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Income Taxes

12 Months Ended

Dec. 31, 2019

Note 13. Income Taxes

We are subject to U.S. federal, state and foreign corporate income taxes. The provision for income taxes is based on income (loss) before provision for income taxes as follows (in thousands):


	Year Ended December 31,
	2019		2018		2017
U.S.	$	712,486	$	478,050	$	36,493
Non-U.S.		(225,695)		(362,703)		(348,783)
Income (loss) before provision for income taxes	$	486,791	$	115,347	$	(312,290)

Our provision for income taxes consists of the following (in thousands):


	Year Ended December 31,
	2019		2018		2017
Current:
Federal	$	23,526	$	—	$	—
State		11,553		5,010		486
Foreign		5,183		1,303		1,171
		40,262		6,313		1,657
Deferred:
State		(205)		111		(805)
Foreign		(172)		(570)		—
		(377)		(459)		(805)
Total provision for income taxes	$	39,885	$	5,854	$	852

A reconciliation of income taxes at the U.S. federal statutory rate to the provision for income taxes is as follows (in thousands):


	Year Ended December 31,
	2019		2018		2017
Provision (benefit) at U.S. federal statutory rate¹	$	102,226	$	24,223	$	(109,302)
Unbenefited net operating losses and tax credits		(82,819)		(51,861)		(99,254)
Excess tax benefits related to share-based compensation		(13,418)		(8,233)		(81,021)
Deferred tax impact of Tax Cuts and Jobs Act of 2017		—		—		196,751
Foreign tax rate differential		25,419		37,061		86,777
Non-deductible officer compensation		5,213		4,114		6,351
Other		3,264		550		550
Provision for income taxes	$	39,885	$	5,854	$	852

^1. Statutory U.S. federal income tax rate of 21% in 2019, 21% in 2018 and 35% in 2017.

The foreign tax rate differential in the table above reflects the impact of operations in jurisdictions with tax rates that differ from the U.S. federal statutory rate.

Significant components of our deferred tax assets and liabilities are as follows (in thousands):


	December 31,
	2019		2018
Deferred tax assets:
Net operating loss carry forwards	$	102,001	$	148,142
Federal and state research credits		400,550		402,798
Capitalized research and development		46,188		53,871
Deferred revenue and accruals		13,609		9,443
Non-cash compensation		67,345		58,194
Acquisition-related contingent consideration		31,956		43,676
Intangibles, net		92,806		93,730
Long term investments		14,899		23,621
Other		21,885		22,211
Total gross deferred tax assets		791,239		855,686
Less valuation allowance for deferred tax assets		(770,497)		(836,992)
Net deferred tax assets	$	20,742	$	18,694

Deferred tax liabilities:
Property and equipment	$	(19,095)	$	(17,424)
Total gross deferred tax liabilities		(19,095)		(17,424)
Net deferred tax assets	$	1,647	$	1,270

The net deferred tax asset balance is reported in other assets, net on the consolidated balance sheets as of December 31, 2019 and 2018.

As of December 31, 2019, the Company has net operating loss (“NOL”) carryforwards, research and development credit carryforwards and orphan drug tax credit carryforwards as follows (in thousands):


	Amount		Expiring if not utilized
Net operating loss carryforwards
State	$	279,544	2020 through 2037; indefinite
Foreign		939,949	2020 through 2026
Research and development credit carryforwards
Federal		187,821	2031 through 2039
State		28,664	2021 through 2039; indefinite
Orphan drug tax credit carryforwards		212,410	2031 through 2039

The valuation allowance for deferred tax assets decreased by approximately $66.5 million during the year ended December 31, 2019, increased by approximately $2.2 million during the year ended December 31, 2018 and increased by approximately $14.6 million during the year ended December 31, 2017. The net valuation allowance decreased during 2019 was primarily due to the utilization of NOLs and research and development (“R&D”) credits in the U.S., and a tax rate reduction impacting the value of certain foreign deferred tax assets. This was partially offset by the generation of U.S. federal R&D credits, orphan drug credits and foreign NOLs.

Valuation allowances require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. 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.

Based upon our analysis of our historical operating results, as well as projections of our future taxable income (losses) during the periods in which the temporary differences will be recoverable, management believes the uncertainty regarding the realization of our U.S. and Swiss net deferred tax assets requires a full valuation allowance against such net

assets as of December 31, 2019. When performing our assessment on projections of future taxable income (losses), we consider factors such as the likelihood of regulatory approval and commercial success of products currently under development, among other factors.

The financial statement recognition of the benefit for a tax position is dependent upon the benefit being more likely than not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at the largest amount that is greater than 50% likely of being realized upon ultimate settlement. If such unrecognized tax benefits were realized and not subject to valuation allowances, we would recognize a tax benefit of $24.3 million. The following table summarizes the gross amounts of unrecognized tax benefits (in thousands):


	Year Ended December 31,
	2019		2018
Balance at beginning of year	$	22,395	$	18,022
Additions related to prior periods tax positions		726		2,098
Reductions related to prior periods tax positions		(82)		—
Additions related to current period tax positions		1,835		2,466
Reductions due to lapse of applicable statute of limitations		(557)		(130)
Currency translation adjustment		(66)		(61)
Balance at end of year	$	24,251	$	22,395

Our policy is to recognize interest and penalties related to uncertain tax positions, if any, as a component of income tax expense. During the years ended December 31, 2019, 2018 and 2017, we recorded interest and penalties as a component of income tax expense of $0.2 million, $0.1 million and $0.3 million, respectively. We do not anticipate any significant changes to our unrecognized tax benefits during the next twelve months.

The Company files U.S. federal, state and local income tax returns and income tax returns in various foreign jurisdictions, with statutes of limitation generally ranging from three to five years during which such tax returns may be audited by the relevant tax authorities. Those statutes could be extended due to NOL or tax credit carryforwards generated during these periods that are subsequently utilized in open tax periods. In general, tax authorities have the ability to adjust the NOL carryforward or tax credits for three years after utilization of that year’s tax attribute carryforward.