Commitments and Contingencies

Contingent Payments

TYSABRI

In 2013 we acquired from Elan full ownership of all remaining rights to TYSABRI that we did not already own or control. Under 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 recorded as cost of sales in our consolidated statements of income. Elan was acquired by Perrigo Company plc (Perrigo) in December 2013, and Perrigo subsequently sold its rights to these payments to a third-party effective January 2017.

SPINRAZA

In the third quarter of 2016 we exercised our option to develop and commercialize SPINRAZA from Ionis. Under our agreement with Ionis, we make royalty payment to Ionis on annual worldwide net sales of SPINRAZA using a tiered royalty rate between 11% and 15%, which are recorded as cost of sales in our consolidated statements of income. For additional information on our collaboration arrangements with Ionis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.

Contingent Consideration related to Business Combinations

In connection with our acquisitions of Convergence, Stromedix and BIN, we agreed to make additional payments based upon the achievement of certain milestone events.

As the acquisitions of Convergence, Stromedix and BIN occurred after January 1, 2009, we recognized the contingent consideration liabilities associated with these transactions at their fair value on the acquisition date and revalue these obligations each reporting period. We may pay up to approximately $1.0 billion in remaining milestones related to these acquisitions.

Fumapharm AG

In 2006 we acquired Fumapharm AG. As part of this acquisition we acquired the Fumapharm Products. We paid $220.0 million upon closing of the transaction and agreed to pay an additional $15.0 million if a Fumapharm Product was approved for MS in the U.S. or E.U. In the second quarter of 2013 TECFIDERA was approved in the U.S. for MS by the FDA and we made the $15.0 million contingent payment. We are also required to make additional contingent payments to former shareholders of Fumapharm AG and 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 12-month period, as defined in the acquisition agreement, until such time as the cumulative sales level reached $20.0 billion, at which time no further contingent payments are due. These payments are accounted for as an increase to goodwill as incurred, in accordance with the accounting standard applicable to business combinations when we acquired Fumapharm AG. Any portion of the payment that is tax deductible was 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 was reached.

During 2018 we paid $1.5 billion in contingent payments as we reached the $15.0 billion and $16.0 billion cumulative sales levels related to the Fumapharm Products in the fourth quarter of 2017 and the $17.0 billion, $18.0 billion and $19.0 billion cumulative sales levels related to the Fumapharm Products in the first, second and third quarters of 2018, respectively. In the fourth quarter of 2018 we achieved the $20.0 billion cumulative sales level threshold and accrued our last $300.0 million contingent payment related to the Fumapharm Products, which will be paid in the first quarter of 2019.

Contingent Development, Regulatory and Commercial Milestone Payments

Based on our development plans as of December 31, 2018, we could make potential future milestone payments to third parties of up to approximately $5.0 billion, including approximately $0.7 billion in development milestones, approximately $1.8 billion in regulatory milestones and approximately $2.5 billion in commercial milestones, as part of our various collaborations, including licensing and development programs. Payments under these agreements generally become due and payable upon achievement of certain development, regulatory or commercial milestones. Because the achievement of these milestones was not considered probable as of December 31, 2018, 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 or commercial milestones.

Other Funding Commitments

As of December 31, 2018, we have several ongoing clinical studies in various clinical trial stages. Our most significant clinical trial expenditures are to CROs. The contracts with CROs are generally cancellable, with notice, at our option. We recorded accrued expenses of approximately $27.0 million in our consolidated balance sheet for expenditures incurred by CROs as of December 31, 2018. We have approximately $655.0 million in cancellable future commitments based on existing CRO contracts as of December 31, 2018.

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, 2018, we have $117.7 million of liabilities associated with uncertain tax positions.

As of December 31, 2018 and 2017, we have accrued income tax liabilities of $697.0 million and $989.6 million, respectively, under the Transition Toll Tax. Of the amounts accrued as of December 31, 2018, no amounts are expected to be paid within one year due to a $150.0 million overpayment of taxes in the current year. The Transition Toll Tax will be paid over an eight-year period, which started in 2018, and will not accrue interest. For additional information on the Transition Toll Tax, please read Note 17, Income Taxes, to these consolidated financial statements.

Solothurn, Switzerland Manufacturing Facility

We are building a large-scale biologics manufacturing facility in Solothurn, Switzerland. We expect this facility to be operational by the end of 2020. As of December 31, 2018, we had contractual commitments of $111.0 million related to the construction of this facility.

Leases

We rent laboratory and office space and certain equipment under non-cancelable operating leases. These lease agreements contain various clauses for renewal at our option and, in certain cases, escalation clauses typically linked to rates of inflation. Rental expense, net of sublease income under these leases, which terminate at various dates through 2028, amounted to $64.5 million, $65.3 million and $68.7 million in 2018, 2017 and 2016, respectively. In addition to rent, the leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses.

As of December 31, 2018, minimum rental commitments under non-cancelable leases, net of income from subleases, for each of the next five years and total thereafter were as follows:



(In millions)	2019			2020			2021			2022			2023			Thereafter			Total
Minimum lease payments	$	87.0		$	80.7		$	75.9		$	71.7		$	71.0		$	215.3		$	601.6
Less: income from subleases (1)	(26.8		)	(25.6		)	(23.7		)	(24.0		)	(24.3		)	(58.4		)	(182.8		)
Net minimum lease payments	$	60.2		$	55.1		$	52.2		$	47.7		$	46.7		$	156.9		$	418.8


(1)	Represents sublease income expected to be received for the vacated manufacturing facility in Cambridge, MA, the vacated portion of our Weston, MA facility and other facilities throughout the world.

Under certain of our lease agreements, we are contractually obligated to return leased space to its original condition upon termination of the lease agreement. At the inception of a lease with such conditions, we record an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. In subsequent periods, for each such lease, we record interest expense to accrete the asset retirement obligation liability to full value and depreciate each capitalized asset retirement obligation asset, both over the term of the associated lease agreement. Our asset retirement obligations were not significant as of December 31, 2018 or 2017.