UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission file number 001-37859

Bioverativ Inc.

(Exact Name of Registrant as Specified in Its Charter)

(781) 663‑4400

(Registrant’s Telephone Number, Including Area Code)

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.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

The number of shares of the issuer’s common stock, $0.001 par value, outstanding as of May 1, 2017 was 108,159,852

BIOVERATIV INC.

FORM 10-Q – Quarterly Report

For the Quarterly Period Ended March 31, 2017

TABLE OF CONTENTS

NOTE REGARDING FORWARD‑LOOKING STATEMENTS

This report contains forward‑looking statements. Use by Bioverativ of the words “may,” “will,” “would,” “could,” “should,” “believes,” “estimates,” “projects,” “potential,” “expects,” “plans,” “seeks,” “intends,” “evaluates,” “pursues,” “anticipates,” “continues,” “designs,” “impacts,” “affects,” “forecasts,” “target,” “outlook,” “initiative,” “objective,” “designed,” “priorities,” or the negative of those words or other similar expressions is intended to identify forward‑looking statements.

These forward‑looking statements may include statements with respect to:

These forward-looking statements involve risks and uncertainties, including those that are described in Item 1A. Risk Factors and elsewhere in this report, that could cause actual results to differ materially from those reflected in such statements.  You should not place undue reliance on these statements.  Forward-looking statements speak only as of the date of this report. Except as required by law, we do not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.

NOTE REGARDING PRESENTATION OF INFORMATION

Unless the context otherwise requires, references in this report to the following terms shall have the following respective meanings:

This report describes the business transferred to Bioverativ by Biogen in the separation as if the transferred business was Bioverativ’s business for all historical periods described. References in this report to Bioverativ’s historical assets, liabilities, products, businesses or activities of Bioverativ’s business are generally intended to refer to the historical assets, liabilities, products, businesses or activities of the transferred business as the business was conducted as part of Biogen prior to the separation.  Since the separation date, Bioverativ has operated as standalone company. 

NOTE REGARDING TRADEMARKS, TRADE NAMES AND SERVICE MARKS

Bioverativ owns or has rights to use the trademarks, service marks and trade names that it uses in conjunction with the operation of its business. Some of the trademarks that Bioverativ owns or has rights to use that appear in this report include: ALPROLIX® and ELOCTATE®, which may be registered or trademarked in the United States and other jurisdictions. Bioverativ’s rights to some of these trademarks may be limited to select markets. Each trademark, trade name or service mark of any other company appearing in this report is, to Bioverativ’s knowledge, owned by such other company. References to ELOCTATE in this report shall also refer to ELOCTA, the approved trade name for ELOCTATE in the European Union, as the context may require.

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PART I – FINANCIAL INFORMATION

BIOVERATIV INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(unaudited, in millions, except per share amounts)

See accompanying notes to these unaudited condensed consolidated financial statements.

BIOVERATIV INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in millions, except share data)

See accompanying notes to these unaudited condensed consolidated financial statements.

BIOVERATIV INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in millions)

See accompanying notes to these unaudited condensed consolidated financial statements.

BIOVERATIV INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited, in millions)

See accompanying notes to these unaudited condensed consolidated financial statements

BIOVERATIV INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Nature of Business and Basis of Presentation

Nature of Business

Bioverativ Inc. (Bioverativ) separated from Biogen Inc. (Biogen) on February 1, 2017 as a result of a special dividend distribution of all the outstanding shares of common stock of Bioverativ to Biogen stockholders. The distribution was made to Biogen stockholders of record as of the close of business on January 17, 2017, who received one share of Bioverativ common stock for every two shares of Biogen common stock held as of such date. As a result of the distribution, Bioverativ became an independent public company.

Bioverativ holds the assets and liabilities of Biogen’s former hemophilia business. Bioverativ is focused on the discovery, research, development and commercialization of innovative therapies for the treatment of hemophilia and other blood disorders.

Bioverativ’s marketed products include ELOCTATE and ALPROLIX, extended half‑life factors for the treatment of hemophilia A and hemophilia B, respectively. Pursuant to a development and commercialization agreement, Bioverativ collaborates with Swedish Orphan Biovitrum AB (publ) (Sobi) to jointly develop and commercialize ELOCTATE and ALPROLIX globally. Sobi has assumed responsibility for commercialization of ELOCTATE and ALPROLIX in Europe, Russia and certain countries in Northern Africa and the Middle East, while Bioverativ retains rights to commercialize those therapies in the United States, Japan, Canada, Australia, Latin American countries and all other markets excluding Sobi’s commercialization territory. See Note 2, Collaborations, for further information on Bioverativ’s collaboration with Sobi.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States (U.S. GAAP).

We operate as one operating segment, which is discovering, researching, developing and commercializing innovative therapies for the treatment of hemophilia and other blood disorders.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Form 10-K). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2016 Form 10-K and updated, as necessary, in this Quarterly Report on Form 10-Q. The December 31, 2016 condensed consolidated balance sheet data presented for comparative purposes was derived from our audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three months ended March 31, 2017, are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

The accompanying unaudited condensed consolidated interim financial statements reflect the consolidated financial position and consolidated results of operations of the company as an independent, publicly-traded company for the period after the February 1, 2017 separation. The unaudited condensed consolidated interim financial statements also reflect the consolidated financial position and consolidated results of operations of the company as a consolidated reporting entity of Biogen for periods prior to the separation.

During the three months ended March 31, 2017, the company recorded certain separation related adjustments in its statement of equity. The separation related adjustments primarily related to differences between assets and liabilities transferred to Bioverativ as a result of the separation and assets and liabilities reported in the company’s consolidated balance sheet as of January 31, 2017.  Separation related adjustments for the three months ended March 31, 2017 totaled $312.4 million consisting primarily of inventory and deferred tax assets retained by Biogen upon separation. Additional separation related adjustments could be recorded in future periods.

Prior to the separation, the unaudited condensed consolidated interim financial statements were prepared on a standalone basis and were derived from Biogen’s consolidated financial statements and accounting records as if the former hemophilia business of Biogen had been standalone business. Accordingly, financial information for periods prior to the separation are shown on a carve-out basis for the hemophilia business as part of Biogen. The unaudited condensed consolidated interim financial statements reflected the company’s financial position, results of operations and cash flows as the business was operated as part of Biogen prior to the distribution.

Prior to the separation, the unaudited condensed consolidated interim financial statements included the attribution of certain assets and liabilities that were historically held at the Biogen corporate level but which were specifically identifiable or attributable to the company. All intercompany transactions and accounts within the company were eliminated. All transactions between the company and Biogen were considered to be effectively settled in the unaudited condensed consolidated interim financial statements at the time the transaction was recorded. The total net effect of the settlement of the transactions with Biogen are reflected in the unaudited condensed consolidated statements of cash flows in periods prior to the separation as a financing activity and in the unaudited condensed consolidated balance sheet as net parent company investment.

Prior to the separation, these unaudited condensed consolidated interim financial statements include an allocation from Biogen to us for certain research and development and selling, general and administrative costs not directly attributable to the hemophilia business of Biogen. The research and development costs include depreciation and other facility‑based expenses, regulatory affairs function, pharmacovigilance, other infrastructure and management costs supporting multiple projects. The selling, general and administrative costs include certain services provided by Biogen, which include, but are not limited to, executive oversight, treasury, finance, legal, human resources, tax planning, internal audit, financial reporting, information technology, investor relations, shared services, insurance, employee benefits and incentives and share‑based compensation.  Allocated amounts have been included in research and development, selling, general and administrative and other income and expense. These expenses have been allocated to the company based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily based on hours or direct costs. The company considers the expense methodology and results to be reasonable for all periods presented. However, the allocations may not be indicative of the actual expense that would have been incurred had the company operated as an independent, publicly traded company for the periods presented.

In periods prior to the separation, Bioverativ’s employees participated in various benefit and share-based compensation plans maintained by Biogen. A portion of the cost of those plans was included in the company’s financial statements. However, the unaudited condensed consolidated balance sheets in periods prior to the separation did not include any equity related to share-based compensation plans.

Prior to the separation, the company’s equity balance represented the excess of total assets over total liabilities, including the due to/from balances between the company and Biogen (net parent company investment) and cumulative translation adjustment.  In connection with the separation, the company’s net parent company investment balance was reclassified to additional paid-in capital.

Reclassifications

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. In first quarter of 2017, the company concluded that it was appropriate to classify costs associated with medical affairs as research and development expense to better align with Bioverativ’s organizational structure.  Previously, such costs had been classified as selling, general and

administrative. As a result, the amounts that were previously presented in selling, general and administrative were reclassified in research and development for each of the following periods in 2016.

Use of Estimates

The preparation of our condensed consolidated financial statements 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. On an on-going basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions.

New Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (FASB) or other standard setting bodies that we adopt as of the specified effective date.

The following new standards issued by FASB were adopted by the company on January 1, 2017:

The following new standards have been issued by FASB but are not yet effective.

In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry-specific guidance. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB has subsequently issued amendments to ASU No. 2014-09 that have the same effective date and transition date of January 1, 2018. We expect to adopt these standards using the modified retrospective method and continue to evaluate the potential impact that this standard may have on our financial position, results of operations and disclosures.

In January 2016 the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new standard amends certain aspects of accounting and disclosure requirements of financial instruments, including the requirement that equity investments with readily determinable fair values be measured at fair value with changes in fair value recognized in a company's results of

operations. The new standard does not apply to investments accounted for under the equity method of accounting or those that result in consolidation of the investee. Equity investments that do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for changes in observable prices. A financial liability that is measured at fair value in accordance with the fair value option is required to be presented separately in other comprehensive income for the portion of the total change in the fair value resulting from change in the instrument-specific credit risk. In addition, a valuation allowance should be evaluated on deferred tax assets related to available-for-sale debt securities in combination with other deferred tax assets. The new standard will be effective for us on January 1, 2018. As of March 31, 2017, the adoption of this standard is not expected to have a material impact on our financial position or results of operations.

In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on their balance sheet and disclose qualitative and quantitative information about their leasing arrangements. The new standard will be effective for us on January 1, 2019. We are currently evaluating the impact that this standard may have on our results of operations, financial position and disclosures. As of March 31, 2017, the adoption of this standard is not expected to have a material impact on our net financial position, but may materially impact the reported amount of total assets and total liabilities.

In October 2016 the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory. This new standard eliminates the deferral of the tax effects of intra-entity transfers of an asset other than inventory. Under the new standard, entities should recognize the income tax consequences on an intra-entity transfer of an asset other than inventory when the transfer occurs. This new standard will be effective for us on January 1, 2018 and will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. As of March 31, 2017, the adoption of this standard is not expected to have a material impact on our financial position.

In January 2017 the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for us on January 1, 2018, however early adoption is permitted. As of March 31, 2017, the adoption of this standard is not expected to have a material impact on our financial position.

2. Collaborations

In connection with the company’s business strategy, the company has entered into various collaboration agreements which provide the company with rights to develop, produce and market products using certain know‑how, technology and patent rights maintained by the company’s collaborative partners. Terms of the various collaboration agreements may require the company to make milestone payments upon the achievement of certain product research and development objectives and pay royalties on future sales, if any, of commercial products resulting from the collaboration.

Swedish Orphan Biovitrum AB (publ)

In January 2007, Biogen acquired 100% of the stock of Syntonix Pharmaceuticals (Syntonix). Syntonix, now known as Bioverativ Therapeutics Inc. (formerly Biogen Hemophilia Inc.), had previously entered into a development and commercialization agreement with Sobi to jointly develop and commercialize Factor VIII and Factor IX hemophilia products, including ELOCTATE and ALPROLIX. Under the development and commercialization agreement, as has been amended and restated, Bioverativ has commercial rights for North America (the Bioverativ North America Territory) and for all other markets outside of the Sobi territory (the Bioverativ Direct Territory), which consists of Europe, Russia and certain countries in Northern Africa and the Middle East (the Sobi Territory).

Under the development and commercialization agreement, prior to May 5, 2024, either Bioverativ or Sobi may present a compound construct as a potential product candidate that the parties may consider developing and

commercializing under the collaboration. Upon Sobi's election to treat a compound construct as a product, and in the case of a novel compound construct Sobi's payment of an upfront fee to us, Sobi is granted the right to opt-in to such compound construct and become responsible for final development and commercialization of that compound construct in Sobi's commercialization territory. Generally, upon opt-in, Sobi becomes obligated to make an advance payment and reimburse Bioverativ for certain development expenses incurred with respect to the compound construct. Until Sobi's portion of the development expenses are fully paid, Sobi's royalty rate payable to Bioverativ is increased, and the royalty payment payable by Bioverativ to Sobi for the sale of products in Bioverativ's territory is decreased.

In November 2014, Sobi exercised its option under the agreement to assume final development and commercialization activities in the Sobi Territory for ELOCTA (the trade name for ELOCTATE in the European Union). In July 2015, Sobi exercised its option under the agreement to assume final development and commercialization of ALPROLIX within the Sobi Territory. Upon each exercise of opt‑in right under the terms of the development and commercialization agreement, Sobi made a $10.0 million payment.

Upon European Medicines Agency (EMA) regulatory approval of each of ELOCTA and ALPROLIX, Sobi was obligated to reimburse Bioverativ 50% of all shared manufacturing and development expenses incurred by Bioverativ from October 1, 2009 through the earlier of the date on which Sobi is registered as the marketing authorization holder for the applicable product or 90 days post‑regulatory approval, as well as 100% of certain development expenses incurred exclusively for the benefit of the Sobi Territory (the Opt‑In Consideration).

ELOCTA was approved by the European Commission (EC) in November 2015. The Opt‑In Consideration and aggregate amount reimbursable by Sobi to us for ELOCTA was $211.0 million. As of March 31, 2017, approximately $126.6 million remained reimbursable to us by Sobi.

ALPROLIX was approved by the EC in February 2016. The Opt‑In Consideration and aggregate amount reimbursable by Sobi to us for ALPROLIX was $184.7 million. As of March 31, 2017, approximately $113.2 million remained reimbursable to us by Sobi.

The Opt‑In Consideration for each product is being paid by Sobi using a cross‑royalty cash payment structure for sales in each company’s respective territories. If the reimbursement of the Opt‑in Consideration for a product has not been achieved within six years of the first commercial sale of such product (the Reimbursement Period), the company maintains the right to require Sobi to pay any remaining balances due to us within 90 days of the six-year anniversary date of the first commercial sales. After Sobi’s Opt‑In Consideration has been repaid, the royalty paid and received by the company resets to the contractual royalty rate of 12%.

Upon Sobi’s first commercial sale in 2016, and during the Reimbursement Period, the royalty rate the company will pay Sobi on sales of ELOCTATE and ALPROLIX in the Bioverativ North American Territory is 7% and Bioverativ Direct Territory is 12%. After the Reimbursement Period concludes, the royalty rate we pay to Sobi increases by 5%. For the three months ended March 31, 2017 and for the expected term of the agreement, we are recording cost of sales at the effective royalty rate of approximately 11%.  For the three months ended March 31, 2016, the effective royalty rate was approximately 7%.

The company is accounting for the development and commercialization agreement under a right to use model and is recognizing revenue over the term of the commercialization period.

The royalty rate received by the company, during the Reimbursement Period on sales of ELOCTATE and ALPROLIX in Sobi’s territory is 17%. After the Reimbursement period concludes, the royalty we receive decreases to 12%. We are recording revenue at the effective royalty rate expected over the term of the agreement of approximately 14%.

In September 2014, Sobi elected to treat BIVV 001 (rFVIIIFc‑VWF‑XTEN), a preclinical compound construct developed using the XTEN technology licensed by Bioverativ from Amunix, as subject to the collaboration.  In February 2017, Sobi elected to treat BIVV 002 (rFIXFc-XTEN), a preclinical compound construct developed using the XTEN technology licensed by Bioverativ from Amunix, as subject to the collaboration. In consideration for its election,

Sobi will pay us $6.2 million, which has been included as a component of research and development expense. If Sobi exercises its opt-in right for BIVV 001 or BIVV 002, as the case may be, it will become responsible for final development and commercialization of the applicable product in the Sobi Territory.  Further, in general upon opt-in, Sobi will be obligated to reimburse Bioverativ 50% of all shared manufacturing and development expenses incurred by Bioverativ from the period of opt-in through the earlier of the date on which Sobi is registered as the marketing authorization holder for the applicable product or 90 days post‑regulatory approval, as well as 100% of certain development expenses incurred exclusively for the benefit of the Sobi Territory.

3. Financial instruments

Cash and Cash Equivalents

We consider only those investments which are highly liquid, readily convertible to cash and that mature within three months from date of purchase to be cash equivalents. As of March 31, 2017, cash equivalents were comprised of money market funds with maturities less than 90 days from the date of purchase and totaled approximately $328.8 million. The carrying values of money market funds approximate fair value due to their short-term maturities.

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, yield curves and foreign currency spot rates. Fair values determined by Level 3 inputs utilize unobservable data points for the asset. All of our financial assets have been classified as Level 2. These assets have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing market observable data. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events.

The table below presents information about our assets that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

There were no liabilities that are measured at fair value as of March 31, 2017.

Undesignated Derivative Instruments

In April 2017, the company entered into undesignated forward contracts to hedge effects of foreign exchange relating to the company’s intercompany loan denominated in Japanese Yen. These derivative instruments are not formally designated as hedges and the terms of these instruments generally do not exceed one month. The notional amount of undesignated derivative instruments is approximately $71 million.

4. Reserves for Discounts and Allowances

Following the company’s product launches, the company began recognizing reserves for discounts and allowances related to products revenue.

An analysis of the change in reserves is summarized as follows:

5. Inventory

The components of inventory are summarized as follows:

Inventory amounts written down as a result of excess, obsolescence, unmarketability or other reasons are charged to cost of sales.  There were no write downs of inventory in either of the three months ended March 31, 2017 and 2016.

In connection with the separation, certain raw material and work in process inventory totaling $179.0 million was retained by Biogen. This inventory is subject to the terms and conditions of our manufacturing and supply agreement with Biogen.

6. Acquired Intangible Assets

Acquired intangibles primarily relate to approval milestones for ALPROLIX paid to the former Syntonix shareholders. In 2014, upon the U.S. Food and Drug Administration’s approval of ALPROLIX for the treatment of hemophilia B, a $20.0 million milestone was paid to the former Syntonix shareholders. This $20.0 million milestone and the corresponding deferred tax liability of $7.3 million were capitalized as an acquired intangible asset. In 2016, upon EMA approval of ALPROLIX in the European Union, an additional $20.0 million milestone was paid to the former Syntonix shareholders. This $20.0 million milestone and the corresponding deferred tax liability of $6.5 million were capitalized as an acquired intangible asset.

Acquired intangible assets as of March 31, 2017 and December 31, 2016, net of accumulated amortization, are $50.2 million and $51.7 million, respectively. During the three-month periods ending March 31, 2017 and 2016, amortization expense associated with acquired intangible assets was $1.4 million and $0.7 million, respectively.

7. Property, Plant and Equipment

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Components of property, plant and equipment, net are summarized as follows:

In connection with the separation, certain property, plant and equipment, mainly buildings and associated accumulated depreciation totaling $9.8 million was retained by Biogen.

8. Income Taxes

Prior to the separation, the company’s income tax expense and deferred tax balances were calculated on a separate tax return basis although the company’s operations had historically been included in the tax returns filed by the respective Biogen entities, of which the company’s business was a part. For periods subsequent to the separation, Bioverativ files tax returns on its own behalf and its income tax expense and deferred income tax balances are recorded in accordance with the company’s standalone income tax positions. Biogen and Bioverativ entered into a tax matters agreement effective as of the date of separation. 

Income Tax Expense Reconciliation

The company’s effective income tax rate was 37.8% and (1.8)% during the three months ended March 31, 2017 and 2016.  The company’s effective income tax rate for the three months ended March 31, 2017 differs from the U.S. federal statutory rate mainly due to state and local taxes. The company’s effective income tax rate for the three months ended March 31, 2016 differs from the U.S. federal statutory rate mainly due to the release of a valuation allowance associated with deferred tax assets resulting from our net losses and business credit carryforwards.

The effective income tax rate increased during the three months ended March 31, 2017 as compared to the prior year period primarily due to the release of a valuation allowance associated with deferred tax assets resulting from our net losses and business credit carryforwards in the three months ended March 31, 2016. Substantially all of these assets will not be available in the future since those attributes have already been utilized in the tax returns of Biogen.

9. Earnings per Share

The denominator for basic earnings per common share (EPS) is the weighted-average number of common shares outstanding during the period. The dilutive effect of outstanding stock options and time vested restricted stock units is reflected in the denominator for diluted EPS using the treasury stock method. The numerator for both basic and diluted EPS is net income.

On February 1, 2017, Biogen distributed approximately 108 million shares of Bioverativ common stock to its shareholders. The computation of basic and dilutive EPS for periods prior to the separation was calculated using the shares distributed.

The following is a reconciliation of basic shares to diluted shares.

Basic and diluted earnings per share are calculated as follows:

The computation of diluted earnings per share excludes 2.0 million and 2.8 million of outstanding common share equivalents for stock options and time vested restricted stock units for the three months ended March 31, 2017 and 2016, respectively, as the effect is anti-dilutive. 

10. Share‑Based Compensation

Bioverativ Share‑Based Compensation Plans

In connection with the separation, we adopted our own share‑based compensation plans. Specifically, we adopted the Bioverativ Inc. 2017 Omnibus Equity Plan (the Omnibus Plan); the Bioverativ Inc. 2017 Non‑Employee Directors Equity Plan (the Directors Plan); and the Bioverativ Inc. 2017 Employee Stock Purchase Plan (ESPP). Cash-settled performance units, market stock units, performance‑vested restricted stock units and restricted stock units (RSUs) granted under Biogen 2008 Omnibus Equity Plan to Biogen employees who became employees of Bioverativ were converted into Bioverativ RSUs, and stock options held by Biogen employees who became employees of Bioverativ were converted into Bioverativ stock options, each according to the terms of an employee matters agreement entered into between Biogen and Bioverativ in connection with the separation (converted awards). Converted awards, as well as future awards issued to Bioverativ officers, directors and employees, will be awarded under, and subject to the terms of, the Omnibus Plan, the Directors Plan and the ESPP, as the case may be.

The following table provides share-based compensation expense by statement of income line item for the three months ended March 31, 2017 and 2016:

During the three months ended March 31, 2017 and subsequent to the separation, Bioverativ awarded share-based compensation grants consisting of 2.0 million stock options and 0.3 million RSUs, with respect to the company’s employees. In addition, Biogen market stock units, performance‑vested restricted stock units and RSUs converted into 0.5 million Bioverativ RSUs.

Stock Options 

Post-Separation

The weighted-average Black-Scholes assumptions used in estimating the fair value of stock options granted by Bioverativ following the separation during the three months ended March 31, 2017, along with the weighted-average grant-date fair values, were as follows:

Expected volatility was determined using an average of peer companies’ expected volatility. As of March 31, 2017, the unrecognized compensation cost related to all unvested stock options held by Bioverativ’s employees of $30.5 million is expected to be recognized as expense over a weighted-average period of 2.9 years.

RSUs

As of March 31, 2017, the unrecognized compensation cost related to all unvested RSUs held by Bioverativ employees of $26.6 million is expected to be recognized as expense over a weighted-average period of 2.0 years.

11. Related Parties

Under the terms of the transition services agreement entered into with Biogen in connection with the separation, Biogen provides various services on an interim, transitional basis. The services provided by Biogen to Bioverativ consist of certain information technology, quality, regulatory, research and supply chain. These services are generally provided on a cost-plus basis. The services generally extend for approximately 9 months to 2 years following the separation. For

the period from the separation date to March 31, 2017, the company incurred the following costs under the transition services agreement:

**          Amount not applicable.

For the company’s operations in the United States and Canada transfer of marketing authorizations and other regulatory requirements did not occur by the separation date of February 1, 2017. As a result, the company entered into a commercial operations agreement with Biogen for the United States and Canada.  Under the terms of the commercial operations agreements, until the Company has obtained the various required authorizations, Biogen will perform certain services related to the distribution of finished goods to the company’s customers. The company is responsible for the business activities conducted by Biogen on its behalf, and is subject to the risks and entitled to the benefits generated by these operations and assets. As a result, the related assets and liabilities and results of operations have been reported in the company’s condensed consolidated interim financial statements as of and for the three months ended March 31, 2017. Net sales related to these operations totaled approximately $147.4 million during the three months ended March 31, 2017.  At March 31, 2017, the assets and liabilities consisted of certain work in process and finished goods inventories which are reported in inventories on the condensed consolidated balance sheet, and accounts receivable, which is reported as due from Biogen, on the condensed consolidated balance sheet. The majority of these operations are expected to be transferred to the company in mid to late 2017.

The company and Biogen also entered into a manufacturing and supply agreement whereby Biogen will continue to produce ELOCTATE and ALPROLIX for us on a cost‑plus basis. As products were historically transferred at cost between Biogen and Bioverativ, these manufacturing and supply arrangements will result in changes to cost of goods sold in future periods.

The company and Biogen also entered into a separation and distribution agreement, tax matters agreement, an employee matters agreement.

The following is a summary of the amounts in the unaudited condensed consolidated balance sheets due to or from Biogen, including the assets and liabilities of certain of the company’s operations that have not yet transferred to Bioverativ and are held by Biogen as of the balance sheet dates:

**          Amount not applicable.

Corporate Overhead and Other Allocations from Biogen

Prior to the separation, the company did not historically operate as a standalone business and had various relationships with Biogen whereby Biogen provided services to the company.  These unaudited condensed consolidated financial statements include an allocation from Biogen to us for certain research and development and selling, general and administrative costs not directly attributable to the hemophilia business of Biogen. For more information, see Note 1, Nature of Business and Basis of Presentation. For the three months ended March 31, 2017, the allocations are for the period from January 1, 2017 through the separation date. These allocations were reflected as follows in the unaudited condensed consolidated financial statements:

12. Other Consolidated Financial Statement Detail

Other Income (Expense), Net

Components of other income (expense), net, are summarized as follows:

Accrued Expenses and Other Current Liabilities

Accrued expenses and other consists of the following: