Nature of Business, Basis of Presentation and New Accounting Standards

9 Months Ended

Sep. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Nature of Business, Basis of Presentation and New Accounting Standards

Celgene Corporation, together with its subsidiaries (collectively “we,” “our,” “us,” “Celgene” or the “Company”), is an integrated global biopharmaceutical company engaged primarily in the discovery, development and commercialization of innovative therapies for the treatment of cancer and inflammatory diseases through next-generation solutions in protein homeostasis, immuno-oncology, epigenetics, immunology and neuro-inflammation. Celgene Corporation was incorporated in the State of Delaware in 1986.

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

Merger Agreement with Bristol-Myers Squibb Company

On January 2, 2019, we entered into a definitive merger agreement with Bristol-Myers Squibb Company (Bristol-Myers Squibb) under which Bristol-Myers Squibb will acquire Celgene in a cash and stock transaction with an equity value of approximately $74 billion, based on the closing price of Bristol-Myers Squibb shares of $52.43 on January 2, 2019 (Bristol-Myers Squibb - Celgene Merger). On April 12, 2019, the stockholders of each of Bristol-Myers Squibb and Celgene approved the Bristol-Myers Squibb - Celgene Merger. On July 29, 2019, Bristol-Myers Squibb announced that the European Commission (EC) has granted unconditional approval of the pending Bristol-Myers Squibb - Celgene Merger. The transaction remains subject to the satisfaction of customary closing conditions and regulatory approvals. Bristol-Myers Squibb and Celgene remain actively engaged in discussions with the U.S. Federal Trade Commission (FTC) on the FTC’s continued regulatory review of the pending Bristol-Myers Squibb - Celgene Merger. We expect the Bristol-Myers Squibb - Celgene Merger to close by the end of 2019.

The definitive merger agreement with Bristol-Myers Squibb includes restrictions on the conduct of our business prior to the completion of the merger or termination of the merger agreement, generally requiring us to conduct our business in the ordinary course consistent with past practice. Without limiting the generality of the foregoing, we are subject to a variety of specified restrictions. Unless we obtain Bristol-Myers Squibb’s prior written consent (which consent may not be unreasonably withheld, conditioned or delayed) and except (i) as required or expressly contemplated by the merger agreement, (ii) as required by applicable law or (iii) as set forth in the confidential disclosure schedule delivered by Celgene to Bristol-Myers Squibb, we may not, among other things, incur additional indebtedness, issue additional shares of our common stock outside of our equity incentive plans, repurchase our common stock, pay dividends, acquire assets, securities or property (subject to certain exceptions, including without limitation, acquisitions up to a specified individual amount and an aggregate limitation), dispose of businesses or assets, enter into material contracts or make certain additional capital expenditures.

Based on the closing price of Bristol-Myers Squibb stock of $52.43 on January 2, 2019, the cash and stock consideration to be received by Celgene stockholders at closing is valued at $102.43 per Celgene share and one Contingent Value Right (Bristol-Myers Squibb CVR). The Bristol-Myers Squibb CVR will entitle its holder to receive a one-time potential payment of $9.00 in cash upon U.S. Food and Drug Administration (FDA) approval of all three of ozanimod (by December 31, 2020), liso-cel (JCAR017) (by December 31, 2020) and ide-cel (bb2121) (by March 31, 2021), in each case for a specified indication. When completed, Bristol-Myers Squibb stockholders are expected to own approximately 69% of the combined company, and Celgene stockholders are expected to own approximately 31% of the combined company.

The transaction is not subject to a financing condition. The cash portion will be funded through a combination of cash on hand and proceeds from Bristol-Myers Squibb's debt financing.

On April 17, 2019, in connection with the Bristol-Myers Squibb - Celgene Merger, Bristol-Myers Squibb commenced an exchange offer for any and all outstanding notes issued by us (the “Celgene Notes”) for up to $19,850,000,000 aggregate principal amount of new notes to be issued by Bristol-Myers Squibb and cash. In conjunction with the exchange offer, Bristol-Myers Squibb concurrently solicited consents to adopt certain proposed amendments to each of the indentures governing the Celgene Notes to eliminate substantially all of the restrictive covenants in such indentures. On May 1, 2019, Bristol-Myers Squibb announced that the requisite number of consents had been received in order to adopt the proposed amendments with respect to the Celgene Notes. The amendments will only become operative upon closing of the exchange offers. The closing of the exchange offers is conditioned

upon, among other things, the closing of the Bristol-Myers Squibb - Celgene Merger. The exchange offers are expected to close on or about the closing date for the Bristol-Myers Squibb - Celgene Merger.

In connection with the Bristol-Myers Squibb - Celgene Merger, we have incurred, and will continue to incur, merger-related and integration-related preparation costs. A significant portion of those costs are contingent on the merger closing, such as investment banking fees, legal fees, and other employee related costs. We incurred $34 million and $263 million of such costs during the three- and nine-month periods ended September 30, 2019, respectively, which were recorded as a component of Acquisition/integration related charges and restructuring, net, within the Consolidated Statement of Income. We expect to incur approximately $163 million of professional fees due upon closing of the Bristol-Myers Squibb - Celgene Merger and approximately $205 million of employee-related costs, a portion of which is due upon closing with the remainder subject to satisfaction of a specified service period.

In addition, certain significant provisions of our contractual arrangements will be triggered in connection with the closing of the Bristol-Myers Squibb - Celgene Merger. In particular, we had a collaboration agreement with BeiGene Limited (BeiGene) to develop and commercialize BeiGene's investigational anti-programmed cell death protein-1 (PD-1) inhibitor, tislelizumab (BGB-A317). The terms of such agreement provided for a termination payment in the event Celgene were to terminate the agreement under certain circumstances. In June 2019, we and BeiGene mutually terminated the collaboration agreement with BeiGene regaining full global rights to BGB-A317 and Celgene paying $150 million to BeiGene in connection with the termination. See Note 14 for additional details related to our collaboration arrangement with BeiGene.

In accordance with the terms of our acquisition of Impact Biomedicines, Inc. (Impact) in February 2018, certain not yet achieved regulatory and net sales related contingent consideration payments may be accelerated and payable to the former shareholders of Impact within 45 days upon the closing of the Bristol-Myers Squibb - Celgene Merger. We expect that such accelerated contingent consideration payments would range from $0 to $300 million. See Note 3 for additional details related to our acquisition of Impact.

OTEZLA^® Divestiture

To allow the Bristol-Myers Squibb - Celgene Merger to close on a timely basis in light of concerns raised by the FTC, Bristol-Myers Squibb announced on June 24, 2019, that it is planning to divest OTEZLA^®subject to the closing of the Bristol-Myers Squibb - Celgene Merger. Accordingly, on August 25, 2019, Celgene entered into an agreement with Amgen Inc. (Amgen) under which Amgen would acquire the OTEZLA^® (apremilast) product line and related intellectual property, including any patents that primarily cover apremilast, and other specified assets and liabilities related to the OTEZLA^® (apremilast) product line for $13.4 billion in cash (OTEZLA^® Divestiture). The closing of the OTEZLA^® Divestiture is contingent upon Bristol-Myers Squibb and Celgene entering into a consent decree with the FTC, the closing of the Bristol-Myers Squibb - Celgene Merger, and the satisfaction of other customary closing conditions. See Note 2 for OTEZLA^®net product sales for the three- and nine-month periods ended September 30, 2019 and 2018.

For periods subsequent to the closing of the OTEZLA^® Divestiture, we have entered into a contract manufacturing agreement with Amgen (CMA) to provide OTEZLA^® finished goods to Amgen (CMA Services). The CMA Services are being provided at cost for a period of up to 24 months, with additional extensions available. In addition, we have also entered into a transition services agreement with Amgen (TSA) to provide certain services (TSA Services) subsequent to the closing of the OTEZLA^® Divestiture. The TSA Services primarily include information technology, finance and accounting, human resources, supply chain and other corporate support services. The TSA Services are being provided at cost for a period of up to 24 months, with additional extensions available.

Basis of Presentation

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

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

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

Interim results may not be indicative of the results that may be expected for the full year. In the opinion of management, these unaudited consolidated financial statements include all normal and recurring adjustments considered necessary for a fair presentation of these interim unaudited consolidated financial statements. Certain prior year amounts have been reclassified to conform to the current year's presentation.

Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements included in our 2018 Annual Report on Form 10-K. Such significant accounting policies are applicable for periods prior to the adoption of the following new accounting standards. Effective January 1, 2019, we changed our approach to lease accounting in conjunction with our adoption of Accounting Standards Update No. 2016-02, "Leases" (ASU 2016-02) and subsequent amendments to ASU 2016-02, including Accounting Standards Update No. 2018-11 “Leases: Targeted Improvements” (ASU 2018-11 and, when taken together with ASU 2016-02, the “New Lease Accounting Standard”). As a result of the adoption of the New Lease Accounting Standard, we have updated our lease accounting policies as detailed below. There were no other changes to our significant accounting policies from those disclosed in our 2018 Annual Report on Form 10-K. See Note 16 for additional details related to our adoption of the New Lease Accounting Standard.

Leases: In accordance with the guidance pursuant to the New Lease Accounting Standard, the determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date and includes considerations such as whether there is an identified asset, whether we have the right to obtain substantially all of the economic benefits from use of the identified asset and whether we have the right to direct the use of the identified asset. Leases are included in our Consolidated Balance Sheet as follows:



Asset/Liability	Operating Leases	Finance Leases⁽¹⁾
Right of use (ROU) assets	Other non-current assets	Property, plant and equipment, net
Current lease liabilities	Accrued expenses and other current liabilities	Short-term borrowings and current portion of long-term debt
Non-current lease liabilities	Other non-current liabilities	Long-term debt, net of discount

⁽¹⁾ As of September 30, 2019, Celgene did not have any leases classified as finance leases.

ROU assets represent our right to use an underlying asset for the expected lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and related lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term, including contractually specified annual rent increases. When determinable, we use the rate implicit in the lease to determine the present value of lease payments. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Our leasing portfolio is comprised entirely of operating leases, which we account for at the asset level. Additionally, our lease agreements may include both lease and non-lease components, which we account for as a single lease component when the payments are fixed. Lease expense for operating lease payments is recognized on a straight-line basis over the expected lease term.

We do not recognize ROU assets or related lease liabilities with a lease term of twelve months or less on our Consolidated Balance Sheet. Such lease payments are recorded in our Consolidated Statements of Income in the period in which the obligation for those payments was incurred. All of our leases are with unaffiliated parties.

New accounting standards which have been adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02 and has subsequently issued a number of amendments to ASU 2016-02, including ASU 2018-11, which offers a transition option to entities adopting the New Lease Accounting Standard. Under the transition option, entities can elect to apply the new guidance using a modified retrospective approach at the beginning of the year in which New Lease Accounting Standard is adopted, rather than to the earliest comparative period presented in their financial statements. The New Lease Accounting Standard was effective for us as of January 1, 2019. The New Lease Accounting Standard provides accounting guidance for both lessee and lessor accounting models. Among other things, lessees will recognize on their balance sheet a ROU asset and a lease liability, based on the characterization of the lease as either an operating or finance lease. For income statement purposes, operating leases will result in the recognition of straight-line rent expense, while finance leases will result in a front-loaded expense pattern made up of both interest expense and amortization of the ROU asset.

We have elected to adopt the New Lease Accounting Standard using the modified retrospective method and, therefore, have not recast comparative periods presented in our unaudited consolidated financial statements. We have elected the package of transition practical expedients for our existing leases and therefore we have not reassessed the following: lease classification for existing leases, whether any existing contracts contained leases, if any initial direct costs were incurred and whether existing land easements should be accounted for as leases. As permitted under the New Lease Accounting Standard, we have elected as accounting policy elections to not recognize ROU assets and related lease liabilities for leases with terms of twelve months or less and to not separate lease and non-lease components, and instead account for the non-lease components together with the lease components as a single lease component.

The New Lease Accounting Standard had an impact on our Consolidated Balance Sheets as of January 1, 2019 and September 30, 2019, with the recognition of ROU assets in the amount of $293 million and $255 million, respectively, and the recognition of operating lease liabilities of $323 million and $282 million, respectively. However, the New Lease Accounting Standard did not have any significant impact on our Consolidated Statements of Income for any period. There was no material tax impact of adopting the New Lease Accounting Standard.

Accounting Standards Adopted in 2018

On January 1, 2018, we adopted several new accounting standards, including the following which required cumulative effect adjustments to Retained earnings and Accumulated Other Comprehensive Income (AOCI):


•	ASU 2014-09 "Revenue from Contracts with Customers" (ASU 2014-09);


•	ASU 2016-01 "Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" (ASU 2016-01);


•	ASU 2018-03 "Technical Corrections and Improvements to Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" (ASU 2018-03);


•	ASU 2018-02 "Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" (ASU 2018-02); and


•	ASU 2016-16 "Intra-Entity Transfers of Assets Other Than Inventory" (ASU 2016-16).

Additional information related to the adoption of these accounting standards is disclosed in Note 1 of Notes to Consolidated Financial Statements contained in our 2018 Annual Report on Form 10-K. The following table presents a summary of cumulative effect adjustments to Retained earnings and AOCI due to the adoption of new accounting standards on January 1, 2018 as noted above:



	Retained Earnings Increase / (Decrease)			AOCI (Decrease) / Increase
ASU 2014-09	$	4		$	—
ASU 2016-01	687			(687		)
ASU 2018-03	44			—
ASU 2018-02	(117		)	117
ASU 2016-16	(166		)	—
Net cumulative effect adjustments to Retained earnings and AOCI on January 1, 2018 due to the adoption of new accounting standards	$	452		$	(570	)

New accounting standards which have not yet been adopted

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, "Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments" (ASU 2016-13). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard will be effective for us on January 1, 2020. We do not expect the guidance to have a material impact on our results of operations.

In November 2018, the FASB issued Accounting Standards Update No. 2018-18, “Collaboration Arrangements: Clarifying the Interaction between Topic 808 and Topic 606” (ASU 2018-18). The issuance of ASU 2014-09 raised questions about the interaction between the guidance on collaborative arrangements and revenue recognition. ASU 2018-18 addresses this uncertainty by (1) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASU 2014-09 when the collaboration arrangement participant is a customer, (2) adding unit of account guidance to assess whether the collaboration arrangement or a part of the arrangement is with a customer and (3) precluding a company from presenting transactions with collaboration arrangement participants that are not directly related to sales to third parties together with revenue from contracts with customers. The new standard will be effective for us on January 1, 2020. We do not expect the guidance to have a material impact on our results of operations.

CELGENE CORP /DE/ 10-Q