Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this report. Certain totals may not sum due to rounding.

Executive Summary

Introduction

Biogen Idec is a global biopharmaceutical company focused on discovering, developing, manufacturing and delivering therapies for neurological, autoimmune and hematologic disorders. Our principal marketed products include AVONEX, PLEGRIDY, TECFIDERA, TYSABRI, and FAMPYRA for multiple sclerosis (MS), ALPROLIX for hemophilia B and ELOCTATE for hemophilia A. We also collaborate on the development and commercialization of RITUXAN for the treatment of non-Hodgkin's lymphoma, chronic lymphocytic leukemia and other conditions and share profits and losses for GAZYVA which is approved for the treatment of chronic lymphocytic leukemia.

Our current revenues depend upon continued sales of our principal products. We may be substantially dependent on sales from our principal products for many years, including an increasing reliance on sales of TECFIDERA as we expand into additional markets. In the longer term, our revenue growth will be dependent upon the successful clinical development, regulatory approval and launch of new commercial products, our ability to obtain and maintain patents and other rights related to our marketed products and assets originating from our research and development efforts, and successful execution of external business development opportunities. As part of our ongoing research and development efforts, we have devoted significant resources to conducting clinical studies to advance the development of new pharmaceutical products and to explore the utility of our existing products in treating disorders beyond those currently approved in their labels.

Financial Highlights

The following table is a summary of financial results achieved:

For the Years Ended December 31,% Change
2014 compared to 2013
(In millions, except per share amounts and percentages)20142013 (1)
Total revenues$9,703.3$6,932.240.0%
Income from operations$3,972.4$2,515.557.9%
Net income attributable to Biogen Idec Inc.$2,934.8$1,862.357.6%
Diluted earnings per share attributable to Biogen Idec Inc.$12.37$7.8158.3%
(1)Commencing in the second quarter of 2013, product and total revenues include 100% of net revenues related to TYSABRI as a result of our acquisition of all remaining rights to TYSABRI from Elan and net revenues related to sales of TECFIDERA.

As described below under “Results of Operations,” our income from operations for the year ended December 31, 2014, reflect the following:

•Worldwide AVONEX revenues totaled $3,013.1 million for 2014, representing an increase of 0.3% over 2013.
•Worldwide PLEGRIDY revenues totaled $44.5 million for 2014.
•Worldwide TECFIDERA revenues totaled $2,909.2 million for 2014, representing an increase of 232.1% over 2013.
•Worldwide TYSABRI revenues totaled $1,959.5 million for 2014, representing an increase of 28.4% over 2013.
•Worldwide FAMPYRA revenues totaled $80.2 million for 2014, representing an increase of 8.4% over 2013.
•Worldwide ALPROLIX revenues totaled $76.0 million for 2014.
•Worldwide ELOCTATE revenues totaled $58.4 million for 2014.
•Our share of revenues from unconsolidated joint business totaled $1,195.4 million for 2014, representing an increase of 6.2% from 2013.
•Total cost and expenses increased 29.4% for 2014 compared to 2013. This increase resulted from a 42.8% increase in the amortization of acquired intangible assets, a 36.5% increase in cost of sales, a 31.1% increase in research and development expense and a 30.4% increase in selling, general and administrative expense, partially offset by a 100.0% decrease in collaboration profit sharing and an increase in the gain on fair value remeasurement of contingent consideration compared with the same period in 2013.

The change in amortization of acquired intangible assets was primarily driven by a $60.2 million increase in amortization of acquired and in-licensed rights and patents as we recognized a full year of expense related to our TYSABRI rights in 2014 versus nine months of expense in 2013, total impairment charges of $50.9 million related to one of our out-licensed patents and one of our in-process research and development intangible assets, and higher amortization of our developed technology intangible asset as a result of lower expected lifetime revenues of AVONEX versus the prior year.

The increase in cost of sales was primarily driven by higher unit sales volume, including recent product launches and higher royalty payments due to Elan. The increase in research and development expense was primarily related to an increase in costs incurred in connection with our early stage programs and milestone and upfront payments. Higher selling, general and administrative expense resulted from increased costs incurred in connection with our recent product launches.

We generated $2,942.1 million of net cash flows from operations for 2014, which were primarily driven by earnings offset by an increase in working capital. Cash, cash equivalents and marketable securities totaled approximately $3,316.0 million as of December 31, 2014.

Business Environment

We conduct our business within the biopharmaceutical industry, which is highly competitive. Many of our competitors are working to develop or have commercialized products similar to those we market or are developing. In addition, the commercialization of certain of our own approved MS products and pipeline product candidates may negatively impact future sales of our MS products. Our products may also face increased competitive pressures from the introduction of generic versions, related prodrug derivatives or biosimilars of existing products and other technologies, such as gene therapies.

The Patient Protection and Affordable Care Act (PPACA)

The PPACA included a significant expansion of the Medicaid program, as well as the creation of new state-based health benefit exchanges, or marketplaces, through which individuals and small businesses may purchase health insurance. Premium and cost-sharing credits and subsidies are available to those who qualify based on income. Marketplace plans began to enroll new members in October 2013, and coverage began on January 1, 2014. Although the effects of the legislation are still unclear, PPACA will result in a greater number of individuals with health insurance under Medicaid and the marketplace health plans. The impact on manufacturers, including us, will depend in part on the formulary and benefit design decisions made by insurance sponsors or plans participating in the programs. It is possible that individuals who were previously unable to access insurance may now become insured, thus increasing coverage for our products. This potential increase in coverage, however, may be offset by the added discounts that could be required in these channels as well as the number of patients who over time move from commercial insurance to the health insurance marketplaces. It is also possible that we may need to provide discounts or rebates to such plans in order to maintain favorable formulary access for our products for this patient population, which could have an adverse impact on our sales and results of operations.

During the third quarter of 2014, the Internal Revenue Service issued final regulations related to the Branded Pharmaceutical Drug (BPD) Fee, which had the effect of changing the recognition of the fee for accounting purposes, from the period in which the fee was paid, to the period when the sale occurs. Our products that are subject to the BPD fee include PLEGRIDY, TECFIDERA and TYSABRI, which are recorded in selling, general and administrative expenses, and RITUXAN, which is recorded in unconsolidated joint business. As a result of these final regulations, we recognized an incremental BPD fee of $43.6 million during 2014 for the periods of 2013 and 2014. The final regulations did not change the timing of payments.

Results of Operations

Revenues

Revenues are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Product Revenues:
United States$5,566.7$3,581.0$2,176.855.5%64.5%
Rest of world2,636.71,961.31,989.334.4%(1.4)%
Total product revenues8,203.45,542.34,166.148.0%33.0%
Unconsolidated joint business revenues1,195.41,126.01,137.96.2%(1.0)%
Other revenues304.5263.9212.515.4%24.2%
Total revenues$9,703.3$6,932.2$5,516.540.0%25.7%

Product Revenues

Product revenues are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Multiple Sclerosis (MS):
AVONEX$3,013.1$3,005.5$2,913.10.3%3.2%
PLEGRIDY44.5——****
TECFIDERA2,909.2876.1—232.1%**
TYSABRI1,959.51,526.51,135.928.4%34.4%
FAMPYRA80.274.057.48.4%28.9%
Hemophilia:
ALPROLIX76.0——****
ELOCTATE58.4——****
Other product revenues:
FUMADERM62.560.259.73.8%0.8%
Total product revenues$8,203.4$5,542.3$4,166.148.0%33.0%

Multiple Sclerosis (MS)

AVONEX and PLEGRIDY

Revenues from AVONEX and PLEGRIDY are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
AVONEX:
United States$1,956.7$1,902.4$1,793.72.9%6.1%
Rest of world1,056.41,103.11,119.4(4.2)%(1.5)%
Total AVONEX revenues$3,013.1$3,005.5$2,913.10.3%3.2%
PLEGRIDY (1):
United States$27.8$—$—****
Rest of world16.7——****
Total PLEGRIDY revenues$44.5$—$—****
(1)E.U. sales began in the third quarter of 2014 and in the U.S. in the fourth quarter of 2014.

For 2014 compared to 2013, the increase in U.S. AVONEX revenues was primarily due to price increases, partially offset by a decrease in unit sales volume of 10%, which was attributable in part to patients transitioning to PLEGRIDY and oral MS therapies, including TECFIDERA. For 2013 compared to 2012, the increase in U.S. AVONEX revenues was primarily due to price increases, partially offset by a decrease in unit sales volume of 8%, which were attributable in part to patients transitioning to oral therapies including TECFIDERA.

For 2014 compared to 2013, the decrease in rest of world AVONEX revenues was due to a 7% decrease in unit demand in Europe primarily attributable to patients transitioning to oral therapies including TECFIDERA, partially offset by a 6% increase in unit demand in the Emerging Markets region. Rest of world AVONEX revenue for 2014 compared to 2013 also reflects the negative impact of foreign currency exchange rate changes experienced in 2014, partially offset by gains recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program. For 2013 compared to 2012, the decrease in rest of world AVONEX revenues was primarily due to pricing reductions resulting from austerity measures enacted in some countries, partially offset by increased unit demand primarily in Europe. Rest of world AVONEX revenues for 2013 compared to 2012 also reflects the positive impact of foreign currency exchange rates, partially offset by losses recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program.

TECFIDERA

Revenues from TECFIDERA are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
United States (1)$2,426.6$864.4$—180.7%**
Rest of world (2)482.611.7—****
Total TECFIDERA revenues$2,909.2$876.1$—232.1%**
(1)U.S. sales began in the second quarter of 2013.
(2)Germany sales began in the first quarter of 2014.

For 2014 compared to 2013, the increase in U.S. TECFIDERA revenues was primarily due to increases in unit sales volume.

For 2014 compared to 2013, rest of world TECFIDERA revenues increased as sales in Germany began in the first quarter of 2014. We expect that rest of world TECFIDERA revenue will increase as TECFIDERA becomes commercially available in additional markets in 2015.

TYSABRI

Revenues from TYSABRI are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
United States$1,025.1$814.2$383.125.9%112.5%
Rest of world934.4712.3752.831.2%(5.4)%
Total TYSABRI revenues$1,959.5$1,526.5$1,135.928.4%34.4%

For 2014 compared to 2013, the increase in U.S. TYSABRI revenues was primarily due to price increases and our recognition, starting in April 2013, of 100% of net revenues on TYSABRI in-market sales due to our acquisition of the remaining rights to TYSABRI from Elan, partially offset by a 4% decrease in unit sales volume. For 2013 compared to 2012, the increase in U.S. TYSABRI revenues was primarily due to our acquisition of the remaining rights to TYSABRI from Elan, price increases and a 1% increase in unit sales volume, which includes the impact of patients transitioning to TECFIDERA.

Based on data reported by Elan for 2013 and 2012 and our sales to third party customers, total U.S. TYSABRI in-market sales were $958.3 million and $886.0 million for 2013 and 2012, respectively. For 2014 compared to 2013, the increase in U.S. TYSABRI in-market sales was primarily due to price increases, partially offset by patients transitioning to oral therapies including TECFIDERA. For 2013 compared to 2012, the increase in in-market sales was due to price increases.

For 2014 compared to 2013, the increase in rest of world TYSABRI revenues was primarily due to the recognition of $53.5 million of revenue previously deferred in Italy relating to the pricing agreement with the Italian National Medicines Agency (Agenzia Italiana del Farmaco or AIFA) as discussed below, volume increases in Europe of 10% and in the Emerging Markets region of 18% and a favorable net price in Germany as the mandatory rebate percentage was reduced. Rest of world TYSABRI revenue for 2014 compared to 2013 also reflects the negative impact of foreign currency exchange rate changes experienced in 2014, partially offset by gains recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program. For 2013 compared to 2012, the decrease in rest of world TYSABRI revenues was primarily due to pricing reductions from austerity measures enacted in some countries, a decrease in unit demand primarily in Europe and the net impact of a EUR15.4 million reduction in revenues recorded for a probable settlement of outstanding claims with AIFA relating to sales of TYSABRI in Italy in excess of a reimbursement limit for the periods between February 2009 and January 2011. Rest of world TYSABRI revenues for 2013 compared to 2012 also reflects the positive impact of foreign currency exchange rates, partially offset by losses recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program.

For information relating to our agreement with AIFA relating to sales of TYSABRI in Italy, please read Note 4, Accounts Receivable to our consolidated financial statements included in this report. As described in Note 4 to our consolidated financial statements, in June 2014, AIFA approved a resolution, effective for a 24 month term, setting the price for TYSABRI in Italy. The resolution also eliminated the reimbursement limit from February 2013 onward.

FAMPYRA

Revenues from FAMPYRA are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
United States$—$—$—****
Rest of world80.274.057.48.4%28.9%
Total FAMPYRA revenues$80.2$74.0$57.48.4%28.9%

We have a license from Acorda Therapeutics, Inc. (Acorda) to develop and commercialize FAMPYRA in all markets outside the U.S. For information about our relationship with Acorda, please read Note 20, Collaborative and Other Relationships to our consolidated financial statements included within this report.

For 2014 compared to 2013, the increase in FAMPYRA revenue was primarily due to increased demand, partially offset by the recognition of deferred revenue in the prior year comparative period. For 2013 compared to 2012, the increase in FAMPYRA revenue was due to the recognition of previously deferred revenue and increased demand in Germany and France. FAMPYRA revenue for 2013 includes the recognition of revenues previously deferred in Germany as a result of finalizing a contract that included the final negotiated fixed price, which was higher than the lowest point of the initial range cited by the German pricing authority.

Hemophilia

ALPROLIX

Revenues from ALPROLIX are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
United States (1)$72.1$—$—****
Rest of world (2)3.9——****
Total ALPROLIX revenues$76.0$—$—****
(1)U.S. sales began in the second quarter of 2014.
(2)Japanese sales began in the fourth quarter of 2014.

ELOCTATE

Revenues from ELOCTATE are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
United States (1)$58.4$—$—****
Rest of world———****
Total ELOCTATE revenues$58.4$—$—****
(1)U.S. sales began in the third quarter of 2014.

Other Product Revenues

Other product revenues are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
FUMADERM$62.5$60.2$59.73.8%0.8%

Unconsolidated Joint Business Revenues

We collaborate with Genentech, Inc., a wholly-owned member of the Roche Group, on the development and commercialization of RITUXAN. In addition, in the U.S. we share operating profits and losses relating to GAZYVA with Genentech. The Roche Group and its sub-licensees maintain sole responsibility for the development, manufacturing and commercialization of GAZYVA in the U.S. For additional information related to this collaboration, including information regarding the pre-tax profit sharing formula and its impact on future unconsolidated joint business revenues, please read Note 20, Collaborative and Other Relationships to our consolidated financial statements included within this report.

Revenues from unconsolidated joint business are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Biogen Idec's share of profits in the U.S. for RITUXAN and GAZYVA (1)$1,114.1$1,085.2$1,031.72.7%5.2%
Reimbursement of selling and development expenses in the U.S. for RITUXAN3.02.11.642.9%31.3%
Revenue on sales in the rest of world for RITUXAN78.338.7104.6102.3%(63.0)%
Total unconsolidated joint business revenues$1,195.4$1,126.0$1,137.96.2%(1.0)%

(1) GAZYVA sales began in the fourth quarter of 2013.

Biogen Idec’s Share of Pre-tax Profits in the U.S. for RITUXAN and GAZYVA

The following table provides a summary of amounts comprising our share of pre-tax profits on RITUXAN and GAZYVA in the U.S.:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Product revenues, net$3,556.6$3,425.8$3,131.83.8%9.4%
Cost and expenses771.1615.9543.725.2%13.3%
Pre-tax profits in the U.S. for RITUXAN and GAZYVA$2,785.5$2,809.9$2,588.1(0.9)%8.6%
Biogen Idec's share of pre-tax profits in the U.S. for RITUXAN and GAZYVA$1,114.1$1,085.2$1,031.72.7%5.2%

For 2014 compared to 2013, the increase in U.S. product revenues was primarily due to price increases and an increase in unit sales volume, partially offset by the 2013 recognition of $94.9 million in net revenues resulting from the July 2013 issuance by the Department of Health and Human Services of its final rule on the Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program. The issuance of the final rule by the Department of Health and Human Services did not have an impact on the amount we recorded as revenues from unconsolidated joint business in our consolidated statements of income because, through June 30, 2013, we had been increasing our share of profits in the U.S. to reflect our interpretation of the proposed 340B rule. The final rule was consistent with our prior interpretation. For 2013 compared to 2012, the increase in U.S. product revenues was due to price increases, an increase in unit sales volume and the $94.9 million recognition in net revenues as discussed above.

Collaboration costs and expenses for 2014 compared to 2013 increased primarily due to the recognition of $53.9 million of additional BPD fee expense as well as GAZYVA sales and marketing and research and development expenses. For additional information related to the BPD fee, please read “The Patient Protection and Affordable Care Act (PPACA)” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Upon the first marketing approval of GAZYVA by the FDA, we began recognizing all activity, including sales and marketing and research and development expenses related to the GAZYVA program in unconsolidated joint business within our consolidated statements of income. Prior to its first regulatory approval, we recognized our share of GAZYVA development and commercialization expenses as research and development expense and selling, general and administrative expense, respectively, within our consolidated statements of income.

Collaboration costs and expenses for 2013 compared to 2012 increased primarily due to a higher cost of goods sold resulting from an increased volume in RITUXAN sales, higher associated third party royalties and GAZYVA sales and marketing and research and development expenses.

Revenue on Sales in the Rest of World for RITUXAN

Revenue on sales in the rest of world for RITUXAN consists of our share of pre-tax co-promotion profits on RITUXAN in Canada and royalty revenue on sales outside the U.S. and Canada. For 2014 compared to 2013, revenue on sales in the rest of world for RITUXAN increased primarily due to the prior year recognition of a $41.2 million charge for damages and interest awarded to Hoechst in its arbitration with Genentech. For 2013 compared to 2012 revenue on sales in the rest of world for RITUXAN decreased as a result of a $41.2 million charge for damages and interest awarded to Hoechst, as discussed above, as well as the expirations of royalties on a country-by-country basis.

The royalty period for sales in the rest of world is 11 years from the first commercial sale of such product on a country-by-country basis. The royalty periods for the substantial portion of the royalty-bearing sales in the rest of world markets expired during 2012 and 2013. We expect future revenue on sales of RITUXAN in the rest of world will be limited to our share of pre-tax co-promotion profits in Canada.

Other Revenues

Other revenues are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Royalty revenues$176.7$185.7$168.7(4.8)%10.1%
Corporate partner revenues127.878.243.863.4%78.5%
Total other revenues$304.5$263.9$212.515.4%24.2%

Royalty Revenues

We receive royalties from net sales on products related to patents that we licensed. Our most significant source of royalty revenue has been derived from net worldwide sales of ANGIOMAX, which is licensed to The Medicines Company (TMC). In March 2012, the U.S. Patent and Trademark Office granted the extension of the term of the principal U.S. patent that covers ANGIOMAX to December 15, 2014.

Royalty revenues from the net worldwide sales of ANGIOMAX are recognized in an amount equal to the level of net sales achieved during a calendar year multiplied by the royalty rate in effect for that tier under our agreement with TMC. The royalty rate increases based upon which tier of total net sales are earned in any calendar year. During 2012, we amended our agreement with TMC for the period from January 1, 2013 to December 15, 2014 to modestly increase the royalty rate in effect for all tiers.

For 2014 compared to 2013, royalty revenues decreased due to a decrease in the net worldwide sales of ANGIOMAX subject to royalty payments. For 2013 compared to 2012 the increase in royalty revenues was primarily related to the increase in the royalty rate as well as an increase in the net worldwide sales of ANGIOMAX.

Our royalty revenues from ANGIOMAX ceased as of December 15, 2014 upon patent expiry. We also expect declines in royalty revenues from our out-licensed patents over the next several years due to changes in the competitive landscape related to one of the underlying technologies we licensed. These changes resulted in an asset impairment charge of $34.7 million recorded in the first quarter of 2014 which has been reflected in amortization of acquired intangible assets within our consolidated statement of income. As a result, we estimate that in 2015 we will have a decrease of approximately $130 million in royalty revenues.

Corporate Partner Revenues

Our corporate partner revenues include amounts earned under contract manufacturing agreements, which includes revenues related to our arrangement with Samsung Bioepis, and revenues covering products previously included within our product line that we have sold or exclusively licensed to third parties.

For 2014 compared to 2013, the increase in corporate partner revenue was primarily due to higher contract manufacturing revenue and increased revenue from our biosimilar arrangements, partially offset by lower revenue associated with our Zevalin supply agreement. For 2013 compared to 2012, the increase in corporate partner revenues was primarily due to increased revenue from our biosimilar arrangements and an amendment to our Zevalin supply agreement, which resulted in the delivery of our remaining Zevalin inventory and the recognition of a previously deferred amount. Zevalin is a program we sold in 2007 but have continued to manufacture in accordance with the amendment to our Zevalin supply agreement. As part of the amendment, we committed to one additional Zevalin manufacturing campaign, which was completed in the third quarter of 2014.

For additional information on our relationship with Samsung Bioepis, please read Note 20, Collaborative and Other Relationships to our consolidated financial statements included within this report.

Reserves for Discounts and Allowances

Revenues from product sales are recorded net of applicable allowances for trade term discounts, wholesaler incentives, Medicaid rebates, Veterans Administration (VA) and Public Health Service (PHS) discounts, specialty pharmacy program fees, managed care rebates, product returns, and other governmental rebates or applicable allowances including those associated with the implementation of pricing actions in certain international markets where we operate.

Reserves established for these discounts and allowances are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer). These reserves are based on estimates of the amounts earned or to be claimed on the related sales. Our estimates take into consideration our historical experience, current contractual and statutory requirements, specific known market events and trends, and forecasted customer buying and payment patterns. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which will have an effect on earnings in the period of adjustment. To date, such adjustments have not been significant.

Reserves for discounts, contractual adjustments and returns that reduced gross product revenues are summarized as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Discounts$346.3$235.6$96.247.0%144.9%
Contractual adjustments1,231.6835.0529.547.5%57.7%
Returns52.624.021.9119.2%9.6%
Total allowances$1,630.5$1,094.6$647.649.0%69.0%
Gross product revenues$9,833.9$6,636.9$4,813.748.2%37.9%
Percent of gross product revenues16.6%16.5%13.5%

As a result of our acquisition of all remaining rights to TYSABRI from Elan, we began recognizing reserves for discounts and allowances for U.S. TYSABRI revenue in the second quarter of 2013. Prior periods included reserves for discounts and allowances for rest of world TYSABRI revenue and worldwide AVONEX revenue. In addition, following our commercial product launches, we began recognizing reserves for discounts and allowances related to these products' revenue. Gross product revenues for the first quarter of 2013 and for 2012 include sales of TYSABRI to Elan under our collaboration agreement, which did not have any corresponding reserves for discounts and allowances.

Discounts include trade term discounts and wholesaler incentives. For 2014 compared to 2013, the increase in discounts was primarily driven by our recent product additions. For 2013 compared to 2012, the increase in discounts was primarily driven by the additions of TECFIDERA and U.S. TYSABRI amounts.

Contractual adjustments relate to Medicaid and managed care rebates, VA, PHS discounts, specialty pharmacy program fees and other government rebates or applicable allowances. In addition to the above noted product additions, for 2014 compared to 2013, the increase in contractual adjustments was primarily due to an increase in managed care rebates, U.S. governmental rebates and allowances as a result of price increases and additional managed care contracts. For 2013 compared to 2012, the increase in contractual adjustments was primarily due to the additions of TECFIDERA and U.S. TYSABRI amounts and an increase in U.S. governmental rebates and allowances as a result of price increases.

Product return reserves are established for returns made by wholesalers. In accordance with contractual terms, wholesalers are permitted to return product for reasons such as damaged or expired product. The majority of wholesaler returns are due to product expiration. Reserves for product returns are recorded in the period the related revenue is recognized, resulting in a reduction to product sales. For 2014 compared to 2013, return reserves increased primarily due to our acquisition of all remaining rights to TYSABRI, the start of commercial sales of TECFIDERA and increased return rates for prior year AVONEX shipments. For 2013 compared to 2012, return reserves increased primarily due to our acquisition of all remaining rights to TYSABRI and the FDA approval and start of commercial sales of TECFIDERA.

For additional information related to our reserves, please read Note 5, Reserves for Discounts and Allowances to our consolidated financial statements included within this report.

Cost and Expenses

A summary of total cost and expenses is as follows:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Cost of sales, excluding amortization of acquired intangible assets$1,171.0$857.7$545.536.5%57.2%
Research and development1,893.41,444.11,334.931.1%8.2%
Selling, general and administrative2,232.31,712.11,277.530.4%34.0%
Amortization of acquired intangible assets489.8342.9202.242.8%69.6%
Collaboration profit sharing—85.4317.9(100.0)%(73.1)%
(Gain) loss on fair value remeasurement of contingent consideration(38.9)(0.5)27.2**(102.0)%
Restructuring charges——2.2**(100.0)%
Total cost and expenses$5,747.7$4,441.6$3,707.429.4%19.8%

Cost of Sales, Excluding Amortization of Acquired Intangible Assets (Cost of Sales)

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Product cost of sales$585.7$427.6$365.937.0%16.9%
Royalty cost of sales585.3430.1179.636.1%139.5%
Total cost of sales$1,171.0$857.7$545.536.5%57.2%

For 2014 compared to 2013, the increase in product cost of sales was driven by higher unit sales volume, including recent product launches and our contract and biosimilars manufacturing arrangements. For 2013 compared to 2012, the increase in product cost of sales was driven by higher unit sales volume, our product launch of TECFIDERA in the U.S. and our biosimilars manufacturing arrangement with Samsung Bioepis. In addition, for 2013 compared to 2012, the increase in product cost of sales was driven by an increase in charges related to excess, obsolete, unmarketable or other inventory due in part to the implementation of our plans to supply rest of world markets with TYSABRI manufactured at our Hillerød, Denmark facility, which was approved by the FDA and EMA in July 2013.

Our products are subject to strict quality control and monitoring which we perform throughout the manufacturing process. Periodically, certain batches or units of product may no longer meet quality specifications or may expire. The expiry associated with our inventory is generally between 6 months and 5 years, depending on the product.

Inventory amounts written down related to excess, obsolete, unmarketable, or other inventory totaled $50.6 million, $47.3 million, and $24.8 million for the years ended December 31, 2014, 2013, and 2012, respectively.

For 2014 compared to 2013 as well as for 2013 compared to 2012, the increase in royalty cost of sales was primarily driven by our acquisition of all remaining rights to TYSABRI, partially offset by the expiration of a third party royalty related to AVONEX. As a result of our acquisition of all remaining rights to TYSABRI from Elan, our contingent payments due to Elan are recorded as a component of royalty cost of sales.

Research and Development

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Marketed products$371.0$252.1$128.247.2%96.6%
Late stage programs109.5272.8467.0(59.9)%(41.6)%
Early stage programs246.5130.890.788.5%44.2%
Research and discovery162.897.694.666.8%3.2%
Other research and development costs755.9552.7479.036.8%15.4%
Milestone and upfront payments247.7138.175.479.4%83.2%
Total research and development$1,893.4$1,444.1$1,334.931.1%8.2%

Research and development expense incurred in support of our marketed products includes costs associated with product lifecycle management activities including, if applicable, costs associated with the development of new indications for existing products. Late stage programs are programs in Phase 3 development or in registration stage. Early stage programs are programs in Phase 1 or Phase 2 development. Research and discovery represents costs incurred to support our discovery research and translational science efforts. Other research and development costs consist of indirect costs incurred in support of overall research and development activities and non-specific programs, including activities that benefit multiple programs, such as management costs as well as depreciation and other facility-based expenses. For several of our programs, the research and development activities are part of our collaborative and other relationships. Our costs reflect our share of the total costs incurred.

For 2014 compared to 2013, the increase in research and development expense was primarily related to increase in costs incurred in connection with our early stage programs, upfront and milestone expenses, research and discovery, marketed products and other research and development cost, partially offset by a decrease in costs incurred in connection with our late stage programs. Research and development expense related to our early stage programs increased over the prior year comparative periods primarily due to costs incurred in the advancement of our Anti-LINGO program in MS, our BIIB037 program for Alzheimer’s disease, BAN2401, a program for Alzheimer’s disease related to our collaboration agreement with Eisai and an increase in spending incurred in connection with our development of STX-100 for the treatment of idiopathic pulmonary fibrosis. The increase in spending associated with marketed products is related to ALPROLIX, ELOCTATE and PLEGRIDY, which were recently approved, and costs associated with TYSABRI, which previously were shared with Elan and now are recorded 100% by us upon our acquisition of all remaining rights to TYSABRI from Elan in April 2013. The increase in other research and development costs were related to increased workforce and infrastructure spend in support of core research and development activities.

The decrease in spending associated with our late stage product candidates was driven by approvals of ALPROLIX, ELOCTATE and PLEGRIDY in 2014 and GAZYVA in the fourth quarter of 2013, partially offset by costs incurred in the development of ISIS-SMNRx for the treatment of SMA.

For 2013 compared to 2012, the increase in research and development expense was primarily related to an increase in costs incurred in connection with our marketed products, early stage programs and upfront and milestone payments partially offset by a decrease in costs incurred in connection with our late stage programs. The increase in spending associated with marketed products is related to TECFIDERA and costs associated with TYSABRI, which previously were shared with Elan. Research and development expense related to our early stage programs increased over the prior year primarily due to costs incurred in the advancement of our Anti-LINGO program in MS, our BIIB037 program for Alzheimer’s disease, our anti-TWEAK program for lupus nephritis, and an increase in spending incurred in connection with our development of STX-100 for the treatment of idiopathic pulmonary fibrosis.

The decrease in spending associated with our late stage product candidates was driven by the discontinuation of dexpramipexole, decreased clinical trial activity associated with ELOCTATE and ALPROLIX, which had clinical trials conclude in 2012, and the FDA approval of TECFIDERA in the U.S. during the first quarter of 2013. At the end of December 2012, we learned that a Phase 3 trial investigating dexpramipexole in people with amyotrophic lateral sclerosis (ALS) did not meet its primary endpoint and failed to show efficacy in its key secondary endpoints. Based on these results, we discontinued development of dexpramipexole in ALS.

We intend to continue committing significant resources to targeted research and development opportunities where there is a significant unmet need and where the drug candidate has the potential to be highly differentiated. Specifically, we intend to continue to invest in our MS pipeline and in pursuing additional therapies for autoimmune disorders, neurodegenerative diseases and hematologic conditions.

Milestone and Upfront Payments included in Research and Development Expense

Research and development expense for 2014 includes $139.3 million recorded in connection with our collaboration agreement with Eisai, $25.0 million recorded as milestones in relation to our collaboration agreements with Isis and an aggregate of $60.0 million related to upfront payments made to Sangamo, Google and for other strategic business arrangements. For additional information about these transactions, please read Note 20, Collaborative and Other Relationships to our consolidated financial statements included within this report. Included in total research and development expense in 2013 were charges of $75.0 million related to an upfront payment made to Isis in September 2013 upon entering into a six year research collaboration with Isis under which both companies will perform research and then seek to develop and commercialize antisense or other therapeutics for the treatment of neurological disorders, $36.0 million related to upfront and milestone payments made to Samsung Bioepis in December 2013 upon entering into a development and commercialization agreement and a $10.0 million milestone payment made to Isis related to the selection and advancement of ISIS-DMPKRx to treat mytonic dystrophy (DM1). These payments are classified as research and development expense as the programs they relate to have not achieved regulatory approval. Research and development expense in 2012 included charges totaling $71.0 million related to upfront payments made to Isis in January, June and December 2012 upon entering into three separate agreements for the development of Isis’ antisense investigational drug ISIS-SMNRx for the treatment of SMA, product candidates related to the treatment of DM1, and antisense therapeutics for up to three gene targets, respectively.

Selling, General and Administrative

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Selling, general and administrative$2,232.3$1,712.1$1,277.530.4%34.0%

For 2014 compared to 2013, the increase in selling, general and administrative expenses was primarily driven by costs associated with developing commercial capabilities for our recent product launches along with an increase in sales and marketing activities in support of our MS products. The successful commercialization of new and potential new products requires significant investments, such as sales force build and development, training, marketing, and other related activities. The increase in selling, general, and administrative expense was also driven by an increase in corporate giving and the recognition of $21.9 million of additional BPD fee expense. For additional information related to the BPD fee, please read “The Patient Protection and Affordable Care Act (PPACA)” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

For 2013 compared to 2012, the increase in selling, general and administrative expense was primarily driven by costs associated with developing commercial capabilities for the product launch of TECFIDERA and the potential product launches of ELOCTATE and ALPROLIX, an increase in sales and marketing activities in support of AVONEX and TYSABRI and the $27.2 million charge recognized in relation to exiting our Weston, Massachusetts facility. For additional information related to this charge, please read Note 11, Property, Plant and Equipment to our consolidated financial statements included in this report. The increase in sales and marketing activities in support of TYSABRI were primarily driven by assuming 100% responsibility of activities as a result of our acquisition of all remaining rights to TYSABRI from Elan. In addition, the increase in selling, general, and administrative expense was driven by an increase in share-based compensation expense, partially offset by a reduction in grant and sponsorship activity.

We remain focused on our recent product launches. As discussed above, we continue to invest in commercial capabilities in support of our TECFIDERA program, and we have continued to make investments in the development of commercial capabilities for our hemophilia products.

Amortization of Acquired Intangible Assets

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Amortization of acquired intangible assets$489.8$342.9$202.242.8%69.6%

For 2014 compared to 2013, the change in amortization of acquired intangible assets was primarily driven by a $60.2 million increase in amortization of acquired and in-licensed rights and patents as we recognized a full year of expense related to our TYSABRI rights in 2014 versus nine months of expense in 2013, total impairment charges of $50.9 million related to one of our out-licensed patents and one of our IPR&D intangible assets, and lower expected lifetime revenues of AVONEX as discussed further below. For additional information related to the amortization of acquired intangible assets, please read Note 7, Intangible Assets and Goodwill to our consolidated financial statements included within this report. For 2013 compared to 2012, the change in amortization of acquired intangible assets was primarily driven by our acquisition of all remaining rights to TYSABRI from Elan and an increase in the amount of amortization recorded in relation to our AVONEX intangible asset.

Our amortization expense is based on the economic consumption of the intangible assets. Our most significant intangible assets are related to our AVONEX and TYSABRI products. Annually, during our long-range planning cycle, we perform an analysis of anticipated lifetime revenues of AVONEX and TYSABRI.

Our most recent long range planning cycle was updated in the third quarter of 2014. Our analysis included an increase in the expected future product revenues of TYSABRI, resulting in a decrease in amortization expense as compared to prior quarters. Our analysis also included a decrease in the expected future product revenues of AVONEX, resulting in an increase in amortization expense as compared to prior quarters. The results of our TYSABRI and AVONEX analyses were impacted by changes in the estimated impact of TECFIDERA, as well as other existing and potential oral and alternative MS formulations, including PLEGRIDY, that may compete with TYSABRI and AVONEX. Based upon this more recent analysis, the estimated future amortization for acquired intangible assets is expected to be as follows:

(In millions)As of December 31, 2014
2015$344.3
2016313.2
2017286.3
2018283.7
2019273.6
Total$1,501.1

We monitor events and expectations regarding product performance. If there are any indications that the assumptions underlying our most recent analysis would be different than those utilized within our current estimates, our analysis would be updated and may result in a significant change in the anticipated lifetime revenues of the relevant process. The occurrence of an adverse event could substantially increase the amount of amortization expense associated with our acquired intangible assets as compared to previous periods or our current expectations, which may result in a significant negative impact on our future results of operations.

Impairment of Intangible Assets

We record charges associated with impairments of intangible assets in amortization of intangible assets. The field of developing idiopathic pulmonary fibrosis (IPF) treatments is highly competitive and characterized by rapid technological advances as two of our competitors filed marketing applications during the second quarter of 2014, seeking approval for potentially competitive treatment regimens. There can be no assurance that we will be able to successfully develop STX-100 for the treatment of IPF (STX-100 in IPF). During the second quarter of 2014, we determined that there were indicators that the value of the STX-100 in IPF intangible asset may have become impaired. As a result of our impairment testing, we determined that no impairment was required.

During 2014, we recorded a charge of $34.7 million related to the impairment of one of our out-licensed patents to reflect a change in its estimated fair value, due to a change in the underlying competitive market for that product, which occurred during the first quarter of 2014.

During the third quarter of 2014, we updated the probabilities of success related to the early stage programs acquired through our recent acquisitions. This change in probability of success, combined with a delay in one of the projects, resulted in an impairment loss of $16.2 million.

For additional information, please read Note 7, Intangible Assets and Goodwill to our consolidated financial statements included within this report.

Overall, the value of our acquired IPR&D assets is dependent upon a number of variables, including estimates of future revenues and the effects of competition, the level of anticipated development costs and the probability and timing of successfully advancing a particular research program from a clinical trial phase to the next. We are continually reevaluating our estimates concerning these variables and evaluating industry data regarding the productivity of clinical research and the development process. Changes in our estimates of items may result in a significant change to our valuation of these assets.

Collaboration Profit Sharing

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Collaboration profit sharing$—$85.4$317.9(100.0)%(73.1)%

Upon the closing of our acquisition of all remaining rights to TYSABRI, our collaboration agreement was terminated, and we no longer record collaboration profit sharing. Collaboration profit sharing previously included the portion of rest of world net operating profits to be shared with Elan under the terms of our collaboration agreement for the development, manufacture and commercialization of TYSABRI. The amount also included the reimbursement for our portion of third-party royalties paid by Elan on behalf of the collaboration relating to rest of world sales. For 2012, our collaboration profit sharing expense included $53.2 million related to the reimbursement of third-party royalty payments made by Elan, which started to expire in 2013. For additional information about this collaboration, please read Note 20, Collaborative and Other Relationships to our consolidated financial statements included in this report.

(Gain) Loss on Fair Value Remeasurement of Contingent Consideration

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
(Gain) loss on fair value remeasurement of contingent consideration$(38.9)$(0.5)$27.2**(102.0)%

The consideration for certain of our business combinations includes future payments that are contingent upon the occurrence of a particular factor or factors. For business combinations completed after January 1, 2009, we record an obligation for such contingent consideration payments at its fair value on the acquisition date. We revalue our contingent consideration obligations each reporting period. Changes in the fair value of our contingent consideration obligations, other than changes due to payments, are recognized as a (gain) loss on fair value remeasurement of contingent consideration within our consolidated statements of income. The increase in the gain for 2014 was primarily due to an adjustment to the value of our contingent consideration liabilities as we updated the probabilities of success related to the early stage programs acquired through our recent acquisitions. For additional information, please read Note 7, Intangible Assets and Goodwill to our consolidated financial statements included within this report.

Gain on Sale of Rights

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Gain on sale of rights$16.8$24.9$46.8(32.7)%(46.8)%

During the third quarter of 2012, we sold all of our rights, including rights to royalties, related to BENLYSTA (belimumab) to a DRI Capital managed fund (DRI). Under the terms of the BENLYSTA sale agreement, we received payments from DRI equal to a multiple of royalties payable by the Human Genome Sciences, Inc. and GlaxoSmithKline plc for the period covering October 2011 to September 2014 and a one-time contingency payment that could be paid to us if the cumulative royalties over the full royalty term exceed an agreed amount.

For 2014 compared to 2013, we recognized lower payments from the sale of our rights to BENLYSTA resulting from a lower multiple of sales being applied in 2014 as compared to 2013. For 2013 compared to 2012, we recognized lower payments from the sale of our rights to BENLYSTA resulting from a lower multiple of sales being applied in 2013 as compared to 2012. As the period under which we would receive royalties expired in September 2014, we will not receive any additional payments under this agreement. For additional information related to this transaction, please read Note 3, Gain on Sale of Rights to our consolidated financial statements included in this report.

Other Income (Expense), Net

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Other income (expense), net$(25.8)$(34.9)$(0.7)(26.2)%**

For 2014 compared to 2013, the change in other income (expense), net was due to lower non-income based state taxes, an increase in interest income due to higher average cash, cash equivalents and marketable securities balances, lower foreign exchange losses and decreased interest expense as we repaid our 6.0% Senior Notes in March 2013, partially offset by lower gains on investments. For 2013 compared to 2012, the change in other income (expense), net was due to a decrease in interest income due to lower average cash, cash equivalent and marketable securities balances primarily related to the use of cash in connection with our acquisition of all remaining rights to TYSABRI from Elan and the repayment of our 6.0% Senior Notes, a decrease in other, net primarily related to higher non-income based state taxes and higher foreign exchange losses. Other income (expense), net in 2012 includes a gain of $9.0 million recognized upon our acquisition of Stromedix in March 2012, which was based on the value derived from the purchase price of our equity interest held in Stromedix prior to the acquisition.

For additional information related to our strategic investments, please read Note 9, Financial Instruments to our consolidated financial statements included in this report.

Income Tax Provision

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Effective tax rate on pre-tax income25.1%24.2%25.4%3.7%(4.7)%
Income tax expense$989.9$601.0$470.664.7%27.7%

Our effective tax rate fluctuates from year to year due to the global nature of our operations. The factors that most significantly impact our effective tax rate include variability in the allocation of our taxable earnings among multiple jurisdictions, changes in tax laws, the amount and characterization of our research and development expenses, the levels of certain deductions and credits, acquisitions, and licensing transactions.

Our effective tax rate for 2014 compared to 2013 increased primarily as a result of the absence of a benefit related to the 2013 change in our uncertain tax position related to our U.S. federal manufacturing deduction and our unconsolidated joint business described below under "Accounting for Uncertainty in Income Taxes", lower current year expenses eligible for the orphan drug credit and a lower relative manufacturing deduction due to unqualified products, partially offset by a higher percentage of our 2014 income being earned outside the U.S.

Our effective tax rate for 2013 compared to 2012 decreased primarily as a result of a change in our uncertain tax position related to our U.S. federal manufacturing deduction and our unconsolidated joint business, described below under "Accounting for Uncertainty in Income Taxes", lower intercompany royalties owed by a foreign wholly owned subsidiary to a U.S. wholly owned subsidiary on the international sales of one of our products, the reinstatement of the federal research and development tax credit and the 2012 correction of an error in our deferred tax accounting, which increased our rate in the prior year. These favorable items were partially offset by higher relative earnings in the U.S. from the commercial launch of TECFIDERA, lower orphan drug credits due to reduced expenditures in eligible clinical trials and higher state taxes.

Accounting for Uncertainty in Income Taxes

During 2013, we received updated technical guidance from the IRS concerning the calculation of our U.S. federal manufacturing deduction and overall tax classification of our unconsolidated joint business for the current and prior year filings. Based on this guidance we reevaluated the level of our unrecognized benefits related to uncertain tax positions and recorded a $49.8 million income tax benefit. This benefit was for a previously unrecognized position and related to years 2005 through 2012. We recorded an offsetting expense of $11.3 million for non-income based state taxes, which was recorded in other income (expense) within our consolidated statements of income.

For more information on our uncertain tax positions and income tax rate reconciliation for 2014, 2013 and 2012, please read Note 17, Income Taxes to our consolidated financial statements included in this report.

Equity in Loss of Investee, Net of Tax

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Equity in loss of investee, net of tax$15.1$17.2$4.5(12.2)%281.2%

In February 2012, we entered into an agreement with Samsung BioLogics Co. Ltd., establishing an entity, Samsung Bioepis, to develop, manufacture and market biosimilar pharmaceuticals. We account for this investment under the equity method of accounting. We recognize our share of the results of operations related to our investment in Samsung Bioepis one quarter in arrears.

For 2014 compared to 2013, the decrease in equity in loss of investee, net of tax was due to the joint venture's clinical trial activity, partially offset by our recognition of a gain as Samsung Bioepis secured additional equity financing from Samsung Biologics from a financing in which we did participate. For 2013 compared to 2012, the increase in equity in loss of investee, net of tax was due to increased clinical trial activity. For additional information related to this transaction, please read Note 20, Collaborative and Other Relationships to our consolidated financial statements included in this report.

Noncontrolling Interest

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Net income attributable to noncontrolling interests, net of tax$6.8$—$—****

For 2014 compared to 2013, the change in net income attributable to noncontrolling interests, net of tax, was related to a $10.0 million milestone payment made to Neurimmune and the consolidation of the research activities of Ataxion. For additional information about these transactions, please read Note 19, Investments in Variable Interest Entities to our consolidated financial statements included within this report.

Market Risk

We conduct business globally. As a result, our operations are subject to certain risks which may affect our results of operations, including volatility in foreign currency exchange rates or weak economic conditions in the foreign markets in which we operate, and pricing pressures worldwide. In addition, our results of operations and the fair value of our asset and liabilities may be impacted by interest rate movements.

Foreign Currency Exchange Risk

Our results of operations are subject to foreign currency exchange rate fluctuations due to the global nature of our operations. We have operations or maintain distribution relationships in the U.S., Europe, Canada, Australia, New Zealand, Japan and Central and South America. In addition, we receive royalty revenues based on worldwide product sales by our licensees and through Genentech on sales of RITUXAN in the rest of world. As a result, our financial position, results of operations and cash flows can be affected by market fluctuations in foreign exchange rates, primarily with respect to the Euro, Canadian dollar, Danish krone, Swiss franc, Japanese yen, Australian dollar and British pound.

While the financial results of our global activities are reported in U.S. dollars, the functional currency for most of our foreign subsidiaries is their respective local currency. Fluctuations in the foreign currency exchange rates of the countries in which we do business will affect our operating results, often in ways that are difficult to predict. In particular, as the U.S. dollar strengthens versus other currencies the value of the non-U.S. revenue will decline when reported in U.S. dollars. The impact to net income as a result of a U.S. dollar strengthening will be partially mitigated by the value of non-U.S. expense which will also decline when reported in U.S. dollars. As the U.S. dollar weakens versus other currencies the value of the non-U.S. revenue and expenses will increase when reported in U.S. dollars.

We have established revenue hedging and balance sheet risk management programs to protect against volatility of future foreign currency cash flows and changes in fair value caused by volatility in foreign exchange rates.

Revenue Hedging Program

Our foreign currency hedging program is designed to mitigate, over time, a portion of the impact resulting from volatility in exchange rate changes on revenues. We use foreign currency forward contracts to manage foreign currency risk with the majority of our forward contracts used to hedge certain forecasted revenue transactions denominated in foreign currencies in the next 15 months. We do not engage in currency speculation. For a more detailed disclosure of our revenue hedging program, please read Note 10, Derivative Instruments to our consolidated financial statements included in this report.

Our ability to mitigate the impact of exchange rate changes on revenues and net income diminishes as significant exchange rate fluctuations are sustained over extended periods of time. In particular, devaluation or significant deterioration of foreign currency exchange rates are difficult to mitigate and likely to negatively impact earnings. The cash flows from these contracts are reported as operating activities in our consolidated statements of cash flows.

Balance Sheet Risk Management Hedging Program

We also use forward contracts to mitigate the foreign currency exposure related to certain balance sheet items. The primary objective of our balance sheet risk management program is to mitigate the exposure of foreign currency denominated net monetary assets of foreign affiliates. In these instances, we principally utilize currency forward contracts. We have not elected hedge accounting for the balance sheet related items. The cash flows from these contracts are reported as operating activities in the consolidated statement of cash flows.

Quantitative and Qualitative Disclosures About Market Risk

The following quantitative information includes the impact of currency movements on forward contracts used in both our revenue and balance sheet hedging programs. As of December 31, 2014 and 2013, a hypothetical adverse 10% movement in foreign currency rates compared to the U.S. dollar across all maturities would result in a hypothetical decrease in the fair value of forward contracts of approximately $160.0 million and $102.0 million, respectively. The estimated fair value change was determined by measuring the impact of the hypothetical exchange rate movement on outstanding forward contracts. Our use of this methodology to quantify the market risk of such instruments is subject to assumptions and actual impact could be significantly different. The quantitative information about market risk is limited because it does not take into account all foreign currency operating transactions.

Interest Rate Risk

Our investment portfolio includes cash equivalents and short-term investments. The fair value of our marketable securities is subject to change as a result of potential changes in market interest rates. The potential change in fair value for interest rate sensitive instruments has been assessed on a hypothetical 100 basis point adverse movement across all maturities. As of December 31, 2014 and 2013, we estimate that such hypothetical adverse 100 basis point movement would result in a hypothetical loss in fair value of approximately $14.5 million and $5.7 million, respectively, to our interest rate sensitive instruments. The fair values of our investments were determined using a combination of pricing and duration models.

Pricing Pressure

Governments in some international markets in which we operate have implemented measures aimed at reducing healthcare costs to constrain the overall level of government expenditures. These implemented measures vary by country and include, among other things, mandatory rebates and discounts, prospective and possible retroactive price reductions and suspensions on pricing increases on pharmaceuticals.

In addition, certain countries set prices by reference to the prices in other countries where our products are marketed. Thus, our inability to secure adequate prices in a particular country may impair our ability to obtain acceptable prices in existing and potential new markets and limit market growth. The continued implementation of pricing actions throughout Europe may also lead to higher levels of parallel trade.

In the U.S., federal and state legislatures, health agencies and third-party payors continue to focus on containing the cost of health care. Legislative and regulatory proposals and enactments to reform health care insurance programs could significantly influence the manner in which our products are prescribed and purchased. It is possible that additional federal health care reform measures will be adopted in the future, which could result in increased pricing pressure and reduced reimbursement for our products and otherwise have an adverse impact on our financial position or results of operations.

There is also significant economic pressure on state budgets that may result in states increasingly seeking to achieve budget savings through mechanisms that limit coverage or payment for our drugs. Managed care organizations are also continuing to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs.

Credit Risk

We are subject to credit risk from our accounts receivable related to our product sales. The majority of our accounts receivable arise from product sales in the U.S. and Europe with concentrations of credit risk limited due to the wide variety of customers and markets using our products, as well as their dispersion across many different geographic areas. Our accounts receivable are primarily due from wholesale distributors, public hospitals and other government entities. We monitor the financial performance and creditworthiness of our large customers so that we can properly assess and respond to changes in their credit profile. We operate in certain countries where weakness in economic conditions has resulted in extended collection periods. We continue to monitor these conditions, including the volatility associated with international economies and the relevant financial markets, and assess their possible impact on our business. Our historical write-offs of accounts receivable have not been significant.

Within the European Union, our accounts receivable in Spain, Italy and Portugal continue to be subject to significant payment delays due to government funding and reimbursement practices. Uncertain credit and economic conditions have generally led to greater collection risk, although these countries have introduced various programs periodically to pay down significantly overdue payables. Please refer to Note 4, Accounts Receivable to our consolidated financial statements included within this report for further details on recent payments and classification.

We believe that our allowance for doubtful accounts was adequate as of December 31, 2014 and 2013, respectively. However, if significant changes occur in the availability of government funding or the reimbursement practices of these or other governments, we may not be able to collect on amounts due to us from customers in such countries and our results of operations could be adversely affected.

Financial Condition, Liquidity and Capital Resources

Our financial condition is summarized as follows:

As of December 31,% Change
(In millions, except percentages)201420132014 compared to 2013
Financial assets:
Cash and cash equivalents$1,204.9$602.6100.0%
Marketable securities — current640.5620.23.3%
Marketable securities — non-current1,470.7625.8135.0%
Total cash, cash equivalents and marketable securities$3,316.0$1,848.579.4%
Borrowings:
Current portion of notes payable$3.1$3.5(10.2)%
Notes payable582.1592.4(1.8)%
Total borrowings$585.2$595.9(1.8)%
Working Capital:
Current assets$4,672.7$3,184.946.7%
Current liabilities(2,219.7)(1,758.3)26.2%
Total working capital$2,453.0$1,426.671.9%

For the year ended December 31, 2014, certain significant cash flows were as follows:

•$1,163.2 million in total payments for income taxes;
•$886.8 million used for share repurchases;
•$375.0 million in contingent payments made to former shareholders of Fumapharm AG and holders of their rights;
•$287.8 million used for purchases of property, plant and equipment; and
•$286.3 million used for upfront and milestone payments in collaborative arrangements.

For the year ended December 31, 2013, certain significant cash flows were as follows:

•$3.25 billion used for our acquisition of all remaining rights to TYSABRI from Elan;
•$643.2 million in total payments for income taxes;
•$450.0 million used for the repayment of principal of our 6.0% Senior Notes;
•$400.3 million used for share repurchases;
•$246.3 million used for purchases of property, plant and equipment; and
•$100.0 million upfront payment made to Isis pursuant to our collaboration agreement dated September 2013.

We have historically financed our operating and capital expenditures primarily through cash flows earned through our operations. We expect to continue funding our current and planned operating requirements principally through our cash flows from operations, as well as our existing cash resources. We believe that our existing funds, when combined with cash generated from operations and our access to additional financing resources, if needed, are sufficient to satisfy our operating, working capital, strategic alliance, milestone payment, capital expenditure and debt service requirements for the foreseeable future. In addition, we may choose to opportunistically return cash to shareholders and pursue other business initiatives, including acquisition and licensing activities. We may, from time to time, also seek additional funding through a combination of new

collaborative agreements, strategic alliances and additional equity and debt financings or from other sources should we identify a significant new opportunity.

The undistributed cumulative foreign earnings of certain of our foreign subsidiaries, exclusive of earnings that would result in little or no net income tax expense under current U.S. tax law or which has already been subject to tax under U.S. tax law, are invested indefinitely outside the U.S.

Of the total cash, cash equivalents and marketable securities at December 31, 2014, approximately $1,755 million was generated in foreign jurisdictions and is primarily intended for use in our foreign operations or in connection with business development transactions outside of the U.S. In managing our day-to-day liquidity in the U.S., we do not rely on the unrepatriated earnings as a source of funds and we have not provided for U.S. federal or state income taxes on these undistributed foreign earnings.

For additional information related to certain risks that could negatively impact our financial position or future results of operations, please read the “Risk Factors” and “Quantitative and Qualitative Disclosures About Market Risk” sections of this report.

Share Repurchase Programs

In February 2011, our Board of Directors authorized the repurchase of up to 20.0 million shares of common stock. This authorization does not have an expiration date. In 2014, approximately 2.9 million shares were repurchased at a cost of $886.8 million. As of December 31, 2014, approximately 1.3 million shares of our common stock remained available for repurchase under the 2011 authorization.

We repurchased approximately 2.0 million shares at a cost of approximately $400.3 million under the 2011 authorization in 2013.

Cash, Cash Equivalents and Marketable Securities

Until required for another use in our business, we typically invest our cash reserves in bank deposits, certificates of deposit, commercial paper, corporate notes, U.S. and foreign government instruments and other interest bearing marketable debt instruments in accordance with our investment policy. It is our policy to mitigate credit risk in our cash reserves and marketable securities by maintaining a well-diversified portfolio that limits the amount of exposure as to institution, maturity, and investment type. We also limit our exposure to European sovereign debt securities and maintain no holdings with respect to certain euro-zone states, such as Portugal, Italy and Spain. The value of our investments, however, may be adversely affected by increases in interest rates, downgrades in the credit rating of the corporate bonds included in our portfolio, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, and by other factors which may result in declines in the value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio if the declines are other-than-temporary or sell investments for less than our acquisition cost which could adversely impact our financial position and our overall liquidity.

The increase in cash, cash equivalents and marketable securities from December 31, 2013 is primarily due to net cash flows provided by operating activities, partially offset by the repurchase of our common stock.

Borrowings

In March 2014, our $750.0 million senior unsecured revolving credit facility expired and was not renewed.

We have $550.0 million aggregate principal amount of 6.875% Senior Notes due March 1, 2018 that were originally priced at 99.184% of par. The discount is amortized as additional interest expense over the period from issuance through maturity.

In connection with our 2006 distribution agreement with Fumedica, we issued notes totaling 61.4 million Swiss Francs which were payable to Fumedica in varying amounts from June 2008 through June 2018. Our remaining note payable to Fumedica had a carrying value of 11.6 million Swiss Francs ($11.7 million) and 14.0 million Swiss Francs ($15.8 million) as of December 31, 2014 and 2013, respectively.

For a summary of the fair and carrying values of our outstanding borrowings as of December 31, 2014 and 2013, please read Note 8, Fair Value Measurements to our consolidated financial statements included in this report.

Working Capital

We define working capital as current assets less current liabilities. The increase in working capital from December 31, 2013 reflects an increase in total current assets of $1,487.8 million, partially offset by an increase in total current liabilities of $461.4 million. The increase in total current assets was primarily driven by an increase in cash and cash equivalents and accounts receivable resulting from increased product revenue. The increase in total current liabilities primarily resulted from an increase in accrued expenses and other.

Cash Flows

The following table summarizes our cash flow activity:

For the Years Ended December 31,% Change
2014 compared to 20132013 compared to 2012
(In millions, except percentages)201420132012
Net cash flows provided by operating activities$2,942.1$2,345.1$1,879.925.5%24.7%
Net cash flows used in by investing activities$(1,543.0)$(1,604.7)$(950.3)(3.8)%68.9%
Net cash flows used in financing activities$(755.9)$(716.5)$(877.5)5.5%(18.3)%

Operating Activities

Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. We expect cash provided from operating activities will continue to be our primary source of funds to finance operating needs and capital expenditures for the foreseeable future.

Operating cash flow is derived by adjusting our net income for:

•Non-cash operating items such as depreciation and amortization, impairment charges and share-based compensation charges;
•Changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations; and
•Changes associated with the fair value of contingent milestones associated with our acquisitions of businesses and payments related to collaborations.

For 2014 compared to 2013, the increase in cash provided by operating activities is primarily driven by higher net income, partially offset by an increase in accounts receivable resulting from increased product revenue

For 2013 compared to 2012, the increase in cash provided by operating activities was primarily driven by an increase in net income and taxes payable, partially offset by an increase in inventory related to our AVONEX, TYSABRI and ELOCTATE programs and accounts receivable resulting from increased product revenue.

Investing Activities

For 2014 compared to 2013, the decrease in net cash flows used in investing activities is primarily due to the prior year acquisition of all remaining rights to TYSABRI from Elan and a decrease in the net purchases of marketable securities, partially offset by the payment of contingent consideration to former shareholders of Fumapharm AG.

For 2013 compared to 2012, the increase in net cash flows used in investing activities was primarily due to $3,262.7 million used for our acquisition of all remaining rights to TYSABRI from Elan, partially offset by net proceeds from sales and maturities of marketable securities.

Financing Activities

For 2014 compared to 2013, the increase in net cash flows used in financing activities is primarily due to an increase in the amount of common stock we repurchased, partially offset by the prior year repayment of the aggregate principal amount of our 6.0% Senior Notes.

For 2013 compared to 2012, the decrease in net cash flows used in financing activities was primarily due to a decrease in the amount of our common stock we repurchased partially offset by the repayment of principal of our 6.0% Senior Notes.

Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2014, excluding amounts related to uncertain tax positions, amounts payable to tax authorities, funding commitments, contingent development, regulatory and commercial milestone payments, TYSABRI contingent payments and contingent consideration related to our business combinations, as described below.

Payments Due by Period
(In millions)TotalLess than 1 Year1 to 3 Years3 to 5 YearsAfter 5 Years
Non-cancellable operating leases (1), (2)$675.7$62.2$129.4$108.0$376.1
Notes payable (3)681.540.981.4559.2—
Purchase and other obligations (4)248.9238.610.3——
Defined benefit obligation56.7———56.7
Total contractual obligations$1,662.8$341.7$221.1$667.2$432.8
(1)We lease properties and equipment for use in our operations. Amounts reflected within the table above, detail future minimum rental commitments under non-cancelable operating leases as of December 31 for each of the periods presented. In addition to the minimum rental commitments, these leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses.
(2)Obligations are presented net of sublease income expected to be received for the vacated portion of our Weston, Massachusetts facility. For additional information, please read Note 11, Property, Plant and Equipment to our consolidated financial statements included in this report.
(3)Notes payable includes principal and interest payments.
(4)Purchase and other obligations primarily includes our obligations to purchase direct materials and also includes approximately $5.4 million related to the fair value of net liabilities on derivative contracts, approximately $8.1 million related to fixed obligations for the purchase of natural gas and approximately $11.8 million related to obligations for communication services.

Tax Related Obligations

We exclude liabilities pertaining to uncertain tax positions from our summary of contractual obligations as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 31, 2014, we have approximately $80.2 million of net liabilities associated with uncertain tax positions.

Other Funding Commitments

As of December 31, 2014, we have several on-going clinical studies in various clinical trial stages. Our most significant clinical trial expenditures are to contract research organizations (CROs). The contracts with CROs are generally cancellable, with notice, at our option. We have recorded accrued expenses of approximately $41.6 million on our consolidated balance sheet for expenditures incurred by CROs as of December 31, 2014. We have approximately $472.3 million in cancellable future commitments based on existing CRO contracts as of December 31, 2014.

World Federation of Hemophilia (WFH) Humanitarian Aid Program

During 2014, we and Sobi announced plans to donate one billion international units (IUs) of clotting factor therapy for humanitarian aid programs in the developing world. Initially, we intend to donate up to 500 million IUs over five years to support these efforts through the WFH. Under the terms of the agreement, at least 85 percent of donated factor will be ELOCTATE, with the remainder comprised of ALPROLIX. These shipments for humanitarian programs are expected to begin in the second half of 2015, subject to the WFH satisfying certain logistical and ongoing requirements. We will record these donations as cost of sales as the donations are made.

Contingent Development, Regulatory and Commercial Milestone Payments

Based on our development plans as of December 31, 2014, we have committed to make potential future milestone payments to third parties of up to approximately $2.8 billion as part of our various collaborations, including licensing and development programs. Payments under these agreements generally become due and payable only upon achievement of certain development, regulatory or commercial milestones. Because the achievement of these milestones had not occurred as of December 31, 2014, such contingencies have not been recorded in our financial statements. Amounts related to contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval and commercial milestones.

We anticipate that we may pay approximately $142.2 million of milestone payments in 2015, provided various development, regulatory or commercial milestones are achieved.

TYSABRI Contingent Payments

On April 2, 2013, we acquired full ownership of all remaining rights to TYSABRI from Elan that we did not already own or control. Under the terms of the acquisition agreement, we are obligated to make contingent payments to Elan of 18% on annual worldwide net sales up to $2.0 billion and 25% on annual worldwide net sales that exceed $2.0 billion. Royalty payments to Elan and other third parties are recognized as cost of sales within our consolidated statements of income.

Contingent Consideration related to Business Combinations

In connection with our purchase of the noncontrolling interests in our joint venture investments in Biogen Dompé SRL and Biogen Dompé Switzerland GmbH and our acquisitions of Stromedix, Biogen Idec International Neuroscience GmbH (BIN) and BIH, we may pay up to approximately $850 million in remaining milestones based upon the achievement of certain events. These milestones may not be achieved.

As the acquisitions of the noncontrolling interests in our joint venture investments and our acquisitions of Stromedix and BIN, formerly Panima Pharmaceuticals AG, occurred after January 1, 2009, we record contingent consideration liabilities at their fair value on the acquisition date and revalue these obligations each reporting period. For additional information related to our acquisition of Stromedix please read Note 2, Acquisitions, to our consolidated financial statements included in this report.

BIH

In connection with our acquisition of BIH, formerly Syntonix, in January 2007, we agreed to pay up to an additional $80.0 million if certain milestone events associated with the development of BIH’s lead product, ALPROLIX are achieved. The first $40.0 million contingent payment was achieved in the first quarter of 2010. We paid an additional $20.0 million during the second quarter of 2014 as ALPROLIX was approved for the treatment of hemophilia B. A second $20.0 million contingent payment will occur if prior to the tenth anniversary of the closing date, a marketing authorization is granted by the EMA for ALPROLIX.

Fumapharm AG

In 2006, we acquired Fumapharm AG. As part of this acquisition we acquired FUMADERM and TECFIDERA (together, Fumapharm Products). We are required to make contingent payments to former shareholders of Fumapharm AG or holders of their rights based on the attainment of certain cumulative sales levels of Fumapharm Products and the level of total net sales of Fumapharm Products in the prior twelve month period, as defined in the acquisition agreement.

During 2014, we paid a $25.0 million contingent payment as we reached the $1.0 billion cumulative sales level related to the Fumapharm Products in 2013, a $150.0 million contingent payment as we reached the $2.0 billion cumulative sales level related to Fumapharm Products in the second quarter of 2014, a $200.0 million contingent payment as we reached the $3.0 billion cumulative sales level in the third quarter of 2014 and accrued $250.0 million upon reaching $4.0 billion in total cumulative sales of Fumapharm Products, in the fourth quarter of 2014.

We will owe an additional $300.0 million contingent payment for every additional $1.0 billion in cumulative sales level of Fumapharm Products reached if the prior 12 months sales of the Fumapharm Products exceed $3.0 billion, until such time as the cumulative sales level reaches $20.0 billion, at which time no further contingent payments shall be due. These payments will be accounted for as an increase to goodwill as incurred, in accordance with the accounting standard applicable to business combinations when we acquired Fumapharm. Any portion of the payment which is tax deductible will be recorded as a reduction to goodwill. Payments are due within 60 days following the end of the quarter in which the applicable cumulative sales level has been reached.

Other Off-Balance Sheet Arrangements

We do not have any relationships with entities often referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We consolidate variable interest entities if we are the primary beneficiary.

Legal Matters

For a discussion of legal matters as of December 31, 2014, please read Note 21, Litigation to our consolidated financial statements included in this report.

Critical Accounting Estimates

The preparation of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP), requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. We evaluate our estimates, judgments and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition and Related Allowances

We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; our price to the customer is fixed or determinable; and collectability is reasonably assured.

Product Revenues

Revenues from product sales are recognized when title and risk of loss have passed to the customer, which is typically upon delivery. The timing of distributor orders and shipments can cause variability in earnings.

Reserves for Discounts and Allowances

We establish reserves for trade term discounts, wholesaler incentives, Medicaid and managed care rebates, VA and PHS discounts, product returns and other governmental discounts or applicable allowances associated with the implementation of pricing actions in certain of international markets in which we operate. These reserves are based on estimates of the amounts earned or to be claimed on the related sales. Our estimates take into consideration our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying patterns. If actual results vary, we may need to adjust these estimates, which could have an effect on earnings in the period of the adjustment.

In addition to the discounts and rebates described above and classified as a reduction of revenue, we also maintain certain customer service contracts with distributors and other customers in the distribution channel that provide us with inventory management, data and distribution services. To the extent we can demonstrate a separable benefit and fair value for these services, we classify these payments within selling, general and administrative expenses.

Revenues from Unconsolidated Joint Business

Revenues from unconsolidated joint business consists of (i) our share of pre-tax profits and losses in the U.S. for RITUXAN and GAZYVA; (ii) reimbursement of our selling and development expenses in the U.S. for RITUXAN; and (iii) revenue on sales in the rest of world for RITUXAN, which consist of our share of pre-tax co-promotion profits in Canada and royalty revenue on sales outside the U.S. and Canada by F. Hoffmann-La Roche Ltd. (Roche) and its sublicensees. Pre-tax co-promotion profits on RITUXAN are calculated and paid to us by Genentech in the U.S. and by Roche in Canada. Pre-tax co-promotion profits consist of U.S. and Canadian net sales to third-party customers less the cost to manufacture, third-party royalty expenses, distribution, selling, and marketing expenses, and joint development expenses incurred by Genentech, Roche and us. We record our share of the pretax co-promotion profits on RITUXAN in Canada and royalty revenues on sales outside the U.S. on a cash basis as we do not have the ability to estimate these profits or royalty revenue in the period incurred. Additionally, our share of the pre-tax profits on RITUXAN and GAZYVA in the U.S. includes estimates made by Genentech and those estimates are subject to change. Actual results may ultimately differ from our estimates.

Concentrations of Credit Risk

The majority of our receivables arise from product sales in the United States and Europe and are primarily due from wholesale distributors, public hospitals and other government entities. We monitor the financial performance and creditworthiness of our large customers so that we can properly assess and respond to changes in their credit profile. We continue to monitor these conditions, including the volatility associated with international economies and the relevant financial markets, and assess their possible impact on our business. The credit and economic conditions within many of the international markets in which we operate, particularly in certain countries throughout Europe, such as Italy, Spain and Portugal, remain uncertain. These conditions have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect on our accounts receivable outstanding in these countries.

In Portugal and select regions in Spain where our collections have slowed and a significant portion of these receivables are routinely being collected beyond our contractual payment terms and over periods in excess of one year, we have discounted our receivables and reduced related revenues based on the period of time that we estimate those amounts will be paid, to the extent such period exceeds one year, using the country’s market-based borrowing rate for such period. The related receivables are classified at the time of sale as non-current assets.

To date, we have not experienced any significant losses with respect to the collection of our accounts receivable. If economic conditions worsen and/or the financial condition of our customers were to further deteriorate, our risk of collectability may increase, which may result in additional allowances and/or significant bad debts.

For additional information related to our concentration of credit risk associated with our accounts receivable balances, please read the subsection above entitled “Credit Risk” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Capitalization of Inventory Costs

We capitalize inventory costs associated with our products prior to regulatory approval, when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. We consider numerous attributes in evaluating whether the costs to manufacture a particular product should be capitalized as an asset. We assess the regulatory approval process and where the particular product stands in relation to that approval process, including any known safety or efficacy concerns, potential labeling restrictions and other impediments to approval. We evaluate our anticipated research and development initiatives and constraints relating to the product and the indication in which it will be used. We consider our manufacturing environment including our supply chain in determining logistical constraints that could hamper approval or commercialization. We consider the shelf life of the product in relation to the expected timeline for approval and we consider patent related or contract issues that may prevent or delay commercialization. We also base our judgment on the viability of commercialization, trends in the marketplace and market acceptance criteria. Finally, we consider the reimbursement strategies that may prevail with respect to the product and assess the economic benefit that we are likely to realize. We expense previously capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among other potential factors, a denial or significant delay of approval by necessary regulatory bodies.

Acquired Intangible Assets, including In-process Research and Development (IPR&D)

Effective January 1, 2009, when we purchase a business, the acquired IPR&D is measured at fair value, capitalized as an intangible asset and tested for impairment at least annually until commercialization, after which time the IPR&D is amortized over its estimated useful life. If we acquire an asset or group of assets that do not meet the definition of a business under applicable accounting standards, the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense as they are incurred.

We have acquired, and expect to continue to acquire, intangible assets through the acquisition of biotechnology companies or through the consolidation of variable interest entities. These intangible assets primarily consist of technology associated with human therapeutic products and in-process research and development product candidates. When significant identifiable intangible assets are acquired, we generally engage an independent third-party valuation firm to assist in determining the fair values of these assets as of the acquisition date. Management will determine the fair value of less significant identifiable intangible assets acquired. Discounted cash flow models are typically used in these valuations, and these models require the use of significant estimates and assumptions including but not limited to:

•estimating the timing of and expected costs to complete the in-process projects;
•projecting regulatory approvals;
•estimating future cash flows from product sales resulting from completed products and in process projects; and
•developing appropriate discount rates and probability rates by project.

We believe the fair values assigned to the intangible assets acquired are based upon reasonable estimates and assumptions given available facts and circumstances as of the acquisition dates.

If these projects are not successfully developed, the sales and profitability of the company may be adversely affected in future periods. Additionally, the value of the acquired intangible assets may become impaired. We believe that the foregoing assumptions used in the IPR&D analysis were reasonable at the time of the respective acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated.

Impairment and Amortization of Long-lived Assets and Accounting for Goodwill

Long-lived Assets Other than Goodwill

Long-lived assets to be held and used, include property, plant and equipment as well as intangible assets, including IPR&D and trademarks. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review our intangible assets with indefinite lives for impairment annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

When performing our impairment assessment, we calculate the fair value using the same methodology as described above under "Acquired Intangible Assets, including In-process Research and Development (IPR&D)". If the carrying value of our intangible assets with indefinite lives exceeds its fair value, then the intangible asset is written-down to its fair values.

Our most significant intangible assets are our acquired and in-licensed rights and patents and developed technology. Acquired and in-licensed rights and patents primarily relates to our acquisition of all remaining rights to TYSABRI from Elan. Developed technology primarily relates to our AVONEX product, which was recorded in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in 2003. We amortize the intangible assets related to TYSABRI and AVONEX using the economic consumption method based on revenue generated from the products underlying the related intangible assets. An analysis of the anticipated lifetime revenues of TYSABRI and AVONEX is performed annually during our long range planning cycle, which is generally updated in the third quarter of each year, and whenever events or changes in circumstances would significantly affect the anticipated lifetime revenues of TYSABRI or AVONEX.

For additional information on the impairment charges related to our long-lived assets during 2014, please read Note 7, Intangible Assets and Goodwill to our consolidated financial statements included within this report. Impairment charges related to our long-lived assets during 2013 and 2012 were immaterial.

Goodwill

Goodwill relates largely to amounts that arose in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation. Our goodwill balances represent the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting.

We assess our goodwill balance within our single reporting unit annually, as of October 31, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable to determine whether any impairment in this asset may exist and, if so, the extent of such impairment. We compare the fair value of our reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of our reporting unit, then we would need to determine the implied fair value of our reporting unit’s goodwill. If the carrying value of our reporting unit’s goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

We completed our required annual impairment test in the fourth quarter of 2014, 2013 and 2012 and determined in each of those periods that the carrying value of goodwill was not impaired. In each year, the fair value of our reporting unit, which includes goodwill, was significantly in excess of the carrying value of our reporting unit.

Investments, including Fair Value Measures and Impairments

We invest in various types of securities, including short-term and long-term marketable securities, principally corporate notes, government securities including government sponsored enterprise mortgage-backed securities and credit card and auto loan asset-backed securities, in which our excess cash balances are invested.

In accordance with the accounting standard for fair value measurements, we have classified our financial assets as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset.

As noted in Note 8, Fair Value Measurements to our consolidated financial statements, a majority of our financial assets have been classified as Level 2. These assets have been initially valued at the transaction price and subsequently valued utilizing third party pricing services. The pricing services use many observable market inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. We validate the prices provided by our third party pricing services by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances.

We also have some investments classified as Level 3 whose fair value is initially measured at transaction prices and subsequently valued using the pricing of recent financing or by reviewing the underlying economic fundamentals and liquidation value of the companies. We apply judgments and estimates when we validate the prices provided by third parties. While we believe the valuation methodologies are appropriate, the use of valuation methodologies is highly judgmental and changes in methodologies can have a material impact on our results of operations.

Impairment

We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale debt securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income.

For available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected within earnings as an impairment loss.

Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security and are reflected within earnings as an impairment loss.

Share-Based Compensation

We make certain assumptions in order to value and record expense associated with awards made under our share-based compensation arrangements. Changes in these assumptions may lead to variability with respect to the amount of expense we recognize in connection with share-based payments.

Determining the appropriate valuation model and related assumptions requires judgment, and includes estimating the expected market price of our stock on vesting date and stock price volatility as well as the term of the expected awards. Determining the appropriate amount to expense based on the anticipated achievement of performance targets requires judgment, including forecasting the achievement of future financial targets. The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made throughout the performance as appropriate. The cumulative impact of any revision is reflected in the period of change.

We also estimate forfeitures over the requisite service period when recognizing share-based compensation expense based on historical rates and forward-looking factors; these estimates are adjusted to the extent that actual forfeitures differ, or are expected to materially differ, from our estimates.

Contingent Consideration

For acquisitions completed before January 1, 2009, we record contingent consideration resulting from a business combination when the contingency is resolved. For acquisitions completed after January 1, 2009, we record contingent consideration resulting from a business combination at its fair value on the acquisition date. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to contingent consideration expense within the consolidated statement of income. Changes in the fair value of the contingent consideration obligations can result from adjustments to the discount rates and achievement and timing of any cumulative sales-based and development milestones, or changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.

Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions described above, could have a material impact on the amount of contingent consideration expense we record in any given period.

Income Taxes

We prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and the effects of tax planning strategies. Our estimates of future taxable income include, among other items, our estimates of future income tax deductions related to the exercise of stock options. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.

All tax effects associated with intercompany transfers of assets within our consolidated group, both current and deferred, are recorded as a prepaid tax or deferred charge and recognized through the consolidated statement of income when the asset transferred is sold to a third party or otherwise recovered through amortization of the asset's remaining economic life. If the asset transferred becomes impaired, for example through the discontinuation of a research program, we will expense any remaining deferred charge or prepaid tax.

We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.

We earn a significant amount of our operating income outside the U.S. As a result, a portion of our cash, cash equivalents, and marketable securities are held by foreign subsidiaries. We currently do not intend or foresee a need to repatriate these funds. We expect existing domestic cash, cash equivalents, marketable securities and cash flows from operations to continue to be sufficient to fund our domestic operating activities and cash commitments for investing and financing activities for the foreseeable future.

As of December 31, 2014, our non-U.S. subsidiaries’ undistributed foreign earnings included in consolidated retained earnings and other basis differences aggregated approximately $4.6 billion. All undistributed foreign earnings of non-U.S. subsidiaries, exclusive of earnings that would result in little or no net income tax expense or which were previously taxed under current U.S. tax law, are reinvested indefinitely in operations outside the U.S. This determination is made on a jurisdiction-by-jurisdiction basis and takes into the account the liquidity requirements in both the U.S. and within our foreign subsidiaries.

If we decide to repatriate funds in the future to execute our growth initiatives or to fund any other liquidity needs, the resulting tax consequences would negatively impact our results of operations through a higher effective tax rate and dilution of our earnings. The residual U.S. tax liability, if cumulative amounts were repatriated, would be between $1.5 billion to $1.6 billion as of December 31, 2014.

New Accounting Standards

For a discussion of new accounting standards please read Note 1, Summary of Significant Accounting Principles to our consolidated financial statements included in this report.

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