8. Long-term Debt

Our long-term debt consisted of the following at September 30, 2015 and December 31, 2014:


*In thousands*	2015			2014
Convertible notes, net	$	162,293		$	156,154
Royalty financing, net		46,483			—
Facility lease obligation		220,612			196,027

		429,388			352,181
Less current portion		(9,666	)		(6,707	)

	$	419,722		$	345,474

3.625 percent Convertible Notes due 2019

On June 17, 2014, the Company issued $200.0 million aggregate principal amount of 3.625 percent convertible senior notes due 2019 (the “convertible notes”). The Company received net proceeds of $192.9 million from the sale of the convertible notes, after deducting fees of $6.0 million and expenses of $1.1 million. At the same time, in order to reduce the potential dilution to the Company’s common stockholders and/or offset any cash payments in excess of the principal amount due upon conversion of the convertible notes, the Company used $43.2 million of the net proceeds from the sale of the convertible notes to pay the cost of convertible bond hedges which cost was partially offset by $27.6 million in proceeds to the Company from the related sale of warrants to the counter-party in the convertible bond hedge transaction.

The outstanding convertible note balances as of September 30, 2015 and December 31, 2014 consisted of the following:


*In thousands*	2015			2014
Principal	$	200,000		$	200,000
Less: debt discount, net		(37,707	)		(43,846	)

Net carrying amount	$	162,293		$	156,154

The Company determined the expected life of the debt was equal to the five-year term on the convertible notes. The effective interest rate on the liability component was 9.625 percent for the period from the date of issuance through September 30, 2015. Interest expense related to the convertible notes during for the three-month and nine-month periods ended September 30, 2015 consisted of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,
*In thousands*	2015		2014		2015		2014
Contractual interest expense	$	1,813	$	1,812	$	5,438	$	2,074
Amortization of debt discount		2,058		1,872		6,032		2,141
Amortization of debt issuance costs		36		33		105		38

	$	3,907	$	3,717	$	11,575	$	4,253

Royalty Financing

On July 28, 2015, the Company entered into a royalty financing agreement with PDL BioPharma, Inc. (“PDL”) under which the Company received an initial payment of $50 million in exchange for a percentage of global net revenues from sales of Iclusig until PDL receives a fixed internal rate of return on the funds it advances the Company. The Company will receive an additional $50 million one year from the effective date of the agreement with the option to receive up to an additional $100 million in one or two tranches between the six-month and twelve-month anniversary dates of the agreement. The proceeds received from PDL are referred to as “advances”.

Under the agreement, the Company agreed to pay PDL a percentage of global Iclusig net product revenues subject to an annual maximum payment of $20 million per year through 2018. The rate is 2.5 percent during the first year and increases to 5 percent in the second year through the end of 2018 and 6.5 percent from 2019 until PDL receives a 10 percent internal rate of return. If the Company draws down in excess of $150 million, the 6.5 percent rate would increase to 7.5 percent until PDL receives 10 percent internal rate of return. Through September 30, 2015, the Company has paid a total of $313,000 to PDL under this agreement. Payments are deemed to be applied against advances. Interest expense related to the financing agreement was $1.3 million for the nine-month period ended September 30, 2015.

Beginning in 2019, if PDL does not receive specified minimum payments each year from sales of Iclusig, then it will also have the right to receive a certain percentage of net revenues from sales of brigatinib, subject to its approval by regulatory authorities. If PDL has not received total cumulative payments under this agreement that are at least equal to the amounts PDL has advanced to the Company by the fifth anniversary of each funding date, the Company is required to pay PDL an amount equal to the shortfall.

PDL retains the option to require the Company to repurchase the then outstanding net advances, together with additional payments representing return on investment as described below (the “put” option), in the event the Company experiences a change of control, undergoes certain bankruptcy events, transfers any of its interests in Iclusig (other than pursuant to a license agreement, development, commercialization, co-promotion, collaboration, partnering or similar agreement), transfers all or substantially all of its assets, or breaches certain of the covenants, representations or warranties made under the agreement. Similarly, the Company has the option to terminate the agreement at any time by payment of the then outstanding net advances, together with additional payments representing return on investment as described below (the “call” option). Both the put and call options can be exercised at a price which is equal to the greater of (a) the then outstanding net advances and an amount that would generate an internal rate of return to PDL of 10 percent after taking into account the amount and timing of all payments made to PDL by the Company or (b) a multiple of the then outstanding net advances of 1.15 if exercised on or prior to the first anniversary of the closing date, 1.20 if exercised after the first anniversary but on or prior to the second anniversary of the closing date or 1.30 if exercised after the second anniversary of the closing date.

In connection with the agreement, the Company also entered into a security agreement with PDL on the same date as the royalty financing agreement. Under the security agreement, the Company granted PDL a security interest in certain assets relating to Iclusig, including all of the Company’s revenues from sales of Iclusig covered by the royalty financing agreement, a certain segregated deposit account established under the royalty financing agreement, and certain intellectual property, license agreements, and regulatory approvals related to Iclusig. The collateral set forth in the security agreement secures the Company’s obligations under the royalty financing agreement, including its obligation to pay all amounts due thereunder.

For accounting purposes, the agreement has been classified as a debt financing as the Company will have significant continuing involvement in the sale of Iclusig and other products which might be covered by the agreement, the parties have the right to cancel the agreement as described above, PDL’s rate of return is implicitly limited by the terms of the transaction, volatility in the sale of Iclusig and other products would have no effect on PDL’s expected ultimate return, and PDL has certain rights in the event that product sales and related payments under this agreement are insufficient to pay down the Company’s obligations.

In connection with the transaction, the Company recorded the initial net proceeds as long-term debt. The Company will impute interest expense associated with this borrowing using the effective interest rate method and will record a corresponding accrued interest liability. The effective interest rate is calculated based on the rate that would enable the debt to be repaid in full over the anticipated life of the arrangement, including the required 10 percent internal rate of return to PDL. Determining the effective interest rate requires judgment and is based on significant assumptions related to estimates of the amounts and timing of future revenue streams. Determination of these assumptions is highly subjective and different assumptions could lead to materially different outcomes.

The Company has evaluated the Company’s call option and PDL’s put option in accordance with ASC 815 “Accounting for Derivative Instruments and Hedging Activities”, and determined that the put option is an embedded derivative. This item is being accounted for as a derivative and the estimated fair value of the put option is carried as part of the carrying value of the related liability, and was not material as of the date of the agreement or September 30, 2015.

Facility Lease Obligation

As of September 30, 2015 and December 31, 2014, the Company has recorded a facility lease obligation related to its lease for a new facility under construction in Cambridge, Massachusetts. See notes 5 and 9 to the condensed consolidated financial statements included in this report for information regarding the lease and related asset under construction. During the construction period the Company is capitalizing the costs as a component of construction in process with a corresponding credit to facility lease obligation.

The Company expects to complete construction and occupy the facility in the third quarter of 2016. Under terms of the lease, the Company commenced making lease payments in March 2015. During the construction period a portion of the lease payment is allocated to land lease expense with the remainder accounted for as a reduction of the obligation.