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Table of Contents


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

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to

Commission file number 000-31191
THE MEDICINES COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
04-3324394
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
8 Sylvan Way
 
07054
Parsippany
,
New Jersey
 
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (973) 290-6000

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
MDCO
NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No

As of October 28, 2019, there were 79,723,499 shares of Common Stock, $0.001 par value per share, outstanding (excluding 3,013,143 shares held in treasury).


Table of Contents



THE MEDICINES COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2019
TABLE OF CONTENTS

 
Page
 
 
 
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-32.2
 
EX-101
 



Table of Contents


Part I. Financial Information

Item 1. Condensed Financial Statements



1

Table of Contents
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)

 
September 30,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
265,850

 
$
238,310

Short-term investment
2,525

 
2,627

Inventory, net

 
864

Prepaid expenses and other current assets
58,354

 
53,002

Total current assets
326,729

 
294,803

Fixed assets, net
7,421

 
8,872

Goodwill
200,571

 
200,571

Restricted cash
4,466

 
6,710

Contingent purchase price from sale of businesses
324,099

 
325,806

Other assets
33,984

 
4,924

Total assets
$
897,270

 
$
841,686

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
7,364

 
$
695

Accrued expenses
45,878

 
57,716

Convertible senior notes
362,312

 

Other current liabilities
7,587

 

Total current liabilities
423,141

 
58,411

Convertible senior notes
464,991

 
792,752

Other liabilities
35,141

 
12,787

Total liabilities
923,273

 
863,950

Equity component of currently redeemable convertible senior notes (Note 9)
33,537

 

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

 

Common stock, $0.001 par value per share, 187,500,000 authorized; 82,621,194 issued and 79,608,051 outstanding at September 30, 2019 and 76,861,668 issued and 73,848,525 outstanding at December 31, 2018
83

 
77

Additional paid-in capital
1,609,574

 
1,452,975

Treasury stock, at cost; 3,013,143 shares at September 30, 2019 and December 31, 2018
(90,016
)
 
(90,016
)
Accumulated deficit
(1,574,638
)
 
(1,380,724
)
Accumulated other comprehensive loss
(4,543
)
 
(4,576
)
Total stockholders’ deficit
(59,540
)
 
(22,264
)
Total liabilities and stockholders’ deficit
$
897,270

 
$
841,686

See accompanying notes to condensed consolidated financial statements.


2

Table of Contents
THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net revenues
$

 
$
(3,300
)
 
$

 
$
6,138

Operating expenses:
 
 
 

 
 
 
 
Cost of revenues

 
890

 

 
6,558

Asset impairment charges

 
5,073

 

 
5,073

Research and development
42,770

 
32,736

 
97,893

 
103,396

Selling, general and administrative
18,599

 
6,826

 
55,470

 
56,790

Total operating expenses
61,369

 
45,525

 
153,363

 
171,817

Loss from operations
(61,369
)
 
(48,825
)
 
(153,363
)
 
(165,679
)
Co-promotion and license income
4,402

 
271

 
4,402

 
753

Loss on short-term investment
(1,893
)
 
(7,953
)
 
(102
)
 
(41,416
)
Interest expense
(16,212
)
 
(12,313
)
 
(48,027
)
 
(36,498
)
Other income
1,088

 
1,119

 
3,196

 
4,541

Loss from continuing operations before income taxes
(73,984
)
 
(67,701
)
 
(193,894
)
 
(238,299
)
(Provision for) benefit from income taxes
(10
)
 
16,066

 
(20
)
 
47,375

Loss from continuing operations
(73,994
)
 
(51,635
)
 
(193,914
)
 
(190,924
)
(Loss) income from discontinued operations, net of tax

 
(3,999
)
 

 
110,242

Net loss
$
(73,994
)
 
$
(55,634
)
 
$
(193,914
)
 
$
(80,682
)
 
 
 
 
 
 
 
 
Basic loss per common share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.92
)
 
$
(0.70
)
 
$
(2.55
)
 
$
(2.60
)
(Loss) earnings from discontinued operations

 
(0.05
)
 

 
1.50

Basic loss per share
$
(0.92
)
 
$
(0.75
)
 
$
(2.55
)
 
$
(1.10
)
 
 
 
 
 
 
 
 
Diluted loss per common share:
 
 
 
 
 
 
 
Loss from continuing operations
$
(0.92
)
 
$
(0.70
)
 
$
(2.55
)
 
$
(2.60
)
(Loss) earnings from discontinued operations

 
$
(0.05
)
 

 
1.50

Diluted loss per share
$
(0.92
)
 
$
(0.75
)
 
$
(2.55
)
 
$
(1.10
)
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
80,129

 
73,544

 
75,928

 
73,564

Diluted
80,129

 
73,544

 
75,928

 
73,564


See accompanying notes to condensed consolidated financial statements.



3


THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(73,994
)
 
$
(55,634
)
 
$
(193,914
)
 
$
(80,682
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
58

 
(11
)
 
33

 
(605
)
Amounts reclassified from accumulated other comprehensive loss

 

 

 
1,183

Other comprehensive income (loss)
58

 
(11
)
 
33

 
578

Comprehensive loss
$
(73,936
)
 
$
(55,645
)
 
$
(193,881
)
 
$
(80,104
)

See accompanying notes to condensed consolidated financial statements.



4



THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)

 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
 
Accumulated
 
Accumulated
Comprehensive
Income
 
Total
Stockholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
(Loss)
 
Equity (Deficit)
Balance at January 1, 2018
76,191

 
$
76

 
(3,013
)
 
$
(90,016
)
 
$
1,377,393

 
$
(1,257,356
)
 
$
(5,183
)
 
$
24,914

Employee stock purchases
335

 

 
 
 
 
 
8,637

 
 
 
 
 
8,637

Issuance of restricted stock awards
35

 

 
 
 
 
 
 
 
 
 
 
 

Non-cash stock compensation
 
 
 
 
 
 
 
 
4,454

 
 
 
 
 
4,454

Adoption of new accounting standard related to revenue recognition
 
 
 
 
 
 
 
 
 
 
(210
)
 
 
 
(210
)
Net income
 
 
 
 
 
 
 
 
 
 
29,149

 
 
 
29,149

Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
(471
)
 
(471
)
Amounts reclassified from accumulated other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
1,183

 
1,183

Balance at March 31, 2018
76,561

 
$
76

 
(3,013
)
 
$
(90,016
)
 
$
1,390,484

 
$
(1,228,417
)
 
$
(4,471
)
 
$
67,656

Employee stock purchases
130

 

 
 
 
 
 
3,274

 
 
 
 
 
3,274

Non-cash stock compensation
 
 
 
 
 
 
 
 
4,619

 
 
 
 
 
4,619

Net loss
 
 
 
 
 
 
 
 
 
 
(54,197
)
 
 
 
(54,197
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
(123
)
 
(123
)
Balance at June 30, 2018
76,691

 
$
76

 
(3,013
)
 
$
(90,016
)
 
$
1,398,377

 
$
(1,282,614
)
 
$
(4,594
)
 
$
21,229

Employee stock purchases
151

 

 
 
 
 
 
3,681

 
 
 
 
 
3,681

Issuance of restricted stock awards
36

 

 
 
 
 
 
 
 
 
 
 
 

Non-cash stock compensation
 
 
 
 
 
 
 
 
4,171

 
 
 
 
 
4,171

Net loss
 
 
 
 
 
 
 
 
 
 
(55,634
)
 
 
 
(55,634
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
(11
)
 
(11
)
Balance at September 30, 2018
76,878

 
$
76

 
(3,013
)
 
$
(90,016
)
 
$
1,406,229

 
$
(1,338,248
)
 
$
(4,605
)
 
$
(26,564
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying notes to condensed consolidated financial statements.



5


THE MEDICINES COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT), Continued
(In thousands)

 
Common Stock
 
Treasury Stock
 
Additional
Paid-in
 
Accumulated
 
Accumulated
Comprehensive
Income
 
Total
Stockholders’
 
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Deficit
 
(Loss)
 
Equity (Deficit)
Balance at January 1, 2019
76,862

 
$
77

 
(3,013
)
 
$
(90,016
)
 
$
1,452,975

 
$
(1,380,724
)
 
$
(4,576
)
 
$
(22,264
)
Employee stock purchases
33

 

 
 
 
 
 
672

 
 
 
 
 
672

Issuance of restricted stock awards
(10
)
 

 
 
 
 
 
 
 
 
 
 
 

Non-cash stock compensation
 
 
 
 
 
 
 
 
4,446

 
 
 
 
 
4,446

Equity component of 2024 Notes issuance, net
 
 
 
 
 
 
 
 
2,452

 
 
 
 
 
2,452

Net loss
 
 
 
 
 
 
 
 
 
 
(59,865
)
 
 
 
(59,865
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
(830
)
 
(830
)
Balance at March 31, 2019
76,885

 
$
77

 
(3,013
)
 
$
(90,016
)
 
$
1,460,545

 
$
(1,440,589
)
 
$
(5,406
)
 
$
(75,389
)
Employee stock purchases
211

 

 
 
 
 
 
5,438

 
 
 
 
 
5,438

Issuance of restricted stock awards
16

 

 
 
 
 
 
 
 
 
 
 
 

Non-cash stock compensation
 
 
 
 
 
 
 
 
5,747

 
 
 
 
 
5,747

Issuance of common stock
5,227

 
5

 
 
 
 
 
161,578

 
 
 
 
 
161,583

Net loss
 
 
 
 
 
 
 
 
 
 
(60,055
)
 
 
 
(60,055
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
805

 
805

Balance at June 30, 2019
82,339

 
$
82

 
(3,013
)
 
$
(90,016
)
 
$
1,633,308

 
$
(1,500,644
)
 
$
(4,601
)
 
$
38,129

Employee stock purchases
189

 
1

 
 
 
 
 
5,463

 
 
 
 
 
5,464

Issuance of restricted stock awards
93

 

 
 
 
 
 
 
 
 
 
 
 

Non-cash stock compensation
 
 
 
 
 
 
 
 
4,340

 
 
 
 
 
4,340

Reclassification from mezzanine equity
 
 
 
 
 
 
 
 
(33,537
)
 
 
 
 
 
(33,537
)
Net loss
 
 
 
 
 
 
 
 
 
 
(73,994
)
 
 
 
(73,994
)
Currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
 
58

 
58

September 30, 2019
82,621

 
$
83

 
(3,013
)
 
$
(90,016
)
 
$
1,609,574

 
$
(1,574,638
)
 
$
(4,543
)
 
$
(59,540
)


See accompanying notes to condensed consolidated financial statements.


6

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

 
Nine Months Ended September 30,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(193,914
)
 
$
(80,682
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 

Depreciation and amortization
1,452

 
1,977

Asset impairment charges

 
5,073

Amortization of debt discount
27,763

 
20,526

Unrealized foreign currency transaction losses, net
(198
)
 
(111
)
Stock compensation expense
14,533

 
13,244

Gain on sale of business

 
(168,955
)
Gain on sale of assets
(500
)
 
(7,026
)
Loss on short-term investments
102

 
41,416

Reserve for excess or obsolete inventory

 
(392
)
Changes in contingent purchase price

 
(258
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable

 
6,195

Inventory, net
863

 
2,202

Prepaid expenses and other assets
2,088

 
5,549

Accounts payable
6,697

 
(2,681
)
Accrued expenses
(11,070
)
 
(58,774
)
Other current liabilities
41

 
(4,317
)
Payments on contingent purchase price

 
(59
)
Other liabilities
(7,166
)
 
4,305

Net cash used in operating activities
(159,309
)
 
(222,768
)
Cash flows from investing activities:
 
 
 
Proceeds from sale of assets
500

 
9,900

Purchases of fixed assets

 
(7
)
Proceeds from sale of business

 
166,383

Net cash provided by investing activities
500

 
176,276

Cash flows from financing activities:
 
 
 
Proceeds from issuances of common stock, net
11,574

 
15,595

Payments on contingent purchase price

 
(511
)
Proceeds from the issuance of convertible senior notes
9,500

 

Proceeds from equity offering, net
161,583

 

Debt issuance costs
(280
)
 

Net cash provided by financing activities
182,377

 
15,084

Effect of exchange rate changes on cash
1,728

 
(1,374
)
Increase (decrease) in cash, cash equivalents and restricted cash
25,296

 
(32,782
)
Cash, cash equivalents and restricted cash at beginning of period
245,020

 
156,900

Cash, cash equivalents and restricted cash at end of period(a)
$
270,316

 
$
124,118

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
24,540

 
$
21,069

(a) The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts reported within the condensed consolidated balance sheet:
 
September 30,
2019
 
September 30,
2018
Reconciliation of cash, cash equivalents and restricted cash
 
 
 
Cash and cash equivalents
$
265,850

 
118,708

Restricted cash
4,466

 
5,410

Total cash, cash equivalents and restricted cash at end of period
$
270,316

 
$
124,118


See accompanying notes to condensed consolidated financial statements.


7

Table of Contents


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

The Medicines Company® name and logo are registered trademarks or trademark applications of The Medicines Company in the United States and/or other countries. All other trademarks, service marks or other tradenames appearing in this Quarterly Report on Form 10-Q are the property of their respective owners. References to “the Company,” “we,” “us” or “our” mean The Medicines Company, a Delaware corporation, and its subsidiaries.

1. Nature of Business

The Medicines Company (the Company) is a biopharmaceutical company driven by its purpose to solve major medical, societal and economic challenges in healthcare. The Company has a singular focus on one of the greatest global healthcare challenges and burdens - that presented by cardiovascular disease, which remains the number one cause of death in the United States and worldwide. The leading cause of cardiovascular disease morbidity and mortality is atherosclerotic cardiovascular disease (ASCVD). The Company takes on that challenge by developing inclisiran, the investigational RNA interference (RNAi) therapeutic, that specifically inhibits production of proprotein convertase subtilisin/kexin type 9 (PCSK9), a key protein that controls LDL-cholesterol (LDL-C) levels. The Company believes inclisiran is uniquely suited to make a significant difference reducing risk in ASCVD. The Company has the right to develop, manufacture and commercialize inclisiran under its collaboration agreement with Alnylam Pharmaceuticals, Inc. (Alnylam).

2. Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, “Significant Accounting Policies,” in the notes to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the 2018 Form 10-K).

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial position, results of operations, comprehensive loss, and cash flows for the periods presented.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company has no unconsolidated subsidiaries.

The Company’s results of operations for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected from the Company for the entire fiscal year or any other quarter of the fiscal year ending December 31, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in the 2018 Form 10-K.

Going Concern

Due to the divestiture of the Company’s rights to branded Angiomax in the United States to Sandoz Inc. (Sandoz) during 2018, the Company is no longer generating revenues from product sales. Prior to such divestiture, the Company’s revenues generated from product sales had been declining significantly since 2014 due to the introduction of generic competition against Angiomax and the divestiture of certain of the Company’s non-core products. The Company has incurred net losses and negative cash flows from operations since 2014 and had an accumulated deficit of $1,574.6 million as of September 30, 2019. The Company expects to incur significant expenses and operating losses for the foreseeable future as it continues to develop, seek regulatory approval for and commercially launch inclisiran.

In January 2015, the Company issued, at par value, $400.0 million aggregate principal amount of 2.5% convertible senior notes due 2022 (the 2022 Notes). As of October 1, 2019, the conditional conversion feature of the 2022 Notes was triggered as a result of the trading price of the Company’s common stock during the third quarter of 2019, and the holders are entitled to convert their 2022 Notes through December 31, 2019. As the Company is required to settle the aggregate principal amount of the 2022 Notes in cash, the liability component related to the 2022 Notes with a carrying amount of $362.3 million was classified as current and


8

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


the equity component related to the 2022 Notes of $33.5 million was classified as mezzanine (temporary) equity on the accompanying condensed consolidated balance sheet at September 30, 2019. See Note 9, “Convertible Senior Notes” for further details.

If the 2022 Notes were converted by the holders, the Company believes that its existing cash and cash equivalents and short term investments of approximately $268.4 million as of September 30, 2019, would not be sufficient to satisfy the Company’s anticipated operating and other funding requirements for the next twelve months from October 30, 2019 (the date of filing this Form 10-Q). In such case, the Company would need to raise additional funds by selling additional equity or debt securities or seek additional financing through other arrangements in order to both satisfy this obligation and meet the Company’s anticipated operating and other funding requirements for the next twelve months. There can be no assurances that public or private financings may be available in amounts or on terms acceptable to the Company, if at all. The Company’s ability to obtain additional debt financing might be limited by the terms of its convertible senior note agreements, market conditions, or otherwise. If the Company were unable to obtain additional financing, it might be required to delay, reduce the scope of, or eliminate one or more of its planned research, development or commercialization activities. Due to these uncertainties, there is substantial doubt about the Company’s ability to continue as a going concern.

At present, the Company does not believe that a substantial portion of the 2022 Notes will be submitted by the holders thereof for conversion.

The unaudited condensed consolidated financial statements as of September 30, 2019 have been prepared under the assumption that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of the uncertainty discussed above.

Equity Financing

On June 28, 2019, the Company sold an aggregate of 5,227,273 shares of its common stock, including the exercise in full by the underwriters of an option to purchase additional 681,818 shares of common stock, in an underwritten public offering at a price to the public of $33.00 per share. We received net proceeds of approximately $161.6 million from the sale of shares in the offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, expenses and accumulated other comprehensive loss that are reported in the condensed consolidated financial statements and accompanying disclosures. Actual results may be different.

Contingencies

The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company continually assesses litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss which could be estimated. In accordance with the guidance of the Financial Accounting Standards Board (FASB) on accounting for loss contingencies, the Company accrues for all contingencies at the earliest date at which the Company deems it probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely than another, the Company accrues the minimum of the range. In the cases where the Company believes that a reasonably possible loss exists, the Company discloses the facts and circumstances of the litigation, including an estimable range, if possible.

Research and Development

Research and development costs are expensed as incurred. Clinical study costs are accrued over the service periods specified in the contracts and adjusted as necessary based upon an ongoing review of the level of effort and costs actually incurred. Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development. Milestone payments that do not represent payments of contingent purchase price from business combinations that are made in connection with regulatory approvals are capitalized and amortized to cost of revenue over the remaining useful life of the asset.



9

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


Contingent Purchase Price From Sale of Business

The Company has contingent assets for certain specified calendar year net sales milestones as part of the 2016 divestitures of its hemostasis portfolio consisting of PreveLeak, Raplixa and Recothrom (the Hemostasis Business) to wholly owned subsidiaries of Mallinckrodt plc (Mallinckrodt) and its non-core cardiovascular assets consisting of Kengreal, Cleviprex and rights to Argatroban for Injection (the Non-Core ACC Products) to Chiesi USA, Inc. (Chiesi USA) and its parent company Chiesi Farmaceutici S.p.A. (Chiesi), which in each case are reflected as contingent purchase price from sale of businesses on the accompanying condensed consolidated balance sheets. The Company also has contingent assets for royalties associated with the sale of the infectious disease business to Melinta, which is reflected as contingent purchase price from sale of business on the accompanying condensed consolidated balance sheets.
The Company will recognize any increases in the carrying amount when the milestones or royalties are achieved and reduce the carrying amount as payments are received. The Company will recognize an impairment of the carrying amount when it determines it is probable that the asset has been impaired and the amount of the loss can be reasonably estimated.
The Company noted no impairment on the carrying amount of the contingent assets. In addition, the Company determined that the fair values of these contingent payments to be received from Mallinckrodt, Chiesi and Melinta, respectively, are not readily determinable at September 30, 2019, as the estimated future net sales of each of the respective products are determined by the future actions of such parties.
Recent Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (ASU No. 2016-02 or Topic 842) and subsequent ASUs issued in 2018 and 2019 that contained improvements to this guidance. This new guidance on leasing will require organizations that lease assets with lease terms of more than 12 months to recognize assets and liabilities for the rights and obligations created by those leases on their balance sheets. The Company adopted this new guidance on leasing on January 1, 2019. The Company elected the package of practical expedients upon transition that allows the Company not to reassess the lease classification for expired and existing leases, whether initial direct costs qualify for capitalization for any expired or existing leases or whether any expired contracts are or contain leases. Additionally, the Company elected the optional transition method that allows for a cumulative effect adjustment in the period of adoption and did not restate prior periods. The adoption of the new guidance on leasing resulted in the recognition of a right-of-use asset of $34.9 million and lease obligations of $41.2 million. The difference between the right-of-use assets and the lease obligations is primarily due to unamortized lease incentives and deferred rent related to the Company’s operating leases at December 31, 2018.

The impact of the adoption of Topic 842 on the accompanying condensed consolidated balance sheet as of January 1, 2019 was as follows (in thousands):
 
December 31, 2018
 
Adoption Adjustment
 
January 1, 2019
Other assets
$
4,924

 
$
34,925

 
$
39,849

 
 
 
 
 
 
Other current liabilities
$

 
$
7,508

 
$
7,508

Other liabilities
$
12,787

 
$
27,417

 
$
40,204



The adoption of the new guidance did not have a material impact on the condensed consolidated statement of operations. For further details regarding the adoption of this standard see Note 16, “Leases.”

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit losses on Financial Instruments” and subsequently amended by ASU 2019-04 and ASU 2019-05, which introduces a forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. This estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This ASU and its subsequent amendments are effective for public companies for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.



10

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


In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies disclosure requirements on fair value measurements. This ASU is effective for public companies for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, with early adoption permitted. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

3. Stock Compensation Expense

The Company recorded stock compensation expense of approximately $4.3 million and $4.2 million for the three months ended September 30, 2019 and 2018, respectively, and $14.5 million and $13.2 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, there was approximately $59.2 million of total unrecognized compensation costs related to non-vested share-based employee compensation arrangements granted under the Company’s equity compensation plans. The Company expects to recognize those costs, exclusive of $39.7 million related to stock options which will vest upon the achievement of specified performance goals, over a weighted average period of 1.3 years.

During the nine months ended September 30, 2019 and 2018, the Company issued a total of 546,570 and 753,452, respectively, of shares of its common stock upon the exercise of stock options, grants of restricted stock, and purchases under the Company’s 2010 employee stock purchase plan (ESPP). Cash received from the exercise of stock options and purchases through the ESPP during the nine months ended September 30, 2019 and 2018 was $11.6 million and $15.6 million, respectively, and is included within the financing activities section of the accompanying condensed consolidated statements of cash flows.

4. Earnings (Loss) Per Share

Basic loss per share is computed by dividing consolidated net (loss) income by the weighted average number of shares of common stock outstanding during the period, excluding unvested restricted common shares. The potentially dilutive effect of the Company’s stock options, unvested restricted common stock, and convertible senior notes due 2022 (2022 Notes) on earnings per share is computed under the treasury stock method.  In addition, the Company analyzes the potential dilutive effect of the convertible senior notes due 2023 (2023 Notes) and 2024 (2024 Notes) on earnings per share under the “if converted” method, in which it is assumed that the outstanding security converts into common stock at the beginning of the period, or at the time of issuance, if later.

For periods of income from continuing operations when the effects are not anti-dilutive, diluted (loss) earnings per share is computed by dividing consolidated net (loss) income by the weighted average number of shares outstanding and the impact of all potential dilutive common shares, consisting primarily of stock options, unvested restricted common stock, shares issuable upon conversion of the 2022 Notes, 2023 Notes and 2024 Notes and stock purchase warrants.

For periods of loss from continuing operations, diluted loss per share is calculated similar to basic loss per share as the effect of including all potentially dilutive common share equivalents is anti-dilutive. Due to the periods of loss from continuing operations, the calculation of diluted loss per share for the three and nine months ended September 30, 2019 excluded 19,419,531 and 17,058,234, respectively, of potentially dilutive stock options, warrants, restricted common shares, and shares issuable upon conversion of the 2022 Notes, 2023 Notes and 2024 Notes as their inclusion would have an anti-dilutive effect.

The calculation of diluted loss per share for the three and nine months ended September 30, 2018 excluded 9,866,498 and 9,322,645, respectively, of potentially dilutive stock options, stock purchase warrants, restricted common shares, and shares issuable upon conversion of the 2022 Notes and 2023 Notes as their inclusion would have an anti-dilutive effect.


5. Income Taxes

For the three months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes of $0.01 million and benefit from income taxes of $16.1 million, respectively. The worldwide effective income tax rates for the Company for the three months ended September 30, 2019 and 2018 was (0.01)% and 23.73%, respectively.

For the nine months ended September 30, 2019 and 2018, the Company recorded a provision for income taxes of $0.02 million and a benefit from income taxes of $47.4 million, respectively. The worldwide effective income tax rates for the Company for the nine months ended September 30, 2019 and 2018 was (0.01)% and 19.9%, respectively.



11

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


For the three and nine months ended September 30, 2019, the Company’s income tax provision is primarily attributable to minimum state taxes and foreign taxes based on income.

For the three and nine months ended September 30, 2018, the Company’s benefit from income taxes is primarily attributable to the utilization of current period losses against a discrete provision for income taxes of $55.2 million from the sale of the Company’s infectious disease business. For further details regarding the sale of the infectious disease business see Note 15, “Discontinued Operations.”

The Company considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce its deferred tax assets to the amount that is more likely than not to be realized. The Company placed significant weight on the fact that the Company expects to be in a cumulative net book loss for the three-year period ending December 31, 2019 in recording valuation allowances on substantial portions of its deferred tax assets as of September 30, 2019.

The Company will continue to evaluate its ability to realize its deferred tax assets on a periodic basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of products currently under development. Any additional changes to the valuation allowance recorded on deferred tax assets in the future would impact the Company’s income taxes.

6. Cash and Cash Equivalents and Investments

The Company considers all highly liquid investments purchased with original maturities at the date of purchase of three months or less to be cash equivalents. At September 30, 2019 and December 31, 2018, the Company had cash and cash equivalents of $265.9 million and $238.3 million, respectively, which consisted of cash of $253.3 million and $226.0 million, and money market funds with original maturities of less than three months of $12.5 million and $12.3 million at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and December 31, 2018, the Company’s common stock investment in Melinta had a readily determinable fair value of $2.5 million and $2.6 million, respectively. During the three and nine months ended September 30, 2019, the Company recognized losses of $1.9 million and $0.1 million, respectively, all of which was unrealized, in the accompanying condensed consolidated statements of operations, relating to the Company’s investment in Melinta.

During the three and nine months ended September 30, 2018, the Company recognized losses of $8.0 million and $41.4 million, respectively, all of which was unrealized, in the accompanying condensed consolidated statements of operations, relating to the Company’s investment in Melinta.

Restricted Cash

The Company had restricted cash of $4.5 million and $6.7 million at September 30, 2019 and December 31, 2018, respectively which included $4.1 million and $6.3 million, respectively, reserved for outstanding letters of credit associated with foreign taxes, and $0.4 million and $0.4 million, respectively, reserved for other U.S. operating expenses. These funds are invested in certificates of deposit.

7. Fair Value Measurements

The Company applies a fair value framework in order to measure and disclose its financial assets and liabilities. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1
Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets consist of money market investments.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable


12

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


market data for substantially the full term of the assets or liabilities. Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates and yield curves.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Financial assets and liabilities measured at fair value on a recurring basis

Financial assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Except for the Company’s Level 2 liabilities which are discussed in Note 9, “Convertible Senior Notes,” the following table sets forth the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018, by level, within the fair value hierarchy:
 
As of September 30, 2019
 
As of December 31, 2018
Assets and Liabilities
Quoted Prices In
Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
 (Level 2)
 
Significant
Unobservable
Inputs
 (Level 3)
 
Balance as of September 30, 2019
 
Quoted Prices In
Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
 (Level 2)
 
Significant
Unobservable
Inputs
 (Level 3)
 
Balance as of December 31, 2018
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
$
12,506

 
$

 
$

 
$
12,506

 
$
12,298

 
$

 
$

 
$
12,298

Short-term investment
2,525

 

 

 
2,525

 
2,627

 

 

 
2,627

Total assets at fair value
$
15,031

 
$

 
$

 
$
15,031

 
$
14,925

 
$

 
$

 
$
14,925



8. Inventory

The major classes of inventory were as follows:
 
 
September 30,
2019
 
December 31,
2018
 
 
(in thousands)
Raw materials
 
$

 
$
864

Work-in-progress
 

 

Finished goods
 

 

Total
 
$

 
$
864



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

9. Convertible Senior Notes

Convertible Senior Notes Due 2024

In December 2018 and January 2019, the Company issued, at par value, $172.5 million aggregate principal amount of 3.5% 2024 Notes. The 2024 Notes bear cash interest at a rate of 3.5% per year, payable semi-annually on January 15 and July 15 of each year, beginning on July 15, 2019. The 2024 Notes will mature on January 15, 2024. The net proceeds to the Company from the offering were $166.8 million after deducting commissions and the offering expenses payable by the Company.



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


The 2024 Notes are governed by an indenture (the 2024 Notes Indenture) with Wells Fargo Bank, National Association, a national banking association, as trustee (the 2024 Notes Trustee).

The 2024 Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2024 Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by the Company’s subsidiaries.

Holders may convert their 2024 Notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2023 only under the following circumstances:

during any calendar quarter commencing on or after March 31, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the 2024 Notes Indenture) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or

upon the occurrence of specified corporate events.

On or after October 15, 2023, until the close of business on the business day immediately preceding the maturity date, holders may convert their 2024 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination thereof, at the Company’s option, based upon a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading day observation period (as more fully described in the 2024 Notes Indenture). The conversion rate for the 2024 Notes was initially, and remains, 39.692 shares of the Company’s common stock per $1,000 principal amount of the 2024 Notes, which is equivalent to an initial conversion price of approximately $25.19 per share of the Company’s common stock.

During the second quarter of 2019 and continuing into the third quarter of 2019, the conditional conversion feature of the 2024 Notes was triggered based on the trading price of the Company’s common stock, and the holders are currently entitled to convert the 2024 Notes through December 31, 2019. From July 1, 2019 through October 28, 2019, no holders of the 2024 Notes exercised their conversion option. In the event that the holders elect to convert their 2024 Notes, the Company intends to deliver shares of the Company’s common stock. As of September 30, 2019, the value of the convertible portion of the 2024 Notes exceeds the principal amount by $169.9 million.

If the Company undergoes a fundamental change (as defined in the 2024 Notes Indenture), subject to certain conditions, holders of the 2024 Notes may require the Company to repurchase for cash all or part of their 2024 Notes at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The 2024 Notes Indenture governing the 2024 Notes contains customary events of default with respect to the 2024 Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the 2024 Notes when due and payable) occurring and continuing, the 2024 Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 2024 Notes by notice to the Company and the 2024 Notes Trustee, may, and the 2024 Notes Trustee at the request of such holders (subject to the provisions of the 2024 Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2024 Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2024 Notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

In accounting for the issuance of the 2024 Notes, the Company separated the 2024 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined


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


by deducting the fair value of the liability component from the par value of the 2024 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the five-year term of the 2024 Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component related to the 2024 Notes was $44.4 million and was recorded in additional paid-in capital on the accompanying consolidated balance sheet.

In accounting for the transaction costs related to the issuance of the 2024 Notes, the Company allocated the total costs incurred to the liability and equity components of the 2024 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the five-year term of the 2024 Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity. Additionally, the Company initially recorded a net deferred tax liability of $12.5 million in connection with the 2024 Notes.

The 2024 Notes consist of the following:

Liability component
 
September 30, 2019
 
December 31, 2018
 
 
(in thousands)
Principal
 
$
172,500

 
$
163,000

Less: Debt discount, net(1)
 
(44,037
)
 
(47,010
)
Net carrying amount
 
$
128,463

 
$
115,990

_______________________________________
(1) 
Included in the accompanying consolidated balance sheets within convertible senior notes (due 2024) and amortized to interest expense over the remaining life of the 2024 Notes using the effective interest rate method.

The fair value of the 2024 Notes was approximately $377.3 million as of September 30, 2019. The Company estimates the fair value of its 2024 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2024 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities, which are classified as Level 2 measurements within the fair value hierarchy. See Note 7, “Fair Value Measurements,” for definitions of hierarchy levels. As of September 30, 2019, the remaining contractual life of the 2024 Notes is approximately 4.3 years.

The following table sets forth total interest expense recognized related to the 2024 Notes:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
(in thousands)
Contractual interest expense
$
1,510

 
$

 
$
4,428

 
$

Amortization of debt discount
2,004

 

 
5,683

 

Total
$
3,514


$

 
$
10,111

 
$

Effective interest rate of the liability component
11.15
%
 
%
 
11.15
%
 
%


Convertible Senior Notes Due 2023

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

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

The 2023 Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2023 Notes; equal in right of payment to the Company’s


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


existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by the Company’s subsidiaries.

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

during any calendar quarter commencing on or after September 30, 2016 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;

during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the 2023 Notes Indenture) per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

during any period after the Company has issued notice of redemption until the close of business on the scheduled trading day immediately preceding the relevant redemption date; or

upon the occurrence of specified corporate events.

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

The Company may not redeem the 2023 Notes prior to July 15, 2020. The Company may redeem for cash all or any portion of the 2023 Notes, at its option, on or after July 15, 2020 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect on the last trading day of, and for at least 19 other trading days (whether or not consecutive) during, any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the 2023 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No redemption date may be designated that falls on or after the 52nd scheduled trading date prior to maturity. No sinking fund is provided for the 2023 Notes, which means that the Company is not required to redeem or retire the 2023 Notes periodically.

If the Company undergoes a fundamental change (as defined in the 2023 Notes Indenture), subject to certain conditions, holders of the 2023 Notes may require the Company to repurchase for cash all or part of their 2023 Notes at a repurchase price equal to 100% of the principal amount of the 2023 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The 2023 Notes Indenture governing the 2023 Notes contains customary events of default with respect to the 2023 Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the 2023 Notes when due and payable) occurring and continuing, the 2023 Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 2023 Notes by notice to the Company and the 2023 Notes Trustee, may, and the 2023 Notes Trustee at the request of such holders (subject to the provisions of the 2023 Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2023 Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2023 Notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.



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


In accounting for the issuance of the 2023 Notes, the Company separated the 2023 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2023 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the seven-year term of the 2023 Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification. The equity component related to the 2023 Notes is $101.0 million and is recorded in additional paid-in capital on the accompanying condensed consolidated balance sheet.

In accounting for the transaction costs related to the issuance of the 2023 Notes, the Company allocated the total costs incurred to the liability and equity components of the 2023 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the 2023 Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity. Additionally, the Company initially recorded a net deferred tax liability of $33.5 million in connection with the 2023 Notes.

The 2023 Notes consist of the following:
Liability component
 
September 30, 2019
 
December 31, 2018
 
 
(in thousands)
Principal
 
$
402,500

 
$
402,500

Less: Debt discount, net(1)
 
(65,972
)