UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

The number of shares of the registrant’s common stock outstanding as of JulyOctober 31, 2016 was 192,713,138.194,200,862.

See notes to unaudited condensed consolidated financial statements.

See notes to unaudited condensed consolidated financial statements.

Nature of Business

Unless the context requires otherwise, references to “ARIAD,” “Company,” “we,” “our,” and “us,” in this quarterly report refer to ARIAD Pharmaceuticals, Inc. and its subsidiaries.

Headquartered in Cambridge, Massachusetts, ARIAD is focused on discovering, developing and commercializing precision therapies for patients with rare cancers. ARIAD is working on new medicines to advance the treatment of rare forms of chronic and acute leukemia, lung cancer and other rare cancers.

The Company has one approved cancer medicine, Iclusig® (ponatinib), for the treatment of certain patients with chronic myeloid leukemia (“CML”) and Philadelphia chromosome positive acute lymphoblastic leukemia (“Ph+ ALL”). The Company sells Iclusig directly in the United States and has partnered with third parties to commercialize Iclusig in selected territories throughout the rest of the world, including Europe, Japan and the Far East, Canada, Australia, Latin America, Israel and the Middle East and North Africa. The Company is also developing Iclusig in earlier lines of therapy and for additional cancer indications.

In addition to Iclusig, the Company is developing two product candidates for the treatment of certain rare forms of lung cancer. Brigatinib is the Company’s next most advanced drug candidate, which it is developing for the treatment of certain patients with a form of non-small cell lung cancer, or NSCLC. The Company has completed enrollment in a pivotal Phase 2 clinical trial of brigatinib and initiated the filing ofsubmitted a new drug application, or NDA, in the United States for the treatment of patients with aplasticanaplastic lymphoma kinase, or ALK, positive NSCLC who are resistant to the drug crizotinib. The Company is also studying brigatinib in a Phase 3 clinical trial as a potential first-line therapy. AP32788 is the Company’s most recently discovered drug candidate, and is being developed for the treatment of patients with NSCLC with specific mutations in the EGFR or HER2 kinases. The Company is currently studying AP32788 in a Phase 1/2 proof-of-concept clinical trial.

In addition to its clinical development programs, the Company has a focused drug discovery program centered on small-molecule therapies that are molecularly targeted to cell-signaling pathways implicated in cancer, and is also seeking to apply the Company’s core competencyexploring potential new opportunities in immuno-oncology using our expertise in kinase inhibitors for precision therapies to explore the potential for the use of small molecules in immuno-oncology.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. The Company has prepared the condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements and should be read in conjunction with the Company’s audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2015. The condensed consolidated balance sheet as of December 31, 2015 was derived from the audited consolidated balance sheet included in the Annual Report on Form 10-K for the year ended December 31, 2015.

The Company has prepared the accompanying condensed consolidated financial statements on the same basis as its audited financial statements, and these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year 2016.

Foreign Currency

The net total of realized and unrealized transaction losses and gains was a loss of $0.1 million$34 thousand and $0.5a gain of $0.2 million, respectively, for the three month periods ended JuneSeptember 30, 2016 and 2015. The net total of realized and unrealized transaction losses and gains was a loss of $0.9 million and a gain of $0.6$0.8 million, respectively, for the six-monthnine-month periods ended JuneSeptember 30, 2016 and 2015.

Marketable Securities

Marketable securities consist of 687,139 shares of common stock of REGENXBIO, Inc. (“REGENXBIO”), which became a publicly traded company in September 2015. At JuneSeptember 30, 2016, these shares had a value of $5.5$9.6 million. The Company obtained these shares in connection with a license agreement it entered into with REGENXBIO in November 2010 for certain gene expression regulation technology. The Company was restricted from trading these securities until March 14, 2016 pursuant to an agreement it entered into with REGENXBIO. The Company has classified these shares as “available for sale” investments and recognized an unrealized gain of $4.1 million and an unrealized loss of $1.9 million and $5.9$1.8 million for the three and six-monthnine-month periods ended JuneSeptember 30, 2016, respectively, using a Level 1 valuation input, which has been excluded from the determination of net income (loss) and is recorded in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, in the three and six-monthnine-month periods ended JuneSeptember 30, 2016. These shares had been accounted for using the equity method with a carrying value of zero due to losses incurred by REGENXBIO in previous years.

Accrued Rent

The Company recognizes rent expense for leases with increasing annual rents on a straight-line basis over the term of the lease. The amount of rent expense in excess of cash payments is classified as accrued rent. Any lease incentives received are deferred and amortized over the term of the lease. At JuneSeptember 30, 2016 and December 31, 2015, the amount of accrued rent was $4.4$3.6 million and $5.4 million for each period. Of these amounts, at JuneAt September 30, 2016, andthe total accrued rent balance of $3.6 million was included in other current liabilities. Of the $5.4 million of accrued rent at December 31, 2015, $3.8 million and $4.8 million for each period was included in other long-term liabilities, with the remaining $0.6 million as of both June 30, 2016 and December 31, 2015, respectively, included in other current liabilities.

Product Revenue, Net

The adjustments recorded during the three-months ended June 30, 2016 relate to the Incyte transaction, including the sale of ARIAD's European operations. See Note 3. As part of the transaction, the allowance and reserves relating to ARIAD's European subsidiaries transferred to Incyte.

Negotiations with the Economic Committee on Health Care Products in France regarding pricing and reimbursement for Iclusig concluded during the quarter ended June 30, 2016. As a result, the Company recorded revenue of $25.5 million related to cumulative shipments to customers in France during the the threenine months ended JuneSeptember 30, 2016 ($22.5 million is related to shipments through 2015 and $3.0 million is related to shipments in 2016 through May 31, 2016). The revenue recorded in 2016 related to product shipments in France prior to the close of the transaction with Incyte on June 1, 2016. At JuneSeptember 30, 2016, the Company has recorded a liability in the amount of $4.5 million recorded within Other Current Liabilities related to the clawback settlement based on the final approved price of Iclusig with the Ministry of Health in France, which represents the amount the Company expects to remit to the Ministry of Health.

The Company has entered into distributor arrangements for Iclusig in a numberoutside of territoriesthe United States, including Australia, Canada, Israel, Latin America, the Middle East and North Africa, certain countries in central and Eastern Europe, and Turkey and Japan and the Far East. The Company recognizes net product revenue from sales of Iclusig under these arrangements when all criteria for revenue recognition have been satisfied. In addition, the Company has out-licensed rights to commercialize Iclusig to Incyte in the European Union and other countries, including Switzerland, Norway, Turkey, Israel and Russia, and receives royalties on sales of Iclusig in these countries since June 1, 2016.

Concentration of Credit Risk

Segment Reporting and Geographic Information

In May 2014, the Financial Accounting Standards Board (FASB) issued a comprehensive new standard which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. The new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosures pertaining to revenue recognition in both interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2017 and allows for adoption using a full retrospective method, or a modified retrospective method. Entities may elect to early adopt the standard for annual periods beginning after December 15, 2016. The Company is currently assessing the method of adoption and the expected impact the new standard has on its financial position and results of operations.

On May 9, 2016, ARIAD (as guarantor) and its wholly-owned subsidiary ARIAD Pharmaceuticals (Cayman) L.P. (the “Seller”) entered into a Share Purchase Agreement (the “Share Purchase Agreement”) with Incyte Corporation (“Incyte”) (as guarantor) and its wholly-owned subsidiary Incyte Europe S.a.r.l. (“Incyte Europe”), pursuant to which Incyte Europe agreed to acquire from the Seller all of the outstanding shares of ARIAD Pharmaceuticals (Luxembourg) S.a.r.l., the parent company of ARIAD’s European subsidiaries responsible for the commercialization of Iclusig® (ponatinib) in the European Union (“EU”) and other countries, including Switzerland, Norway, Turkey, Israel and Russia (the “Territory”), for an upfront payment of $140$140.0 million (the “Upfront Payment”) subject to adjustment for estimated closing working capital balances.

In connection with the closing of the transactions on June 1, 2016, the parties also entered into an Amended and Restated Buy-in License Agreement between ARIAD, Incyte (as guarantor) and ARIAD Pharmaceuticals (Europe) S.a.r.l., one of the entities that was acquired by Incyte through the Share Purchase Agreement (the “License Agreement”). Under the terms of the License Agreement, Incyte was granted an exclusive license to develop and commercialize Iclusig in the Territory (the “License”). ARIAD is entitled to receive tiered royalties from Incyte of between 32 percent and 50 percent of net sales of Iclusig in the Territory (the “Royalty Payments”). The Royalty Payments will be subject to adjustment for certain events, including events related to the expiration of statutory or regulatory exclusivity periods for the commercialization of Iclusig in the Territory. In addition, ARIAD is eligible to receive up to $135 million in potential development and regulatory milestones for Iclusig in new oncology indications in the Territory, together with additional milestones for non-oncology indications, if approved, in the Territory (the "Milestone Payments"). Incyte has agreed to contribute up to $7.0 million in each of 2016 and 2017 to fund ARIAD’s OPTIC and OPTIC-2L clinical trials ("Development Costs"). Incyte will also pay ARIAD for any required product supply at a price reflecting ARIADs cost to manufacture.

The terms of the License Agreement also include an option (the “Option”) for an acquirer of ARIAD to re-purchase the licensed rights from Incyte, subject to certain conditions. Upon exercise of the Option, ARIAD’s acquirer would be required to make a payment to Incyte equivalent to the Upfront Payment and any Milestone Payments or

Development Costs previously paid to ARIAD, and an additional payment based on Iclusig sales in the Territory in the 12 months immediately prior to the exercise of the Option. Following exercise of the Option, Incyte would also be eligible to receive royalties of between 20%ranging from 20 percent to 25%25 percent of net sales of Iclusig in the Territory by an acquirer of ARIAD following the effective date of the re-purchase of the License. The Option cannot be exercised before the two year anniversary or after the six year anniversary of the effective date of the License Agreement. Following

Unless terminated earlier in accordance with its provisions, the term of the License Agreement, including Incyte's obligation to make the full Royalty Payments, will continue in effect on a country-by-country basis until the latest to occur of (1) the expiration date of the composition patent in the relevant country (which, for the countries in Europe covered by the Company's patents, is generally July 2028, subject to a potential six-month extension for pediatric exclusivity), (2) the expiration of any regulatory marketing exclusivity period or other statutory designation that provides similar exclusivity for the commercialization of Iclusig in such country and (3) the seventh anniversary of the first commercial sale of Iclusig in such country; and thereafter, in the absence of generic competition, for a specified period of time in which Incyte will be obligated to pay royalties at a reduced rate.

The transaction closed on June 1, 2016. Consideration for the transaction included the $140$140.0 million Upfront Payment at closing plus an estimated adjusteda working capital payment of $4.8$3.1 million. The working capital payment iswas net of cash acquired in the transaction by Incyte.

The agreements contain multiple elements to be delivered subsequent to the closing of the transaction, including regulatory support, ongoing development activities for the OPTIC and OPTIC-2L clinical trials, and supply of product. Each of these elements was determined to have a standalone value. As a result, a portion of the consideration received at closing was allocated to the undelivered elements using the relative selling price method after determining the best estimated selling price for each element. The remaining amount of consideration was included in the determination of the gain recorded on the sale of the European operations. Contingent royalty payments and funding for the OPTIC and OPTIC-2L trials are similarly allocated among the underlying elements if and when the amounts are determined to be payable to ARIAD. Amounts allocated to the sale of the business are immediately recognized in the statement of operations. Amounts allocated to the other elements are recognized in the statement of operations only to the extent each respective element has been delivered.

Net proceeds for the purpose of calculating the Company's gain on the Incyte transaction were $150.5$150.6 million, consisting of $144.8$143.1 million received at closing,and $7.5 million of net liabilities residing with the Company's European subsidiaries that were transferred to Incyte, partially offset by $1.8 million related to an expected refund to Incyte related to a final working capital adjustment.Incyte. Approximately $131.6$131.9 million of the consideration was allocated to the sale of the businessEuropean Operations and the remaining $18.9$18.7 million was allocated to the undelivered elements described above. The Company also record a $2.9 million loss related to the reclassification into earnings of the accumulated other comprehensive income (loss) associated with the cumulative translation adjustments and pension liability adjustment related to the Company's European subsidiaries. The reclassification was recorded upon transfer of the Company's European subsidiaries to Incyte as part of the transaction.Incyte. The net gain recorded in other income, net during the three and six-monthnine-month periods ended JuneSeptember 30, 2016 was $128.7$129.0 million.

Consideration allocated to the regulatory support, research and development and supply activities will be recognized over the applicable performance periods. Revenue related to the research and development and regulatory support will be recognized on a proportional performance basis. Amortization of deferred revenue attributed to each of the undelivered elements will be included in other revenue as the sale of these services is considered part of ARIAD’s ongoing major or central operations. During the three months September 30, 2016, the Company generated approximately $8.1 million due from Incyte relating to royalty, research and development and other payments. The Company recorded approximately $7.1 million of revenue within License and other revenue after deferring approximately $1.0 million allocated to regulatory support, research and development and supply activities.

This transaction did not qualify as a discontinued operation as it was not considered to be a strategic shift by the Company.

In consideration for the licenses and other rights contained in the Collaboration Agreement, Otsuka paid the Company a non-refundable upfront payment of $77.5 million, less a refundable withholding tax in Japan of $15.8 million that was received in 2015, and2015. In addition, Otsuka has agreed to pay the Company up to $80$80.0 million in futurecontingent milestone payments, consisting of three individual milestones for $10.0 million, $50.0 million and $20.0 million contingent upon obtaining further regulatoryvarious approvals of Japanese new drug applications. Payments received upon the completion of these milestones are based on the results of the Company's efforts and due to the level of effort required and risk of failure associated with the milestones, they are considered to be substantive in the Territory. nature.

Otsuka will pay royalties based on a percentage of net sales in each country until the later of (i) the expiry date of the composition patent in each country, (ii) the expiration of any orphan drug exclusivity period or other statutory designation that provides similar exclusivity, or (iii) 10 years after the date of first commercial sale in such country. Otsuka will also pay for the supply of Iclusig purchased from the Company at a price based on a percentage of net sales in each country.

The nonrefundable upfront cash payment has been recorded as deferred revenue on the Company's balance sheet and is being recognized as revenue on a straight-line basis over the estimated term (currently estimated to extend through 2029), beginning at the point at which the Company began to provide all elements included in the Collaboration Agreement, which occurred in April 2015.

Medinol Ltd.

The license agreement provides for the payment by Medinol to the Company of an upfront license fee, payments based on achievement of development, regulatory and commercial milestones and royalties based on commercial sale of products developed under the agreement. In January 2014, Medinol initiated two registration trials of its ridaforolimus-eluting stent system. The Company is eligible to receive additional regulatory, clinical and commercial milestone payments of up to $34.8 million under the agreement if two products are successfully developed and commercialized. During the third quarter of 2016, the Company recognized a $2.0 million milestone associated with the filing of the application to market and sell licensed products in the countries in the European Union. The Company expects to achieve and recognize an additional $2.5 million milestone during the fourth quarter of 2016.

The Company evaluates its inventory balances quarterly and if the Company identifies excess, obsolete or unsalable inventory, it writes down its inventory to its net realizable value in the period it is identified. These adjustments are recorded based upon various factors, including the level of product manufactured by the Company, the level of product in the distribution channel, current and projected demand for the foreseeable future and the expected shelf-life of the inventory components. The Company recorded such adjustments of $0.2 million for each of the three-month periodperiods ended JuneSeptember 30, 2016 and $0.3 million2015 and $0.2$0.5 million for each of the six-monthnine-month periods ended JuneSeptember 30, 2016 and 2015, respectively, which are recorded as a component of cost of product revenue in the accompanying condensed consolidated statements of operations. Inventory that is not expected to be used within one year is included in other assets, net, on the accompanying condensed consolidated balance sheet.

Royalty Financing

In July 2015, the Company entered into a Revenue Interest Assignment Agreement (the "RIAA") with PDL BioPharma, Inc. (“PDL”) under which the Company received an initial payment of $50$50.0 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. Under the original terms of the RIAA, the Company would receivereceived an additional $50$50.0 million one year from the effective date of the agreement (July 2016) and had the option to receive up to an additional $100$100.0 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”.

Effective on June 1, 2016, in connection with the transactions with Incyte, ARIAD and PDL agreed to amend the RIAA to, among other things, include in the Iclusig net sales calculation under the RIAA net sales of Iclusig made by Incyte in the Territory under the License Agreement. In addition, ARIAD’s option to receive additional funding was restructured so that, in addition to the $50$50.0 million received in July 2016, ARIAD may require PDL to fund up to an additional $40$40.0 million (instead of the original $100$100.0 million) in July 2017 (instead of between January and July 2016).

Under the amended agreement, the Company agreed to pay PDL a percentage of global Iclusig net product revenues subject to an annual maximum payment of $20$20.0 million per year through 2018. The rate iswas 2.5 percent during the first year and increasesthrough July 2016, increased to 5 percent in the second yearfrom August 2016 through the end of 2018 and 6.5 percent from 2019 until PDL receives a 10 percent internal rate of return. Through JuneSeptember 30, 2016, the Company has paid a total of $3.9$5.9 million to PDL under this agreement. Payments are deemed to be applied against advances. Interest expense related to the agreement was $1.3$2.2 million and $2.3$4.5 million, respectively, for the three- and six-monthnine-month periods ended JuneSeptember 30, 2016.

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 in July 2015, as amended effective June 1, 2016. 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. In connection with the amendment to the RIAA, ARIAD and PDL agreed to release ARIAD’s European patents and certain other European assets from the collateral. 

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 imputes 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 significantly different outcomes.

The Company 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, which was immaterial as of the date of the agreement and as of JuneSeptember 30, 2016 is carried as part of the carrying value of the related liability.

Facility Lease Obligation

As of JuneSeptember 30, 2016 and December 31, 2015, the Company has recorded a facility lease obligation related to its lease for a new facility under construction in Cambridge, Massachusetts. See Notes 6 and 10 for information regarding the lease and related asset under construction. During the construction period the Company is capitalizing the construction costs as a component of construction in progress with a corresponding credit to facility lease obligation to the extent the cost was paid by the Company or reimbursed by the landlord.

The Company is completing and occupying the building in stages. During the three months ended September 30, 2016, the Company placed approximately 44% of the building into service. The Company expects to substantially complete construction and occupy the remainder of the facility in the fourth quarter of 2016. Under the 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 and the remainder is accounted for as a reduction of the obligation. See Note 10 for information regarding payments and other terms.

The Company conducts the majority of its operations in a 100,000 square foot office and laboratory facility under an operating lease that originally extended to July 2019 with two consecutive five-year renewal options. The lease providesprovided the Company with the option to early terminate the lease in July 2017. The notification of the early termination must be made by July 2016. The Company maintains an outstanding letter of credit of $1.4 million in accordance with the terms of the amended lease. In May 2012, the Company entered into a three-year operating lease agreement for an additional 26,000 square feet of office space which was extended to August 2016. Future non-cancelable minimum annual rental payments through July 2019 under these leases are $3.3 million remaining in 2016, $6.0 million in 2017, $6.1 million in 2018 and $3.6 million in 2019, prior to the Company's exercise of its early termination right described below.

Binney Street, Cambridge, Massachusetts

As construction progresses, the Company records the project construction costs incurred as an asset. To the extent that the cost is incurred by the landlord or incurred by the Company and reimbursed by the landlord, the Company records a corresponding increase to facility lease obligation included in long-term debt on the consolidated balance sheet. Upon completion ofAs the buildings are completed, the Company willis required to determine if the asset and corresponding financing obligation should continue to be carried on its consolidated balance sheet under the relevant accounting guidance. Based on the current terms of the lease, the Company expects to continue to be the deemed owner of the buildings upon completionas the construction period is completed. The Company is completing and occupying the building in stages. During the three months ended September 30, 2016, the Company placed approximately 44% of the building into service, or $103.2 million related to the building and $13.3 million related to leasehold improvements. The portion of the building placed in service during the quarter ended September 30, 2016 was occupied by our subtenant described below. The Company expects to substantially complete construction period.and occupy the remainder of the facility in the fourth quarter of 2016. As of JuneSeptember 30, 2016, the Company has recorded construction in progress of $292.7$182.7 million and a facility lease obligation of $275.8$284.9 million.

In August 2015, the Company entered into a sublease agreement for approximately 160,000 square feet of the total leased space in the Binney Street facility. The sublease has an initial term of 10 years from the rent commencement date, which occurred inon July 1, 2016, with an option to extend for the remainder of the initial term of the Company’s underlying lease. The sublease rent is subject to increases over the term of the lease. Based on the agreement, during the initial term the non-cancelable minimum annual sublease payments by calendar year beginning upon the rent commencement date of the sublease are approximately $5.3 million in 2016, $10.7 million in 2017, $10.9 million in 2018, $11.1 million in 2019 and $11.3 million in 2020 and $65.5 million thereafter, plus the subtenant’s share of the facility operating expenses.

At JuneSeptember 30, 2016 and December 31, 2015, the carrying amounts of cash equivalents, accounts payable and accrued liabilities approximate fair value because of their short-term nature. The fair value of the convertible notes,

which differs from their carrying value, is influenced by interest rates and stock price and stock price volatility and is determined by prices for the convertible notes observed in market trading. The market for trading of the convertible notes is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the convertible notes, face value of $200.0 million, was $214.0$326.0 million at JuneSeptember 30, 2016 and $198.0 million at December 31, 2015, respectively.

In the first quarter of 2016, the Company issued the following equity awards to senior executives of the Company outside of the Plans as inducements material to their entering into employment with the Company in accordance with NASDAQ rules (the "Inducement Awards"): (i) for the Company's new CEO, 200,000 restricted stock units and 1,500,000 stock options, which vest over 18 months and four years, respectively; and (ii) for the Company's new CFO, 550,000 stock options vesting over four years and 150,000 performance shares that will be earned based on the relative total shareholder return of the Company’s stock price compared to component companies in the NASDAQ Biotechnology Index over a 3 year period ending December 31, 2018. There were no other Inducement Awards in 2016 or in the three and six-monthnine-month periods ended JuneSeptember 30, 2015.

Stock Options

Stock and Stock Unit Grants

The total fair value of stock and stock unit awards that vested during the six-monthsnine-months ended JuneSeptember 30, 2016 and 2015 was $11.7$13.1 million and $6.8$9.2 million, respectively. The total unrecognized compensation expense for

restricted shares or units that have been granted was $16.2$13.4 million at JuneSeptember 30, 2016 and will be recognized over 1.6 years on a weighted average basis.

The Company recognizes compensation expense for performance share units when the achievement of the performance metric is determined to be probable of occurrence. The total number of units earned, and related compensation cost, may be up to 60 percent higher depending on the level or timing of achievement of the metric as defined in the specific award agreement.

We have also excluded the impact of the convertible debt and related warrants from the calculation of diluted share computation.computation for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2015. Holders of the convertible notes may covertconvert their Notes into shares of the Company’s common stock at the applicable conversion rate, subject to certain conditions (refer to Note 9 for a full description). Since it is the Company's stated intent to settle the principal amount of the Notes in cash, the Company has used the treasury stock method for determining the potential dilution in the diluted earnings per share computation. SinceDuring the third quarter of 2016 the average price of the Company's common stock was lessmore than the effective conversion priceprice. As a result, the Company included potentially convertible shares in the diluted shares calculation for such Notes during the reporting periods, the Notes were not dilutive for such periods. nine months ended September 30, 2016.

Since the average price of the Company's common stock was less than the strike price of the Warrants for the reporting periods, such Warrants were also not dilutive. Upon exercise of the Warrants, holders of the Warrants may acquire up to 21.5 million shares of the Company's common stock at an exercise price of $12.00 (refer to Note 9 for additional information on the Warrants). If the market price per share of the Company's common stock for the period exceeds the established strike price, the Warrants will have a dilutive effect on its diluted net income per share using the treasury-stock-type method.

15. Accumulated Other Comprehensive Income (Loss)

During 2016, the Company incurred expenses of $3.0 million associated with employee workforce reductions of approximately 90 positions implemented in March 2016. During the quarternine months ended JuneSeptember 30, 2016, $1.9$2.1 million was paid. In connection with the Incyte transaction,sale of ARIAD's European Operations, $0.8 million of the balance was transferred to Incyte as part of the sale of ARIAD's European operations.Incyte. The remaining restructuring balance will be fully paid by the end of 2016.

There were no material legal proceedings that were instituted or terminated during the quarter ended JuneSeptember 30, 2016, and there have been no material developments in the pending legal proceedings disclosed in Note 16 to the

audited financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

In October 2016, we received a letter from Rep. Elijah Cummings and Sen. Bernard Sanders requesting information and supporting documentation from us related to time, the Company may be subject to various claims and legal proceedings. If the potential loss from any claim, asserted or unasserted, or legal proceedings is considered probableIclusig and the amount is reasonably estimated,pricing of Iclusig in the Company will accrueUnited States since 2012. The letter inquired about our approach to pricing, commercialization and related matters for Iclusig. We responded to the letter on November 4, 2016 and are cooperating with this inquiry.

In November 2016, we received a liabilitysubpoena from the U.S. Attorney’s Office for the estimated loss.District of Massachusetts requesting documents related to our support of 501(c)(3) organizations that provide financial assistance to Medicare patients and our patient support programs.  Other companies in our industry have disclosed similar inquiries. We intend to cooperate with this inquiry.

We have retained worldwide rights to develop and commercialize these products and product candidates, other than under our collaboration and distribution agreements with various third parties to develop and/or commercialize Iclusig in Europe, Japan and nine other Asian countries, Latin America, the Middle East and North Africa, Canada, Australia, Israel, Turkey and selected other countries outside of the United States.

In addition, we have discovered two other drug candidates that we have out-licensed to third parties: ridaforolimus, which we have out-licensed for development in drug-eluting stents and other medical devices for cardiovascular indications; and rimiducid (AP1903), which we have out-licensed for development in novel cellular immunotherapies.

All of our product candidates were discovered internally by our scientists based on our expertise in computational chemistry and structure-based drug design. We are continuing to invest in a discovery research program with the goal of identifying additional potential targeted drug therapies to move into clinical development, as well as exploring potential new opportunities in immuno-oncology using our expertise in kinase inhibitors.

On April 11,August 30, 2016, we announced the initiation of a randomized, front-line Phase 3 trial of brigatinib vs. crizotinib in adult patients with locally advanced or metastatic NSCLC who have not previously been treated with an

On September 28, 2016, we announced distribution agreements forthat our partner, Otsuka Pharmaceutical Co., Ltd., or Otsuka, received approval from the Japanese Pharmaceuticals and Medical Devices Agency, or PMDA, to market Iclusig in Latin AmericaJapan for the treatment of CML resistant or intolerant to preceding drug treatment and relapsed or treatment resistant Philadelphia chromosome-positive acute lymphoblastic leukemia, or Ph+ ALL.

On October 10, 2016, we announced updated clinical data on brigatinib in patients with ALK+ NSCLC from an ongoing Phase 1/2 trial that were included in a poster presentation at the Middle East and North Africa under which we will receive more than 50 percent of net product sales in each41st Annual Congress of the covered territories through a product supply transfer price. In addition,European Society for Medical Oncology (ESMO) held in Copenhagen, Denmark.

On October 31, 2016, we announced that the FDA accepted for review our NDA for brigatinib in patients with metastatic ALK+ NSCLC who are resistant or intolerant to crizotinib. The FDA granted our request for priority review and set an action date of April 29, 2017 under the agreement covering Latin America, we will receive upfront and potential regulatory milestone payments totaling $15 million.

Our financial position and results of operations are affected by subjective and complex judgments, particularly in the areas of revenue recognition, accrued product development expenses, inventory, leased buildings under construction and stock-based compensation expense. We evaluate our estimates, judgments and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of our critical accounting policies and estimates, read Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2015. There have been no changes in those policies or in the method of developing the estimates used to apply those policies,

Revenue increased by 13358 percent to $68.1$46.0 million in the three-month period ended JuneSeptember 30, 2016, compared to $29.2$29.1 million in the corresponding period in 2015, primarily due to increased net product revenue in the United States and Europe.other countries. In the United States, net product revenue increased by 5066 percent to $32.6$33.6 million for the three month period ended JuneSeptember 30, 2016, compared to $21.7$20.3 million in the corresponding period in 2015. TheApproximately 56% of the growth in product revenue in the United States is primarilywas due to a 32 percent increase inpricing and the remaining approximately 44% was due to volume. The number of units of Iclusig shipped within the remainder dueUnited States increased by 29 percent in the third quarter of 2016 as compared to price increases.the third quarter of 2015. Our volume increase in the United States was partially due to an increase in the channel inventory held by our specialty pharmacy at JuneSeptember 30, 2016 as compared to the same period end in the prior year. In Europe, net product revenue increased by 436 percent to $32.7 million in the three-month period ended June 30, 2016, compared to $6.1 million in the corresponding period in 2015. European net product revenue included one-time French revenue of $25.5 million resulting from the completion of pricing and reimbursement negotiations (see Note 2) and approximately $7.2 million of product revenue in Europe in the first two months of the second quarter of 2016. On June 1, 2016, ARIADwe out-licensed the rights to Iclusig in Europe. As a result, product revenue for Europe decreased in the three-month period ended September 30, 2016 by $7.2 million compared to Incyte.the corresponding period in 2015. From June 1, 2016, ARIAD recordswe record royalty revenue based on tiered royalty rates from Iclusig sales in Europe recognized by Incyte rather than product revenue in Europe.Incyte.

Product revenue is reduced by certain gross to net deductions. For the three-month period ended JuneSeptember 30, 2016, gross to net deductions, as a percentage of gross revenue, were approximately 15.918.5 percent as compared to 12.013.7 percent for the corresponding period in 2015. The increase in gross to net percentage primarily relates to the impact of higher Medicaid utilization plus government mandated discounts in certain European countries.utilization. We expect our gross to net reductions related to product revenue generated in the United States, as a percentage of gross revenue, to remain relatively consistent in future periods.

We recognized $2.8$11.7 million of license, collaboration and other revenue in the three-month period ended JuneSeptember 30, 2016, primarily related to $3.5 million of revenue from Incyte for R&D cost sharing, $3.5 million of revenue from Incyte for royalties generated on sales of Iclusig and $1.0 million of revenue from Incyte related to the amortization of the upfront paymentdeferred revenue balances; a $2.0 million milestone achieved from Medinol and $1.3 million amortization of $77.5 million upfront payment from our Iclusig co-development and commercialization agreement with Otsuka and royalties generated on the sales of Iclusig in Europe and other selected countries after the close of the Incyte transaction on June 1, 2016.Otsuka.

In the United States we expect that our product revenue will continue to increase in 2016 compared to 2015 due to increasing sales volume for Iclusig as well as the effect of pricing adjustments.price increases. We also expect that we will increase our license, collaboration and other revenue will increase from the prior year period due to royalty payments from Incyte based on sales of Iclusig in Europe, potential milestone payments from our existing distribution and collaboration agreements and revenue related to the Incyte transaction for research and development and regulatory support. We will no longer generate Iclusig product revenue in Europe due to the Incyte transaction. During the fourth quarter of 2016, we expect to achieve and recognize as revenue a $2.5 million milestone from Medinol.

During the three-month period ended JuneSeptember 30, 2015, the inventory cost of Iclusig sold increased due to an increase in product revenue. During the three-month period ended September 30, 2015, the inventory provision was due to excess inventory related to certain finished products in Europe to comply with European packaging regulation as well as expired product that could no longer be sold.

Research and Development Expenses

Direct external expenses for Iclusig were $7.6$11.4 million in the three-month period ended JuneSeptember 30, 2016, an increasea decrease of $2.0$2.2 million, or 35.216 percent, as compared to the corresponding period in 2015. The increasedecrease is primarily due to increases in clinical trial costs of $2.5 million, partially offset by a decrease in other support cost of $0.5 million. Increases in clinical trial costs relate primarily to increased activity inprogram support of patient enrollment in OPTIC and OPTIC 2L, which were initiated last year to support$1.9 million as a result of the use of Iclusig in earlier lines of therapy. The decrease in other support costs relate to completion of studies conducted last year to address risk factors related to cardio vascular occlusive events, activities related to the NDA filing in Japan and the completion of toxicology and pharmacology studies conducted in the previous year.

Direct external expenses for brigatinib were $13.5$13.3 million in the three-month period ended JuneSeptember 30, 2016, an increase of $5.4$4.0 million, or 67.843 percent, as compared to the corresponding period in 2015. The increase in expenses for brigatinib was due primarily to an increase of $5.2 million in clinical trial costs associated with the fully enrolled ALTA pivotal trial and the initiation of the Phase 3 ALTA-1L trial duringpartially offset by a $1.4 million decrease in pivotal trial expenses due to lower activity in the second quartertrial following the submission of 2016. The increase in clinical trial costs can also be attributedour NDA to the initiation of multiple clin/pharm trials in support of this program.FDA.

All other R&D expenses were $21.8$18.9 million in the three-month period ended JuneSeptember 30, 2016, a decrease of $3.3$6.4 million, or 13.225 percent, in 2016 as compared to the three-month period ended JuneSeptember 30, 2015. The decrease is primarily due to lower personnel costs of $3.7 million relating to headcount reductions.reductions driven by the sale of European operations during the second quarter of 2016 and the reduction in force initiated in the first quarter of 2016 and a reduction of $1.1 million of costs related to development of other product candidates.

As a result of our continued investment in research and development, including our ongoing clinical trials, we expect our research and development related expenses to remain consistent in the near term.

As a result of our reduced facilities and headcount from the sale of our European operations, we expect our selling, general and administrative expenses to continue to be lower in the second halffourth quarter of 2016 as compared to the first halftwo quarters of 2016.

Other income, net

Foreign Exchange Gain (Loss)

Our provision for income taxes for the three-month period ended JuneSeptember 30, 2016 was $1.8a benefit of $2.3 million compared to $0.3a benefit from income taxes of $5.8 million in the corresponding period in 2015. The provision for incomebenefit from taxes in both periods primarily reflects estimated expenses for state taxes and taxes associated with certain foreign subsidiaries. Duringduring the secondthird quarter of 2016 we incurredprimarily relates to the release of a state$2.3 million uncertain tax expenseposition as a result of $1.5 millionthe statute of limitations expiring. The tax benefit recorded during the three months ended September 30, 2015 related to the saleuse of our European business.net losses generated by continuing operations to offset tax provided on an unrealized gain on marketable securities recorded in other comprehensive income.