recognized component net periodic pension costs 2016 853 estimate pay employer contributions approximately 3102 2016 expected future cash flows paid respect pension plans december 31 2015 follows 17 restructuring connection completion new corporate headquarters located new connecticut entered lease termination agreement previous corporate headquarters located cheshire connecticut december 2015 result action recorded restructuring expense 11236 contract termination costs fourth quarter 2015 conjunction acquisition integration synageva 2015 recorded restructuring expense 13335 primarily related employee costs 2015 expect pay remaining accrued amounts related restructuring activity end 2016 fourth quarter 2014 announced plans move european headquarters lausanne zurich switzerland relocation european headquarters supports operational needs based growth european region result action recorded restructuring expenses 15365 related employee costs fourth quarter 2014 year ended december 31 2015 incurred additional restructuring costs 17598 expect pay remaining accrued amounts related restructuring activity end 2016 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts following table presents reconciliation restructuring reserve recorded within accrued expenses companys condensed consolidated balance sheet year ended december 31 2015 december 31 2014 respectively 18 segment information operate one business segment innovation development commercialization lifetransforming therapeutic products therefore results operations reported consolidated basis purposes segment reporting consistent management reporting disclosures net product sales longlived assets geographic area presented net product sales net product sales product follows geographical information 2 longlived assets consist property plant equipment alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2015 2014 2013 amounts thousands except per share amounts 19 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2015 2014 1 included within cost sales first quarter 2015 costs 24352 associated write portion single manufacturing campaign third party manufacturer strensiq 2 included within operating expenses second quarter 2015 acquisition costs 29777 associated acquisition synageva 3 included within operating expenses third fourth quarter 2015 36608 79976 respectivelyof amortization purchased intangible assets associated approval strensiq kanuma 4 included within net income third quarter 2015 onetime tax expense 315569 resulting integration synageva business alexion business tax expense attributable change deferred tax liability outside basis difference resulting movement assets captive foreign partnership 5 included within revenues first quarter 2014 reimbursement shipments made years prior january 1 2014 result agreement french government positively impacted reimbursement soliris result agreement first quarter 2014 recognized 87830 net product sales soliris france relating years prior january 1 2014 also included within cost sales first quarter 2014 incremental impact cost sales 2055 additional royalties related 87830 net product sales prior year shipments 6 included within operating expenses fourth quarter 2014 15365 restructuring expenses recognized connection relocation european headquartersitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference report form 8k filed may 6 2015 5 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 6 incorporated reference annual report form 10k fiscal year ended december 31 2011 7 incorporated reference report form 8k filed january 8 2016 8 incorporated reference registration statement form s1 reg 33300202 9 incorporated reference report form 8k filed april 7 2015 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference annual report form 10k fiscal year ended december 31 2009 12 incorporated reference report form 8k filed september 17 2010 13 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 14 incorporated reference quarterly report form 10q quarter ended march 31 2013 15 incorporated reference quarterly report form 10q quarter ended january 31 2004 16 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 17 incorporated reference annual report form 10k fiscal year ended december 31 2013 18 incorporated reference annual report form 10ka fiscal year ended july 31 1996 19 incorporated reference annual report form 10k fiscal year ended december 31 2008 20 incorporated reference report form 8k filed december 16 2004 21 incorporated reference quarterly report form 10q quarter ended january 31 2005 22 incorporated reference report form 8k filed march 14 2005 23 incorporated reference annual report form 10k fiscal year ended december 31 2010 24 incorporated reference report form 10k fiscal year ended december 31 2014 25 incorporated reference report form 8k filed june 23 2015 26 incorporated reference report form 8k filed september 22 2016 27 incorporated reference quarterly report form 10q quarter ended march 31 2016 confidential treatment granted portions exhibit confidential treatment requested 17 cfr §§20080b4 24b2 confidential portions exhibit omitted marked accordingly confidential portions filed separately sec pursuant confidential treatment request indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2016 2015 2014 pages report independent registered public accounting firm consolidated financial statements consolidated balance sheets consolidated statements operations consolidated statements comprehensive income consolidated statements changes stockholders’ equity consolidated statements cash flows notes consolidated financial statements report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinion accompanying consolidated balance sheets related consolidated statements operations comprehensive income changes stockholders’ equity cash flows present fairly material respects financial position alexion pharmaceuticals inc subsidiaries december 31 2016 2015 results operations cash flows three years period ended december 31 2016 conformity accounting principles generally accepted united states america also opinion company maintain material respects effective internal control financial reporting december 31 2016 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso material weakness internal control financial reporting existed date related maintaining effective control environment senior management failed set appropriate tone top specifically senior management failed reinforce need compliance company’s policies procedures resulted inappropriate business conduct material weakness deficiency combination deficiencies internal control financial reporting reasonable possibility material misstatement annual interim financial statements prevented detected timely basis material weakness referred described management’s report internal control financial reporting appearing item 9a considered material weakness determining nature timing extent audit tests applied audit 2016 consolidated financial statements opinion regarding effectiveness company’s internal control financial reporting affect opinion consolidated financial statements company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report referred responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts classification debt issuance costs manner accounts certain elements employee sharebased payments 2016 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp hartford connecticut february 16 2017 alexion pharmaceuticals inc consolidated balance sheets amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us biopharmaceutical company focused serving patients devastating ultrarare disorders innovation development commercialization lifetransforming therapeutic products complement franchise soliris® first therapeutic approved patients either paroxysmal nocturnal hemoglobinuria pnh lifethreatening ultrarare genetic blood disorder atypical hemolytic uremic syndrome ahus lifethreatening ultrarare genetic disease pnh ahus two disorders resulting chronic uncontrolled activation complement component immune system metabolic franchise commercialize strensiq® treatment patients hypophosphatasia hpp kanuma® treatment patients lysosomal acid lipase deficiency lald hpp ultrarare genetic disease characterized defective bone mineralization lead deformity bones skeletal abnormalities lald serious life threatening ultrarare disease genetic mutations result decreased activity lysosomal acid lipase lal enzyme leading marked accumulation lipids vital organs blood vessels tissues initiated sales products third quarter 2015 also evaluating additional potential indications eculizumab severe devastating diseases uncontrolled complement activation underlying mechanism progressing various stages development additional product candidates potential treatments patients devastating ultrarare disorders june 2015 acquired outstanding shares common stock synageva biopharma corp synageva publiclyheld clinicalstage biotechnology company acquisition furthered objective develop commercialize lifetransforming therapies patients devastating ultrarare diseases basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted us requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • sharebased compensation alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable securities availableforsale accordingly record securities fair value classify marketable securities current assets investments intended available company use funding current operations unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders’ equity adjustment fair value reflects significant decline value security evaluate extent decline determined otherthantemporary would mark security market charge consolidated statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investments options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan securities classified trading securities carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses accounts receivable standard credit terms vary based country sale range 30 120 days consolidated average days’ sales outstanding ranges 60 80 days evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions december 31 2016 three customers accounted 47 accounts receivable balance individual customers ranging 14 19 accounts receivable balance december 31 2015 three customers accounted 51 accounts receivable balance individual customers ranging 14 22 accounts receivable balance year ended december 31 2016 three customers accounted 37 product sales individual customers ranging 10 16 product sales year ended december 31 2015 three customers accounted 38 product sales individual customers ranging 10 18 product sales customers accounted 10 accounts receivable net product sales david anderson alexion’s executive vice president chief financial officer since december 2016 member board directors cardinal health inc since april 2014 cardinal health inc affiliates provide product distribution services alexion united states result foreign operations exposed changes general economic conditions countries conduct business substantially accounts receivable due countries due backed sovereign local governments amount nonsovereign accounts receivable material continue monitor economic conditions including volatility associated international economies associated impacts financial markets business although collection accounts receivables due certain countries may extend beyond standard credit terms expect delays material impact financial condition results operations inventories stated lower cost estimated realizable value determine cost inventory standard cost basis approximates average costs components inventory follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized inventory capitalized products awaiting regulatory approval december 31 2016 2015 products approved us food drug administration fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form products utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire requires adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout preand postproduction process continually gather additional information regarding product quality periods manufacture date products currently maximum estimated life ranging 36 48 months based sales forecasts expect realize carrying value inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash effectiveness qualifying hedge contract assessed quarterly record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified revenue interest alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts expense based nature derivative instrument nonqualifying portion gains losses resulting changes fair value reported income expense property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfifteen thirty five years • machinery laboratory equipmentfive fifteen years • computer hardware softwarethree seven years • furniture office equipment five ten years leasehold improvements assets capital lease arrangements amortized lesser asset’s estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated asset’s useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable managed purpose providing return form dividends lower costs economic benefits consists inputs processes provide ability provide outputs acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill acquisition net assets constitute business goodwill recognized consolidated financial statements include results operations acquired business completion acquisition intangible assets intangible assets consist licenses patents purchased technology acquired inprocess research development iprd intangible assets definite lives amortized based pattern economic benefit estimated useful lives reviewed periodically impairment intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment development complete generally occurs regulatory alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets impairment longlived assets longlived assets primarily comprised intangible assets property plant equipment evaluate finitelived intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders’ equity revenue recognition principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product end customer typically hospital physician’s office private government pharmacy healthcare facility regular basis review revenue arrangements distributor relationships determine whether changes criteria impact revenue recognition amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell governments government agencies factors price products limited number patients short period product sale patient infusion lack contractual return rights customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors ability estimate returns cases exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale record estimated rebates payable governmental programs including medicaid us programs outside us reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation two sharebased compensation plans pursuant awards currently made amended restated 2004 incentive plan 2004 plan ii 2015 employee stock purchase plan espp 2004 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 85 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 15 discount recognized compensation expense 6 month purchase period earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps denominator reflects potential dilution could occur stock options unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method following table summarizes calculation basic diluted eps years ended december 31 2016 2015 2014 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts exclude eps weightedaverage number securities whose effect antidilutive excluded calculation eps years ended december 31 2016 2015 2014 4 2 1 shares common stock respectively effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrued potential interest penalties related unrecognized tax benefits component tax expense comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable securities unrealized gains losses hedge contracts foreign currency translation adjustments certain changes equity reflected net tax investments invest companies securities publicly traded fair value readily available investments include investment preferred stock nonpublic entity moderna therapeutics inc 2014 purchased 38 preferred equity moderna recorded investment cost within assets condensed consolidated balance sheets regularly monitor investments evaluate whether otherthantemporary decline fair value based implied value recent company financings public market prices comparable companies general market conditions carrying value investments impaired december 31 2016 reclassifications adjustments certain items prior year’s consolidated financial statements reclassified conform current presentation new accounting pronouncements may 2014 financial accounting standards board fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2017 allows adoption using full retrospective method modified retrospective method entities may elect early adopt standard annual periods beginning december 15 2016 currently anticipate adopting standard using modified retrospective method expect implementation new standard material impact financial position results operations april 2015 fasb issued new standard simplifying presentation debt issuance costs new standard aligns treatment debt issuance costs debt discounts premiums requires debt issuance costs presented direct deduction carrying amount related debt adopted provisions standard first quarter alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts 2016 reclassified 9 deferred financing costs prepaid expenses current assets current portion longterm debt 27 assets longterm debt less current portion consolidated balance sheets december 31 2015 april 2015 fasb issued new standard clarifying accounting customer’s fees paid cloud computing arrangement standard cloud computing arrangement includes software license customer would account software license consistent software licenses cloud computing arrangement include software license customer would account arrangement service contract adopted provisions standard first quarter 2016 adoption material effect financial condition results operations february 2016 fasb issued new standard requiring rights obligations arising leases recognized balance sheet recording rightofuse asset corresponding lease liability new standard also requires qualitative quantitative disclosures understand amount timing uncertainty cash flows arising leases well significant management estimates utilized standard effective interim annual periods beginning december 15 2018 requires modified retrospective adoption currently assessing impact standard financial condition results operations march 2016 fasb issued new standard intended simplify certain aspects accounting employee sharebased payments elected early adopt standard third quarter 2016 one aspect standard requires entity recognize excess tax benefits deficiencies associated stockbased compensation reduction increase tax expense income statement previously amounts recognized additional paidin capital aspect new standard adopted prospectively accordingly recorded tax benefits 10 within income tax expense year ended december 31 2016 amendments require recognition excess tax benefits regardless whether benefit reduces taxes payable current period result 238 associated previously unrecognized excess tax benefits recorded deferred tax asset increase retained earnings beginning 2016 furthermore amendment requires excess tax benefits classified operating activity statement cash flows instead financing activity elected adopt provision standard prospectively thus prior periods adjusted also elected continue estimate impact forfeitures determining amount compensation cost recognized period rather account forfeitures occur october 2016 fasb issued new standard eliminates prohibition immediate recognition current deferred income tax impacts intraentity asset transfer inventory new standard entities recognize income tax consequences intraentity transfer asset inventory transfer occurs new standard effective interim periods beginning december 15 2017 requires modified retrospective adoption cumulativeeffect adjustment directly retained earnings beginning period adoption currently assessing impact standard financial condition results operations 2 acquisitions june 22 2015 completed acquisition synageva transaction accounted acquisition method accounting business combinations acquisition method accounting assets acquired liabilities assumed synageva recorded acquisition date respective fair values synageva’s results operations included consolidated financial statements date acquisition furthered objective develop commercialize lifetransforming therapies increasing number patients devastating rare diseases synageva’s lead product candidate kanuma enzyme replacement therapy patients suffering lald lifethreatening ultrarare disease approved treatments closing business combination acquired outstanding shares common stock synageva 4565 cash 26 shares common stock financed cash consideration existing cash proceeds new credit facility described note 8 aggregate consideration acquire synageva consisted alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts following table summarizes estimated fair values assets acquired liabilities assumed fair value assets acquired liabilities assumed initially based upon preliminary calculations estimates assumptions subject change obtained additional information estimates measurement period one year acquisition date year ended december 31 2016 recorded fair value adjustments 11 primarily due tax related items acquired 24 kanuma inventory estimated fair value workinprocess finished goods inventory determined utilizing comparative sales method based expected selling price inventory adjusted incremental costs complete manufacturing process direct selling efforts well reasonable profit allowance estimated fair value raw material inventory valued replacement cost equal value market participant would pay acquire inventory intangible assets associated iprd projects primarily relate kanuma estimated fair value iprd assets 4236 determined using multiperiod excess earnings method variation income approach multiperiod excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset fair value using multiperiod excess earnings method dependent estimated weighted average cost capital synageva 10 represents rate return market participant would expect assets excess purchase price fair value amounts assets acquired liabilities assumed represents goodwill amount resulting acquisition goodwill taxdeductible recorded noncurrent asset amortized subject annual review impairment goodwill represents future economic benefits arising assets acquired could individually identified separately recognized expected synergies specific business available market participants including unique ability commercialize therapies rare diseases existing relationships specialty physicians identify patients lald global distribution network facilitate drug delivery benefits believe result combining operations synageva within operations recorded net deferred tax liability 160 amount primarily comprised 603 deferred tax liabilities related iprd inventory acquired offset 443 deferred tax assets related net operating loss carryforwards nols tax credits temporary differences expect utilize year ended december 31 2015 recorded 96 pretax operating losses associated continuing operations synageva consolidated statements operations pro forma financial information unaudited following unaudited pro forma information presents combined results alexion synageva acquisition synageva completed january 1 2014 adjustments give effect pro forma events directly attributable acquisition unaudited pro forma results reflect operating efficiencies potential cost savings may result consolidation operations accordingly unaudited pro forma financial information necessarily indicative results operations would completed transaction january 1 2014 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts unaudited pro forma consolidated results include following pro forma adjustments related nonrecurring activity • alexion synageva expenses 33 127 respectively associated accelerated vesting stock based compensation result acquisition excluded net income year ended december 31 2015 expenses included net income year ended december 31 2014 • alexion synageva acquisitionrelated restructuring costs 53 62 respectively excluded income year ended december 31 2015 expenses included net income year ended december 31 2014 acquisitionrelated costs acquisitionrelated costs associated business combinations years ended december 31 2016 2015 2014 include following acquisition synageva resulted 13 restructuring related charges year ended december 31 2015 synageva restructuring related charges material year ended december 31 2016 see note 17 additional details 3 property plant equipment net summary property plant equipment follows included constructioninprogress december 31 2015 227 costs associated construction facility new connecticut facility placed service 2016 additionally costs 118 19 december 31 2016 2015 included within constructioninprocess associated construction new manufacturing facility although legally premises deemed owner buildings alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts construction period based applicable accounting guidance buildtosuit leases see note 9 “facility lease obligations” additional information connection construction facility new connecticut entered agreement state connecticut department economic community development provides forgivable loan grants totaling 26 tax credits 25 program requires meet certain criteria order prevent forfeiture repayment loan grants credits include maintaining corporate headquarters connecticut ten years ii satisfying minimum employment obligations iii minimum capital spending requirements third quarter 2015 received 26 forgivable loan grants 2016 satisfied second third criteria proceeds reduce costs assets associated project december 31 2016 received tax credits associated agreement state connecticut depreciation amortization property plant equipment approximately 64 44 35 years ended december 31 2016 2015 2014 respectively december 31 2016 2015 computer software costs included property plant equipment 37 20 respectively depreciation amortization expense capitalized computer software costs 12 10 7 years ended december 31 2016 2015 2014 respectively 4 intangible assets goodwill intangible assets goodwill net accumulated amortization follows amortization expense 322 117 11 years ended december 31 2016 2015 2014 respectively assuming changes gross cost basis intangible assets total estimated amortization expense finitelived intangible assets 320 years ending december 31 2017 december 31 2021 fourth quarter 2016 reviewed sbc103 early stage clinical indefinitelived intangible asset related synageva acquisition part annual impairment testing fair value iprd asset determined using income approach included significant unobservable level 3 inputs unobservable inputs included among things expected development regulatory commercial time lines riskadjusted forecasted future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted cost capital 12 applied calculating present value future cash flows based strategic portfolio evaluation increases development regulatory commercial time lines updated cash flows estimated value obtained asset market participant arm’s length transaction 31 lower carrying amount asset result fourth quarter 2016 recognized impairment charge 85 writedown asset fair value impairment recorded operating expenses consolidated statement operations year ended december 31 2016 february 2017 board directors alexion made decision reduce investment sbc103 current phase iii clinical trial expanded new patients added trial patients currently enrolled trial continue receive therapy reassess value asset go forward basis indicators impairment alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts following table summarizes changes carrying amount goodwill 5 marketable securities amortized cost gross unrealized holding gains gross unrealized holding losses estimated fair value availableforsale investments type security december 31 2016 december 31 2015 follows aggregate fair value availableforsale securities unrealized loss position december 31 2016 december 31 2015 265 294 investments continuous unrealized loss position 12 months material december 31 2016 believe cost basis availableforsale investments recoverable fair values availableforsale securities classification consolidated balance sheet follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts fair values availableforsale debt securities december 31 2016 contractual maturity summarized follows december 31 2016 december 31 2015 fair value trading securities 13 9 utilize specific identification method computing realized gains losses realized gains losses availableforsale trading securities material year ended december 31 2016 2015 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen also exposed fluctuations interest rates outstanding term loan debt manage exposures within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 60 months hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar purpose hedges reduce volatility exchange rate fluctuations operating results increase visibility foreign exchange impact forecasted revenues hedges designated cash flow hedges upon contract inception december 31 2016 open foreign exchange forward contracts notional amounts totaling 1742 qualified hedge accounting achieve desired mix floating fixed interest rates term loan entered two interest rate swap agreements june 2016 qualified designated cash flow hedges first agreement notional amount 3281 effective june 30 2016 december 30 2016 agreement hedged contractual floating interest rate term loan result agreement interest rate term loan fixed 0535 plus borrowing spread december 30 2016 second agreement notional amount 656 effective december 31 2016 december 31 2019 second agreement converts floating rate portion term loan fixed rate 098 plus borrowing spread december 31 2016 december 2019 first quarter 2017 entered additional interest rate swap agreement notional amount 300 effective january 31 2017 december 31 2018 converts floating rate portion term loan fixed rate 129 plus borrowing spread january 2017 december 2018 impact accumulated comprehensive income aoci earnings derivative instruments qualified cash flow hedges years ended december 31 2016 2015 follows assuming change foreign exchange rates liborbased interest rates market rates december 31 2016 78 gains recognized aoci reclassified revenue next 12 months amount gains recognized aoci reclassified interest expense next 12 months immaterial alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts enter foreign exchange forward contracts durations approximately 90 days designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2016 notional amount foreign exchange contracts hedge accounting applied 647 recognized loss gain 5 26 income expense years ended december 31 2016 2015 2014 respectively associated foreign exchange contracts designated hedging instruments amounts largely offset gains losses monetary assets liabilities following tables summarize fair value outstanding derivatives december 31 2016 2015 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts although offset derivative assets liabilities within condensed consolidated balance sheets international swap derivatives association agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect consolidated balance sheets offsetting foreign exchange forward contracts interest rate contracts subject provisions 7 accrued expenses accrued expenses consist following 8 debt june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 3500 term loan facility 500 revolving credit facility maturing five years borrowings term loan payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 100 form letters credit borrowings sameday notice referred swingline loans 25 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility amount cause consolidated net leverage ratio exceed maximum allowable amount credit agreement may elect loans credit agreement bear interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts depending upon consolidated net leverage ratio calculated accordance credit agreement december 31 2016 interest rate outstanding loans credit agreement 252 obligations credit facilities guaranteed certain alexion’s foreign domestic subsidiaries secured liens certain alexion’s subsidiaries’ equity interests subject certain exceptions credit agreement requires us comply certain financial covenants quarterly basis financial covenants required deliver administrative agent later 50 days fiscal quarter quarterly financial statements within 5 days thereafter compliance certificate november 2016 obtained waiver necessary lenders requirement due date delivery third quarter 2016 financial statements compliance certificate extended january 18 2017 posting third quarter report form 10q website january 4 2017 satisfied financial statement covenant simultaneously delivered required compliance certificate required lenders credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan connection entering credit agreement paid 45 financing costs amortized interest expense life debt amortization expense associated deferred financing costs years ended december 31 2016 2015 10 6 respectively amortization expense associated deferred financing costs year ended december 31 2014 material connection acquisition synageva june 2015 borrowed 3500 term loan facility 200 revolving facility used available cash remaining cash consideration made principal payments 375 year ended december 31 2016 december 31 2016 3081 outstanding term loan zero outstanding revolving facility december 31 2016 open letters credit 15 borrowing availability revolving facility 485 fair value long term debt measured using level 2 inputs approximates book value contractual maturities longterm debt obligations due subsequent december 31 2016 follows based upon intent ability make payments 2017 included 175 within current liabilities consolidated balance sheet december 31 2016 net current deferred financing costs 9 facility lease obligations new facility lease obligation november 2012 entered lease agreement office laboratory space constructed new connecticut term lease commenced 2015 expire 2030 renewal option 10 years although legally premises deemed owner building due substantial improvements directly funded us construction period based applicable accounting guidance buildtosuit leases accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet construction new facility completed building placed service first quarter 2016 imputed interest rate facility lease obligation december 31 2016 approximately 11 year ended december 31 2016 2015 recognized 14 5 respectively interest expense associated arrangement december 31 2016 2015 total facility lease obligation 136 133 respectively recorded within current liabilities facility lease obligation consolidated balance sheets alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts aggregate future minimum noncancellable commitments new facility lease obligation december 31 2016 follows lonza facility lease obligation third quarter 2015 entered new agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion one existing facilities agreement requires us make certain payments construction new manufacturing facility annual payments ten years thereafter result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement construction period december 31 2016 2015 recorded constructioninprocess asset 118 19 respectively offsetting facility lease obligation 107 15 respectively associated manufacturing facility payments lonza agreement allocated purchases inventory repayment facility lease obligation relative fair value basis 2016 incurred 58 payments lonza agreement 8 applied outstanding facility lease obligation 50 recognized prepayment inventory see note 10 minimum fixed payments due lonza agreements 10 commitments contingencies commitments license agreements entered number license agreements since inception order advance obtain technologies services related business license agreements generally provide us pay initial fee followed milestone royalty payments certain conditions met certain agreements call future payments upon attainment agreed upon development andor commercial milestones agreements may also require minimum royalty payments based sales products developed applicable technologies march 2015 entered agreement third party allowed us exercise option another third party exclusive worldwide perpetual license rights specialized technology intellectual property simultaneously exercised option due early stage assets recorded expense payments 47 first quarter 2015 march 2015 entered collaboration agreement third party allows us identify optimize drug candidates alexion exclusive worldwide rights develop commercialize products arising collaboration due early stage assets licensing connection collaboration recorded expense upfront payment 15 first quarter 2015 addition december 31 2016 could required pay additional 249 certain development regulatory commercial milestones met time well royalties commercial sales january 2015 entered license agreement third party obtain exclusive research development commercial license specific therapeutic molecules due early stage assets recorded expense upfront payment 50 first quarter 2015 addition could required pay additional 822 certain development regulatory commercial milestones met time well royalties commercial sales december 2014 entered agreement xchem pharmaceuticals xchem allows us identify novel drug candidates xchem’s proprietary drug discovery engine alexion exclusive worldwide rights alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts develop commercialize products arising collaboration three program targets due early stage assets recorded expense upfront payment 8 addition program target maximum three targets could required make additional payments upon achievement specified research development regulatory milestones 75 well royalties commercial sales january 2014 entered agreement moderna therapeutics inc moderna allows us purchase ten product options develop commercialize treatments rare diseases moderna’s messenger rna mrna therapeutics platform alexion lead discovery development commercialization treatments produced broad longterm strategic agreement moderna retain responsibility design manufacture messenger rna selected targets due early stage assets recorded expense upfront payment 100 also responsible funding research activities program addition drug target maximum ten targets could required make option exercise payment 15 pay additional 120 respect rare disease product 400 respect nonrare disease product development sales milestones specific milestones met time well royalties commercial sales manufacturing agreements various manufacturing development agreements support clinical commercial product needs rely lonza third party manufacturer produce portion commercial clinical quantities soliris strensiq various agreements lonza remaining total noncancellable future commitments approximately 1148 terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured alexion rhode island manufacturing facility arimf payment respect sales soliris manufactured lonza facilities addition lonza noncancellable commitments 27 third party manufacturers contingent liabilities currently involved various claims lawsuits legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results past received may future receive notices third parties claiming patents may infringed development manufacture sale products guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales products could required pay owners patents technology used manufacture sale products costly license inability obtain necessary license could material adverse effect financial results may 2015 received subpoena connection investigation enforcement division us securities exchange commission sec requesting information related grantmaking activities compliance foreign corrupt practices act fcpa various countries addition october 2015 alexion received request us department justice doj voluntary production document information pertaining alexion’s compliance fcpa sec doj also seek information related alexion’s recalls specific lots soliris related securities disclosures alexion cooperating investigations time alexion unable predict duration scope outcome investigations possible loss related matters may incurred given ongoing nature investigations management cannot reasonably estimate potential magnitude loss range loss several securities class action lawsuits filed company former officers federal district court alleging violations sections 10b 20a securities exchange act 1934 15 usc § 78jb rule 10b5 promulgated thereunder alleging defendants made misstatements andor omissions concerning company’s sales soliris alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts november 17 2016 shareholder filed putative class action us district court southern district new york litigation early stages defendants responded complaint december 30 2016 plaintiffs filed notice voluntary dismissal dismissed claims without prejudice case closed december 29 2016 second shareholder filed putative class action company certain former employees us district court district connecticut alleging defendants made misrepresentations omissions soliris february 10 2014 december 9 2016 january 17 2017 three parties filed motions named lead plaintiff action briefing motions ongoing litigation early stages defendants yet responded complaint given early stages litigation management currently believe loss related matter probable potential magnitude loss range loss reasonably estimated december 2016 received subpoena us attorney’s office district massachusetts requesting documents relating generally support 501c3 organizations provide financial assistance medicare patients taking drugs sold alexion’s provision free drug medicare patients alexion compliance policies training materials concerning antikickback statute payments 501c3 organization provides financial assistance medicare patients companies disclosed similar inquiries cooperating inquiry march 2013 received warning letter warning letter fda regarding compliance current good manufacturing practices cgmp arimf warning letter followed receipt form 483 inspectional observations fda connection fda inspection concluded august 2012 observations relate commercial clinical manufacture soliris arimf responded warning letter fda dated april 2013 previously disclosed fda issued form 483s august 2014 august 2015 related observations arimf inspectional observations august 2014 2015 forms 483s since closed fda july 2016 fda completed routine inspection arimf since confirmed receipt responses inspectional observations included form 483 received inspection observations inspectional represent final fda determination compliance continue manufacture products including soliris facility resolution issues raised warning letter difficult predict currently believe loss related matter probable potential magnitude loss range loss reasonably estimated operating leases december 31 2016 operating leases office laboratory space us foreign locations support operations global organization aggregate lease expense 29 28 23 years ended december 31 2016 2015 2014 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2016 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts 11 income taxes income tax expense based income taxes follows fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership income derived foreign jurisdictions classified “nonus income” purposes financial reporting substantially nonus income years ended december 31 2016 2015 relates income captive foreign partnership components income tax expense follows continue maintain valuation allowance certain deferred tax assets realization certain continue pay cash taxes us federal various us state foreign jurisdictions utilized tax attributes met applicable limitation attribute utilization december 31 2016 tax effected federal state net operating loss carryforwards 57 5 respectively nol’s expire 2020 2036 also federal state income tax credit carryforwards 536 11 respectively income tax credits expire 2019 2036 provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership starting 2014 significant portion nonus income flows partnership portion partnership income attributable us parent company’s ownership percentage taxed us remainder nonus income taxed based tax rate enacted local foreign jurisdictions income earned operations many foreign tax jurisdictions impose income taxes different rates us impact rate differences included foreign income tax rate differential disclose reconciliation us statutory income tax rate effective tax rate additionally included foreign income tax rate differential line item impact taxes attributable intercompany transactions amount approximately 22 24 23 tax expense 2016 2015 2014 respectively provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows second quarter 2016 adopted new sharebased compensation guidance prior guidance effect certain windfall tax benefit deductions recognized deferred tax new guidance fully incorporates deferred tax impact deductions result recorded increase deferred tax asset income tax credits alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts period ended december 31 2016 consistent new guidance deferred tax balances period ended december 31 2015 restated decrease net operating losses due utilization historical synageva net operating loss carryforwards increase income tax credits primarily attributable adoption new sharebased compensation guidance corresponding recognition “windfall” tax benefits increase investment foreign partnership deferred tax liability due 2016 distributions captive foreign partnership follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2016 total amount tax benefit recorded 2016 2015 2014 related unrecognized tax benefits 22 83 17 respectively unrecognized tax benefits recognized would favorable impact effective tax rate reasonably possible portion unrecognized tax benefits could reverse within next twelve months reversal amounts contingent upon completion field audits taxing authorities several jurisdictions whether tax adjustment proposed nature amount adjustment administrative path resolving proposed adjustment cannot reasonably estimate range potential change file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statutes limitations ranging 3 5 years however limitation period could extended due tax attribute carryforward position number jurisdictions tax authorities generally ability review income tax returns periods limitation period previously expired subsequently adjust tax attribute values internal revenue service irs commenced examination us income tax returns 2013 2014 anticipate audit conclude within next twelve months february 16 2017 notified significant proposed adjustments irs record us tax expense undistributed earnings controlled foreign corporation cfc subsidiaries intend reinvest earnings permanently outside us repatriate earnings tax efficient accordingly believe us tax earnings might repatriated would substantially offset tax attributes foreign tax credits deficits foreign earnings profits account december 31 2016 cumulative amount earnings approximately 1462 fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership extent us parent company receives allocation partnership income amounts taxable us year permanent reinvestment assertion inapplicable earnings present anticipated future need cash held cfcs cash generated us well borrowings expected sufficient meet us liquidity needs foreseeable future practicable estimate amount additional taxes might payable cfcs’ undistributed earnings due variety factors including timing extent nature repatriation expectation foreign undistributed earnings us parent company’s share foreign partnership profits permanently alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts invested could certain unforeseen future events could impact permanent reinvestment assertion events include acquisitions corporate restructuring tax law changes currently contemplated 12 sharebased compensation amended restated 2004 incentive plan 2004 plan approved stockholders may 2013 broad based plan provides grant equity awards including restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards directors officers key employees consultants maximum 48 shares stock options granted 2004 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vest four years performancebased restricted stock units threeyear vesting period stock options summary status stock option plans december 31 2016 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2016 2015 2014 42 168 460 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2016 2015 2014 58 51 36 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options weighted average fair value date grant options granted years ended december 31 2016 2015 2014 4146 5303 5122 per option respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts restricted stock summary status nonvested restricted stock changes period ended follows fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2016 2015 2014 including restricted stock units performance conditions 13335 18409 17422 per share respectively total weighted average grant date fair value restricted stock vested years ended december 31 2016 2015 2014 124 135 41 respectively also grant marketbased performance awards senior management provide recipient right receive restricted stock end three year performance period based preestablished marketbased performance goals use payout simulation models estimate grant date fair value awards expense recognized marketbased performance awards material years ended december 31 2016 2015 2014 employee stock purchase plan 2015 company adopted espp employees purchase shares common stock based percentage compensation subject certain limits purchase price per share equal lower 85 fair market value common stock offering date purchase date six month lookback feature espp 1 shares common stock may issued eligible employees elect participate purchase plan shares issued compensation expense recognized espp years ended december 31 2016 2015 material sharebased compensation expense following table summarizes sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2016 2015 2014 12 8 10 respectively december 31 2016 356 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted 2004 plan expense expected recognized weightedaverage period 271 years alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts 13 stockholders’ equity common stock june 2015 connection acquisition synageva issued 26 shares common stock former synageva stockholders employees fair value stock 4914 incurred 4 issuance costs share repurchases november 2012 board directors authorized share repurchase program repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time company’s discretion may 2015 board directors increased authorization acquire shares aggregate value 1000 future purchases repurchase program superseded prior repurchase programs program repurchased 3 2 shares common stock cost 430 328 years ended december 31 2016 2015 respectively company repurchase shares pendency synageva acquisition second quarter 2015 company began repurchasing shares third quarter 2015 february 2017 board directors increased authorization acquire shares aggregate value 1000 future purchases repurchase program superseded prior repurchase programs february 16 2017 total 1000 remaining repurchases repurchase program 14 comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2016 2015 2014 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts table provides details regarding significant reclassifications aoci years ended december 31 2016 2015 2014 aoci component included computation net periodic pension benefit cost see note 16 additional details 15 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts following tables present information assets liabilities measured fair value recurring basis december 31 2016 2015 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts securities transferred level 1 2 3 year ended december 31 2016 valuation techniques classify mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy cash equivalents marketable securities classified level 2 within valuation hierarchy consist institutional money market funds commercial paper municipal bonds us foreign governmentrelated debt corporate debt securities certificates deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources understanding models used obtaining market values pricing sources analyzing pricing data certain instances alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts derivative assets liabilities include foreign exchange interest rate derivatives measured fair value using observable market inputs forward rates interest rates credit risk well evaluation counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy contingent consideration liabilities related acquisitions classified level 3 within valuation hierarchy valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2016 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks contingent consideration connection prior acquisitions may required pay future consideration contingent upon achievement specified development regulatory approvals salesbased milestone events determine fair value obligations acquisition date using various estimates observable market represent level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt 47 developmental milestones weighted average cost capital ranging 10 21 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time estimated future contingent milestone payments related prior business combinations range zero milestone events achieved maximum 766 development regulatory salesbased milestones reached december 31 2016 fair value acquisitionrelated contingent consideration 153 following table represents rollforward acquisitionrelated contingent consideration fourth quarter 2016 criteria met achievement milestone payment associated acquisition enobia pharma corp connection 60 paid december 2016 16 employee benefit plans deferred compensation plan nonqualified deferred compensation plan allows certain highlycompensated employees make voluntary deferrals 80 base salary incentive bonuses plan designed work conjunction 401k plan provides total combined employer match 6 employee’s eligible earnings irs annual 401k contribution limitations deferred compensation amounts plan december 31 2016 2015 13 9 respectively included liabilities within consolidated balance sheets employer matching contributions plan years ended december 31 2016 2015 2014 material defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal 100 dollar contributed first 6 individual’s base salary incentive cash bonus annual irs maximum years ended december 31 2016 2015 2014 recorded matching contributions approximately 17 11 9 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts defined benefit plans maintain defined benefit plans employees certain countries outside us including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments 2015 recorded impacts curtailment related swiss plan result reduction employees due relocation european headquarters discussed note 17 “restructuring” following table sets forth funded status amounts recognized defined benefit plans including impacts 2015 curtailment alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date following table presents total plan assets investment category december 31 2016 2015 classification investment category within fair value hierarchy respect inputs used measure fair value plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active plan assets managed independent investment fiduciary primarily invested debt equity securities real estate funds order maximize overall return investment income considering asset allocation limits determined pension law december 31 2016 recorded liability 20 noncurrent liabilities charge accumulated comprehensive income net tax 7 related additional minimum liability following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts changes plan assets benefit obligations recognized aoci follows estimate pay employer contributions approximately 3 2017 expected future benefits paid respect pension plans december 31 2016 follows 17 restructuring connection completion new corporate headquarters located new connecticut entered lease termination agreement previous corporate headquarters located cheshire connecticut december 2015 result action recorded restructuring expense 11 contract termination costs fourth quarter 2015 connection acquisition integration synageva 2015 recorded restructuring expense 13 primarily related employee costs 2015 synageva restructuring charges material 2016 fourth quarter 2014 announced plans relocate european headquarters lausanne zurich switzerland relocation european headquarters supports operational needs based growth european region result action recorded restructuring expenses 15 related employee costs fourth quarter 2014 years ended december 31 2016 2015 incurred additional restructuring costs 4 18 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts following table presents reconciliation restructuring reserve recorded within accrued expenses company’s consolidated balance sheets years ended december 31 2016 2015 respectively 18 segment information operate single segment focusing serving patients devastating ultrarare disorders innovation development commercialization lifetransforming therapeutic products consistent operational structure chief operating decision maker manages allocates resources global consolidated level therefore results operations reported consolidated basis purposes segment reporting consistent management reporting disclosures net product sales longlived assets geographic area presented net product sales net product sales product follows geographical information alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2016 2015 2014 amounts millions except per share amounts 2 longlived assets consist property plant equipment 19 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2016 2015 1 included within operating expenses fourth quarter 2016 impairment charge 85 associated early stage clinical indefinitelived intangible asset 2 included within net income second quarter 2016 tax benefits 5 resulting adoption new sharebased compensation guidance third quarter 2016 resulted increase basic eps diluted eps 003 002 respectively 3 included within net income third quarter 2015 onetime tax expense 316 resulting integration synageva business alexion business tax expense attributable change deferred tax liability outside basis difference resulting movement assets captive foreign partnershipitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits following materials alexion pharmaceuticals inc annual report form 10k year ended december 31 2017 formatted extensible business reporting language xbrl consolidated statements operations ii consolidated statements comprehensive income iii consolidated balance sheets iv consolidated statements changes stockholders’ equity v consolidated statements cash flows vi related notes tagged blocks text 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference report form 8k filed may 6 2015 5 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 6 incorporated reference annual report form 10k fiscal year ended december 31 2011 7 incorporated reference report form 8k filed january 8 2016 8 incorporated reference registration statement form s1 reg 33300202 9 incorporated reference report form 8k filed april 7 2015 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference annual report form 10k fiscal year ended december 31 2009 12 incorporated reference report form 8k filed september 17 2010 13 incorporated reference registration statement form s3 reg 33336738 filed may 10 2000 14 incorporated reference quarterly report form 10q quarter ended march 31 2013 15 incorporated reference quarterly report form 10q quarter ended january 31 2004 16 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 17 incorporated reference annual report form 10k fiscal year ended december 31 2013 18 incorporated reference annual report form 10ka fiscal year ended july 31 1996 19 incorporated reference annual report form 10k fiscal year ended december 31 2008 20 incorporated reference report form 8k filed december 16 2004 21 incorporated reference quarterly report form 10q quarter ended january 31 2005 22 incorporated reference report form 8k filed march 14 2005 23 incorporated reference annual report form 10k fiscal year ended december 31 2010 24 incorporated reference report form 10k fiscal year ended december 31 2014 25 incorporated reference report form 8k filed june 23 2015 26 incorporated reference report form 8k filed september 22 2016 27 incorporated reference quarterly report form 10q quarter ended march 31 2016 28 incorporated reference quarterly report form 10q quarter ended march 31 2017 29 incorporated reference quarterly report form 10q quarter ended june 30 2017 30 incorporated reference annual report form 10k fiscal year ended december 31 2016 31 incorporated reference registration statement form s8 reg 333217905 filed may 5 2017 confidential treatment granted portions exhibit indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2017 2016 2015 report independent registered public accounting firm report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets alexion pharmaceuticals inc subsidiaries december 31 2017 2016 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2017 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2017 2016 results operations cash flows three years period ended december 31 2017 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2017 based criteria established internal control integrated framework 2013 issued coso basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate spricewaterhousecoopers llp hartford connecticut february 8 2018 served company’s auditor since 2002 alexion pharmaceuticals inc consolidated balance sheets amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us global biopharmaceutical company focused serving patients families affected rare diseases innovation development commercialization lifechanging therapies global leader complement inhibition developed commercialize first approved complement inhibitor treat patients paroxysmal nocturnal hemoglobinuria pnh atypical hemolytic uremic syndrome ahus antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg addition alexion two highly innovative enzyme replacement therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald leader complement biology 20 years alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition current year company’s rounding presentation reported amounts changed current year rounding presentation applied prior year amounts presented certain circumstances change may adjust previously reported balances dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted us requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less december 31 2017 2016 cash equivalents comprised money market funds reverse repurchase agreements debt securities maturities less 90 days date purchase fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable securities availableforsale accordingly record securities fair value classify marketable securities current assets investments intended available company use funding current operations unrealized gains losses deemed temporary included accumulated comprehensive income loss separate component stockholders’ equity adjustment fair value reflects significant decline value security evaluate extent decline determined otherthantemporary would mark security market charge consolidated statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investments options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan securities classified trading securities carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses accounts receivable standard credit terms vary based country sale range 30 120 days consolidated average days’ sales outstanding ranges 60 70 days evaluate creditworthiness customers regular basis certain european countries sales us subject payment terms statutorily determined primarily case countries payer governmentowned governmentfunded alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts consider creditworthy length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected noninterest bearing receivables estimated payment beyond one year discount accounts receivable present value date sale corresponding adjustment revenue subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility reasonably assured time sale december 31 2017 2016 allowances receivables material concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions december 31 2017 four customers accounted 577 accounts receivable balance individual customers ranging 102 189 accounts receivable balance december 31 2016 three customers accounted 470 accounts receivable balance individual customers ranging 137 191 accounts receivable balance year ended december 31 2017 three customers accounted 370 product sales individual customers ranging 108 150 product sales year ended december 31 2016 three customers accounted 367 product sales individual customers ranging 100 160 product sales year ended december 31 2015 three customers accounted 382 product sales individual customers ranging 100 175 product sales customers accounted 100 accounts receivable net product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods date experienced significant losses respect collection accounts receivable inventories stated lower cost estimated realizable value determine cost inventory standard cost basis approximates average costs components inventory follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized inventory capitalized products awaiting regulatory approval december 31 2017 2016 products approved us food drug administration fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form products utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire requires adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout preand postproduction process continually gather additional information regarding product quality periods manufacture date products currently maximum estimated life ranging 36 48 months based sales forecasts expect realize carrying value inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash effectiveness qualifying hedge contract assessed alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts quarterly record fair value qualifying hedges current assets current liabilities gains losses resulting changes fair value qualifying hedges recorded comprehensive income loss forecasted transaction occurs forecasted transaction occurs amount reclassified consolidated statement operations based nature derivative instrument nonqualifying portion gains losses resulting changes fair value reported income expense property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfifteen thirty five years • machinery laboratory equipmentfive fifteen years • computer hardware softwarethree seven years • furniture office equipment five ten years leasehold improvements assets capital lease arrangements amortized lesser asset’s estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service assets held sale classify assets held sale following criteria met management authority approve action commits plan sell asset ii asset available immediate sale present condition subject terms usual customary sales similar assets iii active program locate buyer actions required complete plan sell asset initiated iv sale asset probable transfer asset expected qualify recognition completed sale within one year v asset actively marketed sale price reasonable relation current fair value vi actions required complete plan indicate unlikely significant changes plan made plan withdrawn assets classified held sale recorded lower carrying value fair value less costs sell third quarter 2017 announced intention close alexion rhode island manufacturing facility arimf fourth quarter 2017 met criteria assets held sale reclassified arimf assets property plant equipment assets held sale december 31 2017 124 carrying value arimf assets included within prepaid expenses current assets consolidated balance sheet manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated asset’s useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable managed purpose providing return form dividends lower costs economic benefits consists inputs processes provide ability provide outputs acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill acquisition net assets constitute business goodwill recognized consolidated financial statements include results operations acquired business completion acquisition intangible assets intangible assets consist licenses patents purchased technology acquired inprocess research development iprd intangible assets definite lives amortized based pattern economic benefit estimated useful lives reviewed periodically impairment intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets impairment longlived assets longlived assets primarily comprised intangible assets property plant equipment evaluate finitelived intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts investments invest companies securities publicly traded fair value readily available investments include investment preferred stock nonpublic entity moderna therapeutics inc 2014 purchased 375 preferred equity moderna recorded investment cost within assets consolidated balance sheets regularly monitor investments evaluate whether otherthantemporary decline fair value based implied value recent company financings public market prices comparable companies general market conditions carrying value investments impaired december 31 2017 contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders’ equity revenue recognition principal source revenue product sales recognize revenue product sales persuasive evidence arrangement exists title product associated risk loss passed customer price fixed determinable collection customer reasonably assured performance obligations depending criteria revenue usually recorded upon receipt product customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell governments government agencies addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale factors price products limited number patients short period product sale patient infusion lack contractual return rights customers often carry limited inventory also monitor inventory within sales channels determine whether deferrals appropriate based factors inventory levels compared demand contractual terms financial strength distributors ability estimate returns cases exact quantities inventory channel precisely known requiring us estimate amounts actual amounts inventory differ estimates adjustments could impact period estimates change historically deferred revenue recognition sales certain international customers mainly distributors product received end customer due various factors including inability estimate product returns regular basis review revenue arrangements including distributor relationships determine whether changes arrangements historical experience customers impact alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts revenue recognition first quarter 2017 determined sufficient sales experience certain customers estimate product returns customers accounted prospectively change estimate began recognize revenue customers title product associated risk loss passed customer customers purchase larger quantities product less frequently may result revenue fluctuations quarter believe buying patterns increase risk product returns ability estimate returns record estimated rebates payable governmental programs including medicaid us programs outside us reduction revenue time product sale calculations related rebate accruals require analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months entered volumebased arrangements governments certain countries reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid governments rebate estimate incremental discounts resulting contractual limitations based estimated sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change record distribution fees paid customers reduction revenue unless receive identifiable separate benefit consideration reasonably estimate fair value benefit received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues denominated currencies us dollar hedges designated cash flow hedges upon inception record effective portion cash flow hedges revenue period sale made unrelated third party derivative contract settled amounts collected customers remitted governmental authorities valueadded taxes vat foreign jurisdictions presented net basis consolidated statements operations impact net product sales research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation two sharebased compensation plans pursuant awards currently made 2017 incentive plan 2017 plan ii 2015 employee stock purchase plan espp 2017 plan replaced amended restated 2004 incentive plan 2004 plan effective may 10 2017 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value market performancebased awards payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 850 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 150 discount recognized compensation expense 6 month purchase period restructuring related expenses record liabilities associated exit disposal activities period liability incurred existing benefit arrangements employee termination costs accrued exit disposal cost probable estimable costs onetime termination benefits employee required render service termination order receive benefits recognized ratably service period restructuring related expenses include accelerated depreciation costs impairment charges associated assets impacted restructuring exit activity accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date impacted site closure depreciation expense determined using useful life prior restructuring activities earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps denominator reflects potential dilution could occur stock options unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts following table summarizes calculation basic diluted eps years ended december 31 2017 2016 2015 exclude eps weightedaverage number securities whose effect antidilutive excluded calculation eps years ended december 31 2017 2016 2015 40 42 24 shares common stock respectively effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrued potential interest penalties related unrecognized tax benefits component tax expense december 2017 tax cuts jobs act tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes account deductible allowance tangible asset profit reduction period realized comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable securities unrealized gains losses hedge contracts foreign currency translation adjustments certain changes equity reflected net tax reclassifications certain items prior year’s consolidated financial statements reclassified conform current presentation alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts new accounting pronouncements may 2014 financial accounting standards board fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides five step framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services standard also requires enhanced disclosures pertaining revenue recognition interim annual periods standard effective interim annual periods beginning december 15 2017 allows adoption using full retrospective method modified retrospective method adopt new standard first quarter 2018 using modified retrospective method reviewed new standard identified accounting changes materially impact recognition net product sales also completed review analysis customer contracts determined impact adopting new standard first quarter 2018 material financial position results operations implementing changes accounting policies internal controls disclosures support new standard however changes significant january 2016 fasb issued new standard changes accounting equity investments financial liabilities fair value option presentation disclosure requirements financial instruments addition fasb clarified guidance related valuation allowance assessment recognizing deferred tax assets resulting unrealized losses availableforsale debt securities equity investments readily determinable fair values measured fair value changes fair value recognized net income companies option either measure equity investments without readily determinable fair values fair value cost adjusted changes observable prices minus impairment elected measure equity investments without readily determinable fair values cost adjusted changes observable prices minus impairment recognized net income standard effective interim annual periods beginning december 15 2017 guidance related equity investments without readily determinable fair values applied prospectively equity investments exist date adoption standard may increase volatility net income changes observable prices equity investments without readily determinable fair values recorded net income could material impact consolidated financial statements related disclosures february 2016 fasb issued new standard requiring rights obligations arising leases recognized balance sheet recording rightofuse asset corresponding lease liability new standard also requires qualitative quantitative disclosures understand amount timing uncertainty cash flows arising leases well significant management estimates utilized standard effective interim annual periods beginning december 15 2018 requires modified retrospective adoption currently assessing impact standard financial condition results operations march 2016 fasb issued new standard intended simplify certain aspects accounting employee sharebased payments one aspect standard requires entity recognize excess tax benefits deficiencies associated stockbased compensation reduction increase tax expense income statement previously amounts recognized additional paidin capital amendments also require recognition excess tax benefits regardless whether benefit reduces taxes payable current period furthermore amendment requires excess tax benefits classified operating activity statement cash flows instead financing activity elected early adopt standard third quarter 2016 also elected continue estimate impact forfeitures determining amount compensation cost recognized period rather account forfeitures occur october 2016 fasb issued new income tax standard eliminates exception intraentity asset transfer inventory new standard entities recognize income tax consequences intraentity transfer asset inventory transfer occurs deferred tax asset arises buyers jurisdiction would also recognized time transfer elected early adopt standard first quarter 2017 result adoption first quarter 2017 recorded 188 decrease retained earnings primarily resulting elimination previously recorded prepaid tax assets january 2017 fasb issued new standard clarifies definition business determines integrated set assets activities business framework requires substantially fair value gross assets acquired disposed concentrated single asset group similar identifiable assets would represent business standard effective interim annual alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts periods beginning december 15 2017 early adoption permitted anticipate adoption new standard result transactions accounted asset acquisitions august 2017 fasb issued new standard intended improve simplify certain aspects accounting hedges new standard intended closely align hedge accounting companies’ risk management strategies simplify application hedge accounting increase transparency scope results hedging programs also amends presentation disclosure requirements changes companies assess effectiveness standard effective interim annual periods beginning december 15 2018 early adoption permitted currently assessing impact standard financial condition results operations 2 acquisitions june 22 2015 completed acquisition synageva transaction accounted acquisition method accounting business combinations acquisition method accounting assets acquired liabilities assumed synageva recorded acquisition date respective fair values synageva’s results operations included consolidated financial statements date acquisition furthered objective develop commercialize lifetransforming therapies increasing number patients devastating rare diseases synageva’s lead product candidate kanuma enzyme replacement therapy patients suffering lald lifethreatening ultrarare disease approved treatments closing business combination acquired outstanding shares common stock synageva 45655 cash 261 shares common stock financed cash consideration existing cash proceeds new credit facility described note 8 aggregate consideration acquire synageva consisted following table summarizes estimated fair values assets acquired liabilities assumed fair value assets acquired liabilities assumed initially based upon preliminary calculations estimates assumptions subject change obtained additional information estimates measurement period one year acquisition date acquired 239 kanuma inventory estimated fair value workinprocess finished goods inventory determined utilizing comparative sales method based expected selling price inventory adjusted incremental costs complete manufacturing process direct selling efforts well reasonable profit allowance estimated fair value raw material inventory valued replacement cost equal value market participant would pay acquire inventory intangible assets associated iprd projects primarily relate kanuma estimated fair value iprd assets 42360 determined using multiperiod excess earnings method variation income approach multiperiod excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset fair value using multiperiod excess earnings method dependent estimated weighted average cost capital synageva 100 represents rate return market participant would expect assets alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts excess purchase price fair value amounts assets acquired liabilities assumed represents goodwill amount resulting acquisition goodwill taxdeductible recorded noncurrent asset amortized subject annual review impairment goodwill represents future economic benefits arising assets acquired could individually identified separately recognized expected synergies specific business available market participants including unique ability commercialize therapies rare diseases existing relationships specialty physicians identify patients lald global distribution network facilitate drug delivery benefits believe result combining operations synageva within operations recorded net deferred tax liability 1600 amount primarily comprised 6029 deferred tax liabilities related iprd inventory acquired offset 4429 deferred tax assets related net operating loss carryforwards nols tax credits temporary differences expect utilize year ended december 31 2015 recorded 964 pretax operating losses associated continuing operations synageva consolidated statements operations pro forma financial information unaudited following unaudited pro forma information presents combined results alexion synageva acquisition synageva completed january 1 2014 adjustments give effect pro forma events directly attributable acquisition unaudited pro forma results reflect operating efficiencies potential cost savings may result consolidation operations accordingly unaudited pro forma financial information necessarily indicative results operations would completed transaction january 1 2014 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts unaudited pro forma consolidated results include following pro forma adjustments related nonrecurring activity • alexion synageva expenses 331 1273 respectively associated accelerated vesting stock based compensation result acquisition excluded net income year ended december 31 2015 expenses included net income year ended december 31 2014 • alexion synageva acquisitionrelated restructuring costs 525 621 respectively excluded income year ended december 31 2015 expenses included net income year ended december 31 2014 acquisitionrelated costs acquisitionrelated costs associated business combinations years ended december 31 2017 2016 2015 include following acquisition synageva resulted 133 restructuring related charges year ended december 31 2015 synageva restructuring related charges material year ended december 31 2016 see note 17 additional details 3 property plant equipment net summary property plant equipment follows included constructioninprogress december 31 2017 641 costs associated construction facility boston massachusetts additionally costs 1806 1184 december 31 2017 2016 included within constructioninprocess associated construction new lonza manufacturing facility although legally premises deemed owner buildings construction period based applicable accounting guidance buildtosuit leases see note 9 “facility lease obligations” additional information depreciation amortization property plant equipment approximately 958 640 436 recorded within operating expenses consolidated statement operations years ended december 31 2017 2016 2015 respectively included within amount year ended december 31 2017 charges related 2017 restructuring activities see note 17 “restructuring related expenses” additional information alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts december 31 2017 2016 computer software costs included property plant equipment 582 368 respectively depreciation amortization expense capitalized computer software costs 160 124 100 years ended december 31 2017 2016 2015 respectively 4 intangible assets goodwill following table summarizes carrying amount intangible assets goodwill net accumulated amortization expense 3202 3222 1166 years ended december 31 2017 2016 2015 respectively assuming changes gross cost basis intangible assets total estimated amortization expense finitelived intangible assets approximately 3210 years ending december 31 2018 december 31 2022 fourth quarter 2016 reviewed sbc103 early stage clinical indefinitelived intangible asset related synageva acquisition part annual impairment testing fair value iprd asset determined using income approach included significant unobservable level 3 inputs unobservable inputs included among things expected development regulatory commercial time lines riskadjusted forecasted future cash flows generated asset contributory asset charges assets employed iprd project determination appropriate discount rate based weighted cost capital 12 applied calculating present value future cash flows based strategic portfolio evaluation increases development regulatory commercial time lines updated cash flows estimated value obtained asset market participant arm’s length transaction determined 310 lower carrying amount asset result fourth quarter 2016 recognized impairment charge 850 writedown asset fair value impairment recorded operating expenses consolidated statement operations year ended december 31 2016 second quarter 2017 due clinical results recognized impairment charge 310 related sbc103 acquired inprocess research development asset writedown asset fair value determined de minimis following table summarizes changes carrying amount goodwill alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts 5 marketable securities amortized cost gross unrealized holding gains gross unrealized holding losses fair value availableforsale investments type security december 31 2017 december 31 2016 follows aggregate fair value availableforsale securities unrealized loss position december 31 2017 december 31 2016 4362 2648 investments continuous unrealized loss position 12 months 120 december 31 2017 zero december 31 2016 december 31 2017 believe cost basis availableforsale investments recoverable fair values availableforsale securities classification consolidated balance sheet follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts fair values availableforsale debt securities december 31 2017 contractual maturity summarized follows december 31 2017 december 31 2016 fair value trading securities 185 137 utilize specific identification method computing realized gains losses realized gains losses availableforsale trading securities material years ended december 31 2017 2016 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen also exposed fluctuations interest rates outstanding term loan debt manage exposures within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 60 months hedge exposures resulting portions forecasted revenues including intercompany revenues certain forecasted expenses denominated currencies us dollar purpose hedges reduce volatility exchange rate fluctuations operating results hedges designated cash flow hedges upon contract inception december 31 2017 open revenue related foreign exchange forward contracts notional amounts totaling 14106 qualified hedge accounting december 31 2017 open expense related foreign exchange forward contracts notional amounts totaling 273 qualified hedge accounting achieve desired mix floating fixed interest rates term loan enter interest rate swap agreements qualify designated cash flow hedges contracts convert floating interest rate portion debt fixed rate plus borrowing spread december 31 2017 party interest rate swap agreements total notional amount 23313 convert floating rate portion term loan fixed rates ranging 098 208 plus borrowing spreads arrangements cover periods december 31 2019 following tables summarize total interest rate swap contracts executed december 31 2017 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts impact accumulated comprehensive income aoci earnings foreign exchange interest rate swap contracts qualified cash flow hedges years ended december 31 2017 2016 follows assuming change foreign exchange rates market rates december 31 2017 219 losses recognized aoci reclassified revenue next 12 months assuming change liborbased interest rates market rates december 31 2017 93 gains recognized aoci reclassified interest expense next 12 months amounts recognized aoci expense related foreign exchange forward contracts immaterial december 31 2017 enter foreign exchange forward contracts durations 6 months designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2017 notional amount foreign exchange contracts hedge accounting applied 12702 recognized loss gain 147 52 income expense years ended december 31 2017 2016 2015 respectively associated foreign exchange contracts designated hedging instruments amounts partially offset gains losses monetary assets liabilities following tables summarize fair value outstanding derivatives december 31 2017 2016 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts although offset derivative assets liabilities within consolidated balance sheets international swap derivatives association agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect consolidated balance sheets offsetting foreign exchange forward contracts interest rate contracts subject provisions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts 7 accrued expenses accrued expenses consist following 8 debt june 22 2015 alexion entered credit agreement credit agreement syndicate banks provides 35000 term loan facility 5000 revolving credit facility maturing five years borrowings term loan payable quarterly installments equal 125 original loan amount beginning december 31 2015 final repayment term loan revolving credit loans due june 22 2020 addition borrowings prior notice required revolving credit facility includes sublimit 1000 form letters credit borrowings sameday notice referred swingline loans 250 borrowings used working capital requirements acquisitions general corporate purposes consent lenders administrative agent subject satisfaction certain conditions may increase term loan facility andor revolving credit facility amount cause consolidated net leverage ratio exceed maximum allowable amount credit agreement may elect loans credit agreement bear interest rate per annum equal either base rate eurodollar rate plus case applicable margin applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case depending upon consolidated net leverage ratio calculated accordance credit agreement december 31 2017 interest rate outstanding loans credit agreement 307 obligations credit facilities guaranteed certain alexion’s foreign domestic subsidiaries secured liens certain alexion’s subsidiaries’ equity interests subject certain exceptions credit agreement requires us comply certain financial covenants quarterly basis credit agreement includes negative covenants subject exceptions restricting limiting ability subsidiaries among things incur additional indebtedness grant liens engage certain investment acquisition disposition transactions credit agreement also contains customary representations warranties affirmative covenants events default including payment defaults breach representations warranties covenant defaults cross defaults event default occurs interest rate would increase administrative agent would entitled take various actions including acceleration amounts due loan connection entering credit agreement paid 455 financing costs amortized interest expense life debt amortization expense associated deferred financing costs years ended december 31 2017 2016 92 103 respectively amortization expense associated deferred financing costs year ended december 31 2015 material made principal payments 1750 year ended december 31 2017 december 31 2017 29063 outstanding term loan zero outstanding revolving facility december 31 2017 open letters credit 22 offset borrowing availability revolving facility fair value long term debt measured using level 2 inputs approximates book value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts contractual maturities longterm debt obligations due subsequent december 31 2017 follows based upon intent ability make payments 2017 included 1750 within current liabilities consolidated balance sheet december 31 2017 net current deferred financing costs 9 facility lease obligations new facility lease obligation november 2012 entered lease agreement office laboratory space constructed new connecticut term lease commenced 2015 expire 2030 renewal option ten years although legally premises deemed owner building due substantial improvements directly funded us construction period based applicable accounting guidance buildtosuit leases accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet construction facility completed building placed service first quarter 2016 imputed interest rate facility lease obligation december 31 2017 approximately 11 associated arrangement recognized interest expense 142 140 49 year ended december 31 2017 2016 2015 respectively december 31 2017 2016 total facility lease obligation 1346 1365 respectively recorded within current liabilities facility lease obligation consolidated balance sheets aggregate future minimum noncancellable commitments new facility lease obligation december 31 2017 follows lonza facility lease obligation third quarter 2015 entered agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion one existing facilities agreement requires us make certain payments construction new manufacturing facility annual payments ten years thereafter result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet completion facility including obtaining regulatory approval expected first half 2019 december 31 2017 2016 recorded constructioninprocess asset 1806 1184 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts offsetting facility lease obligation 1591 1068 respectively associated manufacturing facility payments lonza agreement allocated purchases inventory repayment facility lease obligation relative fair value basis 2017 incurred 764 payments lonza agreement 99 applied outstanding facility lease obligation 665 recognized prepayment inventory see note 10 minimum fixed payments due lonza agreements boston facility lease obligation september 2017 entered lease agreement approximately 150000 square feet office space currently constructed boston massachusetts term lease commence upon landlords substantial completion premises expire thirteenth anniversary commencement option renew additional ten years although legally premises due involvement construction period deemed owner portion building lease based applicable accounting guidance buildtosuit leases accordingly landlords costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheet landlords construction building process expected completed first half 2018 december 31 2017 recorded constructioninprocess asset 641 offsetting facility lease obligation 596 associated relative portion building consolidated balance sheet aggregate future minimum noncancellable commitments boston facility lease obligation december 31 2017 follows 10 commitments contingencies commitments license agreements entered number license agreements since order advance obtain technologies services related business license agreements generally require us pay initial fee certain agreements call future payments upon attainment agreed upon development andor commercial milestones agreements may also require minimum royalty payments based sales products developed applicable technologies december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets due early stage assets licensing recorded expense upfront payment 400 fourth quarter 2017 addition december 31 2017 could required pay additional 1600 target developed subject achievement specified development regulatory salesbased milestones well royalties commercial sales march 2015 entered agreement third party allowed us exercise option another third party exclusive worldwide perpetual license rights specialized technology intellectual property simultaneously exercised option due early stage assets recorded expense payments 470 first quarter 2015 march 2015 entered collaboration agreement third party allows us identify optimize drug candidates alexion exclusive worldwide rights develop commercialize products alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts arising collaboration due early stage assets licensing connection collaboration recorded expense upfront payment 150 first quarter 2015 third quarter 2017 terminated partnership third party january 2015 entered license agreement third party obtain exclusive research development commercial license specific therapeutic molecules due early stage assets recorded expense upfront payment 500 first quarter 2015 addition could required pay additional 8220 certain development regulatory commercial milestones met time well royalties commercial sales manufacturing agreements various manufacturing development license agreements support clinical commercial product needs rely lonza third party manufacturer produce portion commercial clinical quantities soliris strensiq various manufacturing license agreements lonza remaining total noncancellable future commitments approximately 10989 terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf payment respect sales soliris manufactured lonza facilities addition lonza noncancellable commitments approximately 273 third party manufacturers contingent liabilities currently involved various claims lawsuits legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results past received may future receive notices third parties claiming patents may infringed development manufacture sale products guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales products could required pay owners patents technology used manufacture sale products costly license inability obtain necessary license could material adverse effect financial results may 2015 received subpoena connection investigation enforcement division securities exchange commission sec requesting information related grantmaking activities compliance us foreign corrupt practices act fcpa various countries addition october 2015 received request us department justice doj voluntary production documents information pertaining alexion’s compliance fcpa sec doj also seek information related alexion’s recalls specific lots soliris related securities disclosures alexion cooperating investigations focused operations various countries including brazil colombia japan russia turkey alexions compliance fcpa applicable laws time alexion unable predict duration scope outcome investigations possible loss related matters may incurred given ongoing nature investigations management cannot reasonably estimate potential magnitude loss range loss cost ongoing investigation determination operations activities compliance existing laws regulations could result imposition fines civil criminal penalties equitable remedies including disgorgement injunctive relief andor sanctions us remediation findings could adverse effect business operations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts alexion committed strengthening compliance program initiated comprehensive companywide transformation plan enhance remediate business processes structures controls training talent systems across alexion’s global operations information concerning risks associated investigation see risk factor fail comply laws regulations may subject investigations civil criminal penalties business could adversely affected previously reported december 29 2016 shareholder filed putative class action company certain former employees us district court district connecticut alleging defendants made misrepresentations omissions soliris april 12 2017 court appointed lead plaintiff july 14 2017 lead plaintiff filed amended putative class action complaint company seven current former employees complaint alleges defendants made misrepresentations omissions soliris including alleged misrepresentations regarding sales practices management changes related investigations january 30 2014 may 26 2017 companys stock price dropped upon purported disclosure misrepresentations defendants’ moved dismiss amended complaint september 12 2017 plaintiffs filed opposition defendants’ motion dismiss november 13 2017 defendants’ filed reply brief support motion december 28 2017 defendants’ motion dismiss fully briefed pending court given early stages litigation management currently believe loss related matter probable potential magnitude loss range loss reasonably estimated december 2016 received subpoena us attorney’s office district massachusetts requesting documents relating generally support 501c3 organizations provide financial assistance medicare patients taking drugs sold alexion’s provision free drug medicare patients alexion compliance policies training materials concerning antikickback statute payments 501c3 organization provides financial assistance medicare patients understand us attorney’s office coordinating office inspector general oig us department health human services companies disclosed similar inquiries cooperating inquiry may 2017 brazilian authorities seized records data sao paulo brazil offices part investigation conducted alexion’s brazilian operations cooperating inquiry june 2017 received demand inspect certain company books records pursuant section 220 general corporation law state delaware behalf purported stockholder among things demand seeks determine whether institute derivative lawsuit certain company’s directors officers relation investigation audit finance committee announced november 2016 investigations instituted sec doj us attorney’s office district massachusetts brazilian law enforcement officials described company responded demand given early stages matter management currently believe loss related matter probable potential magnitude loss range loss reasonably estimated march 2013 received warning letter warning letter us food drug administration fda regarding compliance current good manufacturing practices cgmp arimf october 2017 alexion received notification fda warning letter resolved previously announced plan close arimf align manufacturing facilities ongoing multiproduct network manufacturing strategy utilizes manufacturing operations us ireland manufacturing capacity manufacturing partners september 22 2017 shareholder filed suit derivatively behalf company us district court district delaware eighteen current former employees members board directors naming company nominal defendant complaint asserts federal state law claims alleges january 30 2014 september 22 2017 defendants made misrepresentations omissions solirisincluding alleged misrepresentations regarding sales practices management changes related investigationsin violation federal securities law breach fiduciary duties company litigation early stages defendants yet responded complaint september 27 2017 hearing panel canadian patented medicine prices review board pmprb issued decision previously pending administrative pricing matter alexion excessively priced soliris manner inconsistent canadian pricing rules guidelines decision pmprb ordered alexion decrease price soliris upper limit based upon pricing certain countries forfeit excess alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts revenues period 2009 2017 amount excess revenues material october 2017 alexion filed application judicial review pmprb’s decision federal court canada time cannot predict duration scope outcome judicial review proceedings appeals may follow cannot reasonably estimate amount potential impact soliris revenues canada relating potential future price reduction second quarter 2017 recorded immaterial period adjustment approximately 60 distribution fees related importation expenses fees recorded accrued expenses consolidated balance sheet december 31 2017 operating leases december 31 2017 operating leases office laboratory space us foreign locations support operations global organization aggregate lease expense 272 293 278 years ended december 31 2017 2016 2015 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2017 11 income taxes income tax expense based income taxes follows fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership income derived foreign jurisdictions classified “nonus income” purposes financial reporting substantially nonus income relates income captive foreign partnership alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts components income tax expense follows continue maintain valuation allowance certain deferred tax assets realization certain continue pay cash taxes us federal various us state foreign jurisdictions utilized tax attributes met applicable limitation attribute utilization december 31 2017 tax effected federal state net operating loss carryforwards 21 49 respectively nol’s expire 2021 2036 also federal state income tax credit carryforwards 4493 66 respectively income tax credits expire 2024 2037 provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows december 2017 tax cuts jobs act tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes account deductible allowance tangible asset profit reduction period realized december 31 2017 tax act resulted increase tax expense effective tax rate 458 84 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts income tax expense increased 1779 325 related transition tax unremitted earnings imposed tax act increase includes foreign income subject us tax 1956 partially offset related benefit foreign tax credits 177 b decrease us federal tax rate resulted decrease deferred tax expense 2924 534 decrease includes 1213 221 benefit remeasuring domestic deferred taxes additional decrease attributable remeasuring deferred taxes foreign earnings 1711 312 c permanent differences includes decrease tax expense 51 09 related remeasurement income taxes payable result changes us federal tax rates tax act enactment gilti minimum tax increased us deferred taxes foreign earnings 1654 302 increase includes deferred tax expense related gilti minimum tax 2369 deferred expense partially offset related decrease deferred expense release reserves uncertain tax positions 715 addition 2017 concluded irs examination 2013 2014 tax years conclusion irs examination resulted decrease 2017 effective tax rate approximately 36 year ended december 31 2017 income tax expense year ended december 31 2016 includes impact deferred tax attributable distributions captive foreign partnership 1193 increased 2016 effective tax rate 207 income tax expense year ended december 31 2015 includes onetime charge 3156 related integration synageva assets captive foreign partnership increased 2015 effective tax rate approximately 630 operations many foreign tax jurisdictions impose income taxes different rates us impact rate differences included foreign income tax rate differential disclose reconciliation us statutory income tax rate effective tax rate provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts decrease net operating losses due utilization historical net operating loss carryforwards decrease income tax credits primarily attributable utilization foreign tax credits orphan drug credits increase investment foreign partnership deferred tax liability due impact gilti minimum tax captive foreign partnership follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2017 total amount tax benefit recorded 2017 2016 2015 related unrecognized tax benefits 271 215 827 respectively unrecognized tax benefits recognized would favorable impact effective tax rate 858 decrease tax positions taken prior period primarily related impact tax reform deferred tax accounting foreign captive partnership 158 decrease tax positions related settlements primarily related settlement routine irs audit 2013 2014 tax years decrease includes amounts recorded 2015 2016 positions effectively settled result concluding audit reasonably possible portion unrecognized tax benefits could reverse within next twelve months reversal amounts contingent upon completion field audits taxing authorities several jurisdictions whether tax adjustment proposed nature amount adjustment administrative path resolving proposed adjustment cannot reasonably estimate range potential change incorporated impact tax act results calculated provisional amounts tax effects tax act reasonably estimated completed year ended december 31 2017 accounting tax act incomplete follows calculated reasonable estimate onetime transition tax previously unremitted earnings resulted increase us federal tax expense 1779 increase taxes payable net tax credits 280 initial accounting transition tax incomplete uncertainty regarding calculation amounts subject tax additional analysis provision law well recently released interpretive guidance application company required complete accounting b calculated reasonable estimate impact gilti minimum tax deferred taxes resulted increase us federal tax expense deferred tax liability 2369 initial accounting minimum tax incomplete uncertainty regarding calculation temporary differences subject minimum tax additional analysis regarding computation temporary differences expected timing manner realization required complete accounting c calculated reasonable estimate tax act’s limits deductions employee remuneration including remuneration kind resulted insignificant impact tax expense taxes payable deferred taxes initial accounting limits incomplete uncertainty regarding alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts value deductionlimited remuneration additional analysis regarding whether employee remuneration arrangements agreements deductible tax act required complete accounting anticipate item material impact financial condition results operations calculated reasonable estimate impact tax act us state income taxes resulted increase tax expense taxes payable deferred taxes 29 22 07 respectively interpreted effect tax act’s changes federal law us state’s system taxation date enactment however additional analysis required determine effect modifications federal deductions income inclusions systems e calculated deferred tax liability related interest foreign captive partnership consistent prior periods considering indirect effects tax act calculation result deferred tax liability recorded december 31 2017 5334 related foreign captive partnership provisional additional analysis direct indirect effects tax act required complete accounting item file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statutes limitations ranging 3 6 years however limitation period could extended due tax attribute carryforward position number jurisdictions tax authorities generally ability review income tax returns periods limitation period previously expired subsequently adjust tax attribute values 2017 irs commenced examination us income tax returns 2015 anticipate audit conclude within next twelve months notified significant adjustments proposed irs recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries fourth quarter 2017 recorded onetime us federal transition tax 1779 imposed undistributed earnings cfc subsidiaries required tax act addition recorded immaterial tax expense related incremental withholding foreign local us state income taxes would expect incur dividend distribution earnings us extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential withholding foreign local us state income taxes impact tax act others recorded provisional basis 12 sharebased compensation 2017 incentive plan 2017 plan approved stockholders may 2017 replaced 2004 plan effective may 10 2017 plan broad based plan provides grant equity awards including restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards directors officers key employees consultants maximum 182 shares addition awards outstanding 2004 incentive plan march 14th 2017 subsequently canceled cash settled expired forfeited otherwise terminated without delivery shares subject limitations 2017 plan stock options granted 2017 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vest four years performancebased restricted stock units threeyear vesting period alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts stock options summary status stock option plans december 31 2017 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2017 2016 2015 889 417 1683 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2017 2016 2015 615 581 510 respectively fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options weighted average fair value date grant options granted years ended december 31 2017 2016 2015 4259 4146 5303 per option respectively restricted stock summary status nonvested restricted stock changes period ended follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2017 2016 2015 including restricted stock units performance conditions 12539 13335 18409 per share respectively total fair value restricted stock vested years ended december 31 2017 2016 2015 1570 1244 1353 respectively also grant marketbased performance awards senior management provide recipient right receive restricted stock end three year performance period based preestablished marketbased performance goals use payout simulation models estimate grant date fair value awards expense recognized marketbased performance awards material years ended december 31 2017 2016 2015 employee stock purchase plan 2015 company adopted espp employees purchase shares common stock based percentage compensation subject certain limits purchase price per share equal lower 850 fair market value common stock offering date purchase date six month lookback feature espp 10 shares common stock may issued eligible employees elect participate purchase plan shares issued compensation expense recognized espp years ended december 31 2017 2016 2015 material sharebased compensation expense following table summarizes sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2017 2016 2015 154 121 79 respectively december 31 2017 3449 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted sharebased compensation plans expense expected recognized weightedaverage period 244 years 13 stockholders’ equity common stock june 2015 connection acquisition synageva issued 261 shares common stock former synageva stockholders employees fair value stock 49138 incurred 41 issuance costs share repurchases november 2012 board directors authorized share repurchase program repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time company’s discretion february 2017 board directors authorized future acquisition shares aggregate value 10000 repurchase program superseded prior repurchase programs program repurchased 40 31 shares common stock cost 4636 4306 years ended december 31 2017 2016 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts subsequent december 31 2017 repurchased 07 shares common stock repurchase program cost 850 february 8 2018 total 4514 remaining repurchases repurchase program alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts 14 comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2017 2016 2015 table provides details regarding significant reclassifications aoci years ended december 31 2017 2016 2015 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts aoci component included computation net periodic pension benefit cost see note 16 additional details 15 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following tables present information assets liabilities measured fair value recurring basis december 31 2017 2016 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts securities transferred level 1 2 3 year ended december 31 2017 valuation techniques classify mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy cash equivalents marketable securities classified level 2 within valuation hierarchy consist money market funds commercial paper municipal bonds repurchase agreements us foreign governmentrelated debt corporate debt securities certificates deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources understanding models used obtaining market values pricing sources analyzing pricing data certain instances derivative assets liabilities include foreign exchange interest rate derivatives measured fair value using observable market inputs forward rates interest rates credit risk well evaluation counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts contingent consideration liabilities related acquisitions classified level 3 within valuation hierarchy valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2017 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks contingent consideration connection prior acquisitions may required pay future consideration contingent upon achievement specified development regulatory approvals salesbased milestone events determine fair value obligations using various estimates observable market represent level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt ranging 42 47 developmental milestones weighted average cost capital ranging 9 21 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time estimated future contingent milestone payments related prior business combinations range zero milestone events achieved maximum 7410 development regulatory salesbased milestones reached december 31 2017 fair value acquisitionrelated contingent consideration 1689 following table represents rollforward acquisitionrelated contingent consideration second quarter 2017 salesbased milestone associated acquisition enobia pharma corp achieved connection achievement made 250 milestone payment third quarter 2017 16 employee benefit plans deferred compensation plan nonqualified deferred compensation plan allows certain highlycompensated employees make voluntary deferrals 80 base salary incentive bonuses plan designed work conjunction 401k plan provides total combined employer match 6 employee’s eligible earnings irs annual 401k contribution limitations deferred compensation amounts plan december 31 2017 2016 185 137 respectively included liabilities within consolidated balance sheets employer matching contributions plan years ended december 31 2017 2016 2015 material defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal 100 dollar contributed first 6 individual’s base salary incentive cash bonus annual irs maximum years ended december 31 2017 2016 2015 recorded matching contributions approximately 159 167 115 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts defined benefit plans maintain defined benefit plans employees certain countries outside us including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments 2017 2015 recorded impacts curtailment related swiss plan result reduction employees due restructuring events discussed note 17 “restructuring” following table sets forth funded status amounts recognized defined benefit plans including impacts 2017 2015 curtailments company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active plan assets managed independent investment fiduciary primarily invested debt equity securities real estate funds order maximize overall return investment income considering asset allocation limits determined pension law december 31 2017 recorded liability 192 noncurrent liabilities charge accumulated comprehensive income net tax 48 related additional minimum liability alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows changes plan assets benefit obligations recognized aoci follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts estimate pay employer contributions approximately 32 2018 expected future benefits paid respect pension plans december 31 2017 follows 17 restructuring related expenses first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases initial restructuring activities primarily focused reduction companys global workforce september 2017 committed operational plan realign global organization refocused corporate strategy realignment focuses investments priority growth areas maximize leadership complement grow rare disease business realignment also includes relocation companys headquarters boston massachusetts 2018 new connecticut site continue support employees working research process development laboratories clinical supply quality teams nurse case management number important enterprise business services plan expected reduce companys global workforce approximately 200 restructuring achieve cost savings focusing development portfolio simplifying business structures processes across companys global operations closing multiple alexion sites including arimf certain regional countrybased offices expect pay substantially accrued amounts related 2017 restructuring activities end 2018 connection completion new corporate headquarters located new connecticut entered lease termination agreement previous corporate headquarters located cheshire connecticut december 2015 result action recorded restructuring expense 112 contract termination costs fourth quarter 2015 connection acquisition integration synageva 2015 recorded restructuring expense 133 primarily related employee costs 2015 synageva related restructuring charges material 2016 fourth quarter 2014 announced plans relocate european headquarters lausanne switzerland zurich switzerland relocation european headquarters supports operational needs based growth european region years ended december 31 2016 2015 incurred restructuring costs 36 176 respectively related event following table summarizes total expenses recorded related restructuring activities type activity locations recognized within consolidated statements operations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts employee separation costs associated headcount reductions well corporate employees relocating companys headquarters 2018 assetrelated charges consist accelerated depreciation costs asset impairment charges accelerated depreciation costs primarily relates site closures including arimf accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closure depreciation expense determined using useful life prior restructuring activities asset impairment charges primarily related manufacturing assets longer utilized due restructuring activities costs consist contract termination expenses relocation costs incurred direct result exit plan following table presents reconciliation restructuring reserve recorded within accrued expenses companys consolidated balance sheets years ended december 31 2017 2016 restructuring reserve 582 06 recorded accrued expenses companys consolidated balance sheet december 31 2017 2016 respectively currently estimate incurring additional restructuring related expenses 2018 approximately 300 700 related 2017 restructuring activities primarily related costs continue execute strategic business plan global footprint may incur restructuring expenses 2018 materially different current estimate result planned relocation corporate headquarters boston massachusetts required repay forgivable loan grant provided state connecticut department economic community development 2015 connection construction current headquarters new connecticut loan grant totaled 260 recognized upon receipt reduction cost new facilityrelated fixed assets result 260 repayment obligation recorded third quarter 2017 offsetting increase carrying value related assets repaid amount fourth quarter 2017 could also required repay sales tax credits approximately 35 state connecticut connection relocation corporate headquarters 18 segment information operate single segment focusing serving patients devastating ultrarare disorders innovation development commercialization lifetransforming therapeutic products consistent operational structure chief operating decision maker manages allocates resources global consolidated level therefore results operations reported consolidated basis purposes segment reporting consistent management reporting disclosures net product sales longlived assets geographic area presented alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts net product sales net product sales product significant geographic region follows percentages meaningful longlived assets longlived assets consist property plant equipment alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2017 2016 2015 amounts millions except per share amounts 19 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2017 2016 1 included within cost sales third fourth quarters 2017 830 691 respectively restructuring related expenses associated planned closure arimf facility 2 included within operating expenses first third quarters 2017 238 794 respectively restructuring related expenses 3 2017 recognized tax expense 458 result tax cuts jobs act certain impacts tax act recorded provisional basis see note 11 “income taxes” additional information 4 included within operating expenses second quarter 2017 fourth quarter 2016 impairment charge 310 850 respectively associated early stage clinical indefinitelived intangible assetitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page report 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference quarterly report form 10q quarter ended september 30 2018 5 incorporated reference report form 8k filed may 6 2015 6 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 7 incorporated reference annual report form 10k fiscal year ended december 31 2011 8 incorporated reference report form 8k filed january 8 2016 9 incorporated reference registration statement form s1 reg 33300202 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference annual report form 10k fiscal year ended december 31 2009 12 incorporated reference report form 8k filed september 17 2010 13 incorporated reference quarterly report form 10q quarter ended january 31 2004 14 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 15 incorporated reference annual report form 10k fiscal year ended december 31 2013 16 incorporated reference annual report form 10ka fiscal year ended july 31 1996 17 incorporated reference annual report form 10k fiscal year ended december 31 2008 18 incorporated reference report form 8k filed december 16 2004 19 incorporated reference quarterly report form 10q quarter ended january 31 2005 20 incorporated reference report form 8k filed march 14 2005 21 incorporated reference annual report form 10k fiscal year ended december 31 2010 22 incorporated reference report form 10k fiscal year ended december 31 2014 23 incorporated reference quarterly report form 10q quarter ended march 31 2017 24 incorporated reference quarterly report form 10q quarter ended june 30 2017 25 incorporated reference registration statement form s8 reg 333217905 filed may 5 2017 26 incorporated reference annual report form 10k fiscal year ended december 31 2017 27 incorporated reference report form 8k filed june 13 2018 confidential treatment granted portions exhibit indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2018 2017 2016 report independent registered public accounting firm report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets alexion pharmaceuticals inc subsidiaries “company” december 31 2018 december 31 2017 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2018 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2018 december 31 2017 results operations cash flows three years period ended december 31 2018 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2018 based criteria established internal control integrated framework 2013 issued coso basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate spricewaterhousecoopers llp hartford connecticut february 6 2019 served company’s auditor since 2002 alexion pharmaceuticals inc consolidated balance sheets amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us global biopharmaceutical company focused serving patients families affected rare diseases innovation development commercialization lifechanging therapies global leader complement inhibition developed commercialize two approved complement inhibitors treat patients paroxysmal nocturnal hemoglobinuria pnh well first approved complement inhibitor treat atypical hemolytic uremic syndrome ahus antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg addition alexion two highly innovative enzyme replacement therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald leader complement biology 20 years alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders incorporated 1992 laws state delaware basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted us requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • inventories • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less december 31 2018 2017 cash equivalents comprised money market funds reverse repurchase agreements debt securities maturities less 90 days date purchase fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment investments equity securities publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model observable market inputs historical volatility similar companies riskfree interest rates derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable debt securities availableforsale accordingly record securities fair value classify securities current assets investments intended available company use funding current operations unrealized gains losses marketable debt securities deemed temporary included accumulated comprehensive income loss separate component stockholders’ equity adjustment fair value reflects significant decline value security evaluate extent decline determined otherthantemporary would mark security market charge consolidated statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investments options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan mutual fund investments valued net asset value per share carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts accounts receivable standard credit terms vary based country sale range 30 120 days arrangements payable within one year transfer product consolidated average days’ sales outstanding ranges 60 70 days evaluate creditworthiness customers regular basis length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility probable time sale december 31 2018 2017 allowances receivables material concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable debt securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions december 31 2018 three customers accounted 487 accounts receivable balance individual customers ranging 140 191 accounts receivable balance december 31 2017 four customers accounted 577 accounts receivable balance individual customers ranging 102 189 accounts receivable balance year ended december 31 2018 four customers accounted 503 product sales individual customers ranging 100 164 product sales year ended december 31 2017 three customers accounted 37 product sales individual customers ranging 108 150 product sales year ended december 31 2016 three customers accounted 367 product sales individual customers ranging 100 160 product sales customers accounted 100 accounts receivable net product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods date experienced significant losses respect collection accounts receivable inventories stated lower cost net realizable value cost determined manner approximates average costs components inventory follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized inventory capitalized products awaiting regulatory approval december 31 2018 2017 products approved us food drug administration fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form products utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire requires adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout preand postproduction process continually gather additional information regarding product quality periods manufacture date products currently maximum estimated life ranging 36 48 months based sales forecasts expect realize carrying value inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash quarterly basis perform assessment confirm outstanding hedges remain highly effective continue qualify hedge accounting record fair value qualifying hedges current assets current liabilities unrealized alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts gains losses derivatives designated qualify hedge accounting reported comprehensive income loss recognized underlying hedged transaction affects earnings forecasted transaction occurs amount reclassified consolidated statement operations presented financial statement line item hedged item derivative instruments hedge accounting applied recorded fair value current assets current liabilities unrealized gains losses resulting changes fair value derivatives reported income expense property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfifteen thirty five years • machinery laboratory equipmentfive fifteen years • computer hardware softwarethree seven years • furniture office equipment five ten years leasehold improvements assets capital lease arrangements amortized lesser asset’s estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service assets held sale classify assets held sale following criteria met management authority approve action commits plan sell asset ii asset available immediate sale present condition subject terms usual customary sales similar assets iii active program locate buyer actions required complete plan sell asset initiated iv sale asset probable transfer asset expected qualify recognition completed sale within one year v asset actively marketed sale price reasonable relation current fair value vi actions required complete plan indicate unlikely significant changes plan made plan withdrawn assets classified held sale recorded lower carrying value fair value less costs sell third quarter 2017 announced intention close alexion rhode island manufacturing facility arimf fourth quarter 2017 met criteria assets held sale reclassified arimf assets property plant equipment assets held sale recorded within prepaid expenses current assets subsequently sold arimf third quarter 2018 manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated asset’s useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable conducted managed purpose providing return form dividends lower costs economic benefits consists inputs substantive processes applied inputs ability contribute creation outputs substantially fair value gross assets acquired concentrated single asset group similar identifiable assets represent business acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill acquisitions assets group assets meet definition business accounted asset acquisitions using cost accumulation method whereby cost acquisition including certain transaction costs allocated assets acquired basis relative fair values goodwill recognized asset acquisition intangible assets acquired asset acquisition use research development activities alternative future use capitalized inprocess research development iprd acquired iprd alternative future use recognized research development expense acquisition contingent milestone payments associated asset acquisitions recognized probable estimable amounts expensed research development alternative future use associated asset capitalized intangible asset alternative future use asset exists consolidated financial statements include results operations acquired business completion acquisition intangible assets intangible assets generally consist licensing rights patents purchased technology acquired iprd intangibles intangible assets definite lives amortized based pattern economic benefit estimated useful lives reviewed periodically impairment intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets impairment longlived assets longlived assets primarily comprised intangible assets property plant equipment evaluate finitelived intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset second quarter 2017 recognized impairment charge 310 related sbc103 acquired inprocess research development asset due clinical results alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts investments time make strategic investments equity securities certain biotechnology companies strategic investment portfolio may include equity securities publicly traded companies well investments companies securities publicly traded fair value readily available investments included assets consolidated balance sheets historically recorded investments securities publicly traded cost less impairments january 1 2018 continue record investments cost less impairments however also adjust investment changes resulting observable price change orderly transaction identical similar investments issuer assess relevant transactions occur balance sheet date identify observable price changes regularly monitor investments evaluate whether indication investment impaired based implied value recent company financings public market prices comparable companies general market conditions investments equity securities publicly traded companies unrestricted regularly measured carried fair value classified level 1 equity securities within fair value hierarchy investments publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model classified level 2 equity securities within fair value hierarchy significant assumptions within option pricing valuation model term restrictions stock price volatility based upon historical volatility similar companies also use constant maturity riskfree interest rate match remaining term restrictions investments contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based available information periodic basis additional information becomes available based specific events outcome litigation settlement claims offers settlement may reassess potential liability related matters may revise estimates revisions may material treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders’ equity revenue recognition may 2014 fasb issued comprehensive new standard amends revenue recognition principles adopted new standard january 1 2018 applying modified retrospective method contracts completed date new guidance revenue recognized customer obtains control promised goods services amount reflects consideration expected received exchange goods services revenue recognized fivestep process identify contracts customer ii identify performance obligations contract iii determine transaction price iv allocate transaction price performance obligations contract v recognize revenue performance obligation satisfied company applies fivestep model contracts probable company collect consideration entitled exchange goods services transfers customer contract inception company assesses goods services promised within contract determines performance alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts obligations revenue recognized applicable performance element distinct performance obligation satisfied results reporting periods beginning january 1 2018 presented new guidance prior period amounts adjusted continue reported accounting standards effect prior period adoption new standard significantly change accounting policies nature products principal source revenue product sales contracts customers generally contain single performance obligation recognize revenue product sales satisfied performance obligation transferring control product customers control product generally transfers customer upon delivery certain countries sell distributors consignment basis record revenue control product transfers customer upon sale end user customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell governments government agencies addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale revenue recognized amount expect entitled exchange sale products amount includes fixed variable consideration excludes amounts collected customers remitted governmental authorities valueadded taxes foreign jurisdictions shipping handling costs associated outbound freight control product transferred customers accounted fulfillment cost included operating expenses cost shipping handling activities including customs clearance activities associated transactions revenue recognized accrued completed respective period end timing recognition revenue product sales receipt payment significant standard credit terms vary based country sale range 30 120 days arrangements payable within one year transfer product assess whether contract significant financing component expectation contract inception period transfer promised good customer receipt payment one year less variable consideration pay distribution fees distributors offer rebates andor discounts enter volumebased reimbursement arrangements certain customers reduce transaction price sales amounts variable amounts estimate amount consideration expect entitled based available historic current forecast information primarily use expected value method estimate variable payments limited circumstances apply likely method based type variable consideration method better predicts amount consideration expect entitled consideration received customer expect need refunded future recorded refund liability customer within accrued expenses actual amounts consideration ultimately received refunded may differ estimates actual results future vary estimates adjust estimates would affect net product sales earnings period variances become known variability transaction price products pursuant contracts customers primarily arises following discounts rebates offer discounts rebates certain distributors customers arrangements many cases amounts fixed time sale transaction price reduced accordingly also provide rebates certain governmental programs including medicaid us programs outside us payable based actual claim data estimate rebates based analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts adjustment made generally length time product sale processing reporting rebates three six months volumebased arrangements entered volumebased arrangements governments certain countries customers reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid customer rebate estimate incremental discounts resulting contractual limitations based forecasted sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change distribution fees pay distribution fees certain customers connection sales products record distribution fees paid customers reduction revenue unless payment distinct good service customer reasonably estimate fair value goods services received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale product returns contracts customers generally provide returns product damaged defective upon delivery assess sales transactions arrangements customers monitor inventory within sales channels determine whether provision returns warranted resulting adjustment transaction price necessary assessment based historical experience assumptions date sale changes estimates could impact period change occurs factors price products limited number patients short period product sale patient infusion limited contractual return rights customers often carry limited inventory amount variable consideration included transaction price constrained amount probable result significant reversal revenue consider experience similar transactions expectations regarding contract estimating amount variable consideration expect entitled determining whether estimated variable consideration constrained material constraints variable consideration included within transaction price current revenue arrangements see note 19 “segment information” summary revenue contracts customers product geographical region contract balances receivables contract liabilities relate consideration received andor billed goods delivered customer performance obligation yet completed amounts included within current liabilities consolidated statements operations following table provides information receivables contract liabilities contracts customers alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation two sharebased compensation plans pursuant awards currently made 2017 incentive plan 2017 plan ii 2015 employee stock purchase plan espp 2017 plan replaced amended restated 2004 incentive plan 2004 plan effective may 10 2017 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events significant assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value awards marketbased performance conditions payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 850 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 150 discount recognized compensation expense 6 month purchase period alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts restructuring related expenses record liabilities associated onetime employee termination benefits exit disposal activities period liability incurred onetime employee benefits incurred communicated employees detailed action plans approved costs onetime termination benefits employee required render service termination order receive benefits recognized ratably service period existing benefit arrangements employee termination costs accrued exit disposal cost probable estimable restructuring related expenses include accelerated depreciation costs impairment charges associated assets impacted restructuring exit activity accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date impacted site closure depreciation expense determined using useful life prior restructuring activities earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps denominator reflects potential dilution could occur stock options unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method following table summarizes calculation basic diluted eps years ended december 31 2018 2017 2016 exclude eps weightedaverage number securities whose effect antidilutive excluded calculation eps years ended december 31 2018 2017 2016 28 40 42 shares common stock respectively effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrued potential interest penalties related unrecognized tax benefits component tax expense december 2017 tax cuts jobs act tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable debt securities unrealized gains losses hedge contracts foreign currency translation adjustments certain changes equity reflected net tax reclassifications certain items prior year’s consolidated financial statements reclassified conform current presentation new accounting pronouncements february 2016 fasb issued new standard requires lessees recognize leases onbalance sheet disclose key information leasing arrangements new standard establishes rightofuse rou model requires lessee recognize rou asset lease liability balance sheet leases term longer 12 months leases classified finance operating classification affecting pattern classification expense recognition income statement standard effective january 1 2019 early adoption permitted adopted new standard january 1 2019 use effective date initial application july 2018 fasb issued update provided additional transition option allows companies continue applying guidance lease standard effect time comparative periods presented consolidated financial statements companies elect option would record cumulativeeffect adjustment opening balance retained earnings date adoption elected optional transition method also elected “package practical expedients” permits us reassess new standard prior conclusions lease identification lease classification initial direct costs continue evaluate practical expedients available standard substantially completed assessment standard well implementation leasing software including data upload test procedures continue finalize calculations including discount rate assumptions related new standard also continuing establish new processes internal controls may required comply new lease accounting disclosure requirements set new standard expect impact standard adoption decrease assets liabilities retained earnings within consolidated balance sheet decreases result derecognition existing assets financing obligations related build suit leases offset recognition new rou assets liabilities result leasing standard june 2016 fasb issued new standard intended improve reporting requirements specific loans receivables financial instruments new standard requires credit losses reported based expected losses compared current incurred loss model new standard also requires enhanced disclosure credit risk associated respective assets standard effective interim annual periods beginning december 15 2019 early adoption permitted currently assessing impact standard financial condition results operations february 2018 fasb issued new standard would permit entities make one time reclassification accumulated comprehensive income aoci retained earnings stranded tax effects resulting newly enacted corporate tax rates tax cuts jobs act tax act effective year ended december 31 2017 amount reclassification calculated basis difference historical tax rate newly enacted tax rate standard effective interim annual periods beginning december 15 2018 early adoption permitted currently assessing impact standard financial condition august 2018 fasb issued new standard customers accounting implementation setup upfront costs incurred cloud computing arrangement cca new guidance customers assess cca includes software license cca include software license implementation setup costs accounted consistent existing internaluse software implementation guidance implementation costs alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts associated cca include software license would expensed operating expenses standard also provides classification guidance implementation costs well additional quantitative qualitative disclosures standard effective public business entities fiscal years beginning december 15 2019 interim periods within fiscal years early adoption permitted including adoption interim periods entities choose adopt new guidance prospectively retrospectively currently assessing impact standard statement financial condition results operations recently adopted accounting pronouncements may 2014 fasb issued comprehensive new standard amends revenue recognition principles provides single set criteria revenue recognition among industries new standard provides fivestep framework whereby revenue recognized promised goods services transferred customer amount reflects consideration entity expects entitled exchange goods services adopted new standard january 1 2018 january 2017 fasb issued new standard clarifies definition business determines integrated set assets activities business framework requires substantially fair value gross assets acquired disposed concentrated single asset group similar identifiable assets would represent business adopted new standard january 1 2018 applied new guidance prospectively transactions occurring adoption anticipate adoption new standard likely result transactions extent transactions undertaken company accounted asset acquisitions january 2016 fasb issued new standard changes accounting equity investments financial liabilities fair value option presentation disclosure requirements financial instruments addition fasb clarified guidance related valuation allowance assessment recognizing deferred tax assets resulting unrealized losses availableforsale debt securities equity investments readily determinable fair values measured fair value changes fair value recognized net income companies option either measure equity investments without readily determinable fair values fair value cost adjusted changes observable prices minus impairment adopted new standard january 1 2018 elected measure existing equity investments without readily determinable fair values cost adjusted changes observable prices minus impairment connection adoption new standard reclassified immaterial amount unrealized gains equity securities accumulated comprehensive income retained earnings guidance related equity investments without readily determinable fair values applied prospectively equity investments existed date adoption assess equity investments without readily determinable fair values observable price changes impairment quarterly basis refer note 7 investments details march 2017 fasb issued new standard improves presentation net periodic pension cost net periodic post retirement benefit cost requiring bifurcation net benefit cost new standard service cost component net benefit cost presented employee costs operating expenses components reported separately income expense adopted new standard january 1 2018 adoption standard material impact consolidated statements operations november 2016 fasb issued new standard clarifies entities present restricted cash statement cash flows new standard changes total cash inclusive restricted cash reflected statement cash flows result transfers cash restricted cash longer reflected activity within statement cash flows adopted new standard january 1 2018 adoption standard material impact consolidated statements cash flows august 2017 fasb issued new standard intended improve simplify certain aspects accounting hedges new standard intended closely align hedge accounting companies’ risk management strategies simplify application hedge accounting increase transparency scope results hedging programs also amends presentation disclosure requirements changes companies assess effectiveness standard effective interim annual periods beginning december 15 2018 early adoption permitted early adopted new standard second quarter 2018 using modified retrospective method adoption standard material impact consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts impacts new revenue standard adopted new revenue standard applying modified retrospective method contracts completed january 1 2018 results reporting periods beginning january 1 2018 presented new standard prior period amounts adjusted continue reported accounting standards effect prior period upon adoption new revenue recognition standard january 1 2018 reduced deferred revenue balance 104 offsetting increase 60 retained earnings due cumulative impact adopting new standard impact net product sales net income year ended december 31 2018 increase 53 48 respectively result adopting new standard new standard also resulted decrease 179 deferred revenue increase 108 retained earnings december 31 2018 adoption new revenue standard material impact balances within consolidated financial statements year ended december 31 2018 2 acquisitions wilson therapeutics ab may 25 2018 completed acquisition wilson therapeutics ab publ biopharmaceutical company based stockholm sweden wilson therapeutics develops novel therapy patients rare coppermediated disorders pursuant recommended public cash offer sek 232 share stock wilson therapeutics result acquisition added wtx101 alxn1840 highly innovative drug candidate currently early stages phase iii clinical trials treatment patients wilson disease clinical pipeline acquisition wilson therapeutics accounted asset acquisition substantially fair value gross assets acquired concentrated single asset wtx101 following table summarizes total consideration acquisition value assets acquired liabilities assumed acquired inprocess research development asset relates wtx101 due stage development asset significant risk remains yet probable future economic benefit asset absent successful clinical results regulatory approval asset alternative future use associated wtx101 accordingly value asset 8037 expensed year ended december 31 2018 employee related liabilities include value outstanding employee equity incentive awards accelerated connection wilson therapeutics acquisition settled cash also included amount employer tax obligations associated employee equity incentive awards connection rights wtx101 previously acquired wilson therapeutics third parties could required pay approximately 190 certain development regulatory commercial milestones met time well royalties commercial sales alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts syntimmune inc september 2018 entered definitive agreement acquire syntimmune inc syntimmune clinicalstage biotechnology company developing antibody therapy targeting neonatal fc receptor fcrn syntimmune’s lead candidate synt001 alxn1830 monoclonal antibody designed inhibit interaction fcrn immunoglobulin g igg immune complexes studied phase 1b2a trials treatment iggmediated autoimmune diseases acquisition syntimmune closed november 2018 terms agreement alexion acquired syntimmune upfront cash payment 4000 potential additional milestonedependent payments 8000 total value 12000 acquisition syntimmune accounted asset acquisition substantially fair value gross assets acquired concentrated single inprocess research development asset synt001 following table summarizes total consideration acquisition value assets acquired liabilities assumed acquired inprocess research development asset relates synt001 due stage development asset significant risk remains yet probable future economic benefit asset absent successful clinical results regulatory approval asset alternative future use associated synt001 accordingly value asset 3793 expensed year ended december 31 2018 3 property plant equipment net summary property plant equipment follows included constructioninprogress december 31 2017 641 costs associated construction leased facility boston massachusetts construction facility completed building placed service second quarter 2018 additionally costs 2039 1806 december 31 2018 2017 respectively included within constructioninprocess associated construction new lonza manufacturing facility although legally premises deemed owner buildings alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts construction period based applicable accounting guidance buildtosuit leases see note 10 “facility lease obligations” additional information depreciation amortization property plant equipment approximately 779 958 640 recorded within operating expenses consolidated statement operations years ended december 31 2018 2017 2016 respectively included within amount years ended december 31 2018 2017 charges related 2017 restructuring activities see note 18 “restructuring related expenses” additional information december 31 2018 2017 computer software costs included property plant equipment 503 582 respectively depreciation amortization expense capitalized computer software costs 174 160 124 years ended december 31 2018 2017 2016 respectively january 2019 adopted new lease accounting standard see note 1 “business overview summary significant accounting policies” overview impact standard property plant equipment balances 2019 4 intangible assets goodwill following table summarizes carrying amount intangible assets goodwill net accumulated amortization expense 3211 3202 3222 years ended december 31 2018 2017 2016 respectively assuming changes gross cost basis intangible assets total estimated amortization expense finitelived intangible assets approximately 3220 years ending december 31 2019 december 31 2023 5 marketable securities amortized cost gross unrealized holding gains gross unrealized holding losses fair value availableforsale debt securities type security december 31 2018 december 31 2017 follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts aggregate fair value availableforsale debt securities unrealized loss position december 31 2018 december 31 2017 1287 4362 respectively investments continuous unrealized loss position twelve months 120 december 31 2017 investments continuous unrealized loss position twelve months december 31 2018 december 31 2018 believe cost basis availableforsale debt securities recoverable fair values availableforsale debt securities classification consolidated balance sheet follows fair values availableforsale debt securities december 31 2018 contractual maturity summarized follows sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investment options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan mutual fund investments valued net asset value per share carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses december 31 2018 december 31 2017 fair value investments 165 185 respectively utilize specific identification method computing realized gains losses realized gains losses marketable securities material years ended december 31 2018 2017 2016 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen also exposed fluctuations interest rates outstanding borrowings revolving credit facility term loan facility manage exposures within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 60 months hedge exposures resulting portions forecasted revenues including intercompany revenues certain forecasted expenses denominated currencies us dollar purpose hedges reduce volatility exchange rate fluctuations operating results hedges designated cash flow hedges upon contract inception december 31 2018 open revenue related foreign exchange forward contracts notional amounts totaling 9911 qualified hedge accounting current contract maturities december 2020 december 31 2018 open expense related foreign exchange forward contracts notional amounts totaling 203 qualified hedge accounting contract maturities september 2022 achieve desired mix floating fixed interest rates term loan enter interest rate swap agreements qualify designated cash flow hedges contracts convert floating interest rate portion debt fixed rate plus borrowing spread following tables summarize total interest rate swap contracts executed december 31 2018 january 2019 entered additional interest rate swap agreement notional amount 2000 effective december 31 2019 december 31 2022 converts floating rate portion term loan fixed rate 237 plus borrowing spread second quarter 2018 adopted new standard accounting hedges designed simplify application hedge accounting increase transparency scope results hedging programs updated guidance longer requires separate measurement reporting hedge ineffectiveness following adoption unrealized gains losses derivatives designated qualify hedge accounting reported comprehensive income loss recognized consolidated statements operations underlying hedged transaction affects earnings amount gains losses recognized consolidated statements operations years ended december 31 2018 2017 2016 foreign exchange interest rate swap contracts qualified cash flow hedges follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts impact accumulated comprehensive income aoci earnings foreign exchange interest rate swap contracts qualified cash flow hedges years ended december 31 2018 2017 2016 follows assuming change foreign exchange rates market rates december 31 2018 98 gains recognized aoci reclassified revenue next 12 months assuming change liborbased interest rates market rates december 31 2018 193 gains recognized aoci reclassified interest expense next 12 months amounts recognized aoci expense related foreign exchange forward contracts immaterial december 31 2018 enter foreign exchange forward contracts durations 6 months designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2018 notional amount foreign exchange contracts hedge accounting applied 15116 recognized gain loss 230 147 52 income expense years ended december 31 2018 2017 2016 respectively associated foreign exchange contracts designated hedging instruments amounts partially offset gains losses monetary assets liabilities following tables summarize fair value outstanding derivatives december 31 2018 2017 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts although offset derivative assets liabilities within consolidated balance sheets international swap derivatives association agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect consolidated balance sheets offsetting foreign exchange forward contracts interest rate contracts subject provisions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 7 investments include strategic equity investments moderna therapeutics inc moderna dicerna pharmaceuticals inc dicerna moderna 2014 purchased 375 preferred equity moderna nonpublic biotechnology company recorded cost first quarter 2018 moderna announced completion new round financing considered transaction rights new shares issued new round compared rights preferred equity hold concluded moderna’s new round financing represented observable price change orderly transaction similar investment concluded based respective rights stock consideration potential liquidity events value preferred stock equivalent value newly issued preferred stock result recognized unrealized gain 1008 investment income first quarter 2018 adjust equity investment moderna fair value date observable price change based per share price modernas new round financing december 6 2018 moderna completed initial public offering ipo shares moderna began trading nasdaq global select market symbol “mrna” part ipo preferred stock converted moderna common stock subject one year lockup period equity investment moderna common stock readily determinable fair value recording investment fair value effects holding period restriction estimated using option pricing valuation model fourth quarter 2018 recognized unrealized loss 564 investment income adjust investment moderna fair value december 31 2018 carrying value investment 819 375 december 31 2018 2017 respectively dicerna october 2018 purchased 103 dicerna common stock connection collaboration agreement entered dicerna publiclytraded biopharmaceutical company see note 11 “commitments contingencies” additional information collaboration agreement equity investment dicerna common stock readily determinable fair value recording investment fair value considered effects six month holding period restriction determined impact fair value immaterial fourth quarter 2018 recognized unrealized loss 14 investment income adjust equity investment dicerna fair value december 31 2018 fair value investment 89 december 31 2018 8 accounts payable accrued expenses accounts payable accrued expenses consist following alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 9 debt june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amends restates credit agreement dated june 22 2015 prior credit agreement credit agreement provides 10000 revolving credit facility 26125 term loan facility revolving credit facility term loan facility mature june 7 2023 beginning quarter ending june 30 2019 required make amortization payments 500 aggregate principal amount term loan facility annually payable equal quarterly installments loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125to 200 case based consolidated net leverage ratio calculated accordance credit agreement december 31 2018 interest rate outstanding loans credit agreement 390 obligations credit agreement guaranteed certain alexion pharmaceuticals incs foreign domestic subsidiaries secured liens certain subsidiaries’ equity interests subject certain exceptions terms credit agreement must maintain ratio total net debt ebitda 350 100 subject certain limited adjustments ebitda cash interest expense ratio least 350 100 case calculated accordance credit agreement credit agreement contains certain representations warranties affirmative negative covenants events default negative covenants credit agreement restrict alexion’s subsidiaries’ ability subject certain baskets exceptions among things incur liens indebtedness make investments enter mergers fundamental changes make dispositions pay dividends restriction dividend payments includes exception permits us pay dividends make restricted payments regardless dollar amount long giving pro forma effect thereto consolidated net leverage ratio defined credit agreement within predefined ranges subject certain increases following designated material acquisitions connection entering credit agreement prior credit agreement paid aggregate of531 financing costs financing costs amortized interest expense life debt amortization expense associated deferred financing costs years ended december 31 2018 2017 2016 80 92 103 respectively remaining unamortized deferred financing costs december 31 2018 december 31 2017 208 210 respectively december 31 2018 26125 outstanding term loan 2500 borrowings outstanding revolving credit facility 2500 proceeds revolving credit facility used refinance amounts outstanding prior credit agreement december 31 2018 open letters credit 17 offset availability revolving facility january 2019 paid outstanding revolving credit facility 2500 full fair value long term debt measured using level 2 inputs fair value hierarchy approximates book value contractual maturities longterm debt obligations including revolving credit facility due subsequent december 31 2018 follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 10 facility lease obligations new facility lease obligation november 2012 entered lease agreement office laboratory space constructed new connecticut term lease commenced 2015 expire 2030 renewal option ten years although legally premises deemed owner building due substantial improvements directly funded us construction period based applicable accounting guidance buildtosuit leases accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheets construction facility completed building placed service first quarter 2016 imputed interest rate facility lease obligation december 31 2018 approximately 11 associated arrangement recognized interest expense 133 142 140 years ended december 31 2018 2017 2016 respectively december 31 2018 2017 total facility lease obligation 1335 1346 respectively recorded within current liabilities facility lease obligation consolidated balance sheets fourth quarter 2018 amended new lease agreement significantly reducing leased square footage building beginning 2019 expiration lease amendment impact previous conclusions deemed owner building accounting purposes conjunction lease modification fourth quarter 2018 made payment 530 third party incentive lease released square footage capitalized within assets consolidated balance sheets december 31 2018 aggregate future minimum noncancellable commitments new facility lease obligation december 31 2018 follows lonza facility lease obligation third quarter 2015 entered new agreement lonza group ag affiliates lonza whereby lonza construct new manufacturing facility dedicated alexion one existing facilities agreement requires us make certain payments construction new manufacturing facility annual payments ten years thereafter result contractual right full capacity new manufacturing facility portion payments agreement considered lease payments portion payment supply inventory although legally premises deemed owner manufacturing facility construction period based applicable accounting guidance buildtosuit leases due involvement construction period accordingly landlord’s costs constructing facility construction period required capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheets expect completion facility including obtaining regulatory approval 2019 december 31 2018 2017 recorded constructioninprocess asset 2039 1806 respectively offsetting facility lease obligation 1551 1591 respectively within current liabilities facility lease obligation consolidated balance sheets payments lonza agreement allocated purchases inventory repayment facility lease obligation relative fair value basis 2018 incurred 738 payments lonza agreement 96 applied outstanding facility lease obligation 642 recognized prepayment inventory see note 11 “commitments contingencies” minimum fixed payments due lonza agreements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts boston facility lease obligation september 2017 entered lease agreement approximately 150000 square feet office space constructed boston massachusetts construction facility completed building placed service second quarter 2018 term lease commenced upon landlords substantial completion facility second quarter 2018 expire thirteenth anniversary commencement option renew additional ten years although legally premises due involvement construction period deemed owner portion building lease based applicable accounting guidance buildtosuit leases accordingly landlords costs constructing facility construction period capitalized noncash transaction offset corresponding facility lease obligation consolidated balance sheets interest expense recognized 2018 material december 31 2018 december 31 2017 total facility lease obligation 836 596 respectively recorded within facility lease obligation consolidated balance sheets aggregate future minimum noncancellable commitments boston facility lease obligation december 31 2018 follows january 2019 adopted new lease accounting standard see note 1 “business overview summary significant accounting policies” overview impact standard expected facility lease obligation balances 2019 11 commitments contingencies commitments license agreements entered number license agreements order advance obtain technologies services related business license agreements generally require us pay initial fee certain agreements call future payments upon attainment agreed upon development andor commercial milestones agreements may also require minimum royalty payments based sales products developed applicable technologies october 2018 entered collaboration agreement dicerna provides us exclusive worldwide licenses development commercial rights two preclinical rna interference rnai subcutaneously delivered molecules complementmediated diseases well exclusive option preclinical rnai molecules two additional targets within complement pathway addition collaboration agreement made equity investment dicerna terms agreements made upfront payment 370 exclusive licenses equity investment market value equity investment 103 date acquisition recorded assets consolidated balance sheets due early stage assets licensing recorded upfront license payment 267 research development expense fourth quarter 2018 addition december 31 2018 could also required pay approximately 6250 option exercise fees amounts due upon achievement specified research development regulatory commercial milestones well royalties commercial sales december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets due early stage assets licensing recorded expense upfront payment 400 fourth quarter 2017 addition december 31 2018 could required pay additional alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 1600 target developed subject achievement specified development regulatory salesbased milestones well royalties commercial sales addition december 31 2018 entered license agreements may required pay additional 1372 certain development regulatory commercial milestones met manufacturing agreements various manufacturing development license agreements support clinical commercial product needs rely lonza third party manufacturer produce portion commercial clinical quantities commercial products product candidates various manufacturing license agreements lonza remaining total noncancellable future commitments approximately 10846 terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured arimf facility prior sale payment respect sales soliris manufactured lonza facilities addition lonza december 31 2018 noncancellable commitments approximately 1041 2020 third party manufacturers contingent liabilities currently involved various claims lawsuits legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best estimates based information available time assessment periodic basis additional information becomes available based specific events outcome litigation settlement claims offers settlement may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results costs associated involvement legal proceedings expensed incurred outcome proceedings regardless merits inherently uncertain unable prevail proceedings consolidated financial position results operations future cash flows may materially impacted received may future receive notices third parties claiming patents may infringed development manufacture sale products guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales products could required pay owners patents technology used manufacture sale products costly license inability obtain necessary license could material adverse effect financial results may 2015 received subpoena connection investigation enforcement division sec requesting information related grantmaking activities compliance fcpa various countries addition october 2015 received request doj voluntary production documents information pertaining alexion’s compliance fcpa sec doj also seek information related alexion’s recalls specific lots soliris related securities disclosures alexion cooperating investigations focused operations various countries including brazil colombia japan russia turkey alexions compliance fcpa applicable laws time alexion unable predict duration scope outcome investigations possible loss related matters may incurred given ongoing nature investigations management cannot reasonably estimate potential magnitude loss range loss cost ongoing investigation determination operations activities compliance existing laws regulations could result imposition fines civil criminal penalties equitable remedies including disgorgement injunctive relief andor sanctions us remediation findings could adverse effect business operations alexion committed strengthening compliance program currently implementing comprehensive companywide transformation plan enhance remediate business processes structures controls training talent systems across alexion’s global operations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts previously reported december 29 2016 shareholder filed putative class action company certain former employees us district court district connecticut alleging defendants made misrepresentations omissions soliris april 12 2017 court appointed lead plaintiff july 14 2017 lead plaintiff filed amended putative class action complaint company seven current former employees complaint alleges defendants made misrepresentations omissions soliris including alleged misrepresentations regarding sales practices management changes related investigations january 30 2014 may 26 2017 companys stock price dropped upon purported disclosure misrepresentations plaintiffs seek recover unspecified monetary relief unspecified equitable injunctive relief interest attorneys’ fees costs defendants moved dismiss amended complaint september 12 2017 plaintiffs filed opposition defendants’ motion dismiss november 13 2017 defendants’ filed reply brief support motion december 28 2017 defendants’ motion dismiss fully briefed pending court given early stages litigation estimate possible loss range loss cannot made time december 2016 received subpoena us attorneys office district massachusetts requesting documents relating generally support patient services inc psi national organization rare disorders nord 501c3 organizations provide financial assistance medicare patients taking drugs sold alexion’s provision free drug medicare patients alexion compliance policies training materials concerning antikickback statute information donations psi nord 2010 2016 companies disclosed similar inquiries cooperating inquiry engaged discussions doj potential resolution matter december 2018 reached agreement principle resolve matter entering civil settlement agreement doj office inspector general oig us department health human services part proposed resolution alexion pay approximately 130 doj oig reached agreement principle assurance steps necessary conclusively resolve matter successful settlement terms finalized unable determine potential final settlement may reached unable reach final agreement based agreement principle able predict matters resolved action government take connection may 2017 brazilian authorities seized records data sao paulo brazil offices part investigation conducted alexion’s brazilian operations cooperating inquiry june 2017 received demand inspect certain books records pursuant section 220 general corporation law state delaware behalf purported stockholder among things demand sought determine whether institute derivative lawsuit certain company’s directors officers relation investigation audit finance committee announced november 2016 investigations instituted sec doj us attorney’s office district massachusetts brazilian law enforcement officials described responded demand given early stages matter estimate possible loss range loss cannot made time september 27 2017 hearing panel canadian patented medicine prices review board pmprb issued decision previously pending administrative pricing matter excessively priced soliris manner inconsistent canadian pricing rules guidelines decision pmprb ordered alexion decrease price soliris upper limit based upon pricing certain countries forfeit excess revenues period 2009 2017 amount excess revenues determined material amount october 2017 alexion filed application judicial review pmprb’s decision federal court canada hearing application judicial review took place november 15 16 2018 decision matter yet delivered court time cannot predict outcome judicial review proceedings appeals may follow cannot reasonably estimate amount additional forfeitures required made potential impact future soliris revenues canada relating potential future price reduction october 2018 japanese ministry health labour welfare mhlw conducted administrative inspection alexion’s japanese operations mhlw inquiry primarily focused communication efforts regarding proper use soliris japan ahus among matters cooperated continue cooperate inquiry estimate possible loss range loss action mhlw take connection matter cannot made time alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts chugai pharmaceutical co ltd filed two lawsuits alexion first filed november 2018 united states district court district delaware alexion pharmaceuticals inc alleging ultomiris infringes one us patent held chugai pharmaceutical co ltd second lawsuit filed december 2018 tokyo district court alexion pharma gk whollyowned subsidiary alexion japan alleges ultomiris infringes two japanese patents held chugai pharmaceutical co ltd chugai’s complaints seek unspecified damages certain injunctive relief alexion filed answer us complaint denies infringement addition alexion raised defenses brought several counterclaims chugai pharmaceutical co ltd request finding noninfringement patent invalidity alexion pharma gk responded chugai tokyo district court raised defenses chugai pharmaceutical co ltd request finding noninfringement patent invalidity given early stages litigations estimate possible loss range loss cannot made time operating leases december 31 2018 operating leases office laboratory space us foreign locations support operations global organization aggregate lease expense 244 272 293 years ended december 31 2018 2017 2016 respectively lease expense recorded straightline basis applicable lease terms aggregate future minimum annual rental payments next five years thereafter noncancellable operating leases including facilities equipment december 31 2018 12 income taxes income tax expense based income taxes follows fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership income derived foreign jurisdictions classified “nonus income” purposes financial reporting substantially nonus income relates income captive foreign partnership alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts components income tax expense follows continue pay cash taxes us federal various us state foreign jurisdictions utilized tax attributes met applicable limitation attribute utilization effective tax rate provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows reconciliation statutory us federal income tax rate effective tax rate included benefit foreign earnings amount encapsulates various tax impacts result foreign derived income result us tax reform substantial portion foreign earnings subject gilti minimum tax effective rate lower us statutory tax rate 210 also subject tax foreign jurisdictions locally substantially taxes creditable us taxes imposed foreign earnings result effective tax rate foreign earnings lower us statutory rate year ended december 31 2018 benefit foreign earnings includes foreign local tax expense 581 substantially offset benefit us foreign tax credits 542 resulting net increase effective tax rate 16 incurred us tax expense foreign earnings 2061 includes gilti minimum tax us tax foreign earnings reflects benefit 1087 448 primarily related section 250a deduction compared us statutory rate also included component benefit 677 adjustments 2018 provisional accounting tax act resulted decrease effective tax rate approximately 280 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts year ended december 31 2017 benefit foreign earnings includes foreign local tax expense 544 partially offset benefit us foreign tax credits 332 resulting net increase effective tax rate 39 incurred transition tax imposed tax act 1779 us deferred taxes related gilti provisions tax act 1654 tax actrelated adjustments resulted increase effective tax rate approximately 627 additional us tax imposed foreign earnings 1717 reflects benefit 354 65 compared us statutory rate year ended december 31 2016 benefit foreign earnings includes foreign local tax expense 428 offset benefit us foreign tax credits 483 resulting net decrease effective tax rate 09 additional us tax imposed foreign earnings 1039 reflects benefit 1554 270 compared us statutory rate also included component impact deferred tax attributable distributions captive foreign partnership 1193 increased effective tax rate 207 effective tax rate reconciliation includes tax impact acquisitions iprd assets absent successful clinical results regulatory approval alternative use certain acquired iprd assets increase effective tax rate results value assets expensed tax benefit recognized year ended december 31 2018 component effective tax rate includes increase tax expense 2484 related acquired iprd costs acquisitions wilson therapeutics syntimmune increased effective tax rate 697 329 respectively year ended december 31 2018 permanent differences includes tax expense 211 87 related nondeductible compensation tax benefit 109 45 related foreignderived intangible income 2017 concluded irs examination 2013 2014 tax years conclusion irs examination resulted decrease tax reserves component 2017 effective tax rate approximately 36 tax act december 2017 tax cuts jobs act tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes december 31 2017 tax act resulted increase tax expense effective tax rate 458 84 respectively income tax expense increased 1779 325 related transition tax unremitted earnings imposed tax act increase includes foreign income subject us tax 1956 partially offset related benefit foreign tax credits 177 b decrease us federal tax rate resulted decrease deferred tax expense 2924 534 decrease includes 1213 222 benefit remeasuring domestic deferred taxes additional decrease attributable remeasuring deferred taxes foreign earnings 1711 312 c permanent differences includes decrease tax expense 51 09 related remeasurement income taxes payable result changes us federal tax rates tax act enactment gilti minimum tax increased us deferred taxes foreign earnings 1654 302 increase includes deferred tax expense related gilti minimum tax 2369 deferred expense partially offset related decrease deferred expense release reserves uncertain tax positions 715 calculated provisional amounts tax effects tax act could reasonably estimated completed results year ended december 31 2017 fourth quarter 2018 completed analysis provisional estimates concluded follows calculated reasonable estimate onetime transition tax previously unremitted earnings resulted increase us federal tax expense 1779 increase taxes payable net tax credits 280 period ended december 31 2017 initial accounting transition tax alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts complete december 31 2017 uncertainty regarding calculation amounts subject tax completed analysis transition tax related interpretive guidance third quarter 2018 significant measurement period adjustment initial accounting required b calculated reasonable estimate impact gilti minimum tax deferred taxes resulted increase us federal tax expense deferred tax liability 2369 period ended december 31 2017 initial accounting minimum tax incomplete uncertainty regarding calculation temporary differences subject minimum tax completed analyses temporary differences expected timing manner reversal fourth quarter 2018 recorded measurement period adjustments 2018 resulted decrease us federal tax expense 677 c calculated reasonable estimate tax act’s limits deductions employee remuneration including remuneration kind resulted insignificant impact tax expense taxes payable deferred taxes period ended december 31 2017 initial accounting limits incomplete uncertainty regarding value deductionlimited remuneration completed analysis relevant employee remuneration arrangements third quarter 2018 measurement period adjustment initial accounting required calculated reasonable estimate impact tax act us state income taxes resulted increase tax expense taxes payable deferred taxes 29 22 07 respectively period ended december 31 2017 interpreted effect tax acts changes federal law us states system taxation date enactment completed additional analysis effect modifications federal deductions income inclusions us state tax systems fourth quarter 2018 measurement period adjustment initial accounting required e calculated deferred tax liability related foreign captive partnership period ended december 31 2017 consistent calculation periods prior enactment tax act result deferred tax liability recorded december 31 2017 5334 related foreign captive partnership provisional completed additional analysis direct indirect effects tax act fourth quarter 2018 recorded measurement period adjustments 2018 resulted increase us state income tax expense deferred taxes 111 deferred taxes provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts december 31 2018 tax effected federal state net operating loss carryforwards 200 116 respectively net operating losses expire 2022 2038 also federal state income tax credit carryforwards 3706 84 respectively income tax credits expire 2025 2038 increase net operating losses due acquisition syntimmune recognition historical net operating loss carryforwards subject annual utilization limitations accordance section 382 internal revenue code decrease income tax credits attributable utilization orphan drug credits decrease investment foreign partnership deferred tax liability due adjustments recorded 2018 provisional accounting tax act reversal component temporary differences continue maintain valuation allowance certain deferred tax assets realization certain included investment foreign partnership 241 associated gilti minimum tax accounting gilti minimum tax captive foreign partnership result tax act provisional december 31 2017 completed accounting tax act fourth quarter 2018 unrecognized tax benefits follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2018 total amount tax benefit recorded 2018 2017 2016 related unrecognized tax benefits 354 271 215 respectively unrecognized tax benefits recognized would favorable impact effective tax rate reasonably possible portion unrecognized tax benefits could reverse within next twelve months reversal amounts contingent upon completion field audits taxing authorities several jurisdictions whether tax adjustment proposed nature amount adjustment administrative path resolving proposed adjustment cannot reasonably estimate range potential change tax audits file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statutes limitations ranging 3 6 years however limitation period could extended due tax attribute carryforward position number jurisdictions tax authorities generally ability review income tax returns periods limitation period previously expired subsequently adjust tax attribute values 2017 irs commenced examination us income tax returns 2015 anticipate audit conclude within next twelve months notified significant adjustments proposed irs undistributed earnings recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential withholding foreign local us state income taxes 13 sharebased compensation 2017 incentive plan 2017 plan approved stockholders may 2017 replaced 2004 plan effective may 10 2017 plan broad based plan provides grant equity awards including restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards directors officers key employees consultants maximum 182 shares addition awards outstanding 2004 incentive plan march 14 2017 subsequently canceled cash settled expired forfeited otherwise terminated without delivery shares subject limitations 2017 plan stock options granted 2017 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vest four years performancebased restricted stock units threeyear vesting period alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts stock options summary status stock options december 31 2018 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2018 2017 2016 275 889 417 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2018 2017 2016 272 615 581 respectively grant stock options year ended december 31 2018 years ended december 31 2017 2016 fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options weighted average fair value date grant options granted years ended december 31 2017 2016 4259 4146 per option respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts restricted stock summary status nonvested restricted stock december 31 2018 changes year ended follows fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2018 2017 2016 including restricted stock units performance conditions 11927 12539 13335 per share respectively total fair value restricted stock vested years ended december 31 2018 2017 2016 1817 1570 1244 respectively included table 03 shares granted senior management marketbased performance conditions provide recipient right receive restricted stock end three year performance period based preestablished marketbased performance goals used payout simulation models estimate grant date fair value awards 12325 expense recognized awards marketbased performance conditions 149 year ended december 31 2018 immaterial years ended december 31 2017 2016 employee stock purchase plan 2015 company adopted espp employees purchase shares common stock based percentage compensation subject certain limits purchase price per share equal lower 850 fair market value common stock offering date purchase date six month lookback feature espp 10 shares common stock may issued eligible employees elect participate purchase plan shares issued compensation expense recognized espp years ended december 31 2018 2017 2016 material sharebased compensation expense following table summarizes sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2018 2017 2016 145 154 121 respectively december 31 2018 3127 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted sharebased compensation plans expense expected recognized weightedaverage period 170 years alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 14 stockholders’ equity share repurchases november 2012 board directors authorized share repurchase program repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time company’s discretion february 2017 board directors increased amount authorized expend future repurchases 1000 repurchase program superseded prior repurchase programs repurchase program expiration date repurchase program may discontinued time discretion program repurchased 07 40 shares common stock cost 850 4636 years ended december 31 2018 2017 respectively february 6 2019 total 4515 remaining repurchases repurchase program 15 comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2018 2017 2016 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts table provides details regarding significant reclassifications aoci years ended december 31 2018 2017 2016 aoci component included computation net periodic pension benefit cost see note 17 employee benefit plans additional details 16 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following tables present information assets liabilities measured fair value recurring basis december 31 2018 2017 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts securities transferred level 1 2 3 year ended december 31 2018 valuation techniques classify mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy cash equivalents marketable securities classified level 2 within valuation hierarchy consist commercial paper reverse repurchase agreements us foreign governmentrelated debt corporate debt securities certificates deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources understanding models used obtaining market values pricing sources analyzing pricing data certain instances investments equity securities publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model classified level 2 equity securities within fair value hierarchy significant assumptions within option pricing valuation model term restrictions stock price volatility based upon historical volatility similar companies also use constant maturity riskfree interest rate match remaining term restrictions investments derivative assets liabilities include foreign exchange interest rate derivatives measured fair value using observable market inputs forward rates interest rates credit risk well alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts evaluation counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy contingent consideration liabilities related acquisitions classified level 3 within valuation hierarchy valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2018 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks contingent consideration connection prior business combinations may required pay future consideration contingent upon achievement specified development regulatory approvals salesbased milestone events determine fair value obligations using various estimates observable market represent level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt ranging 42 51 developmental milestones weighted average cost capital ranging 90 210 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time december 31 2018 estimated future contingent milestone payments related prior business combinations range zero milestone events achieved maximum 7020 development regulatory salesbased milestones reached december 31 2018 fair value acquisitionrelated contingent consideration 2808 following table represents rollforward acquisitionrelated contingent consideration september 2018 sold assets rights obligations related alxn1101 program third party result quarter ended september 30 2018 derecognized 46 contingent consideration due prior purchase agreement orphatec pharmaceuticals gmbh dated february 8 2011 definitive agreement related sale alxn1101 provides contingent consideration payments alexion upon achievement various regulatory commercial milestones events well royalties commercial sales amount contingent consideration related contingent payments deemed fully constrained december 31 2018 therefore included transaction price third quarter 2018 recognized immaterial gain sale alxn1101 within operating income september 2018 amended terms certain contingent milestone payments due prior merger agreement enobia pharma corp dated december 28 2011 agreement removed obligations respect regulatory milestone redistributed contingent payment associated milestone various sales milestones result agreement probability achieving various sales milestones contingent consideration liability increased 487 third quarter 2018 17 employee benefit plans deferred compensation plan nonqualified deferred compensation plan allows certain highlycompensated employees make voluntary deferrals 80 base salary incentive bonuses plan designed work conjunction 401k plan provides total combined employer match 6 employee’s eligible earnings alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts irs annual 401k contribution limitations deferred compensation amounts plan december 31 2018 2017 165 185 respectively included liabilities within consolidated balance sheets employer matching contributions plan years ended december 31 2018 2017 2016 material defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal 100 dollar contributed first 6 individual’s base salary incentive cash bonus annual irs maximum years ended december 31 2018 2017 2016 recorded matching contributions approximately 141 159 167 respectively defined benefit plans maintain defined benefit plans employees certain countries outside us including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments 2018 2017 recorded impacts curtailment related swiss plan result reduction employees due restructuring events discussed note 18 “restructuring related expenses” following table sets forth funded status amounts recognized defined benefit plans including impacts curtailments alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active plan assets managed independent investment fiduciary primarily invested debt equity securities real estate funds order maximize overall return investment income considering asset allocation limits determined pension law december 31 2018 recorded liability 176 noncurrent liabilities additional minimum liability 26 net tax accumulated comprehensive income following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories components net periodic benefit cost follows 2018 service costs recorded operating expenses components net periodic benefit recorded income expense within consolidated statement operations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts changes plan assets benefit obligations recognized aoci follows estimate pay employer contributions approximately 24 2019 expected future benefits paid respect pension plans december 31 2018 follows 18 restructuring related expenses first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases initial restructuring activities primarily focused reduction companys global workforce september 2017 committed operational plan realign global organization refocused corporate strategy realignment focuses investments priority growth areas maximize leadership complement grow rare disease business realignment also included relocation companys headquarters boston massachusetts completed second quarter 2018 new connecticut site continues support employees working research process development laboratories clinical supply quality teams nurse case management number important enterprise business services plan also reduced companys global workforce approximately 200 restructuring designed result cost savings focusing development portfolio simplifying business structures processes across companys global operations closing multiple alexion sites including arimf certain regional countrybased offices alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts following table summarizes total expenses recorded related restructuring activities type activity locations recognized within consolidated statements operations employee separation costs associated headcount reductions well corporate employees relocating companys headquarters 2018 assetrelated charges consist accelerated depreciation costs asset impairment charges accelerated depreciation costs primarily relates site closures including arimf sold thirdparty 2018 accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closure depreciation expense determined using useful life prior restructuring activities asset impairment charges primarily related manufacturing assets longer utilized due 2017 restructuring activities costs consist contract termination expenses relocation costs incurred direct result exit plan following table presents reconciliation restructuring reserve recorded within accounts payable accrued expenses companys consolidated balance sheets years ended december 31 2018 2017 restructuring reserve 42 582 recorded accounts payable accrued expenses companys consolidated balance sheet december 31 2018 2017 respectively result relocation corporate headquarters boston massachusetts required repay forgivable loan grant provided state connecticut department economic community development 2015 connection construction current headquarters new connecticut loan grant totaled 260 recognized upon receipt reduction cost new facilityrelated fixed assets result 260 repayment obligation recorded third quarter 2017 offsetting increase carrying value related assets repaid amount fourth quarter 2017 first quarter 2019 undertaken corporate restructuring activities realign global organization refocused strategy reduce costs realize operational efficiencies expect incur estimated expenses 250 associated recent restructuring end 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 19 segment information operate single segment focusing serving patients affected rare diseases innovation development commercialization lifechanging therapies consistent operational structure chief operating decision maker manages allocates resources global consolidated level therefore results operations reported consolidated basis purposes segment reporting consistent management reporting disclosures net product sales longlived assets geographic area presented net product sales net product sales product geographic region follows percentages meaningful longlived assets longlived assets consist property plant equipment alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2018 2017 2016 amounts millions except per share amounts 20 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2018 2017 1 included within operating expenses second fourth quarter 2018 recognized 8037 3793 respectively acquired inprocess research development expense related wilson syntimmune acquisitions respectively see note 2 “acquisitions” additional information 2 included within cost sales third fourth quarters 2017 830 691 respectively restructuring related expenses associated planned closure arimf facility 3 included within operating expenses first third quarters 2017 238 794 respectively restructuring related expenses 4 included within operating expenses second quarter 2017 impairment charge 310 associated early stage clinical indefinitelived intangible asset 5 recognized tax benefit expense 565 458 2018 2017 respectively result tax cuts jobs act 2017 recorded certain impacts tax act provisional basis december 22 2018 accounting impact tax act complete see note 12 “income taxes” additional information 21 subsequent events january 2019 entered collaboration agreement caelum biosciences caelum develop cael101 light chain al amyloidosis terms agreement acquired minority equity interest caelum exclusive option acquire remaining equity company based phase 2 data prenegotiated economics made upfront payment 300 could required pay additional 300 contingent milestonedependent option fees collaboration also provides potential additional payments event alexion exercises acquisition option 5000 includes upfront option exercise payment potential regulatory commercial milestone paymentsitem 15exhibits financial statement schedules item 15a 1financial statements financial statements required item submitted separate section beginning page annual report form 10k 2financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3exhibits 1incorporated reference report form 8k filed february 3 2011 2incorporated reference report form 8k filed january 4 2012 3incorporated reference report form 8k filed february 7 2012 4incorporated reference quarterly report form 10q quarter ended september 30 2018 5incorporated reference report form 8k filed may 6 2015 6incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 7incorporated reference annual report form 10k fiscal year ended december 31 2011 8incorporated reference report form 8k filed january 8 2016 9incorporated reference registration statement form s1 reg 33300202 10incorporated reference report form 8k filed february 16 2006 11incorporated reference annual report form 10k fiscal year ended december 31 2009 12incorporated reference report form 8k filed september 17 2010 13incorporated reference quarterly report form 10q quarter ended january 31 2004 14incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 15incorporated reference annual report form 10k fiscal year ended december 31 2013 16incorporated reference annual report form 10ka fiscal year ended july 31 1996 17incorporated reference annual report form 10k fiscal year ended december 31 2008 18incorporated reference report form 8k filed december 16 2004 19incorporated reference quarterly report form 10q quarter ended january 31 2005 20incorporated reference report form 8k filed march 14 2005 21incorporated reference annual report form 10k fiscal year ended december 31 2010 22incorporated reference report form 10k fiscal year ended december 31 2014 23incorporated reference quarterly report form 10q quarter ended march 31 2017 24incorporated reference quarterly report form 10q quarter ended june 30 2017 25incorporated reference registration statement form s8 reg 333217905 filed may 5 2017 26incorporated reference annual report form 10k fiscal year ended december 31 2017 27incorporated reference report form 8k filed june 13 2018 28incorporated reference report form 8k filed october 16 2019 29incorporated reference quarterly report form 10q quarter ended march 31 2019 30incorporated reference quarterly report form 10q quarter ended june 30 2019 31incorporated reference quarterly report form 10q quarter ended september 30 2019 32incorporated reference report form 8k filed may 7 2020 33incorporated reference report form 8k filed december 14 2020 34incorporated reference quarterly report form 10q quarter ended september 30 2020 35incorporated reference report form 8k filed june 3 2020 36incorporated reference report form 8k filed january 28 2020 37incorporated reference annual report form 10k fiscal year ended december 31 2019 confidential treatment granted portions exhibit certain confidential portions exhibit omitted means marking portions asterisk identified confidential portions material ii would competitively harmful publicly disclosed indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2020 2019 2018 report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets alexion pharmaceuticals inc subsidiaries “company” december 31 2020 2019 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2020 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2020 2019 results operations cash flows three years period ended december 31 2020 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2020 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 1 consolidated financial statements company changed manner accounts leases 2019 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions described management’s report internal control financial reporting management excluded portola pharmaceuticals inc “portola” assessment internal control financial reporting december 31 2020 acquired company purchase business combination 2020 also excluded portola audit internal control financial reporting portola whollyowned subsidiary whose total assets total revenues excluded management’s assessment audit internal control financial reporting represent 24 13 respectively related consolidated financial statement amounts year ended december 31 2020 definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matters communicated matters arising current period audit consolidated financial statements communicated required communicated audit committee relate accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matters providing separate opinions critical audit matters accounts disclosures relate definitelived intangible asset impairment kanuma purchased technology intangible asset described note 4 consolidated financial statements carrying value company’s purchased technology definitelived intangible assets balance 20618 million december 31 2020 quarter ended june 30 2020 based continued challenges expanding patient growth new alternative commercial opportunities company revised strategic view kanuma determined exhausted commercially viable initiatives related kanuma difficulty expanding patient growth long term company focuses promoting commercial programs growing pipeline result company longer expects increase number kanuma patients long term rate previously assumed determination resulted reduced cash flow projections kanuma indicated related intangible asset value fully recoverable undiscounted cash flows basis june 30 2020 management utilized market participant assumptions determine best estimate fair value intangible asset related kanuma compared related carrying value resulted impairment charge 20423 million recorded statement operations estimated fair value kanuma asset june 30 2020 determined using excess earnings method variation income approach excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset remaining economic life long term cash flow projections asset require use significant estimates judgements including forecasted revenue growth rates forecasted cost goods sold discount rate principal considerations determination performing procedures relating definitelived intangible asset impairment kanuma purchased technology intangible asset critical audit matter significant judgment management determining fair value intangible asset ii high degree auditor judgment subjectivity effort performing procedures evaluating management’s significant assumptions related forecasted revenue growth rates included assumed net patient additions per year assumed net price per vial forecasted cost goods sold discount rate iii audit effort involved use professionals specialized skill knowledge addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating management’s identification triggering events definitelived intangible asset impairment assessments including controls management’s valuation kanuma purchased technology intangible asset procedures also included among others testing management’s process determining fair value kanuma purchased technology intangible asset ii evaluating appropriateness excess earnings method iii testing completeness accuracy underlying data used estimate iv evaluating significant assumptions used management related forecasted revenue growth rates including assumed net patient additions per year assumed net price per vial forecasted cost goods sold discount rate evaluating management’s assumptions related forecasted revenue growth rates involved evaluating whether assumptions used management reasonable considering current past net patient additions per year net price per vial invoiced within significant territories evaluating management’s assumptions related forecasted cost goods sold involved evaluating whether assumptions used management reasonable considering current past costs manufacturing kanuma professionals specialized skill knowledge used assist evaluation appropriateness company’s excess earnings method reasonableness discount rate assumption valuation purchased technology intangible assets acquired portola pharmaceuticals inc acquisition described note 2 consolidated financial statements company completed acquisition portola pharmaceuticals inc net consideration 16216 million 2020 resulted purchased technology intangible asset 10360 million recorded purchased technology intangible asset relates portolas lead product andexxa estimated fair value determined using excess earnings valuation method variation income valuation approach excess earnings valuation method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset significant assumptions utilized asset valuation included estimated net cash flows andexxa including net revenues cost sales research development operating expenses potential regulatory commercial success rates associated andexxas current conditional approval status planned extension urgent surgery setting competitive trends impacting assets tax rates fair value using excess earnings valuation method determined using discount rate commensurate risks andexxa 175 represents rate return market participant would expect asset acquired purchased technology intangible asset amortized estimated useful life approximately 10 years fair value measurement based significant inputs observable market thus represents level 3 fair value measurement principal considerations determination performing procedures relating valuation purchased technology intangible assets acquired portola pharmaceuticals inc acquisition critical audit matter significant judgment management determining fair value intangible assets acquired turn led high degree auditor judgment subjectivity performing procedures relating fair value measurement intangible assets acquired ii significant audit effort evaluating management’s significant assumptions relating forecasted net cash flow projections including assumptions relating potential regulatory commercial success rates associated andexxas current conditional approval status planned extension urgent surgery setting estimated net revenues discount rate iii audit effort involved use professionals specialized skill knowledge addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating acquisition accounting including controls management’s valuation purchased technology intangible assets controls development cash flow projections discount rate assumptions utilized valuation intangible assets procedures also included among others reading purchase agreement testing management’s process determining fair value purchased technology intangible assets testing management’s process included evaluating appropriateness valuation method ii testing completeness accuracy data provided management iii evaluating reasonableness significant assumptions related cash flow projections including reasonableness potential regulatory commercial success rates associated andexxas current conditional approval status planned extension urgent surgery setting estimated net revenues considering past performance acquired business well internal external market data iv evaluating reasonableness discount rate selected management evaluating range relevant benchmarks including cost debt cost equity internal rate return weighted average cost capital professionals specialized skill knowledge used assist evaluation appropriateness company’s excess earnings method reasonableness discount rate assumption spricewaterhousecoopers llp boston massachusetts february 8 2021 served company’s auditor since 2002 alexion pharmaceuticals inc consolidated balance sheets amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions following provides reconciliation cash equivalents restricted cash reported within consolidated balance sheets total amounts shown consolidated statement cash flows amounts included restricted cash primarily represent funds placed escrow result judicial order issued federal court canada related soliris pricing note 11 commitments contingencies accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 1business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us global biopharmaceutical company focused serving patients families affected rare diseases devastating conditions discovery development commercialization lifechanging medicines leader rare diseases 25 years alexion developed commercializes two approved complement inhibitors treat patients paroxysmal nocturnal hemoglobinuria pnh atypical hemolytic uremic syndrome ahus well first approved complement inhibitor treat antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg neuromyelitis optica spectrum disorder nmosd patients antiaquaporin4 aqp4 antibody positive alexion also two highly innovative enzyme replacement therapies first approved therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald acquisition portola pharmaceuticals inc portola july 2020 added first approved factor xa inhibitor reversal agent patients treated rivaroxaban apixaban reversal anticoagulation needed due lifethreatening uncontrolled bleeding addition marketed therapies diverse pipeline resulting internal innovation business development alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders cardiology ophthalmology acute care incorporated 1992 laws state delaware merger agreement astrazeneca december 12 2020 entered agreement plan merger agreement astrazeneca plc public limited company incorporated laws england wales astrazeneca delta omega sub holdings inc delaware corporation wholly owned subsidiary astrazeneca bidco delta omega sub holdings inc 1 delaware corporation direct wholly owned subsidiary bidco merger sub delta omega sub holdings llc 2 delaware limited liability company direct wholly owned subsidiary bidco merger sub ii merger agreement provides among things subject satisfaction waiver conditions set forth therein 1 merger sub merge alexion “first merger” alexion surviving first merger wholly owned subsidiary bidco 2 immediately following effective time first merger effective time alexion merge merger sub ii second merger together first merger mergers merger sub ii surviving second merger wholly owned subsidiary bidco indirect wholly owned subsidiary astrazeneca merger agreement effective time defined merger agreement share common stock par value 00001 per share alexion issued outstanding immediately prior effective time certain excluded shares described merger agreement converted right receive 1 21243 american depositary shares astrazeneca election holder thereof number ordinary shares astrazeneca equal number underlying ordinary shares represented american depositary shares 2 6000 cash without interest collectively merger consideration boards directors companies unanimously approved acquisition respective obligations alexion astrazeneca consummate transactions contemplated merger agreement subject satisfaction waiver number customary conditions including 1 adoption merger agreement alexion’s stockholders 2 approval transactions contemplated merger agreement astrazeneca’s shareholders 3 absence law order prohibiting consummation mergers 4 astrazeneca’s registration statement form declared effective securities exchange commission 5 astrazeneca’s shareholder circular required prospectus approved uk financial conduct authority 6 american depository shares astrazeneca issuable mergers ordinary shares astrazeneca represented thereby approved listing nasdaq 7 expiration early termination applicable waiting period hartscottrodino antitrust improvements act 1976 amended approval mergers antitrust foreign investment laws specified jurisdictions 8 accuracy party’s representations warranties subject alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts certain materiality standards set forth merger agreement 9 compliance party material respects party’s obligations merger agreement without limiting generality foregoing subject variety specified restrictions merger agreement unless obtain astrazeneca’s prior written consent may unreasonably withheld conditioned delayed except required expressly contemplated merger agreement ii required applicable law iii set forth confidential disclosure schedule delivered alexion astrazeneca may among things subject certain exceptions aggregate limitations incur additional indebtedness issue additional shares common stock outside equity incentive plans repurchase common stock pay dividends acquire assets securities property dispose businesses assets enter material contracts make certain additional capital expenditures merger agreement alexion required make payment astrazeneca equal 11800 merger agreement terminated certain circumstances including alexion board directors changed recommendation favor mergers terminated merger agreement order enter agreement providing company superior proposal defined merger agreement alexion required make payment astrazeneca equal 2700 merger agreement terminated alexion’s stockholders fail adopt merger agreement astrazeneca required make payment alexion equal 14150 merger agreement terminated certain circumstances including astrazeneca board directors changed recommendation favor mergers astrazeneca’s shareholders fail approve transactions contemplated merger agreement acquisition expected close third quarter 2021 upon completion alexion stockholders approximately 150 combined company basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition use estimates preparation consolidated financial statements conformity us gaap requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses disclosure contingent liabilities consolidated financial statements due covid19 pandemic uncertainty disruption global economy financial markets full extent covid19 pandemic directly indirectly impact business results operations financial condition including sales expenses reserves allowances manufacturing clinical trials research development costs employeerelated amounts depend future developments highly uncertain aware specific event circumstance would require update estimates judgments assumptions revision carrying value assets liabilities february 8 2021 date issuance annual report form 10k estimates may change new events occur additional information obtained actual results may differ estimates different assumptions conditions differences may material dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted us requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions differences may material significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows •revenue recognition •contingent liabilities •sharebased compensation •valuation acquired assets including goodwill intangible assets inventory •valuation contingent consideration •income taxes foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less december 31 2020 2019 cash equivalents comprised money market funds debt securities maturities less three months date purchase fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment investments equity securities publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model observable market inputs historical volatility similar companies riskfree interest rates derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks credit agreement royaltybased debt obligations recorded historical cost approximates fair value contingent consideration liabilities related acquisitions derivative liabilities associated certain option agreements valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable debt securities availableforsale accordingly record securities fair value classify securities current assets investments intended available company use funding current operations credit losses related availableforsale debt securities recorded allowance credit losses within operating results limited amount carrying value security exceeds fair value unrealized gains losses marketable debt securities related interest rate changes alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts factors included accumulated comprehensive income loss separate component stockholders’ equity sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investment options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan mutual fund investments valued net asset value per share carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses accounts receivable standard credit terms vary based country sale range 30 120 days arrangements payable within one year transfer product consolidated average days’ sales outstanding ranges 70 80 days evaluate creditworthiness customers regular basis length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected monitor economic conditions calculate allowances estimated credit losses trade accounts receivable quarterly basis using expected loss model assess whether collectibility probable time sale ongoing basis use judgment ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful december 31 2020 2019 allowances receivables material concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable debt securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions december 31 2020 four customers accounted 668 accounts receivable balance individual customers ranging 117 221 accounts receivable balance december 31 2019 four customers accounted 669 accounts receivable balance individual customers ranging 116 203 accounts receivable balance year ended december 31 2020 three customers accounted 474 product sales individual customers ranging 147 167 product sales year ended december 31 2019 four customers accounted 564 product sales individual customers ranging 100 168 product sales year ended december 31 2018 four customers accounted 503 product sales individual customers ranging 100 164 product sales customers accounted 100 accounts receivable net product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business disaggregate trade accounts receivable population pools similar risk characteristics based underlying customer type geographical location assess current expected credit loss allowances based available information substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods date experienced significant losses respect collection accounts receivable alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts inventories stated lower cost net realizable value cost determined manner approximates average costs components inventory follows total inventories include andexxa inventory acquired connection july 2 2020 portola acquisition exclude acquired andexxa validation batches 609 manufactured processes subject regulatory approval acquired andexxa inventory includes acquisitiondate fair value stepup expensed within cost sales inventory sold customers additional information acquisition portola please refer note 2 acquisitions classify inventory costs longterm expect utilize inventory beyond normal operating cycle include costs assets consolidated balance sheets inventories classified longterm relate andexxa inventory including inventory acquired connection portola acquisition capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval inventory produced new production facilities management considers probable preapproval inventories saleable capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval product facilities sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application far facility progressed along approval process aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized december 31 2020 2019 carrying value inventory unapproved production facilities 398 605 respectively also capitalize costs associated technology transfer including engineering validation activities external cmo’s within prepaid expenses current assets consolidated balance sheets upon regulatory approval saleable inventory produced validation process reclassified inventory expensed cost goods sold product sold costs associated nonsaleable inventory remain prepaid expenses current assets consolidated balance sheets amortized costs goods sold remaining life contract products approved us food drug administration fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form products utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing products subject strict quality control certain batches units product may longer meet quality specifications may expire requires adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout preand postproduction process continually gather additional information regarding product quality periods manufacture date products currently maximum estimated life ranging 36 48 months based sales forecasts expect realize carrying value inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash quarterly basis perform assessment confirm outstanding hedges remain highly effective continue qualify hedge accounting record fair value qualifying hedges prepaid expenses current assets current liabilities unrealized gains losses derivatives designated qualify hedge accounting reported comprehensive income loss recognized underlying hedged transaction affects earnings forecasted transaction occurs amount reclassified consolidated statement operations presented financial statement line item hedged item derivative instruments hedge accounting applied recorded fair value prepaid expenses current assets current liabilities unrealized gains losses resulting changes fair value derivatives reported income expense property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows •building improvementsfifteen thirtyfive years •machinery laboratory equipmentfive fifteen years •computer hardware softwarethree seven years •furniture office equipment five ten years leasehold improvements assets financing lease arrangements amortized lesser asset’s estimated useful life term respective lease maintenance costs expensed incurred alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service leases february 2016 fasb issued new standard requires lessees recognize leases onbalance sheet disclose key information leasing arrangements adopted new standard january 1 2019 using modified retrospective approach upon adoption new lease standard january 1 2019 derecognized 4728 property plant equipment assets 3722 facility lease obligations associated previously existing buildto suit arrangements capitalized right use rou assets 3261 inclusive opening adjustments 708 primarily related prepaid rent existing transition 2553 lease liabilities within consolidated balance sheets upon adoption transition recorded decrease 903 retained earnings net tax primarily related derecognition previously recorded buildtosuit arrangements inception arrangement determine arrangement contains lease based unique facts circumstances present arrangement lease classification recognition measurement determined lease commencement date arrangements contain lease identify lease nonlease components ii determine consideration contract iii determine whether lease operating financing lease iv recognize lease rou assets liabilities lease liabilities corresponding rou assets recorded based present value lease payments expected lease term interest rate implicit lease contracts typically readily determinable use incremental borrowing rate based information available lease commencement date represents internally developed rate would incurred borrow collateralized basis similar term amount equal lease payments similar economic environment leases include options renew terminate lease impact lease term exercise options discretion include options within expected lease term reasonably certain exercise options elected combine lease components example fixed payments including rent nonlease components example nondedicated parking commonarea maintenance costs real estate commercial fleet asset classes separate lease nonlease components embedded contract manufacturing organization cmo arrangements lease nonlease components cmo arrangements determined based allocation consideration contract embedded lease nonlease components arrangement based relative standalone prices components fixed substance fixed lease payments operating leases recognized expected term lease straightline basis fixed substance fixed payments financing leases recognized using effective interest method variable lease expenses considered fixed substance fixed recognized incurred fixed variable lease expense operating leases recognized within operating expenses within consolidated statements operations financing lease rou asset amortization interest costs recorded within operating expenses interest expense respectively within consolidated statements operations operating financing leases corporate offices research development facilities regional executive sales offices commercial fleet cmo embedded lease arrangements elected shortterm lease exemption therefore recognize rou asset corresponding liability lease arrangements original term 12 months less operating leases included right use operating assets current liabilities noncurrent operating lease liabilities consolidated balance sheet december 31 2020 2019 financing leases included property plant equipment current liabilities consolidated balance sheet december 31 2020 2019 manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated asset’s useful life saleable inventory produced validation process initially recorded fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable conducted managed purpose providing return form dividends lower costs economic benefits consists inputs substantive processes applied inputs ability contribute creation outputs substantially fair value gross assets acquired concentrated single asset group similar identifiable assets represent business acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill acquisitions assets group assets meet definition business accounted asset acquisitions using cost accumulation method whereby cost acquisition including certain transaction costs allocated assets acquired basis relative fair values goodwill recognized asset acquisition intangible assets acquired asset acquisition use research development activities alternative future use capitalized inprocess research development iprd acquired iprd alternative future use recognized research development expense acquisition contingent milestone payments associated asset acquisitions recognized probable estimable amounts expensed research development alternative future use associated asset capitalized intangible asset alternative future use asset exists consolidated financial statements include results operations acquired business completion acquisition contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval intangible assets intangible assets generally consist licensing rights patents purchased technology acquired iprd intangibles intangible assets definite lives amortized based pattern economic benefit estimated useful lives reviewed periodically impairment intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets impairment longlived assets longlived assets primarily comprised intangible assets right use assets property plant equipment evaluate finitelived intangible assets right use assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset carrying value finitelived intangible asset recoverable indicator impairment indefinitelived intangible asset recognize impairment amount carrying value asset exceeds fair value calculate fair value assets using discounted cash flow models require use significant estimates judgements include limited timing costs complete inprocess projects timing probability success clinical events regulatory approvals estimated future cash flows product sales resulting completed products inprocess projects tax rates discount rates changes assumptions used cash flow projections could result impairment impairments recorded within impairment intangible assets consolidated statements operations yearended december 31 2020 recognized impairment charges 20533 related 20423 impairment charge kanuma intangible asset impairment charge 110 write cost basis achn4471 alxn2040 acquired inprocess research development asset refer note 4 intangible assets goodwill additional information impairment charges recorded investments time make strategic investments equity securities certain biotechnology companies acquire connection license option agreements strategic investment portfolio may include equity securities publicly traded companies well investments companies securities publicly traded fair value readily available investments included assets consolidated balance sheets record investments securities publicly traded cost less impairments also adjust investment changes resulting observable price change orderly transaction identical similar investments issuer assess relevant transactions occur balance sheet date identify observable price changes regularly monitor investments evaluate whether indication investment impaired based implied value recent company financings public market prices comparable companies general market conditions investments equity securities publicly traded companies unrestricted regularly measured carried fair value classified level 1 equity securities within fair value hierarchy investments publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model classified level 2 equity securities within fair value hierarchy significant assumptions within option pricing valuation model term restrictions stock price volatility based upon historical volatility applicable company similar companies alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best information available time assessment including legal facts circumstances case status proceedings applicable law likelihood settlement periodic basis additional information becomes available based specific events outcome litigation settlement claims offers settlement may reassess potential liability related matters may revise estimates facts circumstances indicate need changes treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders’ equity revenue recognition may 2014 fasb issued comprehensive new standard amends revenue recognition principles adopted new standard january 1 2018 applying modified retrospective method contracts completed date new guidance revenue recognized customer obtains control promised goods services amount reflects consideration expected received exchange goods services revenue recognized fivestep process identify contracts customer ii identify performance obligations contract iii determine transaction price iv allocate transaction price performance obligations contract v recognize revenue performance obligation satisfied company applies fivestep model contracts probable company collect consideration entitled exchange goods services transfers customer contract inception company assesses goods services promised within contract determines performance obligations revenue recognized applicable performance element distinct performance obligation satisfied upon adoption new revenue recognition standard january 1 2018 reduced deferred revenue balance 104 offsetting increase 60 retained earnings due cumulative impact adopting new standard impact net product sales net income year ended december 31 2018 increase 53 48 respectively new standard also resulted decrease 179 deferred revenue increase 108 retained earnings december 31 2018 adoption new revenue standard material impact balances within consolidated financial statements year ended december 31 2018 adoption new standard significantly change accounting policies nature products principal source revenue product sales contracts customers generally contain single performance obligation recognize revenue product sales satisfied performance obligation transferring control product customers control product generally transfers customer upon delivery certain countries sell distributors consignment basis record revenue control product transfers customer upon sale end user customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell governments government agencies addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale revenue recognized amount expect entitled exchange sale products amount includes fixed variable consideration excludes amounts collected customers remitted governmental authorities valueadded taxes foreign jurisdictions shipping handling costs associated outbound freight control product alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts transferred customers accounted fulfillment cost included operating expenses cost shipping handling activities including customs clearance activities associated transactions revenue recognized accrued completed respective period end timing recognition revenue product sales receipt payment significant standard credit terms vary based country sale range 30 120 days arrangements payable within one year transfer product assess whether contract significant financing component expectation contract inception period transfer promised good customer receipt payment one year less variable consideration pay distribution fees distributors offer rebates andor discounts enter volumebased reimbursement arrangements certain customers reduce transaction price sales amounts variable amounts estimate amount consideration expect entitled based available historic current forecast information primarily use expected value method estimate variable payments limited circumstances apply likely method based type variable consideration method better predicts amount consideration expect entitled consideration received customer expect need refunded future recorded refund liability customer within accrued expenses actual amounts consideration ultimately received refunded may differ estimates actual results future vary estimates adjust estimates would affect net product sales earnings period variances become known variability transaction price products pursuant contracts customers primarily arises following discounts rebates offer discounts rebates certain distributors customers arrangements many cases amounts fixed time sale transaction price reduced accordingly also provide rebates certain governmental programs including medicaid us programs outside us payable based actual claim data estimate rebates based analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months volumebased arrangements entered volumebased arrangements governments certain countries customers reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid customer rebate estimate incremental discounts resulting contractual limitations based forecasted sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change distribution fees pay distribution fees certain customers connection sales products record distribution fees paid customers reduction revenue unless payment distinct good service customer reasonably estimate fair value goods services received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale product returns contracts customers ultomiris soliris strensiq kanuma generally provide returns product damaged defective upon delivery factors price products limited number patients short period product sale patient infusion limited contractual return rights soliris ultomiris strensiq kanuma customers often carry limited inventory contracts customers andexxa generally provide returns product alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts damaged defective upon delivery product within eligible expiry window andexxa inventory hand also limited may longer period product sale patient use greater risk return product expiry assess sales transactions arrangements customers monitor inventory within sales channels determine whether provision returns warranted resulting adjustment transaction price necessary assessment based historical experience assumptions date sale changes estimates could impact period change occurs amount variable consideration included transaction price constrained amount probable result significant reversal revenue consider experience similar transactions expectations regarding contract estimating amount variable consideration expect entitled determining whether estimated variable consideration constrained material constraints variable consideration included within transaction price current revenue arrangements refer note 18 segment information summary revenue contracts customers product geographical region contract balances receivables contract liabilities relate consideration received andor billed goods delivered customer performance obligation yet completed amounts included within current liabilities consolidated statements operations following table provides information receivables contract liabilities contracts customers contract balances receivables associated collaboration agreements assumed acquisition portola third quarter 2020 included table material december 31 2020 research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation two sharebased compensation plans pursuant awards currently made 2017 incentive plan 2017 plan ii 2015 employee stock purchase plan espp 2017 plan replaced amended restated 2004 incentive plan 2004 plan effective may 10 2017 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value awards marketbased performance conditions payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 850 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 150 discount recognized compensation expense 6 month purchase period restructuring related expenses record liabilities associated onetime employee termination benefits exit disposal activities period liability incurred onetime employee benefits incurred communicated employees detailed action plans approved existing benefit arrangements employee termination costs accrued exit disposal cost probable estimable costs onetime termination benefits employee required render service termination order receive benefits recognized ratably service period restructuring related expenses include accelerated depreciation costs impairment charges associated assets impacted restructuring exit activity accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date impacted site closure depreciation expense determined using useful life prior restructuring activities earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps denominator reflects potential dilution could occur stock options unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method following table summarizes calculation basic diluted eps years ended december 31 2020 2019 2018 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts exclude eps weightedaverage number securities whose effect antidilutive excluded calculation eps years ended december 31 2020 2019 2018 17 30 28 shares common stock respectively effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrue potential interest penalties related unrecognized tax benefits component tax expense fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership corporate structure derives income multiple jurisdictions requires us interpret related tax laws regulations within jurisdictions develop estimates assumptions regarding significant future events amount timing character deductions applicability foreign tax credits time execute intercompany transactions may impact valuation captive foreign partnership corresponding interest allocated partner resulting change deferred taxes transactions related valuations require application transfer pricing guidelines issued relevant taxing authorities significant estimates assumptions within discounted cash flow models also required calculate valuations december 2017 tax cuts jobs act tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable debt securities unrealized gains losses hedge contracts foreign currency translation adjustments changes equity reflected net tax reclassifications certain items prior year’s consolidated financial statements reclassified conform current presentation new accounting pronouncements accounting standards update asu 201912 “income taxes simplifying accounting income taxes” december 2019 financial accounting standards board fasb issued new standard intended simplify accounting income taxes eliminating certain exceptions related approach intraperiod tax allocation methodology calculating income taxes interim period recognition deferred tax liabilities outside basis differences new standard also simplifies aspects accounting franchise taxes enacted changes tax laws rates clarifies accounting transactions result stepup tax basis goodwill standard effective annual periods beginning december 15 2020 interim periods within early adoption permitted adoption standard requires certain changes made alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts prospectively changes made retrospectively adopted new standard january 1 2021 substantially completed assessment standard expect adoption standard material impact financial condition results operations asu 202001 “investments equity securities investments equity method joint ventures derivatives hedging clarifying interactions topic 321 topic 323 topic 815” january 2020 fasb issued new standard intended clarify interactions accounting standards codification asc 321 asc 323 asc 815 new standard addresses accounting transition equity method measurement certain purchased options forward contracts acquire investments standard effective annual interim periods beginning december 15 2020 early adoption permitted adoption standard requires changes made prospectively adopted new standard january 1 2021 adoption standard impact financial condition results operations asu 202004 “reference rate reform facilitation effects reference rate reform financial reporting response concerns structural risks interbank offered rates particularly risk cessation london interbank offered rate libor regulators around world undertaken reference rate reform initiatives identify alternative reference rates observable transactionbased less susceptible manipulation march 2020 fasb issued new standard provides optional guidance limited time ease potential burden accounting effects reference rate reform including optional expedients exceptions accounting implications contracts hedging relationships transactions affected reference rate reform certain criteria met amendments new standard apply contracts hedging relationships reference libor another reference rate expected discontinued due reference rate reform expedients exceptions provided standard apply contract modifications made hedging relationships entered evaluated december 31 2022 currently reviewing contracts impacted reference rate reform assessing impact standard financial condition results operations recently adopted accounting pronouncements asu 201815 customers accounting implementation costs incurred cloud computing arrangement service contract august 2018 fasb issued new standard customers accounting implementation setup upfront costs incurred cloud computing arrangement cca aligns requirements capitalizing implementation costs cca service contract existing internaluse software guidance standard also provides classification guidance implementation costs well additional quantitative qualitative disclosures standard effective interim annual periods beginning december 15 2019 early adoption permitted adopted prospectively retrospectively adopted new standard january 1 2020 prospective basis adoption standard impact financial statements date adoption however anticipate adoption standard result increase capitalized assets related qualifying cca implementation costs future periods qualifying cca implementation setup upfront costs incurred january 1 2020 capitalized assets consolidated balance sheets assets expensed term hosting arrangement expense presented within line item consolidated statements operations expense fees associated hosting arrangement capitalized costs evaluated impairment events changes circumstances indicate carrying value capitalized implementation costs recoverable year ended december 31 2020 capitalized cca implementation costs material asu 201613 measurement credit losses financial instruments june 2016 fasb issued new standard intended improve reporting requirements specific loans receivables financial instruments new standard requires credit losses financial assets measured amortized cost determined using expected loss model instead current incurred loss model requires credit losses related availableforsale debt securities recorded allowance credit losses limited amount carrying value exceeds fair value new standard also requires enhanced disclosure credit risk associated financial assets standard effective interim annual periods beginning december 15 2019 early adoption permitted alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts adopted new standard january 1 2020 completed assessment standard based composition portfolio financial instruments current forecasted economic conditions date significant financial assets within scope new standard consist trade accounts receivable available sale debt securities historically experienced material credit losses associated trade accounts receivable available debt securities monitor economic conditions including volatility associated international economies associated impacts financial markets business disaggregate trade accounts receivable population pools similar risk characteristics based underlying customer type geographical location current expected credit loss allowances estimated risk pool based available information including historical credit loss experience ii current economic conditions iii reasonable supportable forecasts future economic conditions may affect collectibility recorded amounts based relevant facts economic conditions date adoption concluded expected credit losses trade accounts receivable immaterial additionally unrealized losses available sale investment portfolio immaterial december 31 2020 reassessed estimated credit losses trade accounts receivable including consideration potential impacts covid19 global pandemic based relevant facts economic conditions december 31 2020 concluded expected credit losses trade accounts receivable continued immaterial 2 acquisitions business combinations achillion pharmaceuticals inc october 2019 alexion entered definitive agreement acquire achillion pharmaceuticals inc achillion clinicalstage biopharmaceutical company focused development oral factor inhibitors achillion developing oral small molecule factor inhibitors treat people complement alternative pathwaymediated rare diseases pnh c3 glomerulopathy c3g achillion two clinical stage medicines development including danicopan ach4471alxn2040 ach5228 alxn2050 acquisition achillion closed january 28 2020 terms agreement acquired outstanding common stock achillion 630 per share aggregate 9262 inclusive settlement achillions outstanding equity awards acquisition funded cash hand transaction includes potential additional consideration form nontradeable contingent value rights cvrs paid achillion shareholders certain clinical regulatory milestones achieved within specified periods include 100 per share us food drug administration fda approval danicopan 100 per share initiation phase iii clinical trial ach5228 transaction accounted business combination following table summarizes total consideration transferred acquire achillion estimated fair value identified assets acquired liabilities assumed acquisition date alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts accounting acquisition finalized second quarter 2020 measurement period adjustments increased goodwill 31 second quarter 2020 due purchase price allocation increases deferred tax liabilities net measurement period adjustments recorded result studies completed second quarter 2020 determine tax deductibility certain acquisitionrelated costs valuation historical net operating loss income tax credit carryforwards initial fair value estimate contingent consideration form nontradeable cvrs 1607 recorded noncurrent liability consolidated balance sheet including 57 related compensation attributable postcombination service period determined fair value milestonerelated payment obligations using various estimates including probabilities success prior expiration specified period discount rates amount time conditions milestone payments expected met fair value measurement based significant inputs observable market representing level 3 measurements within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt rate ranging 21 23 range estimated milestone payments upon closing acquisition zero milestones achieved product 3063 certain development regulatory milestones achieved subsequent acquisition date adjusted contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related changes discount rates passage time development work progresses towards potential achievement milestones december 31 2020 fair value contingent consideration achillion acquisition 2106 based probabilityweighted cash flows discounted using cost debt ranging 28 33 changes fair value contingent consideration associated achillion acquisition year ended december 31 2020 499 aggregate fair value equity compensation attributable postcombination service period 257 amount excluded total consideration transferred recognized charge acquisitionrelated costs consolidated statements operations amounts associated accelerated vesting stock options previously granted achillion employees excluding 57 contingent consideration related equity compensation attributable postcombination service period amounts paid first quarter 2020 intangible assets associated iprd relate two developmentstage programs ach4471 alxn2040 ach5228 alxn2050 estimated fair value 9180 determined using excess earnings valuation alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts method variation income valuation approach excess earnings valuation method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset significant assumptions utilized asset valuations included estimated net cash flows asset including net revenues cost sales research development operating expenses potential regulatory commercial success rates competitive trends impacting assets tax rates fair value using excess earnings valuation method determined using estimated weighted average cost capital achillion 115 represents rate return market participant would expect assets fair value measurements based significant inputs observable market thus represent level 3 fair value measurements second quarter 2020 recognized impairment charge 110 write achn4471 alxn2040 iprd asset due clinical results received quarter excess purchase price fair value assets acquired liabilities assumed represents goodwill resulting acquisition goodwill taxdeductible recorded noncurrent asset amortized subject annual review impairment factors contributed recognition goodwill include value acquired workforce synergies specific business available market participants early research preclinical factor inhibitors well effects establishment deferred tax liability acquired iprd intangible assets tax basis recorded net deferred tax liability 629 inclusive measurement period adjustments recorded second quarter 2020 amount primarily comprised 2053 deferred tax liabilities relating iprd acquired offset 1424 deferred tax assets related net operating loss carryforwards nols income tax credits temporary differences achillions results operations included consolidated financial statements date acquisition year ended december 31 2020 recorded 668 pretax operating losses exclusive acquisitionrelated costs 499 changes contingent consideration 110 impairment charges associated operations achillion consolidated statements operations also recorded acquisitionrelated costs connection acquisition year ended december 31 2020 presented revenues recorded results operations year ended december 31 2020 neither alxn2040 alxn2050 approved commercial sale regulatory agency portola pharmaceuticals inc may 2020 alexion entered definitive merger agreement acquire portola pharmaceuticals inc portola commercialstage biopharmaceutical company focused lifethreatening bloodrelated disorders portola’s commercialized medicine andexxa® marketed ondexxya® europe first approved factor xa inhibitor reversal agent demonstrated transformative clinical value rapidly reversing anticoagulant effects factor xa inhibitors rivaroxaban apixaban severe uncontrolled bleeding acquisition provides opportunity grow alexions commercial portfolio strategic fit existing expertise acute care hematology neurology alexion completed acquisition tender offer subsequent merger portola closed july 2 2020 terms tender offer merger agreement alexion purchased outstanding common stock portola 1800 per share aggregate approximately 13808 including settlement certain portolas outstanding equity awards excluding shares portola stock held alexion closing acquisition funded cash hand prior acquisition portola march 2020 april 2020 purchased 145 36 respectively common stock portola recorded fair value upon closing acquisition portola fair value equity investment 478 derecognized included fair value consideration transferred additional information portola equity investment refer note 7 investments aggregate fair value equity compensation attributable postcombination service period 111 amount excluded total consideration transferred recognized charge acquisitionrelated costs consolidated statements operations amounts primarily associated accelerated vesting stock options previously granted portola employees paid third quarter 2020 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts issued 415 equity compensation replacement awards portion attributable services performed prior acquisition date 72 allocated purchase consideration remaining fair value attributable future services expensed sharebased compensation remaining service periods expense associated acceleratedvesting replacement awards connection employee terminations recognized acquisitionrelated employee separation costs connection acquisition alexion also paid 1969 settle certain debt held portola subject preexisting change control provisions transaction accounted business combination following table summarizes total consideration transferred acquire portola estimated fair value identified assets acquired liabilities assumed acquisition date accounting acquisition finalized fourth quarter 2020 measurement period adjustments decreased goodwill 06 fourth quarter 2020 due purchase price allocation increases deferred tax assets net measurement period adjustments recorded result studies completed fourth quarter 2020 determine tax deductibility certain acquisitionrelated costs valuation historical net operating loss income tax credit carryforwards acquired 3625 andexxa inventory inclusive 609 validation batches manufactured processes subject regulatory approval expected commercially saleable following approval estimated fair value raw material inventory valued replacement cost equal value market participant would pay acquire inventory estimated fair value workinprocess finished goods inventory based expected selling price inventory adjusted incremental costs complete manufacturing process direct selling efforts normal profit remaining manufacturing selling alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts costs additionally inventory acquired inclusive validation batches expected realized period approximately 3 years fair value inventory determined using discount rate 175 representing rate return market participant would expect inventory shares risk similar underlying intellectual property fair value measurements based significant inputs observable market thus represent level 3 fair value measurements acquired inventory inclusive acquisitiondate fair value stepup expensed within cost sales inventory sold customers classified andexxa inventory expected utilized beyond normal operating cycle longterm asset fair value noncurrent portion inventory addition validation batches classified within assets consolidated balance sheet intangible assets consist purchased technology 10360 iprd 150 purchased technology intangible asset relates portolas lead product andexxa estimated fair value determined using excess earnings valuation method variation income valuation approach excess earnings valuation method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset significant assumptions utilized asset valuation included estimated net cash flows andexxa including net revenues cost sales research development operating expenses potential regulatory commercial success rates associated andexxas current conditional approval status planned extension urgent surgery setting competitive trends impacting assets tax rates fair value using excess earnings valuation method determined using discount rate commensurate risks andexxa 175 represents rate return market participant would expect asset acquired purchased technology intangible asset amortized estimated useful life approximately 10 years iprd relates cerdulatinib developmentstage asset estimated fair value iprd asset determined using relief royalty rfr method variation income approach based cost savings accrue owner intangible asset would otherwise pay royalties revenues earned use asset rfr method modified reflect cash flow forecast portolas preexisting inlicense cerdulatinib astellas pharma inc acquired fair value 150 represents increase value asset relative initially inlicensed portola significant assumptions utilized iprd asset valuation included estimated net revenue royalty rate tax rates fair value using rfr method determined using estimated discount rate commensurate risks cerdulatinib 175 represents rate return market participant would expect asset fair value measurements based significant inputs observable market thus represent level 3 fair value measurements connection acquisition assumed royaltybased debt requires repayment tiered royalties future net worldwide sales andexxa total potential royalty payments capped 2906 137 paid portola prior acquisition fair value remaining 2769 royaltybased payments date acquisition 1820 estimated fair value measured using level 3 inputs calculated using real options method runs simulations using various estimates including probabilityweighted net sales andexxa volatility using simulation results fair value calculated based expected probabilityweighted riskneutral royalties discounted estimated cost debt ranging 33 71 commensurate cost debt period royaltybased payments estimated made recorded net deferred tax assets 1166 inclusive measurement period adjustments recorded fourth quarter 2020 amount primarily comprised 3016 418 424 393 deferred tax assets relating net operating loss carryforwards nols income tax credits royaltybased debt temporary differences respectively offset 2451 634 deferred tax liabilities relating intangible assets acquired inventory fair value adjustments respectively excess purchase price fair value assets acquired liabilities assumed represents goodwill resulting acquisition goodwill taxdeductible recorded noncurrent asset amortized subject annual review impairment factors contributed recognition goodwill primarily include value acquired workforce effects establishment deferred tax liability fair value stepup acquired inventory intangible assets exceed incremental book value acquired deferred tax assets fair value portolas results operations included consolidated financial statements date acquisition year ended december 31 2020 recorded 788 revenue primarily associated alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts andexxa consolidated statements operations year ended december 31 2020 recorded 805 pretax operating losses excluding acquisitionrelated costs 518 intangible asset amortization associated operations portola consolidated statements operations also recorded acquisitionrelated costs connection acquisition year ended december 31 2020 presented pro forma financial information unaudited following unaudited pro forma information presents combined results alexion achillion portola acquisitions achillion portola completed january 1 2019 adjustments give effect pro forma events directly attributable acquisitions unaudited pro forma results reflect operating efficiencies potential cost savings may resulted consolidation operations accordingly unaudited pro forma financial information necessarily indicative results operations completed transaction january 1 2019 unaudited pro forma consolidated results years ended december 31 2020 2019 primarily include following pro forma adjustments related nonrecurring activity net tax •reclassification alexion achillion portola acquisitionrelated costs acquisitionrelated costs 1508 excluded net income year ended december 31 2020 expenses 1364 included net income year ended december 31 2019 •incremental amortization expense related portola purchased technology intangible assets year ended december 31 2020 398 year ended december 31 2019 795 •incremental cost goods sold related portola inventory fair value stepup adjustments calculated based fair value finished goods inventory year ended december 31 2020 110 year ended december 31 2019 244 acquisitionrelated costs acquisitionrelated costs recorded within consolidated statement operations associated acquisitions achillion portola definitive merger agreement astrazeneca years ended december 31 2020 2019 2018 include following 1 transaction costs primarily include legal fees related acquisition portola well costs incurred effectuate settlement achillion outstanding options 2 employee separation costs include liabilities recognized subsequent changes estimates recorded severance payments onetime shortterm retention awards agreed connection acquisition achillion sharebased compensation expense relating awards accelerated connection terminations portola employees acquisitionrelated costs attributable achillion acquisition year ended december 31 2020 381 acquisitionrelated costs attributable portola acquisition year ended december 31 2020 775 acquisitionrelated costs attributable merger agreement astrazeneca year ended december 31 2020 20 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts asset acquisitions wilson therapeutics ab may 25 2018 completed acquisition wilson therapeutics ab publ biopharmaceutical company based stockholm sweden wilson therapeutics developed novel therapy patients rare coppermediated disorders pursuant recommended public cash offer sek 232 share stock wilson therapeutics result acquisition added wtx101 alxn1840 highly innovative drug candidate currently phase iii clinical trials treatment patients wilson disease clinical pipeline acquisition wilson therapeutics accounted asset acquisition substantially fair value gross assets acquired concentrated single asset wtx101 following table summarizes total consideration acquisition value assets acquired liabilities assumed acquired inprocess research development asset relates wtx101 due stage development asset date acquisition significant risk remained yet probable future economic benefit asset absent successful clinical results regulatory approval asset alternative future use associated wtx101 accordingly value asset expensed second quarter 2018 employee related liabilities include value outstanding employee equity incentive awards accelerated connection wilson therapeutics acquisition settled cash also included amount employer tax obligations associated employee equity incentive awards connection rights wtx101 previously acquired wilson therapeutics third parties could required pay approximately 190 certain development regulatory commercial milestones met time well royalties commercial sales syntimmune inc september 2018 entered definitive agreement acquire syntimmune inc syntimmune clinicalstage biotechnology company developing antibody therapy targeting fcrn syntimmune’s lead candidate synt001 alxn1830 monoclonal antibody designed inhibit interaction fcrn immunoglobulin g igg immune complexes studied treatment iggmediated autoimmune diseases acquisition syntimmune closed november 2018 terms acquisition agreement alexion acquired syntimmune upfront cash payment 4000 potential additional milestonedependent payments 8000 total potential value 12000 acquisition syntimmune accounted asset acquisition substantially fair value gross assets acquired concentrated single inprocess research development asset synt001 connection agreement final working capital adjustment syntimmune acquisition recognized benefit 41 associated previously acquired inprocess research development second quarter 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts following table summarizes total consideration acquisition value assets acquired liabilities assumed acquired inprocess research development asset relates synt001 due stage development asset date acquisition significant risk remained yet probable future economic benefit asset absent successful clinical results regulatory approval asset alternative future use associated synt001 accordingly value asset expensed fourth quarter 2018 3property plant equipment net summary property plant equipment follows depreciation amortization property plant equipment 563 568 779 recorded within consolidated statement operations years ended december 31 2020 2019 2018 respectively included within amount year ended december 31 2018 charges related 2017 restructuring activities refer note 17 restructuring related expenses additional information december 31 2020 2019 computer software costs included property plant equipment 531 534 respectively net accumulated amortization 877 729 respectively depreciation amortization expense capitalized computer software costs 164 153 174 years ended december 31 2020 2019 2018 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 4intangible assets goodwill following table summarizes carrying amount intangible assets goodwill net accumulated amortization connection acquisition achillion first quarter 2020 acquired iprd programs fair value 9180 recorded goodwill 378 additional information acquisition achillion refer note 2 acquisitions second quarter 2020 recognized impairment charge 110 write cost basis achn4471 alxn2040 acquired inprocess research development asset due clinical results received quarter connection acquisition portola third quarter 2020 acquired purchased technology iprd programs fair value 10360 150 respectively recorded goodwill 249 additional information acquisition portola refer note 2 acquisitions year ended december 31 2019 capitalized 180 related regulatory approval commercial milestones related inlicensing arrangements amortization expense 2576 3150 3211 years ended december 31 2020 2019 2018 respectively assuming changes gross cost basis intangible assets total estimated amortization expense finitelived intangible assets approximately 2160 years ending december 31 2021 december 31 2025 quarter ended june 30 2020 based continued challenges expanding patient growth new alternative commercial opportunities revised strategic view kanuma determined exhausted commercially viable initiatives related kanuma difficulty expanding patient growth long term focus promoting commercial programs growing pipeline result longer expect increase number kanuma patients long term rate previously assumed determination resulted reduced cash flow projections kanuma indicated related intangible asset value fully recoverable undiscounted cash flows basis june 30 2020 utilized market participant assumptions determine best estimate fair value intangible asset related kanuma compared related carrying value resulted impairment charge 20423 estimated fair value kanuma asset june 30 2020 determined using excess earnings method variation income approach excess earnings method estimates value intangible asset equal present value incremental aftertax cash flows attributable intangible asset remaining economic life long term cash flow projections asset require use significant estimates judgements including forecasted revenue growth rates forecasted cost goods sold discount rate based recent strategic plan fair value asset determined using estimated weighted average cost capital 100 reflects risks inherent future cash flow projections represents rate return market participant would expect asset estimated revenue growth rates fluctuate life asset weighted average growth rate low single digits believe assumptions consistent plans estimates market participant would use manage business estimated fair value kanuma intangible asset june 30 2020 8200 continue amortized remaining estimated useful life fair value measurement based alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts significant inputs observable market thus represents level 3 fair value measurement carrying value kanuma intangible asset december 31 2020 7827 following summarizes changes carrying amount goodwill 5marketable securities proceeds maturities sales availableforsale debt securities resulting realized gains losses summarized second quarter 2020 liquidated availableforsale debt securities fund acquisition portola additionally liquidated availableforsale debt securities acquired connection portola acquisition utilize specific identification method computing realized gains losses result liquidation availableforsale debt securities second quarter 2020 remaining availableforsale debt securities december 31 2020 amortized cost gross unrealized holding gains gross unrealized holding losses fair value availableforsale debt securities type security december 31 2019 follows aggregate fair value availableforsale debt securities unrealized loss position december 31 2019 215 investments continuous unrealized loss position twelve months december 31 2019 fair values availableforsale debt securities classification consolidated balance sheet follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts sponsor nonqualified deferred compensation plan allows certain highlycompensated employees make voluntary deferrals 80 base salary incentive bonuses plan designed work conjunction 401k plan provides total combined employer match 6 employee’s eligible earnings irs annual 401k contribution limitations participants plan earn return deferrals based several investment options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan mutual fund investments valued net asset value per share carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses december 31 2020 december 31 2019 fair value investments 349 231 respectively employer matching contributions plan years ended december 31 2020 2019 2018 material 6derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen also exposed fluctuations interest rates outstanding borrowings revolving credit facility term loan facility manage exposures within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts hedge exposures resulting portions forecasted revenues including intercompany revenues certain forecasted expenses denominated currencies us dollar revenue expense related foreign exchange forward contracts effect december 31 2020 durations 23 months 60 months respectively purpose hedges reduce volatility exchange rate fluctuations operating results hedges designated cash flow hedges upon contract inception december 31 2020 open revenue related foreign exchange forward contracts notional amounts totaling 11747 qualified hedge accounting current contract maturities june 2022 december 31 2020 open expense related foreign exchange forward contracts notional amounts totaling 87 qualified hedge accounting contract maturities september 2022 achieve desired mix floating fixed interest rates term loan enter interest rate swap agreements qualify designated cash flow hedges contracts convert floating interest rate portion debt fixed rate plus borrowing spread following table summarizes total interest rate swap contracts executed december 31 2020 amount gains losses recognized consolidated statements operations years ended december 31 2020 2019 2018 foreign exchange interest rate swap contracts qualified cash flow hedges follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts impact accumulated comprehensive income aoci earnings foreign exchange interest rate swap contracts qualified cash flow hedges years ended december 31 2020 2019 2018 follows assuming change foreign exchange rates market rates december 31 2020 442 losses recognized aoci reclassified revenue next 12 months assuming change liborbased interest rates market rates december 31 2020 459 losses recognized aoci reclassified interest expense next 12 months amounts recognized aoci expense related foreign exchange forward contracts immaterial december 31 2020 enter foreign exchange forward contracts designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results balance sheet hedges related foreign exchange forward contracts effect december 31 2020 durations 6 months hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2020 notional amount foreign exchange contracts hedge accounting applied 20701 recognized loss gain 36 04 230 income expense years ended december 31 2020 2019 2018 respectively associated foreign exchange contracts designated hedging instruments amounts partially offset gains losses monetary assets liabilities following tables summarize fair value outstanding derivatives december 31 2020 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts although offset derivative assets liabilities within consolidated balance sheets international swap derivatives association agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect consolidated balance sheets offsetting foreign exchange forward contracts interest rate contracts subject provisions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 7other investments include strategic investments equity securities certain biotechnology companies acquired connection strategic business development transactions including license option agreements investments included assets consolidated balance sheets moderna 2014 purchased 375 preferred stock moderna therapeutics inc moderna privately held biotechnology company recorded cost first quarter 2018 moderna announced completion new round financing considered transaction rights new shares issued new round compared rights preferred equity held concluded moderna’s new round financing represented observable price change orderly transaction similar investment concluded based respective rights stock consideration potential liquidity events value preferred stock equivalent value newly issued preferred stock result recognized unrealized gain 1008 investment income first quarter 2018 adjust equity investment moderna fair value date observable price change based per share price modernas new round financing december 6 2018 moderna completed initial public offering ipo shares moderna began trading nasdaq global select market symbol “mrna” part ipo preferred stock converted moderna common stock subject one year lockup period equity investment moderna common stock readily determinable fair value began record investment fair value effects holding period restriction estimated using option pricing valuation model fourth quarter 2018 recognized unrealized loss 564 investment income adjust investment moderna fair value december 31 2018 december 9 2019 sold investment moderna received 1147 net proceeds resulting realized gain 772 initial investment year ended december 31 2019 recognized gain 328 investment income dicerna october 2018 purchased 103 dicerna pharmaceuticals inc dicerna common stock connection agreement entered dicerna publiclytraded biopharmaceutical company equity investment dicerna common stock readily determinable fair value recording investment fair value year ended december 31 2020 unrealized gain loss recognized investment income fair value common stock december 31 2020 consistent fair value december 31 2019 years ended december 31 2019 2018 recognized unrealized gain 95 unrealized loss 14 respectively investment income adjust equity investment dicerna fair value fair value investment 184 december 31 2020 2019 caelum january 2019 purchased 410 preferred stock caelum biosciences caelum privatelyheld biotechnology company 161 option acquire remaining equity caelum based phase ii data connection agreement entered caelum following discussions fda caelum changed clinical development plan cael101 fourth quarter 2019 december 2019 amended terms agreement respect option acquire remaining equity caelum based data modified phase iiiii trials accounted amendment exchange transaction terms modified option determined substantially different terms original option conjunction amendment recognized gain 320 fourth quarter 2019 income expense reflects increase fair value option less 200 incremental upfront funding accrued december 31 2019 paid first quarter 2020 41 associated change fair value contingent payments also modified part amendment refer note 11 commitments contingencies additional information agreement equity investment caelum option acquire remaining equity caelum readily determinable fair value adjust carrying value assets impairment subsequent changes resulting observable price change orderly transaction identical similar equity securities issuer alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts observable price changes associated assets year ended december 31 2020 2019 phase ii trial cael101 commenced first quarter 2020 met primary objectives supporting safety tolerability cael101 confirmed dose regimen adopted phase iii studies september 2020 alexion caelum announced initiation cardiac amyloid reaching extended survival cares program includes two parallel phase iii trials evaluate survival benefits cael101 december 2020 connection entering merger agreement astrazeneca refer note 1 business overview summary significant accounting policies determined fair value option acquire remaining equity caelum decreased result change expected option exercise date resulted 490 impairment charge recorded investment income net carrying value preferred stock unaffected december 31 2020 carrying value investment option respectively 410 150 december 31 2019 carrying value investment option respectively 410 640 zealand march 2019 purchased 138 kr 909 zealand pharma zealand common stock connection agreement entered zealand publiclytraded biopharmaceutical company based copenhagen denmark refer note 11 commitments contingencies additional information agreement equity investment zealand common stock readily determinable fair value recording investment fair value years ended december 31 2020 2019 recognized unrealized loss 19 unrealized gain 147 respectively investment income adjust equity investment zealand fair value fair value investment 291 285 december 31 2020 2019 respectively eidos september 2019 purchased 199 eidos therapeutics inc eidos common stock connection agreement entered eidos publiclytraded biopharmaceutical company subsidiary bridgebio pharma inc refer note 11 commitments contingencies additional information agreement equity investment eidos common stock readily determinable fair value recording investment fair value years ended december 31 2020 2019 recognized unrealized gain 454 79 respectively investment income adjust equity investment eidos fair value fair value investment 732 278 december 31 2020 2019 respectively stealth october 2019 purchased 96 stealth biotherapeutics corp stealth common stock connection agreement entered stealth publicly traded clinicalstage biotechnology company equity investment stealth common stock readily determinable fair value recording investment fair value years ended december 31 2020 2019 recognized unrealized loss 24 52 respectively investment income adjust equity investment stealth fair value fair value investment 20 44 december 31 2020 2019 respectively portola march 2020 april 2020 purchased 145 36 respectively common stock portola pharmaceuticals inc publicly traded commercialstage biological company acquired july 2 2020 equity investment portola common stock readily determinable fair value recorded investment fair value upon closing acquisition portola july 2 2020 fair value equity investment 478 derecognized included fair value consideration transferred resulting realized gain 297 investment income initial investment refer note 2 acquisitions additional information inozyme july 17 2020 sold certain intellectual property rights assets focusing enpp1 gene deficiencies inozyme pharma inozyme publicly traded biopharmaceutical company exchange 148 inozyme pharma common stock initially recorded ipo offering price net effects nine month holding period restriction recognized 148 consideration received gain within gain sale asset consolidated statement operations equity investment inozyme common stock readily determinable fair value recording investment fair value effects nine month holding period alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts restriction estimated using option pricing valuation model year ended december 31 2020 recognized unrealized gain 57 investment income adjust equity investment inozyme fair value fair value investment 205 december 31 2020 8accounts payable accrued expenses accounts payable accrued expenses consist following 9debt credit agreement june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amended restated credit agreement dated june 22 2015 prior credit agreement credit agreement provides 10000 revolving credit facility 26125 term loan facility revolving credit facility term loan facility mature june 7 2023 beginning quarter ended june 30 2019 required make payments 50 original principal amount term loan facility annually payable equal quarterly installments loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement december 31 2020 interest rate outstanding loans credit agreement 14 obligations credit agreement guaranteed certain alexion pharmaceuticals incs foreign domestic subsidiaries secured liens certain subsidiaries’ equity interests subject certain exceptions terms credit agreement must maintain ratio total net debt ebitda 350 100 subject certain limited adjustments ebitda cash interest expense ratio least 350 100 case calculated accordance credit agreement compliance applicable covenants credit agreement december 31 2020 credit agreement contains certain representations warranties affirmative negative covenants events default negative covenants credit agreement restrict alexion’s subsidiaries’ ability subject certain baskets exceptions among things incur liens indebtedness make investments enter mergers fundamental changes make dispositions pay dividends restriction dividend payments includes exception permits us pay dividends make restricted payments regardless dollar amount long giving pro forma effect thereto consolidated net leverage ratio defined credit agreement within predefined ranges subject certain increases following designated material acquisitions connection entering credit agreement prior credit agreement paid aggregate 531 financing costs 2018 financing costs amortized interest expense life debt amortization expense associated deferred financing costs years ended december 31 2020 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 2018 47 50 80 respectively remaining unamortized deferred financing costs december 31 2020 2019 111 158 respectively made principal payments 1306 term loan 2020 december 31 2020 23839 outstanding term loan made principal payments 980 term loan 2019 december 31 2019 25145 outstanding term loan outstanding borrowings revolving credit facility years ended december 31 2020 2019 december 31 2020 2019 open letters credit 10 offset availability revolving facility amount outstanding term loan 23839 december 31 2020 subject variable interest rates based current market rates company believes carrying amount obligation approximates fair value connection planned merger astrazeneca evaluated terms credit agreement determined agreement could require acceleration payments upon change control royaltybased financing connection acquisition portola third quarter 2020 assumed royaltybased debt relating royalty sales agreement portola entered healthcare royalty partners hcr whereby hcr acquired tiered royalty interest future worldwide net sales andexxa portola received 500 upon closing agreement february 2017 additional 1000 following us regulatory approval andexxa may 2018 tiered royalties ranging 42 85 required paid hcr based net worldwide sales andexxa applicable rate decreases worldwide net annual sales levels increase defined thresholds total potential royalty payments capped 1950 funding received less certain transaction expenses 2906 date acquisition remaining due hcr 2769 royaltybased payments recorded hcr debt fair value 1820 upon closing acquisition representing initial debt discount 949 also recognized deferred tax asset 424 related royaltybased debt acquisition date additional information acquisition portola refer note 2 acquisitions interest expense recognized using effective interest rate method estimated period related debt paid requires estimation timing amount future royalty payments generated future sales andexxa reassess expected royalty payments reporting period account changes adjustment effective interest rate prospective basis assumptions used determining expected repayment term debt require make estimates could impact short long term classification debt carrying values period amortize initial debt discount using effective interest rate implied projected timing royalty payments hcr effective interest rate hcr royaltybased debt december 31 2020 115 year ended december 31 2020 recognized interest expense associated amortization debt discount 100 made royaltybased debt payments 50 2020 december 31 2020 carrying value royaltybased debt includes approximately 30 royalty payments fourth quarter sales andexxa paid first quarter 2021 december 31 2020 carrying value hcr royaltybased debt 1870 155 recorded within current portion longterm debt 1715 recorded within longterm debt less current portion consolidated balance sheet payment obligations hcr royaltybased debt follows carrying value royaltybased debt december 31 2020 approximates fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts contractual maturities contractual maturities credit agreement estimated royaltybased debt obligations due subsequent december 31 2020 follows 10leases following table summarizes lease assets liabilities december 31 2020 following table summarizes lease assets liabilities december 31 2019 following table summarizes lease related costs years ended december 31 2020 2019 amounts include 119 156 lease costs associated cmo embedded lease arrangement years ended december 31 2020 2019 respectively capitalized part cost product manufactured site following table summarizes supplemental cash flow information years ended december 31 2020 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts following tables summarize maturities lease liabilities reconciliation lease liabilities december 31 2020 following table summarizes reconciliation lease liabilities december 31 2019 11commitments contingencies asset acquisition inlicense agreements entered asset purchase agreements license agreements option arrangements order advance obtain technologies services related business agreements generally require us pay initial fee certain agreements call future payments upon attainment agreed upon development regulatory andor commercial milestones agreements may also require minimum royalty payments based sales products developed applicable technologies january 2019 entered agreement caelum biotechnology company developing cael101 light chain al amyloidosis terms agreement acquired minority equity interest preferred stock caelum exclusive option acquire remaining equity caelum based phase ii data prenegotiated economics paid 300 first quarter 2019 agreed pay additional alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 300 contingent development milestones prior exercising option acquire remaining equity caelum contingent payments meet definition derivative liability initially recorded fair value 271 allocated total consideration 571 inclusive fair value contingent payments equity investment caelum option acquire remaining equity caelum based relative fair values assets following discussions fda caelum changed clinical development plan cael101 fourth quarter 2019 december 2019 amended terms agreement caelum modify option acquire remaining equity caelum based data modified phase iiiii trials amendment also modified developmentrelated milestone events associated initial 300 contingent payments provided additional 200 upfront funding accrued december 31 2019 well funding 600 exchange additional equity interest fair value upon achievement specific developmentrelated milestone event paid additional 200 upfront funding initial 300 contingent payments 2020 agreement caelum also provides additional payments event alexion exercises purchase option 5000 includes upfront option exercise payment potential regulatory commercial milestone payments phase ii trial cael101 commenced first quarter 2020 met primary objectives supporting safety tolerability cael101 confirmed dose regimen adopted phase iii studies september 2020 alexion caelum announced initiation cardiac amyloid reaching extended survival cares program includes two parallel phase iii trials evaluate survival benefits cael101 december 2020 connection entering merger agreement astrazeneca determined fair value option acquire remaining equity caelum decreased result change expected option exercise date resulted 490 impairment charge recorded investment income net refer note 7 investments march 2019 entered agreement zealand provides us exclusive worldwide licenses well development commercial rights subcutaneously delivered preclinical peptide therapies directed four complement pathway targets pursuant agreement zealand lead joint discovery research efforts preclinical stage alexion lead development efforts beginning investigational new drug filing phase studies addition agreement made equity investment zealand refer note 7 investments terms agreement made upfront payment 400 exclusive license lead target equity investment well preclinical research services performed zealand relation lead target market value equity investment 138 date acquisition recorded assets consolidated balance sheets also recognized prepaid research development expense 50 within consolidated balance sheets associated research activities performed zealand due early stage asset licensing recorded upfront license payment 212 research development expense first quarter 2019 december 31 2020 could required pay 6100 lead target upon achievement specified development regulatory commercial milestones well royalties commercial sales addition could required pay additional 1150 development regulatory milestones longacting shortacting product developed respect lead target three subsequent targets selected option fee 150 potential additional development regulatory commercial milestones well royalty payments reduced price lead target april 2019 entered agreement affibody ab affibody alexion obtained exclusive worldwide license well development commercial rights aby039 bivalent antibodymimetic targets neonatal fc receptor fcrn terms agreement made upfront payment 250 exclusive license aby039 due early stage asset licensed recorded upfront license payment research development expense second quarter 2019 february 2020 based data phase study terminated agreement codevelop aby039 affibody september 2019 entered agreement eidos alexion obtained exclusive license develop commercialize ag10 japan ag10 small molecule designed treat root cause transthyretin amyloidosis attr currently phase iii study us europe japan attr cardiomyopathy attrcm addition made equity investment eidos refer note 7 investments terms agreement made upfront payment 500 exclusive license ag10 japan equity investment market value equity investment 199 date acquisition recorded assets consolidated balance sheets due early stage asset licensing recorded upfront license payment 301 research development expense third alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts quarter 2019 december 31 2020 could also required pay 300 upon achievement japanesebased regulatory milestone well royalties commercial sales october 2019 entered option agreement stealth biotherapeutics corp stealth clinicalstage biotechnology company whose lead product candidate elamipretide investigated latestage clinical studies three primary mitochondrial diseases primary mitochondrial myopathy pmm barth syndrome leber’s hereditary optic neuropathy terms agreement made upfront payment 300 equity investment stealth exclusive option partner stealth development subcutaneous elamipretide based final results phase iii study pmm market value equity investment 96 date acquisition recorded assets consolidated balance sheets due early stage asset option license recorded upfront option payment 204 research development expense fourth quarter 2019 december 2019 stealth announced based topline data phase 3 study pmm study meet primary endpoints following review phase 3 data released december 2019 notified stealth exercise codevelopment option agreement october 2018 entered collaboration agreement dicerna provides us exclusive worldwide licenses development commercial rights two preclinical rna interference rnai subcutaneously delivered molecules complementmediated diseases well exclusive option preclinical rnai molecules two additional targets within complement pathway addition collaboration agreement made equity investment dicerna terms agreements made upfront payment 370 exclusive licenses equity investment market value equity investment 103 date acquisition recorded assets consolidated balance sheets due early stage assets licensing recorded upfront license payment 267 research development expense fourth quarter 2018 december 2019 exercised option exclusive rights two additional targets within complement pathway existing agreement dicerna expands existing research collaboration license agreement dicerna include total four targets within complement pathway connection option exercise paid dicerna 200 recorded research development expense fourth quarter 2019 december 31 2020 excluding accrued milestones could required pay 6041 amounts due upon achievement specified research development regulatory commercial milestones four licensed targets well royalties commercial sales december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets terms agreement made upfront payment 400 exclusive license two four potential targets due early stage assets licensing recorded expense upfront payment fourth quarter 2017 second quarter 2020 forfeited rights one two targets initially licensed december 31 2020 could required pay 1550 remaining licensed target upon achievement specified development regulatory salesbased milestones well royalties commercial sales two subsequent targets licensed option fee 80 contingent payments 1600 per target subject development regulatory commercial milestones well royalties commercial sales connection prior acquisition syntimmune inc clinicalstage biotechnology company developing antibody therapy targeting fcrn could required pay 8000 upon achievement specified development regulatory commercial milestones 1300 specific subcutaneous formulation currently subject claim litigation connection syntimmune acquisition alleging alexion failed meet obligations merger agreement use commercially reasonable efforts achieve milestones plaintiff requested payment full earnout amount addition excluding accrued milestones december 31 2020 license agreements may required pay additional 1140 currently licensed targets certain development regulatory commercial milestones met including 715 development cerdulatinib multiple indications pursuant inlicensing agreement astellas pharma inc assumed acquisition portola third quarter 2020 additional amounts may payable elect acquire licenses additional targets applicable terms agreements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts next 12 months may make milestone payments related asset acquisitions option inlicense agreements approximately 711 excluding milestones accrued december 31 2020 asset sale outlicense arrangements connection prior asset sale outlicense arrangements including assumed alexion acquisition portola third quarter 2020 alexion entitled receive contingent payments upon achievement various regulatory commercial milestones events well royalties commercial sales amount contingent consideration related agreements fully constrained therefore recognized december 31 2020 manufacturing agreements various manufacturing development license agreements support clinical commercial product needs rely lonza third party manufacturer produce portion commercial clinical quantities commercial products product candidates various manufacturing license agreements lonza remaining total noncancellable future commitments approximately 11378 2030 amount includes 1005 undiscounted fixed payments applicable contract manufacturing organization cmo embedded lease arrangement lonza terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza pay lonza royalty sales soliris ultomiris manufactured lonza facilities addition commitments lonza december 31 2020 noncancellable commitments approximately 1756 2023 third party manufacturers contingent liabilities currently involved various claims disputes lawsuits investigations administrative proceedings legal proceedings quarterly basis review status significant matter assess potential financial exposure accordance generally accepted accounting principles potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims proceedings litigation accruals based best estimates based information available time assessment periodic basis additional information becomes available based specific events outcome litigation court decisions settlement claims offers settlement may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results costs associated involvement legal proceedings expensed incurred outcome proceedings regardless merits inherently uncertain unable prevail proceedings consolidated financial position results operations future cash flows may materially impacted received may future receive notices third parties claiming patents may infringed use development manufacture importation sale products product candidates guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales products could required pay owners patents technology used manufacture sale products costly license inability obtain necessary license could material adverse effect financial results may 2015 received subpoena connection investigation enforcement division securities exchange commission sec requesting information related grantmaking activities compliance foreign corrupt practices act fcpa various countries addition october 2015 received request department justice doj voluntary production documents information pertaining alexion’s compliance fcpa sec doj also sought information related alexion’s recalls specific lots soliris related securities disclosures investigations focused operations various countries including brazil colombia japan russia turkey alexions compliance fcpa applicable laws may 2020 doj informed us closed inquiry matters alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts july 2 2020 reached civil settlement sec fully resolving sec’s investigation possible violations fcpa alexion neither admitted denied wrongdoing connection settlement agreed pay 215 sec consisting amounts attributable disgorgement civil penalties prejudgment interest connection settlement july 2020 paid 215 sec following settlement sec ministry health turkey initiated investigation regarding matters referenced sec order relate company’s operations turkey 2010 2015 cooperating investigation alexion committed continually focusing compliance program continues enhance comprehensive companywide program designed enhance business processes structures controls training talent systems across alexion’s global operations previously reported december 29 2016 shareholder filed putative class action company certain former employees us district court district connecticut alleging defendants made misrepresentations omissions soliris april 12 2017 court appointed lead plaintiff july 14 2017 lead plaintiff filed amended putative class action complaint company seven current former employees defendants moved dismiss amended complaint september 12 2017 plaintiffs filed opposition defendants’ motion dismiss november 13 2017 defendants filed reply brief support motion december 28 2017 march 26 2019 court held telephonic status conference court informed counsel preparing ruling granting defendants’ pending motion dismiss court inquired plaintiffs’ counsel whether intended seek leave amend complaint indicated wished file second amended complaint would allowed april 2 2019 court granted plaintiffs may 31 2019 file second amended complaint thereby rendering moot defendants’ pending motion dismiss june 2 2019 plaintiffs filed second amended complaint defendants complaint alleges defendants engaged securities fraud including making misrepresentations omissions public disclosures concerning company’s soliris sales practices management changes related investigations january 30 2014 may 26 2017 companys stock price dropped upon purported disclosure alleged fraud plaintiffs seek recover unspecified monetary relief unspecified equitable injunctive relief interest attorneys’ fees costs defendants’ filed motion dismiss amended complaint august 2 2019 plaintiffs’ filed opposition motion october 2 2019 defendants’ filed reply support motion november 15 2019 given early stage proceedings cannot presently predict likelihood obtaining dismissal case ultimate outcome case motion dismiss denied court estimate possible loss range loss time december 2016 received subpoena us attorneys office district massachusetts requesting documents relating generally support patient services inc psi national organization rare disorders nord 501c3 organizations provide financial assistance medicare patients taking drugs sold alexion’s provision free drug medicare patients alexion compliance policies training materials concerning antikickback statute information donations psi nord 2010 2016 april 2019 entered civil settlement agreement doj office inspector general oig us department health human services resolve matter part settlement agreement alexion paid 131 doj oig require corporate integrity agreement alexion made fundamental organizational changes including hiring new executive leadership team replacing half members board directors effecting significant change workforce may 2017 brazilian authorities seized records data são paulo brazil offices part investigation conducted alexion’s brazilian operations cooperating inquiry june 2017 received demand inspect certain books records pursuant section 220 general corporation law state delaware behalf purported stockholder among things demand sought determine whether institute derivative lawsuit certain company’s directors officers relation investigation audit finance committee announced november 2016 investigations instituted sec doj us attorney’s office district massachusetts brazilian law enforcement officials described responded demand given early stages matter estimate possible loss range loss cannot made time september 27 2017 hearing panel canadian patented medicine prices review board pmprb issued decision previously pending administrative pricing matter excessively priced soliris alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts manner inconsistent canadian pricing rules guidelines decision pmprb ordered alexion decrease price soliris upper limit based upon pricing certain countries forfeit excess revenues period 2009 2017 amount excess revenues period 2009 2017 determined material amount paid 2018 october 2017 alexion filed application judicial review pmprb’s decision federal court canada may 23 2019 federal court canada dismissed alexions application judicial review consequence affirmed decision pmprb excessively priced soliris june 21 2019 alexion filed notice appeal federal court canadas ruling october 17 2019 alexion filed memorandum fact law support appeal december 3 2019 attorney general canada filed memorandum fact law support federal court canadas dismissal alexions appeal pmprbs decision december 19 2019 intervenor minister health province british columbia filed separate memorandum fact law support federal court canadas decision canadian federal court appeal heard appeal october 21 22 2020 issued decision date filing pursuant order made federal court canada february 4 2021 placed approximately 707 escrow secure obligations pending final resolution appeals matter amount reflects difference list price soliris price determined pmprb nonexcessive sales soliris canada period beginning september 2017 december 31 2020 addition quarterly basis appeals process concluded alexion required place amounts escrow vial soliris sold applicable quarter equal difference list price soliris price determined pmprb nonexcessive revenues canada reduced 492 cumulatively date current best estimate liability december 31 2020 lose appeal matter amount ultimate liability however may greater estimate appeal process matter concluded chugai pharmaceutical co ltd filed three lawsuits alexion first filed november 2018 united states district court district delaware alexion pharmaceuticals inc alleging ultomiris infringes one us patent held chugai pharmaceutical co ltd upon issuance new us patent november 12 2019 chugai filed second lawsuit united states alleging ultomiris infringes new patent parties agreed consolidate november 2018 november 2019 lawsuits chugai filed third lawsuit december 2018 tokyo district court alexion pharma gk whollyowned subsidiary alexion japan alleges ultomiris infringes two japanese patents held chugai pharmaceutical co ltd chugai’s complaints seek unspecified damages certain injunctive relief march 5 2020 supreme court japan dismissed chugais appeal earlier ip high court japan decision held one chugai patentsinsuit invalid subsequently chugai filed correction claims patentsinsuit alexion countered corrected claims still invalid infringed cases alexion denied charges countered patents neither valid infringed trial date us case initially set july 2021 rescheduled january 2022 case still briefing stage japan given early stages litigations estimate possible loss range loss cannot made time february 28 2019 amgen inc amgen petitioned us patent trademark office pto institute inter partes review ipr three patents owned alexion relate soliris us patent nos 9725504 9718880 9732149 case amgen alleged patented subject matter anticipated andor obvious view prior art patent claims therefore invalid august 30 2019 pto instituted iprs three patents may 28 2020 entered confidential settlement license agreement “settlement agreement” amgen settle three iprs patent trial appeal board “ptab” pto pursuant settlement agreement alexion amgen terminated pending iprs addition effective march 1 2025 earlier date certain circumstances company grants amgen affiliates certain partners nonexclusive royaltyfree license us patents patent applications related eculizumab various aspects eculizumab product alexion currently markets sells tradename soliris license allow amgen affiliates certain partners effective march 1 2025 right make made use import imported sell sold offer sale offered sale distribute distributed us eculizumab product connection ongoing matter august 2019 brazilian federal revenue service provided notice tax description facts “tax assessment” two alexion subsidiaries brazil subsidiaries well two additional entities logistics provider utilized alexion distributor tax assessment alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts focuses importation soliris vials pursuant alexion’s free drug supply patients program referred global access medicines gatm brazil september 2019 brazil subsidiaries filed defenses tax assessment disputing basis liability tax assessment based among others following connection operation gatm period september 2014 june 2019 importers responsible importation gatm soliris vials brazil correctly identified ii correct customs value utilized purpose importing gatm soliris vials provided patients free charge defenses filed alexion pending judgment first level administrative appeals within brazilian federal administrative proceeding system three separate levels administrative appeals within brazilian federal administrative proceeding system outcome administrative appeals unfavorable final decision federal administrative proceeding system disputed federal court systems brazil time alexion intends appeal tax assessment overturned course administrative appeals given early stage proceedings alexion unable predict duration scope outcome matter expect final resolution take three years possible loss related tax assessment may incurred given ongoing nature cannot reasonably estimate potential magnitude possible loss range loss cost ongoing administrative appeals potential appeals federal court system tax assessment determination aspects importation free charge medications brazil set forth tax assessment compliance existing laws regulations could result imposition fines civil penalties potentially criminal penalties andor sanctions us could adverse impact brazilian operations connection alexion’s acquisition portola assumed litigation portola party among litigation assumed securities fraud class action filed portola certain officers directors underwriters “defendants” securities act 1933 securities exchange act 1934 specifically january 16 2020 february 7 2020 february 28 2020 stockholders filed three putative class actions us district court northern district california captioned hayden v portola pharmaceuticals inc et al 320cv00367vc nd cal mccutcheon v portola pharmaceuticals inc et al 320cv00949 nd cal southeastern pennsylvania transportation authority v portola pharmaceuticals inc et al 320cv01501 nd cal cases since consolidated april 22 2020 court issued order appointing alameda county employees’ retirement association “acera” lead plaintiff litigation acera filed amended consolidated complaint may 20 2020 asserting defendants made misrepresentations omissions public disclosures including materials issued connection august 7 2019 securities offering concerning portola’s sales andexanet alfa marketed andexxa united states ondexxya europe january 8 2019 february 26 2020 specifically plaintiffs allege defendants made materially false andor misleading statements demand andexxa usage andexxa hospitals healthcare organizations portola’s accounting return reserves plaintiffs contend alleged fraud revealed january 9 2020 portola announced preliminary unaudited financial results fourth quarter 2019 february 26 2020 portola issued fourth quarter 2019 financial results july 2020 portola defendants filed motion dismiss court heard oral argument september 24 2020 granted defendants’ pending motion dismiss leave plaintiffs amend complaint plaintiffs filed amended complaint november 5 2020 december 2020 portola defendants filed motion dismiss court oral argument scheduled february 25 2021 plaintiffs seek recover unspecified monetary relief interest attorneys’ fees costs given early stage proceedings cannot presently predict likelihood obtaining dismissal case ultimate outcome case motion dismiss denied court estimate possible loss range loss time alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 12income taxes income tax expense based income taxes follows fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership income derived foreign jurisdictions classified “nonus income” purposes financial reporting substantially nonus income relates income captive foreign partnership components income tax expense follows continue pay cash taxes us federal various us state foreign jurisdictions utilized tax attributes met applicable limitation attribute utilization effective tax rate provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts reconciliation statutory us federal income tax rate effective tax rate included benefit foreign earnings amount encapsulates various tax impacts result nonus income result tax cuts jobs act 2017 tax act substantial portion foreign earnings subject gilti minimum tax effective rate lower us statutory tax rate 210 also subject tax foreign jurisdictions locally majority taxes creditable us taxes imposed foreign earnings result effective tax rate foreign earnings lower us statutory rate year ended december 31 2020 benefit foreign earnings includes foreign local tax expense 2708 offset benefit us foreign tax credits 2406 resulting net increase effective tax rate 53 incurred us tax expense foreign earnings 2015 includes gilti minimum tax us tax foreign earnings reflects benefit 1487 261 primarily related section 250a deduction compared us statutory rate benefit foreign earnings also includes impact certain current year events described year ended december 31 2020 permanent differences includes increase effective tax rate 15 85 associated nondeductible contingent consideration form nontradeable contingent value rights cvrs relating achillion acquisition also included permanent differences decrease effective tax rate 11 62 associated nontaxable gain portola equity investment included fair value consideration transferred connection portola acquisition second quarter 2020 recognized impairment charge 20423 related kanuma intangible asset resulting deferred tax benefit 3773 refer note 4 intangible assets goodwill additional information impairment charge deferred tax benefits decreased effective tax rate year ended december 31 2020 approximately 192 august 2020 received notice examination dutch tax authorities “dta” regarding certain matters relating 2014 2017 tax years entered agreement dta december 2020 agreed pay approximately 738 connection settlement inclusive 2018 2019 tax years taking account 561 us foreign tax credit claimed settlement net cash outflow 177 representing 31 net increase effective tax rate net tax expense reflected within benefit foreign earnings april 2020 became aware european withholding tax regulation could interpreted apply certain previous intragroup transactions continue evaluate whether interpretation regulation applies facts circumstances based preliminary analysis recorded immaterial reserve related matter second quarter 2020 year ended december 31 2019 benefit foreign earnings includes foreign local tax expense 1932 offset benefit us foreign tax credits 1961 resulting net decrease effective tax rate 01 incurred us tax expense foreign earnings 1876 includes gilti minimum tax us tax foreign earnings reflects benefit 2695 124 primarily related section 250a deduction compared us statutory rate benefit foreign earnings also includes certain onetime tax benefits associated intellectual property wilson therapeutics deferred tax benefits include 957 303 associated tax election made respect intellectual property wilson therapeutics valuation allowance release corresponding recognition net operating losses respectively july 1 2019 wilson therapeutics intellectual property integrated alexion corporate structure resulting income tax expense approximately 102 comprehensive analysis prior year estimate related foreignderived intangible income “fdii” completed third quarter 2019 based additional guidance provided proposed regulations issued us treasury department 2019 analysis resulted income tax benefit 170 related prior year recorded change estimate income tax expense consolidated statements operations resulting decrease approximately 08 effective tax rate year ended december 31 2019 company completed intraentity asset transfer certain intellectual property irish subsidiary within captive foreign partnership company recognized deferred tax benefits 22215 represents difference basis intellectual property financial statement purposes basis intellectual property tax purposes applying appropriate enacted alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts statutory tax rates company receive future tax deductions associated amortization intellectual property amortization deducted tax purposes carried forward indefinitely irish tax law offsetting deferred tax expense 18393 recognized reflect reduction future foreign tax credits associated foreign local tax amortization deductions net deferred tax benefits resulted decrease approximately 175 effective tax rate year ended december 31 2018 benefit foreign earnings includes foreign local tax expense 581 substantially offset benefit us foreign tax credits 542 resulting net increase effective tax rate 16 incurred us tax expense foreign earnings 2061 includes gilti minimum tax us tax foreign earnings reflects benefit 1087 448 primarily related section 250a deduction compared us statutory rate also included component benefit 677 adjustments 2018 provisional accounting tax act resulted decrease effective tax rate approximately 280 effective tax rate reconciliation includes tax impact acquisitions iprd assets absent successful clinical results regulatory approval alternative use certain acquired iprd assets increase effective tax rate results value assets expensed tax benefit recognized year ended december 31 2018 component effective tax rate includes increase tax expense 2484 related acquired iprd costs acquisitions wilson therapeutics syntimmune increased effective tax rate 697 329 respectively year ended december 31 2018 permanent differences include tax expense 158 65 related nondeductible compensation tax act december 2017 tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes calculated provisional amounts tax effects tax act could reasonably estimated completed results year ended december 31 2017 fourth quarter 2018 completed analysis provisional estimates concluded follows awe calculated reasonable estimate onetime transition tax previously unremitted earnings resulted increase us federal tax expense 1779 increase taxes payable net tax credits 280 period ended december 31 2017 initial accounting transition tax complete december 31 2017 uncertainty regarding calculation amounts subject tax completed analysis transition tax related interpretive guidance third quarter 2018 significant measurement period adjustment initial accounting required bwe calculated reasonable estimate impact gilti minimum tax deferred taxes resulted increase us federal tax expense deferred tax liability 2369 period ended december 31 2017 initial accounting minimum tax incomplete uncertainty regarding calculation temporary differences subject minimum tax completed analyses temporary differences expected timing manner reversal fourth quarter 2018 recorded measurement period adjustments 2018 resulted decrease us federal tax expense 677 cwe calculated reasonable estimate tax act’s limits deductions employee remuneration including remuneration kind resulted insignificant impact tax expense taxes payable deferred taxes period ended december 31 2017 initial accounting limits incomplete uncertainty regarding value deductionlimited remuneration completed analysis relevant employee remuneration arrangements third quarter 2018 measurement period adjustment initial accounting required alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts dwe calculated reasonable estimate impact tax act us state income taxes resulted increase tax expense taxes payable deferred taxes 29 22 07 respectively period ended december 31 2017 interpreted effect tax acts changes federal law us states system taxation date enactment completed additional analysis effect modifications federal deductions income inclusions us state tax systems fourth quarter 2018 measurement period adjustment initial accounting required ewe calculated deferred tax liability related foreign captive partnership period ended december 31 2017 consistent calculation periods prior enactment tax act result deferred tax liability recorded december 31 2017 5334 related foreign captive partnership provisional completed additional analysis direct indirect effects tax act fourth quarter 2018 recorded measurement period adjustments 2018 resulted increase us state income tax expense deferred taxes 111 deferred taxes provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts december 31 2020 tax effected federal state net operating loss carryforwards 2104 1081 respectively net operating losses expire 2022 2043 exception 1128 federal 19 state net operating losses carried forward indefinitely also federal state income tax credit carryforwards 4170 835 respectively federal income tax credits expire 2033 2040 whereas 516 state income tax credit carryforwards expire 2021 2035 remaining 319 state income tax credits carried forward indefinitely included year ended december 31 2020 757 connecticut state net operating loss carryforwards 537 connecticut state income tax credit carryforwards change connecticut state tax regime signed law 2019 phases capitalbased component business tax fully phased 2024 company subject incomebased taxes state connecticut company anticipates generating tax credits future years exceed amount otherwise utilized result full valuation allowance established carryforward attributes increase net operating losses income tax credits valuation allowance primarily relates achillion portola acquisitions refer note 2 acquisitions additional information continue maintain valuation allowance certain deferred tax assets realization certain following table represents rollforward valuation allowance deferred tax assets included investment foreign partnership deferred tax liability 11943 associated gilti minimum tax unrecognized tax benefits follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2020 total amount tax benefit recorded 2020 2019 2018 related unrecognized tax benefits 214 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 46 354 respectively unrecognized tax benefits recognized would favorable impact effective tax rate reasonably possible portion unrecognized tax benefits could reverse within next twelve months reversal amounts contingent upon completion field audits taxing authorities several jurisdictions whether tax adjustment proposed nature amount adjustment administrative path resolving proposed adjustment cannot reasonably estimate range potential change tax audits file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statutes limitations ranging 3 6 years however limitation period could extended due tax attribute carryforward position number jurisdictions tax authorities generally ability review income tax returns periods limitation period previously expired subsequently adjust tax attribute values 2017 internal revenue service irs commenced examination us income tax returns 2015 second quarter 2020 received revenue agent report rar held discussions irs regarding proposed adjustment related valuation certain intellectual property contributed captive partnership 2015 company agreed adjustment outlined rar recognized previously unrecognized tax benefit second quarter 2020 result significant impact financial statements irs concluded examination third quarter 2020 without additional adjustments described entered agreement dta december 2020 agreed pay approximately 738 connection settlement regarding certain matters relating 2014 2019 tax years undistributed earnings recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential withholding foreign local us state income taxes coronavirus aid relief economic security act response market volatility instability resulting covid19 pandemic coronavirus aid relief economic security act cares act signed law march 27 2020 cares act lifts certain deduction limitations originally imposed tax act tax act federal net operating losses nols generated 2017 could carried back utilization limited 80 taxable income cares act allows fiveyear carryback federal nols generated 2018 2020 eliminates 80 taxable income limitation allowing corporate entities fully utilize nol carryforwards offset taxable income 2018 2020 addition cares act generally allows taxpayers deduct interest 50 adjusted taxable income 30 limit tax act tax years 2019 2020 cares act also allows taxpayers prior year alternative minimum tax repealed tax act amt credits accelerate refund claims tax years beginning 2018 2019 instead recovering credits period years originally enacted tax act additionally cares act raises corporate charitable deduction limit 25 taxable income provides technical correction tax act generally provide qualified improvement property 15year costrecovery period allow 100 bonus depreciation enactment cares act result material adjustments income tax provision year ended december 31 2020 us federal state net deferred tax liabilities december 31 2020 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 13sharebased compensation 2017 incentive plan 2017 plan approved stockholders may 2017 replaced 2004 plan effective may 10 2017 plan broad based plan provides grant equity awards including restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards directors officers key employees consultants maximum 182 shares addition awards outstanding 2004 incentive plan march 14 2017 subsequently canceled cash settled expired forfeited otherwise terminated without delivery shares subject limitations 2017 plan stock options granted 2017 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vest four years performancebased restricted stock units threeyear vesting period stock options summary status stock options december 31 2020 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2020 2019 2018 393 147 275 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2020 2019 2018 48 101 272 respectively grant stock options years ended december 31 2020 2019 2018 restricted stock summary status nonvested restricted stock december 31 2020 changes year ended follows fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2020 2019 2018 including restricted stock units performance conditions 10095 13389 11927 per share respectively included alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts number shares granted 2020 04 shares replacement awards related acquisition portola 03 shares relating incremental shares earned performancebased awards granted prior years total fair value restricted stock vested years ended december 31 2020 2019 2018 2713 1613 1817 respectively restricted stock vested 2020 includes 06 shares total fair value 718 due accelerated vesting restricted stock performancebased awards 2020 granted 05 shares senior management include marketbased nonmarketbased performance conditions provide recipient right receive restricted stock end three year performance period used payout simulation models estimate grant date fair value awards grant date fair value awards estimated 9403 based probable achievement performance targets expense recognized performancebased awards years ended december 31 2020 2019 2018 666 463 149 respectively employee stock purchase plan 2015 company adopted espp employees purchase shares common stock based percentage compensation subject certain limits purchase price per share equal lower 850 fair market value common stock offering date purchase date six month lookback feature espp 10 shares common stock may issued eligible employees elect participate purchase plan shares issued compensation expense recognized espp years ended december 31 2020 2019 2018 material sharebased compensation expense following table summarizes sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2020 2019 2018 119 129 145 respectively december 31 2020 3663 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted sharebased compensation plans expense expected recognized weightedaverage period 168 years alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 14stockholders’ equity share repurchases november 2012 board directors authorized share repurchase program february 2017 board directors increased amount authorized expend future repurchases 10000 repurchase program superseded prior repurchase programs entire amount authorized pursuant february 2017 board approval utilized october 22 2019 board directors approved share repurchase authorization 10000 july 28 2020 board directors approved new share repurchase authorization additional 15000 repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time discretion program repurchased 49 38 shares common stock cost 5108 4160 years ended december 31 2020 2019 respectively december 31 2020 total 20247 remaining repurchases repurchase programs 15other comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2020 2019 2018 table provides details regarding significant reclassifications aoci years ended december 31 2020 2019 2018 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 16fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following tables present information assets liabilities measured fair value recurring basis december 31 2020 2019 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts securities transferred level 1 2 3 year ended december 31 2020 valuation techniques classify mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy cash equivalents marketable securities classified level 2 within valuation hierarchy include money market funds commercial paper us foreign governmentrelated debt corporate debt securities certificates alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources understanding models used obtaining market values pricing sources analyzing pricing data certain instances investments equity securities publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model classified level 2 equity securities within fair value hierarchy significant assumptions within option pricing valuation model term restrictions stock price volatility based upon historical volatility applicable company similar companies also use constant maturity riskfree interest rate match remaining term restrictions investments derivative assets liabilities include foreign exchange interest rate derivatives measured fair value using observable market inputs forward rates interest rates credit risk well evaluation counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy contingent consideration liabilities related business acquisitions derivative liabilities associated contingent payments classified level 3 within valuation hierarchy valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2020 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks acquisitionrelated contingent consideration connection prior business combinations may required pay future consideration contingent upon achievement specified development regulatory approvals salesbased milestone events determine fair value obligations using various estimates observable market represent level 3 measurement within fair value hierarchy december 31 2020 resulting probabilityweighted cash flows discounted using cost debt ranging 28 33 developmental regulatory milestones weighted average cost capital 90 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time december 31 2020 estimated future contingent milestone payments related prior business combinations range zero milestone events achieved maximum 9056 development regulatory salesbased milestones reached december 31 2020 fair value acquisitionrelated contingent consideration 4143 next 12 months expect make milestone payments 1200 associated prior business combinations following table represents rollforward acquisitionrelated contingent consideration contingent payments january 2019 entered agreement caelum biotechnology company developing cael101 light chain al amyloidosis terms agreement acquired minority equity interest alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts preferred stock caelum exclusive option acquire remaining equity caelum based phase ii data prenegotiated economics paid 300 first quarter 2019 agreed pay additional 300 contingent development milestones prior exercise option acquire remaining equity caelum contingent payments met definition derivative liability initially recorded fair value 271 based probabilityweighted cash flows discounted using cost debt ranging 33 35 december 2019 following fda feedback resulted redesign expansion caelums planned clinical development program cael101 amended terms existing option agreement caelum amendment modified terms option acquire remaining equity caelum based data expanded phase iiiii trials amendment also modified developmentrelated milestone events associated initial 300 contingent payments provided additional 200 upfront funding well funding 600 exchange additional equity interest fair value upon achievement specific developmentrelated milestone event december 31 2019 connection amendment remeasured derivative liability related initial 300 contingent payments fair value 240 based probabilityweighted cash flows discounted using cost debt 21 accrued additional 200 upfront funding paid additional 200 upfront funding initial 300 contingent payments 2020 reporting period adjust derivative liability associated contingent payments fair value changes fair value recognized income expense changes fair values reflect new information probability anticipated timing meeting conditions milestone payments absence new information changes fair value reflect interest component liability related passage time aggregate 300 milestone payments made 2020 settled derivative liability reduced derivative liability balance zero recorded 60 expense income expense year ended december 31 2020 recorded 31 income expense year ended december 31 2019 including 41 result amendment agreement caelum 17 restructuring related expenses third quarter 2020 initiated restructuring activities primarily within commercial organization part initiative intended redefine operating model actions intended reallocate resources necessary align organization diversifying portfolio new products strategic objectives include investments digital capabilities technologies solutions support virtual digital customer experience tailored markets operate actions expected substantially completed 2021 cumulative pretax costs incurred company implement program estimated approximately 100 primarily recognized year ended december 31 2020 expect pretax costs primarily result cash outlays costs primarily relate employee separation expenses first quarter 2019 initiated corporate restructuring activities realign international commercial organization reprioritization certain geographical markets implement operational excellence strategic reallocation resources actions first quarter 2019 restructuring program completed first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases september 2017 committed operational plan realign global organization refocused corporate strategy realignment included relocation companys headquarters boston massachusetts reduction companys global workforce restructuring designed result cost savings focusing development portfolio simplifying business structures process across companys global operations closing multiple alexion sites costs incurred 2018 relate 2017 restructuring plan actions 2017 restructuring programs completed alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts following table summarizes total expenses recorded related restructuring activities type activity locations recognized within consolidated statements operations employee separation costs associated headcount reductions assetrelated charges consist accelerated depreciation costs asset impairment charges accelerated depreciation costs primarily relates site closures including arimf sold thirdparty 2018 accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closure depreciation expense determined using useful life prior restructuring activities asset impairment charges primarily related manufacturing assets longer utilized due 2017 restructuring activities costs consist contract termination expenses relocation costs incurred direct result exit plan following table presents reconciliation restructuring reserve recorded within accounts payable accrued expenses companys consolidated balance sheets years ended december 31 2020 2019 restructuring reserve 82 68 recorded accounts payable accrued expenses companys consolidated balance sheet december 31 2020 2019 respectively accrued amounts expected paid next twelve months currently estimate incurring immaterial amount restructuring expenses 2021 related third quarter 2020 action alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 18 segment information operate single segment focusing serving patients affected rare diseases devastating conditions discovery development commercialization lifechanging therapies consistent operational structure chief operating decision maker manages allocates resources global consolidated level therefore results operations reported consolidated basis purposes segment reporting consistent management reporting disclosures net product sales longlived assets geographic area presented net product sales net product sales product geographic region follows percentages meaningful alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts longlived assets longlived assets consist property plant equipment 19 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2020 2019 gross profit calculated total revenues less cost sales 1 included within operating expenses second quarter 2020 recorded impairment charge 20423 writedown kanuma intangible asset fair value kanuma intangible asset impairment resulted deferred tax benefit 3773 refer note 4 intangible assets goodwill additional information 2 first quarter 2019 recognized onetime tax benefits 957 303 associated tax election made respect intellectual property wilson therapeutics ab release existing valuation allowance respectively refer note 12 income taxes additional information 3 fourth quarter 2019 recognized onetime tax benefit 3822 related intraentity asset transfer certain intellectual property within captive foreign partnership refer note 12 income taxes additional information alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2020 2019 2018 amounts millions except per share amounts 20 subsequent events january 2021 alexion entered definitive asset purchase agreement rhythm pharmaceuticals inc “rhythm” acquire rare pediatric disease priority review voucher prv 1000 alexion’s acquisition rhythm’s prv subject satisfaction customary closing conditions approval relevant regulatory agencies including expiration early termination applicable waiting period hartscott rodino antitrust improvements act upon closing make 1000 cash payment expect capitalize prv acquired iprd intangible assetnanitem 15 exhibits financial statement schedules item 15a 1 financial statements financial statements required item submitted separate section beginning page annual report form 10k 2 financial statement schedules omitted absence conditions required information included financial statements notes thereto beginning page report 3 exhibits 1 incorporated reference report form 8k filed february 3 2011 2 incorporated reference report form 8k filed january 4 2012 3 incorporated reference report form 8k filed february 7 2012 4 incorporated reference quarterly report form 10q quarter ended september 30 2018 5 incorporated reference report form 8k filed may 6 2015 6 incorporated reference registration statement form s3 reg 333128085 filed september 2 2005 7 incorporated reference annual report form 10k fiscal year ended december 31 2011 8 incorporated reference report form 8k filed january 8 2016 9 incorporated reference registration statement form s1 reg 33300202 10 incorporated reference report form 8k filed february 16 2006 11 incorporated reference annual report form 10k fiscal year ended december 31 2009 12 incorporated reference report form 8k filed september 17 2010 13 incorporated reference quarterly report form 10q quarter ended january 31 2004 14 incorporated reference registration statement form s8 reg 33371879 filed february 5 1999 15 incorporated reference annual report form 10k fiscal year ended december 31 2013 16 incorporated reference annual report form 10ka fiscal year ended july 31 1996 17 incorporated reference annual report form 10k fiscal year ended december 31 2008 18 incorporated reference report form 8k filed december 16 2004 19 incorporated reference quarterly report form 10q quarter ended january 31 2005 20 incorporated reference report form 8k filed march 14 2005 21 incorporated reference annual report form 10k fiscal year ended december 31 2010 22 incorporated reference report form 10k fiscal year ended december 31 2014 23 incorporated reference quarterly report form 10q quarter ended march 31 2017 24 incorporated reference quarterly report form 10q quarter ended june 30 2017 25 incorporated reference registration statement form s8 reg 333217905 filed may 5 2017 26 incorporated reference annual report form 10k fiscal year ended december 31 2017 27 incorporated reference report form 8k filed june 13 2018 28 incorporated reference report form 8k filed october 16 2019 29 incorporated reference quarterly report form 10q quarter ended march 31 2019 30 incorporated reference quarterly report form 10q quarter ended june 30 2019 31 incorporated reference quarterly report form 10q quarter ended september 30 2019 confidential treatment granted portions exhibit indicates management contract compensatory plan arrangement required filed pursuant item 15b form 10k item 15b exhibits see 3 item 15c financial statement schedules see 2 item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated alexion pharmaceuticals inc contents years ended december 31 2019 2018 2017 report independent registered public accounting firm board directors stockholders alexion pharmaceuticals inc opinions financial statements internal control financial reporting audited accompanying consolidated balance sheets alexion pharmaceuticals inc subsidiaries “company” december 31 2019 2018 related consolidated statements operations comprehensive income changes stockholders’ equity cash flows three years period ended december 31 2019 including related notes collectively referred “consolidated financial statements” also audited companys internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued committee sponsoring organizations treadway commission coso opinion consolidated financial statements referred present fairly material respects financial position company december 31 2019 2018 results operations cash flows three years period ended december 31 2019 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2019 based criteria established internal control integrated framework 2013 issued coso change accounting principle discussed note 1 consolidated financial statements company changed manner accounts leases 2019 basis opinions companys management responsible consolidated financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included managements report internal control financial reporting appearing item 9a responsibility express opinions company’s consolidated financial statements companys internal control financial reporting based audits public accounting firm registered public company accounting oversight board united states pcaob required independent respect company accordance us federal securities laws applicable rules regulations securities exchange commission pcaob conducted audits accordance standards pcaob standards require plan perform audits obtain reasonable assurance whether consolidated financial statements free material misstatement whether due error fraud whether effective internal control financial reporting maintained material respects audits consolidated financial statements included performing procedures assess risks material misstatement consolidated financial statements whether due error fraud performing procedures respond risks procedures included examining test basis evidence regarding amounts disclosures consolidated financial statements audits also included evaluating accounting principles used significant estimates made management well evaluating overall presentation consolidated financial statements audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions definition limitations internal control financial reporting company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate critical audit matters critical audit matter communicated matter arising current period audit consolidated financial statements communicated required communicated audit committee relates accounts disclosures material consolidated financial statements ii involved especially challenging subjective complex judgments communication critical audit matters alter way opinion consolidated financial statements taken whole communicating critical audit matter providing separate opinion critical audit matter accounts disclosures relates income taxes described notes 1 12 consolidated financial statements company’s total income tax benefit year ended december 31 2019 2255 million company net deferred tax assets 2088 million gross unrecognized income tax benefits 1338 million december 31 2019 company’s corporate structure derives income multiple jurisdictions requires management interpret related tax laws regulations within jurisdictions develop estimates assumptions regarding significant future events amount timing character deductions applicability foreign tax credits time company executes intercompany transactions may impact valuation captive foreign partnership corresponding interest allocated partner resulting change deferred taxes transactions related valuations require application transfer pricing guidelines issued relevant taxing authorities significant estimates assumptions within discounted cash flow models also required calculate valuations disclosed management estimates assumptions include limited revenue growth rates discount rates company accounts impact minimum tax foreign earning related intangible assets gilti deferred taxes july 1 2019 wilson therapeutics intellectual property integrated company’s corporate structure year ended december 31 2019 benefit foreign earnings includes certain onetime tax benefits associated intellectual property wilson therapeutics deferred tax benefits include 957 million 303 million associated tax election made respect intellectual property wilson therapeutics valuation allowance release corresponding recognition net operating losses respectively year ended december 31 2019 company completed intraentity asset transfer certain intellectual property irish subsidiary within companys captive foreign partnership company recognized deferred tax benefits 22215 million represents difference basis intellectual property financial statement purposes basis intellectual property tax purposes applying appropriate enacted statutory tax rates company receive future tax deductions associated amortization intellectual property amortization deducted tax purposes carried forward indefinitely irish tax law offsetting deferred tax expense 18393 million recognized reflect reduction future foreign tax credits associated foreign local tax amortization deductions principal considerations determination performing procedures relating income taxes critical audit matter significant judgment management interpreting complex tax laws remeasuring deferred taxes outside basis foreign captive partnership developing provision income taxes deferred tax assets liabilities turn led high degree audit effort judgment subjectivity performing procedures evaluating audit evidence related provision income taxes including gilti deferred taxes relating outside basis foreign captive partnership ip restructurings additionally audit effort involved use professionals specialized skill knowledge assist evaluating audit evidence obtained procedures addressing matter involved performing procedures evaluating audit evidence connection forming overall opinion consolidated financial statements procedures included testing effectiveness controls relating income taxes including controls calculation review provision income taxes deferred taxes including related ip restructurings completeness accuracy data utilized procedures also included among others testing accuracy income tax provision including rate reconciliation implications ip restructurings gilti outside basis partnership deferred tax accounting ii testing accuracy completeness certain data utilized calculation provision income taxes whether data consistent evidence obtained areas audit iii testing accuracy valuation ip iv testing completeness accuracy data underlying valuation ip v evaluating adequacy company’s disclosures professionals specialized skill knowledge used assist evaluating audit evidence reasonableness management’s judgments estimates including application foreign domestic tax laws regulations spricewaterhousecoopers llp boston massachusetts february 4 2020 served company’s auditor since 2002 alexion pharmaceuticals inc consolidated balance sheets amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements operations amounts millions except per share amounts accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements comprehensive income amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements changes stockholders’ equity amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc consolidated statements cash flows amounts millions following provides reconciliation cash equivalents restricted cash reported within consolidated balance sheets total amounts shown consolidated statement cash flows amounts included restricted cash primarily represent funds placed escrow result judicial order issued federal court canada related soliris pricing note 11 commitments contingencies accompanying notes integral part consolidated financial statements alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts 1 business overview summary significant accounting policies business alexion pharmaceuticals inc alexion company us global biopharmaceutical company focused serving patients families affected rare diseases discovery development commercialization lifechanging therapies global leader complement biology inhibition 20 years alexion developed commercializes two approved complement inhibitors treat patients paroxysmal nocturnal hemoglobinuria pnh atypical hemolytic uremic syndrome ahus well first approved complement inhibitor treat antiacetylcholine receptor achr antibodypositive generalized myasthenia gravis gmg neuromyelitis optica spectrum disorder nmosd patients antiaquaporin4 aqp4 antibody positive alexion also two highly innovative enzyme replacement therapies first approved therapies patients lifethreatening ultrarare metabolic disorders hypophosphatasia hpp lysosomal acid lipase deficiency lald addition marketed therapies diverse pipeline resulting internal innovation business development alexion focuses research efforts novel molecules targets complement cascade development efforts core therapeutic areas hematology nephrology neurology metabolic disorders cardiology incorporated 1992 laws state delaware basis presentation principles consolidation accompanying consolidated financial statements include accounts alexion whollyowned subsidiaries intercompany balances transactions eliminated consolidation business combinations assets acquired liabilities assumed recorded respective fair values date acquisition results operations included consolidated financial statements date acquisition dividend policy never paid cash dividend shares stock currently intend retain earnings finance future operations anticipate paying cash dividends stock foreseeable future critical accounting estimates preparation consolidated financial statements prepared accordance accounting principles generally accepted us requires us make estimates judgments assumptions may affect reported amounts assets liabilities revenues expenses related disclosure contingent assets liabilities financial statements believe complex judgments result primarily need make estimates effects matters inherently uncertain significant consolidated financial statements base estimates historical experience various assumptions believe reasonable results form basis making judgments carrying values assets liabilities evaluate estimates judgments assumptions ongoing basis actual results may differ estimates different assumptions conditions differences may material significant areas involving estimates judgments assumptions used preparation consolidated financial statements follows • revenue recognition • contingent liabilities • sharebased compensation • valuation goodwill acquired intangible assets inprocess research development iprd • valuation contingent consideration • income taxes alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts foreign currency translation financial statements subsidiaries functional currencies us dollar translated us dollars using periodend exchange rates assets liabilities historical exchange rates stockholders’ equity weighted average exchange rates operating results translation gains losses included accumulated comprehensive income loss net tax stockholders’ equity foreign currency transaction gains losses included results operations income expense cash equivalents cash equivalents stated cost plus accrued interest approximates fair value include shortterm highly liquid investments original maturities three months less december 31 2019 2018 cash equivalents comprised money market funds debt securities maturities less 90 days date purchase fair value financial instruments carrying amounts reflected consolidated balance sheets cash equivalents accounts receivable assets accounts payable accrued expenses liabilities approximate fair value due shortterm maturities marketable securities valued based upon pricing securities similar investment characteristics holdings mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment investments equity securities publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model observable market inputs historical volatility similar companies riskfree interest rates derivative financial instruments measured fair value using observable market inputs forward rates interest rates credit risk counterparties’ credit risks debt obligations carried historical cost approximates fair value contingent consideration liabilities related acquisitions derivative liabilities associated certain option agreements valued based various estimates including probability success estimated revenues discount rates amount time conditions milestone payments met marketable securities invest excess cash balances marketable securities highly rated financial institutions investmentgrade debt instruments seek diversify investments limit amount investment concentrations individual institutions maturities investment types classify marketable debt securities availableforsale accordingly record securities fair value classify securities current assets investments intended available company use funding current operations unrealized gains losses marketable debt securities deemed temporary included accumulated comprehensive income loss separate component stockholders’ equity adjustment fair value reflects significant decline value security evaluate extent decline determined otherthantemporary would mark security market charge consolidated statement operations credit losses identified expect receive cash flows sufficient recover amortized cost basis security event credit loss amount associated credit loss recognized operating results amount loss relating factors recorded accumulated comprehensive income loss sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investments options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan mutual fund investments valued net asset value per share carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts accounts receivable standard credit terms vary based country sale range 30 120 days arrangements payable within one year transfer product consolidated average days’ sales outstanding ranges 70 80 days evaluate creditworthiness customers regular basis length time sale receipt payment certain countries exceeds credit terms countries collections customers extend beyond normal payment terms seek collect interest record interest customer receivables interest income collected subsequent adjustments declines credit rating recorded bad debt expense component selling general administrative expense also use judgments ability collect outstanding receivables provide allowances portion receivables collection becomes doubtful also assess ongoing basis whether collectibility probable time sale december 31 2019 2018 allowances receivables material concentration credit risk financial instruments potentially expose company concentrations credit risk limited cash equivalents marketable securities accounts receivable foreign exchange derivative contracts invest cash reserves money market funds highquality marketable debt securities accordance investment policy stated objectives investment policy preserve capital provide liquidity consistent forecasted cash flow requirements maintain appropriate diversification generate returns relative investment objectives prevailing market conditions december 31 2019 four customers accounted 669 accounts receivable balance individual customers ranging 116 203 accounts receivable balance december 31 2018 three customers accounted 487 accounts receivable balance individual customers ranging 140 191 accounts receivable balance year ended december 31 2019 four customers accounted 564 product sales individual customers ranging 100 168 product sales year ended december 31 2018 four customers accounted 503 product sales individual customers ranging 100 164 product sales year ended december 31 2017 three customers accounted 370 product sales individual customers ranging 108 150 product sales customers accounted 100 accounts receivable net product sales continue monitor economic conditions including volatility associated international economies associated impacts financial markets business substantially accounts receivable due wholesale distributors public hospitals government entities monitor financial performance customers appropriately respond changes credit worthiness operate certain jurisdictions weakness economic conditions result extended collection periods date experienced significant losses respect collection accounts receivable inventories stated lower cost net realizable value cost determined manner approximates average costs components inventory follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts capitalization inventory costs capitalize inventory produced commercial sale may include costs incurred certain products awaiting regulatory approval inventory produced new production facilities management considers probable preapproval inventories saleable capitalize inventory produced preparation product launches sufficient support estimated initial market demand capitalization inventory begins obtained positive results clinical trials believe necessary support regulatory approval ii concluded uncertainties regarding regulatory approval product facilities sufficiently reduced iii determined inventory probable future economic benefit evaluating whether conditions met consider clinical trial results underlying product candidate results meetings regulatory authorities compilation regulatory application far facility progressed along approval process aware material risks contingencies outside standard regulatory review approval process specific negative issues identified relating safety efficacy manufacturing marketing labeling product would significant negative impact future economic benefits related inventory would capitalized december 31 2019 carrying value inventory unapproved production facilities 605 products approved us food drug administration fda regulatory authorities also used clinical programs assess safety efficacy products usage diseases approved fda regulatory authorities form products utilized commercial clinical programs identical result inventory “alternative future use” defined authoritative guidance raw materials purchased drug product associated clinical development programs included inventory charged research development expense product enters research development process longer used commercial purposes therefore “alternative future use” products development yet approved regulatory authorities purchased drug product charged research development expense upon delivery occurs inventory passes quality inspection ownership transfers us nonrefundable advance payments research development activities including production purchased drug product deferred capitalized goods delivered also recognize expense raw materials purchased developmental purposes raw materials pass quality inspection obligation pay materials inventory writeoffs analyze inventory levels identify inventory may expire prior sale inventory cost basis excess estimated realizable value inventory excess expected sales requirements although manufacturing product subject strict quality control certain batches units product may longer meet quality specifications may expire requires adjustments inventory values also apply judgment related results quality tests perform throughout production process well understanding regulatory guidelines determine probable inventory saleable quality tests performed throughout preand postproduction process continually gather additional information regarding product quality periods manufacture date products currently maximum estimated life ranging 36 48 months based sales forecasts expect realize carrying value inventory future reduced demand quality issues excess supply beyond anticipated management may result material adjustment inventory levels would recorded increase cost sales determination whether inventory costs realizable requires estimates management critical input determination future expected inventory requirements based internal sales forecasts compare requirements expiry dates inventory hand inventories capitalized preparation product launch also consider expected approval date assessing realizability extent inventory expected expire prior sold write value inventory derivative instruments record fair value derivative instruments either assets liabilities balance sheet accounting gains losses resulting changes fair value dependent use derivative whether designated qualifies hedge accounting qualifying hedging activities documented inception hedge must meet definition highly effective offsetting changes future cash quarterly basis perform assessment confirm alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts outstanding hedges remain highly effective continue qualify hedge accounting record fair value qualifying hedges prepaid expenses current assets current liabilities unrealized gains losses derivatives designated qualify hedge accounting reported comprehensive income loss recognized underlying hedged transaction affects earnings forecasted transaction occurs amount reclassified consolidated statement operations presented financial statement line item hedged item derivative instruments hedge accounting applied recorded fair value prepaid expenses current assets current liabilities unrealized gains losses resulting changes fair value derivatives reported income expense property plant equipment property plant equipment stated cost depreciated straightline basis estimated useful lives assets estimate economic lives follows • building improvementsfifteen thirty five years • machinery laboratory equipmentfive fifteen years • computer hardware softwarethree seven years • furniture office equipment five ten years leasehold improvements assets financing lease arrangements amortized lesser asset’s estimated useful life term respective lease maintenance costs expensed incurred constructioninprogress reflects amounts incurred property plant equipment construction improvements placed service leases inception arrangement determine arrangement contains lease based unique facts circumstances present arrangement lease classification recognition measurement determined lease commencement date arrangements contain lease identify lease nonlease components ii determine consideration contract iii determine whether lease operating financing lease iv recognize lease rou assets liabilities lease liabilities corresponding rou assets recorded based present value lease payments expected lease term interest rate implicit lease contracts typically readily determinable use incremental borrowing rate based information available lease commencement date represents internally developed rate would incurred borrow collateralized basis similar term amount equal lease payments similar economic environment leases include options renew terminate lease impact lease term exercise options discretion include options within expected lease term reasonably certain exercise options elected combine lease components example fixed payments including rent nonlease components example nondedicated parking commonarea maintenance costs real estate commercial fleet asset classes separate lease nonlease components embedded contract manufacturing organization cmo arrangements lease nonlease components cmo arrangements determined based allocation consideration contract embedded lease nonlease components arrangement based relative standalone prices components fixed substance fixed lease payments operating leases recognized expected term lease straightline basis fixed substance fixed payments financing leases recognized using effective interest method variable lease expenses considered fixed substance fixed recognized incurred fixed variable lease expense operating leases recognized within operating expenses within consolidated statements operations financing lease rou asset amortization interest costs recorded within operating expenses interest expense respectively within consolidated statements operations operating financing leases corporate offices research development facilities regional executive sales offices commercial fleet cmo embedded lease arrangements elected shortterm lease exemption therefore recognize rou asset corresponding liability lease arrangements original term 12 months less alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts operating leases included right use operating assets current liabilities noncurrent operating lease liabilities consolidated balance sheet december 31 2019 financing leases included property plant equipment current liabilities consolidated balance sheet december 31 2019 assets held sale classify assets held sale following criteria met management authority approve action commits plan sell asset ii asset available immediate sale present condition subject terms usual customary sales similar assets iii active program locate buyer actions required complete plan sell asset initiated iv sale asset probable transfer asset expected qualify recognition completed sale within one year v asset actively marketed sale price reasonable relation current fair value vi actions required complete plan indicate unlikely significant changes plan made plan withdrawn assets classified held sale recorded lower carrying value fair value less costs sell third quarter 2017 announced intention close alexion rhode island manufacturing facility arimf fourth quarter 2017 met criteria assets held sale reclassified arimf assets property plant equipment assets held sale recorded within prepaid expenses current assets subsequently sold arimf third quarter 2018 see note 18 restructuring related expenses manufacturing facilities capitalize costs incurred construction facilities support commercial manufacturing also capitalize costs related validation activities directly attributable preparing facility intended use including engineering runs inventory production necessary obtain approval facility government regulators production commercially approved drug facility substantially complete ready intended use regulatory approval commercial production received place asset service production inventory preparing facility intended use requires two types production engineering runs used testing purposes result saleable inventory validation runs used validating equipment may result saleable inventory costs associated inventory produced engineering runs normal production losses validation runs capitalized fixed assets depreciated asset’s useful life saleable inventory produced validation process initially treated fixed asset however upon regulatory approval inventory reclassified inventory expensed cost goods sold product sold research development expenses product utilized rd activities abnormal production costs incurred validation process expensed incurred acquisitions business combinations accounted using acquisition method accounting acquisition method accounting tangible intangible assets acquired liabilities assumed recorded acquisition date respective fair values evaluate business integrated set activities assets capable conducted managed purpose providing return form dividends lower costs economic benefits consists inputs substantive processes applied inputs ability contribute creation outputs substantially fair value gross assets acquired concentrated single asset group similar identifiable assets represent business acquisition business excess fair value consideration transferred fair value net assets acquired recorded goodwill alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts acquisitions assets group assets meet definition business accounted asset acquisitions using cost accumulation method whereby cost acquisition including certain transaction costs allocated assets acquired basis relative fair values goodwill recognized asset acquisition intangible assets acquired asset acquisition use research development activities alternative future use capitalized inprocess research development iprd acquired iprd alternative future use recognized research development expense acquisition contingent milestone payments associated asset acquisitions recognized probable estimable amounts expensed research development alternative future use associated asset capitalized intangible asset alternative future use asset exists consolidated financial statements include results operations acquired business completion acquisition contingent consideration record contingent consideration resulting business combination fair value acquisition date quarterly basis revalue obligations record increases decreases fair value adjustment operating earnings changes contingent consideration obligations result adjustments discount rates accretion liability due passage time changes estimates likelihood timing achieving development commercial milestones changes probability certain clinical events changes assumed probability associated regulatory approval intangible assets intangible assets generally consist licensing rights patents purchased technology acquired iprd intangibles intangible assets definite lives amortized based pattern economic benefit estimated useful lives reviewed periodically impairment intangible assets related iprd projects considered indefinitelived completion abandonment associated research development efforts period assets considered indefinitelived amortized tested impairment testing performed least annually triggering event occurs could indicate potential impairment development complete generally occurs regulatory approval market product obtained associated assets deemed finitelived amortized period best reflects economic benefits provided assets goodwill represents excess purchase price fair value net assets acquired business combination amortized goodwill subject impairment testing least annually triggering event occurs could indicate potential impairment organized operate single reporting unit therefore goodwill impairment test performed using overall market value determined traded share price compared book value net assets impairment longlived assets longlived assets primarily comprised intangible assets property plant equipment evaluate finitelived intangible assets property plant equipment impairment whenever events changes circumstances indicate carrying value asset group assets recoverable circumstances exist recoverability assets held used measured comparison carrying amount asset group future undiscounted net cash flows expected generated asset group assets considered impaired impairment recognized measured amount carrying amount assets exceeds fair value assets addition indefinitelived intangible assets comprised iprd reviewed impairment annually whenever events changes circumstances indicate likely asset impaired comparing fair value carrying value asset second quarter 2017 recognized impairment charge 310 related sbc103 acquired inprocess research development asset due clinical results alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts investments time make strategic investments equity securities certain biotechnology companies acquire connection license option agreements strategic investment portfolio may include equity securities publicly traded companies well investments companies securities publicly traded fair value readily available investments included assets consolidated balance sheets historically recorded investments securities publicly traded cost less impairments beginning january 1 2018 continue record investments cost less impairments however also adjust investment changes resulting observable price change orderly transaction identical similar investments issuer assess relevant transactions occur balance sheet date identify observable price changes regularly monitor investments evaluate whether indication investment impaired based implied value recent company financings public market prices comparable companies general market conditions investments equity securities publicly traded companies unrestricted regularly measured carried fair value classified level 1 equity securities within fair value hierarchy investments publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model classified level 2 equity securities within fair value hierarchy significant assumptions within option pricing valuation model term restrictions stock price volatility based upon historical volatility applicable company similar companies also use constant maturity riskfree interest rate match remaining term restrictions investments contingent liabilities currently involved various claims legal proceedings quarterly basis review status significant matter assess potential financial exposure potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims litigation accruals based best information available time assessment including legal facts circumstances case status proceedings applicable law likelihood settlement periodic basis additional information becomes available based specific events outcome litigation settlement claims offers settlement may reassess potential liability related matters may revise estimates facts circumstances indicate need changes treasury stock treasury stock accounted using cost method purchase price common stock recorded separately deduction stockholders’ equity revenue recognition may 2014 fasb issued comprehensive new standard amends revenue recognition principles adopted new standard january 1 2018 applying modified retrospective method contracts completed date new guidance revenue recognized customer obtains control promised goods services amount reflects consideration expected received exchange goods services revenue recognized fivestep process identify contracts customer ii identify performance obligations contract iii determine transaction price iv allocate transaction price performance obligations contract v recognize revenue performance obligation satisfied company applies fivestep model contracts probable company collect consideration entitled exchange goods services transfers customer contract inception company assesses goods services promised within contract determines performance obligations revenue recognized applicable performance element distinct performance obligation satisfied results reporting periods beginning january 1 2018 presented new guidance prior period amounts adjusted continue reported accounting standards effect prior period upon adoption new revenue recognition standard january 1 2018 reduced deferred revenue balance 104 offsetting increase 60 retained earnings due cumulative impact adopting alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts new standard impact net product sales net income year ended december 31 2018 increase 53 48 respectively new standard also resulted decrease 179 deferred revenue increase 108 retained earnings december 31 2018 adoption new revenue standard material impact balances within consolidated financial statements year ended december 31 2018 adoption new standard significantly change accounting policies nature products principal source revenue product sales contracts customers generally contain single performance obligation recognize revenue product sales satisfied performance obligation transferring control product customers control product generally transfers customer upon delivery certain countries sell distributors consignment basis record revenue control product transfers customer upon sale end user customers primarily comprised distributors pharmacies hospitals hospital buying groups healthcare providers cases may also sell governments government agencies addition sales countries products commercially available also recorded revenue sales patients receiving treatment namedpatient programs relevant authorities institutions countries agreed reimburse product sold namedpatient basis products received final approval commercial sale revenue recognized amount expect entitled exchange sale products amount includes fixed variable consideration excludes amounts collected customers remitted governmental authorities valueadded taxes foreign jurisdictions shipping handling costs associated outbound freight control product transferred customers accounted fulfillment cost included operating expenses cost shipping handling activities including customs clearance activities associated transactions revenue recognized accrued completed respective period end timing recognition revenue product sales receipt payment significant standard credit terms vary based country sale range 30 120 days arrangements payable within one year transfer product assess whether contract significant financing component expectation contract inception period transfer promised good customer receipt payment one year less variable consideration pay distribution fees distributors offer rebates andor discounts enter volumebased reimbursement arrangements certain customers reduce transaction price sales amounts variable amounts estimate amount consideration expect entitled based available historic current forecast information primarily use expected value method estimate variable payments limited circumstances apply likely method based type variable consideration method better predicts amount consideration expect entitled consideration received customer expect need refunded future recorded refund liability customer within accrued expenses actual amounts consideration ultimately received refunded may differ estimates actual results future vary estimates adjust estimates would affect net product sales earnings period variances become known variability transaction price products pursuant contracts customers primarily arises following discounts rebates offer discounts rebates certain distributors customers arrangements many cases amounts fixed time sale transaction price reduced accordingly also provide rebates certain governmental programs including medicaid us programs outside us payable based actual claim data estimate rebates based analysis historical claim patterns estimates customer mix determine sales subject rebates amount rebates update estimates assumptions period record necessary adjustments may impact revenue period adjustment made generally length time product sale processing reporting rebates three six months alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts volumebased arrangements entered volumebased arrangements governments certain countries customers reimbursement limited contractual amount type arrangement amounts billed excess contractual limitation repaid customer rebate estimate incremental discounts resulting contractual limitations based forecasted sales limitation period apply discount percentage product shipments reduction revenue calculations related arrangements require estimation sales limitation period adjustments estimates may material impact period estimates change distribution fees pay distribution fees certain customers connection sales products record distribution fees paid customers reduction revenue unless payment distinct good service customer reasonably estimate fair value goods services received conditions met record consideration paid customer operating expense costs typically known time sale resulting minimal adjustments subsequent period sale product returns contracts customers generally provide returns product damaged defective upon delivery assess sales transactions arrangements customers monitor inventory within sales channels determine whether provision returns warranted resulting adjustment transaction price necessary assessment based historical experience assumptions date sale changes estimates could impact period change occurs factors price products limited number patients short period product sale patient infusion limited contractual return rights customers often carry limited inventory amount variable consideration included transaction price constrained amount probable result significant reversal revenue consider experience similar transactions expectations regarding contract estimating amount variable consideration expect entitled determining whether estimated variable consideration constrained material constraints variable consideration included within transaction price current revenue arrangements see note 19 segment information summary revenue contracts customers product geographical region contract balances receivables contract liabilities relate consideration received andor billed goods delivered customer performance obligation yet completed amounts included within current liabilities consolidated statements operations following table provides information receivables contract liabilities contracts customers alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts research development expenses research development expenses comprised costs incurred performing research development activities including payroll benefits preclinical clinical trial related clinical manufacturing costs manufacturing development scaleup costs product development regulatory costs contract services outside contractor costs research license fees depreciation amortization lab facilities lab supplies costs expensed incurred accrue costs clinical trial activities based upon estimates services received related expenses incurred yet invoiced contract research organizations clinical study sites laboratories consultants clinical trial vendors perform activities sharebased compensation two sharebased compensation plans pursuant awards currently made 2017 incentive plan 2017 plan ii 2015 employee stock purchase plan espp 2017 plan replaced amended restated 2004 incentive plan 2004 plan effective may 10 2017 plan restricted stock restricted stock units stock options stockrelated awards may granted directors officers employees consultants advisors company subsidiary espp eligible employees purchase shares common stock discount semiannually payroll deductions date sharebased compensation issued plans consists incentive nonqualified stock options restricted stock restricted stock units including restricted stock units market nonmarket performance conditions shares issued espp compensation expense sharebased awards recognized based estimated fair value awards grant date compensation expense reflects estimate number awards expected vest primarily recognized straightline basis requisite service period individual grants typically equals vesting period compensation expense awards performance conditions recognized using gradedvesting method estimates employee stock option values rely estimates factors input blackscholes model key factors involve estimate future uncertain events assumptions include use historical volatility determine expected stock price volatility also estimate expected term exercise reduction expense expected forfeitures currently use historical exercise cancellation patterns best estimate future estimated life nonmarket performancebased awards estimate anticipated achievement performance targets including forecasting achievement future financial targets estimates revised periodically based probability achieving performance targets adjustments made throughout performance period necessary use payout simulation models estimate grant date fair value awards marketbased performance conditions payout simulation models assume volatility common stock common stock comparator group companies well correlations returns price common stock common stock prices comparator group purchase price common stock espp equal 850 lower market value per share common stock first business day offering period ii market value per share common stock purchase date fair value discounted purchases made espp calculated using blackscholes model fair value lookback provision plus 150 discount recognized compensation expense 6 month purchase period alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts restructuring related expenses record liabilities associated onetime employee termination benefits exit disposal activities period liability incurred onetime employee benefits incurred communicated employees detailed action plans approved existing benefit arrangements employee termination costs accrued exit disposal cost probable estimable costs onetime termination benefits employee required render service termination order receive benefits recognized ratably service period restructuring related expenses include accelerated depreciation costs impairment charges associated assets impacted restructuring exit activity accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date impacted site closure depreciation expense determined using useful life prior restructuring activities earnings per common share basic earnings per common share eps computed dividing net income weightedaverage number shares common stock outstanding purposes calculating diluted eps denominator reflects potential dilution could occur stock options unvested restricted stock units contracts issue common stock exercised converted common stock using treasury stock method following table summarizes calculation basic diluted eps years ended december 31 2019 2018 2017 exclude eps weightedaverage number securities whose effect antidilutive excluded calculation eps years ended december 31 2019 2018 2017 30 28 40 shares common stock respectively effect antidilutive income taxes utilize asset liability method accounting income taxes method deferred tax assets liabilities determined based difference financial statement carrying amounts tax basis assets liabilities using enacted tax rates effect years temporary differences expected reverse periodically evaluate likelihood realization deferred tax assets reduce carrying amount deferred tax assets valuation allowance likely deferred tax assets realized recognize benefit uncertain tax position taken expect take income tax returns tax position likely sustained tax benefit recognized financial statements particular tax position based largest benefit likely realized amount unrecognized tax benefits adjusted appropriate changes facts circumstances significant amendments existing tax law new regulations interpretations taxing authorities new information obtained tax examination resolution examination also accrue potential interest penalties related unrecognized tax benefits component tax expense fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership corporate alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts structure derives income multiple jurisdictions requires us interpret related tax laws regulations within jurisdictions develop estimates assumptions regarding significant future events amount timing character deductions applicability foreign tax credits time execute intercompany transactions may impact valuation captive foreign partnership corresponding interest allocated partner resulting change deferred taxes transactions related valuations require application transfer pricing guidelines issued relevant taxing authorities significant estimates assumptions within discounted cash flow models also required calculate valuations december 2017 tax cuts jobs act tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes comprehensive income comprehensive income comprised net income comprehensive income loss comprehensive income loss includes changes equity excluded net income changes pension liabilities unrealized gains losses marketable debt securities unrealized gains losses hedge contracts foreign currency translation adjustments changes equity reflected net tax reclassifications certain items prior year’s consolidated financial statements reclassified conform current presentation new accounting pronouncements accounting standards update asu 201613 measurement credit losses financial instruments june 2016 financial accounting standards board fasb issued new standard intended improve reporting requirements specific loans receivables financial instruments new standard requires credit losses financial assets measured amortized cost determined using expected loss model instead current incurred loss model requires credit losses related availableforsale debt securities recorded allowance credit losses limited amount carrying value exceeds fair value new standard also requires enhanced disclosure credit risk associated financial assets standard effective interim annual periods beginning december 15 2019 early adoption permitted adopted new standard january 1 2020 substantially completed assessment standard based composition portfolio financial instruments current forecasted economic conditions january 1 2020 continuing finalize calculations credit losses establish processes internal controls may required comply new credit loss standard related disclosure requirements expect adoption standard significant impact consolidated financial statements asu 201815 customers accounting implementation costs incurred cloud computing arrangement service contract august 2018 fasb issued new standard customers accounting implementation setup upfront costs incurred cloud computing arrangement cca aligns requirements capitalizing implementation costs cca service contract existing internaluse software guidance standard also provides classification guidance implementation costs well additional quantitative qualitative disclosures standard effective interim annual periods beginning december 15 2019 early adoption permitted adopted prospectively retrospectively adopted new standard january 1 2020 prospective basis continuing establish new processes internal controls may required comply new cloud computing standard expect adoption standard significant impact financial statements however adoption standard result increase capitalized assets related qualifying cca implementation costs incurred adoption date asu 201912 “income taxes simplifying accounting income taxes” december 2019 fasb issued new standard intended simplify accounting income taxes eliminating certain exceptions alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts related approach intraperiod tax allocation methodology calculating income taxes interim period recognition deferred tax liabilities outside basis differences new guidance also simplifies aspects accounting franchise taxes enacted changes tax laws rates clarifies accounting transactions result stepup tax basis goodwill standard effective annual periods beginning december 15 2020 interim periods within early adoption permitted adoption standard requires certain changes made prospectively changes made retrospectively currently assessing impact standard financial condition results operations asu 202001 “investments equity securities investments equity method joint ventures derivatives hedging clarifying interactions topic 321 topic 323 topic 815” january 2020 fasb issued new standard intended clarify interactions asc 321 asc 323 asc 815 new standard addresses accounting transition equity method measurement certain purchased options forward contracts acquire investments standard effective annual interim periods beginning december 15 2020 early adoption permitted adoption standard requires changes made prospectively currently assessing impact standard financial condition results operations recently adopted accounting pronouncements asu 201602 “leases” february 2016 fasb issued new standard requires lessees recognize leases onbalance sheet disclose key information leasing arrangements new standard establishes right use rou model requires lessee recognize rou asset lease liability balance sheet leases term longer 12 months leases classified financing operating classification affecting pattern classification expense recognition statement operations adopted new standard january 1 2019 using modified retrospective approach elected apply transition method allows companies continue applying guidance lease standard effect time comparative periods presented consolidated financial statements recognize cumulativeeffect adjustment opening balance retained earnings date adoption also elected “package practical expedients” permits us reassess new standard prior conclusions lease identification lease classification initial direct costs results reporting periods beginning january 1 2019 presented new standard prior period amounts adjusted continue reported accounting standards effect prior period upon adoption new lease standard january 1 2019 derecognized 4728 property plant equipment assets 3722 facility lease obligations associated previously existing buildtosuit arrangements capitalized rou assets 3261 inclusive opening adjustments 708 primarily related prepaid rent existing transition 2553 lease liabilities within consolidated balance sheets upon adoption transition recorded decrease 903 retained earnings net tax primarily related derecognition previously recorded buildtosuit arrangements asu 201802 reclassification certain tax effects accumulated comprehensive income february 2018 fasb issued new standard permits entities make onetime reclassification accumulated comprehensive income aoci retained earnings stranded tax effects resulting newly enacted corporate tax rates tax cuts jobs act tax act effective year ended december 31 2017 adopted new standard january 1 2019 elected reclassify income tax effects tax act aoci retained earnings continue release disproportionate income tax effects aoci based aggregate portfolio approach adoption standard impact consolidated financial statements 2 acquisitions wilson therapeutics ab may 25 2018 completed acquisition wilson therapeutics ab publ biopharmaceutical company based stockholm sweden wilson therapeutics developed novel therapy patients rare coppermediated disorders pursuant recommended public cash offer sek 232 share stock wilson therapeutics result acquisition added wtx101 alxn1840 highly innovative drug candidate currently phase iii clinical trials treatment patients wilson disease clinical pipeline alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts acquisition wilson therapeutics accounted asset acquisition substantially fair value gross assets acquired concentrated single asset wtx101 following table summarizes total consideration acquisition value assets acquired liabilities assumed acquired inprocess research development asset relates wtx101 due stage development asset date acquisition significant risk remained yet probable future economic benefit asset absent successful clinical results regulatory approval asset alternative future use associated wtx101 accordingly value asset expensed second quarter 2018 employee related liabilities include value outstanding employee equity incentive awards accelerated connection wilson therapeutics acquisition settled cash also included amount employer tax obligations associated employee equity incentive awards connection rights wtx101 previously acquired wilson therapeutics third parties could required pay approximately 190 certain development regulatory commercial milestones met time well royalties commercial sales syntimmune inc september 2018 entered definitive agreement acquire syntimmune inc syntimmune clinicalstage biotechnology company developing antibody therapy targeting fcrn syntimmune’s lead candidate synt001 alxn1830 monoclonal antibody designed inhibit interaction fcrn immunoglobulin g igg immune complexes studied treatment iggmediated autoimmune diseases acquisition syntimmune closed november 2018 terms acquisition agreement alexion acquired syntimmune upfront cash payment 4000 potential additional milestonedependent payments 8000 total potential value 12000 acquisition syntimmune accounted asset acquisition substantially fair value gross assets acquired concentrated single inprocess research development asset synt001 connection agreement final working capital adjustment syntimmune acquisition recognized benefit 41 associated previously acquired inprocess research development second quarter 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts following table summarizes total consideration acquisition value assets acquired liabilities assumed acquired inprocess research development asset relates synt001 due stage development asset date acquisition significant risk remained yet probable future economic benefit asset absent successful clinical results regulatory approval asset alternative future use associated synt001 accordingly value asset expensed fourth quarter 2018 achillion pharmaceuticals inc october 2019 alexion entered definitive agreement acquire achillion pharmaceuticals inc achillion clinicalstage biopharmaceutical company focused development oral factor inhibitors achillion developing oral small molecule factor inhibitors treat people complement alternative pathwaymediated rare diseases pnh c3 glomerulopathy c3g company currently two clinical stage medicines development including danicopan ach4471 ach5228 acquisition achillion closed january 28 2020 terms agreement acquired outstanding common stock achillion 630 per share approximately 9260 inclusive settlement achillion’s outstanding equity awards acquisition funded cash hand transaction includes potential additional consideration form nontradeable contingent value rights cvrs paid achillion shareholders certain clinical regulatory milestones achieved within specified periods include 100 per share us fda approval danicopan 100 per share initiation phase 3 ach5228 anticipate accounting transaction business combination currently evaluating purchase price allocation due proximity completion acquisition filing form 10k practicable provide preliminary purchase price allocation fair value assets purchased liabilities assumed transaction company expects finalize valuation complete preliminary purchase price allocation first quarter 2020 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts 3 property plant equipment net summary property plant equipment follows january 1 2019 adopted new lease accounting standard results reporting periods beginning january 1 2019 presented new standard prior period amounts adjusted continue reported accounting standards effect prior period upon adoption new lease standard january 1 2019 derecognized 4728 property plant equipment assets associated previously existing buildtosuit arrangements see note 1 business overview summary significant accounting policies overview impact standard property plant equipment balances upon adoption financing lease right use assets recorded result new standard included property plant equipment consolidated balance sheet december 31 2019 depreciation amortization property plant equipment approximately 568 779 958 recorded within consolidated statement operations years ended december 31 2019 2018 2017 respectively included within amount years ended december 31 2018 2017 charges related 2017 restructuring activities see note 18 restructuring related expenses additional information december 31 2019 2018 computer software costs included property plant equipment 534 503 respectively depreciation amortization expense capitalized computer software costs 153 174 160 years ended december 31 2019 2018 2017 respectively 4 intangible assets goodwill following table summarizes carrying amount intangible assets goodwill net accumulated amortization 2019 2018 capitalized 180 80 respectively related regulatory approval commercial milestones related inlicensing arrangements third quarter 2019 us patent term extension composition matter patent strensiq granted resulted increase estimated useful life strensiq intangible asset result lower amortization expense future periods alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts amortization expense 3150 3211 3202 years ended december 31 2019 2018 2017 respectively assuming changes gross cost basis intangible assets total estimated amortization expense finitelived intangible assets approximately 2980 years ending december 31 2020 december 31 2024 december 31 2019 net book value purchased technology includes 29924 associated kanuma intangible asset acquired acquisition synageva biopharma corp part standard quarterly procedures reviewed kanuma asset december 31 2019 determined indicators impairment cash flow models used assessments based commercial experience date kanuma require use significant estimates include limited longrange pricing expectations patientrelated assumptions including patient identification conversion retention rates continue review related valuation accounting asset new information becomes available us 5 marketable securities amortized cost gross unrealized holding gains gross unrealized holding losses fair value availableforsale debt securities type security december 31 2019 december 31 2018 follows aggregate fair value availableforsale debt securities unrealized loss position december 31 2019 december 31 2018 215 1287 respectively investments continuous unrealized loss position twelve months december 31 2019 december 31 2018 december 31 2019 believe cost basis availableforsale debt securities recoverable fair values availableforsale debt securities classification consolidated balance sheet follows alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts fair values availableforsale debt securities december 31 2019 contractual maturity summarized follows sponsor nonqualified deferred compensation plan allows certain highlycompensated employees elect defer income future periods participants plan earn return deferrals based several investment options mirror returns underlying mutual fund investments choose invest underlying mutual fund investments offset liability associated nonqualified deferred compensation plan mutual fund investments valued net asset value per share carried fair value gains losses included investment income changes underlying liability employee recorded operating expenses december 31 2019 december 31 2018 fair value investments 231 165 respectively utilize specific identification method computing realized gains losses realized gains losses marketable securities material years ended december 31 2019 2018 2017 6 derivative instruments hedging activities operate internationally normal course business exposed fluctuations foreign currency exchange rates exposures result portions revenues well related receivables expenses denominated currencies us dollar primarily euro japanese yen also exposed fluctuations interest rates outstanding borrowings revolving credit facility term loan facility manage exposures within specified guidelines use derivatives derivative instruments utilized risk management purposes use derivatives speculative trading purposes enter foreign exchange forward contracts durations 60 months hedge exposures resulting portions forecasted revenues including intercompany revenues certain forecasted expenses denominated currencies us dollar purpose hedges reduce volatility exchange rate fluctuations operating results hedges designated cash flow hedges upon contract inception december 31 2019 open revenue related foreign exchange forward contracts notional amounts totaling 10899 qualified hedge accounting current contract maturities june 2021 december 31 2019 open expense related foreign exchange forward contracts notional amounts totaling 140 qualified hedge accounting contract maturities september 2022 achieve desired mix floating fixed interest rates term loan enter interest rate swap agreements qualify designated cash flow hedges contracts convert floating interest rate portion debt fixed rate plus borrowing spread following table summarizes total interest rate swap contracts executed december 31 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts amount gains losses recognized consolidated statements operations years ended december 31 2019 2018 2017 foreign exchange interest rate swap contracts qualified cash flow hedges follows impact accumulated comprehensive income aoci earnings foreign exchange interest rate swap contracts qualified cash flow hedges years ended december 31 2019 2018 2017 follows assuming change foreign exchange rates market rates december 31 2019 67 gains recognized aoci reclassified revenue next 12 months assuming change liborbased interest rates market rates december 31 2019 195 losses recognized aoci reclassified interest expense next 12 months amounts recognized aoci expense related foreign exchange forward contracts immaterial december 31 2019 enter foreign exchange forward contracts durations 8 months designed limit balance sheet exposure monetary assets liabilities enter hedges reduce impact fluctuating exchange rates operating results hedge accounting applied derivative instruments gains losses hedge transactions designed offset gains losses underlying balance sheet exposures december 31 2019 notional amount foreign exchange contracts hedge accounting applied 19746 recognized loss gain 04 230 147 income expense years ended december 31 2019 2018 2017 respectively associated foreign exchange contracts designated hedging instruments amounts partially offset gains losses monetary assets liabilities alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts following tables summarize fair value outstanding derivatives december 31 2019 2018 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts although offset derivative assets liabilities within consolidated balance sheets international swap derivatives association agreements provide net settlement transactions due counterparty upon early termination agreement due event default termination event following tables summarize potential effect condensed consolidated balance sheets offsetting foreign exchange forward contracts interest rate contracts subject provisions 7 investments include strategic investments equity securities certain biotechnology companies acquired connection license option agreements investments included assets consolidated balance sheets moderna 2014 purchased 375 preferred stock moderna therapeutics inc moderna privately held biotechnology company recorded cost first quarter 2018 moderna announced completion new round financing considered transaction rights new shares issued new round compared rights preferred equity held concluded moderna’s new round financing represented observable price change orderly transaction similar investment concluded based respective rights stock consideration potential liquidity events value preferred stock equivalent value newly issued preferred stock result recognized unrealized gain 1008 investment income first quarter 2018 adjust equity investment moderna fair value date observable price change based per share price modernas new round financing december 6 2018 moderna completed initial public offering ipo shares moderna began trading nasdaq global select market symbol “mrna” part ipo preferred stock converted moderna common stock subject one year lockup period equity investment moderna common stock readily determinable fair value began record investment fair value effects holding period restriction estimated using option pricing valuation model fourth quarter 2018 recognized unrealized loss 564 investment income adjust investment moderna fair value december 31 2018 fair value investment 819 december 31 2018 december 9 2019 sold investment moderna received 1147 net proceeds resulting realized gain 772 initial investment twelve months ended december 31 2019 recognized gain 328 investment income alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts dicerna october 2018 purchased 103 dicerna pharmaceuticals inc dicerna common stock connection agreement entered dicerna publiclytraded biopharmaceutical company equity investment dicerna common stock readily determinable fair value recording investment fair value twelve months ended december 31 2019 2018 recognized unrealized gain 95 unrealized loss 14 respectively investment income adjust equity investment dicerna fair value fair value investment 184 89 december 31 2019 2018 respectively caelum january 2019 purchased 410 preferred stock caelum biosciences caelum privatelyheld biotechnology company 161 option acquire remaining equity caelum based phase ii data connection agreement entered caelum following discussions fda caelum changed design clinical development program plans initiate expanded phase iiiii trials second quarter 2020 december 2019 amended terms agreement respect option acquire remaining equity caelum based data expanded phase iiiii trials accounted amendment exchange transaction terms modified option determined substantially different terms original option conjunction amendment recognized gain 320 income expense reflects increase fair value option less 200 incremental upfront funding 41 associated change fair value contingent payments also modified part amendment see note 11 commitments contingencies additional information agreement equity investment caelum option acquire remaining equity caelum readily determinable fair value adjust carrying value assets impairment subsequent changes resulting observable price change orderly transaction identical similar equity securities issuer observable price changes associated assets twelve months ended december 31 2019 carrying value investment option 410 640 respectively impaired december 31 2019 zealand march 2019 purchased 138 zealand pharma zealand common stock connection agreement entered zealand publiclytraded biopharmaceutical company based copenhagen denmark see note 11 commitments contingencies additional information agreement equity investment zealand common stock readily determinable fair value recording investment fair value twelve months ended december 31 2019 recognized unrealized gain 147 investment income adjust equity investment zealand fair value december 31 2019 fair value investment 285 december 31 2019 eidos september 2019 purchased 199 eidos therapeutics inc eidos common stock connection agreement entered eidos publiclytraded biopharmaceutical company subsidiary bridgebio pharma inc see note 11 commitments contingencies additional information agreement equity investment eidos common stock readily determinable fair value recording investment fair value effects one year holding period restriction estimated using option pricing valuation model twelve months ended december 31 2019 recognized unrealized gain 79 investment income adjust equity investment eidos fair value december 31 2019 fair value investment 278 december 31 2019 stealth october 2019 purchased 96 stealth biotherapeutics corp stealth common stock connection agreement entered stealth publicly traded clinicalstage biotechnology company see note 11 commitments contingencies additional information agreement equity investment stealth common stock readily determinable fair value recording investment fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts fourth quarter 2019 recognized unrealized loss 52 investment income adjust equity investment stealth fair value december 31 2019 fair value investment 44 december 31 2019 8 accounts payable accrued expenses accounts payable accrued expenses consist following 9 debt june 7 2018 entered amended restated credit agreement credit agreement bank america na administrative agent credit agreement amended restated credit agreement dated june 22 2015 prior credit agreement credit agreement provides 10000 revolving credit facility 26125 term loan facility revolving credit facility term loan facility mature june 7 2023 beginning quarter ending june 30 2019 required make payments 500 original principal amount term loan facility annually payable equal quarterly installments loans credit agreement bear interest option either base rate eurodollar rate case plus applicable margin credit agreement applicable margins base rate loans range 025 100 applicable margins eurodollar loans range 125 200 case based consolidated net leverage ratio calculated accordance credit agreement december 31 2019 interest rate outstanding loans credit agreement 305 obligations credit agreement guaranteed certain alexion pharmaceuticals incs foreign domestic subsidiaries secured liens certain subsidiaries’ equity interests subject certain exceptions terms credit agreement must maintain ratio total net debt ebitda 350 100 subject certain limited adjustments ebitda cash interest expense ratio least 350 100 case calculated accordance credit agreement compliance applicable covenants credit agreement december 31 2019 credit agreement contains certain representations warranties affirmative negative covenants events default negative covenants credit agreement restrict alexion’s subsidiaries’ ability subject certain baskets exceptions among things incur liens indebtedness make investments enter mergers fundamental changes make dispositions pay dividends restriction dividend payments includes exception permits us pay dividends make restricted payments regardless dollar amount long giving pro forma effect thereto consolidated net leverage ratio defined credit agreement within predefined ranges subject certain increases following designated material acquisitions connection entering credit agreement prior credit agreement paid aggregate 531 financing costs 2018 financing costs amortized interest expense life debt amortization expense associated deferred financing costs years ended december 31 2019 2018 2017 50 80 92 respectively remaining unamortized deferred financing costs december 31 2019 december 31 2018 158 208 respectively made principal payments 980 term loan 2019 december 31 2019 25145 outstanding term loan january 2019 paid outstanding balance revolving credit facility alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts 2500 full used refinance amounts outstanding prior credit agreement outstanding borrowings revolving credit facility december 31 2019 december 31 2019 open letters credit 10 offset availability revolving facility fair value long term debt measured using level 2 inputs fair value hierarchy approximates book value contractual maturities longterm debt obligations due subsequent december 31 2019 follows 10 leases following table summarizes lease assets liabilities december 31 2019 following table summarizes lease related costs twelve months ended december 31 2019 amounts include 156 lease costs associated cmo embedded lease arrangement twelve months ended december 31 2019 capitalized part cost product manufactured site alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts following table summarizes supplemental cash flow information twelve months ended december 31 2019 following tables summarize maturities lease liabilities reconciliation lease liabilities december 31 2019 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts comparable purposes aggregate future minimum noncancellable commitments leases december 31 2018 follows excluded table commitments lonza group ag affiliates lonza third party manufacturer produces portion commercial clinical quantities commercial products product candidates third quarter 2015 entered agreement lonza whereby lonza constructed facility used manufacture product supply agreement alexion one existing facilities resulting determination cmo arrangement contained lease agreement requires us make certain payments construction manufacturing facility annual payments ten years thereafter arrangement contains lease nonlease component related supply product consideration paid lonza allocated components december 31 2018 various manufacturing licensing agreements lonza remaining total noncancellable future commitments approximately 10846 amount included 887 undiscounted fixed payments applicable cmo embedded lease arrangement lonza based relative standalone price lease nonlease components arrangement time 11 commitments contingencies asset acquisition inlicense agreements entered asset purchase agreements license agreements option arrangements order advance obtain technologies services related business agreements generally require us pay initial fee certain agreements call future payments upon attainment agreed upon development regulatory andor commercial milestones agreements may also require minimum royalty payments based sales products developed applicable technologies january 2019 entered agreement caelum biotechnology company developing cael101 light chain al amyloidosis terms agreement acquired minority equity interest preferred stock caelum exclusive option acquire remaining equity caelum based phase ii data prenegotiated economics paid 300 first quarter 2019 agreed pay additional 300 contingent development milestones prior exercise option acquire remaining equity caelum contingent payments meet definition derivative liability initially recorded fair value 271 allocated total consideration 571 inclusive fair value contingent payments equity investment caelum option acquire remaining equity caelum based relative fair values assets following discussions fda caelum changed design clinical development program plans initiate expanded phase iiiii trials second quarter 2020 december 2019 amended terms agreement caelum modify option acquire remaining equity caelum based data expanded phase iiiii trials amendment also modified developmentrelated milestone events associated initial 300 contingent payments provided additional 200 upfront funding accrued december 31 2019 well funding 600 exchange additional equity interest fair value upon achievement specific developmentrelated milestone event agreement caelum also provides additional payments event alexion exercises purchase option 5000 includes upfront option exercise payment potential regulatory commercial milestone payments march 2019 entered agreement zealand provides us exclusive worldwide licenses well development commercial rights subcutaneously delivered preclinical peptide therapies directed four complement pathway targets pursuant agreement zealand lead joint discovery research efforts preclinical stage alexion lead development efforts beginning investigational new drug filing phase studies addition agreement made equity investment zealand see note 7 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts investments terms agreement made upfront payment 400 exclusive license lead target equity investment well preclinical research services performed zealand relation lead target market value equity investment 138 date acquisition recorded assets consolidated balance sheets also recognized prepaid research development expense 50 within consolidated balance sheets associated research activities performed zealand due early stage asset licensing recorded upfront license payment 212 research development expense first quarter 2019 december 31 2019 could required pay 6100 lead target upon achievement specified development regulatory commercial milestones well royalties commercial sales addition could required pay additional 1150 development regulatory milestones longacting shortacting product developed respect lead target three subsequent targets selected option fee 150 potential additional development regulatory commercial milestones well royalty payments reduced price lead target march 2019 entered agreement affibody ab affibody alexion obtained exclusive worldwide license well development commercial rights aby039 bivalent antibodymimetic targets fcrn currently phase development agreement affibody subject clearance hartscott rodino antitrust improvements act following receipt approval transaction closed april 2019 pursuant agreement alexion lead clinical development commercial activities aby039 rare immunoglobulin g iggmediated autoimmune diseases affibody option copromote aby039 us lead clinical development aby039 undisclosed indication terms agreement made upfront payment 250 exclusive license aby039 due early stage asset licensing recorded upfront license payment research development expense second quarter 2019 december 31 2019 could also required pay 6250 amounts due upon achievement specific development regulatory commercial milestones well royalties commercial sales september 2019 entered agreement eidos alexion obtained exclusive license develop commercialize ag10 japan ag10 small molecule designed treat root cause transthyretin amyloidosis attr currently phase iii study us europe attr cardiomyopathy attrcm addition made equity investment eidos see note 7 investments terms agreement made upfront payment 500 exclusive license ag10 japan equity investment market value equity investment 199 date acquisition recorded assets consolidated balance sheets due early stage asset licensing recorded upfront license payment 301 research development expense third quarter 2019 december 31 2019 could also required pay 300 upon achievement japanesebased regulatory milestone well royalties commercial sales october 2019 entered option agreement stealth biotherapeutics corp stealth clinicalstage biotechnology company whose lead product candidate elamipretide investigated latestage clinical studies three primary mitochondrial diseases primary mitochondrial myopathy pmm barth syndrome leber’s hereditary optic neuropathy lhon terms agreement made upfront payment 300 equity investment stealth exclusive option partner stealth development subcutaneous elamipretide based final results phase iii study pmm market value equity investment 96 date acquisition recorded assets consolidated balance sheets due early stage asset option license recorded upfront option payment 204 research development expense fourth quarter 2019 december 2019 stealth announced based topline data phase 3 study pmm study meet primary endpoints following review phase 3 data released december 2019 notified stealth exercise codevelopment option agreement october 2018 entered collaboration agreement dicerna provides us exclusive worldwide licenses development commercial rights two preclinical rna interference rnai subcutaneously delivered molecules complementmediated diseases well exclusive option preclinical rnai molecules two additional targets within complement pathway addition collaboration agreement made equity investment dicerna terms agreements made upfront payment 370 exclusive licenses equity investment market value equity investment 103 date acquisition recorded assets consolidated balance sheets due early stage assets licensing recorded upfront license payment 267 research development expense fourth alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts quarter 2018 december 2019 exercised option exclusive rights two additional targets within complement pathway existing agreement dicerna expands alexion’s existing research collaboration license agreement dicerna include total four targets within complement pathway connection option exercise paid dicerna 200 recorded research development expense fourth quarter 2019 december 31 2019 could required pay 6291 amounts due upon achievement specified research development regulatory commercial milestones four licensed targets well royalties commercial sales december 2017 entered collaboration license agreement halozyme therapeutics inc allows us use drugdelivery technology development subcutaneous formulations portfolio products four targets due early stage assets licensing recorded expense upfront payment 400 fourth quarter 2017 addition december 31 2019 could required pay 1600 target developed subject achievement specified development regulatory salesbased milestones well royalties commercial sales connection prior acquisition syntimmune see note 2 acquisitions additional information could required pay 8000 upon achievement specified development regulatory commercial milestones addition december 31 2019 license agreements may required pay additional 540 currently licensed targets certain development regulatory commercial milestones met additional amounts may payable elect acquire licenses additional targets applicable terms agreements asset sale outlicense arrangements connection prior asset sale outlicense arrangements alexion entitled receive contingent payments upon achievement various regulatory commercial milestones events well royalties commercial sales amount contingent consideration related agreements fully constrained therefore recognized december 31 2019 manufacturing agreements various manufacturing development license agreements support clinical commercial product needs rely lonza third party manufacturer produce portion commercial clinical quantities commercial products product candidates various manufacturing license agreements lonza remaining total noncancellable future commitments approximately 10999 amount includes 1000 undiscounted fixed payments applicable cmo embedded lease arrangement lonza terminate certain supply agreements lonza without cause required pay product scheduled manufacture arrangement existing arrangement lonza also pay lonza royalty sales soliris manufactured alexion rhode island manufacturing facility arimf facility prior sale facility payment respect sales soliris manufactured lonza facilities also pay lonza royalty sales ultomiris addition commitments lonza december 31 2019 noncancellable commitments approximately 606 2020 third party manufacturers alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts contingent liabilities currently involved various claims disputes lawsuits investigations administrative proceedings legal proceedings quarterly basis review status significant matter assess potential financial exposure accordance generally accepted accounting principles potential loss claim asserted unasserted legal proceeding considered probable amount reasonably estimated accrue liability estimated loss uncertainties related claims proceedings litigation accruals based best estimates based information available time assessment periodic basis additional information becomes available based specific events outcome litigation court decisions settlement claims offers settlement may reassess potential liability related matters may revise estimates could result material adverse adjustment operating results costs associated involvement legal proceedings expensed incurred outcome proceedings regardless merits inherently uncertain unable prevail proceedings consolidated financial position results operations future cash flows may materially impacted received may future receive notices third parties claiming patents may infringed use development manufacture importation sale products product candidates guidance asc 450 contingencies record royalty accrual based best estimate fair value percent net sales products could required pay owners patents technology used manufacture sale products costly license inability obtain necessary license could material adverse effect financial results may 2015 received subpoena connection investigation enforcement division securities exchange commission sec requesting information related grantmaking activities compliance foreign corrupt practices act fcpa various countries addition october 2015 received request department justice doj voluntary production documents information pertaining alexion’s compliance fcpa sec doj also seek information related alexion’s recalls specific lots soliris related securities disclosures alexion cooperating investigations focused operations various countries including brazil colombia japan russia turkey alexions compliance fcpa applicable laws preliminary discussions begun sec resolve investigation however time alexion unable predict duration scope outcome preliminary discussions sec investigations sec doj assurance current future discussions sec doj resolve matters successful potential settlement terms amount agreed finalized possible loss related matters may incurred given ongoing nature discussions sec investigations sec doj management cannot reasonably estimate potential magnitude loss range loss cost ongoing investigation determination operations activities compliance existing laws regulations could result imposition fines civil criminal penalties equitable remedies including disgorgement injunctive relief andor sanctions us remediation findings could adverse effect business operations alexion committed strengthening compliance program currently enhancing continuing implement comprehensive companywide transformation plan designed enhance business processes structures controls training talent systems across alexion’s global operations previously reported december 29 2016 shareholder filed putative class action company certain former employees us district court district connecticut alleging defendants made misrepresentations omissions soliris april 12 2017 court appointed lead plaintiff july 14 2017 lead plaintiff filed amended putative class action complaint company seven current former employees defendants moved dismiss amended complaint september 12 2017 plaintiffs filed opposition defendants’ motion dismiss november 13 2017 defendants filed reply brief support motion december 28 2017 march 26 2019 court held telephonic status conference court informed counsel preparing ruling granting defendants’ pending motion dismiss court inquired plaintiffs’ counsel whether intended seek leave amend complaint indicated wished file second amended complaint would allowed april 2 2019 court granted plaintiffs may 31 2019 file second amended complaint thereby rendering moot defendants’ pending motion dismiss may 31 2019 plaintiffs filed second amended complaint defendants complaint alleges defendants engaged securities fraud including making misrepresentations alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts omissions public disclosures concerning company’s soliris sales practices management changes related investigations january 30 2014 may 26 2017 companys stock price dropped upon purported disclosure alleged fraud plaintiffs seek recover unspecified monetary relief unspecified equitable injunctive relief interest attorneys’ fees costs defendants’ filed motion dismiss amended complaint august 2 2019 plaintiffs’ filed opposition motion october 2 2019 defendants’ filed reply support motion november 16 2019 given early stage proceedings cannot presently predict likelihood obtaining dismissal case ultimate outcome case motion dismiss denied court estimate possible loss range loss time december 2016 received subpoena us attorneys office district massachusetts requesting documents relating generally support patient services inc psi national organization rare disorders nord 501c3 organizations provide financial assistance medicare patients taking drugs sold alexion’s provision free drug medicare patients alexion compliance policies training materials concerning antikickback statute information donations psi nord 2010 2016 april 2019 entered civil settlement agreement doj office inspector general oig us department health human services resolve matter part settlement agreement alexion paid 131 doj oig require corporate integrity agreement alexion made fundamental organizational changes including hiring new executive leadership team replacing half members board directors effecting significant change workforce may 2017 brazilian authorities seized records data sao paulo brazil offices part investigation conducted alexion’s brazilian operations cooperating inquiry june 2017 received demand inspect certain books records pursuant section 220 general corporation law state delaware behalf purported stockholder among things demand sought determine whether institute derivative lawsuit certain company’s directors officers relation investigation audit finance committee announced november 2016 investigations instituted sec doj us attorney’s office district massachusetts brazilian law enforcement officials described responded demand given early stages matter estimate possible loss range loss cannot made time september 27 2017 hearing panel canadian patented medicine prices review board pmprb issued decision previously pending administrative pricing matter excessively priced soliris manner inconsistent canadian pricing rules guidelines decision pmprb ordered alexion decrease price soliris upper limit based upon pricing certain countries forfeit excess revenues period 2009 2017 amount excess revenues period 2009 2017 determined material amount paid 2018 october 2017 alexion filed application judicial review pmprb’s decision federal court canada may 23 2019 federal court canada dismissed alexions application judicial review consequence affirmed decision pmprb excessively priced soliris june 21 2019 alexion filed notice appeal federal court canadas ruling october 17 2019 alexion filed memorandum fact law support appeal december 3 2019 attorney general canada filed memorandum fact law support federal court canada’s dismissal alexion’s appeal pmprb’s decision december 19 2019 intervenor minister health province british columbia filed separate memorandum fact law support federal court canada’s decision pursuant order made federal court canada february 4 2020 placed approximately 434 escrow secure obligations pending final resolution appeals matter amount reflects difference list price soliris price determined pmprb nonexcessive sales soliris canada period beginning september 2017 december 31 2019 addition quarterly basis appeals process concluded alexion required place amounts escrow vial soliris sold applicable quarter equal list price soliris price determined pmprb nonexcessive revenues canada recognized year ended december 31 2019 reduced 298 current best estimate liability december 31 2019 lose appeal matter amount ultimate liability however may greater estimate appeal process matter concluded chugai pharmaceutical co ltd filed three lawsuits alexion first filed november 2018 united states district court district delaware alexion pharmaceuticals inc alleging ultomiris alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts infringes one us patent held chugai pharmaceutical co ltd upon issuance new us patent november 12 2019 chugai filed second lawsuit united states alleging ultomiris infringes new patent parties agreed consolidate november 2018 november 2019 lawsuits chugai filed lawsuit december 2018 tokyo district court alexion pharma gk whollyowned subsidiary alexion japan alleges ultomiris infringes two japanese patents held chugai pharmaceutical co ltd chugai’s complaints seek unspecified damages certain injunctive relief cases alexion denied charges countered patents neither valid infringed trial date us case set june 2021 case still briefing stage japan given early stages litigations estimate possible loss range loss cannot made time february 28 2019 amgen inc amgen petitioned us patent trademark office pto institute inter partes review ipr three patents owned alexion relate soliris us patent nos 9725504 9718880 9732149 case amgen alleges patented subject matter anticipated andor obvious view prior art patent claims therefore invalid august 30 2019 pto instituted iprs three patents expect pto review written submissions parties hold oral argument issue decisions three iprs august 30 2020 time cannot determine decision pto make connection ongoing matter august 2019 brazilian federal revenue service provided notice tax description facts “tax assessment” two alexion subsidiaries brazil subsidiaries well two additional entities logistics provider utilized alexion distributor tax assessment focuses importation soliris vials pursuant alexion’s free drug supply patients program referred global access medicines gatm brazil september 2019 brazil subsidiaries filed defenses tax assessment disputing basis liability tax assessment based among others following connection operation gatm period september 2014 june 2019 importers responsible importation gatm soliris vials brazil correctly identified ii correct customs value utilized purpose importing gatm soliris vials provided patients free charge three separate levels administrative appeals within brazilian federal administrative proceeding system outcome administrative appeals unfavorable final decision federal administrative proceeding system disputed federal court systems brazil time alexion intends appeal tax assessment overturned course administrative appeals given early stage proceedings alexion unable predict duration scope outcome matter expect final resolution take three years possible loss related tax assessment may incurred given ongoing nature cannot reasonably estimate potential magnitude possible loss range loss cost ongoing administrative appeals potential appeals federal court system tax assessment determination aspects importation free charge medications brazil set forth tax assessment compliance existing laws regulations could result imposition fines civil penalties potentially criminal penalties andor sanctions us could adverse impact brazilian operations 12 income taxes income tax expense based income taxes follows fourth quarter 2013 connection centralization global supply chain technical operations ireland us parent company became direct partner captive foreign partnership income derived foreign jurisdictions classified “nonus income” purposes financial reporting substantially nonus income relates income captive foreign partnership alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts components income tax expense follows continue pay cash taxes us federal various us state foreign jurisdictions utilized tax attributes met applicable limitation attribute utilization effective tax rate provision benefit income taxes differs us federal statutory tax rate reconciliation statutory us federal income tax rate effective income tax rate follows reconciliation statutory us federal income tax rate effective tax rate included benefit foreign earnings amount encapsulates various tax impacts result nonus income result us tax reform substantial portion foreign earnings subject gilti minimum tax effective rate lower us statutory tax rate 210 also subject tax foreign jurisdictions locally substantially current taxes creditable us taxes imposed foreign earnings result effective tax rate foreign earnings lower us statutory rate year ended december 31 2019 benefit foreign earnings includes foreign local tax expense 1932 offset benefit us foreign tax credits 1961 resulting net decrease effective tax rate 01 incurred us tax expense foreign earnings 1876 includes gilti minimum tax us tax foreign earnings reflects benefit 2695 124 primarily related section 250a deduction compared statutory rate benefit foreign earnings also includes certain onetime tax benefits associated intellectual property wilson therapeutics deferred tax benefits include 957and 303 associated alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts tax election made respect intellectual property wilson therapeutics valuation allowance release corresponding recognition net operating losses respectively july 1 2019 wilson therapeutics intellectual property integrated alexion corporate structure resulting income tax expense approximately 102 year ended december 31 2019 company completed intraentity asset transfer certain intellectual property irish subsidiary within captive foreign partnership company recognized deferred tax benefits 22215 represents difference basis intellectual property financial statement purposes basis intellectual property tax purposes applying appropriate enacted statutory tax rates company receive future tax deductions associated amortization intellectual property amortization deducted tax purposes carried forward indefinitely irish tax law offsetting deferred tax expense 18393 recognized reflect reduction future foreign tax credits associated foreign local tax amortization deductions net deferred tax benefits resulted decrease approximately 175 effective tax rate also completed comprehensive analysis prior year estimate related foreignderived intangible income “fdii” based additional guidance provided proposed regulations issued us treasury department 2019 analysis resulted income tax benefit 170 related prior year recorded change estimate income tax expense consolidated statements operations resulting decrease approximately 08 effective tax rate year ended december 31 2018 benefit foreign earnings includes foreign local tax expense 581 substantially offset benefit us foreign tax credits 542 resulting net increase effective tax rate 16 incurred us tax expense foreign earnings 2061 includes gilti minimum tax us tax foreign earnings reflects benefit 1087 448 primarily related section 250a deduction compared us statutory rate also included component benefit 677 adjustments 2018 provisional accounting tax act resulted decrease effective tax rate approximately 280 year ended december 31 2017 benefit foreign earnings includes foreign local tax expense 544 partially offset benefit us foreign tax credits 332 resulting net increase effective tax rate 39 incurred transition tax imposed tax act 1779 us deferred taxes related gilti provisions tax act 1654 tax actrelated adjustments resulted increase effective tax rate approximately 627 additional us tax imposed foreign earnings 1717 reflects benefit 354 65 compared us statutory rate effective tax rate reconciliation includes tax impact acquisitions iprd assets absent successful clinical results regulatory approval alternative use certain acquired iprd assets increase effective tax rate results value assets expensed tax benefit recognized year ended december 31 2018 component effective tax rate includes increase tax expense 2484 related acquired iprd costs acquisitions wilson therapeutics syntimmune increased effective tax rate 697 329 respectively year ended december 31 2018 permanent differences includes tax expense 211 87 related nondeductible compensation 2017 concluded irs examination 2013 2014 tax years conclusion irs examination resulted decrease tax reserves component 2017 effective tax rate approximately 36 tax act december 2017 tax cuts jobs act tax act enacted law tax act decreased us federal corporate tax rate 210 imposed minimum tax foreign earnings related intangible assets gilti onetime transition tax previously unremitted foreign earnings modified taxation income expense items regard gilti minimum tax foreign earnings reduced profit attributable tangible assets deductible allowance 500 subject annual limitations elected account impact minimum tax deferred taxes december 31 2017 tax act resulted increase tax expense effective tax rate 458 84 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts income tax expense increased 1779 325 related transition tax unremitted earnings imposed tax act increase includes foreign income subject us tax 1956 partially offset related benefit foreign tax credits 177 b decrease us federal tax rate resulted decrease deferred tax expense 2924 534 decrease includes 1213 222 benefit remeasuring domestic deferred taxes additional decrease attributable remeasuring deferred taxes foreign earnings 1711 312 c permanent differences includes decrease tax expense 51 09 related remeasurement income taxes payable result changes us federal tax rates tax act enactment gilti minimum tax increased us deferred taxes foreign earnings 1654 302 increase includes deferred tax expense related gilti minimum tax 2369 deferred expense partially offset related decrease deferred expense release reserves uncertain tax positions 715 calculated provisional amounts tax effects tax act could reasonably estimated completed results year ended december 31 2017 fourth quarter 2018 completed analysis provisional estimates concluded follows calculated reasonable estimate onetime transition tax previously unremitted earnings resulted increase us federal tax expense 1779 increase taxes payable net tax credits 280 period ended december 31 2017 initial accounting transition tax complete december 31 2017 uncertainty regarding calculation amounts subject tax completed analysis transition tax related interpretive guidance third quarter 2018 significant measurement period adjustment initial accounting required b calculated reasonable estimate impact gilti minimum tax deferred taxes resulted increase us federal tax expense deferred tax liability 2369 period ended december 31 2017 initial accounting minimum tax incomplete uncertainty regarding calculation temporary differences subject minimum tax completed analyses temporary differences expected timing manner reversal fourth quarter 2018 recorded measurement period adjustments 2018 resulted decrease us federal tax expense 677 c calculated reasonable estimate tax act’s limits deductions employee remuneration including remuneration kind resulted insignificant impact tax expense taxes payable deferred taxes period ended december 31 2017 initial accounting limits incomplete uncertainty regarding value deductionlimited remuneration completed analysis relevant employee remuneration arrangements third quarter 2018 measurement period adjustment initial accounting required calculated reasonable estimate impact tax act us state income taxes resulted increase tax expense taxes payable deferred taxes 29 22 07 respectively period ended december 31 2017 interpreted effect tax acts changes federal law us states system taxation date enactment completed additional analysis effect modifications federal deductions income inclusions us state tax systems fourth quarter 2018 measurement period adjustment initial accounting required e calculated deferred tax liability related foreign captive partnership period ended december 31 2017 consistent calculation periods prior enactment tax act result deferred tax liability recorded december 31 2017 5334 related foreign captive partnership provisional completed additional analysis direct indirect effects tax act fourth quarter 2018 recorded measurement period adjustments 2018 resulted increase us state income tax expense deferred taxes 111 deferred taxes provisions made deferred taxes based differences basis assets liabilities financial statement purposes basis assets liabilities tax purposes using currently alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts enacted tax rates regulations effect differences expected recovered settled components deferred tax assets liabilities follows december 31 2019 tax effected federal state net operating loss carryforwards 125 437 respectively net operating losses expire 2022 2040 also federal state income tax credit carryforwards 2805 673 respectively federal income tax credits expire 2033 2039 whereas 472 state income tax credit carryforwards expire 2020 2034 remaining 201 state income tax credits carried forward indefinitely included year ended december 31 2019 273 connecticut state net operating loss carryforwards 397 connecticut state income tax credit carryforwards change connecticut state tax regime signed law 2019 phases capitalbased component business tax fully phased company subject incomebased taxes state connecticut company anticipates generating tax credits future years exceed amount otherwise utilized result full valuation allowance established carryforward attributes increase net operating losses primarily relates technical operations center ireland received tax benefit year previously accrued unpaid royalties decrease income tax credits attributable utilization orphan drug credits partially offset increase fully valued connecticut state tax credits due change state tax regime continue maintain valuation allowance certain deferred tax assets realization certain increase intangible deferred tax assets relates intraentity asset transfer certain intellectual property irish subsidiary within captive foreign partnership recognized deferred tax benefit represents difference basis intellectual property financial statement purposes basis intellectual property tax purposes transaction also increased investment foreign partnership deferred tax liability due recognition anticipatory foreign tax credits reflect reduction future foreign taxes associated foreign local tax amortization deductions included investment foreign partnership 14082 associated gilti minimum tax alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts unrecognized tax benefits follow authoritative guidance regarding accounting uncertainty income taxes prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosures transition beginning ending amounts unrecognized tax benefits reconciles follows total amount accrued interest penalties significant december 31 2019 total amount tax benefit recorded 2019 2018 2017 related unrecognized tax benefits 46 354 271 respectively unrecognized tax benefits recognized would favorable impact effective tax rate reasonably possible portion unrecognized tax benefits could reverse within next twelve months reversal amounts contingent upon completion field audits taxing authorities several jurisdictions whether tax adjustment proposed nature amount adjustment administrative path resolving proposed adjustment cannot reasonably estimate range potential change tax audits file federal state income tax returns us numerous foreign jurisdictions us foreign jurisdictions statutes limitations ranging 3 6 years however limitation period could extended due tax attribute carryforward position number jurisdictions tax authorities generally ability review income tax returns periods limitation period previously expired subsequently adjust tax attribute values 2017 irs commenced examination us income tax returns 2015 anticipate audit conclude within next twelve months notified significant adjustments proposed irs reasonably possible previously unrecognized tax benefits could recognized upon conclusion irs examination time estimate change unrecognized tax benefits cannot made undistributed earnings recorded tax undistributed earnings controlled foreign corporation cfc subsidiaries extent cfc earnings may repatriated us dividend distribution due limitations imposed law recorded related potential withholding foreign local us state income taxes alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts 13 sharebased compensation 2017 incentive plan 2017 plan approved stockholders may 2017 replaced 2004 plan effective may 10 2017 plan broad based plan provides grant equity awards including restricted stock restricted stock units collectively referred restricted stock incentive nonqualified stock options stockrelated awards directors officers key employees consultants maximum 182 shares addition awards outstanding 2004 incentive plan march 14 2017 subsequently canceled cash settled expired forfeited otherwise terminated without delivery shares subject limitations 2017 plan stock options granted 2017 plan maximum contractual term ten years date grant exercise price less fair value stock grant date generally vest four years restricted stock awards also generally vest four years performancebased restricted stock units threeyear vesting period stock options summary status stock options december 31 2019 changes year ended presented table narrative total intrinsic value stock options exercised years ended december 31 2019 2018 2017 147 275 889 respectively primarily utilize newly issued shares satisfy exercise stock options total fair value options vested years ended december 31 2019 2018 2017 101 272 615 respectively grant stock options years ended december 31 2019 2018 year ended december 31 2017 fair value options date grant estimated using blackscholes model following ranges weighted average assumptions expected stock price volatility rates based historical volatilities common stock riskfree interest rates based us treasury yield curve effect time grant periods corresponding expected life option average expected life represents weighted average period time options granted expected outstanding evaluated three distinct employee groups determining expected life assumptions estimate expected life stock options based historical experience exercises cancellations forfeitures stock options alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts weighted average fair value date grant options granted year ended december 31 2017 4259 restricted stock summary status nonvested restricted stock december 31 2019 changes year ended follows fair value restricted stock date grant based fair market value shares common stock underlying awards date grant weighted average fair value date grant restricted stock awards granted years ended december 31 2019 2018 2017 including restricted stock units performance conditions 13389 11927 12539 per share respectively total fair value restricted stock vested years ended december 31 2019 2018 2017 1613 1817 1570 respectively included table 04 shares granted senior management include marketbased nonmarketbased performance conditions provide recipient right receive restricted stock end three year performance period used payout simulation models estimate grant date fair value awards 14779 expense recognized awards 463 149 years ended december 31 2019 2018 immaterial year ended december 31 2017 employee stock purchase plan 2015 company adopted espp employees purchase shares common stock based percentage compensation subject certain limits purchase price per share equal lower 850 fair market value common stock offering date purchase date six month lookback feature espp 10 shares common stock may issued eligible employees elect participate purchase plan shares issued compensation expense recognized espp years ended december 31 2019 2018 2017 material sharebased compensation expense following table summarizes sharebased compensation expense consolidated statements operations sharebased compensation expense capitalized inventory years ended december 31 2019 2018 2017 129 145 154 respectively alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts december 31 2019 3514 total unrecognized sharebased compensation expense related nonvested sharebased compensation arrangements granted sharebased compensation plans expense expected recognized weightedaverage period 171 years 14 stockholders’ equity share repurchases november 2012 board directors authorized share repurchase program february 2017 board directors increased amount authorized expend future repurchases 1000 repurchase program superseded prior repurchase programs october 22 2019 board directors approved additional share repurchase authorization 1000 repurchase program expiration date obligated acquire particular number shares repurchase program may discontinued time discretion program repurchased 38 07 shares common stock cost 4160 850 years ended december 31 2019 2018 respectively subsequent december 31 2019 repurchased immaterial number shares common stock repurchase program cost 16 february 4 2020 total 10339 remaining repurchases repurchase program 15 comprehensive income accumulated comprehensive income following table summarizes changes aoci component years ended december 31 2019 2018 2017 alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts table provides details regarding significant reclassifications aoci years ended december 31 2019 2018 2017 aoci component included computation net periodic pension benefit cost see note 17 employee benefit plans additional details 16 fair value measurement authoritative guidance establishes valuation hierarchy disclosure inputs valuation used measure fair value hierarchy prioritizes inputs three broad levels follows level 1 inputs quoted prices unadjusted active markets identical assets liabilities level 2 inputs quoted prices similar assets liabilities active markets inputs observable asset liability either directly indirectly market corroboration substantially full term financial instrument level 3 inputs unobservable inputs based assumptions used measure assets liabilities fair value following tables present information assets liabilities measured fair value recurring basis december 31 2019 2018 indicate fair value hierarchy valuation techniques utilized determine fair value alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts securities transferred level 1 2 3 year ended december 31 2019 valuation techniques classify mutual fund investments equity securities valued based quoted market prices active markets valuation adjustment level 1 assets within fair value hierarchy cash equivalents marketable securities classified level 2 within valuation hierarchy include money market funds commercial paper us foreign governmentrelated debt corporate debt securities certificates deposit estimate fair values marketable securities taking consideration valuations obtained thirdparty pricing sources pricing sources utilize industry standard valuation models including income marketbased approaches significant inputs observable either directly indirectly estimate fair value inputs include market pricing based realtime trade data similar securities issuer credit spreads benchmark yields observable inputs validate prices provided thirdparty pricing sources understanding models used obtaining market values pricing sources analyzing pricing data certain instances investments equity securities publicly traded companies subject holding period restrictions carried fair value using option pricing valuation model classified level 2 equity securities within fair value hierarchy significant assumptions within option pricing valuation model term restrictions stock price volatility based upon historical volatility applicable company similar companies also use constant maturity riskfree interest rate match remaining term restrictions investments alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts derivative assets liabilities include foreign exchange interest rate derivatives measured fair value using observable market inputs forward rates interest rates credit risk well evaluation counterparties’ credit risks based inputs derivative assets liabilities classified within level 2 valuation hierarchy contingent consideration liabilities related business acquisitions derivative liabilities associated contingent payments classified level 3 within valuation hierarchy valued based various estimates including probability success discount rates amount time conditions milestone payments met december 31 2019 impact fair value derivative liabilities due credit risk similarly significant adverse impact derivative assets based evaluation counterparties’ credit risks acquisitionrelated contingent consideration connection prior business combinations may required pay future consideration contingent upon achievement specified development regulatory approvals salesbased milestone events determine fair value obligations using various estimates observable market represent level 3 measurement within fair value hierarchy resulting probabilityweighted cash flows discounted using cost debt ranging 39 51 developmental regulatory milestones weighted average cost capital ranging 90 100 salesbased milestones reporting period adjust contingent consideration fair value changes fair value recognized operating earnings changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component contingent consideration related passage time december 31 2019 estimated future contingent milestone payments related prior business combinations range zero milestone events achieved maximum 6020 development regulatory salesbased milestones reached second quarter 2019 salesbased milestone associated acquisition enobia pharma corp achieved connection achievement made 1000 milestone payment third quarter 2019 december 31 2019 fair value acquisitionrelated contingent consideration 1924 following table represents rollforward acquisitionrelated contingent consideration contingent payments january 2019 entered agreement caelum biotechnology company developing cael101 light chain al amyloidosis terms agreement acquired minority equity interest preferred stock caelum exclusive option acquire remaining equity caelum based phase ii data prenegotiated economics paid 300 first quarter 2019 agreed pay additional 300 contingent development milestones prior exercise option acquire remaining equity caelum contingent payments meet definition derivative liability initially recorded fair value 271 based probabilityweighted cash flows discounted using cost debt ranging 33 35 december 2019 following fda feedback resulted redesign expansion caelum’s planned clinical development program cael101 amended terms existing option agreement caelum amendment modified terms option acquire remaining equity caelum based data expanded phase iiiii trials amendment also modified developmentrelated milestone events associated initial 300 contingent payments provided additional 200 upfront funding accrued december 31 2019 well funding 600 exchange additional equity interest fair value upon achievement alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts specific developmentrelated milestone event following amendment 300 contingent payments continues meet definition derivative liability reporting period adjust derivative liability associated contingent payments fair value changes fair value recognized income expense changes fair values reflect new information probability timing meeting conditions milestone payments absence new information changes fair value reflect interest component liability related passage time december 31 2019 fair value contingent payments 240 based probabilityweighted cash flows discounted using cost debt 21 recorded 31 income expense year ended december 31 2019 related change fair value liability including 41 result amendment agreement caelum 17 employee benefit plans deferred compensation plan nonqualified deferred compensation plan allows certain highlycompensated employees make voluntary deferrals 80 base salary incentive bonuses plan designed work conjunction 401k plan provides total combined employer match 6 employee’s eligible earnings irs annual 401k contribution limitations deferred compensation amounts plan december 31 2019 2018 231 165 respectively included liabilities within consolidated balance sheets employer matching contributions plan years ended december 31 2019 2018 2017 material defined contribution plan one qualified 401k plan covering eligible employees plan employees may contribute statutory allowable amount calendar year make matching contributions equal 100 dollar contributed first 6 individual’s base salary incentive cash bonus annual irs maximum years ended december 31 2019 2018 2017 recorded matching contributions approximately 189 141 159 respectively defined benefit plans maintain defined benefit plans employees certain countries outside us including retirement benefit plans required applicable local law plans valued independent actuaries using projected unit credit method liabilities correspond projected benefit obligations discounted net present value calculated based years employment expected salary increases pension adjustments 2018 2017 recorded impacts curtailment related swiss plan result reduction employees due restructuring events discussed note 18 restructuring related expenses following table sets forth funded status amounts recognized defined benefit plans including impacts curtailments alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts company measures fair value plan assets based prices would received sell asset paid transfer liability orderly transaction market participants measurement date plan asset investments classified level 2 within fair value hierarchy valued utilizing observable prices similar instruments quoted prices identical similar instruments markets active plan assets managed independent investment fiduciary primarily invested debt equity securities real estate funds order maximize overall return investment income considering asset allocation limits determined pension law december 31 2019 recorded liability 277 noncurrent liabilities additional minimum liability 92 net tax accumulated comprehensive income following table provides weighted average assumptions used calculate net periodic benefit cost actuarial present value projected benefit obligations discount rates used determine net periodic benefit cost projected benefit obligation represent yield high quality aarated corporate bonds periods match duration benefit obligations expected longterm rate return plan assets represents weighted average expected returns per asset category rate return considers historical estimated future risk free rates return well risk premiums relevant investment categories alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts components net periodic benefit cost follows 2019 service costs recorded operating expenses components net periodic benefit recorded income expense within consolidated statement operations changes plan assets benefit obligations recognized aoci follows estimate pay employer contributions approximately 26 2020 expected future benefits paid respect pension plans december 31 2019 follows 18 restructuring related expenses first quarter 2019 initiated corporate restructuring activities realign international commercial organization reprioritization certain geographical markets implement operational excellence strategic reallocation resources first quarter 2017 initiated companywide restructuring designed help position company sustainable longterm growth believe allow us fulfill mission serving patients families rare diseases september 2017 committed operational plan realign global organization refocused corporate strategy realignment included relocation companys headquarters boston massachusetts reduction companys global workforce restructuring designed result cost alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts savings focusing development portfolio simplifying business structures process across companys global operations closing multiple alexion sites following table summarizes total expenses recorded related restructuring activities type activity locations recognized within consolidated statements operations employee separation costs associated headcount reductions well corporate employees relocating companys headquarters 2018 assetrelated charges consist accelerated depreciation costs asset impairment charges accelerated depreciation costs primarily relates site closures including arimf sold thirdparty 2018 accelerated depreciation costs represent difference depreciation expense recognized revised useful life asset based upon anticipated date site closure depreciation expense determined using useful life prior restructuring activities asset impairment charges primarily related manufacturing assets longer utilized due 2017 restructuring activities costs consist contract termination expenses relocation costs incurred direct result exit plan following table presents reconciliation restructuring reserve recorded within accounts payable accrued expenses companys consolidated balance sheets years ended december 31 2019 2018 restructuring reserve 68 42 recorded accounts payable accrued expenses companys consolidated balance sheet december 31 2019 2018 respectively accrued amounts expected paid next twelve months estimate incurring immaterial amount additional restructuring expenses relating first quarter 2019 action alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts 19 segment information operate single segment focusing serving patients affected rare diseases discovery development commercialization lifechanging therapies consistent operational structure chief operating decision maker manages allocates resources global consolidated level therefore results operations reported consolidated basis purposes segment reporting consistent management reporting disclosures net product sales longlived assets geographic area presented net product sales net product sales product geographic region follows percentages meaningful alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts longlived assets longlived assets consist property plant equipment 20 quarterly financial information unaudited following condensed quarterly financial information years ended december 31 2019 2018 gross profit calculated total revenues less cost sales 1 first quarter 2019 recognized one time tax benefits 957 303 associated tax election made respect intellectual property wilson therapeutics ab release existing valuation allowance respectively see note 12 income taxes additional information 2 fourth quarter 2019 recognized onetime tax benefit 3822 related intraentity asset transfer certain intellectual property within captive foreign partnership see note 12 income taxes additional information 3 included within operating expenses second fourth quarter 2018 recognized 8037 3793 respectively acquired inprocess research development expense related wilson syntimmune acquisitions respectively connection agreement final working capital adjustment syntimmune acquisition recognized benefit 41 associated previously acquired inprocess research development second quarter 2019 see note 2 acquisitions additional information alexion pharmaceuticals inc notes consolidated financial statements years ended december 31 2019 2018 2017 amounts millions except per share amounts 4 recognized tax benefit 565 2018 result tax cuts jobs act 2017 recorded certain impacts tax act provisional basis december 22 2018 accounting impact tax act complete see note 12 income taxes additional informationnan