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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2014
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the transition period from          to 
Commission file number: 001-35406
Illumina, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
33-0804655
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
5200 Illumina Way
San Diego, California
 
92122
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (858) 202-4500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  þ      No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ
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.  Yes  þ      No  o
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).  Yes  þ      No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
Accelerated filer  o
Non-accelerated filer  o
Smaller reporting company  o
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ
As of January 30, 2015 , there were 143.8 million shares (excluding 37.8 million  shares held in treasury) of the registrant’s common stock outstanding. The aggregate market value of the common stock held by non-affiliates of the registrant as of June 29, 2014 (the last business day of the registrant’s most recently completed second fiscal quarter), based on the closing price for the common stock on The NASDAQ Global Select Market on June 27, 2014 (the last trading day before June 29, 2014), was $21.2 billion . This amount excludes an aggregate of approximately 15.1 million shares of common stock held by officers and directors and each person known by the registrant to own 10% or more of the outstanding common stock. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, directly or indirectly, to direct or cause the direction of the management or policies of the registrant, or that the registrant is controlled by or under common control with such person.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for the 2015 annual meeting of stockholders are incorporated by reference into Items 10 through 14 of Part III of this Report.
 


ILLUMINA, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 28, 2014
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Special Note Regarding Forward-Looking Statements
This annual report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements discuss our current expectations concerning future results or events, including our future financial performance. We make these forward-looking statements in reliance on the safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. These statements include, among others:
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statements concerning our expectations as to our future financial performance, results of operations, or other operational results or metrics;
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statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as product introductions, increased revenue, decreased expenses, and avoided expenses and expenditures; and
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statements of our expectations, beliefs, plans, strategies, anticipated developments (including new products and services), and other matters that are not historical facts.
These statements may be made expressly in this document or may be incorporated by reference to other documents we have filed or will file with the Securities and Exchange Commission (SEC). You can identify many of these statements by looking for words such as “anticipates,” “believes,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should,” or “will,” or the negative of these terms, or other comparable terminology and similar references to future periods. These forward-looking statements are subject to numerous assumptions, risks, and uncertainties that may cause actual results or events to be materially different from any future results or events expressed or implied by us in those statements. Many of the factors that will determine or affect these results or events are beyond our ability to control or project. Specific factors that could cause actual results or events to differ from those in the forward-looking statements include:
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our ability to develop and commercialize our instruments and consumables, to deploy new products, services, and applications, and to expand the markets for our technology platforms;
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our ability to manufacture robust instrumentation and consumables;
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our ability to identify and integrate acquired technologies, products, or businesses successfully;
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our expectations and beliefs regarding prospects and growth for the business and its markets;
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our ability to maintain our revenue levels and profitability during periods of research-funding reduction or uncertainty, or adverse economic and business conditions, including as a result of slowing or uncertain economic growth in the United States or worldwide;
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the assumptions underlying our critical accounting policies and estimates;
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our assessments and estimates that determine our effective tax rate;
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our assessments and beliefs regarding the outcome of pending legal proceedings and any liability, that we may incur as a result of those proceedings; and
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other factors detailed in our filings with the SEC, including the risks, uncertainties, and assumptions described in Item 1A “Risk Factors” below, or in information disclosed in public conference calls, the date and time of which are released beforehand.
Our forward-looking statements speak only as of the date of this annual report. We undertake no obligation, and do not intend, to update or revise forward-looking statements publicly, to review or confirm analysts’ expectations, or to provide interim reports or updates on the progress of any current financial quarter, whether as a result of new information, future events, or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this annual report. Given these uncertainties, we caution investors not to rely unduly on our forward-looking statements.

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Available Information

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available free of charge on our website, www.illumina.com . The information on our website is not incorporated by reference into this report. Such reports are made available as soon as reasonably practicable after filing with, or furnishing to, the SEC. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that electronically file with the SEC. Copies of our annual report on Form 10-K will be made available, free of charge, upon written request.

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Illumina®, BaseSpace®, BeadArray, BlueGnome®, cBot, CSPro®, DASL®, DesignStudio, Epicentre®, ForenSeq, Genetic Energy®, GenomeStudio®, GoldenGate®, HiScan®, HiSeq®, HiSeq X, Infinium®, iScan®, iSelect®, MiSeq®, MiSeqDx®, MiSeq FGx, NeoPrep, NextBio®, Nextera®, NextSeq®, SeqMonitor, TruGenome, TruSeq®, TruSight®, Understand Your Genome®, UYG®, VeraCode®, verifi®, VeriSeq, the pumpkin orange color, and the Genetic Energy streaming bases design are certain of our trademarks. This report also contains brand names, trademarks, or service marks of companies other than Illumina, and these brand names, trademarks, and service marks are the property of their respective holders.

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Unless the context requires otherwise, references in this annual report on Form 10-K to “Illumina,” the “Company,” “we,” “us,” and “our” refer to Illumina, Inc. and its subsidiaries.

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PART I

ITEM 1.     Business.

Overview

We are the global leader in sequencing-and array-based solutions for genetic analysis. Our solutions serve customers in a wide range of markets, enabling the broad adoption of genomics solutions in research and clinical settings. We were incorporated in California in April 1998 and reincorporated in Delaware in July 2000. Our principal executive offices are located at 5200 Illumina Way, San Diego, California 92122. Our telephone number is (858) 202-4500.

Our customers include leading genomic research centers, academic institutions, government laboratories, hospitals, and reference laboratories as well as pharmaceutical, biotechnology, agrigenomics, commercial molecular diagnostic, and consumer genomics companies.

Our portfolio of integrated systems, consumables, and analysis tools is designed to accelerate and simplify genetic analysis. This portfolio addresses a range of genomic complexity, price points, and throughput, enabling customers to select the best solution for their research or clinical challenge. Our leading-edge sequencing instruments can efficiently perform a broad range of nucleic-acid (DNA, RNA) analyses across a wide range of sample sizes.

To provide our customers with more comprehensive sample-to-answer solutions, we acquired several companies: NextBio, a leader in clinical and genomic informatics, in November 2013, Advanced Liquid Logic Inc., a leader in digital microfluidics and liquid handling solutions, in July 2013, and Epicentre Technologies Corporation, a leading provider of nucleic-acid sample preparation reagents and specialty enzymes for sequencing and array applications, in January 2011.

Over the last few years, we have made key acquisitions to enable our goal of becoming a leader in the clinical market. These include Myraqa, Inc. in July 2014, Verinata Health, Inc. in February 2013, and BlueGnome Ltd. in September 2012. Our acquisition of Myraqa bolstered our regulatory and quality capabilities and enhanced our leadership team in molecular and companion diagnostics. The acquisition of Verinata strengthened our reproductive health portfolio by adding the Verinata verifi prenatal test, a comprehensive noninvasive prenatal test (NIPT) for high-risk pregnancies. Our acquisition of BlueGnome, a leading provider of genetic solutions for screening chromosomal abnormalities and genetic variations associated with developmental delay and infertility, expanded our ability to offer integrated solutions in reproductive health and cancer.

Genetics Primer

The instruction set for all living cells is encoded in deoxyribonucleic acid, or DNA. The complete set of DNA for any organism is referred to as its genome. DNA contains small regions called genes, which comprise a string of nucleotide bases labeled A, C, G, and T, representing adenine, cytosine, guanine, and thymine, respectively. These nucleotide bases occur in a precise order known as the DNA sequence. When a gene is “expressed,” a partial copy of its DNA sequence called messenger RNA (mRNA) is used as a template to direct the synthesis of a particular protein. Proteins, in turn, direct all cellular function. The illustration below is a simplified gene expression schematic.

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Variations among organisms are due, in large part, to differences in their DNA sequences. Changes can result from insertions, deletions, inversions, translocations, or duplications of nucleotide bases. These changes may result in certain genes becoming over-expressed (excessive protein production), under-expressed (reduced protein production), or silenced altogether, sometimes triggering changes in cellular function. These changes can be the result of heredity, but most often they occur at random. The most common form of variation in humans is called a single nucleotide polymorphism (SNP), which is a base change in a single position in a DNA sequence. Another type of variation, copy number variations (CNVs), occur when there are fewer or more copies of certain genes, segments of a gene, or stretches of DNA.

In humans, genetic variation accounts for many of the physical differences we see (e.g., height, hair, eye color, etc.). Genetic variations also can have medical consequences affecting disease susceptibility, including predisposition to complex genetic diseases such as cancer, diabetes, cardiovascular disease, and Alzheimer’s disease. They can affect individual response to certain drug treatments, causing patients to experience adverse side effects, or to respond well or not at all.

Scientists are studying these variations and their consequences in humans, as well as in a broad range of animals, plants, and microorganisms. Such research takes place in government, university, pharmaceutical, biotechnology, and agrigenomics laboratories around the world, where scientists expand our knowledge of the biological functions essential for life. Beginning at the genetic level, Illumina tools are used to elucidate the correlation between gene sequence and biological processes. Life-science research includes the study of the cells, tissues, organs, systems, and other components of living organisms. This research supports the development of new treatments to improve human health. Examples include more tailored clinical treatments, often referred to as precision medicine, as well as advances in agriculture and animal husbandry to meet growing needs for food and energy. Researchers who investigate human, viral, and bacterial genetic variation to understand the mechanisms of disease are enabling the development of more effective diagnostics and therapeutics. They also provide greater insight into genetic variation in plants (e.g., food and biofuel crops) and animals (e.g., livestock and domestic), enabling improvements in crop yields and animal breeding programs.

By empowering genetic analysis and facilitating a deeper understanding of genetic variation and function, our tools advance disease research, drug development, and the creation of molecular diagnostic tests. We believe that this will trigger a fundamental shift in the practice of medicine and health care. The increased emphasis on preventive and predictive molecular medicine will usher in the era of precision health care.

Our Principal Markets

Our business units are aligned to target the markets and customers outlined below.

Life Sciences

Historically, our core business has been in the life sciences research market, which includes laboratories associated with universities, medical research centers, and government institutions, along with biotechnology and pharmaceutical companies. Researchers at these institutions use our products and services in a broad spectrum of scientific activities for basic analysis and research, including de novo sequencing, genetic variation analysis, gene expression analysis, epigenetics, genome wide association studies, and targeted screening.  Increasingly, these techniques are migrating to next-generation sequencing (NGS) due to the improved performance, reduced complexity, and declining costs of NGS technologies. Both private and public funding drive this research, along with global initiatives to characterize genetic variation and the migration of legacy genetic applications to sequencing-based technologies.

We also provide products and services for other life sciences applied markets such as agrigenomics. Government and corporate researchers use our sequencing and array-based tools to accelerate and enhance agricultural research. Identifying desirable traits in plants and animals leads to healthier and more productive crops and livestock.

Reproductive and Genetic Health

Illumina technologies and products provide reproductive-health solutions, including preimplantation genetic screening (PGS), preimplantation genetic diagnosis (PGD), noninvasive prenatal testing (NIPT), and neonatal and genetic health testing. Our PGS solutions are used with in-vitro fertilization (IVF) to determine, before implantation, whether an embryo has an abnormal number of chromosomes, which is a major cause of IVF failure and miscarriages. Our PGD solutions identify, before implantation, which embryos are free from gene variants associated with genetic diseases. Our NIPT solutions provide noninvasive tests for early identification of fetal chromosomal abnormalities by analyzing cell-free DNA in maternal blood.


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Oncology

Cancer is a disease of the genome, and the goal of cancer genomics is to identify genomic changes that transform a normal cell into a cancerous one. Understanding these genomic changes allow for a more accurate diagnosis, a better understanding of the prognosis, and the ability to target therapies to individuals. Researchers and clinicians in the research, translational, and clinical oncology markets use Illumina sequencing and array-based solutions to identify the molecular changes in a tumor during all stages of tumor progression. Our solutions help transform discoveries into new treatments or therapies and create tests to predict patient response.

To advance genomic-based precision health care, we are working with leading pharmaceutical companies to develop a universal NGS-based oncology test system for clinical trials of targeted cancer therapies. The goal is to develop and commercialize a multi-gene panel for “companion therapeutic” selection. We are also working with key thought leaders to set standards for NGS-based assays in routine clinical oncology practice and to define regulatory frameworks for this new testing paradigm.

Enterprise Informatics

Enterprise informatics solutions increase the utility of genomic data by allowing customers to aggregate, analyze, archive, and share genomic data. Integrating our instruments with data-analysis software solutions allows customers to go from their biological sample, through the raw genomic data, to meaningful results. Our BaseSpace platform, which can be hosted onsite or in the cloud, integrates directly with our sequencing instruments. It facilitates data sharing, provides data storage solutions, and streamlines sequencing-data analysis through a growing number of data-analysis applications from Illumina and the bioinformatics community.

In 2013, we acquired NextBio, which provides a platform for aggregating and analyzing large quantities of genomic and phenotypic data. Translational research uses this approach to optimize drug therapies and identify trends in overall patient outcomes. We believe that large-scale genomic databases containing genomic and phenotypic information will enhance the value of human genome sequencing and accelerate the pace of discovery.

New and Emerging Opportunities

Our markets change rapidly in response to genomic innovations. New applications and opportunities develop and evolve quickly. We assess these against our corporate strategies and consider whether there is a compelling unmet need together with a strong opportunity to transform the market. Some of the markets that provide immediate and near-term opportunities to expand the use of next-generation sequencing include:

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Transplant diagnostics, where sequencing is used to evaluate donor and patient compatibility;
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Forensic genomics, where sequencing is used to investigate criminal cases; and
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Consumer genomics, where genotyping is used primarily to reveal ancestry and genealogical linkage information.
Our Principal Products and Technologies

Our unique technology platforms support the scale of experimentation necessary for population-scale studies, genome-wide discovery, target selection, and validation studies (see Figure 1 below). Customers use our products to analyze the genome at all levels of complexity, from whole-genome sequencing to targeted panels. A large and dynamic Illumina user community has published more than 10,000 customer-authored scientific papers using our technologies. Through rapid innovation, we are changing the economics of genetic research, enabling projects that were previously considered impossible, and supporting clinical advances towards precision medicine.

Most of our product sales consist of instruments and consumables (which include reagents, flow cells, and microarrays) based on our proprietary technologies. For the fiscal years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , instrument sales comprised 30% , 26% , and 27% , respectively, of total revenues, and consumable sales represented 56% , 62% , and 64% , respectively, of total revenues.
  

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Figure 1: Illumina Platform Overview:
Sequencing

DNA sequencing is the process of determining the order of nucleotide bases (A, C, G, or T) in a DNA sample. Our portfolio of sequencing platforms represents a family of systems that we believe set the standard for productivity, cost-effectiveness, and accuracy among NGS technologies. Customers use our platforms to perform whole-genome, de novo , and exome sequencing, and targeted resequencing of specific gene regions and genes.

Whole-genome sequencing determines the complete DNA sequence of an organism. In de novo sequencing, the goal is to sequence and analyze a sample without using information from prior sequencing of that species. In targeted resequencing, a portion of the sequence of an organism is compared to a standard or reference sequence from previously sequenced samples to identify genetic variation. Understanding the similarities and differences in DNA sequence between and within species helps us understand the function of the structures encoded in the DNA.

Our DNA sequencing technology is based on our proprietary reversible terminator-based sequencing chemistry, referred to as sequencing by synthesis (SBS) biochemistry. SBS tracks the addition of labeled nucleotides as the DNA chain is copied in a massively parallel fashion. Our SBS sequencing technology provides researchers with a broad range of applications and the ability to sequence even large mammalian genomes in days rather than weeks or years.

Our sequencing platforms can generate between 500 megabases (Mb) and 1.8 terabases (Tb) (equivalent to 16 human genomes) of genomic data, depending on the instrument and application. There are different price points per gigabase (Gb) for each instrument, and for different applications, which range from small-genome, amplicon, and targeted gene-panel sequencing to population-scale whole human genome sequencing. Since we launched our first sequencing system in 2007, our systems have reduced the cost of sequencing by more than a factor of 10,000. In addition, the sequencing time per Gb has dropped by a factor of nearly 2,000.

Arrays

Arrays are used for a broad range of DNA and RNA analysis applications, including SNP genotyping, CNV analysis, gene expression analysis, and methylation analysis, and allows for the detection of up to 5,000,000 known genetic markers on a single array.

Our BeadArray technology combines microscopic beads and a substrate in a proprietary manufacturing process to produce arrays that can perform many assays simultaneously. This facilitates large-scale analysis of genetic variation and biological function in a uniquely high-throughput, cost-effective, and flexible manner. Using our BeadArray technology, we achieve high-throughput analysis via a high density of test sites per array and the ability to format arrays in various configurations. We maximize cost effectiveness by reducing expensive consumables, valuable sample input requirements, and manufacturing costs. Varying the size, shape, and format of the well patterns and creating specific beadpools for different

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applications lets us address multiple markets and market segments. Our HiScan and iScan array scanner systems, and our NextSeq 550 system, which we announced in January 2015, image the arrays.

Consumables

We have developed various library preparation and sequencing kits to simplify workflows and accelerate analysis. Our sequencing applications include whole-genome sequencing kits, which sequence entire genomes of any size and complexity, and targeted resequencing kits, which can sequence exomes, specific genes, or other genomic regions of interest. Our sequencing kits maximize the ability of our customers to characterize the target genome accurately. Through our acquisition of Epicentre Technologies Corporation in 2011, we acquired the proprietary Nextera technology for next-generation sequencing library preparation. This technology has enabled us to reduce sample input requirements, simplify genetic analysis workflows, and significantly reduce the time from sample preparation to answer.

Customers use Illumina array-based genotyping consumables for a wide range of analyses, including diverse species, disease-related mutations, and genetic characteristics associated with cancer. Customers can select from a range of human, animal, and agriculturally relevant genome panels or create their own custom arrays to investigate up to 5,000,000 genetic markers targeting any species.

Our Services

In addition to selling products, we provide genotyping, NIPT, and whole-genome sequencing services. Human whole-genome sequencing services are provided through our CLIA-certified, CAP-accredited laboratory. We began offering genotyping services to academic institutions, biotechnology, and pharmaceutical customers in 2002, and added sequencing services in 2007. Using our FastTrack services, customers can perform whole-genome sequencing projects (including phasing and long-read sequencing services) and microarray projects (including large-scale genotyping studies and whole-genome association studies). We also provide NIPT services through our partner laboratories that direct samples to us on a test send-out basis.

Intellectual Property

We have an extensive intellectual property portfolio. As of February 1, 2015, we own or have exclusive licenses to 473 issued U.S. patents and 421 pending U.S. patent applications, including 19 allowed applications that have not yet issued as patents. Our issued patents cover various aspects of our arrays, assays, oligo synthesis, sequencing technology, instruments, digital microfluidics, and chemical-detection technologies, and have terms that expire between 2015 and 2035. We continue to file new patent applications to protect the full range of our technologies. We have filed or have been granted counterparts for many of these patents and applications in foreign countries.

We protect trade secrets, know-how, copyrights, and trademarks, as well as continuing technological innovation and licensing opportunities to develop and maintain our competitive position. Our success depends in part on obtaining patent protection for our products and processes, preserving trade secrets, patents, copyrights and trademarks, operating without infringing the proprietary rights of third parties, and acquiring licenses for technology or products.

We are party to various exclusive and nonexclusive license agreements and other arrangements with third parties that grant us rights to use key aspects of our sequencing and array technologies, assay methods, chemical detection methods, reagent kits, and scanning equipment. Our exclusive licenses expire with the termination of the underlying patents, which will occur between 2015 and 2030. We have additional nonexclusive license agreements with various third parties for other components of our products. In most cases, the agreements remain in effect over the term of the underlying patents, may be terminated at our request without further obligation, and require that we pay customary royalties.

Research and Development

Illumina has historically made substantial investments in research and development. Our research and development efforts prioritize continuous innovation coupled with product evolution.

Research and development expenses for fiscal 2014 , 2013 , and 2012 were $388.1 million , $276.7 million , and $231.0 million , respectively. We expect research and development expense to increase during 2015 to support business growth and continuing expansion in research and product-development efforts.


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Marketing and Distribution

We market and distribute our products directly to customers in North America, Europe, Latin America, and the Asia-Pacific region. In each of these areas, dedicated sales, service, and application-support personnel are expanding and supporting their respective customer bases. In addition, we sell through life-science distributors in certain markets within Europe, the Asia-Pacific region, Latin America, the Middle East, and South Africa. We expect to continue increasing our sales and distribution resources during 2015 and beyond as we launch new products and expand our potential customer base.

Manufacturing

Illumina manufactures sequencing and array platforms, reagent kits, and scanning equipment. In 2014, we continued to increase our manufacturing capacity to meet customer demand. To address increasing product complexity and volume, we are automating manufacturing processes to accelerate throughput and improve quality and yield. Illumina is committed to providing medical devices and related services that consistently meet customer and applicable regulatory requirements. We adhere to access and safety standards required by federal, state, and local health ordinances, such as standards for the use, handling, and disposal of hazardous substances. Our key manufacturing and distribution facilities operate under a quality management system certified to ISO 13485.

Raw Materials

Our manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies. Multiple commercial sources provide many of our components and supplies, but there are some raw materials and components that we obtain from single-source suppliers. To manage potential risks arising from single source suppliers, we believe that we could redesign our products using alternative components or for use with alternative reagents, if necessary. In addition, while we attempt to keep our inventory at minimal levels, we purchase incremental inventory as circumstances warrant to protect our supply chain. If the capabilities of our suppliers and component manufacturers are limited or stopped, due to disasters, quality, regulatory, or other reasons, it could negatively impact our ability to manufacture our products.
  
Competition

Although we believe that our products and services provide significant advantages over products and services currently available from other sources, we expect continued intense competition. Our competitors offer products and services for sequencing, SNP genotyping, gene expression, and molecular diagnostics markets. They include companies such as Affymetrix, Inc., Agilent Technologies, Inc., BGI, Pacific Biosciences of California, Inc., QIAGEN N.V., Roche Holding AG., and Thermo Fisher Scientific, Inc., among others. Some of these companies have or will have substantially greater financial, technical, research, and other resources than we do, along with larger, more established marketing, sales, distribution, and service organizations. In addition, they may have greater name recognition than we do in the markets we address, and in some cases a larger installed base of systems. We expect new competitors to emerge and the intensity of competition to increase. To compete effectively, we must scale our organization and infrastructure appropriately and demonstrate that our products have superior throughput, cost, and accuracy.

Segment and Geographic Information

In accordance with the authoritative accounting guidance for segment reporting, we have determined that we have one reportable segment for purposes of recording and reporting our financial results.

We currently sell our products to a number of customers outside the United States, including customers in other areas of North America, Latin America, Europe, and the Asia-Pacific region. Shipments to customers outside the United States totaled $910.7 million , or 49% of our total revenue, during fiscal 2014 , compared to $706.5 million , or 50% , and $580.1 million , or 51% , in fiscal 2013 and 2012 , respectively. The U.S. dollar has been determined to be the functional currency of the Company’s international operations due to the primary activities of our foreign subsidiaries. We expect that sales to international customers will continue to be an important and growing source of revenue. See note “13. Segment Information, Geographic Data, and Significant Customers” in Part II, Item 8 of this Form 10-K for further information concerning our foreign and domestic operations.


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Backlog

Our backlog was approximately $540 million and $330 million as of December 28, 2014 , and December 29, 2013 , respectively. Approximately $130 million of our backlog as of December 28, 2014 , was associated with the Genomics England sequencing services project, the delivery of which is expected to be completed by the end of 2017. Generally, our backlog consists of orders believed to be firm as of the balance-sheet date. However, we may allow customers to make product substitutions as we launch new products. The timing of shipments depends on several factors, including agreed upon shipping schedules, which may span multiple quarters, and whether the product is catalog or custom. We expect most of the backlog as of December 28, 2014 , to be shipped within the fiscal year ending January 3, 2016 , with the exception of the Genomics England backlog. Although we generally recognize revenue upon the transfer of title to a customer, some customer agreements or applicable accounting treatments might require us to defer the recognition of revenue beyond title transfer.

Environmental Matters

We are committed to the protection of our employees and the environment. Our operations require the use of hazardous materials that subject us to various federal, state, and local environmental and safety laws and regulations. We believe that we are in material compliance with current applicable laws and regulations. However, we could be held liable for damages and fines should contamination of the environment or individual exposures to hazardous substances occur. In addition, we cannot predict how changes in these laws and regulations, or the development of new laws and regulations, will affect our business operations or the cost of compliance.

Government Regulation

As we expand product lines to address the diagnosis of disease, regulation by governmental authorities in the United States and other countries will become an increasingly significant factor in development, testing, production, and marketing. Products that we develop in the molecular diagnostic markets, depending on their intended use, may be regulated as medical devices by the FDA and comparable agencies in other countries. In the United States, certain of our products may require FDA clearance following a pre-market notification process, also known as a 510(k) clearance, or premarket approval (PMA) from the FDA before marketing. The shorter 510(k) clearance process, which we used for the FDA-cleared assays that are run on our FDA-regulated MiSeqDx instrument, generally takes from three to six months after submission, but it can take significantly longer. The longer PMA process is much more costly and uncertain. It generally takes from 9 to 18 months after a complete filing, but it can take significantly longer and typically requires conducting clinical studies, which are not always needed for a 510(k) clearance. All of the products that are currently regulated by the FDA as medical devices are also subject to the FDA Quality System Regulation (QSR). Obtaining the requisite regulatory approvals, including the FDA quality system inspections that are required for PMA approval, can be expensive and may involve considerable delay.

We cannot be certain which of our planned molecular diagnostic products will be subject to the shorter 510(k) clearance process and, in fact, some of our products may need to go through the PMA process. The regulatory approval process for such products may be significantly delayed, may be significantly more expensive than anticipated, and may conclude without such products being approved by the FDA. Without timely regulatory approval, we may not be able to launch or successfully commercialize such products.

Changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products. This may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products. In addition, the FDA may introduce new requirements that may change the regulatory requirements for either or both Illumina or Illumina customers.

If our products labeled as “Research Use Only,” or RUO, are used, or could be used, for the diagnosis of disease, the regulatory requirements related to marketing, selling, and supporting such products could be uncertain. This is true even if such use by our customers occurs without our consent. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.

Illumina products sold as medical devices in Europe will be regulated under the In Vitro Diagnostics Directive (98/79/EC). This regulation includes requirements for both presentation and review of performance data and quality-system requirements.

Certain of our diagnostic products are currently available through laboratories that are certified under the Clinical Laboratory Improvements Amendments (CLIA) of 1988. These products are commonly called “laboratory developed tests,” or

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LDTs. For a number of years, the FDA has exercised its regulatory enforcement discretion to not regulate LDTs as medical devices if created and used within a single laboratory. However, as discussed in more detail under “Risk Factors,” the FDA is reexamining this regulatory approach and changes to the agency’s handling of LDTs could impact our business in ways that cannot be predicted at this time. Certification of CLIA laboratories includes standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, and quality control procedures. CLIA also mandates that, for high complexity labs such as ours, to operate as a lab, we must have an accreditation by an organization recognized by CLIA such as the College of Pathologists (CAP), which we have obtained and must maintain. If we were to lose our CAP accreditation, our business, financial condition, or results of operations could be adversely affected. In addition, state laboratory licensing and inspection requirements may also apply to our products, which, in some cases, are more stringent than CLIA requirements.
    
Employees

As of December 28, 2014 , we had more than 3,700 employees. We consider our employee relations to be positive. Our success will depend in large part upon our ability to attract and retain employees. In addition, we employ a number of temporary and contract employees. We face competition in this regard from other companies, research and academic institutions, government entities, and other organizations.

ITEM 1A.
Risk Factors.

Our business is subject to various risks, including those described below. In addition to the other information included in this Form 10-K, the following issues could adversely affect our operating results or our stock price.

If we do not successfully manage the development, manufacturing, and launch of new products or services, including product transitions, our financial results could be adversely affected.

We face risks associated with launching new products and pre-announcing products and services when the products or services have not been fully developed or tested. If our products and services are not able to deliver the performance or results expected by our target markets or are not delivered on a timely basis, our reputation and credibility may suffer. If we encounter development challenges or discover errors in our products late in our development cycle, we may delay the product launch date. The expenses or losses associated with unsuccessful product development or launch activities or lack of market acceptance of our new products could adversely affect our business, financial condition, or results of operations.

In addition, we may experience difficulty in managing or forecasting customer reactions, purchasing decisions, or transition requirements or programs with respect to newly launched products (or products in development), which could adversely affect sales of our existing products. For instance, in January 2015 we announced significant expansions to our sequencing instrument platforms, the HiSeq X Five system and the HiSeq 3000/4000 systems. When we introduce new or enhanced products, we face numerous risks relating to product transitions, including the inability to accurately forecast demand (including with respect to our existing products), manage excess and obsolete inventories, address new or higher product cost structures, and manage different sales and support requirements due to the type or complexity of the new or enhanced products. Announcements of currently planned or other new products may cause customers to defer or stop purchasing our products until new products become available. Our failure to effectively manage product transitions or introductions could adversely affect our business, financial condition, or results of operations.
  
We face intense competition, which could render our products obsolete, result in significant price reductions, or substantially limit the volume of products that we sell.

We compete with life sciences companies that design, manufacture, and market products for analysis of genetic variation and biological function and other applications using a wide-range of competing technologies. We anticipate that we will continue to face increased competition as existing companies develop new or improved products and as new companies enter the market with new technologies. One or more of our competitors may render our technology obsolete or uneconomical. Some of our competitors have greater financial and personnel resources, broader product lines, a more established customer base, and more experience in research and development than we do. Furthermore, life sciences and pharmaceutical companies, which are our potential customers and strategic partners, could also develop competing products. We believe that customers in our markets display a significant amount of loyalty to their initial supplier of a particular product; therefore, it may be difficult to generate sales to potential customers who have purchased products from competitors. To the extent we are unable to be the first to develop or supply new products, our competitive position may suffer.


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The market for molecular diagnostics products is currently limited and highly competitive, with several large companies already having significant market share, intellectual property portfolios, and regulatory expertise. Established diagnostic companies also have an installed base of instruments in several markets, including clinical and reference laboratories, which could deter acceptance of our products. In addition, some of these companies have formed alliances with genomics companies that provide them access to genetic information that may be incorporated into their diagnostic tests.

Our success depends upon the continued emergence and growth of markets for analysis of genetic variation and biological function.

We design our products primarily for applications in the life sciences, diagnostic, agricultural, and pharmaceutical industries. The usefulness of our technologies depends in part upon the availability of genetic data and its usefulness in identifying or treating disease. We are focusing on markets for analysis of genetic variation and biological function, namely sequencing, genotyping, and gene expression profiling. These markets are new and emerging, and they may not develop as quickly as we anticipate, or reach their full potential. Other methods of analysis of genetic variation and biological function may emerge and displace the methods we are developing. Also, researchers may not be able to successfully analyze raw genetic data or be able to convert raw genetic data into medically valuable information. In addition, factors affecting research and development spending generally, such as changes in the regulatory environment affecting life sciences and pharmaceutical companies, and changes in government programs that provide funding to companies and research institutions, could harm our business. If useful genetic data is not available or if our target markets do not develop in a timely manner, demand for our products may grow at a slower rate than we expect.

Our continued growth is dependent on continuously developing and commercializing new products.

Our target markets are characterized by rapid technological change, evolving industry standards, changes in customer needs, existing and emerging competition, strong price competition, and frequent new product introductions. Accordingly, our continued growth depends on developing and commercializing new products and services, including improving our existing products and services, in order to address evolving market requirements on a timely basis. If we fail to innovate or adequately invest in new technologies, our products and services will become dated, and we could lose our competitive position in the markets that we serve as customers purchase new products offered by our competitors. We believe that successfully introducing new products and technologies in our target markets on a timely basis provides a significant competitive advantage because customers make an investment of time in selecting and learning to use a new product and may be reluctant to switch once that selection is made.

To the extent that we fail to introduce new and innovative products, or such products are not accepted in the market or suffer significant delays in development, we may lose market share to our competitors, which will be difficult or impossible to regain. An inability, for technological or other reasons, to successfully develop and introduce new products on a timely basis could reduce our growth rate or otherwise have an adverse effect on our business. In the past, we have experienced, and are likely to experience in the future, delays in the development and introduction of new products. There can be no assurance that we will keep pace with the rapid rate of change in our markets or that our new products will adequately meet the requirements of the marketplace, achieve market acceptance, or compete successfully with competing technologies. Some of the factors affecting market acceptance of new products and services include:

•
availability, quality, and price relative to competing products and services;
•
the functionality and performance of new and existing products and services;
•
the timing of introduction of new products or services relative to competing products and services;
•
scientists’ and customers’ opinions of the utility of new products or services;
•
citation of new products or services in published research;
•
regulatory trends and approvals; and
•
general trends in life sciences research and applied markets.
We may also have to write off excess or obsolete inventory if sales of our products are not consistent with our expectations or the market requirements for our products change due to technical innovations in the marketplace.


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If defects are discovered in our products, we may incur additional unforeseen costs, our products may be subject to recalls, customers may not purchase our products, our reputation may suffer, and ultimately our sales and operating earnings could be negatively impacted.

Our products incorporate complex, precision-manufactured mechanical parts, electrical components, optical components, and fluidics, as well as computer software, any of which may contain errors or failures, especially when first introduced. In the course of conducting our business, we must adequately address quality issues associated with our products and services, including defects in our engineering, design, and manufacturing processes, as well as defects in third-party components included in our products. In addition, new products or enhancements may contain undetected errors or performance problems that, despite testing, are discovered only after commercial shipment. Identifying the root cause of quality issues, particularly those affecting reagents and third-party components, may be difficult, which increases the time needed to address quality issues as they arise and increases the risk that similar problems could recur. Because our products are designed to be used to perform complex genomic analysis, we expect that our customers will have an increased sensitivity to such defects. If we do not meet applicable regulatory or quality standards, our products may be subject to recall, and, under certain circumstances, we may be required to notify applicable regulatory authorities about a recall. If our products are subject to recall or shipment holds, our reputation, business, financial condition, or results of operations could be adversely affected.
Litigation, other proceedings, or third party claims of intellectual property infringement could require us to spend significant time and money and could prevent us from selling our products or services.

Our success depends in part on our non-infringement of the patents or proprietary rights of third parties. Third parties have asserted and may in the future assert that we are employing their proprietary technology without authorization. As we enter new markets or introduce new products, we expect that competitors will likely claim that our products infringe their intellectual property rights as part of a business strategy to impede our successful competition. In addition, third parties may have obtained and may in the future obtain patents allowing them to claim that the use of our technologies infringes these patents. We could incur substantial costs and divert the attention of our management and technical personnel in defending ourselves against any of these claims. Any adverse ruling or perception of an adverse ruling in defending ourselves against these claims could have an adverse impact on our stock price, which may be disproportionate to the actual impact of the ruling itself. Furthermore, parties making claims against us may be able to obtain injunctive or other relief, which effectively could block our ability to develop further, commercialize, or sell products or services, and could result in the award of substantial damages against us. In the event of a successful infringement claim against us, we may be required to pay damages and obtain one or more licenses from third parties, or be prohibited from selling certain products or services. In addition, we may be unable to obtain these licenses at a reasonable cost, if at all. We could therefore incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins and earnings per share. In addition, we could encounter delays in product introductions while we attempt to develop alternative methods or products. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing products, and the prohibition of sale of any of our products or services could adversely affect our ability to grow or maintain profitability.

We depend on third-party manufacturers and suppliers for some of our products, or components and materials used in our products, and if shipments from these manufacturers or suppliers are delayed or interrupted, or if the quality of the products, components, or materials supplied do not meet our requirements, we may not be able to launch, manufacture, or ship our products in a timely manner, or at all.

The complex nature of our products requires customized, precision-manufactured components and materials that currently are available from a limited number of sources, and, in the case of some components and materials, from only a single source. If deliveries from these vendors are delayed or interrupted for any reason, or if we are otherwise unable to secure a sufficient supply, we may not be able to obtain these components or materials on a timely basis or in sufficient quantities or qualities, or at all, in order to meet demand for our products. We may need to enter into contractual relationships with manufacturers for commercial-scale production of some of our products, or develop these capabilities internally, and there can be no assurance that we will be able to do this on a timely basis, in sufficient quantities, or on commercially reasonable terms. In addition, the lead time needed to establish a relationship with a new supplier can be lengthy, and we may experience delays in meeting demand in the event we must switch to a new supplier. The time and effort required to qualify a new supplier could result in additional costs, diversion of resources, or reduced manufacturing yields, any of which would negatively impact our operating results. Accordingly, we may not be able to establish or maintain reliable, high-volume manufacturing at commercially reasonable costs or at all. In addition, the manufacture or shipment of our products may be delayed or interrupted if the quality of the products, components, or materials supplied by our vendors does not meet our requirements. Current or future social and environmental regulations or critical issues, such as those relating to the sourcing of conflict minerals from the Democratic Republic of the Congo or the need to eliminate environmentally sensitive materials from our products, could restrict the supply

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of components and materials used in production or increase our costs. Any delay or interruption to our manufacturing process or in shipping our products could result in lost revenue, which would adversely affect our business, financial condition, or results of operations.

Unforeseen problems with the implementation and maintenance of our information systems could have an adverse effect on our operations.

As a part of our ongoing effort to upgrade our current information systems, we are implementing new enterprise resource planning software and other software applications to manage certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen, including interruptions in service, loss of data, or reduced functionality. Such problems could adversely impact our ability to provide quotes, take customer orders, and otherwise run our business in a timely manner. In addition, if our new systems fail to provide accurate and increased visibility into pricing and cost structures, it may be difficult to improve or maximize our profit margins. As a result, our results of operations and cash flows could be adversely affected.

Reduction or delay in research and development budgets and government funding may adversely affect our revenue.

The timing and amount of revenues from customers that rely on government and academic research funding may vary significantly due to factors that can be difficult to forecast, and there remains significant uncertainty concerning government and academic research funding worldwide as governments in the United States and Europe, in particular, focus on reducing fiscal deficits while at the same time confronting uncertain economic growth. Funding for life science research has increased more slowly during the past several years compared to previous years and has declined in some countries. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. Other programs, such as defense, entitlement programs, or general efforts to reduce budget deficits could be viewed by governments as a higher priority. These budgetary pressures may result in reduced allocations to government agencies that fund research and development activities, such as the U.S. National Institute of Health, or NIH. Past proposals to reduce budget deficits have included reduced NIH and other research and development allocations. Any shift away from the funding of life sciences research and development or delays surrounding the approval of government budget proposals may cause our customers to delay or forego purchases of our products, which could adversely affect our business, financial condition, or results of operations.

Our acquisitions expose us to risks that could adversely affect our business, and we may not achieve the anticipated benefits of acquisitions of businesses or technologies.

As part of our strategy to develop and identify new products, services, and technologies, we have made, and may continue to make, acquisitions of technologies, products, or businesses. Acquisitions involve numerous risks and operational, financial, and managerial challenges, including the following, any of which could adversely affect our business, financial condition, or results of operations:

•
difficulties in integrating new operations, technologies, products, and personnel;
•
lack of synergies or the inability to realize expected synergies and cost-savings;
•
difficulties in managing geographically dispersed operations;
•
underperformance of any acquired technology, product, or business relative to our expectations and the price we paid;
•
negative near-term impacts on financial results after an acquisition, including acquisition-related earnings charges;
•
the potential loss of key employees, customers, and strategic partners of acquired companies;
•
claims by terminated employees and shareholders of acquired companies or other third parties related to the transaction;
•
the issuance of dilutive securities, assumption or incurrence of additional debt obligations or expenses, or use of substantial portions of our cash;
•
diversion of management’s attention and company resources from existing operations of the business;

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•
inconsistencies in standards, controls, procedures, and policies;
•
the impairment of intangible assets as a result of technological advancements, or worse-than-expected performance of acquired companies; and
•
assumption of, or exposure to, unknown contingent liabilities or liabilities that are difficult to identify or accurately quantify.
In addition, the successful integration of acquired businesses requires significant efforts and expense across all operational areas, including sales and marketing, research and development, manufacturing, finance, legal, and information technologies. There can be no assurance that any of the acquisitions we make will be successful or will be, or will remain, profitable. Our failure to successfully address the above risks may prevent us from achieving the anticipated benefits from any acquisition in a reasonable time frame, or at all.

If we are unable to increase our manufacturing or service capacity and develop and maintain operation of our manufacturing or service capability, we may not be able to launch or support our products or services in a timely manner, or at all.

We continue to rapidly increase our manufacturing and service capacity to meet the anticipated demand for our products. Although we have significantly increased our manufacturing and service capacity and we believe we have plans in place sufficient to ensure we have adequate capacity to meet our current business plans, there are uncertainties inherent in expanding our manufacturing and service capabilities, and we may not be able to sufficiently increase our capacity in a timely manner. For example, manufacturing and product quality issues may arise as we increase production rates at our manufacturing facilities and launch new products. Also, we may not manufacture the right product mix to meet customer demand, especially as we introduce new products. As a result, we may experience difficulties in meeting customer, collaborator, and internal demand, in which case we could lose customers or be required to delay new product introductions, and demand for our products could decline. Additionally, in the past, we have experienced variations in manufacturing conditions and quality control issues that have temporarily reduced or suspended production of certain products. Due to the intricate nature of manufacturing complex instruments, consumables, and products that contain DNA, we may encounter similar or previously unknown manufacturing difficulties in the future that could significantly reduce production yields, impact our ability to launch or sell these products (or to produce them economically), prevent us from achieving expected performance levels, or cause us to set prices that hinder wide adoption by customers.

An interruption in our ability to manufacture our products or an inability to obtain key components or raw materials due to a catastrophic disaster or infrastructure could adversely affect our business.

We currently manufacture in a limited number of locations. Our manufacturing facilities are located in San Diego and the San Francisco Bay Area in California; Madison, Wisconsin; and Singapore. These areas are subject to natural disasters such as earthquakes, wildfires, or floods. If a natural disaster were to damage one of our facilities significantly or if other events were to cause our operations to fail, we may be unable to manufacture our products, provide our services, or develop new products. In addition, if the capabilities of our suppliers and component manufacturers are limited or stopped, due to disasters, quality, regulatory, or other reasons, it could negatively impact our ability to manufacture our products.

Many of our manufacturing processes are automated and are controlled by our custom-designed laboratory information management system (LIMS). Additionally, the decoding process in our array manufacturing requires significant network and storage infrastructure. If either our LIMS system or our networks or storage infrastructure were to fail for an extended period of time, it may adversely impact our ability to manufacture our products on a timely basis and could prevent us from achieving our expected shipments in any given period.

We also rely on our technology infrastructure, among other functions, to interact with suppliers; sell our products and services; fulfill orders; bill, collect, and make payments; ship products; provide services and support to customers; fulfill contractual obligations; and otherwise conduct business. Our systems may be vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets, and other attempts to harm our systems. . Certain of our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Despite any precautions we may take, such problems could result in, among other consequences, interruptions in our services, which could harm our reputation and financial results.


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If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to achieve our goals.

We are highly dependent on our management and scientific personnel, including Jay Flatley, our Chief Executive Officer. The loss of their services could adversely impact our ability to achieve our business objectives. In addition, the continued growth of our business depends on our ability to hire additional qualified personnel with expertise in molecular biology, chemistry, biological information processing, sales, marketing, and technical support. We compete for qualified management and scientific personnel with other life science companies, universities, and research institutions, particularly those focusing on genomics. Competition for these individuals, particularly in the San Diego and San Francisco areas, is intense, and the turnover rate can be high. Failure to attract and retain management and scientific personnel would prevent us from pursuing collaborations or developing our products or technologies. Additionally, integration of acquired companies and businesses can be disruptive, causing key employees of the acquired business to leave. Further, we use share-based compensation, including restricted stock units and performance stock units to attract key personnel, incentivize them to remain with us, and align their interests with those of the Company by building long-term stockholder value. If our stock price decreases, the value of these equity awards decreases and therefore reduces a key employee’s incentive to stay.

Any inability to effectively protect our proprietary technologies could harm our competitive position.

The proprietary positions of companies developing tools for the life sciences, genomics, forensics, agricultural, and pharmaceutical industries, including our proprietary position, generally are uncertain and involve complex legal and factual questions. Our success depends to a large extent on our ability to develop proprietary products and technologies and to obtain patents and maintain adequate protection of our intellectual property in the United States and other countries. The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside of the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights outside of the United States.

We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. Any finding that our patents or applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all. Furthermore, as issued patents expire, we may lose some competitive advantage as others develop competing products, and, as a result, we may lose revenue.

In addition, our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products and may therefore fail to provide us with any competitive advantage. We may need to initiate lawsuits to protect or enforce our patents, or litigate against third party claims, which would be expensive, and, if we lose, may cause us to lose some of our intellectual property rights and reduce our ability to compete in the marketplace. Furthermore, these lawsuits may divert the attention of our management and technical personnel. There is also the risk that others may independently develop similar or alternative technologies or design around our patented technologies. In that regard, certain patent applications in the United States may be maintained in secrecy until the patents issue, and publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months.

We also rely upon trade secrets and proprietary know-how protection for our confidential and proprietary information, and we have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how, or other confidential information.

Security breaches, including with respect to cyber-security, and other disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer.

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information, and that of our customers, and personally identifiable information of our customers and employees, in our data centers and on our networks. The secure maintenance of this information is important to our operations and business strategy. Despite our security measures, our information technology and infrastructure may be vulnerable to cyber-attacks by hackers or breached due to employee error, malfeasance, or other disruptions. As a leader in the field of genetic analysis, we may face cyber-attacks that attempt to penetrate our network security, including our data centers; sabotage or otherwise disable our research, products, and services; misappropriate our or our customers' and partners' proprietary information, which may include personally identifiable information; or cause interruptions of our internal systems and services. Any such breach could

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compromise our networks and the information stored there could be accessed, publicly disclosed, lost, or stolen. Any such access, disclosure, or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and damage to our reputation.

Our products, if used for the diagnosis of disease, could be subject to government regulation, and the regulatory approval and maintenance process for such products may be expensive, time-consuming, and uncertain both in timing and in outcome.

Our products are not subject to FDA clearance or approval if they are not intended to be used for the diagnosis of disease. However, as we expand our product line to encompass products that are intended to be used for the diagnosis of disease, such as our FDA-regulated MiSeqDx, certain of our products will become subject to regulation by the FDA, or comparable international agencies, including requirements for regulatory clearance or approval of such products before they can be marketed. Such regulatory approval processes or clearances may be expensive, time-consuming, and uncertain, and our failure to obtain or comply with such approvals and clearances could have an adverse effect on our business, financial condition, or operating results. In addition, changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products, which may negatively affect our ability to obtain or maintain FDA or comparable regulatory approval of our products, if required.

Molecular diagnostic products, in particular, depending on their intended use, may be regulated as medical devices by the FDA and comparable international agencies and may require either clearance from the FDA following the 510(k) pre-market notification process or premarket approval from the FDA, in each case prior to marketing. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay. If we fail to obtain, or experience significant delays in obtaining, regulatory approvals for molecular diagnostic products that we develop, we may not be able to launch or successfully commercialize such products in a timely manner, or at all.

In addition, if our products labeled as “Research Use Only,” or RUO, are used, or could be used, for the diagnosis of disease, the regulatory requirements related to marketing, selling, and supporting such products could be uncertain, even if such use by our customers is without our consent. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.

If the FDA requires in the future that any of our LDT products be subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.

Certain of our diagnostic products are currently available through laboratories that are certified under the Clinical Laboratory Improvements Amendments (CLIA) of 1988. These products are commonly called “laboratory developed tests,” or LDTs. For a number of years, the FDA has exercised its regulatory enforcement discretion to not regulate LDTs as medical devices if created and used within a single laboratory. However, the FDA has been reconsidering its enforcement discretion policy and has commented that regulation of LDTs may be warranted because of the growth in the volume and complexity of testing services utilizing LDTs. In October 2014, the FDA published two draft guidance documents suggesting an approach for registration and listing of laboratories and assays along with a framework for regulation of LDTs by the FDA based on risk to patients rather than whether the LDTs were made by a conventional manufacturer or a single laboratory. The draft framework guidance includes pre-market review for higher-risk LDTs, including many used to guide treatment decisions, as well as companion diagnostics that have entered the market as LDTs. We cannot predict the nature or extent of the FDA's final guidance or regulation of LDTs, in general, or with respect to our LDTs, in particular. If the FDA requires in the future that LDT products are subject to regulatory clearance or approval, our business, financial condition, or results of operations could be adversely affected.
  
If product or service liability lawsuits are successfully brought against us, we may face reduced demand for our products and incur significant liabilities.

Our products and services are used for sensitive applications, and we face an inherent risk of exposure to product or service liability claims if our products or services are alleged to have caused harm, resulted in false negatives or false positives, or do not perform in accordance with specifications. We cannot be certain that we would be able to successfully defend any product or service liability lawsuit brought against us. Regardless of merit or eventual outcome, product or service liability claims may result in:

•
decreased demand for our products;

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•
injury to our reputation;
•
increased product liability insurance costs;
•
costs of related litigation; and
•
substantial monetary awards to plaintiffs.
Although we carry product and service liability insurance, if we become the subject of a successful product or service liability lawsuit, our insurance may not cover all substantial liabilities, which could have an adverse effect on our business, financial condition, or results of operations.

As we develop, market, or sell diagnostic tests, we may encounter delays in receipt, or limits in the amount, of reimbursement approvals and public health funding, which will impact our ability to grow revenues in the healthcare market.

Physicians and patients may not order diagnostic tests that we develop, market, or sell, such as our verifi prenatal test, unless third-party payors, such as managed care organizations as well as government payors such as Medicare and Medicaid and governmental payors outside of the United States, pay a substantial portion of the test price. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical tests that involve new technologies or provide novel diagnostic information. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on diagnostic product suppliers to reduce their prices. Reimbursement by a payor may depend on a number of factors, including a payor's determination that tests using our technologies are:

•
not experimental or investigational,
•
medically necessary,
•
appropriate for the specific patient,
•
cost-effective,
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supported by peer-reviewed publications, and
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included in clinical practice guidelines.
Since each third-party payor often makes reimbursement decisions on an individual patient basis, obtaining such approvals is a time-consuming and costly process that requires us to provide scientific and clinical data supporting the clinical benefits of each of our products. As a result, there can be no assurance that reimbursement approvals will be obtained. This process can delay the broad market introduction of new products, and could have a negative effect on our results of operations. As a result, third-party reimbursement may not be consistent or financially adequate to cover the cost of diagnostic products that we develop, market, or sell. This could limit our ability to sell our products or cause us to reduce prices, which would adversely affect our results of operations.

Even if our tests are being reimbursed, third party payors may withdraw their coverage policies, cancel their contracts with our customers at any time, review and adjust the rate of reimbursement, require co-payments from patients, or stop paying for our tests, which would reduce our revenues. In addition, insurers, including managed care organizations as well as government payors such as Medicare and Medicaid, have increased their efforts to control the cost, utilization, and delivery of healthcare services. These measures have resulted in reduced payment rates and decreased utilization for the clinical laboratory industry. Reductions in the reimbursement rate of payors may occur in the future. Reductions in the prices at which our tests are reimbursed could have a negative impact on our results of operations.

Doing business internationally creates operational and financial risks for our business.

Conducting and launching operations on an international scale requires close coordination of activities across multiple jurisdictions and time zones and consumes significant management resources. If we fail to coordinate and manage these activities effectively, including the risks noted below, our business, financial condition, or results of operations could be adversely affected. We have sales offices located internationally throughout Europe, the Asia-Pacific region, and Brazil, as well as manufacturing facilities in Singapore. Shipments to customers outside the United States comprised 49% , 50% , and 51% of our total revenue for fiscal years 2014 , 2013 , and 2012 , respectively.

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During 2014 , a significant portion of our sales were denominated in foreign currencies while the majority of our purchases of raw materials were denominated in U.S. dollars. Changes in the value of the relevant currencies may affect the cost of certain items required in our operations. Changes in currency exchange rates may also affect the relative prices at which we are able sell products in the same market. Our revenues from international customers may be negatively impacted as increases in the U.S. dollar relative to our international customers local currency could make our products more expensive, impacting our ability to compete. Our costs of materials from international suppliers may increase if in order to continue doing business with us they raise their prices as the value of the U.S. dollar decreases relative to their local currency. Foreign policies and actions regarding currency valuation could result in actions by the United States and other countries to offset the effects of such fluctuations. Recent global financial conditions have led to a high level of volatility in foreign currency exchange rates and that level of volatility may continue, which could adversely affect our business, financial condition, or results of operations.

In addition to the foregoing risks, international operations entail the following risks:

•
longer payment cycles and difficulties in collecting accounts receivable outside of the United States;
•
longer sales cycles due to the volume of transactions taking place through public tenders;
•
challenges in staffing and managing foreign operations;
•
tariffs and other trade barriers;
•
unexpected changes in legislative or regulatory requirements of foreign countries into which we sell our products;
•
difficulties in obtaining export licenses or in overcoming other trade barriers and restrictions resulting in delivery delays; and
•
significant taxes or other burdens of complying with a variety of foreign laws.
We are subject to risks related to taxation in multiple jurisdictions.

We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments based on interpretations of existing tax laws or regulations are required in determining the provision for income taxes. Our effective income tax rate could be adversely affected by various factors, including, but not limited to, changes in the mix of earnings in tax jurisdictions with different statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in existing tax laws or tax rates, changes in the level of non-deductible expenses (including share-based compensation), changes in our future levels of research and development spending, mergers and acquisitions, or the result of examinations by various tax authorities. Although we believe our tax estimates are reasonable, if the U.S. Internal Revenue Service or other taxing authority disagrees with the positions taken by the Company on its tax returns, we could have additional tax liability, including interest and penalties. If material, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.

An inability to manage our growth or the expansion of our operations could adversely affect our business, financial condition, or results of operations.

Our business has grown rapidly, with total revenues increasing from $73.5 million for the year ended January 1, 2006 to $1.86 billion for the year ended December 28, 2014 , and with the number of employees increasing from 375 to more than 3,700 during the same period. We expect to continue to experience substantial growth in order to achieve our operating plans. The continued global expansion of our business and addition of new personnel may place a strain on our management and operational systems. Our ability to effectively manage our operations and growth requires us to continue to expend funds to enhance our operational, financial, and management controls, reporting systems, and procedures and to attract and retain sufficient numbers of talented employees on a global basis. If we are unable to scale up and implement improvements to our manufacturing process and control systems in an efficient or timely manner, or if we encounter deficiencies in existing systems and controls, then we will not be able to make available the products required to successfully commercialize our technology. Our future operating results will depend on the ability of our management to continue to implement and improve our research, product development, manufacturing, sales and marketing, and customer support programs, enhance our operational and financial control systems, expand, train, and manage our employee base, integrate acquired businesses, and effectively address new issues related to our growth as they arise. There can be no assurance that we will be able to manage our recent or any future expansion or acquisition successfully, and any inability to do so could adversely affect our business, financial condition, or results of operations.

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Our operating results may vary significantly from period to period, and we may not be able to sustain operating profitability.

Our revenue is subject to fluctuations due to the timing of sales of high-value products and services, the effects of new product launches and related promotions, the timing and availability of our customers’ funding, the impact of seasonal spending patterns, the timing and size of research projects our customers perform, changes in overall spending levels in the life sciences industry, and other unpredictable factors that may affect customer ordering patterns. Given the difficulty in predicting the timing and magnitude of sales for our products and services, we may experience quarter-to-quarter fluctuations in revenue resulting in the potential for a sequential decline in quarterly revenue. While we anticipate future growth, there is some uncertainty as to the timing of revenue recognition on a quarterly basis. This is because a substantial portion of our quarterly revenue is typically recognized in the last month of a quarter and because the pattern for revenue generation during that month is normally not linear, with a concentration of orders in the final weeks of the quarter. In light of that, our revenue cut-off and recognition procedures, together with our manufacturing and shipping operations, may experience increased pressure and demand during the time period shortly before the end of a fiscal quarter.

A large portion of our expenses are relatively fixed, including expenses for facilities, equipment, and personnel. In addition, we expect operating expenses to continue to increase significantly in absolute dollars, and we expect that our research and development and selling and marketing expenses will increase at a higher rate in the future as a result of the development and launch of new products. Accordingly, our ability to sustain profitability will depend in part on the rate of growth, if any, of our revenue and on the level of our expenses, and if revenue does not grow as anticipated, we may not be able to maintain annual or quarterly profitability. Any significant delays in the commercial launch of our products, unfavorable sales trends in our existing product lines, or impacts from the other factors mentioned above, could adversely affect our future revenue growth or cause a sequential decline in quarterly revenue. In addition, non-cash share-based compensation expense and expenses related to prior and future acquisitions are also likely to continue to adversely affect our future profitability. Due to the possibility of significant fluctuations in our revenue and expenses, particularly from quarter to quarter, we believe that quarterly comparisons of our operating results are not a good indication of our future performance. If our operating results fluctuate or do not meet the expectations of stock market analysts and investors, our stock price could decline.

From time to time, we receive large orders that have a significant effect on our operating results in the period in which the order is recognized as revenue. The timing of such orders is difficult to predict, and the timing of revenue recognition from such orders may affect period to period changes in net sales. As a result, our operating results could vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue.

Changes in accounting standards and subjective assumptions, estimates, and judgments by management related to complex accounting matters could significantly affect our financial results or financial condition.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines, and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, asset impairment and fair value determinations, inventories, business combinations and intangible asset valuations, and litigation, are highly complex and involve many subjective assumptions, estimates, and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates, or judgments could significantly change our reported or expected financial performance or financial condition.

Ethical, legal, and social concerns related to the use of genetic information could reduce demand for our products or services.

Our products may be used to provide genetic information about humans, agricultural crops, other food sources, and other living organisms. The information obtained from our products could be used in a variety of applications, which may have underlying ethical, legal, and social concerns regarding privacy and the appropriate uses of the resulting information, including preimplantation genetic screening of embryos, prenatal genetic testing, genetic engineering or modification of agricultural products, or testing genetic predisposition for certain medical conditions, particularly for those that have no known cure. Governmental authorities could, for social or other purposes, call for limits on or regulation of the use of genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, such concerns may lead individuals to refuse to use genetics tests even if permissible. These and other ethical, legal, and social concerns about genetic testing may limit market acceptance of our technology for certain applications or reduce the potential markets for our technology, either of which could have an adverse effect on our business, financial condition, or results of operations.


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Our strategic investments may result in losses.

We periodically make strategic investments in various public and private companies with businesses or technologies that may complement our business. The market values of these strategic investments may fluctuate due to market conditions and other conditions over which we have no control. Other-than-temporary declines in the market price and valuations of the securities that we hold in other companies would require us to record losses related to our investment. This could result in future charges to our earnings. It is uncertain whether or not we will realize any long-term benefits associated with these strategic investments.

Conversion of our outstanding convertible notes may result in losses.

As of December 28, 2014 , we had $320.0 million aggregate principal amount of convertible notes due 2016, $632.5 million aggregate principal amount of convertible notes due 2019, and $517.5 million aggregate principal amount of convertible notes due 2021 outstanding. The notes are convertible into cash, and if applicable, shares of our common stock under certain circumstances, including trading price conditions related to our common stock. If the trading price of our common stock remains significantly above the conversion price of $83.55 with respect to convertible notes due 2016, we believe that some noteholders will elect to convert the applicable notes. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the notes to be extinguished and their corresponding net carrying value. The fair value of the notes to be extinguished depends on our current incremental borrowing rate. The net carrying value of our notes has an implicit interest rate of 4.5% with respect to convertible notes due 2016, 2.9% with respect to convertible notes due 2019, and 3.5% with respect to convertible notes due 2021. If our incremental borrowing rate at the time of conversion is lower than the implied interest rate of the notes, we will record a loss in our consolidated statement of income during the period in which the notes are converted.

Our Certificate of Incorporation and Bylaws include anti-takeover provisions that may make it difficult for another company to acquire control of us or limit the price investors might be willing to pay for our stock.

Certain provisions of our Certificate of Incorporation and Bylaws could delay the removal of incumbent directors and could make it more difficult to successfully complete a merger, tender offer, or proxy contest involving us. Our Certificate of Incorporation has provisions that give our Board the ability to issue preferred stock and determine the rights and designations of the preferred stock at any time without stockholder approval. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock. In addition, the staggered terms of our board of directors could have the effect of delaying or deferring a change in control.

In addition, certain provisions of the Delaware General Corporation Law (“DGCL”), including Section 203 of the DGCL, may have the effect of delaying or preventing changes in the control or management of Illumina. Section 203 of the DGCL provides, with certain exceptions, for waiting periods applicable to business combinations with stockholders owning at least 15% and less than 85% of the voting stock (exclusive of stock held by directors, officers, and employee plans) of a company.

The above factors may have the effect of deterring hostile takeovers or otherwise delaying or preventing changes in the control or management of Illumina, including transactions in which our stockholders might otherwise receive a premium over the fair market value of our common stock.

ITEM 1B.
Unresolved Staff Comments.

None.


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ITEM 2.
Properties.

The following table summarizes the facilities we lease as of December 28, 2014 , including the location and size of each principal facility, and their designated use. We believe our facilities are adequate for our current and near-term needs, and will be able to locate additional facilities as needed.
Location
 
Approximate Square Feet
 
Operation
 
Lease
Expiration Dates
San Diego, CA
 
707,000

 
R&D, Manufacturing, Warehouse, Distribution, and Administrative
 
2016 – 2031

San Francisco Bay Area, CA*
 
278,000

 
R&D, Manufacturing, Warehouse, and Administrative
 
2016 – 2024

Singapore
 
151,000

 
R&D, Manufacturing, Warehouse, and Administrative
 
2016 – 2021

Cambridge, United Kingdom
 
94,000

 
R&D, Manufacturing, and Administrative
 
2017 - 2024

Eindhoven, the Netherlands
 
42,000

 
Distribution and Administrative
 
2015

Madison, WI
 
38,000

 
R&D, Manufacturing, and Administrative
 
2019

Other
 
32,000

 
Administrative
 
2015 - 2017

________________
*Excludes approximately 360,000 square feet in Foster City, California, as the lease does not commence until 2017.

ITEM 3.
Legal Proceedings.

We are involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, we assesses, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, we are currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. In the event that opposing litigants in outstanding litigations or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any established accruals, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.


ITEM 4.
Mine Safety Disclosures.

Not applicable.


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PART II

ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock has been quoted on The NASDAQ Global Select Market under the symbol “ILMN” since July 28, 2000. Prior to that time, there was no public market for our common stock. The following table sets forth, for the fiscal periods indicated, the quarterly high and low sales prices per share of our common stock as reported on The NASDAQ Global Select Market.
 
2014
 
2013
 
High
 
Low
 
High
 
Low
First Quarter
$
183.30

 
$
106.79

 
$
56.58

 
$
48.00

Second Quarter
$
178.19

 
$
127.69

 
$
77.11

 
$
53.77

Third Quarter
$
185.00

 
$
156.85

 
$
85.81

 
$
72.13

Fourth Quarter
$
197.37

 
$
145.12

 
$
110.54

 
$
72.77


Stock Performance Graph

The graph below compares the cumulative total stockholder returns on our common stock for the last five fiscal years with the cumulative total stockholder returns on the NASDAQ Composite Index and the NASDAQ Biotechnology Index for the same period. The graph assumes that $100 was invested on January 3, 2010 in our common stock and in each index and that all dividends were reinvested. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

Compare 5-Year Cumulative Total Return Among Illumina, NASDAQ Composite Index,
and NASDAQ Biotechnology Index


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Table of Contents

Holders

As of January 30, 2015 , we had 214 record holders of our common stock.

Dividends

We have never paid cash dividends and have no present intention to pay cash dividends in the foreseeable future. The indentures for our 0.25% convertible senior notes due 2016, 0% convertible senior notes due 2019, and 0.5% convertible senior notes due in 2021, which notes are convertible into cash and, in certain circumstances, shares of our common stock, require us to increase the conversion rate applicable to the notes if we pay any cash dividends.

Purchases of Equity Securities by the Issuer

In April 2012, the Company’s Board of Directors authorized share repurchases for up to $250.0 million via a combination of Rule 10b5-1 and discretionary share repurchase programs. In addition, on January 30, 2014, the Company’s Board of Directors authorized up to $250.0 million to repurchase shares of the Company’s common stock on a discretionary basis. The following table summarizes shares repurchased pursuant to these programs during the three months ended December 28, 2014.
Period
 

Total Number
of Shares
Purchased (1)
 
 

Average Price
Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Programs
 
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Programs
September 29, 2014 - October 26, 2014
—

 
—

 
—

 
$
165,118,222

October 27, 2014 - November 23, 2014
—

 
—

 
—

 
$
165,118,222

November 24, 2014 - December 28, 2014
185,043

 
$
187.79

 
185,043

 
$
130,369,416

Total
185,043

 
$
187.79

 
185,043

 
$
130,369,416

___________
(1) All shares purchased during the three months ended December 28, 2014, were made in open-market transactions.

Sales of Unregistered Securities

None during the fiscal quarter ended December 28, 2014 .


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Table of Contents

ITEM 6.
Selected Financial Data.

The following table sets forth selected historical consolidated financial data for each of our last five fiscal years during the period ended December 28, 2014 .

Statement of Operations Data
 
Years Ended
 
December 28, 2014 (52 weeks)
 
December 29, 2013 (52 weeks)
 
December 30, 2012 (52 weeks)
 
January 1, 2012 (52 weeks)
 
January 2, 2011 (52 weeks)
 
(In thousands, except per share data) 
Total revenue
$
1,861,358

 
$
1,421,178

 
$
1,148,516

 
$
1,055,535

 
$
902,741

Income from operations
$
514,711

 
$
134,107

 
$
200,752

 
$
199,461

 
$
211,654

Net income
$
353,351

 
$
125,308

 
$
151,254

 
$
86,628

 
$
124,891

Net income per share:
 
 
 

 
 

 
 

 
 

Basic
$
2.61

 
$
1.00

 
$
1.23

 
$
0.70

 
$
1.01

Diluted
$
2.37

 
$
0.90

 
$
1.13

 
$
0.62

 
$
0.87

Shares used in calculating net income per share:
 
 

 
 

 
 

 
 

Basic
135,553

 
125,076

 
122,999

 
123,399

 
123,581

Diluted
148,977

 
139,936

 
133,693

 
138,937

 
143,433


Balance Sheet Data
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
 
January 1,
2012
 
January 2,
2011
 
(In thousands)
Cash, cash equivalents and short-term investments(1),(2)
$
1,338,371

 
$
1,165,603

 
$
1,350,204

 
$
1,189,568

 
$
894,289

Working capital
$
1,167,445

 
$
1,295,472

 
$
1,482,477

 
$
1,317,698

 
$
723,881

Total assets
$
3,339,640

 
$
3,019,006

 
$
2,566,085

 
$
2,195,840

 
$
1,839,113

Long-term debt, current portion(1)
$
304,256

 
$
29,288

 
$
36,967

 
—

 
$
311,609

Long-term debt, less current portion(1)
$
986,780

 
$
839,305

 
$
805,406

 
$
807,369

 
—

Total stockholders’ equity(2)
$
1,462,798

 
$
1,533,202

 
$
1,318,581

 
$
1,075,215

 
$
1,197,675


In addition to the following notes, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplementary Data,” for further information regarding our consolidated results of operations and financial position for periods reported therein and for known factors that will impact comparability of future results.
_______________________________________
(1)
During 2014, we issued $632.5 million principal amount of 0% convertible senior notes due 2019 (2019 Notes) and $517.5 million principal amount of 0.5% convertible senior notes due 2021 (2021 Notes), which were classified as long-term liabilities as of December 28, 2014. During 2011, we issued $920.0 million principal amount of 0.25% convertible senior notes due 2016 (2016 Notes), the balance of which were classified as current liabilities as of December 28, 2014 , and as long-term liabilities as of December 29, 2013 and December 30, 2012 , respectively. In February 2007, we issued $400.0 million principal amount of 0.625%  convertible senior notes due 2014 (2014 Notes). Due to the 2014 Notes being convertible during the fiscal years ended December 29, 2013 , December 30, 2012 , and January 2, 2011 , we classified the outstanding principal amount of these notes as current in our consolidated balance sheets in the respective periods. As of January 1, 2012 , the outstanding principal amount of the 2014 Notes was not convertible and was therefore reclassified to long-term liabilities. See note “6. Convertible Senior Notes” in Part II, Item 8, Notes to Consolidated Financial Statements, for further information.


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(2)
For the fiscal years ended December 28, 2014 , December 29, 2013 , December 30, 2012 , January 1, 2012 , and January 2, 2011 , we repurchased 1.5 million , 0.9 million , 1.9 million , 9.2 million , and 0.8 million shares, respectively, of common stock for $237.2 million , $50.0 million , $82.5 million , $570.3 million , and $44.0 million , respectively. See note “9. Stockholders’ Equity” in Part II, Item 8, Notes to Consolidated Financial Statements.

ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) will help readers understand our results of operations, financial condition, and cash flow. It is provided in addition to the accompanying consolidated financial statements and notes. This MD&A is organized as follows:

•
Business Overview and Outlook . High level discussion of our operating results and significant known trends that affect our business.
  
•
Results of Operations . Detailed discussion of our revenues and expenses.
  
•
Liquidity and Capital Resources . Discussion of key aspects of our statements of cash flows, changes in our financial position, and our financial commitments.
  
•
Off-Balance Sheet Arrangements . We have no significant off-balance sheet arrangements.
  
•
Contractual Obligations. Tabular disclosure of known contractual obligations as of December 28, 2014 .
  
•
Critical Accounting Policies and Estimates . Discussion of significant changes we believe are important to understanding the assumptions and judgments underlying our financial statements.

•
Recent Accounting Pronouncements.

This MD&A discussion contains forward-looking statements that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” for additional factors relating to such statements. See “Risk Factors” in Item 1A of this report for a discussion of certain risk factors applicable to our business, financial condition, and results of operations. Operating results are not necessarily indicative of results that may occur in future periods.

Business Overview and Outlook

We are a global leader in sequencing and array-based solutions, which serve customers in a wide range of markets, enabling the broad adoption of genomic solutions in research and clinical settings. Our portfolio of integrated systems, consumables, and analysis tools is designed to accelerate and simplify genetic analysis. This portfolio addresses a range of genomic complexity, price points, and throughput, so that customers can select the best solution for their scientific challenge. Our leading-edge sequencing and array instruments can perform a broad range of nucleic acid (DNA, RNA) analyses efficiently across a wide range of sample sizes.

Financial highlights for 2014 include the following:
 
•
Net revenue increased by 31% in 2014 compared to 2013 . Our sales increased across our portfolio of sequencing products, including consumables, instruments, and services. We expect our revenue to continue to increase in 2015.

•
Gross profit as a percentage of revenue (gross margin) increased to 69.7% in 2014 from 64.2% in 2013 . We settled our litigation with Syntrix in 2014, which resulted in a reversal of cost of sales of $10.4 million during the year, which positively impacted our gross margin. See detailed discussions on this matter in note “10. Legal Proceedings” in Part II, Item 8 of this Form 10-K. In addition, higher margins on sequencing instrument sales during the period and efficiencies in manufacturing contributed to the increase in gross margin. Gross margin in 2013 was negatively affected by a $25.2 million impairment charge associated with the discontinuation of the Eco and NuPCR product lines. We believe our gross margin in future periods will depend on several factors, including: market conditions that may impact our pricing power; sales mix changes among consumables, instruments, and services; product mix changes between established products and new products in new markets; our cost structure for manufacturing operations; royalties; and our ability to create innovative and high premium products that meet or stimulate customer demand.

26
Table of Contents


•
Income from operations increased by $380.6 million in 2014 compared to 2013 . Operating expenses in 2014 included a $82.1 million legal contingency gain associated with the Syntrix patent litigation matter, as compared to a $115.4 million legal contingency charge in 2013 associated with the matter. Operating expenses in 2014 also included a $48.8 million research and development charge recorded upon our litigation settlement and pooling of patents with Sequenom, Inc. These changes as well as higher gross profit in 2014 led to the increase in income from operations despite the increases in research and development and selling, general and administrative expenses, which we expect will continue to grow.

•
Our effective tax rate was 21.3% in 2014 and 2013 . The variance from the U.S. federal statutory tax rate of 35% in 2014 and 2013 was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as earnings in Singapore and the United Kingdom, and the benefit from research and development credits and foreign tax credits. Our future effective tax rate may vary from the U.S. federal statutory tax rate due to the mix of earnings in tax jurisdictions with different statutory tax rates and the other factors discussed in the risk factor “We are subject to risks related to taxation in multiple jurisdictions” in Part I Item 1A “Risk Factors” of this Form 10-K. We anticipate that our effective tax rate will trend lower than the U.S. federal statutory tax rate in the future due to the portion of our earnings that will be subject to lower statutory tax rates.
 
•
We ended 2014 with cash, cash equivalents, and short-term investments totaling $1.3 billion .

This overview and outlook provides a high-level discussion of our operating results and significant known trends that affect our business. We believe that an understanding of these trends is important to understanding our financial results for the periods reported herein as well as our future financial performance. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Annual Report on Form 10-K.

27
Table of Contents

Results of Operations

To enhance comparability, the following table sets forth audited consolidated statement of operations data for the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 stated as a percentage of total revenue.
 
2014
 
2013
 
2012
Revenue:
 

 
 

 
 

Product revenue
87.0
 %
 
89.0
 %
 
91.9
 %
Service and other revenue
13.0

 
11.0

 
8.1

Total revenue
100.0

 
100.0

 
100.0

Cost of revenue:
 
 
 

 
 

Cost of product revenue
23.2

 
28.7

 
27.6

Cost of service and other revenue
5.0

 
4.8

 
3.8

Amortization of acquired intangible assets
2.1

 
2.3

 
1.2

Total cost of revenue
30.3

 
35.8

 
32.6

Gross profit
69.7

 
64.2

 
67.4

Operating expense:
 

 
 

 
 

Research and development
20.8

 
19.5

 
20.1

Selling, general and administrative
25.1

 
26.8

 
24.9

Legal contingencies
(4.0
)
 
8.1

 
—

Headquarter relocation
0.3

 
0.2

 
2.3

Acquisition related (gain) expense, net
(0.1
)
 
(0.8
)
 
0.2

Unsolicited tender offer related expense
—

 
1.0

 
2.0

Restructuring
—

 
—

 
0.4

Total operating expense
42.1

 
54.8

 
49.9

Income from operations
27.6

 
9.4

 
17.5

Other income (expense):
 

 
 

 
 

Interest income
0.3

 
0.3

 
1.4

Interest expense
(2.2
)
 
(2.7
)
 
(3.3
)
Cost-method investment related gain, net
0.2

 
4.3

 
4.0

Other expense, net
(1.8
)
 
(0.1
)
 
(0.2
)
Total other (expense) income, net
(3.5
)
 
1.8

 
1.9

Income before income taxes
24.1

 
11.2

 
19.4

Provision for income taxes
5.1

 
2.4

 
6.2

Net income
19.0
 %
 
8.8
 %
 
13.2
 %

Our fiscal year is the 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. Each of fiscal years 2014, 2013 and 2012 were 52 weeks.

Revenue
 
2014 - 2013
 
2013 - 2012
 (Dollars in thousands)
2014
 
2013
 
Change
 
% Change
 
2012
 
Change
 
% Change
Product revenue
$
1,619,511

 
$
1,264,656

 
$
354,855

 
28
%
 
$
1,055,826

 
$
208,830

 
20
%
Service and other revenue
241,847

 
156,522

 
85,325

 
55

 
92,690

 
63,832

 
69

Total revenue
$
1,861,358

 
$
1,421,178

 
$
440,180

 
31
%
 
$
1,148,516

 
$
272,662

 
24
%


28

Product revenue consists primarily of revenue from sales of consumables and instruments. Services and other revenue consists primarily of sequencing and genotyping service revenue as well as instrument service contract revenue. Revenues from businesses acquired in 2013 are predominantly recorded in service and other revenue.

2014 Compared to 2013

Consumables revenue increased $160.7 million , or 18% , to $1,041.0 million in 2014 compared to $880.3 million in the prior year. The increase was primarily attributable to sales of sequencing consumables, driven by the growth in the installed base, including HiSeq X Ten and NextSeq platforms introduced in January 2014. Such increase was partially offset by a decrease in array consumables.

Instrument revenue increased $190.7 million , or 51% , to $562.2 million in 2014 compared to $371.5 million in the prior year, driven primarily by shipments of sequencing instruments, in particular HiSeq X Ten and NextSeq platforms introduced in January 2014.

Service and other revenue increased $85.3 million , or 55% , to $241.8 million in 2014 compared to $156.5 million in the prior year, driven primarily by sequencing services and extended service contracts for our instruments as our installed base continues to grow. Revenues from businesses acquired in 2013 are predominantly recorded in service revenue. Excluding the impact of acquisitions completed in 2013, the increase in service and other revenue was 35%.

2013 Compared to 2012

Consumables revenue increased $151.0 million , or 21% , to $880.3 million in 2013 compared to $729.3 million in the prior year. The increase was primarily attributable to increased sales of sequencing consumables, driven by the growth in the installed base for both HiSeq and MiSeq systems, as well as higher consumable sales per HiSeq instrument in the installed base.

Instrument revenue increased $57.2 million , or 18% , to $371.5 million in 2013 compared to $314.3 million in the prior year, driven primarily by an increase in HiSeq shipments.
 
The increase in service and other revenue in 2013 compared to prior year was driven by an increase in sequencing service volume and instrument service contract revenue as a result of our growing installed base. Excluding the impact of acquisitions completed in 2013, the increase in service and other revenue was 49%.

Gross Margin
 
2014 - 2013
 
2013 - 2012
 (Dollars in thousands)
2014
 
2013
 
Change
 
% Change
 
2012
 
Change
 
% Change
Total gross profit
$
1,297,710

 
$
911,887

 
$
385,823

 
42
%
 
$
773,528

 
$
138,359

 
18
%
Total gross margin
69.7
%
 
64.2
%
 
 
 
 
 
67.4
%
 
 
 
 

2014 Compared to 2013

Gross profit increased $385.8 million , or 42% , to $1,297.7 million in 2014 compared to $911.9 million in the prior year, primarily due to the increase in revenue. Excluding gross profit from acquisitions completed in 2013, which was predominately included in gross profit from service sales, the increase in gross profit was 37%. Also contributing to the increase in gross profit was our litigation settlement with Syntrix in 2014, which resulted in reversal of cost of sales of $10.4 million. See detailed discussions on this matter in note “10. Legal Proceedings” in Part II, Item 8 of this Form 10-K. In addition, higher margins on sequencing instrument sales and efficiencies in manufacturing contributed to the increase in gross margin. In 2013, gross margin was negatively affected by a $25.2 million impairment charge associated with the discontinuation of the Eco and NuPCR product lines.

2013 Compared to 2012

Gross profit increased $138.4 million , or 18% , to $911.9 million compared to $773.5 million in the prior year, primarily due to the increase in revenue. Excluding gross profit from acquisitions completed in 2013, which was predominately included in gross profit from services sales, the increase in gross profit was 19%. Gross margin decreased in 2013 in comparison to the prior year, primarily due to impairments associated with the discontinuation of the Eco and NuPCR product lines, an increase in

29

amortization of acquired intangible assets due to recent acquisitions, and an increase in legal contingencies, which had an aggregate impact to gross margins of 3.9%. Acquisitions also contributed to the decrease in gross margin. These decreases were partially offset by the favorable impacts from higher instrument margins, higher mix of sequencing consumables, and operational efficiencies.

Operating Expense
 
2014 - 2013
 
2013 - 2012
 (Dollars in thousands)
2014
 
2013
 
Change
 
% Change
 
2012
 
Change
 
% Change
Research and development
$
388,055

 
$
276,743

 
$
111,312

 
40
 %
 
$
231,025

 
$
45,718

 
20
 %
Selling, general and administrative
466,283

 
381,040

 
85,243

 
22

 
285,991

 
95,049

 
33

Legal contingencies
(74,338
)
 
115,369

 
(189,707
)
 
(164
)
 
—

 
115,369

 
100

Headquarter relocation
5,638

 
2,624

 
3,014

 
115

 
26,328

 
(23,704
)
 
(90
)
Acquisition related (gain) expense, net
(2,639
)
 
(11,617
)
 
8,978

 
(77
)
 
2,774

 
(14,391
)
 
(519
)
Unsolicited tender offer related expense
—

 
13,621

 
(13,621
)
 
(100
)
 
23,136

 
(9,515
)
 
(41
)
Restructuring
—

 
—

 
—

 
—

 
3,522

 
(3,522
)
 
(100
)
Total operating expense
$
782,999

 
$
777,780

 
$
5,219

 
1
 %
 
$
572,776

 
$
205,004

 
36
 %

2014 Compared to 2013

Research and development expense increased by $111.3 million , or 40% , in 2014 from 2013 . The increase is partially attributable to our litigation settlement and patent pooling agreement with Sequenom in 2014, as $48.8 million was recorded to research and development expense for the upfront payment. See detailed discussion on this matter in note “10. Legal Proceedings” to our financial statements in Part II, Item 8 of this Form 10-K. In addition, headcount increases and other expenses related to our new product launches contributed to the increase in research and development expenses, reflecting our continued investment in the development of new products as well as enhancements to existing products.
 
Selling, general and administrative expense increased by $85.2 million , or 22% in 2014 from 2013 . The increase is primarily driven by increases in headcount, consulting services, and infrastructure investment to support the growth of our Company.
 
Acquisitions completed in 2013 also contributed to the increases in research and development expense and selling, general and administrative expense in 2014 compared to 2013.
  
Legal contingencies in 2014 reflected predominantly the $82.1 million gain from our litigation settlement with Syntrix, offset by other legal contingency charges. The $115.4 million in legal contingencies in 2013 were primarily charges recorded for the Syntrix litigation matter. See detailed discussion on this matter in note “10. Legal Proceedings” in Part II, Item 8 of this Form 10-K.

We completed the relocation of our headquarters in 2012. During 2014 and 2013, we incurred $5.6 million and $2.6 million , respectively, in additional headquarter relocation expense, consisting primarily of changes in estimated lease exit liability recorded upon vacating our former headquarters, and accretion expense related to such facility exit obligation.

Acquisition related (gain) expense, net, in 2014 and 2013 consisted of changes in fair value of contingent consideration and transaction related costs.

In 2013, we recorded $13.6 million of expenses incurred in relation to an unsolicited tender offer in Q1 2012. The expenses consisted primarily of advisory and legal fees. The advisory service arrangement was completed in 2013.

2013 Compared to 2012

Research and development expense increased by $45.7 million , or 20% , in 2013 from 2012 , primarily due to increased headcount and consulting services as we continued to increase our investment in the development of new products as well as enhancements to existing products. In 2012, we recorded a $21.4 million impairment charge for an in-process research and development asset. The lack of such charge in 2013 partially offset the increase in overall research and development expense.

30

 
Selling, general and administrative expense increased by $95.0 million , or 33% , in 2013 from 2012 . The increase is primarily driven by increased headcount and consulting services to support the growth of our Company and our focus on global business process improvements, as well as increased amortization of intangible assets.

Acquisitions completed in 2013 and 2012 also contributed to the increases in research and development expense and selling, general and administrative expense.

During 2013, we recorded $115.4 million in legal contingency charges within operating expenses primarily related to the Syntrix litigation matter. See detailed discussion on this matter in note “10. Legal Proceedings” in Part II, Item 8 of this Form 10-K.

We completed the relocation of our headquarters in 2012. During 2013, we recorded additional cease-use losses due to a delay in the sublease of portions of our prior headquarters and accretion of interest expense related to the facility exit obligation recorded upon vacating our former headquarters. Headquarter relocation expense recorded in 2012 consisted of cease-use loss recorded upon vacating our prior headquarters, accretion expense related to the facility exit obligation, double rent expense during the transition to our new facility, and moving expenses.

Acquisition related (gain) expense, net , in 2013 consisted primarily of gains from changes in fair value of contingent consideration of $18.8 million. Such gains were partially offset by transaction and other acquisition related costs of $7.2 million. Acquisition related (gain) expense, net in 2012 consisted of changes in fair value of contingent consideration of $2.0 million.

During 2013, we recorded $13.6 million of expenses incurred in relation to an unsolicited tender offer in Q1 2012. The expenses consisted primarily of advisory and legal fees. The advisory related expenses decreased from the prior year as the advisory service arrangements were completed.

As a result of a restructuring effort announced in 2011, we recorded restructuring charges of $3.5 million during 2012, comprised primarily of severance pay and other employee separation costs.

Other (Expense) Income, Net
 
2014 - 2013
 
2013 - 2012
 (Dollars in thousands)
2014
 
2013
 
Change
 
% Change
 
2012
 
Change
 
% Change
Interest income
$
3,901

 
$
4,887

 
$
(986
)
 
(20
)%
 
$
16,208

 
$
(11,321
)
 
(70
)%
Interest expense
(41,728
)
 
(39,690
)
 
(2,038
)
 
5

 
(37,779
)
 
(1,911
)
 
5

Cost-method investment related gain, net
4,427

 
61,357

 
(56,930
)
 
(93
)
 
45,911

 
15,446

 
34

Other expense, net
(32,553
)
 
(1,347
)
 
(31,206
)
 
2,317

 
(2,484
)
 
1,137

 
(46
)
Total other (expense) income, net
$
(65,953
)
 
$
25,207

 
$
(91,160
)
 
(362
)%
 
$
21,856

 
$
3,351

 
15
 %

2014 Compared to 2013

Interest income primarily consisted of returns from our investment portfolio. Interest income decreased slightly in 2014 compared to 2013 as a result of lower yields, partially offset by the impact from a larger investment portfolio. Interest expense in 2014 remained relatively consistent to 2013 and consisted primarily of accretion on our convertible senior notes.
 
Cost-method investment related gain, net in 2014 consisted of a gain associated with additional proceeds received for a cost-method investment sold in a prior year. In 2013, we recognized $61.4 million in gains from sales of cost-method investments, of which $55.2 million related to the sale of our minority ownership interest in Oxford Nanopore Technologies Ltd.
 
Other expense, net , in 2014 and 2013 primarily consisted of loss on extinguishment of debt and net foreign exchange gains and losses. In conjunction with the issuance of the 2019 and 2021 Notes, we used $1,244.7 million in cash to repurchase $600.0 million in principal amount of the outstanding 2016 Notes in privately negotiated transactions. As a result, we recorded $31.4 million in loss on extinguishment of debt calculated as the difference between the fair value and carrying value of the liability component of the debt.

31


2013 Compared to 2012

Interest income decreased in 2013 from 2012 as a result of a decrease in our investment portfolio balance as well as lower yields during the period. Furthermore, interest income in 2012 included a $6.0 million recovery of a note receivable. Interest expense in 2013 remained relatively consistent as compared to 2012 and consisted primarily of accretion of discount on our convertible senior notes.
 
In 2013, we recognized $61.4 million in gains from sales of cost-method investments, of which $55.2 million related to the sale of our minority ownership interest in Oxford Nanopore Technologies Ltd. Cost-method investment related gain in 2012 consisted of a gain of $48.6 million on the sale of our minority ownership interest in deCODE Genetics, partially offset by an impairment loss of $2.7 million on another cost-method investment that was determined to be other-than-temporarily impaired.
 
Other expense, net in 2013 and 2012 primarily consisted of net foreign exchange losses and losses on the extinguishment of debt recorded on conversions of our 2014 Notes.

Provision for Income Taxes
 
2014 - 2013
 
2013 - 2012
 (Dollars in thousands)
2014
 
2013
 
Change
 
% Change
 
2012
 
Change
 
% Change
Income before income taxes
$
448,758

 
$
159,314

 
$
289,444

 
182
%
 
$
222,608

 
$
(63,294
)
 
(28
)%
Provision for income taxes
95,407

 
34,006

 
61,401

 
181

 
71,354

 
(37,348
)
 
(52
)
Net income
$
353,351

 
$
125,308

 
$
228,043

 
182
%
 
$
151,254

 
$
(25,946
)
 
(17
)%
Effective tax rate
21.3
%
 
21.3
%
 
 
 
 
 
32.1
%
 
 
 
 

2014 Compared to 2013

Our effective tax rate was 21.3% in 2014 and 2013, respectively. The variance from the U.S. federal statutory tax rate of 35% was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as earnings in Singapore and the United Kingdom. In addition, the variance in 2014 was also attributable to the benefit from research and development credits and foreign tax credits, and the variance in 2013 was also attributable to the retroactive reinstatement of the federal research and development credit for 2012 which was enacted in January 2013. These items offset the impact of recording a valuation allowance which was primarily related to the estimated limitation on utilizing foreign tax credits in the U.S.

2013 Compared to 2012

Our effective tax rate was 21.3% in 2013 , as compared to 32.1% in 2012. The variance from the U.S. federal statutory tax rate of 35% in 2013 was primarily attributable to the mix of earnings in jurisdictions with lower statutory tax rates than the U.S. federal statutory tax rate, such as earnings in Singapore and the United Kingdom; and the retroactive reinstatement of the federal research and development credit for 2012 which was enacted in January 2013. These items offset the impact of recording a valuation allowance which was primarily related to the estimated limitation on utilizing foreign tax credits in the U.S. In 2012 the variance from the U.S. federal statutory tax rate of 35% was primarily attributable to the change in the mix of earnings in tax jurisdictions with different statutory rates.

The American Taxpayer Relief Act of 2012, which was signed into law on January 2, 2013, included the retroactive reinstatement of the federal research and development credit from January 1, 2012 through December 31, 2013. Our provision for income taxes for the year ended December 30, 2012 did not include the impact of the federal research credit generated in 2012 since the law was enacted subsequent to our 2012 reporting period. Instead, the retroactive reinstatement of the federal research credit generated in 2012 reduced our provision for income taxes for 2013 by approximately $2.9 million.
  

Liquidity and Capital Resources

At December 28, 2014 , we had approximately $636.2 million in cash and cash equivalents, of which approximately $430 million were held by our foreign subsidiaries. Cash and cash equivalents decreased by $75.5 million from last year, due to the

32

factors described in the “Cash Flow Summary” below. Our primary source of liquidity, other than our holdings of cash, cash equivalents, and investments, has been cash flows from operations. Our ability to generate cash from operations provides us with the financial flexibility we need to meet operating, investing, and financing needs. It is our intention to indefinitely reinvest all current and future foreign earnings in foreign subsidiaries.

Historically, we have liquidated our short-term investments and/or issued debt and equity securities to finance our business needs as a supplement to cash provided by operating activities. As of December 28, 2014 , we have $702.2 million in short-term investments. Short-term investments held by our foreign subsidiaries as of December 28, 2014 , were approximately $260 million . Our short-term investments include marketable securities consisting of U.S government-sponsored entities, corporate debt securities, and U.S. Treasury securities.

In June 2014, we issued convertible senior notes due 2019 and 2021 (2019 and 2021 Notes) with an aggregate principal amount of $1,150.0 million. The proceeds from such issuance and cash on hand totaling $1,244.7 million were used to repurchase $600.0 million in principal amount of our convertible senior notes due 2016 (2016 Notes). As of December 28, 2014 , $320.0 million in principal amount of the 2016 Notes remained outstanding, with a maturity date of March 15, 2016. The 2016 Notes became convertible on April 1, 2014 and continue to be convertible through March 31, 2015. It is our intent and policy to settle conversions of the 2016 Notes through combination settlement, which essentially involves repayment of an amount of cash equal to the principal amount and delivery of the excess of conversion value over the principal amount in shares of common stock. The 2019 and 2021 Notes were not convertible as of December 28, 2014 .

We anticipate that our current cash, cash equivalents, and short-term investments, together with cash provided by operating activities are sufficient to fund our near term capital and operating needs for at least the next 12 months. Operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include:

•
potential early repayment of debt obligations as a result of conversions;
•
support of commercialization efforts related to our current and future products, including expansion of our direct sales force and field support resources both in the United States and abroad;
•
acquisitions of equipment and other fixed assets for use in our current and future manufacturing and research and development facilities;
•
repurchases of our outstanding common stock;
•
the continued advancement of research and development efforts;
•
potential strategic acquisitions and investments;
•
the expansion needs of our facilities, including costs of leasing additional facilities; and
•
investment in our global business processes, and the associated Enterprise Resource Planning platform.

As of December 28, 2014 , we had $44.1 million in fair value of contingent consideration liabilities associated with prior acquisitions to be settled in future periods.

During 2014, we used $237.2 million to repurchase our outstanding shares under the stock repurchase programs authorized by our Board of Directors. As of December 28, 2014 , there remains $130.4 million under the authorized programs.

We expect that our revenue and the resulting operating income, as well as the status of each of our new product development programs, will significantly impact our cash management decisions.

Our future capital requirements and the adequacy of our available funds will depend on many factors, including:
•
our ability to successfully commercialize and further develop our technologies and create innovative products in our markets;
•
scientific progress in our research and development programs and the magnitude of those programs;
•
competing technological and market developments; and
•
the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.


33

Cash Flow Summary
(In thousands)
2014
 
2013
 
2012
Net cash provided by operating activities
$
501,271

 
$
386,421

 
$
291,873

Net cash used in investing activities
(406,624
)
 
(69,649
)
 
(150,012
)
Net cash used in financing activities
(166,748
)
 
(38,719
)
 
(10,755
)
Effect of exchange rate changes on cash and cash equivalents
(3,382
)
 
(397
)
 
(103
)
Net (decrease) increase in cash and cash equivalents
$
(75,483
)
 
$
277,656

 
$
131,003


Operating Activities

Cash provided by operating activities in 2014 consisted of net income of $353.4 million plus net adjustments of $204.4 million partially offset by net changes in net operating assets and liabilities of $56.5 million . The primary non-cash expenses added back to net income included share-based compensation of $152.6 million , depreciation and amortization expenses of $112.6 million , deferred income taxes $99.8 million , accretion of debt discount of $38.1 million , and loss on extinguishment of debt of $31.4 million . These non-cash add-backs were partially offset by $126.5 million in incremental tax benefit related to share-based compensation and $109.4 million in gain on litigation settlement. Cash flow impact from changes in net operating assets included increases in account receivables, inventory, other assets, and accrued legal contingencies, partially offset by an increase in accrued liabilities.

Cash provided by operating activities in 2013 consisted of net income of $125.3 million plus net adjustments of $107.7 million , and a change in net operating assets of $153.4 million . The primary non-cash expenses added back to net income included share-based compensation of $105.8 million , depreciation and amortization expenses related to property and equipment and intangible assets of $97.9 million , accretion of debt discount of $36.2 million , and impairments of $25.2 million . The adjustments to net income also included $61.4 million in cost-method investment related gain, $56.7 million in incremental tax benefit related to share-based compensation, and $36.7 million in deferred income taxes. The main drivers in the change in net operating assets was an increase in legal contingencies due to the Syntrix patent litigation.

Cash provided by operating activities in 2012 consisted of net income of $151.3 million plus net adjustments of $158.6 million , offset by changes in net operating assets of $18.0 million . The primary non-cash expenses added back to net income included share-based compensation of $94.3 million , depreciation and amortization expenses related to property and equipment and intangible assets of $65.3 million , accretion of debt discount of $35.0 million , and impairment of IPR&D of $21.4 million . The adjustments to net income also included a $45.9 million in net cost-method investment related gain and $20.8 million in incremental tax benefit related to share-based compensation. The main drivers in the change in net operating assets included increases in account receivable and inventory, partially offset by an increase in accounts payable, and, accrued liabilities.

Investing Activities

Cash used in investing activities totaled $406.6 million in 2014 . We purchased $791.3 million of available-for-sale securities and $541.9 million of our available-for-sale securities matured or were sold during the period. We also invested $106.0 million in capital expenditures primarily associated with the purchase of manufacturing, research and development equipment, leasehold improvements, and information technology equipment and systems.

Cash used in investing activities totaled $69.6 million in 2013 . We purchased $364.0 million of available-for-sale securities and $812.8 million of our available-for-sale securities matured or were sold during the period. We also paid net cash of $523.5 million for acquisitions, and invested $79.2 million in capital expenditures primarily associated with the purchase of manufacturing, research and development equipment, leasehold improvements, and information technology equipment and systems.

Cash used in investing activities totaled $150.0 million in 2012 . During the year we purchased $925.5 million of available-for-sale securities and $898.8 million of our available-for-sale securities matured or were sold during the period. We received net proceeds from the sale of strategic investments of $40.9 million . We also paid net cash of $83.2 million for acquisitions, $68.8 million in capital expenditures primarily associated with the purchase of manufacturing and servicing equipment, leasehold improvements, and information technology equipment and systems and used $12.2 million for purchases of intangibles assets.


34

Financing Activities

Cash used in financing activities totaled $166.7 million in 2014 . We received $1,132.4 million in proceeds from the issuance of $1,150.0 million in principal amount of our convertible senior notes due 2019 and 2021, net of issuance costs paid in the period. We used $1,244.7 million to repurchase $600.0 million in principal amount of our 2016 Notes and used $237.2 million to repurchase our common stock. In addition, we paid $30.0 million primarily in conversions of our convertible senior notes due 2014. We received $126.5 million in incremental tax benefit related to share-based compensation and $96.3 million in proceeds from the issuance of our common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan.

Cash used in financing activities totaled $38.7 million in 2013 . We received $94.5 million in proceeds from the issuance of common stock through the exercise of stock options and the sale of shares under our employee stock purchase plan, and received $56.7 million in incremental tax benefit related to share-based compensation. We used $125.0 million for retirement of warrants, and used $50.0 million to repurchase our common stock.

Cash used in financing activities totaled $10.8 million in 2012 . We received $54.4 million in proceeds from the issuance of common stock through the exercise of stock options and warrants and the sale of shares under our employee stock purchase plan. We used $82.5 million to repurchase our common stock in 2012. In addition, we received $20.8 million in incremental tax benefit related to share-based compensation.

Off-Balance Sheet Arrangements

We do not participate in any transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. During the fiscal year ended December 28, 2014 , we were not involved in any “off-balance sheet arrangements” within the meaning of the rules of the Securities and Exchange Commission.

Contractual Obligations

Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude orders for goods and services entered into in the normal course of business that are not enforceable or legally binding. The following table represents our contractual obligations as of December 28, 2014 , aggregated by type (amounts in thousands):
 
 
Payments Due by Period(1)
 
 
 
 
Less Than
 
 
 
 
 
More Than
Contractual Obligation
 
Total
 
1 Year
 
1 – 3 Years
 
3 – 5 Years
 
5 Years
Debt obligations(2)
 
$
1,488,046

 
$
3,388

 
$
325,602

 
$
637,675

 
$
521,381

Leases(3)
 
614,053

 
36,197

 
85,401

 
77,403

 
415,052

License agreements
 
100,125

 
8,650

 
25,970

 
41,955

 
23,550

Purchase obligations
 
19,083

 
10,750

 
4,733

 
2,400

 
1,200

Amounts due under executive deferred compensation plan
 
20,310

 
20,310

 
—

 
—

 
—

Total
 
$
2,241,617

 
$
79,295

 
$
441,706

 
$
759,433

 
$
961,183

_______________________________________

(1)
The table excludes $123.0 million of contingent consideration payments related to acquisitions and $52.1 million of uncertain tax positions. These items were excluded because it remained uncertain as of December 28, 2014 with respect to the timing and amounts of the settlement of such contingent payments or uncertain positions, if any. See notes “3. Acquisitions” and “11. Income Taxes”, respectively, in Part II, Item 8 of this Form 10-K for further discussions of these items.

(2)
Debt obligations include the principal amount of our convertible senior notes due 2016, 2019, and 2021, as well as interest payments to be made under the notes. Although these notes mature in 2016, 2019, and 2021, respectively, they may be converted into cash and shares of our common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayments of the principal amounts sooner than the scheduled repayments as

35

indicated in the table. See note “6. Convertible Senior Notes” in Part II, Item 8 of this Form 10-K for further discussion of the terms of the convertible senior notes.

(3)
Contractual obligations under leases excludes the lease we signed on December 30, 2014 for a facility in Foster City, California, which will commence in 2017. The aggregate rent during the initial term of the lease is expected to be approximately $204.0 million . See note “7. Commitments” in Part II, Item 8 of this Form 10-K for further discussion of this lease.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience, market and other conditions, and various other assumptions it believes to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, the estimation process is, by its nature, uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our consolidated financial statements may be materially affected. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may also have a material effect on our consolidated financial statements.

We believe that the following critical accounting policies and estimates have a higher degree of inherent uncertainty and require our most significant judgments. In addition, had we used estimates different from any of these, our consolidated financial statements could have been materially different from those presented. Members of our senior management have discussed the development and selection of our critical accounting policies and estimates, and our disclosure regarding them, with the audit committee of our board of directors. Our accounting policies are more fully described in note “1. Organization and Significant Accounting Policies” in Part II, Item 8 of this Form 10-K.

Revenue Recognition

Our revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services and instrument service contracts. The timing of revenue recognition and the amount of revenue recognized in each case depends upon a variety of factors, including the specific terms of each arrangement and the nature of our deliverables and obligations. Determination of the appropriate amount of revenue recognized involves significant judgment and estimates.

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. We occasionally offer discounts on newly introduced products to recent customers of existing products. These promotions sometimes involve the trade-in of existing products in exchange for a discount on new products. Where applicable, we defer a portion of revenue on the sales of existing products in recognition of the promotional discounts until the delivery of new products. All revenue is recorded net of discounts and sales taxes collected on behalf of governmental authorities.

Revenue from product sales is recognized generally upon transfer of title to the customer, provided that no significant obligations remain and collection of the receivable is reasonably assured. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer or agreed upon milestones are reached.

In order to assess whether the price is fixed or determinable, we evaluate whether an arrangement is cancellable or subject to future changes in price, deliverables, or other terms. If it is determined that the price is not fixed or determinable, we defer revenue recognition until the price becomes fixed or determinable. We assess collectibility based on a number of factors, including past transaction history with, and the creditworthiness of, the customer. If we determine that collection of a payment is not reasonably assured, revenue recognition is deferred until receipt of payment.

We regularly enter into contracts where revenue is derived from multiple deliverables including products or services. These products or services are generally delivered within a short time frame, approximately three to six months, after the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of

36

accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.

For transactions with multiple deliverables, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, we use best estimate of the selling price for the deliverable.

In order to establish VSOE of selling price, we must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there are not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then we consider whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, we have rarely established selling price using third-party evidence. If neither VSOE nor third party evidence of selling price exists, we determine our best estimate of selling price using average selling prices over a rolling 12-month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by our pricing committee adjusted for applicable discounts. We recognize revenue for delivered elements only when we determine there are no uncertainties regarding customer acceptance.

In certain markets, we sell products and provides services to customers through distributors that specialize in life science products. In most sales through distributors, the product is delivered directly to customers. In cases where the product is delivered to a distributor, revenue recognition is deferred until acceptance is received from the distributor, and/or the end-user, if required by the applicable sales contract. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers. These transactions are accounted for in accordance with our revenue recognition policy described herein.

Investments

We invest in various types of securities, including debt securities in government-sponsored entities, corporate debt securities, and U.S. Treasury securities. As of December 28, 2014 , we had $702.2 million in short-term investments. In accordance with the accounting standard for fair value measurements, we classify our investments 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 and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset.

As discussed in note “5. Fair Value Measurements” in Part II, Item 8 of this Form 10-K, a majority of our security holdings have been classified as Level 2. These securities have been initially valued at the transaction price and subsequently valued utilizing a third party service provider who assesses the fair value using inputs other than quoted prices that are observable either directly or indirectly, such as yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. We perform certain procedures to corroborate the fair value of these holdings, and in the process, we apply judgment and estimates that if changed, could significantly affect our statement of financial positions.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We evaluate the collectibility of our accounts receivable based on a combination of factors. We regularly analyze customer accounts, review the length of time receivables are outstanding, review historical loss rates and assess current economic trends that may impact the level of credit losses in the future. Our gross trade accounts receivables totaled $294.9 million and the allowance for doubtful accounts was $5.5 million at December 28, 2014 . Our allowance for doubtful accounts has generally been adequate to cover our actual credit losses. However, since we cannot reliably predict future changes in the financial stability of our customers, we may need to increase our reserves if the financial conditions of our customers deteriorate.


37

Inventory Valuation

Inventories are stated at lower of cost or market. We record adjustments to inventory for potentially excess, obsolete, or impaired goods in order to state inventory at net realizable value. We must make assumptions about future demand, market conditions, and the release of new products that will supersede old ones. We regularly review inventory for excess and obsolete products and components, taking into account product life cycles, quality issues, historical experience, and usage forecasts. Our gross inventory totaled $217.2 million and the cumulative adjustment for potentially excess and obsolete inventory was $26.1 million at December 28, 2014 . Historically, our inventory adjustment has been adequate to cover our losses. However, if actual market conditions are less favorable than anticipated, additional inventory adjustments could be required.

Contingencies

We are involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, we assess, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. We regularly review outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures in consideration of many factors, which include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. We may change our estimates if our assessment of the various factors changes and the amount of ultimate loss may differ from our estimates, resulting in a material effect on our business, financial condition, results of operations, and/or cash flows.

Business Combinations

Under the acquisition method of accounting, we allocate the fair value of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the date of acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. We record the excess consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, as goodwill. These valuations require us to make significant estimates and assumptions, especially with respect to intangible assets.

In connection with certain of our acquisitions, additional contingent consideration is earned by the sellers upon completion of certain future performance milestones. In these cases, a liability is recorded on the acquisition date for an estimate of the acquisition date fair value of the contingent consideration by applying the income approach utilizing variable inputs such as anticipated future cash flows, risk-free adjusted discount rates, and nonperformance risk. Any change in the fair value of the contingent consideration subsequent to the acquisition date is recognized in acquisition related (gain) expense, net, a component of operating expenses, in our consolidated statements of income. This method requires significant management judgment, including the probability of achieving certain future milestones and discount rates. Future changes in our estimates could result in expenses or gains.

Management typically uses the discounted cash flow method to value our acquired intangible assets. This method requires significant management judgment to forecast future operating results and establish residual growth rates and discount factors. The estimates we use to value and amortize intangible assets are consistent with the plans and estimates that we use to manage our business and are based on available historical information and industry estimates and averages. If the subsequent actual results and updated projections of the underlying business activity change compared with the assumptions and projections used to develop these values, we could experience impairment charges. In addition, we have estimated the economic lives of certain acquired assets and these lives are used to calculate depreciation and amortization expense. If our estimates of the economic lives change, depreciation or amortization expenses could be accelerated or slowed.

Intangible Assets and Other Long-Lived Assets — Impairment Assessments

We regularly perform reviews to determine if the carrying values of our long-lived assets are impaired. A review of identifiable intangible assets and other long-lived assets is performed when an event occurs indicating the potential for impairment. If indicators of impairment exist, we assess the recoverability of the affected long-lived assets and compare their fair values to the respective carrying amounts.


38

In order to estimate the fair value of identifiable intangible assets and other long-lived assets, we estimate the present value of future cash flows from those assets. The key assumptions that we use in our discounted cash flow model are the amount and timing of estimated future cash flows to be generated by the asset over an extended period of time and a rate of return that considers the relative risk of achieving the cash flows, the time value of money, and other factors that a willing market participant would consider. Significant judgment is required to estimate the amount and timing of future cash flows and the relative risk of achieving those cash flows.

Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. For example, if our future operating results do not meet current forecasts or if we experience a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of our reporting unit, we may be required to record future impairment charges for purchased intangible assets. Impairment charges could materially decrease our future net income and result in lower asset values on our balance sheet.

Share-Based Compensation

We are required to measure and recognize compensation expense for all share-based payments based on estimated fair value. We estimate the fair value of stock options granted and stock purchases under our employee stock purchase plan using the Black-Scholes-Merton (BSM) option-pricing model. The fair value of our restricted stock units is based on the market price of our common stock on the date of grant.

The determination of fair value of share-based awards using the BSM model requires the use of certain estimates and highly judgmental assumptions that affect the amount of share-based compensation expense recognized in our consolidated statements of income. These include estimates of the expected volatility of our stock price, expected life of an award, expected dividends, the risk-free interest rate, and forecast of our future financial performance, in the case of performance stock units. We determine the volatility of our stock price by equally weighing the historical and implied volatility of our common stock. The historical volatility of our common stock over the most recent period is generally commensurate with the estimated expected life of our stock awards, adjusted for the impact of unusual fluctuations not reasonably expected to recur, and other relevant factors. Implied volatility is calculated from the implied market volatility of exchange-traded call options on our common stock. The expected life of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. We determined expected dividend yield to be 0% given we have never declared or paid any cash dividends on our common stock and we currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards. We update our forecast of future financial performance periodically, which impacts our estimate of the number of shares to be issued pursuant to the outstanding performance stock units. We amortize the fair value of share-based compensation on a straight-line basis over the requisite service periods of the awards. If any of the assumptions used in the BSM model change significantly, share-based compensation expense may differ materially from what we have recorded in the current period.

Warranties

We generally provide a one-year warranty on instruments. Additionally, we provide a warranty on consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. We establish an accrual for estimated warranty expenses based on historical experience as well as anticipated product performance. We periodically review the adequacy of our warranty reserve, and adjust, if necessary, the warranty percentage and accrual based on actual experience and estimated costs to be incurred. If our estimates of warranty obligation change or if actual product performance is below our expectations we may incur additional warranty expense.

Cease-Use Loss upon Exit of Facility

We may, from time to time, relocate or consolidate our office locations and cease to use a facility for which the lease continues beyond the cease-use date. We estimate cease-use loss as the present value of the remaining lease obligation offset by estimated sublease rental receipts during the remaining lease period, adjusted for deferred items and leasehold improvements. In this process, management is required to make significant judgments to estimate the present value of future cash flows from the assumed sublease, including the amount and timing of estimated sublease rental receipts, and the risk-adjusted discount rate. These assumptions are subjective in nature and the actual future cash flows could differ from our estimates, resulting in significant adjustments to the cease-use loss recorded.


39

Income Taxes

Our provision for income taxes, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect our best assessment of estimated future taxes to be paid. Significant judgments and estimates based on interpretations of existing tax laws or regulations in the United States and the numerous foreign jurisdictions where we are subject to income tax are required in determining our provision for income taxes. Changes in tax laws, statutory tax rates, and estimates ofour future taxable income could impact the deferred tax assets and liabilities provided for in the consolidated financial statements and would require an adjustment to the provision for income taxes.

Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when we believe it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating our ability to recover deferred tax assets within the jurisdiction which they arise, we consider all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, our history of earnings and reliability of our forecasts, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies. Based on the available evidence as of December 28, 2014 , we were not able to conclude it is more likely than not certain U.S. deferred tax assets will be realized. Therefore, we recorded a valuation allowance of $15.2 million against certain U.S. deferred tax assets.

We recognize the impact of a tax position in our financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Tax authorities regularly examine our returns in the jurisdictions in which we do business and we regularly assess the tax risk of our return filing positions. Due to the complexity of some of the uncertainties, the ultimate resolution may result in payments that are materially different from our current estimate of the tax liability. These differences, as well as any interest and penalties, will be reflected in the provision for income taxes in the period in which they are determined.

Recent Accounting Pronouncements

For summary of recent accounting pronouncements applicable to our consolidated financial statement see note “1 Organization and Summary of Significant Accounting Policies” in Part II, Item 8, Notes to Consolidated Financial Statements, which is incorporated herein by reference.

ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.

Interest Rate Sensitivity

Our investment portfolio is exposed to market risk from changes in interest rates. The fair market value of fixed rate securities may be adversely impacted by fluctuations in interest rates while income earned on floating rate securities may decline as a result of decreases in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to ensure the safety and preservation of our invested principal funds by limiting default risk, market risk, and reinvestment risk. We mitigate default risk by investing in investment grade securities. We have historically maintained a relatively short average maturity for our investment portfolio, and we believe a hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments. In addition, if a 100 basis point change in overall interest rates were to occur in 2015 , our interest income would change by approximately $13.4 million in relation to amounts we would expect to earn, based on our cash, cash equivalents, and short-term investments as of December 28, 2014 .

Changes in interest rates may impact gains or losses from the conversion of our outstanding convertible senior notes. In June 2014, we issued $632.5 million aggregate principal amount of 0% convertible senior notes due 2019 (2019 Notes) and $517.5 million aggregate principal amount of 0.5% convertible senior notes due 2021 (2021 Notes). Similar to our 0.25% convertible senior notes due 2016, at our election, the notes are convertible into cash, shares of our common stock, or a combination of cash and shares of our common stock under certain circumstances, including trading price conditions related to our common stock. If the trading price of our common stock reaches a price at 130% above the conversion price, the notes will become convertible. Upon conversion, we are required to record a gain or loss for the difference between the fair value of the debt to be extinguished and its corresponding net carrying value. The fair value of the debt to be extinguished depends on our then-current incremental borrowing rate. If our incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the notes, we will record a gain or loss in our consolidated statement of income during the period in which the notes are converted. The implicit interest rates for the 2019 and 2021 Notes were 2.9% and 3.5% , respectively. An incremental borrowing rate that is a hypothetical 100 basis points lower than the implicit interest rate upon conversion of

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$100.0 million aggregate principal amount of each of the 2019 and 2021 Notes would result in losses of approximately $4.1 million and $5.5 million , respectively.

Foreign Currency Exchange Risk

We conduct a portion of our business in currencies other than the company’s U.S. dollar functional currency. These transactions give rise to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. The value of these monetary assets and liabilities are subject to changes in currency exchange rates from the time the transactions are originated until settlement in cash. Our foreign currency exposures are primarily concentrated in the Euro, Yen, and Australian dollar. Both realized and unrealized gains or losses on the value of these monetary assets and liabilities are included in the determination of net income. We recorded a $5.4 million net currency exchange loss for the fiscal year ended December 28, 2014 on business transactions, excluding hedging transactions, which are included in other (expense) income, net, in our consolidated statements of income.

We use forward exchange contracts to manage foreign currency risks related to monetary assets and liabilities denominated in currencies other than the U.S. dollar. We only use derivative financial instruments to reduce foreign currency exchange rate risks; we do not hold any derivative financial instruments for trading or speculative purposes. We primarily use forward exchange contracts to hedge foreign currency exposures, and they generally have terms of one month or less. Realized and unrealized gains or losses on the value of financial contracts entered into to hedge the exchange rate exposure of these monetary assets and liabilities are also included in the determination of net income, as they have not been designated for hedge accounting. These contracts, which settle monthly, effectively fix the exchange rate at which these specific monetary assets and liabilities will be settled, so that gains or losses on the forward contracts offset the gains or losses from changes in the value of the underlying monetary assets and liabilities. As of December 28, 2014 , the total notional amount of outstanding forward contracts in place for foreign currency purchases was $61.0 million .

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ITEM 8.
Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Illumina, Inc.

We have audited the accompanying consolidated balance sheets of Illumina, Inc. as of December 28, 2014 and December 29, 2013 , and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 28, 2014 . Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Illumina, Inc. at December 28, 2014 and December 29, 2013 , and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended December 28, 2014 , in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Illumina, Inc.’s internal control over financial reporting as of December 28, 2014 , based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 17, 2015 expressed an unqualified opinion thereon.

/s/ E RNST  & Y OUNG LLP

San Diego, California

February 17, 2015

43

ILLUMINA, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
 
December 28,
2014
 
December 29,
2013
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
636,154

 
$
711,637

Short-term investments
702,217

 
453,966

Accounts receivable, net
289,458

 
238,946

Inventory
191,144

 
154,099

Deferred tax assets, current portion
40,786

 
36,076

Prepaid expenses and other current assets
29,844

 
22,811

Total current assets
1,889,603

 
1,617,535

Property and equipment, net
265,264

 
202,666

Goodwill
724,904

 
723,061

Intangible assets, net
314,500

 
331,173

Deferred tax assets, long-term portion
49,848

 
88,480

Other assets
95,521

 
56,091

Total assets
$
3,339,640

 
$
3,019,006

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Accounts payable
$
82,626

 
$
73,655

Accrued liabilities
335,276

 
219,120

Long-term debt, current portion
304,256

 
29,288

Total current liabilities
722,158

 
322,063

Long-term debt
986,780

 
839,305

Long-term legal contingencies
—

 
132,933

Other long-term liabilities
167,904

 
191,221

Commitments and contingencies


 


Conversion option subject to cash settlement
—

 
282

Stockholders’ equity:
 

 
 
Preferred stock, $0.01 par value, 10,000 shares authorized; no shares issued and outstanding at December 28, 2014 and December 29, 2013
—

 
—

Common stock, $0.01 par value, 320,000 shares authorized; 181,332 shares issued and 143,629 outstanding at December 28, 2014; 175,205 shares issued and 127,723 outstanding at December 29, 2013
1,805

 
1,753

Additional paid-in capital
2,172,940

 
2,562,705

Accumulated other comprehensive (loss) income
(1,080
)
 
1,234

Retained earnings
561,206

 
207,855

Treasury stock, 37,703 shares and 47,482 shares at cost at December 28, 2014 and December 29, 2013, respectively
(1,272,073
)
 
(1,240,345
)
Total stockholders’ equity
1,462,798

 
1,533,202

Total liabilities and stockholders’ equity
$
3,339,640

 
$
3,019,006


See accompanying notes to consolidated financial statements.



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ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Revenue:
 

 
 

 
 

Product revenue
$
1,619,511

 
$
1,264,656

 
$
1,055,826

Service and other revenue
241,847

 
156,522

 
92,690

Total revenue
1,861,358

 
1,421,178

 
1,148,516

Cost of revenue:
 

 
 

 
 

Cost of product revenue
431,920

 
407,877

 
317,283

Cost of service and other revenue
92,355

 
67,811

 
43,552

Amortization of acquired intangible assets
39,373

 
33,603

 
14,153

Total cost of revenue
563,648

 
509,291

 
374,988

Gross profit
1,297,710

 
911,887

 
773,528

Operating expense:
 

 
 

 
 

Research and development
388,055

 
276,743

 
231,025

Selling, general and administrative
466,283

 
381,040

 
285,991

Legal contingencies
(74,338
)
 
115,369

 
—

Headquarter relocation
5,638

 
2,624

 
26,328

Acquisition related (gain) expense, net
(2,639
)
 
(11,617
)
 
2,774

Unsolicited tender offer related expense
—

 
13,621

 
23,136

Restructuring
—

 
—

 
3,522

Total operating expense
782,999

 
777,780

 
572,776

Income from operations
514,711

 
134,107

 
200,752

Other income (expense):
 

 
 

 
 

Interest income
3,901

 
4,887

 
16,208

Interest expense
(41,728
)
 
(39,690
)
 
(37,779
)
Cost-method investment related gain, net
4,427

 
61,357

 
45,911

Other expense, net
(32,553
)
 
(1,347
)
 
(2,484
)
Total other (expense) income, net
(65,953
)
 
25,207

 
21,856

Income before income taxes
448,758

 
159,314

 
222,608

Provision for income taxes
95,407

 
34,006

 
71,354

Net income
$
353,351

 
$
125,308

 
$
151,254

Net income per basic share
$
2.61

 
$
1.00

 
$
1.23

Net income per diluted share
$
2.37

 
$
0.90

 
$
1.13

Shares used in calculating basic net income per share
135,553

 
125,076

 
122,999

Shares used in calculating diluted net income per share
148,977

 
139,936

 
133,693


See accompanying notes to consolidated financial statements.



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ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
 
Years Ended
 
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Net income
 
$
353,351

 
$
125,308

 
$
151,254

Unrealized (loss) gain on available-for-sale securities, net of deferred tax
 
(2,314
)
 
(889
)
 
6

Total comprehensive income
 
$
351,037

 
$
124,419

 
$
151,260

See accompanying notes to consolidated financial statements.


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ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
 
 
 
 
Additional
 
Accumulated Other
 
Retained Earnings
 
 
 
 
 
Total
 
Common Stock
 
Paid-In
 
Comprehensive
 
(Accumulated
 
Treasury Stock
 
Stockholders’
 
Shares
 
Amount
 
Capital
 
Income (Loss)
 
Deficit)
 
Shares
 
Amount
 
Equity
 
(In thousands)
Balance as of January 1, 2012
166,707

 
$
1,668

 
$
2,249,900

 
$
2,117

 
$
(68,707
)
 
(44,665
)
 
$
(1,109,763
)
 
$
1,075,215

Net income
—

 
—

 
—

 
—

 
151,254

 
—

 
—

 
151,254

Unrealized gain on available-for-sale securities, net of deferred tax
—

 
—

 
—

 
6

 
—

 
—

 
—

 
6

Issuance of common stock, net of repurchases
3,464

 
35

 
55,106

 
—

 
—

 
(1,875
)
 
(83,306
)
 
(28,165
)
Reclassification of conversion option subject to cash settlement
—

 
—

 
2,565

 
—

 
—

 
—

 
—

 
2,565

Share-based compensation
—

 
—

 
94,385

 
—

 
—

 
—

 
—

 
94,385

Net incremental tax benefit related to share-based compensation
—

 
—

 
17,015

 
—

 
—

 
—

 
—

 
17,015

Equity based contingent compensation
—

 
—

 
6,306

 
—

 
—

 
—

 
—

 
6,306

Issuance of treasury stock
—

 
—

 
(5,446
)
 
—

 
—

 
312

 
5,446

 
—

Balance as of December 30, 2012
170,171

 
1,703

 
2,419,831

 
2,123

 
82,547

 
(46,228
)
 
(1,187,623
)
 
1,318,581

Net income
—

 
—

 
—

 
—

 
125,308

 
—

 
—

 
125,308

Unrealized loss on available-for-sale securities, net of deferred tax
—

 
—

 
—

 
(889
)
 
—

 
—

 
—

 
(889
)
Issuance of common stock, net of repurchases
5,034

 
50

 
98,215

 
—

 
—

 
(1,254
)
 
(52,722
)
 
45,543

Reclassification of conversion option subject to cash settlement
—

 
—

 
2,338

 
—

 
—

 
—

 
—

 
2,338

Share-based compensation
—

 
—

 
105,771

 
—

 
—

 
—

 
—

 
105,771

Net incremental tax benefit related to share-based compensation
—

 
—

 
53,032

 
—

 
—

 
—

 
—

 
53,032

Equity based contingent compensation
—

 
—

 
8,278

 
—

 
—

 
—

 
—

 
8,278

Fair value of options assumed in acquisition
—

 
—

 
240

 
—

 
—

 
—

 
—

 
240

Warrant retirement
—

 
—

 
(125,000
)
 
—

 
—

 
—

 
—

 
(125,000
)
Balance as of December 29, 2013
175,205

 
1,753

 
2,562,705

 
1,234

 
207,855

 
(47,482
)
 
(1,240,345
)
 
1,533,202

Net income
—

 
—

 
—

 
—

 
353,351

 
—

 
—

 
353,351

Unrealized loss on available-for-sale securities, net of deferred tax
—

 
—

 
—

 
(2,314
)
 
—

 
—

 
—

 
(2,314
)
Issuance of common stock, net of repurchases
6,127

 
52

 
96,204

 
—

 
—

 
(2,696
)
 
(247,221
)
 
(150,965
)
Tax impact from the issuance, repurchase and conversion of convertible notes
—

 
—

 
(58,354
)
 
—

 
—

 
—

 
—

 
(58,354
)
Reclassification of conversion option subject to cash settlement
—

 
—

 
282

 
—

 
—

 
—

 
—

 
282

Share-based compensation
—

 
—

 
153,189

 
—

 
—

 
—

 
—

 
153,189

Net incremental tax benefit related to share-based compensation
—

 
—

 
126,477

 
—

 
—

 
—

 
—

 
126,477

Equity based contingent compensation
—

 
—

 
2,621

 
—

 
—

 
—

 
—

 
2,621

Warrant exercises
—

 
—

 
(215,493
)
 
—

 
—

 
12,475

 
215,493

 
—

Repurchase of convertible notes, net of issuances
—

 
—

 
(494,691
)
 
—

 
—

 
—

 
—

 
(494,691
)
Balance as of December 28, 2014
181,332

 
$
1,805

 
$
2,172,940

 
$
(1,080
)
 
$
561,206

 
(37,703
)
 
$
(1,272,073
)
 
$
1,462,798


See accompanying notes to consolidated financial statements.

47
Table of Contents

ILLUMINA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Cash flows from operating activities:
 

 
 

 
 

Net income
$
353,351

 
$
125,308

 
$
151,254

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
61,905

 
50,810

 
48,249

Amortization of intangible assets
50,669

 
47,115

 
17,070

Share-based compensation expense
152,551

 
105,826

 
94,324

Accretion of debt discount
38,069

 
36,237

 
35,004

Loss on extinguishment of debt
31,360

 
555

 
—

Contingent compensation expense
2,621

 
8,278

 
6,306

Incremental tax benefit related to share-based compensation
(126,479
)
 
(56,678
)
 
(20,783
)
Deferred income taxes
99,846

 
(36,663
)
 
(21,698
)
Change in fair value of contingent consideration
(5,356
)
 
(18,784
)
 
1,975

(Gain) impairment related to discontinued product line
(2,000
)
 
25,214

 
21,438

Change in estimated cease-use loss
5,651

 
2,624

 
22,367

Cost-method investment related gain
(4,427
)
 
(61,357
)
 
(45,911
)
Gain on litigation settlement
(109,363
)
 
—

 
—

Other
9,346

 
4,533

 
251

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(50,381
)
 
(15,928
)
 
(34,441
)
Inventory
(36,542
)
 
6,217

 
(23,707
)
Prepaid expenses and other current assets
6,619

 
1,783

 
(3,062
)
Other assets
(36,256
)
 
(16,357
)
 
(2,903
)
Accounts payable
(2,106
)
 
2,389

 
15,112

Accrued liabilities
83,902

 
38,550

 
24,388

Accrued legal contingencies
(23,570
)
 
132,933

 
—

Other long-term liabilities
1,861

 
3,816

 
6,640

Net cash provided by operating activities
501,271

 
386,421

 
291,873

Cash flows from investing activities:
 

 
 

 
 

Purchases of available-for-sale securities
(791,252
)
 
(364,001
)
 
(925,478
)
Sales of available-for-sale securities
391,655

 
523,635

 
498,371

Maturities of available-for-sale securities
150,229

 
289,197

 
400,379

Net cash paid for acquisitions
(3,285
)
 
(523,501
)
 
(83,156
)
Net (purchases of) sales proceeds from strategic investments
(11,755
)
 
95,580

 
40,881

Purchases of property and equipment
(105,996
)
 
(79,215
)
 
(68,781
)
Cash paid for intangible assets
(36,220
)
 
(11,344
)
 
(12,228
)
Net cash used in investing activities
(406,624
)
 
(69,649
)
 
(150,012
)
Cash flows from financing activities:
 

 
 

 
 

Payments on financing obligations
(29,991
)
 
(10,852
)
 
—

Payments on acquisition related contingent consideration liability
—

 
(3,985
)
 
(3,374
)
Proceeds from issuance of convertible notes
1,132,378

 
—

 
—

Repurchase of convertible notes
(1,244,721
)
 
—

 
—

Incremental tax benefit related to share-based compensation
126,479

 
56,678

 
20,783

Common stock repurchases
(237,183
)
 
(50,020
)
 
(82,522
)
Taxes paid related to net share settlement of equity awards
(10,038
)
 
—

 
—

Payments on retirement of warrants
—

 
(125,000
)
 
—

Proceeds from issuance of common stock
96,328

 
94,460

 
54,358

Net cash used in financing activities
(166,748
)
 
(38,719
)
 
(10,755
)
Effect of exchange rate changes on cash and cash equivalents
(3,382
)
 
(397
)
 
(103
)
Net (decrease) increase in cash and cash equivalents
(75,483
)
 
277,656

 
131,003

Cash and cash equivalents at beginning of year
711,637

 
433,981

 
302,978

Cash and cash equivalents at end of year
$
636,154

 
$
711,637

 
$
433,981

 
 
 
 
 
 
Supplemental cash flow information:
 

 
 

 
 

Cash paid for income taxes
$
17,886

 
$
50,086

 
$
74,037

Unsettled short-term investments purchase
—

 
—

 
$
9,154


See accompanying notes to consolidated financial statements.

48
Table of Contents

ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unless the context requires otherwise, references in this report to “Illumina,” “we,” “us,” the “Company,” and “our” refer to Illumina, Inc. and its consolidated subsidiaries.

1.
Organization and Summary of Significant Accounting Policies

Organization and Business

Illumina, Inc. is a provider of sequencing- and array-based solutions, which serves customers in a board range of markets, enabling the adoption of genomic solutions in research and clinical settings. The Company’s customers include leading genomic research centers, academic institutions, government laboratories, hospitals, and reference laboratories, as well as pharmaceutical, biotechnology, agrigenomics, commercial molecular diagnostic, and consumer genomics companies.

Basis of Presentation

The consolidated financial statements of the Company have been prepared in conformity with U.S. generally accepted accounting principles and include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year

The Company’s fiscal year is 52 or 53 weeks ending the Sunday closest to December 31, with quarters of 13 or 14 weeks ending the Sunday closest to March 31, June 30, September 30, and December 31. Each of the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 were 52  weeks.

Use of Estimates

The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
 
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers . The new standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 will be effective for the Company beginning in the first quarter of 2017 and allows for a full retrospective or a modified retrospective adoption approach. The Company is currently evaluating the impact of ASU 2014-09 on its consolidated financial statements.

Segment Information

Effective December 30, 2013, the Company reorganized and separated the roles of the Chief Executive Officer and the President, with core market and operational functions centralized and reporting to the President, for the primary purpose of achieving scalability in business operations to support the growth in the Company’s strategic markets. Corporate functions and the President report to the CEO. As a result, the Company operates under one operating segment and reports under one reportable segment.

Concentrations of Risk

The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results. A portion of the Company’s customers consist of university and research institutions that management believes are, to some degree, directly or indirectly supported by the United States Government. A significant change in current research funding, particularly with respect to the U.S. National Institutes of Health, could have an adverse impact on the Company’s future revenues and results of operations.

49
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The Company is also subject to risks related to its financial instruments including its cash and cash equivalents, investments, and accounts receivable. Most of the Company’s cash and cash equivalents as of December 28, 2014 were deposited with U.S. financial institutions, either domestically or with their foreign branches. The Company’s investment policy restricts the amount of credit exposure to any one issuer to 5% of the portfolio or 5% of the total issue size outstanding at the time of purchase and to any one industry sector, as defined by Bloomberg classifications, to 30% of the portfolio at the time of purchase. There is no limit to the percentage of the portfolio that may be maintained in debt securities in U.S. government-sponsored entities, U.S. Treasury securities, and money market funds.

The Company’s products require customized products and components that currently are available from a limited number of sources. The Company sources certain key products and components included in its products from single vendors.

The Company performs a regular review of customer activity and associated credit risks and does not require collateral or enter into netting arrangements. Shipments to customers outside the United States comprised 49% , 50% , and 51% of the Company’s revenue for the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , respectively. Customers outside the United States represented 48% and 52% of the Company’s gross trade accounts receivable balance as of December 28, 2014 and December 29, 2013 , respectively.

International sales entail a variety of risks, including currency exchange fluctuations, longer payment cycles, and greater difficulty in accounts receivable collection. The Company is also subject to general geopolitical risks, such as political, social and economic instability, and changes in diplomatic and trade relations. The risks of international sales are mitigated in part by the extent to which sales are geographically distributed. The Company has historically not experienced significant credit losses from investments and accounts receivable.

Fair Value Measurements

The Company determines the fair value of its assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

•
Level 1 — Quoted prices in active markets for identical assets or liabilities.
•
Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amounts of financial instruments such as cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, and accrued liabilities, excluding acquisition related contingent consideration liabilities, approximate the related fair values due to the short-term maturities of these instruments.

Functional Currency

The U.S. dollar is the functional currency of the Company’s international operations. The Company remeasures its foreign subsidiaries’ monetary assets and liabilities to the U.S. dollar and records the net gains or losses resulting from remeasurement in other expense, net in the consolidated statements of income.

Acquisitions

The Company measures all assets acquired and liabilities assumed, including contingent considerations and all contractual contingencies, at fair value as of the acquisition date. Contingent purchase considerations to be settled in cash are remeasured to estimated fair value at each reporting period with the change in fair value recorded in acquisition related (gain) expense, net, a component of operating expenses. In addition, the Company capitalizes in-process research and development (IPR&D) and either amortizes it over the life of the product upon commercialization, or impairs it if the project is abandoned.

50
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Post-acquisition adjustments in deferred tax asset valuation allowances and liabilities for uncertain tax positions are recorded in current period income tax expense.

Cash Equivalents and Short-Term Investments

Cash equivalents are comprised of short-term, highly liquid investments with maturities of 90 days or less at the date of purchase.

Short-term investments consist predominantly of debt securities in U.S. government-sponsored entities, corporate debt securities, and U.S. Treasury securities. Management classifies short-term investments as available-for-sale at the time of purchase and evaluates such classification as of each balance sheet date. All short-term investments are recorded at estimated fair value. Unrealized gains and losses for available-for-sale securities are included in accumulated other comprehensive income, a component of stockholders’ equity. The Company evaluates its investments to assess whether those with unrealized loss positions are other than temporarily impaired. Impairments are considered to be other than temporary if they are related to deterioration in credit risk or if it is likely that the Company will sell the securities before the recovery of their cost basis. Realized gains, losses, and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in other (expense) income, net in the consolidated statements of income.

Accounts Receivable

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. The Company considers receivables past due based on the contractual payment terms. The Company reserves specific receivables if collectibility is no longer reasonably assured. The Company also reserves a percentage of its trade receivable balance based on collection history and current economic trends that might impact the level of future credit losses. The Company re-evaluates such reserves on a regular basis and adjusts its reserves as needed. Once a receivable is deemed to be uncollectible, such balance is charged against the reserve.

Inventory

Inventory is stated at the lower of cost or market, on a first in, first out basis. Inventory includes raw materials and finished goods that may be used in the research and development process and such items are expensed as consumed or expired. Provisions for slow moving, excess, and obsolete inventories are estimated based on product life cycles, quality issues, historical experience, and usage forecasts.

Property and Equipment

Property and equipment are stated at cost, subject to review for impairment, and depreciated over the estimated useful lives of the assets, which generally range from three to seven years , using the straight-line method. Amortization of leasehold improvements is recorded over the shorter of the lease term or the estimated useful life of the related assets. Maintenance and repairs are charged to operations as incurred. When assets are sold, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operating expense.

In 2013, as a part of the Company’s ongoing effort to upgrade its current information systems, the Company started the implementation of new enterprise resource planning software and applications to manage parts of its business operations. Certain costs incurred in the development of such internal-use software and software applications, including external direct costs of materials and services and applicable compensation costs of employees devoted to specific software development, are capitalized as computer software costs. Costs incurred outside of the application development stage are expensed as incurred.

Leases

Leases are reviewed and classified as capital or operating at their inception. The Company records rent expense on a straight-line basis over the term of the lease, which includes the construction build-out period and lease extension periods, if appropriate. The difference between rent payments and straight-line rent expense is recorded as deferred rent in accrued liabilities and other long-term liabilities. Landlord allowances are amortized on a straight-line basis over the lease term as a reduction to rent expense. The Company capitalizes leasehold improvements and amortizes the value over the shorter of the lease term or expected useful lives.
  

51
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Headquarter relocation expenses consisted of expenses such as accelerated depreciation expense, impairment of assets, additional rent expense during the transition period in 2012 when both the new and former headquarter facilities were occupied, moving expenses, cease-use losses, and accretion of interest expense on lease exit liability. The Company completed the relocation of its headquarters in 2012 to another facility in San Diego, California and recorded cease-use losses and the corresponding facility exit obligation upon vacating its former headquarters in 2011 and 2012, calculated as the present value of the remaining lease obligation offset by estimated sublease rental receipts during the remaining lease period, adjusted for deferred items and estimated lease incentives. The Company reassesses the facility exit obligation on a quarterly basis and the key assumptions used in the calculation include the amount and timing of estimated sublease rental receipts, and the risk-adjusted discount rate.

Goodwill, Intangible Assets and Other Long-Lived Assets

Goodwill, which has an indefinite useful life, represents the excess of cost over fair value of net assets acquired. The change in the carrying value of goodwill during the year ended December 28, 2014 was due to a current year acquisition and adjustments to the purchase price subsequent to the preliminary allocation of purchase price related to prior year acquisitions. Goodwill is reviewed for impairment at least annually during the second quarter, or more frequently if an event occurs indicating the potential for impairment. During its goodwill impairment review, the Company may assess qualitative factors to determine whether it is more likely than not that the fair value of its reporting unit is less than its carrying amount, including goodwill. The qualitative factors include, but are not limited to, macroeconomic conditions, industry and market considerations, and the overall financial performance of the Company. If, after assessing the totality of these qualitative factors, the Company determines that it is not more likely than not that the fair value of its reporting unit is less than its carrying amount, then no additional assessment is deemed necessary. Otherwise, the Company proceeds to perform the two-step test for goodwill impairment. The first step involves comparing the estimated fair value of the reporting unit with its carrying value, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the Company performs the second step of the goodwill impairment test to determine the amount of loss, which involves comparing the implied fair value of the goodwill to the carrying value of the goodwill. The Company may also elect to bypass the qualitative assessment in a period and elect to proceed to perform the first step of the goodwill impairment test. The Company performed its annual assessment for goodwill impairment in the second quarter of 2014 , noting no impairment.

The Company’s identifiable intangible assets are typically comprised of acquired core technologies, licensed technologies, customer relationships, license agreements, and trade names. The cost of identifiable intangible assets with finite lives is generally amortized on a straight-line basis over the assets’ respective estimated useful lives.

The Company regularly performs reviews to determine if any event has occurred that may indicate its intangible assets with finite useful lives and other long-lived assets are potentially impaired. If indicators of impairment exist, the Company performs an impairment test to assess the recoverability of the affected assets by determining whether the carrying amount of such assets exceeds the undiscounted expected future cash flows. If the affected assets are not recoverable, the Company estimates the fair value of the assets and records an impairment loss if the carrying value of the assets exceeds the fair value. Factors that may indicate potential impairment include a significant decline in the Company’s stock price and market capitalization compared to its net book value, significant changes in the ability of a particular asset to generate positive cash flows the Company’s strategic business objectives, and the pattern of utilization of a particular asset.

During 2013, the Company decided to discontinue its Eco and NuPCR product lines to better align its product portfolio with its core strategy. As a result, the Company recorded a total impairment charge of $25.2 million in cost of product revenue, $22.9 million of which related to identifiable intangible assets.

Derivatives

The Company is exposed to foreign exchange rate risks in the normal course of business. The Company enters into foreign exchange contracts to manage foreign currency risks related to monetary assets and liabilities that are denominated in currencies other than the U.S. dollar. These foreign exchange contracts are carried at fair value in other assets or other liabilities and are not designated as hedging instruments. Changes in the value of the derivatives are recognized in other expense, net, along with the remeasurement gain or loss on the foreign currency denominated assets or liabilities.

As of December 28, 2014 , the Company had foreign exchange forward contracts in place to hedge exposures in the euro, Japanese yen, and Australian dollar. As of December 28, 2014 and December 29, 2013 , the total notional amount of outstanding forward contracts in place for foreign currency purchases was $61.0 million and $54.7 million , respectively. Non-

52
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

designated foreign exchange forward contract related gain was $4.1 million and $3.5 million for the years ended December 28, 2014 and December 29, 2013 , respectively, and immaterial for the year ended December 30, 2012 .

Reserve for Product Warranties

The Company generally provides a one -year warranty on instruments. Additionally, the Company provides a warranty on consumables through the expiration date, which generally ranges from six to twelve months after the manufacture date. At the time revenue is recognized, the Company establishes an accrual for estimated warranty expenses based on historical experience as well as anticipated product performance. The Company periodically reviews its warranty reserve for adequacy and adjusts the warranty accrual, if necessary, based on actual experience and estimated costs to be incurred. Warranty expense is recorded as a component of cost of product revenue.

Revenue Recognition

The Company’s revenue is generated primarily from the sale of products and services. Product revenue primarily consists of sales of instruments and consumables used in genetic analysis. Service and other revenue primarily consists of revenue generated from genotyping and sequencing services and instrument service contracts.
 
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. In instances where final acceptance of the product or system is required, revenue is deferred until all the acceptance criteria have been met. The Company occasionally offers discounts on newly introduced products to recent customers or existing products. These promotions sometimes involve the trade-in of existing products in exchange for a discount on new products. Where applicable, the Company defers a portion of revenue on the sales of existing products in recognition of the promotional discounts until the delivery of new products. All revenue is recorded net of discounts and sales taxes collected on behalf of governmental authorities.

 Revenue from product sales is recognized generally upon transfer of title to the customer, provided that no significant obligations remain and collection of the receivable is reasonably assured. Revenue from instrument service contracts is recognized as the services are rendered, typically evenly over the contract term. Revenue from genotyping and sequencing services is recognized when earned, which is generally at the time the genotyping or sequencing analysis data is made available to the customer or agreed upon milestones are reached.
 
In order to assess whether the price is fixed or determinable, the Company evaluates whether an arrangement is cancellable or subject to future changes in price, deliverables, or other terms. If it is determined that the price is not fixed or determinable, the Company defers revenue recognition until the price becomes fixed or determinable. The Company assesses collectibility based on a number of factors, including past transaction history with, and the creditworthiness of, the customer. If the Company determines that collection of a payment is not reasonably assured, revenue recognition is deferred until receipt of payment.
 
The Company regularly enters into contracts where revenue is derived from multiple deliverables including products or services. These products or services are generally delivered within a short time frame, approximately three to six months, after the contract execution date. Revenue recognition for contracts with multiple deliverables is based on the individual units of accounting determined to exist in the contract. A delivered item is considered a separate unit of accounting when the delivered item has value to the customer on a stand-alone basis. Items are considered to have stand-alone value when they are sold separately by any vendor or when the customer could resell the item on a stand-alone basis.

For transactions with multiple deliverables, consideration is allocated at the inception of the contract to all deliverables based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (VSOE) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence exists, the Company uses its best estimate of the selling price for the deliverable.
 
In order to establish VSOE of selling price, the Company must regularly sell the product or service on a standalone basis with a substantial majority priced within a relatively narrow range. VSOE of selling price is usually the midpoint of that range. If there are not a sufficient number of standalone sales and VSOE of selling price cannot be determined, then the Company considers whether third party evidence can be used to establish selling price. Due to the lack of similar products and services sold by other companies within the industry, the Company has rarely established selling price using third-party evidence. If

53
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

neither VSOE nor third party evidence of selling price exists, the Company determines its best estimate of selling price using average selling prices over a rolling 12 -month period coupled with an assessment of current market conditions. If the product or service has no history of sales or if the sales volume is not sufficient, the Company relies upon prices set by the Company’s pricing committee adjusted for applicable discounts. The Company recognizes revenue for delivered elements only when it determines there are no uncertainties regarding customer acceptance.
 
In certain markets, the Company sells products and provides services to customers through distributors that specialize in life science products. In most sales through distributors, the product is delivered directly to customers. In cases where the product is delivered to a distributor, revenue recognition is deferred until acceptance is received from the distributor, and/or the end-user, if required by the applicable sales contract. The terms of sales transactions through distributors are consistent with the terms of direct sales to customers. These transactions are accounted for in accordance with the Company’s revenue recognition policy described herein.

Share-Based Compensation

The Company incurs share-based compensation expense related to restricted stock, its Employee Stock purchase Plan (ESPP), and stock options.

Restricted stock units (RSU), restricted stock awards (RSA), and performance stock units (PSU) are all considered restricted stock. The fair value of restricted stock is determined by the closing market price of the Company’s common stock on the date of grant. The Company recognizes share-based compensation expense based on the fair value on a straight-line basis over the requisite service periods of the awards, taking into consideration estimated forfeitures. PSU represents a right to receive a certain number of shares of common stock based on the achievement of corporate performance goals and continued employment during the vesting period. At each reporting period, the Company reassesses the probability of the achievement of such corporate performance goals and any additional expenses resulting from an adjustment in the estimated shares to be released are treated as a cumulative catch-up in the period of adjustment.

The Company uses the Black-Scholes-Merton option-pricing model to estimate the fair value of stock purchases under ESPP and stock options granted. The model assumptions include expected volatility, term, dividends, and the risk-free interest rate. The Company determines the expected volatility by equally weighing the historical and implied volatility of the Company’s common stock. The historical volatility is generally commensurate with the estimated expected term of the Company’s stock awards, adjusted for the impact of unusual fluctuations and other relevant factors. The implied volatility is calculated from the implied market volatility of exchange-traded call options on the Company’s common stock. The expected term of an award is based on historical forfeiture experience, exercise activity, and on the terms and conditions of the stock awards. The expected dividend yield is determined to be 0% given that the Company has never declared or paid cash dividends on its common stock and does not anticipate paying such cash dividends. The risk-free interest rate is based upon U.S. Treasury securities with remaining terms similar to the expected term of the share-based awards.

Shipping and Handling Expenses

Shipping and handling expenses are included in cost of product revenue.

Research and Development

Research and development expenses include personnel expenses, contractor fees, license fees, facilities costs, and utilities. Expenditures relating to research and development are expensed in the period incurred.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were $16.4 million , $14.5 million , and $10.5 million for the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , respectively.


54
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income Taxes

The provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and credit carryforwards. Deferred tax assets and liabilities are determined using the enacted tax rates in effect for the years in which those tax assets are expected to be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the provision for income taxes in the period that includes the enactment date.

Deferred tax assets are regularly assessed to determine the likelihood they will be recovered from future taxable income. A valuation allowance is established when the Company believes it is more likely than not the future realization of all or some of a deferred tax asset will not be achieved. In evaluating the ability to recover deferred tax assets within the jurisdiction which they arise the Company considers all available positive and negative evidence. Factors reviewed include the cumulative pre-tax book income for the past three years, scheduled reversals of deferred tax liabilities, history of earnings and reliable forecasting, projections of pre-tax book income over the foreseeable future, and the impact of any feasible and prudent tax planning strategies.

The Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company.

The Company recognizes the impact of a tax position in the financial statements only if that position is more likely than not of being sustained upon examination by taxing authorities, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions will be reflected in income tax expense.

Net Income per Share

Basic net income per share is computed based on the weighted average number of common shares outstanding during the period. Diluted net income per share is computed based on the sum of the weighted average number of common shares and potentially dilutive common shares outstanding during the period.

Potentially dilutive common shares consist of shares issuable under convertible senior notes, equity awards, and warrants. Convertible senior notes have a dilutive impact when the average market price of the Company’s common stock exceeds the applicable conversion price of the respective notes. Potentially dilutive common shares from equity awards and warrants are determined using the average share price for each period under the treasury stock method. In addition, the following amounts are assumed to be used to repurchase shares: proceeds from exercise of equity awards and warrants; the average amount of unrecognized compensation expense for equity awards; and estimated tax benefits that will be recorded in additional paid-in capital when expenses related to equity awards become deductible. In loss periods, basic net loss per share and diluted net loss per share are identical because the otherwise dilutive potential common shares become anti-dilutive and are therefore excluded.

The following table presents the calculation of weighted average shares used to calculate basic and diluted net income per share (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Weighted average shares outstanding
135,553

 
125,076

 
122,999

Effect of potentially dilutive common shares from:
 
 
 
 
 
Convertible senior notes
3,489

 
1,340

 
967

Equity awards
4,340

 
4,404

 
3,906

Warrants
5,595

 
9,116

 
5,821

Weighted average shares used in calculating diluted net income per share
148,977

 
139,936

 
133,693

Potentially dilutive shares excluded from calculation due to anti-dilutive effect
124

 
996

 
2,556


55
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Accumulated Other Comprehensive Income

Comprehensive income is comprised of net income and other comprehensive income. Accumulated other comprehensive income on the consolidated balance sheets at December 28, 2014 and December 29, 2013 includes accumulated foreign currency translation adjustments and unrealized gains and losses on the Company’s available-for-sale securities.

The components of accumulated other comprehensive income are as follows (in thousands):
 
December 28,
2014
 
December 29,
2013
Foreign currency translation adjustments
$
1,289

 
$
1,289

Unrealized loss on available-for-sale securities, net of deferred tax
(2,369
)
 
(55
)
Total accumulated other comprehensive income
$
(1,080
)
 
$
1,234


2.
Balance Sheet Account Details

Short-Term Investments

The following is a summary of short-term investments (in thousands):
 
December 28, 2014
 
December 29, 2013
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Estimated
Fair Value
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Estimated
Fair Value
Available-for-sale securities:
Debt securities in government-sponsored entities
$
51,308

 
$
10

 
$
(55
)
 
$
51,263

 
$
82,226

 
$
18

 
$
(101
)
 
$
82,143

Corporate debt securities
502,924

 
46

 
(2,882
)
 
500,088

 
342,034

 
312

 
(376
)
 
341,970

U.S. Treasury securities
151,255

 
5

 
(394
)
 
150,866

 
29,795

 
58

 
—

 
29,853

Total available-for-sale securities
$
705,487

 
$
61

 
$
(3,331
)
 
$
702,217

 
$
454,055

 
$
388

 
$
(477
)
 
$
453,966


As of December 28, 2014 , the Company had 467 available-for-sale securities in a gross unrealized loss position, all of which had been in such position for less than twelve months. There were no impairments considered other-than-temporary as it is more likely than not the Company will hold the securities until maturity or the recovery of the cost basis.

The following table shows the estimated fair values and the gross unrealized losses of the Company’s available-for-sale securities that were in an unrealized loss position for less than twelve months as of December 28, 2014 and December 29, 2013 , aggregated by investment category (in thousands):
 
December 28, 2014
 
December 29, 2013
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
Gross
Unrealized
Losses
Debt securities in government-sponsored entities
$
36,084

 
$
(55
)
 
$
73,362

 
$
(101
)
Corporate debt securities
428,078

 
(2,882
)
 
168,118

 
(373
)
U.S. Treasury securities
143,755

 
(394
)
 
—

 
—

Total
$
607,917

 
$
(3,331
)
 
$
241,480

 
$
(474
)

Realized gains and losses are determined based on the specific identification method and are reported in interest income.

56
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Contractual maturities of available-for-sale debt securities as of December 28, 2014 are as follows (in thousands):
 
Estimated Fair Value
Due within one year
$
238,198

After one but within five years
464,019

Total
$
702,217


Cost-Method Investments

As of December 28, 2014 and December 29, 2013 , the aggregate carrying amounts of the Company’s cost-method investments in non-publicly traded companies were $37.2 million and $22.1 million , respectively, included in other assets. The Company’s cost-method investments are assessed for impairment quarterly. The Company determines that it is not practicable to estimate the fair value of its cost-method investments on a regular basis and does not reassess the fair value of cost-method investments if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investments.

During the year ended December 28, 2014 , the Company recorded a gain of $4.4 million associated with additional proceeds received for a cost-method investment sold in a prior period. During the year ended December 29, 2013 , the Company recorded cost-method investment related gains of $61.4 million , of which $55.2 million related to the sale of the Company’s minority interest in Oxford Nanopore Technologies Ltd.

No impairment losses were recorded during the years ended December 28, 2014 and December 29, 2013 . During the year ended December 30, 2012, the Company determined that a cost-method investment was other-than-temporarily impaired and recorded an impairment loss of $2.7 million . This determination was based upon operational performance trends coupled with uncertainty regarding the entity’s ability to obtain additional funding in a required timeframe for the entity to continue operations.

Accounts Receivable

Accounts receivable, net consist of the following (in thousands):
 
December 28,
2014
 
December 29,
2013
Accounts receivable from product and service sales
$
292,847

 
$
241,360

Other receivables
2,070

 
1,266

Total accounts receivable, gross
294,917

 
242,626

Allowance for doubtful accounts
(5,459
)
 
(3,680
)
Total accounts receivable, net
$
289,458

 
$
238,946


Inventory

Inventory consists of the following (in thousands):
 
December 28,
2014
 
December 29,
2013
Raw materials
$
70,316

 
$
57,398

Work in process
94,102

 
70,016

Finished goods
26,726

 
26,685

Total inventory
$
191,144

 
$
154,099



57
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property and Equipment

Property and equipment, net consists of the following (in thousands):
 
December 28,
2014
 
December 29,
2013
Leasehold improvements
$
143,597

 
$
104,571

Machinery and equipment
192,715

 
175,340

Computer hardware and software
86,929

 
73,544

Furniture and fixtures
13,669

 
10,511

Building
7,670

 
7,670

Construction in progress
35,421

 
8,531

Total property and equipment, gross
480,001

 
380,167

Accumulated depreciation
(214,737
)
 
(177,501
)
Total property and equipment, net
$
265,264

 
$
202,666


Capital expenditures included accrued expenditures of $14.1 million for the year ended December 28, 2014 , which was excluded from the consolidated statements of cash flows. Accrued capital expenditures were immaterial for the years ended December 29, 2013 , and December 30, 2012 . As of December 28, 2014, $16.5 million of computer software costs were capitalized associated with the Company’s implementation of a new enterprise resource planning software and applications, which are included primarily in construction in progress assets on the consolidated balance sheets. No computer software costs were capitalized as of December 29, 2013.

Goodwill

Changes to the Company’s goodwill balance during the year ended December 28, 2014 and December 29, 2013 are as follows (in thousands):
 
December 28, 2014
 
December 29, 2013
Balance at beginning of period
$
723,061

 
$
369,327

Current period acquisition
3,338

 
353,734

Purchase price allocation adjustments related to prior year acquisitions
(1,495
)
 
—

Balance at end of period
$
724,904

 
$
723,061


Accrued Liabilities

Accrued liabilities consist of the following (in thousands):
 
December 28,
2014
 
December 29,
2013
Accrued compensation expenses
$
112,606

 
$
82,705

Deferred revenue, current portion
75,294

 
50,834

Acquisition related contingent consideration liability, current portion
44,124

 
6,719

Accrued taxes payable
38,942

 
30,435

Customer deposits
20,274

 
13,569

Reserve for product warranties
15,616

 
10,407

Facility exit obligation, current portion
3,837

 
5,570

Other
24,583

 
18,881

Total accrued liabilities
$
335,276

 
$
219,120



58
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.
Acquisitions

Acquisitions in 2013

On February 21, 2013, the Company acquired all of the outstanding capital stock of Verinata Health, Inc., a provider of non-invasive tests for the early identification of fetal chromosomal abnormalities. With this acquisition, the Company strengthened its reproductive health product portfolio by gaining access to Verinata’s verifi non-invasive prenatal test (NIPT) as well as what management believes to be the most comprehensive intellectual property portfolio in the NIPT industry.

The contractual price for the acquisition was $350.0 million , plus potential cash payments of up to $100.0 million based on the achievement of certain regulatory and revenue milestones. The aggregate purchase price was determined to be $396.3 million , including total cash payment of $339.3 million , $56.2 million in fair value of the contingent milestone payments, $0.2 million in fair value of converted stock options attributed to pre-combination services, and $0.5 million in loss realized on settlement of preexisting relationships. In connection with the transaction, the Company deposited into escrow $30.0 million of consideration otherwise payable to shareholders of Verinata. This amount was included in the aggregate consideration and was released to shareholders of Verinata in September of 2014. As of December 29, 2013 , transaction costs of $3.4 million were expensed as incurred in acquisition related (gain) expense, net.
 
In conjunction with the acquisition, the Company assumed the Verinata Health, Inc. 2008 Stock Plan and converted, as of the acquisition date, the unvested stock options outstanding under the plan, all of which were in the money, into 0.4 million unvested stock options to purchase Illumina’s common stock, retaining the original vesting schedules. The fair value of all converted options was $18.9 million , $0.2 million of which was attributed to the pre-combination service period and was included in the calculation of purchase price. The remaining fair value is being recognized over the awards’ remaining vesting periods subsequent to the acquisition. The weighted-average acquisition-date fair value of the converted options was determined using the Black-Scholes option pricing model with the following assumptions: (i) market price of $48.36 per share, which was the closing price of Illumina’s common stock on the acquisition date; (ii) weighted average expected term of 2.3 years ; (iii) weighted average risk-free interest rate of 0.32% ; (iv) weighted average annualized volatility of 42% ; and (v) no dividend yield. The weighted average acquisition-date fair value per share of the assumed stock options was $42.63 .

An initial liability of $56.2 million was recorded for an estimate of the acquisition date fair value of the contingent consideration. Any change in the fair value of the contingent milestone consideration subsequent to the acquisition date was and will be recognized in the consolidated statement of income. The fair value of the regulatory milestone payments was measured by the probability-weighted discounted cash flows and the fair value of the revenue milestone payments was measured using a risk-neutral option pricing model, which captures the present value of the expected payment and the probability of reaching the revenue targets. Key assumptions used in the fair value assessments included discount rates ranging from 6% to 20% , volatility of 50% , risk-free rates of 0.26% , revenue projections, and the probability of achieving regulatory milestones. This fair value measurement of the contingent consideration is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect the Company’s own assumptions in measuring fair value.

59
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


As of December 29, 2013 , the allocation of the purchase price to the assets acquired and liabilities assumed on the acquisition date was as follows (in thousands):
 
Allocation of purchase price
Cash and cash equivalents
$
9,151

Accounts receivable
2,801

Inventory
1,110

Prepaid expenses and other current assets
979

Property and equipment
12,083

Other assets
978

Intangible assets
176,490

Goodwill
227,453

Accounts payable
(2,539
)
Accrued liabilities
(3,803
)
Lease financing obligation
(9,695
)
Deferred tax liability
(18,741
)
       Total purchase price
$
396,267


In conjunction with the acquisition, the Company assumed Verinata’s building lease, for which Verinata was considered the accounting owner of the leased building and as such, recorded the fair value of the building as an asset as of the acquisition date. The building is depreciated over a useful life of 30 years . The Company also recorded the related lease financing obligation as a liability assumed, representing the present value of all remaining building lease payments with an interest rate of 6.0% . The annual future minimum payments, including the balloon payment at the end of the lease for the value of the building to be transferred to the landlord, are $1.0 million for each of the years 2015 and 2016, and $8.4 million for 2017.

The following table summarizes the fair value of identifiable intangible assets acquired (amounts in thousands):
 
Weighted Average Useful Lives
(in years)
 
Fair Value
Developed technology
13
 
$
170,200

Customer relationships
5
 
4,690

Trade name
2
 
1,600

     Total intangible assets acquired, excluding goodwill
 
 
$
176,490


The fair value of the developed technology and trade name was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The estimated fair value was developed by discounting future net cash flows to their present value at market-based rates of return. The fair value of the customer relationships was developed using a cost approach by estimating the time and personnel effort in constructing the customer base. The useful life of the intangible assets for amortization purposes was determined by considering the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors including legal, regulatory, contractual, competitive, economic, or other factors that may limit the useful life of intangible assets.

The excess of the fair value of the total consideration over the estimated fair value of the net assets was recorded as goodwill, which was primarily attributable to the synergies expected from combining the technologies of Illumina with those of Verinata, including complementary products that will enhance the Company’s overall product portfolio, and the value of the workforce that became our employees following the closing of the acquisitions. The goodwill recognized is not deductible for income tax purposes.


60
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During 2013, the Company also completed acquisitions of Advanced Liquid Logic Inc., a provider of liquid handling solutions, NextBio, a provider of clinical and genomic informatics tools, and another development-stage company. As a result of these transactions, the Company recorded developed technologies of $79.7 million with a weighted average useful life of eight years and goodwill of $124.8 million .

Pro Forma Information

The following unaudited pro forma information presents the consolidated results of operations of the Company as if the acquisitions completed during the year ended December 29, 2013 had occurred at the beginning of the applicable annual reporting period, with pro forma adjustments to give effect to intercompany transactions to be eliminated, amortization of intangible assets, share-based compensation, and transaction costs directly associated with the acquisitions (in thousands, except per share amounts):
 
Years Ended
 
December 29,
2013
 
December 30,
2012
Net revenues
$
1,433,935

 
$
1,161,241

Net income
$
113,869

 
$
92,645

Net income per share-basic
$
0.91

 
$
0.75

Net income per share-diluted
$
0.81

 
$
0.69


These unaudited pro forma consolidated financial results have been prepared for illustrative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the first day of the earliest period presented, or of the future results of the consolidated entities. The unaudited pro forma consolidated financial information does not reflect any operating efficiencies and cost savings that may be realized from the integration of the acquisition.

Acquisition in 2012

On September 19, 2012, the Company announced the acquisition of BlueGnome Ltd. (BlueGnome), a provider of cytogenetics and in vitro fertilization screening products. Total consideration for the acquisition was $95.5 million , which included $88.0 million in initial cash payments and $7.5 million in fair value of contingent cash consideration of up to $20.0 million based on the achievement of certain revenue based milestones by December 28, 2014.

The Company estimated the fair value of contingent cash consideration using a probability weighted discounted cash flow approach, a Level 3 measurement, using a discount rate of 30% . The Company also agreed to pay up to $20.0 million to BlueGnome shareholders contingent upon the retention of certain key employees and certain other criteria. Such contingent payments are recognized as contingent compensation expense over the retention period through December 28, 2014.

As a result of this acquisition, the Company recorded developed technologies of $25.0 million , customer relationships of $16.8 million , and a trade name of $7.1 million with average useful lives of seven , five , and ten years , respectively. The Company recorded the excess consideration of approximately $47.5 million as goodwill.

Summary of Contingent Compensation Expenses

Contingent compensation expenses recorded as a result of acquisitions consist of the following (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Contingent compensation expense, included in research and development expense
$
1,509

 
$
544

 
$
3,419

Contingent compensation expense, included in selling, general and administrative expense
2,756

 
13,066

 
5,732

     Total contingent compensation expense
$
4,265

 
$
13,610

 
$
9,151



61
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.
Intangible Assets

The Company’s intangible assets, excluding goodwill, include acquired licensed and core technologies, customer relationships, license agreements, and trade name. Amortization for the intangible assets that have finite useful lives is generally recorded on a straight-line basis over their useful lives.
  
The following is a summary of the Company’s identifiable intangible assets (in thousands):
 
December 28, 2014
 
December 29, 2013
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Intangibles,
Net
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Intangibles,
Net
Licensed technologies
$
83,956

 
$
(39,423
)
 
$
44,533

 
$
48,361

 
$
(31,927
)
 
$
16,434

Core technologies
321,200

 
(77,493
)
 
243,707

 
321,700

 
(45,534
)
 
276,166

Customer relationships
26,461

 
(12,522
)
 
13,939

 
26,770

 
(7,376
)
 
19,394

License agreements
15,042

 
(4,592
)
 
10,450

 
18,917

 
(4,947
)
 
13,970

Trade name
4,700

 
(2,829
)
 
1,871

 
11,800

 
(6,591
)
 
5,209

Total intangible assets, net
$
451,359

 
$
(136,859
)
 
$
314,500

 
$
427,548

 
$
(96,375
)
 
$
331,173


As of December 28, 2014 , the remaining weighted-average amortization period for identifiable intangible assets was 8.1 years .

Intangible assets acquired during the year ended December 28, 2014 are as follows (in thousands):
 
Weighted-Average
Useful Lives
(in years)
 
Gross
Carrying
Amount
Licensed technologies
4.7
 
$
35,595

Customer relationships
0.5
 
291

License agreements
7.2
 
125

Total intangible asset additions
 
 
$
36,011


The estimated annual amortization of intangible assets for the next five years and thereafter is shown in the following table (in thousands). Actual amortization expense to be reported in future periods could differ from these estimates as a result of acquisitions, divestitures, asset impairments, among other factors.
 
Estimated Annual Amortization
2015
$
52,994

2016
47,752

2017
43,276

2018
33,971

2019
30,685

Thereafter
105,822

Total
$
314,500



62
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.
Fair Value Measurements

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis as of December 28, 2014 and December 29, 2013 (in thousands):
 
December 28, 2014
 
December 29, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market funds (cash equivalent)
$
431,172

 
$
—

 
$
—

 
$
431,172

 
$
478,755

 
$
—

 
$
—

 
$
478,755

Debt securities in government-sponsored entities
—

 
51,263

 
—

 
51,263

 
—

 
82,143

 
—

 
82,143

Corporate debt securities
—

 
500,088

 
—

 
500,088

 
—

 
341,970

 
—

 
341,970

U.S. Treasury securities
150,866

 
—

 
—

 
150,866

 
29,853

 
—

 
—

 
29,853

Deferred compensation plan assets
—

 
23,486

 
—

 
23,486

 
—

 
17,805

 
—

 
17,805

Total assets measured at fair value
$
582,038

 
$
574,837

 
$
—

 
$
1,156,875

 
$
508,608

 
$
441,918

 
$
—

 
$
950,526

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition related contingent consideration liabilities
$
—

 
$
—

 
$
44,124

 
$
44,124

 
$
—

 
$
—

 
$
49,480

 
$
49,480

Deferred compensation liability
—

 
20,310

 
—

 
20,310

 
—

 
14,957

 
—

 
14,957

Total liabilities measured at fair value
$
—

 
$
20,310

 
$
44,124

 
$
64,434

 
$
—

 
$
14,957

 
$
49,480

 
$
64,437


The Company holds available-for-sale securities that consist of highly liquid, investment grade debt securities. The Company considers information provided by the Company’s investment accounting and reporting service provider in the measurement of fair value of its debt securities. The investment service provider provides valuation information from an industry-recognized valuation service. Such valuations may be based on trade prices in active markets for identical assets or liabilities (Level 1 inputs) or valuation models using inputs that are observable either directly or indirectly (Level 2 inputs), such as quoted prices for similar assets or liabilities, yield curve, volatility factors, credit spreads, default rates, loss severity, current market and contractual prices for the underlying instruments or debt, broker and dealer quotes, as well as other relevant economic measures. The Company’s deferred compensation plan assets consist primarily of investments in life insurance contracts carried at cash surrender value, which reflects the net asset value of the underlying publicly traded mutual funds. The Company performs control procedures to corroborate the fair value of its holdings, including comparing valuations obtained from its investment service provider to valuations reported by the Company’s asset custodians, validation of pricing sources and models, and review of key model inputs if necessary.

The Company reassesses the fair value of contingent consideration to be settled in cash related to acquisitions on a quarterly basis using the income approach. This is a Level 3 measurement. Significant assumptions used in the measurement include probabilities of achieving the remaining milestones and the discount rates, which depend on the milestone risk profiles. The changes in fair value of the contingent considerations during the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 were due to changes in the estimated payments and a shorter discounting period.

63
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Changes in estimated fair value of contingent consideration liabilities from January 1, 2012 through December 28, 2014 are as follows (in thousands):
 
Contingent
Consideration
Liability
(Level 3 
Measurement)
Balance as of January 1, 2012
$
6,638

Acquisition of BlueGnome
7,500

Change in estimated fair value, recorded in acquisition related (gain) expense, net
1,975

Cash payments
(3,594
)
Balance as of December 30, 2012
12,519

Additional liability recorded for current period acquisitions
60,184

Change in estimated fair value, recorded in acquisition related (gain) expense, net
(18,784
)
Cash payments
(4,439
)
Balance as of December 29, 2013
49,480

Change in estimated fair value, recorded in acquisition related (gain) expense, net
(5,356
)
Balance as of December 28, 2014
$
44,124


6.
Convertible Senior Notes

As of December 28, 2014 , the Company had outstanding $320.0 million in principal amount of 0.25% convertible senior notes due March 15, 2016 , $632.5 million in principal amount of 0% convertible senior notes due June 15, 2019 , and $517.5 million in principal amount of 0.5% convertible senior notes due June 15, 2021 .

0% Convertible Senior Notes due 2019 and 0.5% Convertible Senior Notes due 2021

On June 11, 2014, the Company issued $632.5 million aggregate principal amount of 0% convertible senior notes due 2019 (2019 Notes) and $517.5 million aggregate principal amount of 0.5% convertible senior notes due 2021 (2021 Notes) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933, as amended. The Notes were issued at 100% of par value. The net proceeds from the issuance, after deducting the offering expenses payable by the Company, was $1,132.4 million . The Company used the net proceeds plus cash on hand to repurchase a portion of the outstanding 2016 Notes in privately negotiated transactions concurrently with the issuance of the 2019 and 2021 Notes.

Both the 2019 and 2021 Notes will be convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at the Company's election, based on an initial conversion rate, subject to adjustment, of 3.9318 shares per $1,000 principal amount of the notes (which represents an initial conversion price of approximately $254.34 per share), only in the following circumstances and to the following extent: (1) during the five business-day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2019 and 2021 Note for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during that quarter) after the calendar quarter ending September 30, 2014, if the last reported sale price of the Company’s common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events described in the indenture for the 2019 and 2021 Notes; and (4) at any time on or after March 15, 2019 for the 2019 Notes, or March 15, 2021 for the 2021 Notes, through the second scheduled trading day immediately preceding the maturity date .

As noted in the indentures for the 2019 and 2021 Notes, it is the Company's intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in shares of common stock. In general, for each $1,000 in principal the “principal portion” of cash upon settlement is defined as the lesser of $1,000 and the conversion value during the 20 -day observation period. The conversion value is the sum of the daily conversion value which is

64
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the product of the effective conversion rate divided by 20 days and the daily volume weighted average price (VWAP) of the Company's common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000 .

The 2019 Notes carry no coupon interest. The Company pays 0.5% interest per annum on the principal amount of the 2021 Notes, payable semiannually in arrears in cash on June 15 and December 15 of each year, beginning on December 15, 2014. The 2019 and 2021 Notes mature on June 15, 2019 and June 15, 2021 , respectively. If a designated event, as defined in the indentures for the 2019 and 2021 Notes, such as acquisition, merger, or liquidation, occurs prior to the maturity date, subject to certain limitations, holders of the notes may require the Company to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.

The Company accounts separately for the liability and equity components of the 2019 and 2021 Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company has no outstanding non-convertible public debt, the Company determined that market-traded senior, unsecured corporate bonds represent a similar liability to the convertible senior notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry as the Company, and with similar maturities to the 2019 and 2021 Notes, the Company estimated the implied interest rates of its 2019 and 2021 Notes to be 2.9% and 3.5% , respectively, assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rates were applied to the 2019 and 2021 Notes, which resulted in a fair value of the liability component in aggregate of $971.5 million upon issuance, calculated as the present value of implied future payments based on the $1,150.0 million aggregate principal amount. The $161.2 million difference between the cash proceeds of $1,132.7 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the 2019 and 2021 Notes are not considered redeemable.

As a policy election under applicable guidance related to the calculation of diluted net income per share, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of the potential dilutive impact of the 2019 and 2021 Notes. Neither the 2019 nor the 2021 Notes were convertible as of December 28, 2014 and had no dilutive impact during the year ended December 28, 2014 . If the 2019 and 2021 Notes were converted as of December 28, 2014 , the if-converted value would not exceed the principal amount.

0.25% Convertible Senior Notes due 2016

In 2011, the Company issued $920.0 million aggregate principal amount of 0.25% convertible senior notes due 2016 (2016 Notes) in an offering conducted in accordance with Rule 144A under the Securities Act of 1933, as amended. The 2016 Notes were issued at 98.25% of par value. Debt issuance costs of approximately $0.4 million were primarily comprised of legal, accounting, and other professional fees, the majority of which were recorded in other noncurrent assets and are being amortized to interest expense over the five -year term of the 2016 Notes.

The 2016 Notes are convertible into cash, shares of common stock, or a combination of cash and shares of common stock, at the Company’s election, based on an initial conversion rate, subject to adjustment, of 11.9687 shares per $1,000 principal amount of the 2016 Notes (which represents an initial conversion price of approximately $83.55 per share), only in the following circumstances and to the following extent: (1) during the five business-day period after any 10 consecutive trading day period (the “measurement period”) in which the trading price per 2016 Note for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such day; (2) during any calendar quarter (and only during that quarter) after the calendar quarter ending March 31, 2011, if the last reported sale price of the Company’s common stock for 20 or more trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 130% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; (3) upon the occurrence of specified events described in the indenture for the 2016 Notes; and (4) at any time on or after December 15, 2015 through the second scheduled trading day immediately preceding the maturity date. Based upon meeting the stock trading price conversion requirement during the three months ended March 30, 2014, the 2016 Notes became convertible on April 1, 2014 and continue to be

65
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

convertible through March 31, 2015 . As such, the remaining 2016 Notes outstanding were classified as current liabilities as of December 28, 2014 .

As noted in the indenture for the 2016 Notes, it is the Company’s intent and policy to settle conversions through combination settlement, which essentially involves repayment of an amount of cash equal to the “principal portion” and delivery of the “share amount” in excess of the conversion value over the principal portion in shares of common stock. In general, for each $1,000 in principal, the “principal portion” of cash upon settlement is defined as the lesser of $1,000 , and the conversion value during the 20 -day observation period as described in the indenture for the 2016 Notes. The conversion value is the sum of the daily conversion value which is the product of the effective conversion rate divided by 20 days and the daily volume weighted average price (“VWAP”) of the Company’s common stock. The “share amount” is the cumulative “daily share amount” during the observation period, which is calculated by dividing the daily VWAP into the difference between the daily conversion value (i.e., conversion rate x daily VWAP) and $1,000 . The Company pays 0.25% interest per annum on the principal amount of the 2016 Notes semiannually in arrears in cash on March 15 and September 15 of each year. The 2016 Notes mature on March 15, 2016 . If a designated event, as defined in the indenture for the 2016 Notes, such as an acquisition, merger, or liquidation, occurs prior to the maturity date, subject to certain limitations, holders of the 2016 Notes may require the Company to repurchase all or a portion of their 2016 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2016 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the repurchase date.

The Company accounts separately for the liability and equity components of the 2016 Notes in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature. Because the Company has no outstanding non-convertible public debt, the Company determined that senior, unsecured corporate bonds traded on the market represent a similar liability to the convertible senior notes without the conversion option. Based on market data available for publicly traded, senior, unsecured corporate bonds issued by companies in the same industry and with similar maturity, the Company estimated the implied interest rate of its 2016 Notes to be 4.5% , assuming no conversion option. Assumptions used in the estimate represent what market participants would use in pricing the liability component, including market interest rates, credit standing, and yield curves, all of which are defined as Level 2 observable inputs. The estimated implied interest rate was applied to the 2016 Notes, which resulted in a fair value of the liability component of $748.5 million upon issuance, calculated as the present value of implied future payments based on the $920.0 million aggregate principal amount. The $155.4 million difference between the cash proceeds of $903.9 million and the estimated fair value of the liability component was recorded in additional paid-in capital as the 2016 Notes were not considered redeemable.

In conjunction with the issuance of the 2019 and 2021 Notes, the Company used the net proceeds from the issuance plus cash on hand to repurchase $600.0 million in principal amount of the outstanding 2016 Notes in privately negotiated transactions. The aggregate cash used for the repurchase was $1,244.7 million . The repurchase is accounted for as an extinguishment of debt. Extinguishment accounting requires the purchase price to be allocated to the liability and equity components of the repurchased notes based on the fair value of the liability component, and the difference between the fair value and the carrying value of the liability component to be recognized as loss on extinguishment of debt. An interest rate of 1.2% upon settlement, which was estimated using Level 2 inputs, was applied to measure the fair value of the liability component of the extinguished debt. This calculation resulted in $588.8 million allocated to the debt component and $655.9 million allocated to the equity component. The $31.4 million difference between the $588.8 million fair value of debt component and the carrying value of the repurchased 2016 Notes was recorded as a loss on extinguishment of debt within other expense, net, during the three and six months ended June 29, 2014. The $655.9 million of the repurchase price allocated to the equity component was recorded as a reduction of additional paid-in capital.

As a policy election under applicable guidance related to the calculation of diluted net income per share, the Company elected the combination settlement method as its stated settlement policy and applied the treasury stock method in the calculation of dilutive impact of the 2016 Notes. During the years ended December 29, 2013 and December 30, 2012, the 2016 Notes were not convertible. However, as the market price of the Company’s common stock exceeded the conversion price during the last months of 2013, the calculation of dilutive potential common shares outstanding for the year ended December 29, 2013 reflects the dilutive impact from the 2016 Notes. The 2016 Notes had no dilutive impact for the year ended December 30, 2012. If the 2016 Notes were converted as of December 28, 2014 , the if-converted value would exceed the principal amount by $393.3 million .


66
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

0.625% Convertible Senior Notes due 2014

In 2007, the Company issued $400.0 million principal amount of 0.625% convertible senior notes due 2014 (2014 Notes). The Company pays 0.625% interest per annum on the principal amount of the 2014 Notes semi-annually in arrears in cash on February 15 and August 15 of each year. The 2014 Notes matured on February 15, 2014 . The effective interest rate of the liability component was estimated to be 8.3% .

The Company entered into hedge transactions concurrently with the issuance of the 2014 Notes under which the Company was entitled to purchase up to approximately 18.3 million shares of the Company’s common stock at a strike price of approximately $21.83 per share, subject to adjustment. The convertible note hedge transactions had the effect of reducing dilution to the Company’s stockholders upon conversion of the 2014 Notes. Also concurrently with the issuance of the 2014 Notes, the Company sold to the hedge counterparties warrants exercisable, on a cashless basis, for up to approximately 18.3 million shares of the Company’s common stock at a strike price of $31.435 per share, subject to adjustment. The proceeds from these warrants partially offset the cost to the Company of the convertible note hedge transactions.

The 2014 Notes were convertible into cash and shares of the Company’s common stock in various prior periods and became convertible again from April 1, 2012 through, and including, February 12, 2014 , by which date all notes were converted. In all cases of conversions of the 2014 Notes, the principal amount converted was repaid with cash and the excess of the conversion value over the principal amount was paid in shares of common stock. The equity dilution resulting from the issuance of common stock related to the conversion of the 2014 Notes was offset by repurchase of the same amount of shares under the convertible note hedge transactions, which were automatically exercised in accordance with their terms at the time of each conversion. Accordingly, the hedge transactions terminated concomitant with the conversions of the 2014 Notes.

As a result of the conversions during the year ended December 28, 2014 , the Company recorded losses on extinguishment of debt calculated as the difference between the estimated fair value of the debt and the carrying value of the notes as of the settlement dates. To measure the fair value of the converted notes as of the settlement dates, the applicable interest rates were estimated using Level 2 observable inputs and applied to the converted notes using the same methodology as in the issuance date valuation.

The following table summarizes information about the conversion of the 2014 Notes during the year ended December 28, 2014 (in thousands):
 
2014 Notes
Cash paid for principal of notes converted
$
29,570

Conversion value over principal amount paid in shares of common stock
$
196,095

Number of shares of common stock issued upon conversion
1,151


The following table summarizes information about the equity and liability components of all convertible senior notes outstanding as of the period reported (dollars in thousands). The fair values of the respective notes outstanding were measured based on quoted market prices.
 
December 28,
2014
 
December 29, 2013
Principal amount of convertible notes outstanding
$
1,470,027

 
$
949,570

Unamortized discount of liability component
(178,991
)
 
(80,977
)
       Net carrying amount of liability component
1,291,036

 
868,593

Less: current portion
(304,256
)
 
(29,288
)
       Long-term debt
$
986,780

 
$
839,305

Conversion option subject to cash settlement
—

 
$
282

Carrying value of equity component, net of issuance costs
$
215,283

 
$
274,304

Fair value of outstanding notes
$
2,021,750

 
$
1,428,743

Weighted average remaining amortization period of discount on the liability component
5.2 years

 
2.2 years



67
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7.
Commitments

Leases

The Company leases office and manufacturing facilities under various noncancellable lease agreements. Facility leases generally provide for periodic rent increases, and many contain escalation clauses and renewal options. Certain leases require the Company to pay property taxes and routine maintenance. The Company is headquartered in San Diego, California and leases facilities in San Diego and the San Francisco Bay Area in California; Madison, Wisconsin; Morrisville, North Carolina; Australia; Brazil; China; France; Japan; Singapore; the Netherlands; and the United Kingdom.

On December 30, 2014, the Company entered into a lease agreement, under the terms of which the Company will lease certain office buildings to be constructed at 200-800 Lincoln Centre Drive, Foster City, California, consisting of approximately 360,000 rentable square feet. In addition, the Company has the right to further expand the premises and lease an additional office building that may be built at this facility (the "Expansion Building"). The lease is for a period of 16 years (the "Initial Term") with a target commencement date of July 1, 2017 . The Company has three five -year options to extend the lease. The aggregate rent during the Initial Term of the lease is expected to be approximately $204.0 million , but not including the Expansion Building.  The future minimum payments under this lease is not included in the table below. In addition to rent, the lease requires the Company to pay certain taxes, insurance, and operating costs relating to the leased buildings.

During 2013, the Company entered into an agreement to sublease sections of its former headquarters. The sublease has an initial term of approximately ten years. In conjunction with the sublease, the Company issued a letter of credit in the amount of $8.0 million , which will decrease ratably to zero over the term of the sublease. As of December 28, 2014 , the letter of credit carried a balance of $7.2 million .

Annual future minimum payments under operating leases as of December 28, 2014 were as follows (in thousands):
 
Operating
Leases
 
Sublease
Income
 
Net Operating
Leases
2015
$
35,210

 
$
(2,900
)
 
$
32,310

2016
38,892

 
(2,924
)
 
35,968

2017
37,064

 
(2,708
)
 
34,356

2018
37,747

 
(2,789
)
 
34,958

2019
39,656

 
(2,873
)
 
36,783

Thereafter
415,052

 
(11,837
)
 
403,215

Total minimum lease payments
$
603,621

 
$
(26,031
)
 
$
577,590


Rent expense was $33.2 million , $28.1 million , and $21.4 million for the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , respectively.

68
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


The Company recorded facility exit obligations upon vacating its former headquarters in 2011. Changes in the facility exit obligation from January 1, 2012 through December 28, 2014 are as follows (in thousands):
 
Facility Exit Obligation
Balance as of January 1, 2012:
$
25,049

Adjustment to facility exit obligation
24,878

Accretion of interest expense
2,129

Cash payments
(6,704
)
Balance as of December 30, 2012
45,352

Adjustment to facility exit obligation
(114
)
Accretion of interest expense
2,738

Cash payments
(9,758
)
Balance as of December 29, 2013
38,218

Adjustment to facility exit obligation
2,555

Accretion of interest expense
2,638

Cash payments
(5,711
)
Balance as of December 28, 2014
$
37,700


Licensing Agreements

In the normal course of its business, the Company enters, from time to time, into licensing agreements under which the Company commits to certain minimum royalty payments, some of which are subject to adjustment. Such licensing agreements may be terminated prior to the expiration of underlying intellectual property under certain circumstances. Annual future minimum royalty payments under the Company’s licensing agreements as of December 28, 2014 are as follows (in thousands):
 
Minimum Payments
2015
$
8,650

2016
12,470

2017
13,500

2018
18,475

2019
23,480

Thereafter
23,550

Total minimum royalty payments
$
100,125



69
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Warranties

Changes in the Company’s reserve for product warranties from January 1, 2012 through December 28, 2014 are as follows (in thousands):
 
Warranty Reserve
Balance as of January 1, 2012
$
11,966

Additions charged to cost of revenue
17,279

Repairs and replacements
(19,109
)
Balance as of December 30, 2012
10,136

Additions charged to cost of revenue
15,674

Repairs and replacements
(15,403
)
Balance as of December 29, 2013
10,407

Additions charged to cost of revenue
24,150

Repairs and replacements
(18,941
)
Balance as of December 28, 2014
$
15,616


8.
Share-based Compensation Expense

Share-based compensation expense for all stock awards consists of the following (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Cost of product revenue
$
9,451

 
$
6,223

 
$
7,575

Cost of service and other revenue
1,204

 
777

 
461

Research and development
50,880

 
37,439

 
30,879

Selling, general and administrative
91,016

 
61,387

 
55,409

Share-based compensation expense before taxes
152,551

 
105,826

 
94,324

Related income tax benefits
(44,194
)
 
(32,819
)
 
(30,759
)
Share-based compensation expense, net of taxes
$
108,357

 
$
73,007

 
$
63,565



70
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The assumptions used for the specified reporting periods and the resulting estimates of weighted-average grant date fair value per share of options granted and for stock purchased under the ESPP are as follows:
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Stock options granted:
 
 
 
 
 
Risk-free interest rate
—
 
0.14 - 1.86%

 
0.56 - 0.93%

Expected volatility
—
 
30 - 44%

 
41 - 48%

Expected term
—
 
0.8 - 9.4 years

 
4.0 - 6.6 years

Expected dividends
—
 
—
 
—
Weighted-average grant-date fair value per share
—
 
$
40.66

 
$
15.47

 
 
 
 
 
 
Stock purchased under the ESPP:
 
 
 
 
 
Risk-free interest rate
0.05 - 0.13%

 
0.08 - 0.15%

 
0.09 - 0.17%

Expected volatility
38% - 41%

 
31 - 32%

 
33 - 64%

Expected term
0.5 - 1.0 year

 
0.5 - 1.0 year

 
0.5 - 1.0 year

Expected dividends
—
 
—
 
—
Weighted-average grant-date fair value per share
$
44.64

 
$
19.30

 
$
16.45


As of December 28, 2014 , approximately $280.6 million of total unrecognized compensation cost related to stock options, restricted stock, and ESPP shares issued to date is expected to be recognized over a weighted-average period of approximately 2.1 years .

9.
Stockholders’ Equity

The Company’s 2005 Stock and Incentive Plan (the 2005 Stock Plan), 2005 Solexa Equity Incentive Plan (the 2005 Solexa Equity Plan), the Verinata Health, Inc. 2008 Stock Plan (the 2008 Stock Plan), and the New Hire Stock and Incentive Plan allow for the issuance of stock options, restricted stock units and awards, and performance stock units. During the year ended December 29, 2013, the stockholders ratified an amendment to increase the maximum number of shares of common stock authorized for issuance under the 2005 Stock Plan by 5.0 million shares. As of December 28, 2014 , approximately 5.3 million  shares remained available for future grants under the 2005 Stock Plan, the 2005 Solexa Equity Plan, and the 2008 Verinata Health Stock Plan. There is no set number of shares reserved for issuance under the New Hire Stock and Incentive Plan.

Stock Options

Stock options granted at the time of hire primarily vest over a four or five -year period, with 25% or 20% of options vesting on the first anniversary of the grant date and the remaining options vesting monthly over the remaining vesting period. Stock options granted subsequent to hiring primarily vest monthly over a four or five -year period. Each grant of options has a maximum term of ten years, measured from the applicable grant date, subject to earlier termination if the optionee’s service ceases. Vesting in all cases is subject to the individual’s continued service through the vesting date. The Company satisfies option exercises through the issuance of new shares.


71
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company’s stock option activity under all stock option plans from January 1, 2012 through December 28, 2014 is as follows:
 
Options
(in thousands)
 
Weighted-
Average
Exercise Price
Outstanding at January 1, 2012
10,378

 
$
29.69

Granted
251

 
$
40.79

Exercised
(2,071
)
 
$
20.34

Cancelled
(207
)
 
$
39.18

Outstanding at December 30, 2012
8,351

 
$
32.10

Granted
512

 
$
14.74

Exercised
(3,006
)
 
$
27.70

Cancelled
(133
)
 
$
41.80

Outstanding at December 29, 2013
5,724

 
$
32.64

Exercised
(2,478
)
 
$
29.93

Cancelled
(35
)
 
$
31.73

Outstanding at December 28, 2014
3,211

 
$
34.74


At December 28, 2014 , outstanding options to purchase 2.9 million  shares were exercisable with a weighted-average per share exercise price of $35.94 . The weighted-average remaining life of options outstanding and exercisable is 4.3 years and 4.1 years , respectively, as of December 28, 2014 .

The aggregate intrinsic value of options outstanding and options exercisable as of December 28, 2014 was $492.8 million and $444.2 million , respectively. Aggregate intrinsic value represents the product of the number of options outstanding multiplied by the difference between the Company’s closing stock price per share on the last trading day of the fiscal period, which was $188.20 as of December 26, 2014 , and the exercise price. Total intrinsic value of options exercised was $330.5 million , $141.7 million , and $60.6 million for the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , respectively. Total fair value of options vested was $17.2 million , $24.0 million , and $31.9 million for the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , respectively.

Restricted Stock

The Company issues restricted stock units (RSU), restricted stock awards (RSA), and performance stock units (PSU). The Company grants RSU and PSU pursuant to its 2005 Stock and Incentive Plan and 2008 Stock Plan. RSU are share awards that, upon vesting, will deliver to the holder shares of the Company’s common stock. For grants to new hires prior to July 2011 and for grants to existing employees, RSU generally vest 15% on the first anniversary of the grant date, 20% on the second anniversary of the grant date, 30% on the third anniversary of the grant date, and 35% on the fourth anniversary of the grant date. For grants to new hires subsequent to July 2011, RSU generally vest over a four -year period with equal vesting on anniversaries of the grant date. The Company satisfies RSU vesting through the issuance of new shares. The Company issues PSU for which the number of shares issuable at the end of a three -year performance period can reach up to 150% of the shares approved in the award based on the Company’s performance relative to specified earnings per share targets.

The Company also issues RSA that are released based on service related vesting conditions. RSA may be issued from the Company’s treasury stock or granted pursuant to the Company’s 2005 Stock and Incentive Plan.
  

72
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the Company’s restricted stock activity and related information from January 1, 2012 through December 28, 2014 is as follows (in thousands, except per share amounts):
 
Restricted
Stock Awards
(RSA)
 
Restricted
Stock Units
(RSU)
 
Performance
Stock Units
(PSU)
 
Weighted-Average
Grant-Date Fair Value per Share
 
 
 
 
RSA
 
RSU
 
PSU
Outstanding at January 1, 2012
230

 
3,476

 
—

 
$
65.95

 
$
41.87

 
—

Awarded
312

 
1,640

 
599

 
$
47.91

 
$
48.52

 
$
49.66

Vested
(77
)
 
(1,062
)
 
—

 
$
65.95

 
$
38.48

 
—

Cancelled
—

 
(394
)
 
(12
)
 
—

 
$
45.05

 
$
50.54

Outstanding at December 30, 2012
465

 
3,660

 
587

 
$
53.84

 
$
45.49

 
$
49.64

Awarded
—

 
1,532

 
584

 
—

 
$
77.53

 
$
59.16

Vested
(217
)
 
(1,308
)
 
—

 
$
54.27

 
$
42.97

 
—

Cancelled
—

 
(256
)
 
(70
)
 
—

 
$
49.24

 
$
50.42

Outstanding at December 29, 2013
248

 
3,628

 
1,101

 
$
53.46

 
$
59.66

 
$
54.64

Awarded
—

 
780

 
968

 
—

 
$
172.53

 
$
104.52

Vested
(140
)
 
(1,383
)
 
(753
)
 
$
47.90

 
$
55.44

 
$
49.52

Cancelled
—

 
(184
)
 
(59
)
 
—

 
$
65.09

 
$
52.87

Outstanding at December 28, 2014
108

 
2,841

 
1,257

 
$
56.62

 
$
92.35

 
$
96.21


Pre-tax intrinsic values and total fair value of vested restricted stock are as follows (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Pre-tax intrinsic value of outstanding restricted stock:
 
 
 
 
 
RSA
$
20,321

 
$
27,384

 
$
25,437

RSU
$
534,708

 
$
400,421

 
$
200,383

PSU
$
236,606

 
$
121,555

 
$
32,149

 
 
 
 
 
 
Fair value of restricted stock vested:
 
 
 
 
 
RSA
$
6,712

 
$
11,750

 
$
5,039

RSU
$
76,646

 
$
56,212

 
$
40,870

PSU
$
37,313

 
—

 
—


Employee Stock Purchase Plan

A total of 15.5 million  shares of the Company’s common stock have been reserved for issuance under its 2000 Employee Stock Purchase Plan, or ESPP. The ESPP permits eligible employees to purchase common stock at a discount, but only through payroll deductions, during defined offering periods. The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The initial offering period commenced in July 2000.

The ESPP provides for annual increases of shares available for issuance by the lesser of 3% of the number of outstanding shares of the Company’s common stock on the last day of the immediately preceding fiscal year, 3.0 million  shares, or such lesser amount as determined by the Company’s board of directors. Approximately 0.3 million , 0.4 million , and 0.3 million shares were issued under the ESPP during the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , respectively. As of December 28, 2014 and December 29, 2013 , there were approximately 14.7 million  and 15.0 million  shares available for issuance under the ESPP, respectively.


73
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Warrants

In connection with the offering of the Company’s 2014 Notes, the Company sold warrants to purchase 18.3 million shares of common stock to counterparties to the convertible note hedge transactions. The warrants have an exercise price of $31.435 per share, and the proceeds from the sale of such warrants were used by the Company to partially offset the cost of the transactions. In July 2013, the Company settled with a hedging counterparty outstanding warrants to purchase approximately 3.0 million shares of the Company’s common stock for $125.0 million in cash. The remaining warrants were exercised in full during the year ended December 28, 2014 .

Share Repurchases

During the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , the Company repurchased approximately 1.5 million shares for $237.2 million , 0.9 million shares for $50.0 million , and 1.9 million shares for $82.5 million , respectively.

In April 2012, the Company’s Board of Directors authorized share repurchases for up to $250.0 million via a combination of Rule 10b5-1 and discretionary share repurchase programs. In addition, on January 30, 2014, the Company’s Board of Directors authorized up to $250.0 million to repurchase shares of the Company’s common stock on a discretionary basis. Authorizations to repurchase up to an additional $130.4 million of its common stock remained as of December 28, 2014 .
 
Stockholder Rights Plan

In connection with the unsolicited tender offer by Roche (refer to note “15. Unsolicited Tender Offer”), on January 25, 2012, the Company’s Board of Directors declared a dividend of one preferred share purchase right (Right) for each outstanding share of the Company’s common stock. Each Right entitled the registered holder to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock, par value $0.01 per share (Preferred Shares), at a price of $275.00 per one thousandth of a Preferred Share, subject to adjustment. The Rights were not exercisable until such time that the Board of Directors determined to eliminate its deferral of the date on which separate Rights certificates are issued and the Rights traded separately from the Company’s common stock (Distribution Date). If a person or group (triggering party) acquired 15% or more of the Company’s outstanding common stock, each Right would have entitled holders other than the triggering party to purchase, at the exercise price of the Right, a number of shares of common stock having a market value of two times the exercise price of the Right. If the Company was acquired in a merger or other business combination transaction after a person acquires 15% or more of the Company’s common stock, each Right would have entitled holders other than the triggering party to purchase, at the Right’s then-current exercise price, a number of common shares of the acquiring company that at the time of such transaction have a market value of two times the exercise price of the Right. The Board of Directors would have been entitled to redeem the Rights at a price of $0.001 per Right at any time before the Distribution Date. The Board of Directors would have been entitled to exchange the Rights at an exchange ratio per Right of one share of common stock after any person acquires beneficial ownership of 15% or more of the Company’s outstanding common stock, and prior to the acquisition of 50% or more of the Company’s outstanding common stock. In 2013, the expiration date was amended to March 27, 2013, from January 26, 2017, and the Rights expired accordingly.

10.
Legal Proceedings

The Company is involved in various lawsuits and claims arising in the ordinary course of business, including actions with respect to intellectual property, employment, and contractual matters. In connection with these matters, the Company assesses, on a regular basis, the probability and range of possible loss based on the developments in these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable results could occur, assessing contingencies is highly subjective and requires judgments about future events. The Company regularly reviews outstanding legal matters to determine the adequacy of the liabilities accrued and related disclosures. The amount of ultimate loss may differ from these estimates. Each matter presents its own unique circumstances, and prior litigation does not necessarily provide a reliable basis on which to predict the outcome, or range of outcomes, in any individual proceeding. Because of the uncertainties related to the occurrence, amount, and range of loss on any pending litigation or claim, the Company is currently unable to predict their ultimate outcome, and, with respect to any pending litigation or claim where no liability has been accrued, to make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. In the event that opposing litigants in outstanding litigations or claims ultimately succeed at trial and any subsequent appeals on their claims, any potential loss or charges in excess of any established accruals, individually or in the aggregate,

74
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

could have a material adverse effect on the Company’s business, financial condition, results of operations, and/or cash flows in the period in which the unfavorable outcome occurs or becomes probable, and potentially in future periods.

Syntrix

On November 24, 2010, Syntrix Biosystems, Inc. (“Syntrix”) filed suit against the Company in the United States District Court for the Western District of Washington at Tacoma (Case No. C10-5870-BHS) alleging that the Company willfully infringed U.S. Patent No. 6,951,682 by selling its BeadChip array products, and that the Company misappropriated Syntrix’s trade secrets. On January 30, 2013, the Court granted the Company’s motion for summary judgment on Syntrix’s trade secret claims, and dismissed those claims from the case. On March 14, 2013, a jury reached a verdict in favor of Syntrix, finding that Illumina’s BeadChip kits infringe the Syntrix patent. During trial, the Court dismissed Syntrix’s claim that the alleged infringement was willful. On July 1, 2013, the Court entered a Final Amended Judgment for $115.1 million , in accordance with the jury verdict, including supplemental damages and prejudgment interest. In addition, the Court awarded Syntrix an ongoing royalty of 8% for accused sales from March 15, 2013 until the patent expires on September 16, 2019. On December 3, 2013, the Company filed a Notice of Appeal to the Court of Appeals for the Federal Circuit challenging the Final Amended Judgment. On December 16, 2013, Syntrix cross appealed the Court’s dismissal of its trade secret claims and denial of its willfulness claim. For the year ended December 29, 2013, the Company recorded total charges of  $132.9 million related to this matter,  $114.6 million  of which was recorded within operating expenses, with the remainder recorded to cost of sales.

On November 14, 2014, the Company entered into a Settlement and License Agreement with Syntrix and its sole shareholders, John A. Zebala and Amy Zebala, that settled all claims in the litigation. Pursuant to the terms of the Settlement and License Agreement, the Company paid Syntrix a one-time payment of $70.0 million in exchange for a release of past damages claimed and a fully paid-up exclusive license to U.S. Patent No. 6,951,682.  None of the parties made any admission of liability in entering into the Settlement and License Agreement. On November 19, 2014, the Court dismissed the litigation with prejudice and vacated the judgment against the Company. The Company allocated the $70.0 million payment on relative fair value basis, resulting in $29.5 million capitalized as an intangible asset for the value of the exclusive license, which is amortized over a period of 4.8 years on a straight-line basis, and the remaining $40.5 million to the release of past damages claimed. The fair value of license and past damages was estimated using a discounted cash flow model, and is considered to be a Level 3 measurement.

As of September 28, 2014, the Company had accrued $148.8 million for damages and interest awarded to Syntrix. The settlement of the litigation resulted in a gain of $109.4 million , calculated as the difference between the accrual released and the amount of payment allocated to the release of past damages claimed. $27.3 million of the total gain was recorded as reversal of cost of sales, reflecting a true-up of historical royalty expenses to the effective royalty rate. The remaining gain of $82.1 million was recorded as a legal contingency gain in operating expenses. In conjunction with the settlement, a $33.5 million deposit with the Court, which was reported in prepaid expenses, was released.

Sequenom

On December 2, 2014, the Company and its subsidiary Verinata Health, Inc. entered into a series of agreements with Sequenom, Inc. (“Sequenom”), its subsidiary Sequenom Center for Molecular Medicine LLC (“Sequenom LLC”), and Chinese University of Hong Kong (“CUHK”), and an agreement with the Trustees of Leland Stanford University (“Stanford”), that, together, (1) settled a patent litigation pending in the United States District Court for the Northern District of California (the “District Court”) between Verinata and Stanford, on the one hand, and Sequenom, Sequenom LLC, and Isis Innovation Limited (“Isis”), on the other hand, (2) requested remand of certain claims and counterclaims of Sequenom, Isis, Verinata, and Stanford from the appeal pending in the United States Court of Appeals for the Federal Circuit of a second patent litigation pending in District Court in order to seek to vacate an order related to those claims and dismiss them, and (3) settled an inter partes review related to a United States Patent No. 8,195,415, assigned to Stanford and licensed to Verinata.

As part of the settlement, the Company and Sequenom have entered into a Pooled Patents Agreement and related sublicense agreements whereby (1) Sequenom granted Illumina a worldwide license to patents directed to Non-Invasive Prenatal Testing (“NIPT”) for Laboratory Developed Testing (“LDT”) and In-Vitro Diagnostic (“IVD”) products, which license is exclusive in the LDT field, except with respect to certain patents formerly owned by Isis, in which case it is non-exclusive, and (2) Illumina (and Verinata in some cases) granted a worldwide non-exclusive license to Sequenom under Illumina-owned and in-licensed NIPT-related patents for Sequenom to continue its business related to NIPT LDT (the patents owned or in-licensed by either the Company or Sequenom that fall under the Pooled Patents Agreement are the “Pooled Patents”). The Company also assumed, by novation, amended exclusive patent licenses from CUHK to Sequenom and entered into several

75
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

new exclusive in-license agreements with CUHK related to CUHK patents directed to NIPT, and granted to Sequenom non-exclusive sublicenses under the Company’s license agreements with CUHK, Stanford, and General Hospital Corporation for Sequenom to practice NIPT LDT. The Company and Sequenom also extended, amended, and restated their current supply agreement under which Sequenom purchases from the Company equipment and supplies for NIPT LDT and other clinical fields, and entered into a separate agreement whereby Sequenom transferred to the Company certain clinical samples and data useful in the development of NIPT IVD.

As consideration for the foregoing settlement arrangements, the Company agreed to pay Sequenom an aggregate of $50.0 million , as well as to pay royalties to Sequenom for sales of NIPT IVD products. The Company and Sequenom also agreed to share revenues received for exploitation of the Pooled Patents in NIPT LDT. None of the parties made any admission of liability in entering into these arrangements. The parties filed certain stipulated motions with the Federal Circuit and District Court to vacate and dismiss the associated claims and counterclaims with prejudice, which motions have been granted by the respective courts.

The Company considered whether the elements received represented identifiable benefits that were sufficiently separable from the products it sells to Sequenom, and considered whether the value of these benefits could be reasonably estimated. The Company identified the legal settlement, clinical samples, the IVD and LDT patent rights as elements. The Company used a discounted cash flow analysis to estimate the value of the patent rights, replacement cost to value the samples, and an assumed royalty rate on historical sales for the legal settlement. These fair value estimates are considered Level 3 measurements. The Company determined that the aggregate fair value of the benefits received exceeded the consideration paid and allocated the $50.0 million payment to the various elements on a relative fair value basis. This resulted in $48.8 million allocated to the samples and patent rights transferred to Illumina, which were expensed in research and development expenses due to lack of alternative future use.  The remaining $1.2 million was recorded as a legal contingency charge in operating expenses. 


11.
Income Taxes

The income before income taxes summarized by region is as follows (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
United States
$
176,974

 
$
(53,703
)
 
$
102,296

Foreign
271,784

 
213,017

 
120,312

Total income before income taxes
$
448,758

 
$
159,314

 
$
222,608


The provision for income taxes consists of the following (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Current:
 

 
 

 
 

Federal
$
60,984

 
$
78,419

 
$
57,285

State
12,381

 
8,854

 
10,121

Foreign
41,815

 
39,416

 
31,504

Total current provision
115,180

 
126,689

 
98,910

Deferred:
 

 
 

 
 

Federal
(3,191
)
 
(69,102
)
 
(7,724
)
State
(4,974
)
 
(15,222
)
 
(7,708
)
Foreign
(11,608
)
 
(8,359
)
 
(12,124
)
Total deferred benefit
(19,773
)
 
(92,683
)
 
(27,556
)
Total tax provision
$
95,407

 
$
34,006

 
$
71,354



76
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The provision for income taxes reconciles to the amount computed by applying the federal statutory rate to income before taxes as follows (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Tax at federal statutory rate
$
157,065

 
$
55,760

 
$
77,913

State, net of federal benefit
5,023

 
647

 
4,056

Research and other credits
(16,144
)
 
(10,977
)
 
(2,613
)
Change in valuation allowance
(4,212
)
 
10,544

 
(37
)
Change in fair value of contingent consideration
(1,321
)
 
(3,859
)
 
—

Impact of foreign operations
(42,215
)
 
(18,006
)
 
(11,470
)
Other
(2,789
)
 
(103
)
 
3,505

Total tax provision
$
95,407

 
$
34,006

 
$
71,354


The impact of foreign operations primarily represents the difference between the actual provision for income taxes for our legal entities that operate primarily in jurisdictions that have statutory tax rates lower than the U.S. federal statutory tax rate of 35% . The most significant tax benefits from foreign operations were from the Company’s earnings in Singapore and the United Kingdom, which had statutory tax rates of 17% and 21.5% , respectively, in the year ended December 28, 2014. The impact of foreign operations also includes the U.S. foreign tax credit impact of non-U.S. earnings and uncertain tax positions related to foreign items.

Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
 
December 28,
2014
 
December 29,
2013
Deferred tax assets:
 

 
 

Net operating losses
$
47,738

 
$
66,969

Tax credits
32,192

 
36,277

Other accruals and reserves
41,676

 
86,716

Stock compensation
54,570

 
36,728

Deferred rent
25,975

 
16,823

Inventory adjustments
12,003

 
9,034

Other amortization
28,203

 
9,571

Other
24,045

 
18,244

Total gross deferred tax assets
266,402

 
280,362

Valuation allowance on deferred tax assets
(15,191
)
 
(19,132
)
Total deferred tax assets
251,211

 
261,230

Deferred tax liabilities:
 

 
 

Purchased intangible amortization
(85,612
)
 
(98,671
)
Convertible debt
(61,383
)
 
(27,821
)
Property and equipment
(16,521
)
 
(13,311
)
Other
(1,670
)
 
(6,349
)
Total deferred tax liabilities
(165,186
)
 
(146,152
)
Net deferred tax assets
$
86,025

 
$
115,078


A valuation allowance is established when it is more likely than not the future realization of all or some of the deferred tax assets will not be achieved. The evaluation of the need for a valuation allowance is performed on a jurisdiction-by-jurisdiction basis, and includes a review of all available positive and negative evidence. Based on the available evidence as of December 28, 2014 , the Company was not able to conclude it is more likely than not certain U.S. deferred tax assets will be realized. Therefore, the Company recorded a valuation allowance of $15.2 million against certain U.S. deferred tax assets.

77
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

During the year ended December 28, 2014 , the valuation allowance decreased by $3.9 million , primarily due to a $10.4 million decrease in the provision for income taxes related to foreign tax credits utilized in the U.S., offset by a $6.0 million increase in the provision for income taxes related to state research and development credits generated in the current year.

As of December 28, 2014 , the Company had net operating loss carryforwards for federal and state tax purposes of $163.6 million and $295.0 million , respectively, which will begin to expire in 2020 and 2015 , respectively, unless utilized prior. The Company also had federal and state tax credit carryforwards of $15.3 million and $63.7 million , respectively, which will begin to expire in 2024 and 2019, respectively, unless utilized prior.

Pursuant to Section 382 and 383 of the Internal Revenue Code, utilization of the Company’s net operating losses and credits may be subject to annual limitations in the event of any significant future changes in its ownership structure. These annual limitations may result in the expiration of net operating losses and credits prior to utilization. The deferred tax assets as of December 28, 2014 are net of any previous limitations due to Section 382 and 383.

The Company recognizes excess tax benefits associated with share-based compensation to stockholders’ equity only when realized. When assessing whether excess tax benefits relating to share-based compensation have been realized, the Company follows the with-and-without approach excluding any indirect effects of the excess tax deductions. Under this approach, excess tax benefits related to share-based compensation are not deemed to be realized until after the utilization of all other tax benefits available to the Company. During the year ended December 28, 2014 , the Company realized $126.5 million of such excess tax benefits, and accordingly recorded a corresponding credit to additional paid-in capital. As of December 28, 2014 , the Company had $36.8 million of unrealized excess tax benefits associated with share-based compensation. These tax benefits will be accounted for as a credit to additional paid-in capital, if and when realized, rather than a reduction of the provision for income taxes.

The Company’s manufacturing operations in Singapore operate under various tax holidays and incentives that begin to expire in 2018. For the year ended December 28, 2014 , these tax holidays and incentives resulted in a $15.6 million decrease to the provision for income taxes and an increase in net income per diluted share of $0.10 .

It is the Company’s intention to indefinitely reinvest all current and future foreign earnings in order to ensure sufficient working capital to support and expand existing operations outside the United States. Accordingly, residual U.S. income taxes have not been provided on $395.6 million of undistributed earnings of foreign subsidiaries as of December 28, 2014 . In the event the Company was required to repatriate funds from outside of the United States, such repatriation would be subject to local laws, customs, and tax consequences.

The following table summarizes the gross amount of the Company’s uncertain tax positions (in thousands):
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
Balance at beginning of year
$
49,046

 
$
37,585

 
$
28,396

Increases related to prior year tax positions
426

 
4,794

 
2,573

Decreases related to prior year tax positions
(804
)
 
(223
)
 
(69
)
Increases related to current year tax positions
8,756

 
7,503

 
6,685

Decreases related to lapse of statute of limitations
(5,336
)
 
(613
)
 
—

Balance at end of year
$
52,088

 
$
49,046

 
$
37,585


Included in the balance of uncertain tax positions as of December 28, 2014 , and December 29, 2013 , were $42.6 million and $40.1 million , respectively, of net unrecognized tax benefits that, if recognized, would reduce the Company’s effective income tax rate in future periods.

Any interest and penalties related to uncertain tax positions are reflected in the provision for income taxes. The Company recognized expense of $0.7 million , $1.0 million , and $0.8 million , related to potential interest and penalties on uncertain tax positions during the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , respectively. The Company recorded a liability for potential interest and penalties of $4.4 million and $3.5 million as of December 28, 2014 and December 29, 2013 , respectively.


78
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company is currently under examination by the IRS for tax year 2011. The IRS has not yet proposed any adjustments to the filed return. Tax years 1997 to 2014 remain subject to future examination by the major tax jurisdictions in which the Company is subject to tax. Given the uncertainty of potential adjustments from the current examination as well as the impact of the current examination on the potential expiration of the statute of limitations, it is reasonably possible that the balance of unrecognized tax benefits could change significantly over the next 12 months. However, at this time, an estimate of the range of reasonably possible adjustments to the balance of unrecognized tax benefits cannot be determined given the number of matters being examined and the number of years that are potentially subject to examination.

12.
Employee Benefit Plans

Retirement Plan

The Company has a 401(k) savings plan covering substantially all of its employees in the United States. Company contributions to the plan are discretionary. During the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , the Company made matching contributions of $9.5 million , $7.0 million , and $5.5 million , respectively.

Deferred Compensation Plan

The Company adopted the Illumina, Inc. Deferred Compensation Plan (the Plan) that became effective January 1, 2008. The Company’s senior level employees can contribute up to 80% of their base salary and 100% of their variable cash compensation. Members of the board of directors can contribute up to 100% of their director fees and equity awards. The Company has agreed to credit the participants’ contributions with earnings that reflect the performance of certain independent investment funds. On a discretionary basis, the Company may also make employer contributions to participant accounts in any amount determined by the Company. The vesting schedules of employer contributions are at the sole discretion of the Compensation Committee. However, all employer contributions shall become 100% vested upon the occurrence of the participant’s disability, death or retirement or a change in control of the Company. The benefits under this plan are unsecured. Participants are generally eligible to receive payment of their vested benefit at the end of their elected deferral period or after termination of their employment with the Company for any reason or at a later date to comply with the restrictions of Section 409A. As of December 28, 2014 , no employer contributions were made to the Plan.

In January 2008, the Company also established a rabbi trust for the benefit of the participants under the Plan. In accordance with authoritative guidance related to consolidation of variable interest entities and accounting for deferred compensation arrangements where amounts earned are held in a rabbi trust and invested, the Company has included the assets of the rabbi trust in its consolidated balance sheet since the trust’s inception. As of December 28, 2014 and December 29, 2013 , the assets of the trust were $23.5 million and $17.8 million , respectively, and liabilities of the Company were $20.3 million and $15.0 million , respectively. The assets and liabilities are classified as other assets and accrued liabilities, respectively, on the Company’s consolidated balance sheets. Changes in the values of the assets held by the rabbi trust are recorded in other (expense) income, net in the consolidated statements of income, and changes in the values of the deferred compensation liabilities are recorded in cost of sales or operating expenses.

13.
Segment Information, Geographic Data, and Significant Customers

The Company had revenue in the following regions for the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 (in thousands):
 
Years Ended
 
December 28,
2014
 
December 29,
2013
 
December 30,
2012
United States
$
950,703

 
$
714,662

 
$
568,443

Europe
466,536

 
354,682

 
291,404

Asia-Pacific
342,702

 
276,442

 
232,498

Other markets
101,417

 
75,392

 
56,171

Total
$
1,861,358

 
$
1,421,178

 
$
1,148,516


Revenues are attributable to geographic areas based on the region of destination.


79
ILLUMINA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The majority of our product sales consist of consumables and instruments. For the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 , consumable sales represented 56% , 62% , and 64% , respectively, of total revenues and instrument sales comprised 30% , 26% , and 27% , respectively, of total revenues. The Company’s customers include leading genomic research centers, academic institutions, government laboratories, hospitals, and reference laboratories, as well as pharmaceutical, biotechnology, agrigenomics, commercial molecular diagnostic, and consumer genomics companies. The Company had no customers that provided more than 10% of total revenue in the years ended December 28, 2014 , December 29, 2013 , and December 30, 2012 .
  
Net long-lived assets exclude goodwill and other intangible assets since they are not allocated on a geographic basis. The Company had net long-lived assets consisting of property and equipment in the following regions as of December 28, 2014 and December 29, 2013 (in thousands):
 
December 28,
2014
 
December 29,
2013
United States
$
204,717

 
$
150,470

United Kingdom
31,965

 
24,122

Singapore
22,326

 
21,311

Other countries
6,256

 
6,763

Total
$
265,264

 
$
202,666


14.
Quarterly Financial Information (unaudited)

The following financial information reflects all normal recurring adjustments, which are, in the opinion of management, necessary for a fair statement of the results and cash flows of interim periods. All quarters for fiscal years 2014 and 2013 ended December 28, 2014 and December 29, 2013 were 13  weeks. Summarized quarterly data for fiscal years 2014 and 2013 are as follows (in thousands, except per share amounts):
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
2014
 

 
 

 
 

 
 

Total revenue
$
420,781

 
$
447,568

 
$
480,630

 
$
512,379

Gross profit
$
278,292

 
$
300,540

 
$
333,941

 
$
384,937

Net income
$
59,977

 
$
46,605

 
$
93,489

 
$
153,280

Net income per share, basic
$
0.47

 
$
0.36

 
$
0.66

 
$
1.08

Net income per share, diluted
$
0.40

 
$
0.31

 
$
0.63

 
$
1.03

2013
 
 
 
 
 
 
 
Total revenue
$
330,958

 
$
346,094

 
$
356,800

 
$
387,326

Gross profit
$
219,292

 
$
223,409

 
$
209,940

 
$
259,246

Net (loss) income
$
(22,587
)
 
$
35,877

 
$
31,357

 
$
80,661

Net (loss) income per share, basic
$
(0.18
)
 
$
0.29

 
$
0.25

 
$
0.64

Net (loss) income per share, diluted
$
(0.18
)
 
$
0.26

 
$
0.22

 
$
0.56


ITEM 9.     Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

ITEM 9A.
Controls and Procedures.

We design our internal controls to provide reasonable assurance that (1) our transactions are properly authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are properly recorded and reported in conformity with U.S. generally accepted accounting principles. We also maintain internal controls and procedures to ensure that we comply with applicable laws and our established financial policies.


80
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Based on management’s evaluation (under the supervision and with the participation of our chief executive officer (CEO) and chief financial officer (CFO)), as of the end of the period covered by this report, our CEO and CFO concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

During the fourth quarter of 2014 , there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control over financial reporting.

An evaluation was also performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of any change in our internal control over financial reporting that occurred during the fourth quarter of 2014 and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. The evaluation did not identify any such change.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 28, 2014 . The effectiveness of our internal control over financial reporting as of December 28, 2014 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Illumina, Inc.

We have audited Illumina, Inc.’s internal control over financial reporting as of December 28, 2014 , based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Illumina, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Illumina, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 28, 2014 , based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Illumina, Inc. as of December 28, 2014 and December 29, 2013 , and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended December 28, 2014 of Illumina, Inc. and our report dated February 17, 2015 expressed an unqualified opinion thereon.

/s/ E RNST  & Y OUNG LLP
San Diego, California
February 17, 2015

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ITEM 9B.
Other Information.

None.

PART III

ITEM 10.
Directors, Executive Officers, and Corporate Governance.

(a) Identification of Directors. Information concerning our directors is incorporated by reference from the section entitled “Proposal One: Election of Directors,” “Information About Directors,” “Director Compensation,” and “Board of Directors and Corporate Governance” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

(b) Identification of Executive Officers. Information concerning our executive officers is incorporated by reference from the section entitled “Executive Officers” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

(c) Compliance with Section 16(a) of the Exchange Act. Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference from the section entitled “Section 16(a) Beneficial Ownership Reporting Compliance” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

(d) Information concerning the audit committee financial expert as defined by the SEC rules adopted pursuant to the Sarbanes-Oxley Act of 2002 is incorporated by reference from the section entitled “Board of Directors and Corporate Governance” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

Code of Ethics

We have adopted a code of ethics for our directors, officers, and employees, which is available on our website at www.illumina.com in the Corporate Governance portal of the Investor Relations section under “Company.” A copy of the Code of Ethics is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the Code of Ethics to: Corporate Secretary, Illumina, Inc., 5200 Illumina Way, San Diego, California 92122. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website. The information on, or that can be accessed from, our website is not incorporated by reference into this report.

ITEM 11.
Executive Compensation.

Information concerning executive compensation is incorporated by reference from the sections entitled “Compensation Discussion and Analysis,” “Director Compensation,” and “Executive Compensation” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Information concerning the security ownership of certain beneficial owners and management and information covering securities authorized for issuance under equity compensation plans is incorporated by reference from the sections entitled “Stock Ownership of Principal Stockholders and Management,” “Executive Compensation,” and “Equity Compensation Plan Information” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.

Information concerning certain relationships and related transactions, and director independence is incorporated by reference from the sections entitled “Proposal One: Election of Directors,” “Information About Directors,” “Director Compensation,” “Executive Compensation,” and “Certain Relationships and Related Party Transactions” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

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ITEM 14.
Principal Accountant Fees and Services.

Information concerning principal accountant fees and services is incorporated by reference from the sections entitled “Proposal Two: Ratification of Appointment of Independent Registered Public Accounting Firm” and “Independent Registered Public Accountants” to be contained in our definitive Proxy Statement with respect to our 2015 Annual Meeting of Stockholders to be filed with the SEC no later than April 26, 2015 .

PART IV

ITEM 15.
Exhibits, Financial Statement Schedules.

1.  Financial Statements:   See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.

2.  Financial Statement Schedule:   See “Schedule II — Valuation and Qualifying Accounts and Reserves” in this section of this Form 10-K.

3.  Exhibits:   The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-K.

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SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 
Balance at
Beginning of
Period
 
Additions Charged
to Expenses/(Reductions from)
Revenue(1)
 
Deductions(2)
 
Balance at
End of
Period
 
(In thousands)
Year ended December 28, 2014
 
 
 
 
 
 
 
Allowance for doubtful accounts
$
3,680

 
1,870

 
(91
)
 
$
5,459

Year ended December 29, 2013
 

 
 

 
 

 
 

Allowance for doubtful accounts
$
4,280

 
(422
)
 
(178
)
 
$
3,680

Year ended December 30, 2012
 

 
 

 
 

 
 

Allowance for doubtful accounts
$
3,997

 
2,191

 
(1,908
)
 
$
4,280

_______________________________________
(1)
Additions to and reductions from allowance for doubtful accounts are recorded to selling, general and administrative expense.
(2)
Deductions for allowance for doubtful accounts are for accounts receivable written off.

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INDEX TO EXHIBITS
 
 
 
 
Incorporated by Reference
 
 
Exhibit
 
 
 
 
 
 
 
 
 
Filing
 
Filed
Number
 
Exhibit Description
 
Form
 
File Number
 
Exhibit
 
Date
 
Herewith
2.1
 
Agreement and Plan of Merger by and among Illumina, Inc., TP Corporation, Verinata Health, Inc. and Shareholder Representative Services LLC (as the Stockholder Representative), dated as of January 6, 2013
 
10-K
 
000-35406
 
2.1

 
2/15/2013
 
 
3.1
 
Amended and Restated Certificate of Incorporation
 
8-K
 
000-30361
 
3.1

 
9/23/2008
 
 
3.2
 
Amended and Restated Bylaws
 
8-K
 
000-30361
 
3.1

 
11/5/2014
 
 
4.1
 
Specimen Common Stock Certificate
 
S-1/A
 
333-33922
 
4.1

 
7/3/2000
 
 
4.2
 
Indenture related to the 0.25% Convertible Senior Notes due 2016, dated as of March 18, 2011, between Illumina and The Bank of New York Mellon Trust Company, N.A., as trustee
 
10-Q
 
000-30361
 
4.1

 
5/4/2011
 
 
4.3
 
Indenture related to the 0% Convertible Senior Notes due 2019, dated as of June 11, 2014, between Illumina and The Bank of New York Mellon Trust Company, N.A., as trustee
 
8-K
 
000-30361
 
4.1

 
6/11/2014
 
 
4.4
 
Indenture related to the 0.5% Convertible Senior Notes due 2021, dated as of June 11, 2014, between Illumina and The Bank of New York Mellon Trust Company, N.A., as trustee
 
8-K
 
000-30361
 
4.2

 
6/11/2014
 
 
4.5
 
First Supplemental Indenture related to the 0.5% Convertible Senior Notes due 2021, dated as of August 27, 2014, between Illumina and The Bank of New York Mellon Trust Company, N.A., as trustee
 
10-Q
 
000-30361
 
4.1

 
10/29/2014
 
 
+10.1
 
Form of Indemnification Agreement between Illumina and each of its directors and executive officers
 
10-Q
 
000-30361
 
10.55

 
7/25/2008
 
 
+10.2
 
Amended and Restated Change in Control Severance Agreement between Illumina and Jay T Flatley, dated October 22, 2008
 
10-K
 
000-30361
 
10.33

 
2/26/2009
 
 
+10.3
 
Form of Change in Control Severance Agreement between Illumina and each of its executive officers
 
10-K
 
000-30361
 
10.34

 
2/26/2009
 
 
+10.4
 
2000 Employee Stock Purchase Plan, as amended and restated through February 2, 2012
 
10-K
 
000-30361
 
10.4

 
2/24/2012
 
 
+10.5
 
2005 Stock and Incentive Plan, as amended and restated through May 29, 2013
 
S-8
 
333-190322
 
4.5

 
8/2/2013
 
 
+10.6
 
Form of Restricted Stock Unit Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan
 
10-K
 
000-30361
 
10.6

 
2/24/2012
 
 
+10.7
 
Form of Stock Option Agreement for Non-Employee Directors under 2005 Stock and Incentive Plan
 
10-K
 
000-30361
 
10.7

 
2/24/2012
 
 
+10.8
 
Form of Restricted Stock Unit Agreement for Employees under 2005 Stock and Incentive Plan
 
10-K
 
000-30361
 
10.8

 
2/24/2012
 
 

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INDEX TO EXHIBITS — (Continued)
+10.9
 
Form of Stock Option Agreement for Employees under 2005 Stock and Incentive Plan
 
10-K
 
000-30361
 
10.9

 
2/24/2012
 
 
+10.10
 
New Hire Stock and Incentive Plan, as amended and restated through October 28, 2009
 
10-K
 
000-30361
 
10.7

 
2/26/2010
 
 
10.11
 
License Agreement, effective as of May 6, 1998, between Tufts University and Illumina
 
10-Q
 
000-30361
 
10.5

 
5/3/2007
 
 
+10.12
 
The Solexa Unapproved Company Share Option Plan
 
8-K
 
000-30361
 
99.3

 
11/26/2007
 
 
+10.13
 
The Solexa Share Option Plan for Consultants
 
8-K
 
000-30361
 
99.4

 
11/26/2007
 
 
+10.14
 
Solexa Limited Enterprise Management Incentive Plan
 
8-K
 
000-30361
 
99.5

 
11/26/2007
 
 
+10.15
 
Amended and Restated Solexa 2005 Equity Incentive Plan
 
10-K
 
000-30361
 
10.25

 
2/26/2009
 
 
+10.16
 
Amended and Restated Solexa 1992 Stock Option Plan
 
10-K
 
000-30361
 
10.26

 
2/26/2009
 
 
10.17
 
License Agreement, dated June 24, 2002, between Dade Behring Marburg GmbH and Illumina (with certain confidential portions omitted)
 
S-3/A
 
333-111496
 
10.23

 
3/2/2004
 
 
10.18
 
Non-exclusive License Agreement, dated January 24, 2002, between Amersham Biosciences Corp. and Illumina (with certain confidential portions omitted)
 
S-3/A
 
333-111496
 
10.24

 
3/2/2004
 
 
10.19
 
Amended and Restated Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9885 Towne Centre Drive property, dated January 26, 2007
 
10-Q
 
000-30361
 
10.41

 
5/3/2007
 
 
10.20
 
Lease between BMR-9885 Towne Centre Drive LLC and Illumina for the 9865 Towne Centre Drive property, dated January 26, 2007
 
10-Q
 
000-30361
 
10.42

 
5/3/2007
 
 
10.21
 
Settlement and Release Agreement between Affymetrix, Inc. and Illumina, dated January 9, 2008
 
10-K
 
000-30361
 
10.44

 
2/26/2008
 
 
10.22
 
Amended and Restated Lease Agreement, dated March 27, 2012, between ARE-SD Region No. 32, LLC and Illumina
 
10-Q
 
000-30361
 
10.1

 
5/3/2012
 
 
10.23
 
First Amendment to Amended and Restated Lease Agreement, dated March 27, 2012, between ARE-SD Region No. 32, LLC and Illumina
 
 
 
 
 
 
 
 
 
X
10.24
 
Second Amendment to Amended and Restated Lease Agreement, dated March 27, 2012, between ARE-SD Region No. 32, LLC and Illumina
 
 
 
 
 
 
 
 
 
X
+10.25
 
Deferred Compensation Plan, effective December 1, 2007
 
14D-9
 
005-60457
 
99(e)(6)

 
2/7/2012
 
 
10.26
 
Lease between BMR-Lincoln Centre LP and Illumina, dated December 30, 2014
 
 
 
 
 
 
 
 
 
X
10.27
 
Pooled Patents Agreement between Illumina and Sequenom, Inc., dated December 2, 2014 (with certain confidential portions omitted)
 
 
 
 
 
 
 
 
 
X
21.1
 
Subsidiaries of Illumina
 
 
 
 
 
 

 
 
 
X

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INDEX TO EXHIBITS — (Continued)
23.1
 
Consent of Independent Registered Public Accounting Firm
 
 
 
 
 
 

 
 
 
X
24.1
 
Power of Attorney (included on the signature page)
 
 
 
 
 
 

 
 
 
X
31.1
 
Certification of Jay T. Flatley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 

 
 
 
X
31.2
 
Certification of Marc A. Stapley pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 

 
 
 
X
32.1
 
Certification of Jay T. Flatley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 

 
 
 
X
32.2
 
Certification of Marc A. Stapley pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
 

 
 
 
X
101.INS
 
XBRL Instance Document
 
 
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema
 
 
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
 
 
 
 
 
 
 
X
_______________________________________
+
 
Management contract or corporate plan or arrangement

Supplemental Information

No Annual Report to stockholders or proxy materials has been sent to stockholders as of the date of this report. The Annual Report to stockholders and proxy material will be furnished to our stockholders subsequent to the filing of this Annual Report on Form 10-K and we will furnish such material to the SEC at that time.


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SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 17, 2015 .

 
ILLUMINA , I NC.
 
 
 
 
By 
/s/  J AY  T. F LATLEY
 
 
Jay T. Flatley
Chief Executive Officer


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February 17, 2015
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Jay T. Flatley and Marc A. Stapley, and each or any one of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his or her name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their, his, or her substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

/s/  J AY  T. F LATLEY
 
Chief Executive Officer and Director
(Principal Executive Officer)
 
February 17, 2015
Jay T. Flatley
 
 
 
 
 
 
 
 
 
/s/  M ARC  A. S TAPLEY
 
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
 
February 17, 2015
Marc A. Stapley
 
 
 
 
 
 
 
 
 
/s/  M ICHEL  B OUCHARD
 
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
 
February 17, 2015
Michel Bouchard
 
 
 
 
 
 
 
 
 
/s/  W ILLIAM H. R ASTETTER
 
Chairman of the Board of Directors
 
February 17, 2015
William H. Rastetter
 
 
 
 
 
 
 
 
 
/s/  F RANCIS  A. D ESOUZA
 
President and Director
 
February 17, 2015
Francis A. deSouza
 
 
 
 
 
 
 
 
 
/s/  A. B LAINE  B OWMAN
 
Director
 
February 17, 2015
A. Blaine Bowman
 
 
 
 
 
 
 
 
 
/s/  D ANIEL  M. B RADBURY
 
Director
 
February 17, 2015
Daniel M. Bradbury
 
 
 
 
 
 
 
 
 
/s/  K ARIN  E ASTHAM
 
Director
 
February 17, 2015
Karin Eastham
 
 
 
 
 
 
 
 
 
/s/  R OBERT  S. E PSTEIN
 
Director
 
February 17, 2015
Robert S. Epstein
 
 
 
 
 
 
 
 
 
 
 
Director
 
February 17, 2015
Gerald Möller
 
 
 
 
 
 
 
 
 
/s/  J EFF  H UBER
 
Director
 
February 17, 2015
Jeff Huber
 
 
 
 
 
 
 
 
 
/s/  D AVID  R. W ALT
 
Director
 
February 17, 2015
David R. Walt
 
 
 
 
 
 
 
 
 
/s/  R OY  W HITFIELD
 
Director
 
February 17, 2015
Roy Whitfield
 
 
 
 


90
705490696.2 1 FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (this "First Amendment") is made and entered into as of April ___, 2013, by and between ARE-SD REGION NO. 32, LLC, a Delaware limited liability company (“Landlord”), and ILLUMINA, INC., a Delaware corporation (“Tenant”). RECITALS A. Landlord and Tenant are parties to that certain Amended and Restated Lease Agreement dated as of March 27, 2012 (the "Lease"). Pursuant to the Lease, Tenant leases certain premises consisting of approximately 497,078 rentable square feet ("Premises"), located at 5200 Illumina Way, San Diego, California. The Premises are more particularly described in the Lease. Capitalized terms used herein without definition shall have the meanings defined for such terms in the Lease. B. Landlord’s affiliate, ARE-San Francisco No. 43, LLC, a Delaware limited liability company, and Tenant are concurrently herewith entering into that certain Lease Agreement, dated on or about the date hereof (the “499 Lease”), pursuant to which Tenant shall lease certain premises at a property located at 499 Illinois Street, San Francisco, California. C. Landlord and Tenant desire, subject to the terms and conditions set forth herein to, amend the Lease to, among other things, extend the Land Rent Commencement Date (as such term is defined in Section 39(b) of the Lease). NOW, THEREFORE, in consideration of the foregoing Recitals, which are incorporated herein by this reference, the mutual promises and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Land Rent Commencement Date. Notwithstanding anything to the contrary contained in the Lease, the Land Rent Commencement Date is hereby extended until January 1, 2018. 2. Brokers. Landlord and Tenant each represents and warrants that it has not dealt with any broker, agent or other person (collectively, “Broker") in connection with the transaction reflected in this First Amendment and that no Broker brought about this transaction, other than Cushman & Wakefield of San Diego. Landlord and Tenant each hereby agree to indemnify and hold the other harmless from and against any claims by any Broker claiming a commission or other form of compensation by virtue of having dealt with Tenant or Landlord, as applicable, with regard to this First Amendment. 3. Miscellaneous. a. This First Amendment is the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior and contemporaneous oral and written agreements and discussions. This First Amendment may be amended only by an agreement in writing, signed by the parties hereto. b. This First Amendment is binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. c. This First Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. The signature page of any counterpart may be detached therefrom without impairing the legal effect of the signature(s) thereon provided such signature page is attached to

 
705490696.2 2 any other counterpart identical thereto except having additional signature pages executed by other parties to this First Amendment attached thereto. d. Except as amended and/or modified by this First Amendment, the Lease is hereby ratified and confirmed and all other terms of the Lease shall remain in full force and effect, unaltered and unchanged by this First Amendment. In the event of any conflict between the provisions of this First Amendment and the provisions of the Lease, the provisions of this First Amendment shall prevail. Whether or not specifically amended by this First Amendment, all of the terms and provisions of the Lease are hereby amended to the extent necessary to give effect to the purpose and intent of this First Amendment. [Signatures are on the next page.]

 

 
SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (this "second Amendment") is made as , A$J"* t' 2014, by and between ARE-SD REGION NO. 32, LLC, a Delaware limited liability company ("Landlord"), and ILLUMINA, lNC., a Delaware corporation ('Tenant"). RECITALS A. Landlord and Tenant are now parties to that certain Amended and Restated Lease Agreement dated as of March 27,2012, as amended by that certain First Amendment to Lease dated as of May 23, 2013 (as amended, the "Lease"). Pursuant to the Lease, Tenant leases certain premises consisting of approximately 496,070 rentable square feet ("Original Premises") located at 5200 lllumina Way, San Diego, California ("Project"). The Original Premises are more particularly described in the Lease. Capitalized terms used herein without definition shall have the meanings defined for such terms in the Lease. B. Landlord and Tenant desire, subject to the terms and conditions set forth below, to amend the Lease to, among other things, expand the size of the Original Premises by adding approximately 149,663 rentable square feet of space to be located in a to be constructed building at the Project. NOW, THEREFORE, in consideration of the foregoing Recitals, which are incorporated herein by this reference, the mutual promises and conditions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Buildins 6. ln addition to the Original Premises, commencing on the Building 6 Commencement Date (as defined below), Landlord leases to Tenant, and Tenant leases from Landlord, that certain to be constructed building to be located at the Project shown on Exhibit A attached to this Second Amendment, containing approximately 149,663 rentable square feet of space (the "Building 6"). 2. Deliverv. Landlord shall be responsible for Landlord's Work (as defined in the Building 6 Work Letter attached to this Second Amendment as Exhibit B). Landlord shall deliver Building 6 to Tenant for the commencement of the construction of the Building 6 Tenant lmprovements (as defined in the Building 6 Work Letter) on the Waterproof Roof Building Shell Delivery Date ("Delivery" or "Delived') which Landlord shall use reasonable efforts to cause to occur on or before August 8, 2015 ("Target Buitding 6 Delivery Date"). The "Waterproof Roof Building Shell Delivery Date" shall be the date that (a)Tenant is notified accurately by Landlord or the general contractor for Building 6 that construction of the Building Shell (as defined in the Building 6 Work Letter) is at a point where Building 6 has a waterproof roof, and (b) Landlord and Tenant reasonably determine that Building 6 is in a condition reasonably acceptable for the commencement and continuing construction of the Building 6 Tenant lmprovements, subject to reasonable coordination between Landlord and Tenant taking into account Landlord's continued construction of the Building Shell during Tenant's construction of the Tenant lmprovements. lf Landlord fails to timely Deliver Building 6, Landlord shall not be liable to Tenant for any loss or damage resulting therefrom except as expressly provided for below, and the Lease, as amended herein, shall not be void or voidable. lf Landlord does not Deliver Building 6 within 120 days of the Target Building 6 Delivery Date ("Abatement Trigger Date") for any reason other than Force Majeure and Tenant Delays (as defined below), then Tenant shall receive (i) a 1 day abatement of Base Rent othenivise payable by Tenant for Building 6 for every 1 full day after the Abatement Trigger Date that the Waterproof Roof Building Shell Delivery Date does not occur through the date that is 60 days after the Abatement Trigger Date, and (ii) a 2 day abatement of Base Rent otherwise payable by Tenant for Building 6 for every 1 70828ss36.12 a Copyri8ht O 2m5, Alexmdria Rcsl llstat llquitiei Irc. ALL UJ RIclrfS RESERVED. Conridarial snd Prcprietary - Do Nol ^ r , ^ _ii ,, o , ^. Copy or Disribute. Abxe&ia and thc AleBndrir Logo @ Egislercd mde@ks of Alexandria Real trshte Equitics, Inc.

 
full day after the date that is 60 days after the Abatement Trigger Date that the Waterproof Roof . Building Shell Delivery Date does not occur. As used herein, the term "Tenant Delay" shall mean: (i) any delay caused by Tenant in connection with the design, permitting or construction of the Building Shell that actually causes a delay of the Waterproof Roof Building Shell Delivery Date beyond the date that Delivery would have otherwise occurred but for such delay; (ii) any interference by Tenant with Landlord's construction of the Building Shell including, without limitation, in each case, (A) delays arising from changes requested by Tenant to the specifications for the Building Shell set forth in Schedule 1 to the Building 6 Work Letter ("Base Shell Changes"), (B) Tenant's failure to provide Landlord with any information required from Tenant for the normal progression of Landlord's design, permitting and construction of the Building Shell in accordance with the detailed schedule of key milestones attached to this Second Amendment as Exhibit G and so as not to delay Landlord's substantial completion of Building 6, and/or (C) Tenant's failure to reasonably coordinate Tenant's construction of the Building 6 Tenant lmprovements with Landlord. Notwithstanding anything to the contrary contained herein, Tenant shall be solely responsible for all costs incurred by Landlord in connection with any Base Shell Changes; provided, however, nothing contained herein shall obligate Landlord to agree to make any such requested changes. Landlord hereby agrees to permit Tenant early access, at Tenant's sole risk and expense, to Building 6 30 days prior to the Waterproof Roof Building Shell Delivery DaE ("Early Access Date") to commence performing the Building 6 Tenant lmprovements, provided that (i) Tenant's access and work is coordinated with Landlord's architect and general contractor and complies with the Lease and all other reasonable restrictions and conditions Landlord may impose, and (ii) all such access and work by Tenant shall be during normal business hours or otherwise at such other times as are reasonably designated by Landlord. Notwithstanding the foregoing, any such entry and work by Tenant and any Tenant Party shall comply with all established safety practices of Landlord's contractor, and Tenant and any Tenant Party shall not unreasonably interfere with the performance of Landlord's Work. Landlord shall have the right to exclude Tenant and any Tenant Party from Building 6 if such interference is not resolved by Tenant in a manner reasonably acceptable to Landlord within 1 day after Landlord's written notice to Tenant. Landlord agrees to use reasonable efforts to cooperate with Tenant in Tenant's performance of Tenant's Work; provided, however, that in no event shall Landlord have any obligation to incur any additional or overtime costs in connection with such cooperation with Tenant. The "Building 6 Commencement Date" shall be March 23,2016, regardless of whether or not Tenant has completed the Building 6 Tenant lmprovements; provided, however, that such date shall be deemed extended by one (1) day for each day of delay due to (i) Force Majeure delays, or (ii) delays caused by Landlord's breach of its obligations under this Second Amendment which actually cause a delay of Tenant's Work, provided that no such delay shall be deemed to have commenced unless Tenant has provided Landlord with written notice of such delay. Such March 23,2016 date shall also be deemed extended one (1) day for each day beyond August 8, 2015, that Landlord fails, for any reason other than Tenant Delays, to deliver the Building Shell to Tenant in the condition required pursuant to the second paragraph of this Section 2. Upon the request of Landlord, Tenant shall execute and deliver a factually correct written acknowledgment of the Early Access Date, the Waterproof Roof Building Shell Delivery Date and the Building 6 Commencement Date in substantially the form of the "Acknowledgement of Commencement Date" attached to the Lease as Exhibit D; orovided, however, Tenant's failure to execute and deliver such acknowledgment shall not affect Landlord's or Tenant's rights hereunder. Tenant acknowledges that Landlord shall require access to Building 6 following the Waterproof Roof Building Shell Delivery Date in order to complete the construction of the Building Shell. Landlord and its contractors and agents shall have the right to enter Building 6 following the Waterproof Roof Building Shell Delivery Date to complete the Building Shell. Tenant agrees to coordinate such entry with Landlord but Tenant acknowledges that Landlord's completion of the Building Shell may adversely affect Tenant's construction of the Building 6 Tenant lmprovements Copyright O 2m5, Alexandria Rrsl lishb Iiquilies, lnc. ALL(-l-) RIGIITSRESERVED. Conlid$tialandPrcprietary-DoNor ^ , , ,Y* R r ^. Copy or qsribue. Abrandria md the Alexaodria Logo re - -' Bgiscr€d mdcrurks of Aleredria Real llshte Equitics,ltrc. 708285536.r2

 
(as defined in the Building 6 Work Letter). Landlord shall reasonably cooperate with Tenant in . order to minimize such adverse effects. Except as set forth in the Building 6 Work Letter: (i) Tenant shall accept Building 6 in its condition as of the Waterproof Roof Building Shell Delivery Date; (ii) except as otherwise provided in the Building 6 Work Letter, Landlord shall have no obligation for any defects in Building 6. Any occupancy of Building 6 by Tenant before the Building 6 Commencement Date shall be subject to all of the terms and conditions of the Lease, excluding the obligation to pay Base Rent. Tenant agrees and acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the suitability of Building 6 for the conduct of Tenant's business, and Tenant waives any implied warranty that Building 6 is suitable for the Permitted Use. 3. Definition of Premises. Commencing on the Building 6 Commencement Date, the defined term "Premises" on page 1 of the Lease shall be deleted in its entirety and replaced with the following: "Premises: That certain portion of the Project consisting of (i) a building containing approximately 171,340 rentable square feet ("Building 1"), (ii) a building containing approximately 159,272 rentable square feet ("Building 2"), (iii) a central plant building containing approximately 15,969 rentable square feet (referred to herein as the "Gentral PIant Building" or "Building 3"), (iv) that certain office/laboratory building containing approximately 127,373 rentable square feet ("Building 4"), (v) that certain tenant activity center building containing approximately 22,116 rentable square feet (referred to herein as the "Activity Center" or "Building 5"), and (vi) that certain building containing approximately 149,663 rentable square feet ("Building 6"). Building 1, Building 2, Building 3, Building 4, Building 5, Building 6 and the Central Plant are all as shown on Exhibit A. Building 1, Building 2, Building 3, Building 4, Building 5 and Building 6 are collectively referred to herein as the "Buildings"." As of the Building 6 Commencement Date, Exhibit A to the Lease shall be amended to include Building 6 as shown on Exhibit A attached to this Second Amendment. Rentable Area of Premises and Proiect. Commencing on the Building 6 Commencement Date, the defined terms "Rentable Area of Premises" and "Rentable Area of ProJect" on page 1 of the Lease shall be deleted in their entirety and replaced with the following: "Rentable Area of Premises: 645,733 rentable square feet" "Rentable Area of Project: 645,733 rentable square feet" Base Rent. (a) Original Premises. Tenant shall continue to pay Base Rent for the Original Premises as provided for in the Lease through the expiration date of the Lease. (b) Building 6. Commencing on the Building 6 Commencement Date, Tenant shall pay Base Rent for Building 6 in the amount of $1.38 per rentable square foot of Building 6 per month. Base Rent payable for Building 6 shall be increased on every other anniversary of the Building 6 Commencement Date (each a "Building 6 Adjustment Date") by multiplying the Base Rent payable with respect Building 6 immediately before such Building 6 Adjustment Date by the Rent Adjustment Percentage and adding the resulting amount to the Base Rent payable with respect to Building 6 immediately before such Building 6 Adjustment Date. 4. 5. 708285536.12 ,^ CopyriShr O 2m5, Alexanddu Rlsl lls(ate l4uitie!, ltrc, AI-L LIJ RICIITS RFSERVED. Confiderrial snd Profrietry - Do Not ^ , , , ii ,, R I A- Copy or Disributs- Abrm&ia ild lheAlerandrir Logo rcrgistered mdeMks of Alexandiia Real !$ae Equiticc. lnc.

 
7. Tenant's Share of Operatinq Expenses. Tenant shall be required to pay all Operating . Expenses with respect to Building 6 and Tenant's Share of Operating Expenses shall continue to be 100%. For the avoidance of any doubt, nothing contained in this Second Amendment is intending to limit or reduce the Operating Expenses which Tenant is required to pay for the Project (including, without limitation, Building 6) prior to the Building 6 Commencement Date. Re-Measurement. (a) Original Premises. Landlord and Tenant agree that the rentable square footage of the Original Premises set forth in the Lease (and this Second Amendment) is conclusively deemed to be the rentable square footage of the Original Premises and, notwithstanding anything to the contrary contained in the Lease, the rentable square footage of the Original Premises shall not be subject to re-measurement. (b) Building 6. Landlord and Tenant agree that the rentable square footage of Building 6 is conclusively deemed to be 149,663 rentable square feet and, notwithstanding anything to the contrary contained in the Lease or this Second Amendment, the rentable square footage of Building 6 shall not be subject to re-measurement. Parkinq. Section 10 of the Lease is hereby deleted in its entirety and replaced with the following: '10. Parking. Subject to all matters of record, Force Majeure, a Taking (as defined in Section 19 below), the PID Permitand theexercise byLandlord of its rights hereunder, Tenantshall have the right to use all of the parking spaces at the Project for the first 36 months after the lnitial Commencement Date. Tenant's right to use all of the parking spaces at the Project shall be extended for so long as all of Tenant's Expansion Rights (as defined in Section 39) continue in full force and effect. All of Tenant's parking rights under this Lease shall, during the Base Term, be at no additional cost to Tenant, except as provided for herein. Notwithstanding anything to the contrary contained herein, Landlord and Tenant acknowledge and agree that all parking at theProject (including, without limitation, the number of parking spaces available in the Parking Structure(s) (as defined below) and in the balance of the Project) shall be required at all times to satisfy all Legal Requirements for the Project. Notwithstanding anything to the contrary contained in this Lease, Tenant may only elect to exercise any of its Extension Rights under Section 40 with respect to less than all of the Buildings, if, as of the commencement date of the applicable Extension Term, (i) there are at least 3 parking spaces per 1,000 rentable square feet available for each Building with respect to which Tenant does not extend the Term of the Lease and those parking spaces are in close proximity to the applicable Building, and (ii) there are sufficient parking spaces available for each Building with respect to which Tenant has elected to extend the Term of the Lease to comply with applicable Legal Requirements (but in no event no less than 2.5 parking spaces per 1,000 rentable squarefeet). Tenant agrees to indemnify, defend, save and hold Landlord harmless from and against any and all Claims (including, without limitation, from any Governmental Authority) at any time(s)(including, without limitation, during the construction of any Building(s) and/or Parking Structure(s)) in connection with there not being sufficient parking spaces at the Project as may be required by applicable Legal Requirements. lf Tenant's Expansion Rights expire and/or Landlord commences constructing any new buildings at the Project ("New Gonstruction"), Tenant shall, subject to the provisions of this Section 10, have the right, in common with other tenants of the Project pro rata in accordance with the rentable area of the Premises and the rentable areas of the Project occupied by such other tenants, to park in those areas designated for non-reserved parking, subject in each case to Landlord's commercially reasonable rules and regulations; provided, however, that Landlord may reduce the allocation to Tenant to less than Tenant's pro rata share if Tenant's pro rata share would result in any Building(s) at the Project not being leased in their entirety by Tenant having 8. A Copyrighr O 200.5, Alexe&ir Rel ljsllle Iquitbs, lno. A1"L LIJ RICIITS RESERVED. Confidcrtial ard Propdot{ry - Do Nol ^ r, x ii n R I ^. Copy or Disriblk. Alaxadlia ald theAlexeddr Logo e regisrmd mde@rks of Alex&ndtia Real trstate Equitica, :nc. '108285536.12

 
10. less than 3 parking space per 1,000 rentable square feet. Landlord may allocate parking spaces . among Tenant and other tenants in the Project as described above if Landlord determines that parking facilities are becoming crowded. lf Landlord commences New Construction, Tenant may elect to mark as reserved or separate and secure its parking from the balance of the Project, in which case, Landlord shall reasonably cooperate with Tenant to effectuate, if possible and at Tenant's sole cost and expense, such a separation of Tenant's parking in a manner reasonably acceptable to Landlord and Tenant. Landlord shall not be responsible for enforcing Tenant's parking rights against any third parties, including other tenants of the Project. Notwithstanding anything to the contrary contained herein, the number of parking spaces allocated to Tenant for Building 6 (and/or any other Expansion Buildings) shall be reduced by the number of parking space which Landlord reasonably determines cannot be constructed or used as a result of any generator(s), not to exceed 2 generators, and/or any HVAC pad(s)/enclosure(s) constructed in connection with the Tenant's use of Building 6 (and/or any other ExpansionBuildings). Tenant acknowledges and agrees that the location and screening (and related landscaping with respect to) any such generato(s) and/or HVAC pad(s)/enclosure(s) shall be subject to Landlord's prior written approval (not to be unreasonably withheld, conditioned or delayed) and Tenant shall be responsible for bearing all costs in connection foregoing; provided, however, that Tenant may use the Building 6 Tl Allowance to pay for the same in connection with Building 6." Permitted Use. ln addition to the Permitted Use (as provided for on the first page of the Lease), Tenant shall be entitled to use Building 6 for manufacturing purposes in compliance with applicable Legal Requirements. Notwithstanding anything to the contrary contained in the Lease or that certain letter agreement between Landlord and Tenant dated May 10, 2013 ("Letter Agreement"), Tenant shall be entitled to use Building 5 and the amphitheater adjacent to Building 5, subject to the terms and conditions of the Lease and the Letter Agreement, for lectures, concerts, plays, fundraising activities and/or similar events conducted by or for certain businesses, non-profit entities and/or individuals, whether or not they are engaged in the health and life sciences industry. Alterations. Section 12 of the Lease is hereby amended as follows: (a) The language in clause (vi) in the second sentence of the first paragraph of Section 12 which reads as follows "(vi) do not involve a use of the Premises that is inconsistent with the current use of the Premises, without Landlord's prior approval if the cost of any such Alteration (excluding carpeting and painting) does not exceed $100,000 and the aggregate cost of all such Alterations (excluding carpeting and painting) in any 12 month period does not exceed $300,000" is hereby deleted in its entirety and replaced with the following: "(vi) do not involve a use of the Premises that is inconsistent with the current use of the Premises, without Landlord's prior approval, and if the cost of any such Alteration (excluding carpeting and painting) does not exceed $400,000 per occurrence and the aggregate cost of all such Alterations (excluding carpeting and painting) in any 12 month period does not exceed $2,000,000". (b) Notwithstanding anything to the contrary contained in the third to last sentence of the second paragraph of Section 12 of the Lease, in no event shall Tenant be required to pay to Landlord any plan review, coordination, scheduling or supervision fee in connection with any Notice-Only Alterations. Extension Riqht. For the avoidance of doubt, the Extension Rights granted to Tenant pursuant to Section 40(a) of the Lease shall apply to Building 6. Notwithstanding anything to the contrary contained in Section 40(a), if Tenant elects to exercise any Extension Right(s) for Building 6 pursuant to Section 40(a), upon the commencement of the applicable Extension Term, Base Rent 11. Copyrigh O 2005, Alexardlid tcrl EslaE Lquities, lnc. ALl, UJ RICII-IS RESERVED. Confid€nrial and Propdotdy - Do Not n , , , ;i ,, R r A Copy or Disribuk. Alexildriaed thc Alcxandda Logo @' regismd mdemrls of Alexardria Resl LrsEre Equities,lnc. 708285536.12

 
12. for Building 6 shall be payable at the Building 6 Market Rate (as defined belorru). Base Rent for . Building 6 shall thereafter be adjusted on each anniversary of the commencement date of such Extension Term by a percentage as determined by Landlord and agreed to by Tenant at the time the Building 6 Market Rate is determined (or as part of the determination of Building 6 Market Rate as provided in Section 40(b) if the parties are unable to agree on the Building 6 MarketRate). As used herein, "Building 6 Market Rate" shall mean the rate that comparable landlords of comparable buildings have accepted in current transactions from non-equity (i.e., not being offered equity in the buildings), nonrenewal, non-expansion and nonaffiliated tenants of similar financial strength for space of comparable size, quality (based on the Building Shell and the depreciated amount of the Building 6 Tenant lmprovements paid for with the Building 6 Tl Allowance (assuming a 38-year amortization schedule) and the land value for Building 6 agreed upon by the parties (for the avoidance of doubt, the "land value" for Building 6 shall mean that portion of the Project allocated to or required for Building 6 along with the parking required pursuant to applicable Legal Requirements in connection with Building 6 and not any excess land), parking spaces allocated to Building 6 and floor height in first class manufacturing/research and development buildings, as applicable, in the University Towne Center area of San Diego for a comparable term, with the determination of the Building 6 Market Rate to take into account all relevant factors, including tenant inducements, leasing commissions, allowances or concessions, if any. lf the allowances, free rent and/or other economic concessions granted with respect to Building 6 pursuant to this Section 11 differ from those granted in the comparable transactions, an adjustment to the applicable Building 6 Market Rate shall be made on a basis consistent with the adjustments commonly made in the market for comparable differenoes in concession packages. For the avoidance of doubt, in no event shall the Building 6 Market Rate include the cost of any tenant improvements or other alterations to Building 6 paid for solely by Tenant. Earlv Termination Riqht. For the avoidance of doubt, if Tenant elects to exercise its Termination Right pursuant to Section 42 of the Lease, the lease with respect to Building 6 shall also terminate on the Termination Date and the Early Termination Payment payable by Tenant shall also include (i) an amount equal to 6 months of Rent with respect to Building 6 at the amount payable with respect to Building 6 by Tenant as of the date that Tenant delivers the Termination Notice to Landlord, and (ii) an amount equal to, as calculated by Landlord and provided to Tenant within 10 business days after Tenant delivers a written request therefor to Landlord, (1) the unamortized Building 6 Tl Allowance, and (2) all of the unamortized third party leasing commissions paid by Landlord in connection with Tenant's lease of Building 6, which amounts in this clause 12(ii) shall be subject to verification by Tenant. Risht to Exoand. Section 39 of the Lease is hereby deleted in its entirety and replaced with the following: '39. Right to Expand. (a) Expansion in the Project. Subject to the provisions of this Section 39, Tenant shall have the right, but not the obligation, on or before December 31,2018 ("Expansion Right Expiration Date") to expand the Premises (the "Expansion Rights") to include the to be constructed buildings (including any related subterranean parking) contemplated on the project site plan attached hereto as Exhibit H ("Project Site PIan") as (i) Building 7, which Landlord currently contemplates will contain 4 floors and a total of approximately 195,000 rentable square feet of laboratory and/or office space ("Building 7'), (ii) Building 8, which Landlord currently contemplates will contain 4 floors and a total of approximately 198,000 rentable square feet of laboratory and/or office space ("Building 8"), and (iii) Building 9, which Landlord currently contemplates will contain 1 floor and a total of approximately 6,800 rentable Equare feet for an amenity building ("Building 9"), all upon the terms and conditions in this Section 39; provided, however, that all of the Expansion Requirements (as defined below) are met each time Tenant exercises an Expansion Right. Building 7, Building 8 and Building 9 shall each be individually referred to herein as an "Expansion Building" and collectively as the "Expansion Buildings". 13. 70828ss36.12 ,^ C{pyrighr @ 2m5, Aiexandrir Rrll l$taB Iquitic; lno. A1l(I) RICIITS RESERVED. Conlidetrial .nd Protrictaty - Do Nol ^,, " ii,, o, n_ Copy or Disribuk- Alexmdr:a and theAlem&ir Logo eregismd mderuIs orAlexan*ia Real trslate Equiries,lf,c.

 
Landlord shall endeavor to cause the Expansion Buildings to be constructed in a manner ' consistent with the site plan attached to the Second Amendment as Exhibit F. Notwithstanding anything to the contrary contained in this Lease, Tenant acknowledges that the Project Site Plan and the rentable square footage provided for above with respect to the Expansion Rights (and the Expansion Buildings) contemplates entitlements and approvals for the Project which Landlord does not currently have and may not obtain and, in the event that Landlord does not obtain all of such entitlements and approvals on terms and conditions, acceptable to Landlord in its sole and absolute (but good faith) discretion, Landlord shall have the right at any time, in Landlord's sole and absolute (but good faith) discretion but after consultation with Tenant, to amend both the Expansion Rights to which Tenant is entitled under this Lease and the Project Site Plan in a manner reasonably acceptable to Landlord and reflective of the actual entitlements and approvals obtained by Landlord. Landlord agrees that, while Tenant's Expansion Rights remain in effect, Landlord shall not transfer the entitlements actually obtained by Landlord with respect to the Project and required for the development and construction of the Expansion Buildings, up to the 399,800 rentable square feet of entitlements in the aggregate contemplated above, to anotherproject. Notwithstanding the foregoing, Landlord may transfer any entitlements actually obtained by Landlord in excess of the 399,800 rentable square feet of entitlements contemplated above to another project at any time. Upon Tenant's written request from time to time during the Term (but in no event more than twice during any calendar year), Landlord shall provide to Tenant updated information regarding the status of entitlements for the Project, including, but not limited to, material correspondence between Landlord and any governmental authority regarding such entitlements. As used in this Lease, "Expansion Requirements" shall mean that all of the following requirements are satisfied: (i) Tenant is not in material Default under any provision of the Lease; (ii) Tenant has a credit rating of "BBB-' or better from Standard & Poor's Corporation, or "Baa3" or better from Moody's lnvestors Service, lnc. (or in each case any successor thereof), or, in the event that Tenant does not have a credit rating at that time, Tenant has a net worth (as determined in accordance with GAAP) that is not less than the Minimum Net Worth Amount; and(iii) lllumina, lnc., a Delaware corporation, or any entity leasing or subleasing the Premises pursuant to a Permitted Assignment, is the tenant occupying and operating out of at least 70o/o of the Premises under this Lease. Subject to the terms and conditions of this Section 39, if Tenant elects to exercise an Expansion Right with respect to any Expansion Building(s), Tenant shall, on or before the Expansion Right Expiration Date, deliver written notice to Landlord of its election to exercise such Expansion Right (each, an "Expansion Notice"), which Expansion Notice shall identify the Expansion Building(s) with respect to which Tenant is exercising its Expansion Right (each an "ldentified Expansion Building") along with a deposit in the amount of $100,000 multiplied by the number of ldentified Expansion Buildings identified in the Expansion Notice for use by Landlord for the initial costs actually incurred by Landlord in connection with the initial design and pricing (collectively, lnitia! Costs") for each ldentified Expansion Building ("Expansion Deposit"). Landlord agrees to contribute up to $100,000 for the lnitial Costs associated with each ldentified Expansion Building following the exhaustion of Tenant's applicable Expansion Deposit for such ldentified Expansion Building (evidence of which exhaustion/contribution shall be provided to Tenant upon Tenant's written request from time to time in the form of a detailed line item statement). Notwithstanding anything to the contrary contained herein, Tenant acknowledges and agrees that (i) Landlord shall have no obligation to commence the design and/or construction of any Expansion Building prior to Tenant delivering an Expansion Notice and an Expansion Deposit with respect to such Expansion Building to Landlord, (ii) in no event shall Tenant have the right to exercise an Expansion Right with respect to any later numbered Expansion Building if Tenant has not previously or concurrently therewith exercised an Expansion Right with respect to the Expansion Building number immediate preceding it (e.g. Tenant cannot elect to exercise an ,^ Copyright O 2005, Alcxandfi! Rcel tiac Lquiric$, lDc. ALL tlJ RICI ITS RESERVED. Confidcnrial and prapfietary - Do No1 ^ r L r ii o o, o. Copy u Dsribok. Alexildria ed theAlexe&i! Logo eEgiskrcd mderDrls of Alexe{ria Real ltshte Equitics,:nc. 70828ss36.12

 
Expansion Right for Building 8 if Tenant has not exercised an Expansion Right for Building 7) and . Landlord shall have the right, in Landlord's sole and absolute discretion, to elect not to construct any later numbered Expansion Building(s) for Tenant if Tenant elects as provided for in this Lease to rescind its Expansion Notice with respect to an earlier numbered Expansion Building (e.9., Landlord can elect not to construct Building 8 if Tenant rescinds its Expansion Notice for Building 7), (iii) in no event shall Tenant have the right under any circumstances to exercise an Expansion Right with respect to less than all of the rentable square footage of an Expansion Building, (iv) the Project Site Plan including, without limitation, the number of floors, rentable square footages, configuration and locations of the Expansion Buildings within the Project are not guaranteed and are subject to change by Landlord in the exercise of Landlord's reasonable discretion; provided, however, that so long as all of Tenant's Expansion Rights remain in full force and effect under this Section 39, any such changes made by Landlord shall not materially and adversely impact: (A) the use of the Expansion Buildings for the Permitted Use, (B) Tenant's ability to access the Premises, (C) Tenant's parking rights under Section 10, or (D) the total square footage available to Tenant for expansion of the Premises pursuant to this Section 39(a), and (v) Landlord's obligation to develop each Expansion Building on receipt of the applicable Expansion Notice is expressly conditioned upon and subject to, and with Landlord having no liability for the failure of any of such conditions (except as otherwise expressly provided herein), Landlord's ability to obtain, on terms and conditions reasonably acceptable to Landlord, all governmental approvals necessary to permit the design and construction of the applicable Expansion Building, the reasonable availability of materials and labor and all other conditions outside of Landlord's reasonable control. lf Tenant exercises its Expansion Rights hereunder with respect to any Expansion Building and does not exercise any of its rescission rights under Section 39(c) with respect thereto, Landlord agrees to use reasonable and diligent efforts to pursue and obtain as contemplated under this Lease and the applicable work letter the necessary governmental approvals to permit the design and construction of such Expansion Building. (b) Extension of Expansion Right Expiration Date. Tenant shall have the right to extend the Expansion Right Expiration Date by delivering written notice ("EIection Notice") of such election to Landlord no later than June 30, 2018, in which case, commencing on January 1, 2019 ("Land Rent Commencement Date"), and continuing thereafter on the first day of each month until the Outside Expansion Right Expiration Date (as defined below), Tenant shall be required to pay rent to Landlord ("Land Rent") in an amount which results in Landlord receiving in equal monthly installments a 7.5o/o pil annum return on the amount of the then Buildable Entitlements at the Project (not to exceed 318,152) multiplied by $34.09 for each square foot of such Buildable Entitlements. The Land Rent shall be increased on every other anniversary of the Land Rent Commencement Date by the Bi-Annual Rent Adjustment Percentage. For example, if Tenant elects to extend the Expansion Right Expiration Date as provided for in this Section 39(b) and Tenant has not commenced paying Base Rent on any Expansion Building, the Land Rent due on January '1, 2019, shall be $67,786.25 per month (calculated as follows: 318,152 X $34.09 per square foot X 7.5%) divided by 12). Notwithstanding anything to the contrary contained herein, if, commencing on January 1,2019 and continuing for each month of the Term, Tenant pays the Land Rent due under this Lease and Tenant timely exercises any express right which Tenant has under Section 39(eXE) to terminate this Lease with respect to the Expansion Building then being constructed, Landlord shall refund to Tenant the allocable portion of the Land Rent paid by Tenant with respect to such Expansion Building between the date that Tenant exercised the Expansion Right for such Expansion Building and the date Tenant elects to terminate the Lease pursuant to Section 39(eXE) with respect to such Expansion Building. ln no event, however, shall Tenant be entitled to any refund of any Land Rent if Tenant's termination right under Section 39(eXE) is caused in whole or in part by any revocation of any entitlements existing as of the date hereof. lf Landlord receives written notice from any Governmental Authority revoking any entitlements existing as of the date hereof, Landlord shall provide Tenant with a copy of such notice and the Land Rent shall be adjusted accordingly on a going forward basis. 708285536.12 Copyiight @ 2005. Alexmdia Raal Lltstr trquities, Inc. AII(!lJ RIGIITS RESERVED. Confideitial od Proprietary - Do Not ^ , , , ii ,, o , ^_ Copy or DisribuE. Alcxildlia od thc Alerudria Logo rc Fgismd hdelMls of Alerandd. Real llsute Equilics, ]nc.

 
lf Tenant does not provide Landlord with an Election Notice by June 30, 2018, then , Landlord shall provide Tenant with a written notice stating in bold and all caps 12 point font that Tenant's failure to respond in writing to Landlord within 10 business days after Tenant's receipt of Landlord's notice and affirmatively electing in such response to extend the Expansion Right Expiration Date shall be deemed Tenant's election to waive Tenant's right to extend the Expansion Right Expiration Date. lf in Tenant's response notice, Tenant elects to extend the Expansion Right Expiration Date, Tenant shall be required to commence paying Land Rent as provided for in this Lease commencing on January 1,2019. As used in this Lease, (i) "Outside Expansion Right Expiration Date" shall mean the earlier of (a) the date which is 6 months after the date Tenant provides Landlord with written notice of its election to terminate all of its unexercised Expansion Rights under this Section 39, and (b) October 31,2031; and (ii) "Buildable Entitlements" shall mean 318,152 rentable square feet of space contemplated for the Expansion Buildings (notwithstanding that the contemplated rentable square footage for the Expansion Buildings is 399,800 rentable square feet) minus the rentable square footage of the Expansion Building(s) for which Tenant is paying Base Rent. For the avoidance of doubt, (x) following the Expansion Right Expiration Date or, if applicable the Outside Expansion Right Expiration Date, or (y) if Tenant is not paying the Land Rent which Tenant is required to pay to Landlord under this Lease, Landlord shall have the right to develop any new building(s) at the Project and lease all or any portion of such new building(s) to any third party(ies) (except as provided in Sections 39(fl and 44(r)) upon any terms and conditions acceptable to Landlord. (c) Rescission Rights. (i) lnitial Rescission Right. Following receipt of each Expansion Notice, Landlord shall deliver to Tenant a detailed written line item estimate on the part of Landlord of the Project Costs (as defined below) for the ldentified Expansion Building ("lnitial Project Cost Estimate") along with a corresponding estimate of the initial monthly Base Rent which would be due for the applicable ldentified Expansion Building ("lnitial Base Rent Estimate"). Tenant shall have the right ("lnitial Rescission Right") to rescind the applicable Expansion Notice by delivery to Landlord of a written rescission notice ("lnitial Rescission Notice") on or before the date that is 15 business days after Landlord's delivery to Tenant of the lnitial Project Cost Estimate and lnitial Base Rent Estimate for the ldentified Expansion Building if (and only if) the lnitial Base Rent Estimate for the ldentified Expansion Building for the first year of the Base Term for such ldentified Expansion Building exceeds $3.00 per rentable square foot per month ("Cap Amount"). The Cap Amount provided for in the preceding sentence applies if the first year of the Base Term for the ldentified Expansion Building is reasonably estimated by Landlord to commence within 24 months after the lnitial Commencement Date, and the Cap Amount shall thereafter be increased by the Bi-Annual Rent Adjustment Percentage on every other anniversary of the lnitial Commencement Date. The lnitial Rescission Right shall only apply, depending on when the Base Term for the ldentified Expansion Building is reasonably estimated by Landlord to commence, if the lnitial Base Rent Estimate exceeds the Cap Amount (as adjusted). lf Tenant fails to timely deliver the lnitial Rescission Notice to Landlord, Tenant shall be deemed to have waived its lnitial Rescission Right. lf Tenant delivers the lnitial Rescission Notice to Landlord pursuant to this paragraph (and Tenant does not continue to pay Land Rent as provided for in this Lease), Tenant's Expansion Right with respect to the ldentified Expansion Building shall terminate and be of no further force or effect, in which case Tenant shall harre no further rights under Section 39 with respect to such ldentified Expansion Building, and Landlord shall have the right to develop any new building(s) at the Project and lease all or any portion of such new building(s) to any third party(ies) (except as provided in Sections 39(fl and 44(r)) upon any terms and conditions acceptable to Landlord unless Tenant continues to pay the Land Rent as provided for in Section 39(b) in which case Landlord shall not have the right to develop any new building(s) untilthe Outside Expansion Right Expiration Date. ,^ Clprrighr @ 2m.5. Alexandril tErl I$taE Ihuities, lnc. ALL(I) RICImS RESERVED. Confidcnti3l rnd Prcprietary - Do Nor ^,,, ii,, R I a_ Copy or Disribu@. Aloxm&ia ud theAlexao&i{ LoSo rc' regiskEd mdemalks ofAl€rsdria Real Esute Equitics, loc. 70828ss36.t2

 
(ii) Final Rescission Right. Following Tenant's waiver of its lnitial Rescission Right and the development by Landlord of preliminary plans for such ldentified Expansion Building, Landlord shall prepare a RFP for 3 general contractors reasonably acceptable to Landlord and Tenant who will each be requested to respond with their fee and general conditions based on the Expansion Building Preliminary Plans. Landlord and Tenant shall use reasonable efforts to agree upon one of the bids ("Gontractor's lnitial Bid") for the purposes of developing a revised estimate of the Project Costs. Based on the Contractor's lnitial Bid, Landlord shall deliver to Tenant a revised written estimate on the part of Landlord of the Project Costs for the ldentified Expansion Building ("Revised Project Cost Estimate"). Tenant shall have a final right ("Finat Rescission Right") to rescind the applicable Expansion Notice by delivery to Landlord of a written rescission notice ("Final Rescission Notice") on or before (i) the date that is 15 business days after Landlord's delivery to Tenant of the Revised Project Cost Estimate for the ldentified Expansion Building if (and only if) the Revised Project Cost Estimate exceeds the lnitial Project Cost Estimate by more lhan 20o/o, or (ii) the date that is 5 business days after Landlord selection of such Contractor's lnitial Bid for the purposes of developing the Revised Project Cost Estimate if Tenant was unwilling to agree to use the Contractor's lnitial Bid selected by Landlord for the purposes of developing a revised estimate of the Project Costs. lf Tenant fails to timely deliver the Final Rescission Notice to Landlord, Tenant shall be deemed to have waived its Final Rescission Right. lf Tenant delivers the Final Rescission Notice to Landlord pursuant to this paragraph (and Tenant does not continue to pay Land Rent as provided for in this Lease), Tenant's Expansion Right with respect to the ldentified Expansion Building shall terminate and be of no further force or effect, in which case Tenant shall have no further rights under Section 3g with respect to such ldentified Expansion Building, and Landlord shall have the right to develop any new building(s) at the Project and lease all or any portion of such new building(s) to any thirdparty(ies) (except as provided in Sections 39(fl and 44(r)) upon any terms and conditions acceptable to Landlord unless Tenant continues to pay the Land Rent as provided for in Section39(b) in which case Landlord shall not have the right to develop any new building(s) until the Outside Expansion Right Expiration Date. (iii) Effect of Multiple Rescissions. Notwithstanding anything to the contrary contained in this Lease, if Tenant's exercises a second lnitial Rescission Right and/or a second Final Rescission Right under this Lease, Tenant shall be solely responsible (without any contribution from Landlord) for all lnitial Costs and other related costs incurred by Landlord in connection with all future exercises by Tenant of any of its Expansion Rights. (iv) Acknowledgement. lf Tenant elects to exercise either its lnitial Rescission Right or its Final Rescission Right with respect to any ldentified Expansion Building, Landlord shall return to Tenant any unused portion, if any, of the Expansion Deposit delivered by Tenant to Landlord with respect to such ldentified Expansion Building. Tenant acknowledges and agrees that the lnitial Project Cost Estimates and the Revised Project Cost Estimate provided by Landlord and the Contractor's lnitial Bid delivered pursuant to the provisions of Section 3g(cXi) and (jj) are merely estimates and are not a guaranty of actual Project Costs and/or the amount of Base Rent which will be payable for any ldentified Expansion Building and Landlord shall have no liability to Tenant in connection therewith nor shall Tenant have any additional rescission rights beyond those expressly provided for in Section 39(cXi) and (!!). (d) Lease Terms for Expansion Building(s). Tenant acknowledges and agrees that if Tenant leases any Expansion Building(s) pursuant to this Section 39, al! of the terms and conditions of this Lease shall apply to the leasing of such Expansion Building, except that: (i) the definitions on page 1 of this Lease shall be amended as necessary to document and reflect the addition of the applicable Expansion Building to the Project; (ii) Tenant shall be required to pay annual Base Rent in equal monthly installments for the first 12 months following the Expansion Building Rent Commencement Date (as defined below) for the applicable Expansion Building at a rate which provides Landlord with an annual return on all Project Costs for such Expansion Building which is the greater of (A) 300 basis points above the 10-year U.S. Treasury yield as of 708285536.12 10 ,^ Clpyrighl O 2m5, Alexmdli{ R.al Lsbb lhuiaiBs, lnc. ALL(Il RlGl ffs RESERVED. Confid€ntial and Proprieaary - Do Nol ^,,, ii,, R I ^ Copy d Disribuk. Alexudria ed theAlexandds Logo re ftgisErcd mdemrks of Alexm&ia Real tlshte Equities, tnc.

 
the date that Landlord receives the applicable Expansion Notice, and (B) 8.5%, and such return . shall be subject to increases as provided for in Section 4 hereof by the Bi-Annual Rent Adjustment Percentage on every other anniversary of the applicable Expansion Building Rent Commencement Date; (iii) the Base Term of the Lease with respect to the applicable Expansion Building shall expire on the same day as the Base Term with respect to the original Premises; provided, however, that each time Tenant exercises its Expansion Right wlth respect to any Expansion Building during the last 120 months of the Base Term, the Base Term for the entire Premises shall be extended each time to the date that is 120 months after the Expansion Building Rent Commencement Date for the applicable Expansion Building; (iv) Landlord shall be responsible for the construction of tenant improvements in each Expansion Building desired by Tenant which improvements shall be of a fixed and permanent nature approved by Landlord("Expansion Building Tenant lmprovements") and shall be required to satisfy the requirements set forth on Exhibit K, and the parties shall enter into a work letter for the Expansion Building and Expansion Building Tenant lmprovements reasonably acceptable to both parties and based substantially on the form of work letter attached hereto as Exhibit J (each, an "Expansion Building Work Letter'') with Tenant receiving a tenant improvement allowance from Landlord in the amount of $60 per rentable square foot of the applicable Expansion Building ($7.50 per rentable square foot of which may be used for Tenant's cabling and Tenant's furniture, fixtures and equipment within the applicable Expansion Building) which shall be disbursed as provided for in the applicable Expansion Building Work Letter; and (v) the "Expansion Building Rent Commencement Date" shall be the date that is 60 days after the Substantial Completion of the Building Shell and the Substantial Tl Completion of the Expansion Building Tenant lmprovements (all as defined in the Expansion Building Work Letter), and Tenant shall commence paying Base Rent and Operating Expenses for the Expansion Building on such date. As used in this Lease, "Project Gosts" shall mean the sum of all of the actual, documented costs incurred by Landlord through Project Close-Out in connection with the acquisition, design and construction of the applicable Expansion Building, the Parking Structure and all related improvements including, without limitation: (i) the value of the land on which the applicable Expansion Building is being constructed (which for purposes hereof the parties agree is equal to $34.09 per rentable square foot of the applicable Expansion Building as of the lnitial Commencement Date and such amount is subject to increases of 60/o on every other anniversary of the lnitial Commencement Date; (ii) architectural, engineering, construction and development cost and fees; (iii) other soft and legal costs; (iv) a development fee to Landlord equal to 3o/o of the hard Project Costs; (v) Landlord's carry costs related to the applicable Expansion Building from the initiation of construction of such Expansion Building until the applicable Expansion Building Rent Commencement Date; (vi) the $60 per rentable sguare foot tenant improvement allowance granted by Landlord for the applicable Expansion Building Tenant lmprovements plus Landlord's carry costs related to the applicable Expansion BuiHing Tenant lmprovements from the initiation of construction of the applicable Expansion Building Tenant lmprovements until the applicable Expansion Building Rent Commencement Date; (vii) infrastructure costs, assessments, impact fees, site preparation costs, testing, labor and materials to construct the applicable Expansion Building and the Parking Structure and related infrastructure and improvements, permit fees, costs associated with obtaining the PID Permit amendment and necessary entitlement or re-entitlements, if necessary, and any other governmental fees, sales taxes and fees payable to contractors, project landscaping, water, gas and electrical fees and related miscellaneous costs, and builder's risk insurance and other insurance related costs, (viii) leasing commissions, if any, payable to a broker solely in its capacity as the broker representing Tenant in connection with the applicable Expansion Right and, unless Tenant has notified Landlord in writing otherwise, such broker shall be Cushman & Wakefield of San Diego, lnc., but only if Steve Rosetta is the broker at Cushman & Wakefield of San Diego, lnc., representing Tenant in connection with the applicable Expansion Right and further provided however, that Landlord and tenant's broker (whether Cushman & Wakefield of San Diego, lnc., or any other brokerage company) shall have entered into a commission agreement with respect to such commission which agreement is in form and content acceptable to Landlord and such broker, 70828ss36.12 11 ,^ CopyrightO2m-r,AlexmdriaRrnlUstatefquiti€s,lnc. ALLLIJ RICIITS RESERVED. Cul'ideitial sndProprieiary- Do Nol n r , x ii ,, R r A- Copy or DisribuE. Alrxmdria ard the Alemdria Logo rcEgisrcrcd mderorls oJAlexan*ia Rea: thtate Eqlilica,lnc.

 
each in their respective sole and absolute discretion, (ix) Landlord's carry costs related to the Parking Structure from the initiation of construction of such Parking Structure until the Project Close-Out; (x) Landlord's contribution towards the lnitial Costs for such Expansion Building, and(xi) Landlord's reasonable financing costs (or reasonable imputed market rate financing costs) with respect to all of the foregoing. Landlord shall not incur any Project Costs not contemplated by this Lease and/or any applicable work letter without Tenant's prior written approval. Tenant shall have the right to audit Project Costs within 180 days after the Project Close-Out and if Tenant discovers errors and Landlord and Tenant are unable to resolve such dispute within 30 days after the expiration of such 180 day period, it shall be resolved by arbitration by a single arbitrator with the qualifications and experience appropriate to resolve the matter and appointed pursuant to and acting in accordance with the rules of the American Arbitration Association. As used herein, "Parking Structure" shall mean, all as elected by Landlord in it sole discretion, one or more parking structures each of which may be constructed in one or more phases with the same or different numbers of tiers in each phase. Landlord shall not however require the construction in connection with any Expansion Building of more parking spaces than is required under applicable Legal Requirements to satisfy the PID Permit for the then Premises and the additional rentable square footage of such Expansion Building. Each Parking Structure shall generally comply with the requirements set forth on Exhibit O attached hereto. Landlord shall use reasonable efforts to notify Tenant of its elections with respect to the applicable Parking Structure(s) within a reasonable time after Tenant exercises its Expansion Right for an Expansion Building. lf Landlord elects to construct any Parking Structure(s) in phases, all of the Project Costs incurred in connection with each such phase of the applicable Parking Structure(s) shall be attributable to the applicable Expansion Building being constructed by Landlord. For example, if Landlord elects in connection with Tenant's exercise of the Expansion Right for Building 7 to construct a Parking Structure with only 2 tiers, all of the Project Costs in connection with such Parking Structure shall be included in the definition of Project Costs for Building 8 and used to calculate Base Rent for Building 8, and, if Tenant thereafter elects to exercise its Expansion Right for Building 8, and Landlord elects to construct additional tiers and/or a new Parking Structure at that time, all of the Project Costs in connection with such additional tiers and/or new Parking Structure shall be included in the definition of Project Costs for Building 8 and used to calculate Base Rent for Building 7. Notwithstanding anything to the contrary contained herein, if Tenant properly exercises its rescission rights as provided for in this Lease, any elections made by Landlord pursuant to this paragraph shall not be binding on Landlord if Landlord so elects and Landlord shall be free to make new elections if Tenant thereafter exercises any of its Expansion Rights. As used in this Lease, "Project Close-Out" shall mean the first date following the final completion of the applicable Expansion Building by Landlord that (i) all contractors, subcontractors, suppliers, architects and others who supplied labor or materials have been paid in full and all liens are released; (ii) the architect or general contractor for the applicable Expansion Building have issued any certificate(s) of completion as may be required by Landlord; (iii) all punch list items have been completed; and (iv) the contractors and architect have provided all close out documentation required by Landlord; provided, however, that in no event shall such date be deemed to occur untilthe applicable Expansion Building Rent Commencement Date. (e) Construction of Expansion Buildings. ln addition to the foregoing, the following provisions shall apply with respect to the design and construction of each Expansion Building: (A) Building Shell. Notwithstanding anything to the contrary contained in this Section 39, Landlord's construction obligation with respect to the each Expansion Building shall be limited to an obligation to construct, subject to the other provisions of this Section 39, and to deliver to Tenant the Expansion Building upon Substantial Completion of the Building Shell and upon Substantial Tl Completion of the Expansion Copyright O 205, Alexandli{ Rcsl lj$taE lhuitics, lnc, ALL(I) RIGIITS RESERI'ED. Confidatial .nd hoprietary - Do Nol ^ , , , ii ,, R r A. Copy or DistsibuE. Abxildria ed tbe Alexaodd! Logo reregisered mderorls of Alexmdria Real llshte Equities,lnc. 70828ss36.12 12

 
Building Tenant lmprovements. As used in this Lease, "Building Shell" shall mean a warm shell containing the warm shell requirements set forth in the Expansion Building Requirements attached hereto as Exhibit l. As used in this Lease, "Building Shetl/Tl Delivery Date" shall mean the date that Tenant is notified in writing that the Building Shell has been Substantially Completed. (B) Architects and Gontractors. After the selection of the general contractor as provided for in the Expansion Building Work Letter, Landlord shall enter into a guaranteed maximum price contract with the selected general contractor. (C) Plans. Tenant acknowledges that certain plans and other information that may be made available to Tenant pursuant to the provisions of this Section 39 and any Expansion Building Work Letter constitute information that Landlord considers confidential and, upon request from Landlord, Tenant and Landlord shall execute a confidentiality and non-disclosure agreement reasonably acceptable to each party with respect to such confidential information. (D) Budget. The cost information related to the design and construction of each Expansion Building shall be shared with Tenant on a so called "open book basis". Tenant shall have the right to approve (which approval shall not be unreasonably withheld, conditioned or delayed) any material changes to the final budget prior to Landlord entering into the guaranteed maximum price contract with the general contractor for the Building Shell. Notwithstanding anything to the contrary contained herein or in the Expansion Building Work Letter, Landlord shall have the right to include a contingency of up to 10% in the budget and in the guaranteed maximum price contract with the general contractor. ln addition, the budget for each Expansion Building shall also include a payment for the development fee provided for as part of the Project Costs. Landlord shall not be entitled to any reimbursement of any fees, overhead, travel, salaries or costs of Landlord's personnel in connection with the construction of the Expansion Building unless they are defined as direct Project Cost. (E) Schedule. Landlord's proposed construction schedule shall be included as part of the Expansion Building Work Letter. Landlord shall use reasonable efforts to cause the Building Shell to be Substantially Completed within 24 months after the building permit for the shell and core construction of the applicable Shell Building has been issued by the applicable Governmental Authority). lf the Building Shell/Tl Delivery Date has not occurred within such 24 month period, Tenant shall have no right to terminate this Lease with respect to the Expansion Building nor shall Landlord have any liability to Tenant for any loss or damage resulting therefrom except that Tenant shall be entitled to occupy such Expansion Building following the Expansion Building Rent Commencement Date without the obligation to pay Base Rent 1 day for each day following the expiration of such 24 month period until the Building Shellffl Delivery Date. lf the Building Shellffl Delivery Date has not occurred within 30 months after the building permit for the shell and core construction of the applicable Shell Building has been issued by the applicable Governmental Authority, Tenant shall have the right to elect to either (i) continue to receive the Base Rent abatement provided for in the preceding sentence, or (ii) terminate this Lease only with respect to the applicable Expansion Building by written notice to Landlord, in which case, except as provided for in the last sentence of the first paragraph of Section 39(b), Landlord shall not have any further duties or obligations to Tenant under this Lease with respect to the applicable Expansion Building and Tenant shall have no further expansion rights with respect to such Expansion Building and Landlord shall be free to lease it to any third party(ies) on any terms and conditions acceptable to Landlord. lf Tenant does not elect to terminate this Lease with respect to the applicable Expansion Building pursuant to subsection (ii) of the immediately preceding sentence within 10 business days after the expiration of such 30 month period, 708285536.12 13 ,^ CopyriShr O 2m.s, Alexandria R.d lislaE Iquiries, lnc, ALL(I) RIGIITS RESERVED. Confidential .nd ProFiotary - Do Nor ^ , , , ii ,, o , n_ Copy or DisribuE. Alexandria md thc Alcmdri{ Logo @ - '' registeredmdemartsofAlexedriaReal['suEEquitics,lnc.

 
such right to terminate this Lease with respect to applicable Expansion Building shall be waived, this Lease with respect to the applicable Expansion Building shall remain in full force and effect, and Tenant shall be deemed to have elected to proceed under subsection (i) above. Notwithstanding anything to the contrary contained herein, Tenant acknowledges and agrees that any Tenant Delays (as defined in Expansion Building Work Letter) and/or delays caused by Force Majeure shall extend the dates set forth in this paragraph for Landlord's performance of its obligations on a day for day basis; provided, however, that in no event may any delays caused by Force Majeure extend the dates set forth in this paragraph for Landlord's performance of its obligations by more than 90 days in the aggregate except in the case of any matter covered by the provisions of Sections 18 and 19 hereof. (F) Acknowledgment. Upon the request of either Landlord or Tenant, the parties shall execute and deliver a written factually correct acknowledgement of the Building Shellffl Delivery Date, the Expansion Building Rent Commencement Date, the Base Rent for the Expansion Building and the expiration date of the Base Term as and when such are established in the form substantially similar to the form of the "Acknowledgement of Commencement Date" attached to this Lease as Exhibit D; provided, however, the failure by either party to execute and deliver such acknowledgment shall not affect the other party's rights hereunder. (f) Right to Further Expand at the Project. During the Term, Tenant shall have the right (the "SGS Expansion Right") to elect to lease any Available Second Generation Space upon the terms and conditions set forth in this Section 39(fl. As used herein, "Available Second Generation Space" shall mean any space previously leased by Landlord to any third party in any new building(s) constructed by Landlord at the Project after the date hereof and not leased by Tenant. lf there is any Available Second Generation Space available for lease or becoming available for lease to a third party (other than the tenant then leasing such space (whether or not such tenant has the right to renew) and/or any other party to whom Landlord has granted a right to lease such Available Second Generation Space), Landlord shall, at such time as Landlord shall elect, deliver to Tenant written notice (the "Offer Notice") of such Available Second Generation Space, together with the terms and conditions on which Landlord is prepared to lease to Tenant such Available Second Generation Space. Tenant shall be entitled to exercise its right under this Section 39(fl only with respect to the entire Available Second Generation Space identified in the Offer Notice. lf the applicable Available Second Generation Space being described in the applicable Offer Notice is 1 floor or less of any applicable building, Landlord may not require a base term for such space in the Offer Notice which is more than 10 years. lf the applicable Available Second Generation Space being described in the applicable Offer Notice is more than 1 floor in any applicable building, there shall be no cap on the length of the base term which Landlord may require for such space in the Offer Notice. lf Tenant delivers an Acceptance Notice but in good faith believes that the Base Rent and escalations being required by Landlord is above the market rate for such Available Second Generation Space, the Base Rent for such Available Second Generation Space shall be determined in the same manner as the Market Rate (as defined in Section 40) is determined pursuant to Section 40 but on an expedited basis to be agreed upon by Landlord and Tenant at the time Tenant delivers an Acceptance Notice but in all events the determination of the Base Rent for such Available Second Generation Space must be finalized, if at all, within 30 days after Tenant delivers the applicable Acceptance Notice. Tenant shall have 10 business days following delivery of the Offer Notice to deliver to Landlord written notification ("Acceptance Notice") if Tenant elects to lease the Available Second Generation Expansion Space described in the Offer Notice. Tenant's failure to deliver an Acceptance Notice to Landlord within the required 10 business day period shall be deemed to be an election by Tenant not to exercise Tenant's right to lease the Available Second Generation 708285536.12 14 ,^ Copyright @ 200-5, Alexondria Rltl lltatc ijquiries, lnc. ALL LlJ RIGIrrS RESERVED. Confidcntial snd Prcprietary - Do Not ^ r, x ii,, R r a. Copy G Diskibuts. Alerandria &d $eAlemdrir Logo rcrgi{ercd mderu*s of Alexmdria Real listate Equitics, lnc.

 
Space pursuant to this Section 39(fl, in which case Tenant shall be deemed to have waived its rights under this Section 39(fl with respect to such Available Second Generation Space, the provisions of this Section 39(fl shall no longer apply to such Available Second Generation Space and Landlord shall have the right to lease such Available Second Generation Space to any party or parties and on any terms and conditions acceptable to Landlord in its sole and absolute discretion. Notwithstanding anything to the contrary contained herein, if Tenant delivers an Acceptance Notice to Landlord for any Available Second Generation Space and within 30 days thereafter no lease amendment or lease agreement for the applicable Available Second Generation Space has been entered into by the parties on such terms and conditions as may be acceptable to each party in its sole and absolute discretion after negotiating in good faith, Tenant shall be deemed to have waived its right to lease the applicable Available Second Generation Space and Landlord shall be free to lease the same to any third party and on any terms and conditions acceptable to Landlord in its sole and absolute discretion. Notwithstanding anything to the contrary contained herein, Tenant's SGS Expansion Right shall, at Landlord's option, not be in effect during any period where Tenant is in material Default under this Lease. (g) Tenant Default. Notwithstanding anything to the contrary contained herein, Landlord shall have the right to suspend performance of all or any of Landlord's obligations under this Section 39 during any period that Tenant is in material Default under this Lease and such period of suspension shall constitute a delay caused by Tenant; provided that Landlord has notified Tenant in writing of Landlord's intention to suspend performance due to such Default. (h) Amended Lease. Landlord and Tenant shall enter into a lease amendment or lease agreement acceptable to both Landlord and Tenant for each Expansion Building setting forth the lease terms and the rental of such Expansion Building consistent with those set forth in this Section 39. (i) Termination. The Expansion Right shall, at Landlord's option, terminate and be of no further force or effect even after Tenant's due and timely exercise of the Expansion Right, if, after such exercise, but prior to the commencement date of the Base Term of the lease of the applicable Expansion Building, there is any material Default by Tenant under the Lease. 0) Rights Personal. The Expansion Rights and the SGS Expansion Right are personal to Tenant and are not assignable without Landlord's consent, which may be granted or withheld in Landlord's sole discretion separate and apart from any consent by Landlord to an assignment of Tenant's interest in the Lease, except that they may be assigned in connection with any Permitted Assignment of this Lease. (k) No Extensions. The period of time within which any Expansion Right or SGS Expansion Right, as applicable, may be exercised shall not be extended or enlarged by reason of Tenant's inability to exercise the Expansion Right or SGS Expansion Right, as applicable. (l) Additional Entitlements. Tenant acknowledges and agrees that (i) Landlord may be able to obtain additional entitlements for approximately 190,000 additional rentable square feet at the Project ("Additional Entitlements"), (ii) if Landlord obtains any or all such Additional Entitlements, the Project Site Plan may be revised by Landlord to include such additional square footage, (iii) in no event is Landlord obligated to seek or obtain such Additional Entitlements, and (iv) if Landlord obtains any or all such Additional Entitlements, Tenant's Expansion Right shall, at Landlord's option, include such additional square footage subject to all of the other provisions of this Section 39; provided, however, that Tenant shall not be required to pay Land Rent in connection with such Additional Entitlements. ln no event shall any portion of ,^ Copyrighr @ 2m-5, Alexandlia Rr&l lj$lae &uities, Inc. ALL(IJ Rlcl ITS RESERVED. Conlidcnrial and Propietary - Do Nol ^ , , * ii ,, o , ^- Copy or Dsribuc. Atr xe&ia ed the Alexmdda Logo rc rcgisrered mdewks of Alexedia Real lf,slate Equitis,lnc- 70828ss36.12 15

 
14, the square footage comprising the Additional Entitlements be added to Building 7, Building B or Building 9 so long as Tenant continues to have the Expansion Rights under this Lease and Tenant is paying the Land Rent." Exhibit H attached to the Lease is hereby deleted in its entirety and replaced with Exhibit C attached to this Second Amendment. Brokers. Landlord and Tenant each represents and warrants that it has not dealt with any broker, agent or other person (collectively, "Broker") in connection with the transaction reflected in this Second Amendment and that no Broker brought about this transaction, other than Cushman & Wakefield. Landlord and Tenant each hereby agrees to indemnify and hold the other harmless from and against any claims by any Broker claiming a commission or other form of compensation by virtue of having dealt with Tenant or Landlord, as applicable, with regard to this leasing transaction. Landlord shall be responsible for all commissions due to Cushman & Wakefield arising out of the execution of this Second Amendment in accordance with the terms of a separate written agreement between Cushman & Wakefield and Landlord. Miscellaneous. a. This Second Amendment is the entire agreement between the parties with respect to thesubject matter hereof and supersedes all prior and contemporaneous oral and written agreements and discussions. This Second Amendment may be amended only by an agreement in writing, signed by the parties hereto. b. This Second Amendment is binding upon and shall inure to the benefit of the parties hereto, and their respective successors and assigns. c. This Second Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all of which when taken together shall constitute one and the same instrument. The signature page of any counterpart may be detached therefrom without impairing the legal effect of the signature(s) thereon provided such signature page is attached to any other counterpart identical thereto except having additional signature pages executed by other parties to this Second Amendment attached thereto. d. Except as amended and/or modified by this Second Amendment, the Lease is hereby ratified and confirmed and all other terms of the Lease shall remain in full force and effect, unaltered and unchanged by this Second Amendment. ln the event of any conflict between the provisions of this Second Amendment and the provisions of the Lease, the provisions of this Second Amendment shall prevail. Whether or not specifically amended by this Second Amendment, all of the terms and provisions of the Lease are hereby amended to the extent necessary to give effect to the purpose and intent of this Second Amendment. [Signatures are on the next page.l 15. ,^ Copyri8hr O 200.r, Alexandir Rcsl l.ishc &uiriss, lnc. ALLtU RICIITSRESERVED. ConfidentialrndProprietary-DoNot ^ , , , ii ,, R r A. Copy or Dsribuk. Abxandri{ tod thc Alexedria Logo re regisGred mderurls ofAlexrDdria Real t sttte Equitics, lnc. 708285536.12 16

 
IN WITNESS WHEREOF, day and year first above written. the parties hereto have executed this Second Amendment as of the TENANT: ILLUMINA, INC., a Delaware corporation LANDLORD: ARE.SD REGION NO.32, LLC, a Delaware limited liability company By: ALEXANDRIA REAL ESTATE EQUITIES, L.P., a Delaware limited partnership, managing member ARE-QRS CORP., a Maryland corporation, general partner By: RE LegolAffoin 'Y t-r i-t '' Copyrighr O 2m5, Alexaadria RGa, BtaE nquiries, Itrc. AII tlJ RlGl lTS RESmVED. Confiderdol rnd Propriotary - Do Nol ^ , , , ii ,, R I A- Copy s DisEibuE, Abxe&ia ad rhe Alexedris Logo @EgisEEd mdelMls of Alepn&ia Real lLslate Equitics,lnc. 70828ss36.12 17

 
LEASE by and between BMR–LINCOLN CENTRE LP, a Delaware limited partnership and ILLUMINA, INC., a Delaware corporation

 
i Table of Contents 1. Lease of Premises.................................................................................................................... 1 2. Basic Lease Provisions............................................................................................................ 2 3. Term........................................................................................................................................ 7 4. Project and Base Building Work; Substantial Completion; Schedule and Budget................. 7 5. Rent ....................................................................................................................................... 12 6. Rent Adjustments.................................................................................................................. 14 9. Use ........................................................................................................................................ 18 10. Rules and Regulations, CC&Rs and Parking Facilities ........................................................ 20 11. Control by Landlord.............................................................................................................. 21 12. Quiet Enjoyment ................................................................................................................... 22 13. Utilities and Services ............................................................................................................ 23 14. Alterations............................................................................................................................. 28 15. Repairs and Maintenance ...................................................................................................... 31 17. Estoppel Certificate............................................................................................................... 35 18. Hazardous Materials ............................................................................................................. 36 19. Odors and Exhaust ................................................................................................................ 39 20. Insurance; Waiver of Subrogation ........................................................................................ 39 21. Damage or Destruction ......................................................................................................... 44 22. Eminent Domain ................................................................................................................... 46 23. Surrender............................................................................................................................... 47 24. Holding Over ........................................................................................................................ 48 25. Indemnification and Exculpation .......................................................................................... 49 26. Assignment or Subletting...................................................................................................... 50 27. Subordination and Attornment.............................................................................................. 54 28. Defaults and Remedies ......................................................................................................... 55 29. Bankruptcy............................................................................................................................ 60 30. Brokers .................................................................................................................................. 61 31. Definition of Landlord .......................................................................................................... 61 32. Limitation of Landlord’s Liability ........................................................................................ 61 33. Joint and Several Obligations ............................................................................................... 62

 
ii 34. Representations ..................................................................................................................... 63 35. Confidentiality ...................................................................................................................... 63 36. Notices .................................................................................................................................. 64 37. Miscellaneous ....................................................................................................................... 64 38. Telecommunications Equipment ........................................................................................ 69 39. Options to Extend Term........................................................................................................ 69 40. Expansion Option ................................................................................................................. 71 41. Right of First Refusal to Purchase ........................................................................................ 76 42. Multi Tenant Provisions........................................................................................................ 79 43. Secured Areas ....................................................................................................................... 79

 
LEASE THIS LEASE (this “Lease”) is entered into as of this ____ day of December, 2014 (the “Execution Date”), by and between BMR–LINCOLN CENTRE LP, a Delaware limited partnership (“Landlord”), and ILLUMINA, INC., a Delaware corporation (“Tenant”). RECITALS A. WHEREAS, Landlord owns certain real property (the “Property”) and all improvements on the Property which is located at 200-800 Lincoln Centre Drive, Foster City, California 94044 as more fully described on Exhibit A-1 attached hereto; B. WHEREAS, Landlord intends to construct on the Property three (3) buildings, each containing 160,000 square feet of Rentable Area, as defined below, (which buildings shall be referred to herein as “Building A”, “Building B” and “Building C”), one (1) building containing 40,000 square feet of Rentable Area (which building shall be referred to herein as “Building D”), and certain parking structures (known as PS1, PS2 and PS3), surface parking facilities and other improvements (such buildings and improvements are more fully depicted on the preliminary site plan attached hereto as Exhibit A, which site plan is for illustration purposes only and remains subject to change in accordance with the terms and conditions of this Lease). Building A, Building B, Building C and Building D or any combination thereof may be referred to herein as the “Buildings,” and any reference herein to a “Building” shall mean Building A, Building B, Building C or Building D, as applicable. Building A, Building B, Building C, Building D and all parking structures, facilities and other improvements serving such buildings, together with the Property, are collectively referred to herein as the “Project;” and C. WHEREAS, Landlord wishes to lease to Tenant, and Tenant desires to lease from Landlord, the Premises (as defined below), pursuant to the terms and conditions of this Lease, as detailed below. AGREEMENT NOW, THEREFORE, Landlord and Tenant, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, agree as follows: 1. Lease of Premises. Effective on the Term Commencement Date (as defined below), Landlord hereby leases to Tenant and Tenant hereby leases from Landlord (i) Building A (including, without limitation, all shafts, cable runs, mechanical spaces and rooftop areas (subject to the terms and conditions of this Lease)), (ii) Building B (including, without limitation, all shafts, cable runs, mechanical spaces and rooftop areas (subject to the terms and conditions of this Lease)), (iii) Building D (including, without limitation, all shafts, cable runs, mechanical spaces and rooftop areas (subject to the terms and conditions of this Lease)) and (iv) all landscaping, parking facilities and structures, private drives and other improvements and appurtenances within the Project related thereto or serving the applicable Buildings as reasonably designated by Landlord (all of (i), (ii), (iii) and (iv) above, together with the rights of access and

 
2 parking granted to Tenant hereunder which are appurtenant to the Premises, are collectively referred to herein as the “Premises”) for use by Tenant in accordance with the Permitted Use (as defined below) and no other uses. Notwithstanding anything to the contrary in this Lease, Landlord and Tenant have mutually agreed to defer construction of PS1 (as defined in Section 40.5 below), and have agreed that the area where PS1 will be constructed will be paved and used as a surface parking lot until the “PS1 Trigger Date” as defined in Section 40.5 below. 1.1 Verification of Rentable Area. Upon completion of the Design Development Drawings (as defined below) or their equivalent for each Building in the Project, Landlord will cause an architect/space measurement consultant reasonably acceptable to Landlord and Tenant (the “Space Measurement Consultant”) to calculate the Rentable Area (as defined below) for the applicable Building using the method of measurement attached hereto as Exhibit L (the “Measurement Standard”) and the results of such measurement will be provided to Landlord and Tenant and may be referred to herein as the “Rentable Area” of such Building (provided, however, Landlord and Tenant hereby agree that, for purposes of this Lease, the Rentable Area for each of Building A, Building D and Building B shall be the Rentable Area set forth in Section 2.2 below). Landlord and Tenant hereby agree that the measurement of the applicable Building as determined by the Space Measurement Consultant (or, with respect to Building A, Building D and Building B, the Rentable Area set forth in Section 2.2 below) will be the final, binding Rentable Area of the applicable Building and will not be subject to change by either party during the Term, unless the physical size of a Building or the Premises leased by Tenant actually changes. Any amounts or provisions in this Lease which vary with Rentable Area will be appropriately adjusted upon such remeasurement and confirmed by Landlord to Tenant in writing. 2. Basic Lease Provisions. For convenience of the parties, certain basic provisions of this Lease are set forth herein. The provisions set forth herein are subject to the remaining terms and conditions of this Lease and are to be interpreted in light of such remaining terms and conditions. 2.1. This Lease shall take effect upon the Execution Date and, except as specifically otherwise provided within this Lease, each of the provisions hereof shall be binding upon and inure to the benefit of Landlord and Tenant from the date of execution and delivery hereof by all parties hereto. 2.2. “Rentable Area” of the Premises. Landlord and Tenant hereby stipulate that the Rentable Area of Building A, Building D and Building B shall be as follows: (a) Building A: 160,000 square feet. (b) Building D: 40,000 square feet. (c) Building B: 160,000 square feet. 2.3. “Base Rent”:

 
3 (a) Building A and Building D: Initial monthly and annual installments of Base Rent for Building A and Building D shall be payable commencing as of the Phase 1 Rent Commencement Date (as defined below), subject to increase as set forth in Section 6 below: Dates Square Feet of Rentable Area Base Rent per Square Foot of Rentable Area Monthly Base Rent Annual Base Rent Month 1 – Month 24 200,000 $32.86 annually $547,666.67 $6,572,000 (b) Building B : Initial monthly and annual installments of Base Rent for Building B shall be payable commencing as of the Phase 2 Rent Commencement Date (as defined below), subject to increase as set forth in Section 6 below and subject to the Building B Base Rent Abatement (as defined in Section 5.5 below): Dates Square Feet of Rentable Area Base Rent per Square Foot of Rentable Area Monthly Base Rent Annual Base Rent Month 1 – Month 24 160,000 $32.86 annually $438,133.33 $5,257,600 (c) Occupancy: Notwithstanding anything to the contrary, from and after the Term Commencement Date, Tenant shall be permitted to occupy any space within Building A and/or Building B for purposes of conducting business subject to the terms, conditions and provisions of this Section 2.3(c). Tenant shall not be permitted to occupy Building D for any purpose other than constructing the Tenant Improvements (as defined below) until the Phase 1 Rent Commencement Date. (i) Tenant will notify Landlord in advance before commencing any business activity in any Building, which notice must include proof that Tenant has obtained all required approvals, permits and licenses from any applicable Governmental Authorities to allow Tenant to legally commence business from such Building. (ii) If prior to the Phase 1 Rent Commencement Date, Tenant commences conducting business within any Building, then Tenant shall pay, with respect to any Rentable Area in which Tenant commences conducting business (any such Rentable Area, “Phase 1 Early Occupancy Space”), Early Occupancy Additional Rent (as defined below), for the period commencing on the date Tenant first conducts business activities in such Phase 1 Early Occupancy Space and ending on the date immediately preceding the Phase 1 Rent Commencement Date.

 
4 (iii) If, after the Phase 1 Rent Commencement Date but prior to the Phase 2 Rent Commencement Date, Tenant commences conducting business within a combined Rentable Area (within Building A and Building B) in excess of the Rentable Area of Building A (any such excess Rentable Area, “Phase 2 Early Occupancy Space”), then Tenant shall pay, with respect to such Phase 2 Early Occupancy Space, Early Occupancy Additional Rent, for the period commencing on the date Tenant first conducts business activities in such Phase 2 Early Occupancy Space and ending on the date immediately preceding the Phase 2 Rent Commencement Date. (iv) “Early Occupancy Additional Rent” shall mean one hundred percent (100%) of utility charges and other expenses incurred or attributable to any Building occupied by Tenant, Taxes (as prorated pursuant to Article 7), Insurance Expenses (as prorated pursuant to Article 13) and Operating Expenses (as prorated pursuant to Article 13). 2.4. Commencement Date: (a) The “Term Commencement Date” shall be the date that Building A, Building B and Building D are delivered to Tenant in TI Ready Condition. (b) The “Phase 1 Rent Commencement Date” is the date that is the later of (i) July 1, 2017 and (ii) the date that is nine (9) months after the date upon which Building A, Building B and Building D are delivered to Tenant in TI Ready Condition (as defined in the Work Letter); provided that if the Phase 1 Rent Commencement Date is delayed because of a Tenant Delay (as defined the Work Letter), then the Phase 1 Rent Commencement Date shall be the date that the Phase 1 Rent Commencement Date would have occurred but for such Tenant Delay, and in the event there is a Landlord Delay or an Uncontrollable Delay which actually delays completion of the Tenant Improvements (provided that no Uncontrollable Delays shall exceed 90 days regardless of the actual number of days of Uncontrollable Delay)), then the nine (9) month period set forth above will be extended by the number of days of such Landlord Delays and/or Uncontrollable Delays, as applicable. (c) The “Phase 2 Rent Commencement Date” is the date that is one (1) year after the Phase 1 Rent Commencement Date; provided that if the Phase 2 Rent Commencement Date is delayed because of a Tenant Delay, then the Phase 2 Rent Commencement Date shall be the date that the Phase 2 Rent Commencement Date would have occurred but for such Tenant Delay, and in the event there is a Landlord Delay or an Uncontrollable Delay which actually delays completion of the Tenant Improvements in Building B (provided that no Uncontrollable Delays shall exceed 90 days regardless of the actual number of days of Uncontrollable Delay)), then the Phase 2 Rent Commencement Date will be extended by the number of days of such Landlord Delays and/or Uncontrollable Delays, as applicable. 2.5. Term Expiration Date*: (a) Building A and Building D: The “Term Expiration Date” for Building A and Building D shall be date that is fifteen (15) years after the Phase 1 Rent Commencement Date.

 
5 (b) Building B: The “Term Expiration Date” for Building B shall be the date that is fifteen (15) years after the Phase 2 Rent Commencement Date. *The parties hereby acknowledge that the Term of this Lease as to Building A and Building D will not expire on the same date as the Term of the Lease as to Building B unless Tenant properly exercises the following option. Tenant shall have the option, exercisable by written notice (an “Extension Notice”) to Landlord within ninety (90) days after the Phase 2 Rent Commencement Date, to extend the Term Expiration Date for Building A and Building D such that the Term of the Lease with respect to Building A and Building D will expire conterminously with the Term of the Lease with respect to Building B. In the event Tenant delivers the Extension Notice within the time period set forth above, the Term of this Lease as to Building A and Building D shall be automatically extended such that Tenant’s lease of Building A and Building D will expire on the Term Expiration Date for Building B, and all terms and conditions of this Lease as applicable to Building A and Building D shall continue to apply during such extended Term, including the bi-annual adjustment of Base Rent payable as set forth in Section 6 below. Tenant will sign a commercially reasonable lease amendment memorializing such extension if requested by Landlord, but such extension will be effective regardless of whether such an amendment is fully executed by Landlord and Tenant. Tenant will not have the right to exercise the above option in the event Tenant is in default hereunder after the expiration of any applicable notice and cure periods. 2.6. Security Deposit: None. 2.7. Permitted Use: Office, R&D, manufacturing, distribution, laboratory and any other uses in conformity with all Applicable Laws (as defined below); provided that at least seventy-five percent (75%) of the Rentable Area of the Premises will be used for office, R&D, manufacturing, distribution and/or laboratory use. “Applicable Laws” shall mean all federal, state, municipal and local laws, codes, ordinances, rules and regulations of Governmental Authorities (as defined below), committees, associations, or other regulatory committees, agencies or governing bodies having jurisdiction over the Premises or any portion thereof, Landlord or Tenant, including both statutory and common law and hazardous waste rules and regulations and any covenants, conditions or restrictions, reciprocal easements or similar agreements affecting the Project. Subject to Force Majeure or temporary interruptions due to casualty or repairs and maintenance, Tenant will have access to the Premises 24 hours per day, 7 days per week throughout the Term. 2.8. Address for Rent Payment: BMR-Lincoln Centre LP Attention Entity 445 P.O. Box 511415 Los Angeles, California 90051-7970 2.9. Address for Notices to Landlord:

 
6 BMR-Lincoln Centre LP 17190 Bernardo Center Drive San Diego, California 92128 Attn: Vice President, Real Estate Legal 2.10. Address for Notices to Tenant: Illumina, Inc. 5200 Illumina Way San Diego, CA 92122 Attn: Director of Facilities And Illumina, Inc. 5200 Illumina Way San Diego, CA 92122 Attn: General Counsel With a copy to: Martin Togni, Esq. Allen Matkins Leck Gamble Mallory & Natsis LLP 501 West Broadway, 15th Floor San Diego, CA 92101-3541 2.11. Address for Invoices to Tenant: Illumina, Inc. 5200 Illumina Way San Diego, CA 92122 Attn: Accounts Payable 2.12. The following Exhibits are attached hereto and incorporated herein by reference: Exhibit A Premises and Site Plan Exhibit A-1 Property Exhibit B Work Letter Exhibit B-1 Tenant Work Insurance Schedule Exhibit C-1 Shell Schematic Design Documents Exhibit C-2 Specifications Exhibit D Project Cost Estimate Exhibit E Project Costs Exhibit F Key Milestone Dates Exhibit G Multi-Tenant Provisions Exhibit H Tenant’s Personal Property Exhibit I Form of Estoppel Certificate

 
7 Exhibit J Acknowledgement of Commencement Date and Term Expiration Date Exhibit K Rules and Regulations Exhibit L Measurement Standard Exhibit M Form of Memorandum of Lease Exhibit N Form Termination of Memorandum of Lease 3. Term. The actual term of this Lease (as the same may be extended pursuant to Article 39 hereof, the “Term”) shall commence on the Term Commencement Date and shall end on the “Term Expiration Date” as defined in Section 2.5 above as to the applicable portions of the Premises. TENANT HEREBY WAIVES THE REQUIREMENTS OF SECTION 1933 OF THE CALIFORNIA CIVIL CODE, AS THE SAME MAY BE AMENDED FROM TIME TO TIME. 4. Project and Base Building Work; Substantial Completion; Schedule and Budget. 4.1. Entitlements. Promptly upon the full execution and delivery of this Lease, Landlord shall diligently pursue the procurement of all permits, approvals, and entitlements necessary for the construction of the Project and Base Building Work (as defined below) on the Property (collectively, the "Entitlements"), which Entitlements will include PS1 to the extent reasonably practicable, even though PS1 will be constructed at a later date. If, as of October 4, 2015 (as such date may be extended by any Uncontrollable Delays (as defined below); but provided that such date will not be extended beyond December 1, 2015 regardless of the cause of delay), all Entitlements necessary to commence construction of the Project and Base Building Work have not been received or remain subject to any appeal or challenge for any reason, then Tenant will have the right (in its sole and absolute discretion) to terminate this Lease upon ten (10) days’ prior written notice to Landlord. In addition, in the event Tenant fails to exercise its termination right above, and any Governmental Authority notifies Landlord that Entitlements will not be issued for the Project (despite Landlord’s diligent efforts to procure such Entitlements including, without limitation, exhausting all administrative remedies available to Landlord in connection therewith), then Landlord will have the right to terminate this Lease by delivery of written notice to Tenant on or before December 31, 2015. Following the exercise of either of the termination rights above, this Lease shall be fully and finally surrendered and terminated and shall no longer be of any force or effect, except for those provisions that, by their express terms, survive the expiration or earlier termination of this Lease. The term “Uncontrollable Delay” shall mean any event of Force Majeure (as defined below), any strike, lockout or similar labor disturbance, any litigation, challenge or appeal brought by a third party objecting to the Project or Entitlements, excess time in obtaining governmental permits or approvals beyond the time period normally required to obtain such permits or approvals for similar space, similarly improved, in comparable office/lab buildings in Foster City, California, delays caused by changes to the Approved Plans (as defined below) requested by Governmental Authorities, any environmental mitigation requirements or similar unforeseen delay in obtaining Entitlements. 4.2. Landlord's Project and Base Building Work. Landlord will construct the Project and Base Building Work on an open book basis, using a general contractor selected by Landlord

 
8 on a negotiated fee basis, which general contractor will be retained pursuant to a guaranteed maximum price contract in a form reasonably negotiated by Landlord, a copy of which will be provided to Tenant. Tenant will have the right to reasonably approve the general contractor selected by Landlord, provided that such approval must be given or withheld (with a written statement outlining the reasonable basis for any disapproval) within five (5) days after Landlord’s request for approval or Tenant will be deemed to have approved the contractor. Promptly following the date on which the Entitlements necessary for the construction of the Project and Base Building Work have been received and are no longer subject to any potential appeal or challenge and the Approved Plans (as defined in Section 4.4 below) are approved, or on such earlier date as Landlord may elect in its discretion, Landlord shall cause the contractor selected by Landlord (the “General Contractor”) to commence and diligently prosecute the construction of the work described on the Approved Plans (the "Project and Base Building Work") in accordance with Section 2.1 of the Work Letter attached hereto as Exhibit B (the "Work Letter"); provided, Landlord shall have no obligation to start any grading or construction before the necessary Entitlements for the Project and Base Building Work have been received and are no longer subject to any potential appeal or challenge and PS1 construction will be deferred until the “PS1 Trigger Date” (as defined in Section 40.5 below). The Project and Base Building Work shall be constructed in a good and workmanlike manner, and in accordance with Applicable Laws (subject only to (a) such minor discrepancies as will not adversely impact the performance of the Tenant Improvements (collectively, the "Punchlist Items") and (b) any failure to comply with Applicable Laws as will not adversely impact Tenant's ability to obtain a certificate of occupancy and use the Premises for Tenant's Permitted Use). 4.3. Substantial Completion of Project and Base Building Work. The Project and Base Building Work shall be deemed "Substantially Complete" or there shall be "Substantial Completion" at such time as (a) Landlord has completed construction of the Project and Base Building Work in accordance with the Approved Plans (excluding PS1, which shall be constructed pursuant to Section 40.5 below), subject only to Punchlist Items (which shall be completed by Landlord within thirty (30) days after the preparation of the Punchlist, or as soon thereafter as is reasonably practicable provided Landlord uses diligent efforts to complete such Punchlist within a reasonable time), (b) Tenant has been provided the number of parking passes to which it is entitled pursuant to Section 10.4 of this Lease, and (c) Landlord has provided Tenant with continuous and uninterrupted access to the Premises (provided that Landlord will be permitted reasonable access to the Premises as necessary to complete the Punchlist Items). The date on which the Project and Base Building Work is deemed Substantially Complete pursuant to the foregoing shall be referred to herein as the "Substantial Completion Date." Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the condition of the Premises or with respect to the suitability of the Premises for the conduct of Tenant’s business. Tenant acknowledges that Landlord shall have no obligation to alter, repair or otherwise prepare the Premises for Tenant’s occupancy or to pay for or construct any improvements to the Premises, except with respect to the Project and Base Building Work and payment of the TI Allowance (as defined in the Work Letter) or in connection with any repair obligations expressly undertaken by Landlord pursuant to this Lease. Tenant’s taking of possession of the Premises shall, except as otherwise agreed to in writing by

 
9 Landlord and Tenant, conclusively establish that the Premises were at such time in good, sanitary and satisfactory condition and repair. 4.4. Approved Plans. Landlord has caused its architect to prepare the schematic plans attached hereto as Exhibit C-1 (the “Shell Schematic Design Documents”), based upon the specifications attached hereto as Exhibit C-2 (the “Specifications”). The Shell Schematic Design Documents, together with any Permitted Plan Changes (as defined below) and any Approved Significant Changes (as defined below) shall be referred to herein as the “Approved Plans.” The Approved Plans shall be subject to change (a) to accommodate minor field changes, (b) by Landlord provided such changes do not materially and adversely affect the quality of the Project and Base Building Work or Tenant’s ability to operate its business at the Premises for the Permitted Use, (c) to obtain Entitlements, (d) to comply with Applicable Laws or as required by any Governmental Authority as a condition to the issuance of a permit or other approval for the Project and Base Building Work (collectively, the “Permitted Plan Changes”). Tenant will not be entitled to object to any Permitted Plan Changes unless such Permitted Plan Changes are not a logical progression of the Shell Schematic Design Documents, including any change which results in (1) a reduction in the number of buildings to be built on the Property, (2) a material decrease in the Rentable Area, which for purposes hereof shall mean a decrease of more than ten percent (10%) of the Rentable Area of the Premises set forth in Section 2.2 above, (3) a reduction in the number of parking passes that Landlord can provide to Tenant below the number required in Section 10.4 below, (4) a material change which significantly impairs ingress or egress to the Project, or (5) a material change in the configuration of the Project (including a material change in the configuration of the improvements thereon) (each of the foregoing items (1) through (5), a “Significant Change”). (a) Significant Changes; Termination Right. In the event of a Significant Change, Landlord will cause the Approved Plans to be modified to incorporate the Significant Change and will submit such revised plans to Tenant for review. Tenant will have ten (10) days from and after the date Tenant is provided with the revised Approved Plans to deliver a written notice to Landlord which notice will either (i) approve the revisions, (ii) request reasonable changes to the revised Approved Plans (based upon the Significant Change) or (iii) terminate this Lease. Failure of Tenant to respond during such ten (10) day period, if such failure continues for an additional three (3) days after written notice to Tenant of such failure, shall be deemed Tenant’s approval of the revised Approved Plans. In the event Tenant reasonably objects to the revised Approved Plans, Landlord will revise the Approved Plans in order to address Tenant’s objections. Landlord shall then resubmit the further revised Approved Plans to Tenant for approval, but the approval period with respect to any such revisions shall be five (5) business days (and Tenant’s response will be limited to either approving such revisions or reasonably disapproving such revisions due to a failure to address Tenant’s requested changes). Failure of Tenant to respond within such five (5) business days, if such failure continues for an additional three (3) days after written notice to Tenant of such failure, will be deemed approval of such revised Approved Plans. If Tenant terminates this Lease as a result of a Significant Change in the Approved Plans, this Lease will thereafter be null and void and of no further force or effect, and Landlord will not be obligated to reimburse Tenant for any costs incurred by Tenant in connection with this Lease. Any changes made to the Approved Plans pursuant to the foregoing

 
10 process shall be referred to herein as “Approved Significant Changes.” After Tenant’s approval or deemed approval of the revised Approved Plans, Landlord shall submit the revised Approved Plans to the appropriate Governmental Authorities for approval. If the applicable Governmental Authorities require modifications to the resubmitted Approved Plans, then Landlord will revise the Approved Plans based upon the direction of such Governmental Authority (which change will be a Permitted Plan Change); provided, however, if such revisions constitute a Significant Change to the resubmitted Approved Plans, then Landlord shall resubmit the revised Approved Plans to Tenant pursuant to the review process for a Significant Change set forth above. In the event that Tenant does not exercise its right under subsection (iii) above in connection with such Significant Change, then, after Tenant’s approval or deemed approval of the revised Approved Plans, Landlord shall resubmit such revised Approved Plans to the Governmental Authority, and this process will be repeated until the Approved Plans are approved by the Governmental Authorities and all Entitlements are issued. Landlord will provide notice to Tenant of any Permitted Plan Change to allow Tenant to conform the Tenant Improvements to such change. Landlord will prepare the final construction drawings for the Project and Base Building Work in accordance with the Approved Plans (the “Design Development Drawings”) and provide a copy of such Design Development Drawings to Tenant, but Tenant will have no approval rights over the Design Development Drawings so long as they are consistent with and logical evolutions of the Approved Plans. (b) Change Orders. Tenant may request changes to the Approved Plans or Design Development Drawings in order to accommodate the Tenant Improvements by submitting a detailed request for such change(s) to Landlord in writing (a “Change Order”); provided that after Entitlements are issued for the Project and Base Building Work, Tenant will not be permitted to request a Change Order which would require any change to the Entitlements or could permit any Governmental Authority to revoke any Entitlement. As soon as reasonably practicable after receipt of Tenant’s requested Change Order, Landlord will either approve or deny the Change Order in its reasonable discretion. If Landlord approves the Change Order, Landlord will provide Tenant with a breakdown of the total anticipated cost to implement such Change Order and the time delay anticipated due to such Change Order (which time delay will be a Tenant Delay (as defined in Section 9.3 of the Tenant Work Letter) (a “Change Order Statement”). Tenant will have five (5) days after receipt of the Change Order Statement to approve the Change Order Statement. In the event that Tenant approves the Change Order Statement, Tenant shall be solely responsible for all costs incurred by Landlord in connection with the Change Order and shall pay such costs to Landlord within thirty (30) days of receipt of invoice from Landlord. Tenant’s failure to respond within such five (5) day period will be deemed disapproval of such Change Order Statement, in which case the Change Order will be deemed to have been rescinded and Landlord will not be obligated to make the requested change. 4.5. Budget/Additional TI Allowance. Landlord has established a budget for the Total Project Costs (as defined in Exhibit E) which it believes will be reasonably required to complete construction of the Project and Base Building Work for the Premises, which budget is $163,881,400 (the “Project Cost Estimate”) as more particularly set forth on Exhibit D attached hereto, and which Project Cost Estimate does not include the cost to construct PS1, as Tenant is obligated to pay the costs of construction of PS1 separately pursuant to Section 40.5 below.

 
11 Upon completion of the Design Development Drawings for the Project, Landlord will submit a revised interim budget to Tenant for informational purposes only, which revised budget is anticipated to be delivered on the date set forth as task 11 on Exhibit F attached hereto. Promptly upon completion of the Project and Base Building Work (except PS1, which shall be excluded from Project Costs for purposes of this Section 4.5), Landlord will calculate the actual total of all Project Costs incurred plus the Land Value Contribution to obtain the actual Total Project Costs (the “Final Budget”), which Final Budget will be delivered to Tenant together with a calculation of the Additional TI Allowance (as defined below), if any. In the event the Final Budget is less than the Project Cost Estimate, the difference shall be an addition to the TI Allowance payable to Tenant pursuant to the Work Letter (the “Additional TI Allowance”). It is the intention of the parties that the Additional TI Allowance will not include any amount due to the deferred construction of PS1, as the Project Cost Estimate does not include the cost to construct PS1 and Tenant is obligated to pay the costs of construction of PS1 pursuant to Section 40.5 below. 4.6. Schedule/Delays. Landlord will use commercially reasonable efforts to (a) cause each Building to be delivered to Tenant in TI Ready Condition within eighteen (18) months after the date of issuance of the building permit for such Building (subject to Tenant Delays and Uncontrollable Delays), (b) meet the “Key Milestone Dates” set forth on Exhibit F, as such dates may be extended by Tenant Delays and Uncontrollable Delays and (c) cause the Substantial Completion Date to occur on or before the Phase 1 Rent Commencement Date (as to Building A and Building D and the parking structure (“PS2”) described on Exhibit A as “Parking Structure 2”) and on or before the Phase 2 Commencement Date (as to Building B); provided, however, except as otherwise expressly provided under Section 4.1 above or under this Section 4.6 below, Tenant agrees that in the event any or all of the deadlines set forth in (a), (b) or (c) above are not reached for any reason, then this Lease shall not be void or voidable and Landlord shall not be liable to Tenant for any loss or damage resulting therefrom. In the event that Building A, Building D and Building B are not in TI Ready Condition (as defined in the Work Letter) on or before the date which is one hundred twenty (120) days after July 1, 2016 (as such July 1, 2016 date may be extended by Tenant Delays and Uncontrollable Delays (provided that Uncontrollable Delays will not exceed 90 days for purposes of this Section 4.6) (“Outside Date”), then the sole remedy of Tenant shall be a credit equal to one (1) day of free Base Rent (to be applied commencing on the Phase 1 Rent Commencement Date) for each day beyond the Outside Date that Building A, Building D and Building B are not in TI Ready Condition; provided that if such delay exceeds sixty (60) days, then for each day of delay beyond sixty (60) days, Tenant will receive two (2) days of free Base Rent (to be applied commencing on the day that is sixty-one (61) days following the Phase 1 Rent Commencement Date) for each day of delay beyond sixty (60) days. In the event that Building A, Building D and Building B are not in TI Ready Condition on or before the date (“Outside Termination Date”) which is two hundred forty (240) days after July 1, 2016 (as such July 1, 2016 date may be extended by Tenant Delays and Uncontrollable Delays (provided that Uncontrollable Delays will not exceed 90 days for purposes of this Section 4.6)), then the sole remedy of Tenant shall be the right to deliver a notice to Landlord (the “Outside Date Termination Notice”) electing to terminate this Lease effective upon receipt of the Outside Date Termination Notice by Landlord. The Outside Date Termination Notice must be delivered by Tenant to Landlord, if at all, not earlier than the Outside Termination Date and not later than five (5) business days after the Outside Termination

 
12 Date. If Tenant delivers the Outside Date Termination Notice, this Lease shall terminate as of the date of such notice, and Landlord will not be obligated to reimburse Tenant for any costs incurred by Tenant in connection with this Lease. 4.7. Assignment of Warranties. Except for Landlord’s responsibility under Section 15.3 below, Landlord will not be responsible for any defects in the Project and Base Building Work; provided that Landlord will obtain industry standard warranties relating to such Project and Base Building Work (which warranties shall, with respect to any elements of the Project and Base Building Work related to the roof membrane of a Building, be in effect for a minimum of 15 years following the date the applicable Building is in TI Ready Condition; and, as to the warranty applicable to the glazing system, Landlord will use good faith efforts to obtain a 15 year warranty, including purchasing such warranty if available from the applicable contractor at a commercially reasonable price) and Landlord will assign to Tenant all warranties obtained by Landlord in connection with the non-structural portions of the Project and Base Building Work (but only to the extent such warranties are assignable). Landlord will reasonably cooperate with Tenant to enforce such warranties; provided that Landlord will not have any obligation to initiate legal proceedings or perform or pay the cost to perform any work which any contractor fails to perform. Any assignment of such warranties will provide that assignment of the warranty to Tenant will not affect Landlord’s rights pursuant to such warranties, and Landlord reserves the right to enforce such warranties directly against the applicable contractor, at its sole option. In the event any warranties cannot be assigned to Tenant, Landlord will enforce such warranties against the applicable contractor on Tenant’s behalf. 4.8. Confirmation of Dates. Tenant shall execute and deliver to Landlord any factually correct written acknowledgments of the Rent Commencement Date(s) (as defined below) and the Term Expiration Date for the applicable portion of the Premises within ten (10) business days of Landlord’s request (provided, however, that Landlord shall not be permitted to request any such acknowledgement until after the applicable Rent Commencement Date), which acknowledgement shall be in the form attached as Exhibit J hereto. Failure to execute and deliver such acknowledgment, however, shall not affect any Rent Commencement Date(s) or Landlord’s or Tenant’s liability hereunder. Failure by Tenant to obtain validation by any medical review board or other similar governmental licensing of the Premises required for the Permitted Use by Tenant shall not serve to extend any Rent Commencement Date(s). 5. Rent. 5.1. Base Rent. Tenant shall pay to Landlord as Base Rent for (a) Building A and Building D, commencing on the Phase 1 Rent Commencement Date, and (b) Building B, commencing on the Phase 2 Rent Commencement Date (as applicable, the “Rent Commencement Date”), the Base Rent set forth in Section 2.3, subject to the rental adjustments provided in Article 6 hereof and subject to the Building B Base Rent Abatement (as defined in Section 5.5 below). Base Rent shall be paid in equal monthly installments in advance on the first day of each and every calendar month during the Term. Beginning on the applicable Rent Commencement Date, Tenant shall pay to Landlord an amount equal to the Base Rent, subject to adjustments pursuant to Section 6 below without deduction, offset or prior notice or demand, except as may be expressly provided by the terms of this Lease.

 
13 5.2. Additional Rent. In addition to Base Rent, Tenant shall pay to Landlord as additional rent (“Additional Rent”) at times hereinafter specified in this Lease (a) any Early Occupancy Additional Rent due pursuant to Section 2.3(c) above, (b) amounts related to Operating Expenses, Insurance Expenses and Taxes (each as defined below), (c) the Property Management Fee (as defined below) and (d) any other amounts that Tenant assumes or agrees to pay under the provisions of this Lease that are owed to Landlord, including any and all other sums that may become due by reason of any default of Tenant or failure on Tenant’s part to comply with the agreements, terms, covenants and conditions of this Lease to be performed by Tenant, after any applicable notice and cure periods. 5.3. Payment of Rent. Base Rent and Additional Rent shall together be denominated “Rent.” Rent shall be paid to Landlord, without abatement, deduction or offset (except as may be expressly provided by the terms of this Lease), in lawful money of the United States of America at the office of Landlord as set forth in Section 2.8 or to such other person or at such other place as Landlord may from time designate in writing. In the event the Term or any early occupancy pursuant to Section 2.3(c) above commences or ends on a day other than the first day of a calendar month, then the Rent for such fraction of a month shall be prorated for such period on the basis of the number of days in the month and shall be paid at the then-current rate for such fractional month. 5.4. Rental Obligation. Except as expressly provided in this Lease, Tenant’s obligation to pay Rent shall not be discharged or otherwise affected by (a) any Applicable Laws now or hereafter applicable to the Premises, (b) any other restriction on Tenant’s use not attributable to a breach of this Lease by Landlord (Section 28.13 below shall govern any breach by Landlord) or (c) any other occurrence; and, except as expressly provided in this Lease, Tenant waives all rights now or hereafter existing to terminate or cancel this Lease or quit or surrender the Premises or any part thereof, or to assert any defense in the nature of constructive eviction to any action seeking to recover rent. For avoidance of doubt, Landlord and Tenant agree that, for purposes of this Section 5.4, the phrase “except as expressly provided in this Lease” means that in the event of any conflict between this Section 5.4 and any other express provision of this Lease, the express provision of this Lease shall control. 5.5. Base Rent Abatement. Tenant’s obligations with respect to Base Rent as to Building B only (and not as to any other Building) shall be subject to abatement in the amount of Five Million Two Hundred Fifty-Seven Thousand Six Hundred Dollars ($5,257,600) (the "Building B Base Rent Abatement"), which Building B Base Rent Abatement shall be amortized and applied in equal installments over months one (1) through twelve (12) of the initial Term with respect to Building B commencing on the Phase 2 Rent Commencement Date; provided, however, that Tenant shall not be entitled to any portion of the Building B Base Rent Abatement accruing during a period of time in which Tenant is in monetary Default or material non- monetary Default under this Lease. Tenant acknowledges and agrees that the Building B Base Rent Abatement has been granted to Tenant as additional consideration for entering into this Lease and for agreeing to pay the Rent and perform all of the obligations of Tenant under this Lease (including, without limitation, Tenant’s obligations with respect to PS1 under Section 40.5 below). The Building B Base Rent Abatement shall not work to abate or reduce Tenant’s

 
14 obligations under this Lease with respect to Additional Rent for Building B including (without limitation) Tenant’s obligations with respect to Taxes, Insurance and Operating Expenses with respect to Building B; provided, however, that the Property Management Fee for months one (1) through twelve (12) of the initial Term with respect to Building B shall be adjusted pursuant to Article 8 below. 6. Rent Adjustments. Base Rent for the Premises shall be subject to an upward adjustment of five percent (5%) of the then-current Base Rent every twenty four (24) months during the Term. As to Building A and Building D, the first such adjustment shall become effective commencing on the second (2nd) annual anniversary of the Phase 1 Rent Commencement Date, and subsequent adjustments shall become effective on every other successive annual anniversary for so long as this Lease continues in effect with respect to Building A and Building D. As to Building B, the first such adjustment shall become effective commencing on the second (2nd) annual anniversary of the Phase 2 Rent Commencement Date, and subsequent adjustments shall become effective on every other successive annual anniversary for so long as this Lease continues in effect with respect to Building B. In the event Tenant exercises the Land Rental Option (as defined in Section 40.1 below), then the Expansion Land Rent will be subject to an upward adjustment of five percent (5%) of the then-current Expansion Land Rent every twenty four (24) months during the term of the Land Rental Option commencing on the first day of the sixty-first (61st) month following the Phase 1 Rent Commencement Date, and subsequent adjustments shall become effective on every other successive annual anniversary for so long as the Land Rental Option continues in effect. The Project Costs Component (as defined in Section 40 below) of Base Rent for the Expansion Space will be subject to an upward adjustment of five percent (5%) of the then-current Project Costs Component of Base Rent every twenty four (24) months during the Term commencing on the second (2nd) annual anniversary of the Expansion Space Commencement Date (as defined below), and subsequent adjustments of the Project Costs Component shall become effective on every other successive annual anniversary for so long as this Lease continues in effect with respect to the Expansion Space, and the Land Rent Component (as defined below) of Base Rent for the Expansion Space shall be subject to an upward adjustment of five percent (5%) of the then-current Land Rent Component of Base Rent every twenty four (24) months commencing on the first day of the sixty-first (61st) month following the Phase 1 Rent Commencement Date (the “Initial Land Rent Component Adjustment Date”) regardless of when payment of the Land Rent Component commences (i.e., adjustments of the Land Rent Component shall commence on the Initial Land Rent Component Adjustment Date even if Tenant’s payment obligations with respect to the Land Rent Component do not begin until after the Initial Land Rent Component Adjustment Date), and subsequent adjustments shall become effective on every other successive annual anniversary for so long as this Lease continues in effect with respect to the Expansion Space. 7. Taxes. 7.1. Commencing on the earlier of (i) the Phase 1 Rent Commencement Date or (ii) the first day of any early occupancy pursuant to Section 2.3(c) above, and continuing for each tax year (each such “tax year” being a period of twelve (12) consecutive calendar months for which the applicable taxing authority levies or assesses Taxes), for the balance of the Term, Tenant

 
15 shall pay to Landlord the amount of all Taxes levied and assessed for any such year as follows: Tenant shall pay 100% of the portion of Taxes attributable to improvements on the Property, plus a pro rata portion of Taxes attributable to the land within the Project (which pro rata portion will be calculated based upon a fraction, the numerator of which will be (a) prior to the Phase 1 Rent Commencement Date, the combined Rentable Area of any Phase 1 Early Occupancy Space occupied under Section 2.3(c)(ii) above, (b) after the Phase 1 Rent Commencement Date but prior to the Phase 2 Rent Commencement Date, the combined Rentable Area of Building A, Building D and any Phase 2 Early Occupancy Space, and (c) at any time after the Phase 2 Rent Commencement Date, all Rentable Area leased by Tenant, and the denominator of which will be total Rentable Area of the Project including, without limitation, the Expansion Space). “Taxes” means all government impositions, including property tax costs consisting of real and personal property taxes and assessments (including amounts due under any improvement bond upon the Premises or any portion thereof) or assessments in lieu thereof imposed by any federal, state, regional, local or municipal governmental authority, agency or subdivision (each, a “Governmental Authority”); taxes on or measured by gross rentals received from the rental of space at the Premises; taxes based on the Rentable Area of the Premises or any portion thereof, as well as any parking charges, utilities surcharges or any other costs levied, assessed or imposed by, or at the direction of, or resulting from Applicable Laws or interpretations thereof, promulgated by any Governmental Authority in connection with the use or occupancy of the Premises or the parking facilities serving the Premises; taxes on this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises; any fee for a business license to operate an office building; and any expenses, including the reasonable cost of attorneys or experts, reasonably incurred by Landlord in seeking reduction by the taxing authority of the applicable taxes, less tax refunds obtained as a result of an application for review thereof. Notwithstanding anything in this Lease to the contrary, Taxes shall not include any federal or state income taxes, net income, franchise, capital stock, estate or inheritance and succession taxes, or taxes that are the personal obligation of Tenant. Any amount paid by Tenant for any partial year of the Term shall be prorated on the basis of the number of days of such partial year. Payment shall be made in the following manner: Tenant shall pay to Landlord the amounts owed under this Article 7 within thirty (30) days after Landlord gives notice to Tenant of the amount of such Taxes payable by Tenant (or not less than fifteen (15) days prior to delinquency, whichever is later). Landlord also shall provide Tenant with a copy of the applicable tax bill or tax statement from the relevant taxing authority. Notwithstanding the foregoing, if Applicable Laws allow any such Taxes to be paid in installments, then Tenant may make such payments to Landlord in installments, provided that each such installment shall be payable to Landlord not less than fifteen (15) days prior to the date upon which payment of the applicable installment to the taxing authority becomes delinquent. In addition to any other amounts due from Tenant to Landlord, if Tenant fails to pay Taxes to Landlord as herein required, Tenant shall pay to Landlord the amount of any interest, penalties or late charges imposed by any governmental authority for late payment. (a) Notwithstanding anything to the contrary contained in this Lease, in the event that, at any time during the first five (5) years of the initial Term, any sale, refinancing, or change in ownership of the Project is consummated, and as a result thereof, and to the extent that in connection therewith, the Project is reassessed (the "Reassessment") for real estate tax

 
16 purposes by the appropriate governmental authority pursuant to the terms of Proposition 13, then the following provisions shall apply to such Reassessment of the Project. (b) For purposes of this Section 7.1, the term "Tax Increase" shall mean that portion of the Taxes, as calculated immediately following the Reassessment, which is attributable solely to the Reassessment. Accordingly, the term Tax Increase shall not include any portion of the Taxes, as calculated immediately following the Reassessment, which (i) is attributable to the initial assessment of the value of the Project, the Buildings or the tenant improvements located in the Project, (ii) is attributable to assessments which were pending immediately prior to the Reassessment which assessments were conducted during, and included in, such Reassessment, or which assessments were otherwise rendered unnecessary following the Reassessment, (iii) is attributable to improvements (including, without limitation, due to construction of Building A, Building D, Building B and Building C as applicable) constructed on the Project and not due to a change in ownership, or (iv) is attributable to the annual inflationary increase of real estate taxes permitted to be assessed annually under Proposition 13. During the first five (5) years of the initial Term, any Tax Increase shall be excluded from Taxes. After the first five (5) years of the initial Term, any Tax Increase shall be included in Taxes. (c) The amount of Taxes which Tenant is not obligated to pay or will not be obligated to pay during the first five (5) years of the initial Term in connection with a particular Reassessment pursuant to the terms of this Section 7.1, shall be referred to as a "Proposition 13 Protection Amount." At any time during the Term, upon notice to Tenant, Landlord shall have the right to purchase the Proposition 13 Protection Amount relating to the applicable Reassessment (the "Applicable Reassessment"), by paying to Tenant an amount equal to the Proposition 13 Purchase Price, as that term is defined below, provided that the right of any successor of Landlord to exercise its right of repurchase hereunder shall not apply to any Reassessment which results from the event pursuant to which such successor of Landlord became the Landlord under this Lease. As used herein, "Proposition 13 Purchase Price" shall mean the present value of the Proposition 13 Protection Amount remaining during the Term, as of the date of payment of the Proposition 13 Purchase Price by Landlord. Such present value shall be calculated (i) by using the portion of the Proposition 13 Protection Amount attributable to each remaining year during the Term (as though the portion of such Proposition 13 Protection Amount benefited Tenant at the end of each such year), as the amounts to be discounted, and (ii) by using discount rates for each amount to be discounted equal to the prime interest rate, as reported by Wells Fargo Bank, N.A. (or if Wells Fargo ceases to exist to publish such a rate, the largest federally chartered banking institution in California) as of the date of Landlord's exercise of its right to purchase, as set forth in this Section 7.1(c). Upon such payment of the Proposition 13 Purchase Price, the provisions of Subsection 7.1(b) of this Lease shall not apply to any Tax Increase attributable to the Applicable Reassessment. If Landlord estimates the Proposition 13 Purchase Price because a Reassessment has not yet occurred, then when such Reassessment occurs, if Landlord has underestimated the Proposition 13 Purchase Price, then upon notice by Landlord to Tenant, Tenant's Base Rent next due shall be credited with the amount of such underestimation, and if Landlord overestimates the Proposition 13 Purchase Price, then upon notice by Landlord to Tenant, Base Rent next due shall be increased by the amount of the overestimation.

 
17 7.2. Tenant shall have the right, by appropriate proceedings, to protest or contest in good faith any assessment or reassessment of Taxes, any special assessment, or the validity of any Taxes or of any change in assessment or tax rate; provided, however, that prior to any such challenge Tenant must either (a) pay the Taxes alleged to be due in their entirety and seek a refund from the appropriate authority or (b) post a bond in an amount sufficient to ensure full payment of the Taxes, including any potential interest, late charge and penalties. Upon a final determination with respect to any such contest or protest, Tenant shall promptly pay to the appropriate Governmental Authority all sums found to be due with respect thereto. In any such protest or contest, Tenant may act in its own name, and at the request of Tenant, Landlord shall cooperate with Tenant in any way Tenant may reasonably require in connection with such contest or protest, including signing such documents as Tenant reasonably shall request, provided that such cooperation shall be at no expense to Landlord and shall not require Landlord to attend any appeal or other hearing. Any such contest or protest shall be at Tenant's sole expense, and if any penalties, interest or late charges become payable with respect to the Taxes as a result of such contest or protest, Tenant shall pay the same. 7.3. If Tenant obtains a refund as the result of Tenant's protest or contest, and subject to Tenant's obligation to pay Landlord's actual costs (if any) associated therewith, Tenant shall be entitled to such refund to the extent it relates to the Premises during the Term. 7.4. Tenant shall be solely responsible for the payment of any and all taxes levied upon (a) personal property and trade fixtures located at the Premises and (b) any gross or net receipts of or sales by Tenant, and shall pay the same at least ten (10) days prior to delinquency. 7.5. To the extent Landlord is required by a lender, Tenant shall timely pay all tax and insurance impound payments due on the Premises. 7.6. Tenant shall not be responsible for Taxes attributable to the time period prior to the Phase 1 Rent Commencement Date except to the extent required under Section 2.3(c) above. Tenant’s responsibility for Taxes shall continue to the latest of (a) the date of termination of the Lease and (b) the date Tenant has fully vacated the Premises (provided that the foregoing will not limit Landlord’s remedies in the event of a default by Tenant hereunder). 7.7. Cut-Off Date. Notwithstanding anything herein to the contrary, Tenant shall not be responsible for Taxes attributable to any calendar year which are first billed to Tenant more than eighteen (18) months after the expiration of the applicable calendar year, except with respect to supplemental Taxes. 8. Property Management Fee. Tenant shall pay to Landlord on the first day of each calendar month of the Term, as Additional Rent, the Property Management Fee (as defined below). The “Property Management Fee” shall equal one percent (1%) of Base Rent due from Tenant (subject to increase pursuant to Exhibit G). Tenant shall pay the Property Management Fee with respect to the entire Term, including any extensions thereof or any holdover periods, regardless of whether Tenant’s obligation to pay Base Rent, Operating Expenses or any other Rent with respect to any such period or portion thereof has been abated and, for any period of time in which

 
18 Base Rent is abated, the Property Management Fee will be calculated as if Tenant were paying the amount of Base Rent that is being abated (provided, however, that, for purposes of calculating the Property Management Fee for months one (1) through twelve (12) of the initial Term with respect to Building B, the dollar amount of Base Rent actually abated in connection with the Building B Base Rent Abatement pursuant to Section 5.5 of this Lease shall be deducted from Base Rent for Building B). 9. Use. 9.1. Tenant shall not use the Premises, or permit or suffer the Premises to be used, for any purpose other than the Permitted Use without Landlord’s prior written consent, which consent Landlord may withhold in its reasonable discretion. 9.2. Tenant shall not use or occupy the Premises in violation of Applicable Laws; zoning ordinances; or the certificate of occupancy issued for the Premises or any portion thereof, and shall, upon five (5) days’ written notice from Landlord, discontinue any use of the Premises that is declared or claimed by any Governmental Authority having jurisdiction to be a violation of any of the above. Tenant shall comply with any direction of any Governmental Authority having jurisdiction that shall, by reason of the nature of Tenant’s use or occupancy of the Premises, impose any duty upon the Premises or with respect to the use or occupation thereof. 9.3. Tenant shall not do or permit to be done anything that will invalidate or increase the cost of any fire, environmental, extended coverage or any other insurance policy covering the Premises or any portion thereof, and shall comply with all rules, orders, regulations and requirements of the insurers of the Premises or any portion thereof, and Tenant shall promptly, upon demand, reimburse Landlord for any additional premium charged for such policy by reason of Tenant’s failure to comply with the provisions of this Article. 9.4. So long as Tenant or a Tenant’s Affiliate (as defined below) is the sole tenant of the Project, Tenant shall, at Tenant's sole cost and expense, have the exclusive right to install the maximum amount of any legally permitted signage in the Project ("Signage"), which Signage shall be subject to compliance with all Applicable Laws. In the event Tenant or a Tenant’s Affiliate is not the sole tenant of the Project, Tenant will have the right to install and/or maintain its pro-rata portion of the legally-permissible signage for the Project, and will remove any Signage installed in excess of such pro-rata allotment, as designated and directed by Landlord. Such Signage may include (a) building top signage on any Building at least fifty percent (50%) leased by Tenant (provided that Tenant’s building top signage rights will not be exclusive for any Building not 100% leased by Tenant or a Tenant’s Affiliate), (b) monument signage near the entrance to each Building leased by Tenant (including Building D, if applicable), and (c) signage at each entrance to the Project. Tenant shall keep the Signage in good condition and repair. The size, design, and other physical aspects of any sign shall be subject to any covenants, conditions, or restrictions encumbering the Premises and, any Applicable Laws. The cost of the sign(s), including but not limited to the permitting, installation, maintenance and removal thereof shall be at Tenant's sole cost and expense. If Tenant fails to maintain its sign(s), or if Tenant fails to remove such sign(s) upon termination of this Lease (or upon Landlord’s direction if Tenant ceases to be the sole

 
19 tenant of the Project), and/or fails to repair any damage to the Buildings, Project or Project monument signs caused by such removal (including without limitation, painting the damaged portions of the Buildings and any other portions of the Buildings that Landlord reasonably determines in good faith shall be painted so that repainting the damaged portion of the Buildings does not adversely affect the visual appearance of the Buildings, if required by Landlord; provided, however, in no event shall Landlord require Tenant to repaint an entire Building), Landlord may do so at Tenant's expense. Tenant shall on demand reimburse Landlord for all costs incurred by Landlord to effect such removal, which amounts shall be deemed Additional Rent and shall include without limitation, all sums disbursed, incurred or deposited by Landlord, including Landlord's costs, expenses and actual attorneys' fees with interest thereon. 9.5. Tenant may only place equipment within the Premises with floor loading consistent with the Building’s structural design unless Tenant obtains Landlord’s prior written approval and pays for any structural support necessary to support such additional loads. Tenant may place such equipment only in a location designed to carry the weight of such equipment. 9.6. Tenant shall not (a) use or allow the Premises to be used for unlawful purposes or any use which would reasonably be expected to offend an institutional landlord of comparable first class laboratory properties in the vicinity of the Project or (b) cause, maintain or permit any nuisance or waste in, on or about the Premises. 9.7. Tenant shall, at its sole cost and expense, promptly and properly observe and comply with all present and future orders, regulations, directions, rules, laws, ordinances, and requirements of any Governmental Authorities (including, without limitation, all state, county, municipal, and federal governments and their departments, bureaus, boards and officials) relating to the Premises, including, without limitation the requirements of the Americans with Disabilities Act of 1990 and regulations adopted thereunder (the “ADA”). Notwithstanding the foregoing, Landlord will be responsible for constructing the Project and Base Building Work in compliance with Applicable Laws (on an unoccupied basis and without regard for Tenant’s intended use or the Tenant Improvements), including the ADA, in effect as of the date that Landlord’s architect provides a certified affidavit that the Project and Base Building Work has been completed by Landlord in accordance with the Approved Plans. In the event of a breach of the foregoing sentence by Landlord, as Tenant’s sole remedy (enforceable in accordance with Section 15.4 as applicable), Landlord will, at Landlord’s sole cost and expense, correct any aspect of the Project and Base Building Work which was not constructed in compliance with Applicable Laws (on an unoccupied basis and without regard for Tenant’s intended use or the Tenant Improvements) in effect at the time that Landlord’s architect provided the certified affidavit referenced in the immediately preceding grammatical sentence. In no event will Tenant be required to make any improvements, alterations repairs or replacements to comply with this Section 9.7 unless the applicable Governmental Authority requires that such work be performed (i.e., if an aspect of the Premises is not required to be brought up to current code due to “grandfathering” provisions, Tenant will not be required to upgrade such item unless and until it is required to do so by a Governmental Authority). Tenant shall indemnify, save, defend (at Landlord’s option and with counsel reasonably acceptable to Landlord) and hold Landlord and its affiliates, employees,

 
20 agents and contractors; and any lender, mortgagee or beneficiary (each, a “Lender” and, collectively with Landlord and its affiliates, employees, agents and contractors, the “Landlord Indemnitees”) harmless from and against any demands, claims, liabilities, losses, costs, expenses, actions, causes of action, damages, suits or judgments, and all reasonable expenses (including reasonable attorneys’ fees, charges and disbursements, regardless of whether the applicable demand, claim, action, cause of action or suit is voluntarily withdrawn or dismissed) incurred in investigating or resisting the same (collectively, “Claims”) arising out of any such failure of the Premises to comply with Applicable Laws. The Premises have not undergone inspection by a Certified Access Specialist (as defined in California Civil Code Section 55.52). The provisions of this Section shall survive the expiration or earlier termination of this Lease. 10. Rules and Regulations, CC&Rs and Parking Facilities. 10.1. Tenant shall faithfully observe and comply with the rules and regulations adopted by Landlord and attached hereto as Exhibit K, together with such other reasonable and nondiscriminatory rules and regulations as are hereafter promulgated by Landlord in its reasonable discretion (the “Rules and Regulations”). In the event of a conflict between the Rules and Regulations and the terms and conditions of this Lease, the terms and conditions of this Lease shall control. 10.2. This Lease is subject to any recorded covenants, conditions or restrictions on the Property or Premises as the same may be amended, amended and restated, supplemented or otherwise modified from time to time (the “CC&Rs”); provided that any such amendments, restatements, supplements or modifications do not materially modify Tenant’s rights or obligations hereunder nor materially increase Tenant’s monetary obligations under this Lease. Any future CC&Rs or modifications to existing CC&Rs which would have a material impact on Tenant’s rights or obligations hereunder will be subject to Tenant’s reasonable approval (which approval will be given or withheld within ten (10) business days after request) so long as Tenant or Tenant’s Affiliate occupies at least seventy five percent (75%) of the Rentable Area within the Project. Tenant shall comply with the CC&Rs (except to the extent any such future CC&Rs or modification to existing CC&R is required by Applicable Laws or any Governmental Authority). 10.3. Tenant shall have the right to install any security systems (including cameras) inside and outside the Premises subject to Landlord’s reasonable prior written consent and the terms and conditions of Article 14 below. In the event the Project becomes a multi-tenant project, Landlord may require that Tenant make reasonable adjustments and modifications to the security systems to the extent reasonably deemed necessary to accommodate a multi-tenant project. 10.4. For so long as Tenant or any Tenant’s Affiliate is the sole tenant of the Project, Tenant shall have the right to use all parking structures and parking facilities serving the Project during the Term at no additional cost, which parking will contain not less than 1,120 parking spaces for Building A, Building D and Building B. In the event Tenant or any Tenant’s Affiliate is not the sole tenant of the Project, Tenant will at all times have the right to use its pro rata share of the parking spaces serving the Project at locations designated by Landlord within the Project and subject to the terms and conditions of Exhibit G; provided, however, that (a) Tenant shall be

 
21 permitted to designate up to twenty percent (20%) of its pro rata share of parking spaces as reserved parking spaces (with Landlord reasonably designating the precise location of such reserved parking spaces), and (b) Landlord shall be obligated to maintain at least 1,120 total parking spaces at the Project for the collective use of occupants of Building A, Building D and Building B. Landlord will permit Tenant, subject to Tenant’s compliance with Section 14 of this Lease, to install security gates (including security guards), card key access control, parking control arms or similar parking security measures, subject to Landlord’s reasonable approval of such measures. In the event Tenant or any Tenant’s Affiliate ceases to be the sole tenant of the Project, Landlord will have the option to (i) require Tenant to remove any security measures that Landlord reasonably determines would injure or disturb other tenants of the Project; (ii) modify such measures in order to allow for shared access to the parking structures and facilities by other tenants and their visitors; and/or (iii) require Tenant to remove any “reserved” or similar parking designations which it has marked on any parking stalls or portions of the Project parking facilities (subject to Tenant’s rights set forth in subsection 10.4(a) above). 11. Control by Landlord. 11.1. Landlord reserves full control over the Project to the extent not inconsistent with Tenant’s enjoyment of the same as provided by this Lease. Notwithstanding the foregoing, only in the event the Project ceases to be leased solely by Tenant or any Tenant’s Affiliate, Landlord shall have the right to subdivide the Project; convert portions of the Project to condominium units; change the size of the Project by selling all or a portion of the Project or adding real property and any improvements thereon to the Project; provided, however, that such rights shall be exercised in a way that does not unreasonably and adversely (in light of the commercially reasonable expectations of a sophisticated landlord and tenant in the context of a lease transaction similar to this Lease) affect Tenant’s beneficial use and occupancy of the Premises, including the Permitted Use and Tenant’s access to the Premises and Tenant’s parking rights hereunder. In any event, Landlord reserves the right to grant easements and licenses to third parties; and maintain or establish ownership of the Buildings separate from fee title to the Property; provided, however, that such rights shall be exercised in a way that does not unreasonably and adversely (in light of the commercially reasonable expectations of a sophisticated landlord and tenant in the context of a lease transaction similar to this Lease) affect Tenant’s beneficial use and occupancy of the Premises, including the Permitted Use and Tenant’s access to the Premises and Tenant’s parking rights hereunder. 11.2. Tenant shall, at Landlord’s request, promptly execute such further documents as may be reasonably appropriate to assist Landlord in the performance of its obligations hereunder; provided that Tenant need not execute any document that creates additional liability for Tenant or that unreasonably and adversely (in light of the commercially reasonable expectations of a sophisticated landlord and tenant in the context of a lease transaction similar to this Lease) affects Tenant’s quiet enjoyment and beneficial use of the Premises (including access and parking rights) as provided for in this Lease and Landlord will reimburse Tenant with reasonable out of pocket costs incurred by Tenant in connection with the review and execution of any such documents.

 
22 11.3. Subject to compliance with Tenant’s commercially reasonable security requirements (including the requirement that Landlord be escorted by a representative of Tenant), Landlord may, at any and all reasonable times during non-business hours (or during business hours, if (a) with respect to Subsections 11.3(v) through 11.3(y), Tenant so requests, and (b) with respect to Subsection 11.3(z), if Landlord so requests), and upon forty-eight (48) hours’ prior written notice (provided that no time restrictions shall apply or advance notice be required if an emergency (which involves an imminent threat of personal injury or property damage) necessitates immediate entry), enter the Premises to (v) inspect the same and to determine whether Tenant is in compliance with its obligations hereunder, (w) supply any service Landlord is required to provide hereunder, (x) post notices of nonresponsibility, (y) access the telephone equipment, electrical substation and fire risers and (z) show the Premises to prospective tenants during the final year of the Term and current and prospective purchasers and lenders at any time during the Term. In no event shall Tenant’s Rent abate as a result of Landlord’s activities pursuant to this Section; provided, however, that all such activities shall be conducted in such a manner so as to cause as little interference to Tenant as is reasonably possible. Landlord shall at all times retain a key with which to unlock all of the doors in the Premises. If an emergency (which involves an imminent threat of personal injury or property damage) necessitates immediate access to the Premises, Landlord may use whatever force is necessary to enter the Premises, and any such entry to the Premises shall not constitute a forcible or unlawful entry to the Premises, a detainer of the Premises, or an eviction of Tenant from the Premises or any portion thereof. 12. Quiet Enjoyment. Landlord covenants that Tenant, upon paying the Rent and performing its obligations contained in this Lease, may peacefully and quietly have, hold and enjoy the Premises (including all appurtenant rights expressly set forth in this Lease), free from any claim by Landlord or persons claiming under Landlord, but subject to all of the terms and provisions hereof, provisions of Applicable Laws and rights of record to which this Lease is or may become subordinate. This covenant is in lieu of any other quiet enjoyment covenant, either express or implied. Notwithstanding the foregoing, and subject to Section 13.9 below, to the extent that Landlord uses commercially reasonable efforts to minimize any interference that any construction at the Project may have on Tenant's use and quiet enjoyment of the Premises for Tenant's normal business operations, Tenant hereby (a) accepts any and all typical inconveniences associated with any such construction (based on the scope of construction being undertaken), including, any noise, paint, fumes, dust, debris, obstruction of access (including any temporary obstruction caused by the erection of scaffolding, barricades or other reasonably necessary structures on the Property), or any other inconvenience caused by the construction, (b) acknowledges and agrees that Landlord shall not, for any reason, be responsible or liable to Tenant for any direct or indirect injury to Tenant or Tenant's Agents, or interference with Tenant's business, arising from any construction at the Project, and (c) agrees that the performance of construction shall not constitute a constructive eviction nor shall Tenant be entitled to an abatement of Rent; provided, however, that the terms, conditions and provisions of this Section 12 shall be subject to the terms, conditions and provisions of Section 13.9 below.

 
23 13. Utilities and Services. 13.1. Tenant shall be responsible for contracting directly for janitorial services for the Premises at least 5 days per week, consistent with similar services in comparable Class A office/lab buildings in the vicinity of the Premises. 13.2. Tenant shall, at Tenant’s sole cost and expense, procure and maintain contracts, with copies of the same and of any related records furnished promptly to Landlord after execution thereof, in customary form and substance for, and with contractors and/or Tenant’s employees specializing and experienced in, the maintenance of the following equipment and improvements, if any, if and when installed on the Premises: (a) heating, ventilating and air conditioning (“HVAC”) equipment, (b) boilers and pressure vessels, (c) fire extinguishing systems, including fire alarm and smoke detection devices, (d) landscaping and irrigation systems, (e) roof coverings and drains, (f) clarifiers, (g) basic utility feeds to the perimeter of the Building and (h) any other equipment reasonably required by Landlord. Notwithstanding the foregoing, in the event Tenant fails to maintain the contracts required under this Section 13.2 within five (5) business days after Landlord provides Tenant written notice of such failure, Landlord reserves the right, upon notice to Tenant, to procure and maintain any or all of such service contracts, and if Landlord so elects, Tenant shall reimburse Landlord, upon demand, for the actual documented costs thereof. 13.3. Commencing on the date (the “Operating Expense Start Date”) that is earlier of (a) the Phase 1 Rent Commencement Date, or (b) the first day of any early occupancy pursuant to Section 2.3(c) above, and continuing for the balance of the Term, Tenant shall pay to Landlord the amount of all Insurance Expenses and Operating Expenses (subject to the terms and conditions of this Section). Landlord shall give Tenant a written estimate for each calendar year of the cost of (i) utilities provided to the Project, to the extent not separately metered or billed directly to Tenant, (ii) any other costs (excluding Taxes and Insurance Expenses) paid or incurred by Landlord in connection with the operation or ownership of the Project or for which Tenant is otherwise required to reimburse to Landlord pursuant to the terms of this Lease ((i) and (ii), collectively, “Operating Expenses”), and (iii) insurance provided by Landlord (“Insurance Expenses”). 13.3.1 For purposes of calculating Operating Expenses payable by Tenant, (a) Operating Expenses will not include any of the items excluded from Operating Expenses in Exhibit G attached hereto, and (b) commencing on the Operating Expense Start Date but prior to the Phase 2 Rent Commencement Date, Operating Expenses shall include 100% of all variable Operating Expenses but shall only include a pro rata portion of those Operating Expenses reasonably determined by Landlord to be fixed costs (i.e., Operating Expenses that do not vary depending on occupancy) (such Operating Expenses, “Fixed Operating Expenses”), which pro rata portion will be calculated based on a fraction, the numerator of which will be (i) prior to the Phase 1 Rent Commencement Date, the combined Rentable Area of any Phase 1 Early Occupancy Space occupied under Section 2.3(c)(ii) above, and (ii) after the Phase 1 Rent Commencement Date but prior to the Phase 2 Rent Commencement Date, the combined Rentable Area of Building A, Building D and any Phase 2 Early Occupancy Space; and in either case, the denominator being the total Rentable Area of Building A, Building B and Building D.

 
24 For avoidance of doubt, from and after the Phase 2 Rent Commencement Date, Fixed Operating Expenses shall no longer be pro-rated and Tenant shall be responsible for 100% of Operating Expenses. 13.3.2 For purposes of calculating Insurance Expenses payable by Tenant, Tenant shall pay 100% of the portion of Insurance Expenses attributable to improvements on the Property (as reasonably determined by Landlord), plus a pro rata portion of Insurance Expenses attributable to the land within the Project (which pro rata portion will be calculated based upon a fraction, the numerator of which will be (a) prior to the Phase 1 Rent Commencement Date, the combined Rentable Area of any Phase 1 Early Occupancy Space occupied under Section 2.3(c)(ii) above, (b) after the Phase 1 Rent Commencement Date but prior to the Phase 2 Rent Commencement Date, the combined Rentable Area of Building A, Building D and any Phase 2 Early Occupancy Space, and (c) at any time after the Phase 2 Rent Commencement Date, all Rentable Area leased by Tenant, and the denominator of which will be total Rentable Area of the Project including, without limitation, the Expansion Space). Tenant shall pay such estimated amount to Landlord in advance in equal monthly installments. 13.3.3 Within ninety (90) days after the conclusion of each calendar year (or such longer period as may be reasonably required by Landlord), Landlord shall furnish to Tenant a statement showing in reasonable detail the actual Taxes, Insurance Expenses and any Operating Expenses for the Project and any over or under payment of such costs by Tenant (the “Annual Statement”). Any additional sum due from Tenant to Landlord shall be immediately due and payable. If the amounts paid by Tenant pursuant to this Section 13.3 exceed Taxes, Insurance Expenses and Operating Expenses for the previous calendar year, then Landlord shall credit the difference against the estimates of Taxes, Insurance Expenses and Operating Expenses next due and owing from Tenant; provided that, if the Term has expired, Landlord shall accompany the Annual Statement with payment for the amount of such difference. Any amount due under this Section for any period that is less than a full month shall be prorated for such fractional month on the basis of the number of days in the month. Operating Expenses for the calendar year in which Tenant’s obligation to share therein commences and for the calendar year in which such obligation ceases shall be prorated on a basis reasonably determined by Landlord. 13.3.4 The Annual Statement shall be final and binding on Tenant unless Tenant disputes such Annual Statement in accordance with this Section. In the event Tenant disputes the amounts of Operating Expenses in any Annual Statement and/or the allocation of Operating Expenses for the particular calendar year delivered by Landlord to Tenant and Tenant is not in monetary Default or material non-monetary Default hereunder, Tenant shall have the right, at Tenant's cost, after reasonable notice to Landlord, to have Tenant's authorized employees inspect, at Landlord's office in San Diego County during normal business hours, Landlord's books, records and supporting documents concerning the Operating Expenses set forth in such Annual Statement; provided, however, Tenant shall have no right to conduct such inspection, have an audit performed by the Accountant as described below, or object to or otherwise dispute the amount and/or allocation of the Operating Expenses set forth in any such Annual Statement unless Tenant notifies Landlord of such objection and dispute, completes such inspection, and has the Accountant commence and complete such audit

 
25 within one hundred eighty (180) days immediately following Landlord's delivery of the particular Annual Statement in question (the "Review Period"); provided, further, that notwithstanding any such timely objection, dispute, inspection, and/or audit, and as a condition precedent to Tenant's exercise of its right of objection, dispute, inspection and/or audit as set forth in this Section, Tenant shall not be permitted to withhold payment of, and Tenant shall timely pay to Landlord, the full amounts as required by the provisions of this Lease in accordance with such Annual Statement. However, such payment may be made under protest pending the outcome of any audit which may be performed by the Accountant as described below. In connection with any such inspection by Tenant, Landlord and Tenant shall reasonably cooperate with each other so that such inspection can be performed pursuant to a mutually acceptable schedule. If after such inspection and/or request for documentation, Tenant still disputes the amount of the expenses set forth in the Annual Statement, Tenant shall have the right, within the Review Period, to cause an independent certified public accountant selected by Tenant (and reasonably approved by Landlord) and compensated on a non-contingency fee basis (the "Accountant") to complete an audit of Landlord's books and records to determine the proper amount of the expenses incurred and amounts payable by Tenant for the calendar year which is the subject of such Annual Statement. Such audit by the Accountant shall be final and binding upon Landlord and Tenant. If such audit reveals that Landlord has over-charged Tenant, then within thirty (30) days after the results of such audit are made available to Landlord, Landlord shall reimburse to Tenant the amount of such over-charge. If the audit reveals that the Tenant was under- charged, then within thirty (30) days after the results of such audit are made available to Tenant, Tenant shall reimburse to Landlord the amount of such under-charge. Tenant agrees to pay the cost of such audit unless it is subsequently determined that Landlord's original Annual Statement which was the subject of such audit overstated expenses by five percent (5%) or more of the actual expenses which were the subject of such audit. The payment by Tenant of any amounts pursuant to this Section shall not preclude Tenant from questioning, during the Review Period, the correctness of the particular Annual Statement in question provided by Landlord, but the failure of Tenant to object thereto, conduct and complete its inspection and have the Accountant conduct the audit as described above prior to the expiration of the Review Period for such Annual Statement shall be conclusively deemed Tenant's approval of the Annual Statement in question and the amount of expenses shown thereon. If following Tenant's delivery to Landlord of a written request to make Landlord's books and records regarding the expenses reasonably available to Tenant and/or the Accountant to conduct any such inspection and/or audit described above in this Section, Landlord fails to make Landlord's books reasonably available for such purposes during Landlord's normal business hours, and such failure continues for five (5) business days after Tenant notifies Landlord thereof, then the Review Period shall be extended one (1) day for each such additional day that Tenant and/or the Accountant, as the case may be, is so prevented from accessing such books and records. In connection with any inspection and/or audit conducted by Tenant pursuant to this Section, Tenant agrees to keep, and to cause all of Tenant's employees and consultants and the Accountant to keep, all of Landlord's books and records and the audit, and all information pertaining thereto and the results thereof, strictly confidential (except if required by any court to disclose such information or if such information is available from an inspection of public records).

 
26 13.4. Commencing as of the Term Commencement Date, Tenant shall make all arrangements for and pay for all water, electricity, air, sewer, refuse, gas, heat, light, power, telephone service and any other service or utility Tenant required at the Premises. For any Project-wide utilities, for purposes of allocating such costs to the Premises, Landlord may base its bills for utilities on reasonable estimates; provided that Landlord adjusts such billings promptly thereafter to reflect the actual cost as allocated by Landlord of providing utilities to the Premises. 13.5. Except as provided in Section 13.9 below, Landlord shall not be liable for, nor shall any eviction of Tenant result from, the failure to furnish any utility or service (and in no event will Tenant have any right to terminate this Lease due to such failure), whether or not such failure is caused by accidents; breakage; casualties (to the extent not caused by the party claiming Force Majeure); Severe Weather Conditions (as defined below); physical natural disasters (but excluding weather conditions that are not Severe Weather Conditions); strikes, lockouts or other labor disturbances or labor disputes (other than labor disturbances and labor disputes resulting solely from the acts or omissions of the party claiming Force Majeure); acts of terrorism; riots or civil disturbances; wars or insurrections; shortages of materials (which shortages are not unique to the party claiming Force Majeure); government regulations, moratoria or other governmental actions, inactions or delays; failures by third parties to deliver gas, oil or another suitable fuel supply, or inability of the party claiming Force Majeure, by exercise of reasonable diligence, to obtain gas, oil or another suitable fuel; or other causes beyond the reasonable control of the party claiming that Force Majeure has occurred (collectively, “Force Majeure”). In the event Tenant is prevented from performing its obligations hereunder as a result of a Force Majeure, such performance will be excused during such Force Majeure, and if this Lease specifies a time period for Tenant’s performance, such time period will be extended by the number of days of such Force Majeure; provided, however, that this Section 13.5 is not intended to, and shall not excuse Tenant’s obligations with respect to any payment of Rent or extend the time period for the payment of any Rent or other monetary amounts due from Tenant pursuant to this Lease. “Severe Weather Conditions” means weather conditions that are materially worse than those that reasonably would be anticipated for the Property at the applicable time based on historic meteorological records. 13.6. Tenant shall pay for, prior to delinquency of payment therefor, any utilities and services that may be furnished to the Premises during or, if Tenant occupies the Premises after the expiration or earlier termination of the Term, after the Term. Tenant shall not use the Premises in a manner that would increase the amount of gas, electricity or water beyond the existing capacity of the Premises, unless Tenant agrees, at Tenant’s sole cost, to upgrade the capacity of the applicable Building (as an Alteration pursuant to Article 14 below and subject to Tenant obtaining all necessary permits and approvals for such upgrades) subject to Landlord’s approval of all plans and specifications for such capacity upgrade. 13.7. Tenant will be permitted to install emergency backup generators in locations designated by Landlord for each of Building A, Building B and Building D (and if leased by Tenant pursuant to the Expansion Option, Building C) and to connect such generators to the applicable Building’s emergency electrical panel (collectively, the “Generator”). Tenant shall

 
27 maintain, repair and (if necessary) replace the Generator at its sole cost and expense. The terms and conditions of this Lease, including Tenant’s insurance and indemnity obligations, shall apply to such Generators which shall be a part of the Premises for such purposes. Tenant will not install any underground fuel storage tanks and any Hazardous materials used in connection with such Generators will be subject to the terms and conditions of this Lease, including all surrender obligations. In no event shall Landlord have any liability to Tenant in connection with the Generator or its failure to operate in an emergency situation. 13.8. For any utilities serving the Premises for which Tenant is billed directly by such utility provider, Tenant agrees to furnish to Landlord any utility usage information required for Landlord to comply with Applicable Laws, including, if required for Landlord to comply with any Applicable Law, authorization to allow Landlord to access Tenant’s usage information necessary for Landlord to complete an ENERGY STAR® Statement of Performance (or similar comprehensive utility usage report) and any other information reasonably requested by Landlord. Tenant agrees at all times to cooperate fully with Landlord and to abide by all reasonable rules established by Landlord in order to comply with the requirements of utility suppliers and governmental agencies regulating the consumption of energy and/or other resources. Tenant acknowledges that any utility information for the Premises may be shared with third parties as required to comply with Applicable Laws. In addition to the foregoing, Tenant shall comply with all Applicable Laws related to the disclosure and tracking of energy consumption at the Premises. The provisions of this Section shall survive the expiration or earlier termination of this Lease. 13.9. Notwithstanding anything in this Lease to the contrary, if Tenant is prevented from using, and does not use, the Premises or any portion thereof, as a result of (a) the failure by Landlord to provide access to the Premises, or (b) the interruption of HVAC service, water, sewer and/or electricity, where such failure or interruption is due to the negligent acts or omissions of Landlord and not due to any matter beyond Landlord’s reasonable control (any such stoppage to be known as an “Abatement Event”), then Tenant shall give Landlord written notice of such Abatement Event, and if such Abatement Event continues for 3 consecutive business days (including Saturday) after Landlord’s receipt of any such notice, or occurs for 10 non-consecutive business days in a 12 month period (provided Landlord is sent a notice (in either of such events, the “Eligibility Period”), then the Base Rent and Tenant’s obligations with respect to Operating Expenses shall be abated or reduced, as the case may be, after the expiration of the Eligibility Period for such time that Tenant continues to be so prevented from using, and does not use, the Premises, or a portion thereof, in the proportion that the Rentable Area of the portion of the Premises that Tenant is prevented from using, and does not use (“Unusable Area”), bears to the total Rentable Area of the Premises; provided, however, regardless who is managing the Project, if Tenant is prevented from using, and does not use, the Unusable Area for a period of time in excess of the Eligibility Period and the remaining portion of the Premises is not sufficient to allow Tenant to conduct its business therein, and if Tenant does not conduct its business from such remaining portion, then for such time after the expiration of the Eligibility Period during which Tenant is so prevented from conducting its business and is not conducting its business in any portion of the Premises, the Base Rent and Tenant’s obligations under this Lease with respect to Operating Expenses for the entire Premises shall be abated for such

 
28 time as Tenant continues to be so prevented from using, and does not use, the Premises. Notwithstanding anything to the contrary contained herein, Tenant shall not be entitled to any abatement of Rent provided for in this paragraph above and beyond the amount of rent loss insurance proceeds paid to Landlord for the Abatement Event in question. If, however, Tenant reoccupies any portion of the Premises during such period, the Rent allocable to such reoccupied portion, based on the proportion that the Rentable Area of such reoccupied portion of the Premises bears to the total Rentable Area of the Premises, shall be payable by Tenant from the date Tenant reoccupies such portion of the Premises. Such right to abate Base Rent and Tenant’s obligations under this Lease with respect to Operating Expenses shall be Tenant’s sole and exclusive remedy at law or in equity for an Abatement Event and Landlord shall not otherwise be liable for any loss or damage suffered or sustained by Tenant resulting from any failure or cessation of services; provided, however, nothing in this paragraph, shall impair Tenant’s rights under Sections 15.4 and 28.13 below. To the extent Tenant is entitled to abatement under this paragraph because of an event covered by Sections 21 or 22 of this Lease, then those provisions of this Lease shall apply and not the provisions of this paragraph. For the avoidance of any doubt, the Rent abatement being provided for under this Lease shall not be considered a free rent period. 14. Alterations. 14.1. Tenant shall make no alterations, additions or improvements other than the Tenant Improvements in or to the Premises or engage in any construction, demolition, reconstruction, renovation or other work (whether major or minor) of any kind in, at or serving the Premises (“Alterations”) without Landlord’s prior written approval, which approval Landlord shall not unreasonably withhold, condition or delay; provided that it shall be reasonable to withhold consent if the Alteration (i) adversely affects the exterior appearance of a Building or the Premises, (ii) adversely affects the structural aspects of a Building, including, without limitation, the roof, foundation, load bearing walls and structural elements of the Premises, (iii) adversely affects any base-building system or equipment, including, without limitation, the base building HVAC, mechanical, electrical, plumbing or life safety systems; (iv) will violate any Applicable Law or increase insurance premiums (unless Tenant agrees to pay any such premium increase); (v) violates any recorded document affecting the Premises (each, a "Design Problem"). In seeking Landlord’s approval, Tenant shall provide Landlord, at least ten (10) business days in advance of any proposed construction, with plans, specifications, bid proposals, certified stamped engineering drawings and calculations by Tenant’s engineer of record or architect of record, if any (including, if applicable, connections to the Building’s structural system, modifications to the Building’s envelope, non-structural penetrations in slabs or walls, and modifications or tie-ins to life safety systems), if applicable, work contracts, requests for laydown areas and such other information concerning the nature and cost of the Alterations as Landlord may reasonably request. Notwithstanding the provisions of Section 14.1 above, Tenant may make non-structural Alterations to the Premises ("Acceptable Changes") upon at least ten (10) business days prior written notice to Landlord but without Landlord's prior consent provided (a) the Acceptable Changes do not involve Design Problems; (b) the Acceptable Changes do not impact the base building systems, (c) the Acceptable Changes do not adversely affect the value of the improvements in the particular area (e.g., conversion of lab to office space) and (d) the cost of

 
29 such Acceptable Changes do not exceed Five Hundred Thousand Dollars ($500,000) per occurrence or an aggregate amount of Two Million Dollars ($2,000,000) in any twelve (12) month period. 14.2. Tenant shall not construct or permit to be constructed partitions or other obstructions that will interfere with free access to mechanical installation or service facilities of the Building, or interfere with the moving of Landlord’s equipment to or from the enclosures containing such installations or facilities. 14.3. Tenant shall accomplish any work performed on the Premises in such a manner as to permit any life safety systems to remain fully operable at all times (except for temporary outages which are permitted and performed in accordance with Applicable Laws). 14.4. Tenant covenants and agrees that all work done by Tenant or Tenant’s contractors shall be performed in full compliance with Applicable Laws, and Tenant will perform any legal compliance work in the Project which is triggered by any Alterations performed by or on behalf of Tenant. Tenant shall maintain copies of “as built” drawing print sets and electronic CADD files on disc showing any changes in the Premises (but only if drawings and plans were required by this Lease or were prepared in connection with any such Alterations). Tenant will provide the same to Landlord upon request. 14.5. Before commencing any Alterations or Tenant Improvements, Tenant shall give Landlord at least ten (10) days’ prior written notice of the proposed commencement of such work. 14.6. Tenant shall repair any damage to the Premises caused by Tenant’s removal of any property from the Premises. During any such restoration period, Tenant shall pay Rent to Landlord as provided herein for the portion of the space occupied (or such larger portion of the Premises to the extent Landlord’s ability to show the larger space to prospective tenants, lease the space to prospective tenants or prepare the space for reletting is adversely affected) as if such space were otherwise occupied by Tenant. The provisions of this Section shall survive the expiration or earlier termination of this Lease. 14.7. Except for (a) those items listed on Exhibit H, (b) any other unattached trade fixtures, equipment, stock, inventory, machines or other personal property of Tenant (which shall remain the property of Tenant), and (c) any attached trade fixtures, equipment or machinery that are proprietary or unique to Tenant’s business (as opposed to attached trade fixtures, equipment or machinery commonly associated with laboratory buildings, such as lab benches, fume hoods, sinks, etc.) ((a), (b), and (c), collectively, “Tenant’s Property”), all Alterations, attached equipment, decorations, fixtures, trade fixtures, additions and improvements attached to or built into the Premises, made by either of the Parties, including, without limitation, all built-in floor and wall coverings, built-in cabinet work and paneling, sinks and related plumbing fixtures, laboratory benches, exterior venting fume hoods and walk-in freezers and refrigerators, ductwork, conduits, electrical panels and circuits shall become the property of Landlord upon the expiration or earlier termination of the Term, and shall remain upon and be surrendered with the Premises as a part thereof unless, prior to such

 
30 construction or installation, Landlord notifies Tenant such installation or construction must be removed upon the expiration or earlier termination of this Lease and the Premises restored to the condition existing prior to such construction or installation. The Premises shall at all times remain the property of Landlord and shall be surrendered to Landlord upon the expiration or earlier termination of this Lease. Tenant shall, prior to the expiration or earlier termination of this Lease, remove all of Tenant’s Property and repair any damage caused by such removal. Notwithstanding the foregoing, at any time during the Term, subject to Landlord's prior written approval, which approval shall not be unreasonably withheld, conditioned or delayed, Tenant shall have the right to update Exhibit H. 14.8. If Tenant shall fail to remove any of its effects from the Premises within ten (10) days after the termination of this Lease, then Landlord may, at its option, remove the same in any manner that Landlord shall choose and store said effects without liability to Tenant for loss thereof or damage thereto, and Tenant shall pay Landlord, upon demand, any actual, documented and reasonable costs and expenses incurred due to such removal and storage or Landlord may, at its sole option and upon notice to Tenant, sell such property or any portion thereof at private sale and without legal process for such price as Landlord may obtain and apply the proceeds of such sale against any (a) amounts due by Tenant to Landlord under this Lease and (b) any actual and documented expenses incident to the removal, storage and sale of said personal property. 14.9. Notwithstanding any other provision of this Article to the contrary, in no event shall Tenant remove any improvement from the Premises as to which Landlord contributed payment, and in no event shall Tenant remove any of the initial Tenant Improvements (or any improvements installed to replace any initial Tenant Improvements with like-kind or reasonable substitute improvements), without Landlord’s prior written consent, which consent Landlord may withhold in its sole and absolute discretion, unless such improvement is considered Tenant’s Property under Section 14.7 above. 14.10. Tenant shall pay to Landlord an amount equal to one percent (1%) of the hard cost to Tenant of all Alterations (not to exceed Twenty Five Thousand Dollars ($25,000) for any one (1) Alteration) to cover Landlord’s overhead and expenses for plan review, engineering review, coordination, scheduling and supervision thereof (but only for Alterations requiring Landlord consent). For purposes of payment of such sum, Tenant shall submit to Landlord copies of all bills, invoices and statements covering the costs of such Alterations, accompanied by payment to Landlord of the fee set forth in this Section. Tenant shall reimburse Landlord for any extra expenses incurred by Landlord by reason of faulty work done by Tenant or its contractors, or by reason of inadequate clean-up. 14.11. Within sixty (60) days after final completion of the Tenant Improvements or any Alterations performed by Tenant with respect to the Premises, Tenant shall submit to Landlord a copy of the final permit (if applicable). 14.12. Tenant shall take, and shall cause its contractors to take, commercially reasonable steps to protect the Premises during the performance of any Alterations or Tenant Improvements,

 
31 including covering or temporarily removing any window coverings so as to guard against dust, debris or damage. 14.13. Tenant shall require its contractors and subcontractors performing work on the Premises to name Landlord and its affiliates and Lenders as additional insureds on their respective insurance policies. 15. Repairs and Maintenance. 15.1. Subject to Section 15.3 below, Tenant, at its sole cost and expense, shall maintain and keep the Premises, including without limitation all improvements thereon, and all appurtenances thereto, including without limitation sidewalks, parking areas, curbs, roads, driveways, lighting standards, landscaping, sewers, water, gas and electrical distribution systems and facilities, drainage facilities, and all signs, both illuminated and non-illuminated that are now or hereafter on the Premises, in good condition and in a manner consistent with the Permitted Use. Subject to Section 15.3 below, Tenant shall make all repairs, replacements and improvements, including without limitation all structural repairs, HVAC, plumbing and electrical repairs, replacements and improvements required, and shall keep the same free and clear from all rubbish, debris. Tenant’s obligations hereunder may include capital expenditures and repairs whose benefit may extend beyond the Term, and nothing herein will be construed to allow capital repairs without consent of Landlord if required by Article 14. Tenant shall, within ten (10) days after receipt of written notice from Landlord, provide to Landlord any maintenance records that Landlord reasonably requests. All repairs made by Tenant shall be at least equal in quality to the original work, and shall be made only by a qualified employee or a licensed contractor approved in advance by Landlord (which shall not be unreasonably withheld, conditioned or delayed); provided, however, that such contractor need not be approved by Landlord if the non-structural alterations, repairs, additions or improvements to be performed do not exceed Five Hundred Thousand Dollars ($500,000) per occurrence. Tenant shall not take or omit to take any action, the taking or omission of which shall cause waste, damage or injury to the Premises. Tenant shall indemnify, defend (by legal counsel acceptable to Landlord) and hold harmless Landlord from and against any and all Claims (as defined below) arising out of the failure of Tenant or Tenant’s Agents to perform the covenants contained in this Section. As used in this Lease, “Tenant’s Agents” shall be defined to include Tenant’s officers, employees, agents, contractors, invitees, customers and subcontractors. 15.2. Subject to Section 15.3 below, Tenant shall maintain the lines designating the parking spaces in good condition and paint the same as often as may be reasonably necessary, so that they are easily discernable at all times; resurface the parking areas as necessary to maintain them in good condition; paint any exterior portions of the Building as necessary to maintain them in good condition; maintain the roof membrane and landscaping in good condition; maintain sightly screens, barricades or enclosures around any waste or storage areas; and take all reasonable precautions to insure that the drainage facilities of the roof are not clogged and are in good and operable condition at all times. 15.3. Subject to Section 13.9 above, there shall be no abatement of Rent and no liability of Landlord by reason of any injury to or interference with Tenant’s business arising from the

 
32 making of any repairs, alterations or improvements in or to any portion of the Premises, or in or to improvements, fixtures, equipment and personal property therein. Landlord shall, at Landlord’s sole cost and expense (not to be included within Operating Expenses), be responsible for the repair and maintenance of the structural portions of the Buildings identified in the structural plans (i.e., the “S” series of drawings) which form a part of the Approved Plans. 15.4. Landlord shall not be liable for any failure to make any repairs or to perform any maintenance that is Landlord’s obligation pursuant to this Lease unless such failure shall persist beyond the time periods set forth in the immediately following grammatical sentence. Notwithstanding any provision in this Lease to the contrary, if Tenant provides notice to Landlord of an event or circumstance which requires the action of Landlord with respect to the provision of repairs that Landlord is obligated to perform under this Lease, and Landlord fails to provide such action as required by the terms of this Lease within thirty (30) days after the date of such notice from Tenant (or if such repair is reasonably expected to require longer than thirty (30) days to complete, if Landlord shall fail to commence in a meaningful way such repair within said thirty (30) day period and diligently pursue such repair to completion), then Tenant may provide Landlord with a second written notice stating in bold and all caps font "LANDLORD'S FAILURE TO COMMENCE REPAIR OF THE DAMAGE DESCRIBED BELOW WITHIN THREE (3) BUSINESS DAYS AFTER LANDLORD'S RECEIPT OF THIS SECOND NOTICE SHALL ENTITLE TENANT TO REPAIR SUCH DAMAGE." If Landlord does not commence in a meaningful way such repair within such three (3) business day period, then Tenant shall, as Tenant’s sole and exclusive remedy (provided, however, nothing in this paragraph, shall impair Tenant’s rights under Section 28.13 below), have the right to take such action, and if such action was required under the terms of this Lease to be taken by Landlord, then Tenant shall be entitled to reimbursement by Landlord of Tenant's reasonable actual and documented costs and expenses in taking such action. Notwithstanding the foregoing, in case of an emergency (where there is an imminent threat of injury to persons or damage to property), Tenant shall only be required to provide Landlord five (5) business days’ notice of the need to make such repairs stating in bold and all caps "EMERGENCY: LANDLORD'S FAILURE TO COMMENCE ITS REPAIRS OF SUCH DAMAGE WITHIN FIVE (5) BUSINESS DAYS AFTER LANDLORD'S RECEIPT OF THIS NOTICE SHALL ENTITLE TENANT TO REPAIR SUCH DAMAGE," and if Landlord does not commence in a meaningful way such repair within such five (5) business day period, then Tenant shall, as Tenant’s sole and exclusive remedy (provided, however, nothing in this paragraph, shall impair Tenant’s rights under Section 28.13 below), have the right to take such action. In the event Tenant takes such action, and such work will affect the building systems and equipment, structural integrity of the Buildings or exterior appearance of the Buildings, Tenant shall use a general contractor designated by Landlord for such work unless such contractor is unwilling or unable to perform such work or its pricing is unreasonable, in which event Tenant may utilize the services of any other qualified contractor which normally and regularly performs similar work in comparable first-class, institutional quality, office buildings in the Foster City, California area whose pricing is competitively bid in the market. If Tenant is entitled to reimbursement by Landlord of Tenant's reasonable actual and documented costs and expenses in taking any action pursuant to this Section, Tenant shall so notify Landlord in writing (the "Reimbursement Notice"), which Reimbursement Notice shall specify in detail such costs and expenses. Within

 
33 thirty (30) days after Landlord's receipt of a Reimbursement Notice, Landlord shall pay to Tenant any undisputed portion of such costs and expenses and shall notify Tenant in writing of those costs and expenses specified by Tenant in the Reimbursement Notice which Landlord disputes (the "Disputed Amounts") and the reasons for such dispute. Any amounts which are not so identified by Landlord as Disputed Amounts within said thirty (30) day period shall be considered to be undisputed. To the extent Landlord fails to reimburse Tenant for the actual and documented costs and expenses specified in the Reimbursement Notice within thirty (30) days after demand therefor, Tenant shall be entitled to offset the sum of the amount of any undisputed portion of such costs and expenses against Base Rent payable by Tenant under this Lease together with interest at the interest rate of eight percent (8%) per annum from the date of expiration of said thirty (30) day period until the earlier of (a) the date that Landlord reimburses Tenant such amount and (b) the date of offset (up to a maximum offset each month of fifteen percent (15%) of the Base Rent payable for the Premises) until the full pre-judgment offset amount (plus such interest) has been so offset. If Tenant obtains a final judgment against Landlord for the Disputed Amount and if Landlord fails to pay such judgment within thirty (30) days after the date such judgment is rendered, Tenant shall be entitled to offset such judgment against Base Rent payable by Tenant under this Lease together with interest at the interest rate of eight percent (8%) per annum from the date Landlord failed to timely reimburse Tenant for such costs and expenses until the earlier of (y) the date that Landlord reimburses Tenant such amount and (z) the date of offset (up to a maximum offset each month of fifteen percent (15%) of the Base Rent payable for the Premises) until the full amount of such judgment (plus such interest) has been so offset. If Landlord obtains a final judgment against Tenant for the Disputed Amount, Tenant shall pay to Landlord such judgment within thirty (30) days after the date such judgment is rendered, together with interest from the date Landlord paid such Disputed Amount to Tenant or the date Tenant wrongly offset such Disputed Amounts, as applicable. 15.5. Subject to Section 15.3 above, Tenant shall be responsible for all repairs, maintenance and replacements at the Premises. Landlord shall not be required to maintain or make any repairs or replacements of any nature or description whatsoever to the Premises unless (a) Landlord is required to make such repairs or replacements pursuant to Section 15.3 above, or (b) the necessity for such repairs or replacements is due to Landlord's negligence or willful misconduct (and not due in any part to any negligent act or omission on the part of Tenant or any Tenant Party). Except as otherwise provided in this Lease, Tenant hereby expressly waives the right to make repairs at the expense of Landlord as provided for in any Applicable Laws in effect at the time of execution of this Lease, or in any other Applicable Laws that may hereafter be enacted, and waives its rights under Applicable Laws relating to a landlord's duty to maintain its premises in a tenantable condition. Notwithstanding the foregoing, if Tenant shall fail, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant, to commence and thereafter to proceed with diligence to make any repair or perform any maintenance required of it pursuant to the terms of this Lease, Landlord, without being under any obligation to do so and without thereby waiving such default by Tenant, may so maintain or make such repair and may charge Tenant for the actual and documented costs thereof. Any commercially reasonable expense reasonably incurred by Landlord in connection with the making of such repairs may be billed by Landlord to Tenant monthly or, at Landlord's option, immediately, and shall be due and payable within thirty (30) days after such billing.

 
34 15.6. Subject to Section 11.3 above, Landlord and Landlord’s agents shall have the right to enter upon the Premises or any portion thereof for the purposes of performing any repairs or maintenance Landlord is required to make pursuant to this Lease, and of ascertaining the condition of the Premises or whether Tenant is observing and performing Tenant’s obligations hereunder, all without unreasonable interference from Tenant or Tenant’s Agents. Except for emergency maintenance or repairs, the right of entry contained in this paragraph shall be exercisable at reasonable times, at reasonable hours and on reasonable notice. 15.7. Tenant shall, upon the expiration or sooner termination of the Term, (a) surrender the Premises to Landlord in as good a condition as when received, ordinary wear and tear and damage by casualty excepted and with the Tenant Improvements in substantially the same condition as existed upon completion thereof, reasonable wear and tear excepted (subject to any Alterations made by Tenant pursuant to Article 14); (b) at Landlord’s request and Tenant’s sole cost and expense, remove equipment from the Premises and repair any damage to the Premises caused thereby, and (c) cause a licensed electrician to (i) remove all wiring and cabling from disconnected equipment back to the junction box, and (ii) otherwise place all wiring and cabling in a safe condition and in the condition required by Applicable Laws. Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof, other than pursuant to the terms and provisions of this Lease or as described in Exhibit B with respect to payment of the Improvement Allowance. 15.8. If any excavation shall be made upon land adjacent to or under the Building, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter the Premises for the purpose of performing such work as such person shall deem necessary or desirable to preserve and protect the Building from injury or damage and to support the same by proper foundations, without any claim for damages or liability against Landlord and without reducing or otherwise affecting Tenant’s obligations under this Lease. 15.9. This Article relates to repairs and maintenance arising in the ordinary course of operation of the Premises. In the event of a casualty described in Article 21, Article 21 shall apply in lieu of this Article. In the event of eminent domain, Article 22 shall apply in lieu of this Article. 16 Liens. 16.1 Subject to the immediately succeeding sentence, Tenant shall keep the Premises free from any liens arising out of work or services performed, materials furnished or obligations incurred by Tenant. Tenant further covenants and agrees that any mechanic’s or materialman’s lien filed against the Premises for work or services claimed to have been done for, or materials claimed to have been furnished to, or obligations incurred by Tenant shall be discharged or bonded by Tenant within twenty (20) days after the filing thereof, at Tenant’s sole cost and expense; provided, however, that Tenant shall have the right to contest any such lien by any manner available to Tenant under applicable law provided that a bond has been issued and any such contest shall stay the enforcement of the lien until such contest is completed.

 
35 16.2 Should Tenant fail to discharge or bond against any lien of the nature described in Section 16.1, Landlord may, at Landlord’s election, pay such claim or post a statutory lien bond or otherwise provide security to eliminate the lien as a claim against title, and Tenant shall immediately reimburse Landlord for the costs thereof as Additional Rent. Tenant shall indemnify, save, defend (at Landlord’s option and with counsel reasonably acceptable to Landlord) and hold the Landlord Indemnitees harmless from and against any Claims arising from any such liens, including any administrative, court or other legal proceedings related to such liens. 16.3 In the event that Tenant leases or finances the acquisition of office equipment, furnishings or other personal property of a removable nature utilized by Tenant in the operation of Tenant’s business (which Tenant shall have the right to do), Tenant warrants that any Uniform Commercial Code financing statement shall, upon its face or by exhibit thereto, indicate that such financing statement is applicable only to removable personal property of Tenant located within the Premises. In no event shall the address of the Premises be furnished on a financing statement without qualifying language as to applicability of the lien only to removable personal property located in an identified suite leased by Tenant. Should any holder of a financing statement record or place of record a financing statement that appears to constitute a lien against any interest of Landlord, Tenant shall, within ten (10) days after filing such financing statement, cause (a) a copy of the lender security agreement or other documents to which the financing statement pertains to be furnished to Landlord to facilitate Landlord’s ability to demonstrate that the lien of such financing statement is not applicable to Landlord’s interest and (b) Tenant’s lender to amend such financing statement and any other documents of record to clarify that any liens imposed thereby are not applicable to any interest of Landlord in the Premises. Upon Tenant’s request, Landlord will execute and deliver to Tenant a commercially reasonable form of Landlord’s waiver reasonably acceptable to Landlord in favor of Tenant’s equipment lienor; provided, however, that (a) Landlord shall have the opportunity to make any reasonable comments to such form that Landlord desires, and (b) Tenant will reimburse Landlord for the cost to Landlord to review and negotiate such waiver. 17. Estoppel Certificate. Tenant shall, within twenty (20) days of receipt of written notice from Landlord, execute, acknowledge and deliver a statement in writing substantially in the form attached to this Lease as Exhibit I, or on any other commercially reasonable form reasonably requested by a current or proposed Lender or encumbrancer or proposed purchaser, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect) and the dates to which rental and other charges are paid in advance, if any, (b) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (c) setting forth such further information with respect to this Lease or the Premises as may be reasonably requested thereon. Any such statement may be relied upon by any prospective purchaser or encumbrancer of all or any portion of the Property. Tenant’s failure to deliver such statement within such the prescribed time shall, at Landlord’s option, constitute a Default (as defined below) under this Lease, and, in any event, shall be binding upon Tenant that the Lease is in full force and effect and without modification except as may be represented by Landlord in any certificate prepared by Landlord and delivered

 
36 to Tenant for execution. Landlord shall, within twenty (20) days of receipt of written notice from Tenant but in no event more than once every twelve (12) months, provide to Tenant an estoppel certificate signed by Landlord, (a) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease as so modified is in full force and effect) and the dates to which rental and other charges are paid in advance, if any, and (b) acknowledging that there are not, to Landlord's knowledge, any uncured defaults on the part of Tenant hereunder, or specifying such defaults if any are claimed. 18. Hazardous Materials. 18.1. Tenant shall not cause or permit any Hazardous Materials (as defined below) to be brought upon, kept or used in or about the Premises in violation of Applicable Laws by Tenant or any of its employees, agents, contractors or invitees (collectively with Tenant, each a “Tenant Party”). If (a) Tenant breaches such obligation, (b) the presence of Hazardous Materials as a result of such a breach results in contamination of the Premises, any portion thereof, or any adjacent property, (c) contamination of the Premises otherwise occurs during the Term or any extension or renewal hereof or holding over hereunder (other than (i) if such contamination results from migration of Hazardous Materials from outside the Premises not caused by a Tenant Party or (ii) to the extent such contamination is caused by Landlord or any Landlord Party or (iii) if such Hazardous Materials existed in, on or about the Premises prior to the Execution Date) or (d) contamination of the Premises occurs as a result of Hazardous Materials that are placed on or under or are released into the Premises by a Tenant Party, then Tenant shall indemnify, save, defend (at Landlord’s option and with counsel reasonably acceptable to Landlord) and hold the Landlord Indemnitees harmless from and against any and all Claims of any kind or nature, including (w) diminution in value of the Premises or any portion thereof, (x) damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises, (y) damages arising from any adverse impact on marketing of space in the Premises or any portion thereof and (z) sums paid in settlement of Claims that arise before, during or after the Term as a result of such breach or contamination. This indemnification by Tenant includes costs incurred in connection with any investigation of site conditions or any clean-up, remedial, removal or restoration work required by any Governmental Authority because of Hazardous Materials present in the air, soil or groundwater above, on, under or about the Premises. Without limiting the foregoing, if the presence of any Hazardous Materials in, on, under or about the Premises, any portion thereof or any adjacent property caused or permitted by any Tenant Party results in any contamination of the Premises, any portion thereof or any adjacent property, then Tenant shall promptly take all actions at its sole cost and expense as are necessary to return the Premises, any portion thereof or any adjacent property to its respective condition existing prior to the time of such contamination; provided that Landlord’s written approval of such action shall first be obtained, which approval Landlord shall not unreasonably withhold; and provided, further, that it shall be reasonable for Landlord to withhold its consent if such actions could have a material adverse long-term or short-term effect on the Premises, any portion thereof or any adjacent property. Tenant’s obligations under this Section shall not be affected, reduced or limited by any limitation on the amount or type of damages, compensation or benefits payable by or for Tenant under workers’ compensation acts, disability benefit acts, employee benefit acts or similar legislation. Notwithstanding anything contained in this Article 18, Tenant shall not be

 
37 responsible for any Hazardous Materials which (i) Tenant can prove existed on the Premises prior to the date Tenant first commenced occupancy of the Premises, (ii) migrated onto the Premises from offsite and were not exacerbated by any act of Tenant or any Tenant Party or (iii) were brought onto the Premises by Landlord, its employees or agents. Landlord will provide Tenant with copies of any soils test, Hazardous Materials reports or similar studies ordered by Landlord during the construction of the Project and Base Building Work upon request from Tenant. Landlord shall, at no cost to Tenant (and not as an Operating Expense), cause the removal or remediation, to the extent required in order to obtain the Entitlements for the Project and/or required by any Governmental Authority as a condition to the construction of the Project and Base Building Work, of any Hazardous Material which was on the Project prior to the Phase 1 Rent Commencement Date in violation of Applicable Laws in effect as of the Phase 1 Rent Commencement Date; provided, however, that Landlord shall have no obligations with respect to any Hazardous Materials brought onto the Property by Tenant or any Tenant Party. Landlord indemnifies Tenant for, from and against any (a) breach by Landlord of the obligations stated in the preceding sentence and (b) contamination of the Premises caused by Landlord or any Landlord Party, and agrees to defend and hold Tenant harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses which arise during or after the Term as a result of such (a) or (b). 18.2. Landlord acknowledges that it is not the intent of this Article to prohibit Tenant from operating its business for the Permitted Use. Tenant may operate its business according to the custom of Tenant’s industry so long as the use or presence of Hazardous Materials is strictly and properly monitored in accordance with Applicable Laws. As a material inducement to Landlord to allow Tenant to use Hazardous Materials in connection with its business, Tenant agrees to deliver to Landlord (a) a list identifying each type of Hazardous Material to be present at the Premises that is subject to regulation under any environmental Applicable Laws, (b) a list of any and all approvals or permits from Governmental Authorities required in connection with the presence of such Hazardous Material at the Premises and (c) correct and complete copies of (i) notices of violations of Applicable Laws related to Hazardous Materials and (ii) plans relating to the installation of any storage tanks to be installed in, on, under or about the Premises (provided that installation of storage tanks shall only be permitted after Landlord has given Tenant its written consent to do so, which consent Landlord may withhold in its sole and absolute discretion) and closure plans or any other documents required by any and all Governmental Authorities for any storage tanks installed in, on, under or about the Premises for the closure of any such storage tanks (collectively, “Hazardous Materials Documents”). Tenant shall deliver to Landlord updated Hazardous Materials Documents, within fourteen (14) days after receipt of a written request therefor from Landlord, not more often than once per year, unless (m) there are any changes to the Hazardous Materials Documents or (n) Tenant initiates any Alterations or changes its business, in either case in a way that involves any material increase in the types or amounts of Hazardous Materials. For each type of Hazardous Material listed, the Hazardous Materials Documents shall include (t) the chemical name, (u) the material state (e.g., solid, liquid, gas or cryogen), (v) the concentration, (w) the storage amount and storage condition (e.g., in cabinets or not in cabinets), (x) the use amount and use condition (e.g., open use or closed use), (y) the location (e.g., room number or other identification) and (z) if known, the

 
38 chemical abstract service number. Notwithstanding anything in this Section to the contrary, Tenant shall not be required to provide Landlord with any Hazardous Materials Documents containing information of a proprietary nature, which Hazardous Materials Documents, in and of themselves, do not contain a reference to any Hazardous Materials or activities related to Hazardous Materials. Landlord may, at Landlord’s expense, cause the Hazardous Materials Documents to be reviewed by a person or firm qualified to analyze Hazardous Materials to confirm compliance with the provisions of this Lease and with Applicable Laws. In the event that a review of the Hazardous Materials Documents indicates non-compliance with this Lease or Applicable Laws, Tenant shall, at its expense, diligently take steps to bring its storage and use of Hazardous Materials into compliance. Notwithstanding anything in this Lease to the contrary or Landlord’s review into Tenant’s Hazardous Materials Documents or use or disposal of hazardous materials, however, Landlord shall not have and expressly disclaims any liability related to Tenant’s or other tenants’ use or disposal of Hazardous Materials, it being acknowledged by Tenant that Tenant is best suited to evaluate the safety and efficacy of its Hazardous Materials usage and procedures. 18.3. Intentionally Omitted. 18.4. At any time, and from time to time, prior to the expiration of the Term, Landlord, at its sole cost and expense, shall have the right to conduct appropriate tests of the Premises or any portion thereof to demonstrate that Hazardous Materials are present or that contamination has occurred due to the acts or omissions of a Tenant Party; provided that Tenant shall pay all actual, documented and reasonable costs of such tests if such tests reveal that Hazardous Materials for which Tenant is responsible pursuant to Section 18.1 above exist at the Premises in violation of Applicable Laws or this Lease. 18.5. If underground or other storage tanks storing Hazardous Materials installed or utilized by Tenant are located on the Premises, or are hereafter placed on the Premises by Tenant (or by any other party, if such storage tanks are utilized by Tenant), then Tenant shall monitor the storage tanks, maintain appropriate records, implement reporting procedures, properly close any underground storage tanks, and take or cause to be taken all other steps necessary or required under the Applicable Laws. Tenant shall have no responsibility or liability for underground or other storage tanks installed by anyone other than Tenant unless Tenant utilizes such tanks, in which case Tenant’s responsibility for such tanks shall be as set forth in this Section. 18.6. Tenant shall promptly report to Landlord any actual or suspected presence of mold or water intrusion at the Premises. 18.7. Landlord’s and Tenant’s obligations under this Article shall survive the expiration or earlier termination of the Lease. During any period of time needed by Tenant or Landlord after the termination of this Lease to complete the removal from the Premises of any such Hazardous Materials which are Tenant’s responsibility under this Lease, Tenant shall be deemed a holdover tenant and subject to the provisions of Article 24. 18.8. As used herein, the term “Hazardous Material” means any toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous

 
39 substance, material or waste that is or becomes regulated by Applicable Laws or any Governmental Authority. 19. Odors and Exhaust. Tenant shall, at Tenant’s sole cost and expense, undertake commercially reasonable steps to minimize or eliminate, where possible, offensive odors emanating from the Premises, including providing odor eliminators and other devices (such as filters, air cleaners, scrubbers and whatever other equipment may be required by Applicable Laws or in Tenant’s good faith business judgment be necessary or appropriate from time to time) to completely remove, eliminate and abate any odors, fumes or other substances in Tenant’s exhaust stream that, in Landlord’s judgment, emanate from Tenant’s Premises. Any work Tenant performs under this Section shall constitute Alterations. 20. Insurance; Waiver of Subrogation. 20.1. Landlord shall maintain insurance for the Project in amounts equal to full replacement cost (exclusive of the costs of excavation, foundations and footings, and without reference to depreciation taken by Landlord upon its books or tax returns) providing protection against any peril generally included within the classification "Fire and Extended Coverage," together with insurance against sprinkler damage (if applicable), vandalism and malicious mischief. Landlord, subject to availability thereof, shall further insure, if Landlord deems it appropriate, coverage against flood, environmental hazard, earthquake, loss or failure of building equipment, rental loss during the period of repairs or rebuilding, workers’ compensation insurance and fidelity bonds for employees employed to perform services. Notwithstanding the foregoing, Landlord may, but shall not be deemed required to, provide insurance for any improvements installed by Tenant or that are in addition to the standard improvements customarily furnished by Landlord, without regard to whether or not such are made a part of or are affixed to the Buildings. 20.2. In addition, Landlord shall carry Commercial General Liability insurance with limits of not less than Five Million Dollars ($5,000,000) per occurrence/general aggregate for bodily injury (including death), or property damage with respect to the Premises. 20.3. Tenant shall, at its own cost and expense, procure (prior to Tenant’s entry onto the Premises to commence any occupancy or Tenant Improvements) and maintain during the Term the following insurance for the benefit of Tenant and Landlord (as their interests may appear) with insurers financially acceptable and lawfully authorized to do business in the state where the Premises are located: (b) Commercial General Liability insurance on a broad-based occurrence coverage form, with coverages including but not limited to bodily injury (including death), property damage (including loss of use resulting therefrom), premises/operations, personal & advertising injury, and contractual liability with limits of liability of not less than $5,000,000 for bodily injury and property damage per occurrence, $5,000,000 general aggregate, which limits may be met by use of excess and/or umbrella liability insurance provided that such coverage is at least as broad as the primary coverages required herein.

 
40 (c) Commercial Automobile Liability insurance covering liability arising from the use or operation of any auto, including those owned, hired or otherwise operated or used by or on behalf of the Tenant. The coverage shall be on a broad-based occurrence form with combined single limits of not less than $1,000,000 per accident for bodily injury and property damage. (d) Commercial Property insurance covering property damage to the full replacement cost value and business interruption (which may be self-insured as set forth below). Covered property shall include all tenant improvements in the Premises (to the extent not insured by Landlord pursuant to Section 20.1) and Tenant’s Property including personal property, furniture, fixtures, machinery, equipment, stock, inventory and improvements and betterments, which may be owned by Tenant or Landlord and required to be insured hereunder, or which may be leased, rented, borrowed or in the care custody or control of Tenant, or Tenant’s agents, employees or subcontractors. Such insurance, with respect only to all Tenant Improvements, Alterations or other work performed on the Premises by Tenant (collectively, “Tenant Work”), shall name Landlord and Landlord’s current and future mortgagees as loss payees as their interests may appear. Such insurance shall be written on an “all risk” of physical loss or damage basis including the perils of fire, extended coverage, electrical injury, mechanical breakdown, windstorm, vandalism, malicious mischief, sprinkler leakage, back-up of sewers or drains, flood, earthquake, terrorism and such other risks Landlord may from time to time designate, for the full replacement cost value of the covered items with an agreed amount endorsement with no co- insurance. Business interruption coverage shall have limits sufficient to cover Tenant’s lost profits and necessary continuing expenses, including rents due Landlord under the Lease. The minimum period of indemnity for business interruption coverage shall be twelve (12) months plus twelve (12) months’ extended period of indemnity. Notwithstanding anything to the contrary contained herein, the Tenant originally named herein (the “Original Tenant”) (and not any assignee, subtenant or other transferee) may, subject to the provisions of this Section 20.3(d), fulfill its insurance obligations under the preceding sentence by self-insurance (regardless of whether Tenant elects to self-insure all insurance pursuant to Section 20.10 below). Any self- insurance so maintained by Tenant shall be deemed to contain all of the terms and conditions applicable to such insurance as required in this Article 20, including, without limitation, a deemed waiver of subrogation; consequently, Landlord shall be treated, for all purposes, as if Tenant had actually purchased such insurance from a third party. If Tenant elects to so self- insure, then with respect to any claims which may result from incidents occurring during the Term, such self-insurance obligation shall survive the expiration or earlier termination of this Lease to the same extent as the insurance required hereunder would survive. (e) Workers’ Compensation insurance as is required by statute or law, or as may be available on a voluntary basis and Employers’ Liability insurance with limits of not less than the following: each accident, Five Hundred Thousand Dollars ($500,000); disease ($500,000); disease (each employee), Five Hundred Thousand Dollars ($500,000). (f) Pollution Legal Liability insurance is required if Tenant stores, handles, generates or treats hazardous materials, as determined solely by Landlord, on or about the Premises. Such coverage shall include bodily injury, sickness, disease, death or mental anguish

 
41 or shock sustained by any person; property damage including physical injury to or destruction of tangible property including the resulting loss of use thereof, clean-up costs, and the loss of use of tangible property that has not been physically injured or destroyed; and defense costs, charges and expenses incurred in the investigation, adjustment or defense of claims for such compensatory damages. Coverage shall apply to both sudden and non-sudden pollution conditions including the discharge, dispersal, release or escape of smoke, vapors, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials or other irritants, contaminants or pollutants into or upon land, the atmosphere or any watercourse or body of water. Claims-made coverage is permitted, provided the policy retroactive date is continuously maintained prior to the commencement date of this agreement, and coverage is continuously maintained during all periods in which Tenant occupies the Premises. Coverage shall be maintained with limits of not less than $1,000,000 per incident with a $2,000,000 policy aggregate. (g) During all construction by Tenant at the Premises, with respect to tenant improvements being constructed (including the Tenant Improvements and any Alterations, insurance required in Exhibit B-1 must be in place. 20.4. The insurance required to be purchased and maintained by Tenant pursuant to this Lease shall show, as an additional insured in respect of the Premises, Landlord, BioMed Realty, L.P., BioMed Realty Trust, Inc., any management company retained by Landlord to manage the Premises, any ground lessor and any mortgagee of Landlord required to be named pursuant to its mortgage documents. All general liability and property damage policies shall contain a provision that Landlord, although named as an additional insured or loss payee, nevertheless shall be entitled to recovery under said policies for any loss occasioned to it, its servants, agents and employees by reason of the negligence of Tenant. Said insurance shall be with companies having a rating of not less than policyholder rating of A and financial category rating of at least Class VII in "Best's Insurance Guide." Tenant shall obtain for Landlord from the insurance companies or cause the insurance companies to furnish certificates of insurance evidencing all coverages required herein to Landlord. If available, the policy will provide that such policy shall not be cancelable or subject to reduction of coverage or other modification or cancellation except after thirty (30) days' prior written notice to Landlord from the insurer. Tenant’s required policies shall contain severability of interests clauses stating that, except with respect to limits of insurance, coverage shall apply separately to each insured or additional insured. All such policies shall be written as primary policies, not contributing with and not in excess of the coverage that Landlord may carry. Tenant's policy may be a "blanket policy" that specifically provides that the amount of insurance shall not be prejudiced by other losses covered by the policy. Tenant shall, at least twenty (20) days prior to the expiration of such policies, furnish Landlord with renewals or binders. Tenant agrees that if Tenant does not take out and maintain such insurance, Landlord may (but shall not be required to) procure said insurance on Tenant's behalf and at its cost to be paid by Tenant as Additional Rent. 20.5. In each instance where insurance is to name Landlord Parties as additional insureds, Tenant shall, upon Landlord’s written request, also designate and furnish certificates evidencing such Landlord Parties as additional insureds to (a) any Lender of Landlord holding a security interest in the Premises, (b) the landlord under any lease whereunder Landlord is a tenant

 
42 of the real property upon which the Premises is located if the interest of Landlord is or shall become that of a tenant under a ground lease rather than that of a fee owner and (c) any management company retained by Landlord to manage the Premises. 20.6. Tenant assumes the risk of damage to any fixtures, goods, inventory, merchandise, equipment and leasehold improvements, and Landlord shall not be liable for injury to Tenant’s business or any loss of income therefrom, relative to such damage, all as more particularly set forth within this Lease. Tenant shall, at Tenant’s sole cost and expense, carry such insurance as Tenant desires for Tenant’s protection with respect to personal property of Tenant or business interruption. 20.7. Landlord and Tenant and its insurers each hereby waive any and all rights of recovery against the other or against the officers, directors, employees, agents and representatives of the other on account of loss or damage occasioned by such waiving party or its property or the property of others under such waiving party's control, in each case to the extent that such loss or damage is insured against under any fire and extended coverage insurance policy that either Landlord or Tenant may have in force at the time of such loss or damage. Such waivers shall continue so long as their respective insurers so permit. Any termination of such a waiver shall be by written notice to the other party, containing a description of the circumstances hereinafter set forth in this Section 20.7. Landlord and Tenant, upon obtaining the policies of insurance required or permitted under this Lease, shall give notice to the insurance carrier or carriers that the foregoing mutual waiver of subrogation is contained in this Lease. If such policies shall not be obtainable with such waiver or shall be so obtainable only at a premium over that chargeable without such waiver, then Landlord or Tenant shall notify the other party in writing within 30 days of becoming aware of the condition. 20.8. Landlord may require insurance policy limits required under this Lease to be raised to conform with requirements of Landlord’s Lender (provided that Landlord will only be permitted to revise such limits one time in any five (5) year period); provided such increased limits are being provided by similarly situated tenants of Landlord. 20.9. Any costs incurred by Landlord pursuant to this Article shall be included as Insurance Expenses payable by Tenant pursuant to this Lease. 20.10 Self Insurance. The Original Tenant shall have the right to self-insure for any or all of the insurance required by this Article 20, on the following terms and conditions: "Self-insure" shall mean that Tenant is itself acting as though it were the insurance company providing the insurance required under the provisions hereof and Tenant shall pay any amounts due in lieu of insurance proceeds which would have been payable if the insurance policies had been carried, which amounts shall be treated as insurance proceeds for all purposes under this Lease. All amounts which Tenant pays or is required to pay and all loss or damages resulting from risks for which Tenant has elected to self-insure shall be subject to the waiver of

 
43 subrogation provisions of Section 20.7 hereof and shall not limit Tenant's indemnification obligations set forth in Section 25.1 hereof. Tenant's right to self-insure and to continue to self-insure is conditioned upon and subject to: (a) Tenant now having and hereafter maintaining a market capitalization rate of at least Five Billion Dollars ($5,000,000,000); (b) If requested by Landlord or its mortgagee, Tenant providing an audited financial statement, prepared in accordance with generally accepted accounting principles, to Landlord and Landlord's mortgagee once per year which establishes and confirms that Tenant has the required net worth (provided that the foregoing will not be required so long as Tenant remains a publicly traded company and such financial information is readily available by public means); (c) No change in use occurring in the Premises that would materially increase the risk of the operations conducted being thereon; and (d) Tenant maintaining appropriate loss reserves for the amount of its self- insurance obligations under this Lease and otherwise with are actuarially derived in accordance with accepted standards of the insurance industry and accrued (i.e., charged against earnings) or otherwise funded. In the event Tenant fails to fulfill the requirements of this Section 20.10, then Tenant shall immediately lose the right to self-insure and shall be required to provide the insurance specified herein issued by a qualifying insurance company. In the event that Tenant elects to self-insure and an event or claim occurs for which a defense and/or coverage would have been available from the insurance company, Tenant shall: (1) undertake the defense of any such claim, including a defense of Landlord, at Tenant's sole cost and expense, and (2) use its own funds to pay any claim or replace property or otherwise provide the funding which would have been available from insurance proceeds but for such election by Tenant to self-insure. In the event of a damage or destruction of the Premises, any self-insurance proceeds will be paid to Landlord as required by Article 21 of this Lease in the same manner as the proceeds from a third party insurer would be payable to Landlord. In the event that Tenant elects to self-insure a deductible or self-insured retention, Tenant shall provide Landlord and Landlord's mortgagee with certificates of insurance from the primary, umbrella and excess carriers specifying the extent of self-insurance coverage hereunder

 
44 and containing a waiver of subrogation and/or release of right of recovery provision reasonably satisfactory to Landlord. Any insurance coverage provided by Tenant shall be for the benefit of Tenant, Landlord and Landlord’s mortgagee, as their respective interests may appear and, shall name the mortgagee under a standard mortgage provision. The obligations of Tenant under this Section 20.10 are independent and shall remain in full force and effect notwithstanding any breach of any provision of this Lease by Landlord. 21. Damage or Destruction. 21.1. Subject to Section 21.2, In the event of a partial or complete destruction of the Premises by fire or other perils, Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration of the Premises, and this Lease shall continue in full force and effect. 21.2. Notwithstanding the terms of this Article 21, Landlord may elect not to rebuild and/or restore the Premises and instead terminate this Lease by notifying Tenant in writing of such termination within sixty (60) days after the date of damage, such notice to include a termination date giving Tenant ninety (90) days to vacate the Premises, but Landlord may so elect only if the Premises or the Buildings shall be damaged by fire or other casualty or cause or be subject to a condition existing as a result of such a fire or other casualty or cause, and one or more of the following conditions is present: (i) in the reasonable judgment of a contractor selected by Landlord and reasonably approved by Tenant, repairs cannot reasonably be completed within two hundred forty (240) days of the date of damage (when such repairs are made without the payment of overtime or other premiums); (ii) the holder of any mortgage on the Premises or the Buildings, or ground or underlying lessor with respect to the Premises or the Buildings (a) shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt due to an impairment of such holder's collateral, and the remaining proceeds are insufficient to repair the damage and as a result thereof the deficiency of insurance proceeds exceeds the "Maximum Amount," as that term is defined below, and Landlord elects not to commence repair to the Premises within one (1) year of such damage or destruction, or (b) shall terminate the ground or underlying lease, as the case may be; (iii) the dollar amount of the damage or condition arising as a result of such damage which is not fully covered by Landlord's insurance policies (and that would not be fully covered by Landlord's insurance policies if Landlord had carried the coverage required under this Lease) including any deductible amount, is equal to or greater than Two Million Dollars ($2,000,000) (the "Maximum Amount"), which Maximum Amount shall, as of the date of termination of this Lease, be equal to the product of (a) the Maximum Amount and (b) a fraction, the numerator of which is the number of full months remaining in the then-current Term, or when appropriate the Option Term then applicable, as of the date of the termination of this Lease, and the denominator of which is 180 (or, if applicable, 60 during an Option Term) and Landlord elects not to commence repair to the Premises or Buildings within one (1) year of such damage or destruction; or (iv) the damage occurs during the last twenty-four (24) months of the Term, as such Term may have been extended by Tenant pursuant to this Lease; provided, however, that if Landlord does not elect to terminate this Lease pursuant to Landlord's termination right as provided above, and the repairs of such damage

 
45 cannot, in the reasonable opinion of a contractor selected by Landlord and reasonably approved by Tenant, be completed within twelve (12) months after being commenced, Tenant may elect, not later than thirty (30) days after the date of such damage, to terminate this Lease by written notice to Landlord effective as of the date specified in the notice. At any time, from time to time, after the date occurring thirty (30) days after the date of the damage, but in no event more than once every forty-five (45) days, Tenant may request that Landlord provide Tenant with a certificate from the architect or contractor described above setting forth such architect's or contractors' reasonable opinion of the date of completion of the repairs and Landlord shall respond to such request within fifteen (15) business days. 21.3. Landlord shall give written notice to Tenant within sixty (60) days following the date of damage or destruction of its election not to repair, reconstruct or restore the Premises. 21.4. Upon any termination of this Lease under any of the provisions of this Article, the parties shall be released thereby without further obligation to the other from the date possession of the Premises is surrendered to Landlord, except with regard to (a) items occurring prior to the damage or destruction and (b) provisions of this Lease that, by their express terms, survive the expiration or earlier termination hereof. 21.5. In the event of repair, reconstruction and restoration as provided in this Article, all Rent to be paid by Tenant under this Lease shall be abated proportionately based on the extent to which Tenant’s use of the Premises is impaired during the period of such repair, reconstruction or restoration, unless Landlord provides Tenant with other space during the period of repair, reconstruction and restoration that, in Tenant’s sole, but reasonable opinion, is suitable for the temporary conduct of Tenant’s business. 21.6. Notwithstanding anything to the contrary contained in this Article, should Landlord be delayed or prevented from completing the repair, reconstruction or restoration of the damage or destruction to the Premises after the occurrence of such damage or destruction by Force Majeure (but in no event shall Force Majeure delays exceed ninety (90) days) or delays caused by a Tenant Party, or due to delays in obtaining clearances or authorization relating to any Hazardous Materials used by Tenant, then the time for Landlord to commence or complete repairs, reconstruction and restoration shall be extended on a day-for-day basis; provided, however, that, at Landlord’s election, Landlord shall be relieved of its obligation to make such repairs, reconstruction and restoration and may instead terminate this Lease by written notice delivered to Tenant in the event that the aggregate amount of any such delays exceed twelve (12) months (provided, further, that for purposes of determining whether the aggregate amount of delays exceeds twelve (12) months, the number of days of Force Majeure delays shall not be limited to ninety (90) days but rather shall be uncapped). 21.7. If Landlord is obligated to or elects to repair, reconstruct or restore as herein provided, then Landlord shall be obligated to make such repairs, reconstruction or restoration only with regard to those portions of the Premises that were originally provided at Landlord’s expense. The repairs, reconstruction or restoration of improvements not originally provided by Landlord or at Landlord’s expense shall be the obligation of Tenant. In the event Tenant has

 
46 elected to upgrade certain improvements from Landlord’s building standards (the “Building Standard”), Landlord shall, upon the need for replacement due to an insured loss, provide only the Building Standard, unless Tenant again elects to upgrade such improvements and pay any incremental costs related thereto, except to the extent that excess insurance proceeds, if received, are adequate to provide such upgrades, in addition to providing for basic repairs, reconstruction and restoration of the Premises. 21.8. Notwithstanding anything to the contrary contained in this Article, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises if the damage resulting from any casualty covered under this Article occurs during the last twenty-four (24) months of the Term or any extension thereof, and will take more than one hundred eighty (180) days to complete or to the extent that insurance proceeds are not available therefor. 21.9. Landlord’s obligation, should it elect or be obligated to repair, reconstruct or restore, shall be limited to the Project and Base Building Work. Tenant shall, at its expense, replace or fully repair all of Tenant’s personal property and any Alterations installed by Tenant existing at the time of such damage or destruction. If the Premises are to be repaired, reconstructed or restored in accordance with the foregoing, Landlord shall make available to Tenant any portion of insurance proceeds it receives that are allocable to the Alterations constructed by Tenant pursuant to this Lease, and subject to the requirements of any Lender of Landlord (if applicable). 21.10. In addition to its termination right in Section 21.2 above, Tenant shall have the right to terminate this Lease if any damage to the Buildings or Premises: (a) occurs during the last twelve (12) months of the Term of this Lease (including the last twelve (12) months of any Option Term, if applicable); or (b) causes Tenant to be unable to occupy more than twenty-five percent (25%) of the Premises. 21.11. This Article sets forth the terms and conditions upon which this Lease may terminate in the event of any damage or destruction. Accordingly, the parties hereby waive the provisions of California Civil Code Sections 1932(2) and 1933(4) (and any successor statutes permitting the parties to terminate this Lease as a result of any damage or destruction). 22. Eminent Domain. 22.1. Total Taking — Termination. In the event the whole of the Premises, or such part thereof so that reconstruction of the Premises will not result in the Premises being reasonably suitable (as reasonably determined by Landlord and Tenant) for Tenant's continued occupancy for the uses and purposes permitted by this Lease, shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to said authority. 22.2. Partial Taking. In the event of a partial taking of the Premises, or of drives, walkways or parking areas serving the Premises for any public or quasi-public purpose by any lawful power or authority by exercise of right of appropriation, condemnation, or eminent

 
47 domain, or sold to prevent such taking, then, without regard to whether any portion of the Premises occupied by Tenant was so taken, Landlord may elect to terminate this Lease as of such taking if such taking is, in Landlord's sole opinion, of a material nature such as to make it uneconomical to continue use of the unappropriated portion for purposes of renting office or laboratory space. If any partial taking (i) materially interferes with Tenant’s use of the Premises for the Permitted Use and (ii) prevents Tenant from accessing the Premises or the parking areas of the Project where no substitute parking is made available, and such partial taking continues for more than one hundred eighty (180) days, Tenant will have the right to terminate this Lease by delivery of written notice given within ten (10) business days after the expiration of such one hundred eighty (180) day period. 22.3. Tenant shall be entitled to any award that is specifically awarded as compensation for (a) the taking of Tenant's personal property that was installed at Tenant's expense and (b) the costs of Tenant moving to a new location. Except as set forth in this Article 22, any award for such taking shall be the property of Landlord. 22.4. If, upon any taking of the nature described in this Article, this Lease continues in effect, then Landlord shall promptly proceed to restore the Premises to substantially their same condition prior to such partial taking. To the extent such restoration is infeasible, as determined by Landlord in its sole and absolute discretion, the Rent shall be decreased proportionately to reflect the loss of any portion of the Premises no longer available to Tenant. 22.5. This Article sets forth the terms and conditions upon which this Lease may terminate in the event of any damage or destruction. Accordingly, the parties hereby waive the provisions of California Code of Civil Procedure Section 1265.130 (and any successor statutes permitting the parties to terminate this Lease as a result of any damage or destruction). 22.6. Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant’s personal property and fixtures belonging to Tenant and removable by Tenant upon expiration of the Term in accordance with the terms of this Lease, and for moving expenses, so long as such claim is payable separately to Tenant and does not diminish Landlord’s claim. 23. Surrender. 23.1. Prior to Tenant’s surrender of possession of any part of the Premises, Tenant shall provide Landlord with a facility decommissioning and Hazardous Materials closure plan for the Premises (“Exit Survey”) prepared by an independent third party state-certified professional with appropriate expertise, which Exit Survey must be reasonably acceptable to Landlord. The Exit Survey shall comply with the American National Standards Institute’s Laboratory Decommissioning guidelines (ANSI/AIHA Z9.11-2008) or any successor standards published by ANSI or any successor organization (or, if ANSI and its successors no longer exist, a similar entity publishing similar standards). In addition, at least ten (10) days prior to Tenant’s surrender of possession of any part of the Premises, Tenant shall (a) provide Landlord with written evidence of all appropriate governmental releases obtained by Tenant in accordance with Applicable Laws, including laws pertaining to the surrender of the Premises, (b) place Laboratory

 
48 Equipment Decontamination Forms on all decommissioned equipment to assure safe occupancy by future users and (c) conduct a site inspection with Landlord. In addition, Tenant agrees to remain responsible after the surrender of the Premises for the remediation of any recognized environmental conditions set forth in the Exit Survey and comply with any recommendations set forth in the Exit Survey. Tenant’s obligations under this Section shall survive the expiration or earlier termination of the Lease. 23.2. No surrender of possession of any part of the Premises shall release Tenant from any of its obligations hereunder, unless such surrender is accepted in writing by Landlord. 23.3. The voluntary or other surrender of this Lease by Tenant shall not effect a merger with Landlord’s fee title or leasehold interest in the Premises or any portion thereof, unless Landlord consents in writing, and shall, at Landlord’s option, operate as an assignment to Landlord of any or all subleases. 23.4. The voluntary or other surrender of any ground or other underlying lease that now exists or may hereafter be executed affecting the Premises or any portion thereof, or a mutual cancellation thereof or of Landlord’s interest therein by Landlord and its lessor shall not effect a merger with Landlord’s fee title or leasehold interest in the Premises and shall, at the option of the successor to Landlord’s interest in the Premises or any portion thereof operate as an assignment of this Lease. 24. Holding Over. 24.1. If, with Landlord’s prior written consent, Tenant holds possession of all or any part of the Premises after the Term, Tenant shall become a tenant from month to month after the expiration or earlier termination of the Term, and in such case Tenant shall continue to pay (a) Base Rent in accordance with Section 2.3 and Article 5, as adjusted in accordance with Article 6, and (b) any amounts for which Tenant would otherwise be liable under this Lease if the Lease were still in effect, including payments for Taxes, Operating Expenses, Insurance Expenses and Tenant’s electricity and other utility costs. Any such month-to-month tenancy shall be subject to every other term, covenant and agreement contained herein. 24.2. Notwithstanding the foregoing, if Tenant remains in possession of the Premises after the expiration or earlier termination of the Term without Landlord’s prior written consent, (a) Tenant shall become a tenant at sufferance subject to the terms and conditions of this Lease, except that the monthly rent shall be equal to (a) for the first three (3) months that Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease, one hundred fifteen percent (115%) of the Base Rent in effect during the last thirty (30) days of the Term; and (b) for any time thereafter that Tenant remains in possession of the Premises after the expiration or earlier termination of this Lease, one hundred fifty percent (150%) of the Base Rent in effect during the last thirty (30) days of the Term, and (c) Tenant shall be liable to Landlord for any and all damages suffered by Landlord as a result of any holdover for more than ninety (90) days, including any lost rent or consequential, special and indirect damages (in each case, regardless of whether such damages are foreseeable).

 
49 24.3. Acceptance by Landlord of Rent after the expiration or earlier termination of the Term shall not result in an extension, renewal or reinstatement of this Lease. 24.4. The foregoing provisions of this Article are in addition to and do not affect Landlord’s right of reentry or any other rights of Landlord hereunder or as otherwise provided by Applicable Laws. 24.5. The provisions of this Article shall survive the expiration or earlier termination of this Lease. 25. Indemnification and Exculpation. 25.1. Tenant agrees to indemnify, save, defend (at Landlord’s option and with counsel reasonably acceptable to Landlord) and hold the Landlord Indemnitees harmless from and against any and all Claims of any kind or nature, real or alleged, arising from (a) injury to or death of any person or damage to any property occurring within or about the Premises arising directly or indirectly out of the presence at or use or occupancy of the Premises or Project by a Tenant Party, (b) an act or omission on the part of any Tenant Party, (c) a breach or default by Tenant in the performance of any of its obligations hereunder or (d) injury to or death of persons or damage to or loss of any property, real or alleged, arising from the serving of alcoholic beverages at the Premises or Project, including liability under any dram shop law, host liquor law or similar Applicable Law, except to the extent caused by Landlord’s negligence or willful misconduct. Tenant’s obligations under this Section shall not be affected, reduced or limited by any limitation on the amount or type of damages, compensation or benefits payable by or for Tenant under workers’ compensation acts, disability benefit acts, employee benefit acts or similar legislation. Tenant’s obligations under this Section shall survive the expiration or earlier termination of this Lease. Subject to Sections 20.7, 25.2 and 28.13 and any subrogation provisions contained in the Work Letter, Landlord agrees to indemnify, save, defend (at Tenant’s option and with counsel reasonably acceptable to Tenant) and hold the Tenant Parties harmless from and against any and all Claims arising from injury to or death of any person or damage to or loss of any physical property occurring within or about the Premises to the extent directly arising out of (i) a default by Landlord under this Lease or (ii) Landlord’s gross negligence or willful misconduct. Tenant shall not be liable for any damages to the extent arising from any act, omission or neglect of any other tenant or in the Project, except to the extent a Tenant Party committed such act, omission or neglect. 25.2. Subject to Section 13.9 above and Landlord’s indemnity obligations above, Landlord shall not be liable to Tenant for and Tenant assumes all risk of damage or losses caused by fire, electrical malfunction, gas explosion or water damage of any type (including broken water lines, malfunctioning fire sprinkler systems, roof leaks or stoppages of lines), unless any such loss is due to Landlord’s willful disregard of written notice by Tenant of need for a repair that Landlord is responsible to make for an unreasonable period of time (given the circumstances). Notwithstanding anything to the contrary contained in this Lease, Landlord shall not be liable under any circumstances for damage to personal property or scientific research, including loss of records kept by Tenant within the Premises (in each case, regardless of whether such damages are foreseeable). Tenant further waives any claim for injury to Tenant's business

 
50 or loss of income relating to any such damage or destruction of personal property as described in this Section 25.2. 25.3. Landlord shall not be liable for any damages arising from any act, omission or neglect of any third party other than the gross negligence or willful misconduct of any Landlord Parties. 25.4. Tenant acknowledges that security devices and services, if any, while intended to deter crime, may not in given instances prevent theft or other criminal acts. Landlord shall not be liable for injuries or losses caused by criminal acts of third parties, and Tenant assumes the risk that any security device or service may malfunction or otherwise be circumvented by a criminal. If Tenant desires protection against such criminal acts, then Tenant shall, at Tenant’s sole cost and expense, obtain appropriate insurance coverage. 25.5. Notwithstanding any contrary provision of this Lease, neither Landlord nor Tenant shall be liable to the other party for any consequential damages, loss of business or profit for a breach or default under this Lease; provided that this sentence shall not limit Landlord's damages if, as a result of Tenant's holdover for a period in excess of ninety (90) days after the expiration or earlier termination of this Lease: (a) Landlord does not or is unable to lease the Premises to another party, or (b) a third party is unable to occupy the Premises on the date specified in such third party's lease. 25.6. The provisions of this Article shall survive the expiration or earlier termination of this Lease. 26. Assignment or Subletting. 26.1. Except as hereinafter expressly permitted, Tenant shall not, either voluntarily or by operation of Applicable Laws, directly or indirectly sell, hypothecate, assign, pledge, encumber or otherwise transfer this Lease, or sublet the Premises or any part hereof (each, a "Transfer"), without Landlord's prior written consent, which consent Landlord may not unreasonably withhold, condition or delay. Tenant shall have the right to Transfer without Landlord's prior written consent the Premises or any portion thereof to any person or entity that: (a) directly, or indirectly through one or more intermediaries, (i) controls, is controlled by, or is under common control with Tenant, (ii) acquires all or substantially all of the assets of Tenant, or (iii) is the resulting entity of a merger or consolidation of Tenant with another entity, and (b) has a net worth equal to Two Hundred Million Dollars ($200,000,000) (each, a "Tenant's Affiliate"), provided (1) Tenant shall notify Landlord in writing at least ten (10) days prior to the effectiveness of such Transfer to Tenant's Affiliate (an "Exempt Transfer"), unless providing such notification to Landlord would violate a confidentiality agreement between Tenant and the Tenant’s Affiliate (provided, however, that Tenant shall use its best efforts to ensure that such confidentiality agreement permits Tenant to provide the notification required under this subsection 26.1(b)(1)), in which event Tenant shall provide such notification as soon as such notification is permissible under the confidentiality agreement; and (2) Tenant remains fully and primarily liable under this Lease (including in connection with any extension or expansion of this Lease and Tenant’s obligations hereunder by any such Tenant’s Affiliate, including, without

 
51 limitation any exercise of the rights granted pursuant to Sections 37.22, 39 or 40 below). For purposes of Exempt Transfers, "control" requires both (y) owning (directly or indirectly) more than fifty-one percent (51%) of the stock or other equity interests of another person and (z) possessing, directly or indirectly, the power to direct or cause the direction of the management and policies of such person. 26.2. In the event Tenant desires to effect a Transfer, then, at least twenty (20) business days (or at least ten (10) days with respect to an Exempt Transfer subject to subsection 26.1(b)(1) above) but not more than one hundred eighty (180) days prior to the date when Tenant desires the Transfer to be effective (the "Transfer Date"), Tenant shall provide written notice to Landlord (the "Transfer Notice") containing the proposed Transfer Date; any ownership or commercial relationship between Tenant and the proposed transferee, assignee or sublessee; and the consideration and all other material terms and conditions of the proposed Transfer; and evidence respecting the relevant business experience and financial responsibility, including unconsolidated financial statements, of the proposed transferee, assignee or sublessee, all in such detail as Landlord shall reasonably require (the "Transfer Information"). Tenant shall also tender to Landlord the actual, documented and reasonable attorneys' fees and other costs or overhead expenses incurred by Landlord in reviewing Tenant's request for such Transfer. 26.3. Landlord, in determining whether consent should be given to a proposed assignment, may give consideration to the financial strength of such transferee (notwithstanding Tenant remaining liable for Tenant's performance). Notwithstanding anything to the contrary, in no event shall Landlord be deemed to be unreasonable for declining to consent to a Transfer to a transferee, assignee or sublessee of lacking financial qualifications or seeking a change in the Permitted Use, or jeopardizing directly or indirectly the status of Landlord or any of Landlord's affiliates as a Real Estate Investment Trust under the Internal Revenue Code of 1986 (the "Code"). Notwithstanding anything contained in this Lease to the contrary, (w) no Transfer shall be consummated on any basis such that the rental or other amounts to be paid by the occupant, assignee, manager or other transferee thereunder would be based, in whole or in part, on the income or profits derived by the business activities of such occupant, assignee, manager or other transferee; (x) Tenant shall not furnish or render any services to an occupant, assignee, manager or other transferee with respect to whom transfer consideration is required to be paid, or manage or operate the Premises or any capital additions so transferred, with respect to which transfer consideration is being paid; (y) Tenant shall not consummate a Transfer with any person in which Landlord owns an interest, directly or indirectly (by applying constructive ownership rules set forth in Section 856(d)(5) of the Code); and (z) Tenant shall not consummate a Transfer with any person or in any manner that could cause any portion of the amounts received by Landlord pursuant to this Lease or any sublease, license or other arrangement for the right to use, occupy or possess any portion of the Premises to fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto or which could cause any other income of Landlord to fail to qualify as income described in Section 856(c)(2) of the Code. Landlord shall respond to Tenant's proposed Transfer within twenty (20) days after receipt of Tenant's Transfer request. If Landlord fails to respond within such twenty (20) day period, then Tenant shall provide Landlord with a second written notice stating in bold and all caps 12 point font that "Landlord's failure to respond to Tenant's Transfer request within

 
52 five (5) days after Landlord's receipt of this second notice shall be deemed approval by Landlord," and if Landlord does not respond within such five (5) day period, then Landlord shall be deemed to have approved such Transfer request. 26.4. The following are conditions precedent to a Transfer or to Landlord considering a request by Tenant to a Transfer: (a) Tenant shall remain fully liable under this Lease during the unexpired Term (and any Option Term or other extension of the Term exercised or negotiated by a Tenant’s Affiliate, including, without limitation any exercise of the rights granted pursuant to Sections 37.22, 39 or 40 below). Tenant agrees that it shall not be (and shall not be deemed to be) a guarantor or surety of this Lease, however, and waives its right to claim that is it is a guarantor or surety or to raise in any legal proceeding any guarantor or surety defenses permitted by this Lease or by Applicable Laws; (b) Tenant shall provide Landlord with the Transfer Information; (c) In the case of an Exempt Transfer, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord that the Transfer qualifies as an Exempt Transfer, unless providing such information to Landlord prior to the effectiveness of such Exempt Transfer would violate a confidentiality agreement between Tenant and the Tenant’s Affiliate (provided, however, that Tenant shall use its best efforts to ensure that such confidentiality agreement permits Tenant to provide the information required under this subsection 26.4(c)), in which event Tenant shall provide such information as soon as the same is permissible under the confidentiality agreement; (d) Except with respect to an Exempt Transfer, if Tenant’s transfer of rights or sharing of the Premises provides for the receipt by, on behalf of or on account of Tenant of any “Net Profit” as defined below, Tenant shall pay fifty percent (50%) of all of such Net Profit to Landlord. “Net Profit” shall mean all cash rents payable by a transferee in excess of the Base Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer (on a per square foot basis if less than all of the Premises is transferred) after deducting the expenses incurred or to be incurred by Tenant for the following: (1) any changes, alterations and improvements to the Premises in connection with the Transfer, (2) any space planning, architectural or design fees or other expenses incurred in marketing such space or in connection with such Transfer, (3) any improvement allowance, rent abatement or other monetary concessions provided by Tenant to the Transferee, (4) any brokerage commissions incurred by Tenant in connection with the Transfer, (5) any attorneys' fees incurred by Tenant in connection with the Transfer, (6) any lease takeover costs incurred by Tenant in connection with the Transfer, (7) any costs of advertising the space which is the subject of the Transfer, with all such costs amortized over the term of the Transfer, (8) the fair market value of any furniture that may be included in connection with the transfer, and (9) the cost of the Tenant Improvements and Alterations paid for by Tenant to the Premises on account of such transfer; (e) The proposed transferee, assignee or sublessee shall agree that, in the event Landlord gives such proposed transferee, assignee or sublessee notice that Tenant is in

 
53 default under this Lease, such proposed transferee, assignee or sublessee shall thereafter make all payments otherwise due Tenant directly to Landlord, which payments shall be received by Landlord without any liability being incurred by Landlord, except to credit such payment against those due by Tenant under this Lease, and any such proposed transferee, assignee or sublessee shall agree to attorn to Landlord or its successors and assigns should this Lease be terminated for any reason; provided, however, that in no event shall Landlord or its Lenders, successors or assigns be obligated to accept such attornment; (f) Landlord’s consent to any such Transfer shall be effected on Landlord’s forms, subject to changes by Tenant that are satisfactory to Landlord in its reasonable discretion; (g) Tenant shall not then be in monetary or material non-monetary default hereunder (beyond the expiration of all applicable notice and cure periods) hereunder in any respect; (h) Such proposed transferee, assignee or sublessee’s use of the Premises shall be consistent with the Permitted Use; (i) Landlord shall not be bound by any provision of any agreement pertaining to the Transfer, except for Landlord’s written consent to the same; (j) Tenant shall pay all transfer and other taxes (including interest and penalties) assessed or payable for any Transfer; (k) Landlord’s consent (or waiver of its rights) for any Transfer shall not waive Landlord’s right to consent or refuse consent to any later Transfer; (l) Tenant shall deliver to Landlord one executed copy of any and all written instruments evidencing the Transfer; and (m) Tenant shall deliver to Landlord a list of Hazardous Materials (as defined below), certified by the proposed transferee, assignee or sublessee to be true and correct, that the proposed transferee, assignee or sublessee intends to use or store in the Premises. Additionally, Tenant shall deliver to Landlord, on or before the date any proposed transferee, assignee or sublessee takes occupancy of the Premises, all of the items relating to Hazardous Materials of such proposed transferee, assignee or sublessee as described in Section 18.2. 26.5. Any Transfer that is not in compliance with the provisions of this Article or with respect to which Tenant does not fulfill its obligations pursuant to this Article shall be void and shall, at the option of Landlord, constitute a default under this Lease. 26.6. Notwithstanding any Transfer, Tenant shall remain fully and primarily liable for the payment of all Rent and other sums due or to become due hereunder, and for the full performance of all other terms, conditions and covenants to be kept and performed by Tenant. The acceptance of Rent or any other sum due hereunder, or the acceptance of performance of any

 
54 other term, covenant or condition thereof, from any person or entity other than Tenant shall not be deemed a waiver of any of the provisions of this Lease or a consent to any Transfer. 26.7. [Intentionally omitted] 26.8. If Tenant sublets the Premises or any portion thereof, Tenant hereby immediately and irrevocably assigns to Landlord, as security for Tenant’s obligations under this Lease, all rent from any such subletting, and appoints Landlord as assignee and attorney-in-fact for Tenant, and Landlord (or a receiver for Tenant appointed on Landlord’s application) may collect such rent and apply it toward Tenant’s obligations under this Lease; provided that, until the occurrence of a Default (as defined below) by Tenant, Tenant shall have the right to collect such rent. 26.9. Notwithstanding any contrary provision of this Article 26, the original Tenant named in this Lease (i.e., Illumina, Inc.) and any Tenant’s Affiliate (but not any other assignee or any subtenant) shall have the right, without the receipt of Landlord's consent, but on prior written notice to Landlord, to license (or, with respect to any space that contains less than 5,000 square feet of Rentable Area, sublease) up to an aggregate of up to ten percent (10%) of the Rentable Area of the Premises to individuals or entities (each, a "Business Affiliate") or to a Tenant Affiliate, which license (or sublease) to a Business Affiliate or Tenant Affiliate shall be on and subject to all of the following conditions: (i) Tenant shall have a direct contractual business relationship (relating to a primary business of Tenant conducted in the Premises and other than Business Affiliate's use of the Premises) with each such Business Affiliate; (ii) each such Business Affiliate or Tenant Affiliate shall be of a character and reputation consistent with the quality of the Buildings; (iii) each license shall clearly specify that it is only a contract right and that the Business Affiliate or Tenant Affiliate is not a subtenant and has no interest in real property; (iv) each such Business Affiliate's or Tenant Affiliate’s use of the Premises is in a manner consistent with the Permitted Use; and (v) no demising walls or separate entrances shall be constructed in the Premises to accommodate any such license or sublease. No such license or sublease shall relieve Tenant from any liability under this Lease. 27. Subordination and Attornment. 27.1. Subject to Tenant’s receipt of a commercially reasonable subordination, non- disturbance and attornment agreement, this Lease shall be subject and subordinate to the lien of any mortgage, deed of trust, or lease in which Landlord is tenant now or hereafter in force against the Premises or any portion thereof and to all advances made or hereafter to be made upon the security thereof without the necessity of the execution and delivery of any further instruments on the part of Tenant to effectuate such subordination. Such commercially reasonable subordination, non-disturbance and attornment agreements shall include an obligation by any successor ground lessor or lender, mortgagor or lien holders to recognize Tenant’s rights specifically set forth in this Lease so long as Tenant is not in default hereunder after any applicable notice and cure period, and will be in a recordable form. Landlord hereby represents to Tenant that there is no lender for the Project as of the date of this Lease. 27.2. Notwithstanding the foregoing, Tenant shall execute and deliver upon demand such further instrument or instruments evidencing such subordination of this Lease to the lien of

 
55 any such mortgage or mortgages or deeds of trust or lease in which Landlord is tenant as may be required by Landlord. If any such mortgagee, beneficiary or landlord under a lease wherein Landlord is tenant (each, a “Mortgagee”) so elects, however, this Lease shall be deemed prior in lien to any such lease, mortgage, or deed of trust upon or including the Premises regardless of date and Tenant shall execute a statement in writing to such effect at Landlord’s request. If Tenant fails to execute any document required from Tenant under this Section within thirty (30) days after written request therefor, such failure shall be a Default under this Lease. 27.3. Upon written request of Landlord and opportunity for Tenant to review, Tenant agrees to execute any Lease amendments not (a) materially altering the terms of this Lease, (b) increasing Tenant’s liability or obligations under this Lease, or (c) diminishing Tenant’s rights under this Lease, if required by a mortgagee or beneficiary of a deed of trust encumbering real property of which the Premises constitute a part incident to the financing of the real property of which the Premises constitute a part. 27.4. Subject to Section 27.1 above, in the event any proceedings are brought for foreclosure, or in the event of the exercise of the power of sale under any mortgage or deed of trust made by Landlord covering the Premises, Tenant shall at the election of the purchaser at such foreclosure or sale attorn to the purchaser upon any such foreclosure or sale and recognize such purchaser as Landlord under this Lease. 28. Defaults and Remedies. 28.1. Late payment by Tenant to Landlord of Rent and other sums due shall cause Landlord to incur costs not contemplated by this Lease, the exact amount of which shall be extremely difficult and impracticable to ascertain. Such costs include processing and accounting charges and late charges that may be imposed on Landlord by the terms of any mortgage or trust deed covering the Premises. Therefore, if any installment of Rent due from Tenant is not received by Landlord within three (3) days after written notice that such payment is due, Tenant shall pay to Landlord (a) an additional sum of three percent (3%) of the overdue Rent as a late charge plus (b) interest at an annual rate (the “Default Rate”) equal to the lesser of (1) twelve percent (12%) and (2) the highest rate permitted by Applicable Laws; provided, however that, so long as Rent due from Tenant has not been late more often than two (2) times in any twelve (12) month period or more than five (5) times over the Term of this Lease (whichever occurs first), the foregoing cure period will be modified to provide that Tenant will not be subject to a late fee unless (i) any payment of Base Rent is not received by Landlord within ten (10) days after written notice that such payment is due and (ii) any payment of Additional Rent is not paid within thirty (30) days after written notice that such payment is due. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord shall incur by reason of late payment by Tenant and shall be payable as Additional Rent to Landlord due with the next installment of Rent or within ten (10) business days after Landlord’s demand, whichever is earlier. Landlord’s acceptance of any Additional Rent (including a late charge or any other amount hereunder) shall not be deemed an extension of the date that Rent is due or prevent Landlord from pursuing any other rights or remedies under this Lease, at law or in equity. Notwithstanding the foregoing, Landlord shall waive the imposition of such late charge for the first late payment of Rent due hereunder in any calendar year of the Term.

 
56 28.2. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent payment herein stipulated shall be deemed to be other than on account of the Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Rent or pursue any other remedy provided in this Lease or in equity or at law. If a dispute shall arise as to any amount or sum of money to be paid by Tenant to Landlord hereunder, Tenant shall have the right to make payment “under protest,” such payment shall not be regarded as a voluntary payment, and there shall survive the right on the part of Tenant to institute suit for recovery of the payment paid under protest. 28.3. If Tenant fails to pay any sum of money required to be paid by it hereunder or perform any other act on its part to be performed hereunder, in each case within the applicable cure period (if any) described in Section 28.4, then Landlord may (but shall not be obligated to), without waiving or releasing Tenant from any obligations of Tenant, make such payment or perform such act; provided that such failure would likely result in a violation of Applicable Laws or the cancellation of an insurance policy maintained by Landlord. Notwithstanding the foregoing, in the event of an emergency, Landlord shall have the right to enter the Premises and act in accordance with its rights as provided elsewhere in this Lease. In addition to the late charge described in Section 28.1, Tenant shall pay to Landlord as Additional Rent all sums so paid or incurred by Landlord, together with interest at the Default Rate, computed from the date such sums were paid or incurred. 28.4. The occurrence of any one or more of the following events shall constitute a “Default” hereunder by Tenant: (a) Tenant fails to make any payment of Rent, as and when due, or to satisfy its obligations under Article 18, where such failure shall continue for a period of five (5) business days after written notice thereof from Landlord to Tenant (provided that for the first late payment in any twelve (12) month period, the cure period shall be ten (10) days after written notice); (b) Tenant fails to observe or perform any obligation or covenant contained herein (other than described in Sections 28.4(a) and 28.4(c)-(i)) to be performed by Tenant, where such failure continues for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided that, if the nature of Tenant’s default is such that it reasonably requires more than thirty (30) days to cure, Tenant shall not be deemed to be in Default if Tenant commences such cure within such thirty (30) day period and thereafter diligently prosecute the same to completion; (c) Tenant makes an assignment for the benefit of creditors; (d) A receiver, trustee or custodian is appointed to or does take title, possession or control of all or substantially all of Tenant’s assets; (e) Tenant files a voluntary petition under the United States Bankruptcy Code or any successor statute (as the same may be amended from time to time, the “Bankruptcy

 
57 Code”) or an order for relief is entered against Tenant pursuant to a voluntary or involuntary proceeding commenced under any chapter of the Bankruptcy Code; (f) Any involuntary petition is filed against Tenant under any chapter of the Bankruptcy Code and is not dismissed within one hundred twenty (120) days; (g) A default exists under any other lease by and between Landlord or an affiliate of Landlord and Tenant, after the expiration of any applicable notice and cure periods; (h) Tenant fails to deliver an estoppel certificate in accordance with Article 17 and such failure continues for more than five (5) business days after Landlord delivers notice to Tenant of such failure; or (i) Tenant’s interest in this Lease is attached, executed upon or otherwise judicially seized and such action is not released within one hundred twenty (120) days of the action. Notices given under this Section shall specify the alleged default and shall demand that Tenant perform the provisions of this Lease or pay the Rent that is in arrears, as the case may be, within the applicable period of time, or quit the Premises. No such notice shall be deemed a forfeiture or a termination of this Lease unless Landlord elects otherwise in such notice 28.5. In the event of a Default by Tenant, and at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy that Landlord may have, Landlord has the right to do any or all of the following: (a) Halt any Project and Base Building Work, Tenant Improvements and Alterations and order Tenant’s contractors, subcontractors, consultants, designers and material suppliers to stop work (and any resulting delay will be a Tenant Delay); (b) Terminate Tenant’s right to possession of the Premises by any lawful means, in which case Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall have the immediate right to re-enter and remove all persons and property, and such property may be removed and stored in a public warehouse or elsewhere at the cost and for the account of Tenant, all without service of notice or resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage that may be occasioned thereby; and (c) Terminate this Lease, in which event Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord, shall to the extent allowed under Applicable Laws, have the right to re-enter and remove all persons and property, and such property may be removed and stored in a public warehouse or elsewhere at the cost and for the account of Tenant, all without service of notice or resort to legal process and without being deemed guilty of trespass or becoming liable for any loss or damage that may be occasioned thereby. In the event that Landlord shall elect to so terminate this Lease, then Landlord shall be

 
58 entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant’s default, including the sum of: A. The worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus B. The worth at the time of award of the amount by which the unpaid Rent that would have been earned during the period commencing with termination of the Lease and ending at the time of award exceeds that portion of the loss of Landlord’s rental income from the Premises that Tenant proves could have been reasonably avoided; plus C. The worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds that portion of the loss of Landlord’s rental income from the Premises that Tenant proves could have been reasonably avoided; plus D. Any other amount necessary to compensate Landlord for all the detriment caused by Tenant’s failure to perform its obligations under this Lease or that in the ordinary course of things would be likely to result therefrom,; plus E. At Landlord’s election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by Applicable Laws. As used in Sections 28.5(c)(A) and (B), “worth at the time of award” shall be computed by allowing interest at the Default Rate. As used in Section 28.5(c)(C), the “worth at the time of the award” shall be computed by taking the present value of such amount, using the discount rate of the Federal Reserve Bank of San Francisco at the time of the award plus one percent (1%). 28.6. In addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 and may continue this Lease in effect after Tenant’s Default and abandonment and recover Rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations. For purposes of this Section, the following acts by Landlord will not constitute the termination of Tenant’s right to possession of the Premises: (a) Acts of maintenance or preservation or efforts to relet the Premises, including alterations, remodeling, redecorating, repairs, replacements or painting as Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof; or (b) The appointment of a receiver upon the initiative of Landlord to protect Landlord’s interest under this Lease or in the Premises. Notwithstanding the foregoing, in the event of a Default by Tenant, Landlord may elect at any time to terminate this Lease and to recover damages to which Landlord is entitled.

 
59 28.7. If Landlord does not elect to terminate this Lease as provided in Section 28.5, then Landlord may, from time to time, recover all Rent as it becomes due under this Lease. At any time thereafter, Landlord may elect to terminate this Lease and to recover damages to which Landlord is entitled. 28.8. In the event Landlord elects to terminate this Lease and relet the Premises, Landlord may execute any new lease in its own name. Tenant hereunder shall have no right or authority whatsoever to collect any Rent from such tenant. The proceeds of any such reletting shall be applied as follows: (a) First, to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (b) Second, to the payment of the costs and expenses of reletting the Premises, including (i) alterations and repairs that Landlord deems reasonably necessary and advisable and (ii) reasonable attorneys’ fees, charges and disbursements incurred by Landlord in connection with the retaking of the Premises and such reletting; (c) Third, to the payment of Rent and other charges due and unpaid hereunder; and (d) Fourth, to the payment of future Rent and other damages payable by Tenant under this Lease. 28.9. All of Landlord’s rights, options and remedies hereunder shall be construed and held to be nonexclusive and cumulative. Landlord shall have the right to pursue any one or all of such remedies, or any other remedy or relief that may be provided by Applicable Laws, whether or not stated in this Lease. No waiver of any default of Tenant hereunder shall be implied from any acceptance by Landlord of any Rent or other payments due hereunder or any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in such waiver. 28.10. Landlord’s termination of (a) this Lease or (b) Tenant’s right to possession of the Premises shall not relieve Tenant of any liability to Landlord that has previously accrued or that shall arise based upon events that occurred prior to the later to occur of (y) the date of Lease termination and (z) the date Tenant surrenders possession of the Premises. 28.11. To the extent permitted by Applicable Laws, Tenant waives any and all rights of redemption granted by or under any present or future Applicable Laws if Tenant is evicted or dispossessed for any cause, or if Landlord obtains possession of the Premises due to Tenant’s default hereunder or otherwise 28.12. In the event of a Default by Tenant hereunder, to the fullest extent required by Applicable Laws (to the extent such Applicable Laws cannot be modified by contract), Landlord shall use commercially reasonable efforts to mitigate its damages.

 
60 28.13. Landlord shall not be in default or liable for damages under this Lease unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event shall such failure continue for more than thirty (30) days after written notice from Tenant specifying the nature of Landlord’s failure; provided, however, that if the nature of Landlord’s obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. If Landlord fails to cure a Landlord default after the expiration of all applicable notice and cure periods, Tenant may, except as otherwise provided for in this Lease and subject to any limitations contained in this Lease, exercise all of its rights and remedies provided for in this Lease or at law or in equity for such default; provided, however, that, notwithstanding anything to the contrary, Tenant shall not be permitted to terminate this Lease unless a court of competent jurisdiction grants to Tenant a right of termination. 28.14. In the event of any default by Landlord, Tenant shall give notice by registered or certified mail to any (a) beneficiary of a deed of trust or (b) mortgagee under a mortgage covering the Premises or any portion thereof and to any landlord of any lease of land upon or within which the Premises are located, and shall offer such beneficiary, mortgagee or landlord a commercially reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or a judicial action if such should prove necessary to effect a cure; provided that Landlord shall furnish to Tenant in writing, upon written request by Tenant, the names and addresses of all such persons who are to receive such notices. 29. Bankruptcy . In the event a debtor, trustee or debtor in possession under the Bankruptcy Code, or another person with similar rights, duties and powers under any other Applicable Laws, proposes to cure any default under this Lease or to assume or assign this Lease and is obliged to provide adequate assurance to Landlord that (a) a default shall be cured, (b) Landlord shall be compensated for its damages arising from any breach of this Lease and (c) future performance of Tenant’s obligations under this Lease shall occur, then such adequate assurances shall include any or all of the following, as designated by Landlord in its sole and absolute discretion: 29.1. Those acts specified in the Bankruptcy Code or other Applicable Laws as included within the meaning of “adequate assurance,” even if this Lease does not concern a shopping center or other facility described in such Applicable Laws; 29.2. A prompt cash payment to compensate Landlord for any monetary defaults or actual damages arising directly from a breach of this Lease; 29.3. A cash deposit in an amount at least equal to the then-current amount of the Security Deposit; or 29.4. The assumption or assignment of all of Tenant’s interest and obligations under this Lease.

 
61 30. Brokers. 30.1. Tenant represents and warrants that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease other than Cushman & Wakefield of San Diego, Inc. (“Broker”), and that it knows of no other real estate broker or agent that is or might be entitled to a commission in connection with this Lease. Landlord shall compensate Broker in relation to this Lease pursuant to a separate agreement between Landlord and Broker. 30.2. Tenant represents and warrants that no broker or agent has made any representation or warranty relied upon by Tenant in Tenant’s decision to enter into this Lease, other than as contained in this Lease. 30.3. Tenant acknowledges and agrees that the employment of brokers by Landlord is for the purpose of solicitation of offers of leases from prospective tenants and that no authority is granted to any broker to furnish any representation (written or oral) or warranty from Landlord unless expressly contained within this Lease. Landlord is executing this Lease in reliance upon Tenant’s representations, warranties and agreements contained within Sections 30.1 and 30.2. 30.4. Tenant agrees to indemnify, save, defend (at Landlord’s option and with counsel reasonably acceptable to Landlord) and hold the Landlord Indemnitees harmless from any and all cost or liability for compensation claimed by any broker or agent, other than Broker, employed or engaged by Tenant or claiming to have been employed or engaged by Tenant. 31. Definition of Landlord. With regard to obligations imposed upon Landlord pursuant to this Lease, the term “Landlord,” as used in this Lease, shall refer only to Landlord or Landlord’s then-current successor-in-interest. In the event of any transfer, assignment or conveyance of Landlord’s interest in this Lease or in Landlord’s fee title to or leasehold interest in the Property, as applicable, Landlord herein named (and in case of any subsequent transfers or conveyances, the subsequent Landlord) shall be automatically freed and relieved, from and after the date of such transfer, assignment or conveyance, from all liability for the performance of any covenants or obligations contained in this Lease thereafter to be performed by Landlord and, without further agreement, the transferee, assignee or conveyee of Landlord’s interest in this Lease or in Landlord’s fee title to or leasehold interest in the Property, as applicable, shall otherwise be deemed to have assumed and agreed to observe and perform any and all covenants and obligations of Landlord hereunder during the tenure of its interest in the Lease or the Property. Landlord or any subsequent Landlord may transfer its interest in the Premises or this Lease without Tenant’s consent. 32. Limitation of Landlord’s Liability. 32.1. If Landlord is in default under this Lease and, as a consequence, Tenant recovers a monetary judgment against Landlord, the judgment shall be satisfied only out of (a) the proceeds of sale received on execution of the judgment and levy against the right, title and interest of Landlord in the Premises, (b) rent or other income from such real property receivable by Landlord or (c) the consideration received by Landlord from the sale, financing, refinancing or other disposition of all or any part of Landlord’s right, title or interest in the Premises.

 
62 32.2. Neither Landlord nor any of its affiliates, nor any of their respective partners, shareholders, directors, officers, employees, members or agents shall be personally liable for Landlord’s obligations or any deficiency under this Lease, and service of process shall not be made against any shareholder, director, officer, employee or agent of Landlord or any of Landlord’s affiliates. No partner, shareholder, director, officer, employee, member or agent of Landlord or any of its affiliates shall be sued or named as a party in any suit or action, and service of process shall not be made against any partner or member of Landlord except as may be necessary to secure jurisdiction of the partnership, joint venture or limited liability company, as applicable. No partner, shareholder, director, officer, employee, member or agent of Landlord or any of its affiliates shall be required to answer or otherwise plead to any service of process, and no judgment shall be taken or writ of execution levied against any partner, shareholder, director, officer, employee, member or agent of Landlord or any of its affiliates. 32.3. If Tenant is a partnership or joint venture, then the partners of such partnership shall not be personally liable for Tenant's obligations under this Lease, and no partner of Tenant shall be sued or named as a party in any suit or action, and service of process shall not be made against any partner of Tenant except as may be necessary to secure jurisdiction of the partnership or joint venture. If Tenant is a corporation, then the shareholders, directors, officers, employees and agents of such corporation shall not be personally liable for Tenant's obligations under this Lease, and no shareholder, director, officer, employee or agent of Tenant shall be sued or named as a party in any suit or action. If Tenant is a limited liability company, then the members of such limited liability company shall not be personally liable for Tenant's obligations under this Lease, and no member of Tenant shall be sued or named as a party in any suit or action, and service of process shall not be made against any member of Tenant except as may be necessary to secure jurisdiction of the limited liability company. No partner, shareholder, director, employee, member or agent of Tenant shall be required to answer or otherwise plead to any service of process in its personal capacity, and no judgment shall be taken or writ of execution levied against any partner, shareholder, director, employee or agent of Tenant in its personal capacity. 32.4. Each of the covenants and agreements of this Article shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by Applicable Laws and shall survive the expiration or earlier termination of this Lease. 33. Joint and Several Obligations. If more than one person or entity executes this Lease as Tenant, then: 33.1. Each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed or performed by Tenant, and such terms, covenants, conditions, provisions and agreements shall be binding with the same force and effect upon each and all of the persons executing this Agreement as Tenant; and 33.2. The term “Tenant,” as used in this Lease, shall mean and include each of them, jointly and severally. The act of, notice from, notice to, refund to, or signature of any one or more of them with respect to the tenancy under this Lease, including any renewal, extension,

 
63 expiration, termination or modification of this Lease, shall be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them had so acted, so given or received such notice or refund, or so signed. 34. Representations. Tenant hereby covenants and warrants that (a) Tenant is duly incorporated or otherwise established or formed and validly existing under the laws of its state of incorporation, establishment or formation, (b) Tenant has and is duly qualified to do business in the state in which the Property is located, (c) Tenant has full corporate, partnership, trust, association or other appropriate power and authority to enter into this Lease and to perform all Tenant’s obligations hereunder, (d) each person (and all of the persons if more than one signs) signing this Lease on behalf of Tenant is duly and validly authorized to do so. In addition, Tenant represents that, to its current, actual knowledge (without duty of inquiry), it is not an entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) or other similar governmental action. Landlord hereby covenants and warrants that (a) Landlord is duly incorporated or otherwise established or formed and validly existing under the laws of its state of incorporation, establishment or formation, (b) Landlord has and is duly qualified to do business in the state in which the Property is located, (c) Landlord has full corporate, partnership, trust, association or other appropriate power and authority to enter into this Lease and to perform all Landlord's obligations hereunder and (d) each person (and all of the persons if more than one signs) signing this Lease on behalf of Landlord is duly and validly authorized to do so. In addition, Landlord represents that, to its current, actual knowledge (without duty of inquiry), it is not an entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control ("OFAC") of the Department of the Treasury (including those named on OFAC's Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) or other similar governmental action. 35. Confidentiality. Neither party shall disclose any terms or conditions of this Lease (including Rent) or give a copy of this Lease to any third party, and Landlord shall not release to any third party any nonpublic financial information or nonpublic information about Tenant's ownership structure that Tenant gives Landlord, except (a) if required by Applicable Laws or in any judicial proceeding or otherwise in connection with SEC filings desired by either party (but not required under Applicable Laws), provided that the releasing party has given the other party reasonable notice of such requirement or SEC filing, if feasible, (b) to a party's attorneys, accountants, brokers and other bona fide consultants or advisers, provided such third parties agree to be bound by this Section or (c) to bona fide prospective assignees or subtenants of this Lease, provided they agree in writing to be bound by this Section. Either party may issue a press release or similar announcement regarding this Lease, provided that the other party reasonably approves the content of such press release in advance.

 
64 36. Notices. Except as otherwise stated in this Lease, any notice, consent, demand, invoice, statement or other communication required or permitted to be given hereunder shall be in writing and shall be given by (a) personal delivery, (b) overnight delivery with a reputable international overnight delivery service, such as FedEx, or (c) facsimile or email transmission, so long as such transmission is followed within one (1) business day by delivery utilizing one of the methods described in Subsection 36(a) or (b). Any such notice, consent, demand, invoice, statement or other communication shall be deemed delivered (x) upon receipt, if given in accordance with Subsection 36(a); (y) one business (1) day after deposit with a reputable international overnight delivery service, if given if given in accordance with Subsection 36(b); or (z) upon transmission, if given in accordance with Subsection 36(c). Except as otherwise stated in this Lease, any notice, consent, demand, invoice, statement or other communication required or permitted to be given pursuant to this Lease shall be addressed to Tenant at the Premises, or to Landlord or Tenant at the addresses shown in Sections 2.9 and 2.10 or 2.11, respectively. Either party may, by notice to the other given pursuant to this Section, specify additional or different addresses for notice purposes. 37. Miscellaneous. 37.1. Tenant will be permitted to select the initial name for the Project, subject to Landlord’s reasonable prior approval of such Project name. If at any time Tenant ceases to occupy a minimum of three hundred sixty thousand (360,000) square feet of Rentable Area at the Project, Landlord reserves the right to change the name of the Building or the Project in its sole discretion. 37.2. To induce Landlord to enter into this Lease, Tenant agrees that it shall promptly furnish to Landlord, from time to time, upon Landlord’s written request, the most recent year-end unconsolidated financial statements reflecting Tenant’s current financial condition audited by a nationally recognized accounting firm. Tenant shall, within ninety (90) days after the end of Tenant’s financial year, furnish Landlord with a certified copy of Tenant’s year-end unconsolidated financial statements for the previous year audited by a nationally recognized accounting firm. Tenant represents and warrants that all financial statements, records and information furnished by Tenant to Landlord in connection with this Lease are true, correct and complete in all respects. If audited financials are not otherwise prepared, unaudited financials complying with generally accepted accounting principles and certified by the chief financial officer of Tenant as true, correct and complete in all respects shall suffice for purposes of this Section. This Section shall not apply so long as Tenant is a publicly traded company and its financial statements are readily available by public means, e.g., the internet. 37.3. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and shall not be effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. 37.4. The terms of this Lease are intended by the parties as a final, complete and exclusive expression of their agreement with respect to the terms that are included herein, and may not be contradicted or supplemented by evidence of any other prior or contemporaneous agreement.

 
65 37.5. Landlord or Tenant may, but shall not be obligated to, record a short form or memorandum hereof. In the event Tenant wishes to record a short form memorandum, such memorandum shall be in the form attached hereto as Exhibit M, and concurrently with Tenant’s signature on such short form memorandum, Tenant will sign a termination of such short form memorandum of lease in the form of Exhibit N which termination will be held by Landlord and may be recorded by Landlord upon the expiration or earlier termination of this Lease. Within ten (10) days after receipt of written request from Landlord, which Landlord may make at any time, Tenant shall execute an updated termination of any short form or memorandum of lease recorded with respect hereto (which termination will be held by Landlord in escrow until the termination or expiration of this Lease). Tenant shall be responsible for the cost of recording any short form or memorandum of this Lease, including any transfer or other taxes incurred in connection with such recordation. Neither party shall record this Lease. 37.6. Where applicable in this Lease, the singular includes the plural and the masculine or neuter includes the masculine, feminine and neuter. The words “include,” “includes,” “included” and “including” mean “‘include,’ etc., without limitation.” The word “shall” is mandatory and the word “may” is permissive. The section headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part of this Lease. Landlord and Tenant have each participated in the drafting and negotiation of this Lease, and the language in all parts of this Lease shall be in all cases construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. 37.7. Except as otherwise expressly set forth in this Lease, each party shall pay its own costs and expenses incurred in connection with this Lease and such party’s performance under this Lease; provided that, if either party commences an action, proceeding, demand, claim, action, cause of action or suit against the other party arising out of or in connection with this Lease, then the substantially prevailing party shall be reimbursed by the other party for all reasonable costs and expenses, including reasonable attorneys’ fees and expenses, incurred by the substantially prevailing party in such action, proceeding, demand, claim, action, cause of action or suit, and in any appeal in connection therewith (regardless of whether the applicable action, proceeding, demand, claim, action, cause of action, suit or appeal is voluntarily withdrawn or dismissed). 37.8. Time is of the essence with respect to the performance of every provision of this Lease. 37.9. Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition. 37.10. Notwithstanding anything to the contrary contained in this Lease, Tenant’s obligations under this Lease are independent and shall not be conditioned upon performance by Landlord. 37.11. Whenever consent or approval of either party is required, that party shall not unreasonably withhold such consent or approval, except as may be expressly set forth to the contrary.

 
66 37.12. Any provision of this Lease that shall prove to be invalid, void or illegal shall in no way affect, impair or invalidate any other provision hereof, and all other provisions of this Lease shall remain in full force and effect and shall be interpreted as if the invalid, void or illegal provision did not exist. 37.13. Each of the covenants, conditions and agreements herein contained shall inure to the benefit of and shall apply to and be binding upon the parties hereto and their respective heirs; legatees; devisees; executors; administrators; and permitted successors and assigns. This Lease is for the sole benefit of the parties and their respective heirs, legatees, devisees, executors, administrators and permitted successors and assigns, and nothing in this Lease shall give or be construed to give any other person or entity any legal or equitable rights. Nothing in this Section shall in any way alter the provisions of this Lease restricting assignment or subletting. 37.14. This Lease shall be governed by, construed and enforced in accordance with the laws of the state in which the Premises are located, without regard to such state’s conflict of law principles. 37.15. Tenant guarantees, warrants and represents that the individual or individuals signing this Lease have the power, authority and legal capacity to sign this Lease on behalf of and to bind all entities, corporations, partnerships, limited liability companies, joint venturers or other organizations and entities on whose behalf such individual or individuals have signed. 37.16. This Lease may be executed in one or more counterparts, each of which, when taken together, shall constitute one and the same document. 37.17. No provision of this Lease may be modified, amended or supplemented except by an agreement in writing signed by Landlord and Tenant. 37.18. No waiver of any term, covenant or condition of this Lease shall be binding upon Landlord unless executed in writing by Landlord. The waiver by Landlord of any breach or default of any term, covenant or condition contained in this Lease shall not be deemed to be a waiver of any preceding or subsequent breach or default of such term, covenant or condition or any other term, covenant or condition of this Lease. 37.19. To the extent permitted by Applicable Laws, the parties waive trial by jury in any action, proceeding or counterclaim brought by the other party hereto related to matters arising out of or in any way connected with this Lease; the relationship between Landlord and Tenant; Tenant’s use or occupancy of the Premises; or any claim of injury or damage related to this Lease or the Premises. 37.20. Subject to Force Majeure or temporary interruptions due to casualty or repairs and maintenance, Tenant will have access to the Premises 24 hours per day, 7 days per week throughout the Term. 37.21. Whenever in this Lease a non-scheduled payment is required to be made by one party to the other, but a specific date for payment is not set forth or a specific number of days

 
67 within which payment is to be made is not set forth, or the words "promptly" and/or "on demand," or the equivalent, are used to specify when such payment is due, then such payment shall be due thirty (30) days (and when words such as “immediately” or the equivalent are used, then such payment will be due ten (10) days) after the party which is entitled to such payment sends written notice to the other party demanding payment. 37.22. For so long as Tenant leases a minimum of three hundred sixty thousand (360,000) square feet of Rentable Area at the Project, Landlord shall not enter into a lease agreement for any space in the Project with any of the following competitors of Tenant: Affymetrix (including Parallele, True Materials, Panomics, and US Bio Chemicals), Agilent, Beckman Coulter, BGI (including Complete Genomics), BioArray Solutions, Combimatrix, Intelligent Biosystems, Thermo Fisher (including Life Technologies, Applied Biosystems, Invitrogen, and Ion Torrent), Luminex, Natera, New England Biolabs, Pacific Biosciences, Qiagen (including Intelligent Biosystems & Pyrosequencing), Roche, Sequenom, Ariosa (including Tandem Diagnostics), Genomic Health, Oxford Nanopore (each, a “Competitor”); provided, however, that nothing in this Lease shall prohibit Landlord from entering into a lease agreement with any affiliate (which shall mean a company controlled by, under common control with, or which controls such Competitor) of a Competitor (any such entity, a “Competitor Affiliate”); provided, further, that, prior to entering into any lease agreement with a Competitor Affiliate for space at the Project, Landlord shall be obligated to offer the space which Landlord intends to lease to such Competitor Affiliate to Tenant in accordance with the terms, conditions and provisions of this Section 37.22 (the “Competitor ROFR”). 37.22.1 In the event Landlord receives from a Competitor Affiliate a bona fide offer to lease space in the Project on terms which Landlord would consider (any such space, the “Competitor ROFR Premises”), Landlord shall provide written notice thereof to Tenant (the “Notice of Offer”), specifying the terms and conditions (including lease term) of the proposed lease to such Competitor Affiliate of the Competitor ROFR Premises. This Competitor ROFR will not apply in the event an existing tenant of the Project becomes a Competitor Affiliate after entering into its lease at the Project, in which case, Landlord will have no obligation to offer such Competitor Affiliate’s space to Tenant, and Landlord will have the right to extend, expand or permit such Competitor Affiliate to exercise any rights or options granted to it pursuant to its lease without any liability or obligation to Tenant hereunder. 37.22.2 Within ten (10) days following its receipt of a Notice of Offer, Tenant shall advise Landlord in writing whether Tenant elects to lease all (not just a portion) of the Competitor ROFR Premises on the terms and conditions set forth in the Notice of Offer. If Tenant fails to notify Landlord of Tenant’s election within such ten (10) day period, then Tenant shall be deemed to have elected not to lease the Competitor ROFR Premises. 37.22.3 If Tenant timely notifies Landlord that Tenant elects to lease the Competitor ROFR Premises on the terms and conditions set forth in the Notice of Offer, then Landlord shall lease the Competitor ROFR Premises to Tenant upon the terms and conditions set forth in the Notice of Offer. Landlord and Tenant will execute an amendment to this Lease adding the Competitor ROFR Premises to the Premises on the terms set forth in the Notice of

 
68 Offer (provided that the Term as to the Competitor ROFR Premises does not have to be coterminous with the Premises) and otherwise in accordance with the terms and conditions of this Lease. Notwithstanding anything in this Section 37.22 to the contrary, the Competitor ROFR shall not apply during the last twelve (12) months of the Term (or any applicable Option Term) unless Tenant has delivered an Option Exercise Notice pursuant to Section 39.3 of this Lease further extending the Term. 37.22.4 If Tenant notifies Landlord that Tenant elects not to lease the Competitor ROFR Premises on the terms and conditions set forth in the Notice of Offer, or if Tenant fails to notify Landlord of Tenant’s election within the ten (10)-day period described above, then Landlord shall have the right to consummate a lease with such Competitor Affiliate of the Competitor ROFR Premises on such terms as Landlord and such Competitor Affiliate deem acceptable (provided that in the event the terms previously offered to Tenant in the Notice of Offer are altered so as to reduce the Net Effective Rental Rate (as defined below) by more than five percent (5%) of the Net Effective Rental Rate listed in the Notice of Offer delivered to Tenant, Landlord will be obligated to deliver a revised Notice of Offer stating such revised terms, and Tenant will have three (3) business days after receipt of the revised Notice of Offer to deliver written notice to Landlord exercising the Competitor ROFR on such revised terms). The term “Net Effective Rental Rate” shall mean the rental rate, as adjusted to reflect the value of any free rent, tenant improvement allowance or similar monetary concessions contained in the revised Notice of Offer. If Tenant elects not to exercise the Competitor ROFR on such revised terms (or fails to respond during such three (3) business day period), then Tenant will have no further rights with respect to the Competitor ROFR Premises and Landlord shall have the right to enter into a lease with such Competitor Affiliate on any terms and conditions it deems acceptable. 37.22.5 Notwithstanding anything in this Article to the contrary, Tenant shall not have the right to exercise the Competitor ROFR during such period of time that Tenant is in monetary or material non-monetary Default under any provision of this Lease (and the time period for Tenant to exercise the Competitor ROFR will not be extended by reason of Tenant’s inability to so exercise the Competitor ROFR). Any attempted exercise of the Competitor ROFR during a period of time in which Tenant is so in monetary or material non-monetary Default (beyond the expiration of all applicable notice and cure periods) shall be void and of no effect. 37.22.6 The rights described in this Section 37.22 shall be personal to the Tenant originally named in this Lease (i.e., Illumina, Inc.), may not be transferred to any other entity, and may not be assigned to any third party except in connection with an assignment of Tenant’s entire interest in this Lease to a Tenant’s Affiliate; provided, however, that the Tenant originally named in this Lease (i.e., Illumina, Inc.) shall be fully and primarily liable under this Lease for any Competitor ROFR Premises leased pursuant to this Section 37.22 regardless of whether the right of first refusal granted under this Section 37.22 is exercised by the Tenant originally named in this Lease (i.e., Illumina, Inc.) or by a Tenant’s Affiliate. Illumina, Inc. will sign any reasonable document reasonably requested by Landlord to confirm the foregoing continuing liability of Illumina, Inc. as an express condition precedent to Landlord’s obligation to lease the Competitor ROFR Premises to any Tenant’s Affiliate.

 
69 37.22.7 If Tenant exercises the Competitor ROFR, Landlord does not guarantee that the Competitor ROFR Premises will be available on the anticipated commencement date for the Lease as to such Competitor ROFR Premises due to a holdover by the then-existing occupants of the Competitor ROFR Premises or for any other reason beyond Landlord’s reasonable control. 38. Telecommunications Equipment. At any time during the Term, subject to the terms of this Article 38, Tenant shall have the exclusive right to install, at Tenant's sole cost and expense, satellite or microwave dishes or other communication equipment (the "Telecommunications Equipment") upon the roof of the Buildings leased solely by Tenant to the extent the same is reasonably necessary for equipment used in connection with Tenant’s business operations at the Project. Tenant shall comply with any roof or roof-related warranties. The physical appearance and the size of the Telecommunications Equipment shall be subject to Landlord's written approval prior to installation (which approval will not unreasonably be withheld, conditioned or delayed) any covenants, conditions, or restrictions encumbering the Premises and, any Applicable Laws. Tenant shall maintain such Telecommunications Equipment in good condition and repair, at Tenant's sole cost and expense. The cost of the Telecommunications Equipment, including but not limited to the permitting, installation, maintenance and removal thereof shall be at Tenant's sole cost and expense. If Tenant fails to maintain its Telecommunications Equipment, or if Tenant fails to remove such Telecommunications Equipment upon termination of this Lease, or fails to repair any damage caused by such removal, Landlord may do so at Tenant's expense. Tenant shall on demand reimburse Landlord for all actual, documented and reasonable costs incurred by Landlord to effect such removal, which amounts shall be deemed Additional Rent and shall include without limitation, all sums disbursed, incurred or deposited by Landlord, including Landlord's costs, expenses and actual attorneys' fees with interest thereon. Tenant shall indemnify, defend and hold harmless Landlord from and against any loss, cost, claim, lawsuit, liability or expense (including reasonable attorneys' fees and disbursements) arising directly or indirectly out of Tenant's Telecommunications Equipment or any failure to perform any of its obligations under this Article 38. 39. Options to Extend Term. Tenant (or a Tenant’s Affiliate to whom Tenant has assigned its entire interest in this Lease) shall have three (3) options (each, an “Option”) to extend the Term by five (5) years each (each, an “Option Term”) as to the entire Premises (or as to any full Building leased by Tenant; provided that in the event Tenant does not elect to exercise its Option as to all Buildings in the Project, the Multi-Tenant Provisions will apply as of the commencement date of such Option Term) upon the following terms and conditions. If Tenant fails to renew the Term as to any Building within the Project, Tenant will have no further right or Option with respect to those Buildings for which Tenant does not exercise the applicable Option (e.g., if Tenant elects to exercise its Option only as to Building A, the Multi-Tenant Provisions will apply and Tenant will have no further right or Option with respect to Building D, Building B or Building C). Tenant may not exercise the second or third Option, as applicable, unless Tenant has properly exercised the first and second Options in accordance with the terms of this Article 39. Any extension of the Term pursuant to an Option shall be on all the same terms and conditions as this Lease, except as follows:

 
70 39.1. Base Rent for the applicable Building(s) identified in the Option Exercise Notice (as defined below) shall be adjusted on the first (1st) day of each Option Term. The Base Rent during each Option Term shall equal the Fair Market Value for the applicable Option Term, which Fair Market Value determination will include rental adjustments in accordance with comparable transactions as determined as part of the Fair Market Value determination. "Fair Market Value" means the then-prevailing average annual rate that comparable landlords have accepted in current transactions from new, non-equity (i.e., not being offered equity in the Buildings), nonrenewal, nonexpansion and nonaffiliated tenants of similar financial strength for comparable space in comparable class "A" office/lab buildings comparably located, with comparable size, quality and floor height in a first class office building, or as appropriate, a laboratory building, taking into consideration all relevant factors, including, without limitation, the proposed lease term, the tenant inducements, allowances or concessions, if any, and excluding specialized tenant improvements or tenant paid improvements for a comparable term, with the determination of Fair Market Value to take into account all relevant factors, including tenant inducements, allowances or concessions, if any, the extent of the services provided or to be provided to the Premises, and contraction and expansion options. In the event the tenant inducements, allowances or concessions granted differ from the terms contained in this Lease, an adjustment to the Fair Market Value shall be made on a basis consistent with the adjustments commonly made in the market for comparable differences and concession packages. If Landlord and Tenant cannot agree on the Fair Market Value for purposes of any Option Term within sixty (60) days after Tenant delivers the Option Exercise Notice, then they shall engage a mutually agreeable independent third party appraiser, which appraiser shall be a real estate broker with at least ten (10) years' experience in appraising the rental value of leased commercial premises (for research and development and laboratory uses) at comparable sites within the Bay Area Peninsula submarket (the "Appraiser"). If the parties cannot agree on the Appraiser, each shall within ten (10) days after such impasse appoint an Appraiser (meeting the qualifications set forth above) and, within ten (10) days after the appointment of both such Appraisers, those two Appraisers shall select a third Appraiser meeting the qualifications set forth above. If either party fails to timely appoint an Appraiser, then the Appraiser the other party appoints shall be the sole Appraiser. Within ten (10) days after appointment of all Appraiser(s), Landlord and Tenant shall each simultaneously give the Appraisers (with a copy to the other party) its determination of Fair Market Value, with such supporting data or information as each submitting party determines appropriate. Within ten (10) days after such submissions, the Appraisers shall by majority vote select either Landlord's or Tenant's Fair Market Value. The Appraisers may not select or designate any other Fair Market Value. The determination of the Appraiser(s) shall bind the parties. 39.2. The rights described in this Section 39 shall be personal to the Tenant originally named in this Lease (i.e., Illumina, Inc.), may not be transferred to any other entity, and may not be assigned separately from this Lease except in connection with an assignment of Tenant’s entire interest in this Lease to a Tenant’s Affiliate; provided, however, that the Tenant originally named in this Lease (i.e., Illumina, Inc.) shall remain fully and primarily liable under this Lease during any Option Term regardless of whether such Option was exercised by the Tenant originally named in this Lease (i.e., Illumina, Inc.) or by a Tenant’s Affiliate. Illumina, Inc. will sign any reasonable document reasonably requested by Landlord to confirm the foregoing

 
71 continuing liability of Illumina, Inc. as an express condition precedent to Landlord’s obligation to allow any Tenant’s Affiliate to exercise an Option. 39.3. Each Option is conditional upon Tenant giving Landlord written notice (“Option Exercise Notice”) of its election to exercise such Option at least twelve (12) months prior to the end of the expiration of the then-current Term. Time shall be of the essence as to Tenant’s exercise of an Option. Tenant assumes full responsibility for maintaining a record of the deadlines to exercise an Option. Tenant acknowledges that it would be inequitable to require Landlord to accept any exercise of an Option after the date provided for in this Section. 39.4. Notwithstanding anything contained in this Article to the contrary, Tenant shall not have the right to exercise an Option during any time period when Tenant is in monetary or material non-monetary default after the expiration of any applicable notice and cure period, or in the event that Tenant has defaulted in the performance of its obligations under this Lease three (3) or more times and a service or late charge has become payable under Section 28.1 for each of such defaults during the twelve (12)-month period immediately prior to the date that Tenant intends to exercise an Option, whether or not Tenant has cured such defaults. 39.5. The period of time within which Tenant may exercise an Option shall not be extended or enlarged by reason of Tenant’s inability to exercise such Option because of the provisions of Section 39.4. 40. Expansion Option. Upon a written request from Tenant, at any time during the Expansion Exercise Period (as defined below), Tenant can request that Landlord provide (1) its then-current calculation of the estimated Project Costs for the Expansion Space (as defined below) based on a bid from Landlord’s general contractor, and (2) a detailed rent schedule for the Expansion Space, which Landlord shall provide within thirty (30) days after receipt of Tenant’s written request. In the event that, at any time within the first thirty-six (36) months after the Phase 1 Rent Commencement Date subject to extension as set forth below (the “Expansion Exercise Period”), Tenant would like to expand the Premises to include that certain Building to be constructed by Landlord and referred to as Building C and containing approximately 160,000 square feet of Rentable Area, subject to measurement pursuant to Section 1.1 above (“Expansion Space”), as further described on Exhibit A attached hereto, Tenant may do so by delivering written notice to Landlord (“Expansion Notice”), which notice shall state that Tenant is exercising its option (“Expansion Option”) to request that Landlord construct Building C and the related parking facilities to accommodate Tenant’s expansion into the Expansion Space. If Tenant delivers an Expansion Notice to Landlord within the Expansion Exercise Period, then the Expansion Space will be added to the Premises leased by Tenant hereunder on terms and conditions substantially equivalent to those applicable to the original Premises except that (i) the Commencement Date as to Tenant’s lease of the Expansion Space will be the date (the “Expansion Space Commencement Date”) which is nine (9) months after the Expansion Space is delivered to Tenant in TI Ready Condition; provided that if the Expansion Space Commencement Date is delayed because of a Tenant Delay (as defined the Work Letter), then the Expansion Space Commencement Date shall be the date that the Expansion Space Commencement Date would have occurred but for such Tenant Delay, and in the event there is

 
72 a Landlord Delay or an Uncontrollable Delay which actually delays completion of the Tenant Improvements (provided that no Uncontrollable Delays shall exceed 90 days regardless of the actual number of days of Uncontrollable Delay)), then the nine (9) month period set forth above will be extended by the number of days of such Landlord Delays and/or Uncontrollable Delays, as applicable, and (ii) the annual Base Rent for the Expansion Space (the “Expansion Space Base Rent”) will be equal to the sum of (a) the product of seven percent (7%) and the Project Costs (as defined in Exhibit E) allocable to the Expansion Space, which shall be payable commencing as of the Expansion Space Commencement Date (which will escalate pursuant to Section 6 above) (the “Project Costs Component”), plus (b) the fixed portion of the Expansion Land Rent set forth in Section 40.1(a) below (i.e., $1,574,809.60, but subject to increase pursuant to Section 6 above), which shall be payable commencing on the later of (1) the first day of the thirty-seventh (37th) month after the Phase 1 Rent Commencement Date or (2) the Expansion Space Commencement Date, and will be further subject to escalation as set forth in Section 6 above (the “Land Rent Component”), (iii) the only tenant improvement allowance payable by Landlord in connection with the Expansion Space will be an amount equal to Fifty Five Dollars ($55.00) per square foot of Rentable Area in the Expansion Space, as measured in accordance with Section 1.1 of this Lease, (iv) the Term Expiration Date as to the Expansion Space will be the date that is fifteen (15) years after the Expansion Space Commencement Date and (v) the Project and Base Building Work, including without limitation the Shell Schematic Design Documents, Approved Plans, Design Development Documents, Project Cost Estimate and Final Budget, will all be altered, prepared and/or approved as necessary to reflect the Expansion Space. Expansion Space Base Rent will be payable in monthly installments equal to 1/12th of the Expansion Space Base Rent as calculated pursuant to subsection (ii) of the foregoing sentence and otherwise in accordance with the provisions of this Lease applicable to Base Rent (and further subject to adjustment pursuant to the terms of Section 6 of this Lease). The Project and Base Building Work with respect to the Expansion Space will be constructed in a manner which is comparable to the initial Premises (and delivered in substantial accordance with the Specifications set forth in Exhibit C). In the event Tenant properly exercises the Expansion Option, Landlord and Tenant will execute an amendment to this Lease memorializing the addition of the Expansion Space to the Premises within thirty (30) days after the date of the Expansion Notice (provided that the execution of such an amendment will not be a condition precedent to the effectiveness of the expansion), which Expansion Space Amendment shall include a detailed schedule of the Expansion Space Base Rent. In order to exercise the Expansion Option hereunder, Tenant must not be in Default under this Lease after expiration of applicable notice and cure periods at the time of delivery of the Expansion Notice. The rights described in this Section 40 shall be personal to the Tenant originally named in this Lease (i.e., Illumina, Inc.), may not be transferred to any other entity, and may not be assigned separately from this Lease except in connection with an assignment of Tenant’s entire interest in this Lease to a Tenant’s Affiliate; provided, however, that the Tenant originally named in this Lease (i.e., Illumina, Inc.) shall be fully and primarily liable under this Lease for the Expansion Space (if the Expansion Option is exercised), regardless of whether the Expansion Option is exercised by the Tenant originally named in this Lease (i.e., Illumina, Inc.) or by a Tenant’s Affiliate, and Illumina, Inc. agrees to sign any reasonable document reasonably requested by Landlord to confirm the foregoing continuing liability of Illumina, Inc. as an express condition precedent to Landlord’s obligation to lease the Expansion Space to any Tenant’s Affiliate regardless of whether the Expansion Option, Land Rent Option

 
73 and/or Building C ROFR (as applicable) is exercised by the Tenant originally named in this Lease (i.e., Illumina, Inc.) or by a Tenant’s Affiliate. 40.1 By delivery of written notice (“Land Rental Notice”) delivered to Landlord no later than the day that is twenty-four (24) months after the Phase 1 Rent Commencement Date, Tenant (or a Tenant’s Affiliate to whom Tenant has assigned its entire interest in this Lease) may elect to extend the Expansion Option (such extension may be referred to as the “Land Rental Option”) by agreeing to pay “Expansion Land Rent” as defined below, which Expansion Land Rent will commence on the first day of the thirty-seventh (37th) month following the Phase 1 Rent Commencement Date; provided, however, that Tenant's right to provide the Land Rental Notice shall continue unless Landlord provides written notice ("Reminder Notice") to Tenant of Tenant's failure to timely provide such Land Rental Notice and Tenant fails to provide the same within ten (10) days of Landlord's Reminder Notice (which Reminder Notice shall not be sent earlier than that date which is twenty-four (24) months after the Phase 1 Rent Commencement Date). The “Expansion Land Rent” shall mean an annual amount equal to the sum of (a) $1,574,809.60, plus (b) the product of (i) seven percent (7%) and (ii) all Project Costs which are allocated to Building C by Landlord based on the pro rata share of Building C to the overall Rentable Area of the Project. Expansion Land Rent will be payable in monthly installments equal to 1/12th of the Expansion Land Rent as calculated pursuant to the foregoing sentence and otherwise in accordance with the provisions of this Lease applicable to Base Rent (and further subject to adjustment pursuant to the terms of Section 6 of this Lease). In the event Tenant elects to exercise the Land Rental Option, then Tenant’s Expansion Option will remain in full force and effect and Tenant will continue to pay the Expansion Land Rent for so long as Tenant desires (provided that the Land Rental Option will in no event extend beyond the Term of this Lease as to Building A and Building D). In the event Tenant wishes to terminate the Land Rental Option, it may do so by delivery of at least eighteen (18) months’ prior written notice, in which event the Land Rental Option (and the Expansion Option) will terminate as of the date which is eighteen (18) months after Landlord’s receipt of such termination notice. Landlord shall have all the same rights and remedies for non-payment of Expansion Land Rent as it has for non-payment of Base Rent hereunder. The rights described in this Section 40.1 shall be personal to the Tenant originally named in this Lease (i.e., Illumina, Inc.), may not be transferred to any other entity, and may not be assigned separately from this Lease except in connection with an assignment of Tenant’s entire interest in this Lease to a Tenant’s Affiliate; provided, however, that the Tenant originally named in this Lease (i.e., Illumina, Inc.) shall be fully and primarily liable under this Lease for the Expansion Land Rent regardless of whether the Land Rent Option is exercised by the Tenant originally named in this Lease (i.e., Illumina, Inc.) or by a Tenant’s Affiliate, and Illumina, Inc. agrees to sign any reasonable document reasonably requested by Landlord to confirm the foregoing continuing liability of Illumina, Inc. as an express condition precedent to Landlord’s obligation to allow any Tenant’s Affiliate to exercise the Land Rental Option. 40.2 The parties hereby acknowledge that in the event Tenant exercises the Expansion Option, the Term of this Lease as to the Premises and the Expansion Space will not expire on the same date. Tenant shall have the option, exercisable by written notice (an “Expansion Extension Notice”) delivered to Landlord within ninety (90) days after the Expansion Space Commencement Date, to extend the Term Expiration Date for the Premises such that the Term of

 
74 Tenant’s lease of the Premises will expire conterminously with the Expansion Space. In the event Tenant delivers the Expansion Extension Notice within the time period set forth above, the Term of this Lease as to the Premises shall be automatically extended such that Tenant’s lease of the Premises will expire on the Term Expiration Date for the Expansion Space, and all terms and conditions of this Lease as applicable to the Premises shall continue to apply during such extended Term, including the bi-annual adjustment of Base Rent set forth in Section 6 above. Tenant will sign a lease amendment memorializing such extension if requested by Landlord, but such extension will be effective regardless of whether an amendment is entered. Tenant will not have the right to exercise the above option in the event Tenant is in monetary or material non- monetary default hereunder after the expiration of any applicable notice and cure periods. The rights described in this Section 40.2 shall be personal to the Tenant originally named in this Lease (i.e., Illumina, Inc.), may not be transferred to any other entity, and may not be assigned separately from this Lease except in connection with an assignment of Tenant’s entire interest in this Lease to a Tenant’s Affiliate; provided, however, that the Tenant originally named in this Lease (i.e., Illumina, Inc.) shall be fully and primarily liable under this Lease regardless of whether the extension right is exercised by the Tenant originally named in this Lease (i.e., Illumina, Inc.) or by a Tenant’s Affiliate, and Illumina, Inc. agrees to sign any reasonable document reasonably requested by Landlord to confirm the foregoing continuing liability of Illumina, Inc. 40.3 In the event (i) Tenant fails to exercise the Expansion Option or the Land Rental Option, or (ii) the Expansion Option or Land Rental Option expire or are terminated in accordance with the terms of this Article 40 or by lapse of time, then Landlord will be free to develop Building C, together with all landscaping, parking facilities and structures, private drives and other improvements and appurtenances within the Project related thereto or serving Building C exclusively as reasonably designated by Landlord (the “Building C Site”); provided such development will comply with the provisions of Article 12 of this Lease and Landlord will not make any material changes to the configuration of the Project in connection with the development of the Building C Site. Landlord will have sole control and discretion over the design (provided that Landlord will not make material changes to the exterior appearance of Building C), development and leasing of Building C (subject to Section 37.22 above and the Building C ROFR described in Section 40.4 below). 40.4 In the event Tenant does not exercise its Expansion Option, Tenant shall have a right of first refusal (“Building C ROFR”) as to any space in Building C, provided that such Building C ROFR will only apply after the initial lease of the applicable portions of Building C to third party tenant(s) (i.e., Tenant will have no rights with respect to the initial leasing of any portion of Building C, regardless of when such initial lease is entered). After the initial lease of any portion of Building C, if such space becomes available for lease to third parties, as reasonably determined by Landlord (“Available Second Generation Space”), the Building C ROFR shall apply on the terms and conditions set forth in this Section 40.4, subject to the rights of any holder of a Superior Right (as defined below). To the extent that Landlord renews or extends a then-existing lease with any then-existing tenant or subtenant of any space, or enters into a new lease with such then-existing tenant or subtenant for the same premises, or allows an existing tenant to exercise an option to expand, exercise a right of first refusal or first offer, such rights shall be deemed “Superior Rights” and the affected space shall not be deemed to be

 
75 Available Second Generation Space. In the event Landlord receives from a third party a bona fide offer to lease Available Second Generation Space on terms which Landlord would consider, Landlord shall provide written notice thereof to Tenant (the “Building C Notice of Offer”), specifying the terms and conditions (including lease term) of a proposed lease to Tenant of the Available Second Generation Space. 40.4.1 Within ten (10) days following its receipt of a Building C Notice of Offer, Tenant shall advise Landlord in writing whether Tenant elects to lease all (not just a portion) of the Available Second Generation Space on the terms and conditions set forth in the Building C Notice of Offer. If Tenant fails to notify Landlord of Tenant’s election within such ten (10) day period, then Tenant shall be deemed to have elected not to lease the Available Second Generation Space. 40.4.2 If Tenant timely notifies Landlord that Tenant elects to lease the Available Second Generation Space on the terms and conditions set forth in the Building C Notice of Offer, then Landlord shall lease the Available Second Generation Space to Tenant upon the terms and conditions set forth in the Building C Notice of Offer. Landlord and Tenant will execute an amendment to this Lease adding the Available Second Generation Space to the Premises on the terms set forth in the Building C Notice of Offer (provided that the Term as to the Available Second Generation Space does not have to be coterminous with the Premises) and otherwise in accordance with the terms and conditions of this Lease. Notwithstanding anything in this Section 40.4 to the contrary, the Building C ROFR shall not apply during the last twelve (12) months of the Term (or any applicable Option Term) unless Tenant has delivered an Option Exercise Notice pursuant to Section 39.3 of this Lease further extending the Term. 40.4.3 If Tenant notifies Landlord that Tenant elects not to lease the Available Second Generation Space on the terms and conditions set forth in the Notice of Offer, or if Tenant fails to notify Landlord of Tenant’s election within the ten (10)-day period described above, then Landlord shall have the right to consummate the lease of the Available Second Generation Space with a third party on such terms as Landlord deems acceptable (provided that in the event the terms previously offered to Tenant in the Building C Notice of Offer are altered so as to reduce the Net Effective Rental Rate (as defined below) by more than five percent (5%) of the Net Effective Rental Rate listed in the Building C Notice of Offer delivered to Tenant, Landlord will be obligated to deliver a revised Building C Notice of Offer stating such revised terms, and Tenant will have three (3) business days after receipt of the revised Building C Notice of Offer to deliver written notice to Landlord exercising the Building C ROFR on such revised terms). The term “Net Effective Rental Rate” shall mean the rental rate, as adjusted to reflect the value of any free rent, tenant improvement allowance or similar monetary concessions contained in the revised Building C Notice of Offer. If Tenant elects not to exercise the Building C ROFR on such revised terms (or fails to respond during such three (3) business day period), then Tenant will have no further rights with respect to the Available Second Generation Space and Landlord shall have the right to enter into a lease with a third party on any terms and conditions it deems acceptable. 40.4.4 Notwithstanding anything in this Article to the contrary, Tenant shall not exercise the Building C ROFR during such period of time that Tenant is in default under any provision of this Lease (and the time period for Tenant to exercise the Building C ROFR will not

 
76 be extended by reason of Tenant’s inability to so exercise the Building C ROFR). Any attempted exercise of the Building C ROFR during a period of time in which Tenant is so in default shall be void and of no effect. 40.4.5 The rights described in this Section 40.4 shall be personal to the Tenant originally named in this Lease (i.e., Illumina, Inc.), may not be transferred to any other entity, and may not be assigned to any third party except in connection with an assignment of Tenant’s entire interest in this Lease to a Tenant’s Affiliate; provided, however, that the Tenant originally named in this Lease (i.e., Illumina, Inc.) shall be fully and primarily liable under this Lease for any Available Second Generation Space leased pursuant to this Section 40.4 regardless of whether the right of first refusal granted under this Section 40.4 is exercised by the Tenant originally named in this Lease (i.e., Illumina, Inc.) or by a Tenant’s Affiliate. Illumina, Inc. will sign any reasonable document reasonably requested by Landlord to confirm the foregoing continuing liability of Illumina, Inc. as an express condition precedent to Landlord’s obligation to lease the Available Second Generation Space to any Tenant’s Affiliate. 40.4.6 If Tenant exercises the Building C ROFR, Landlord does not guarantee that the Available Second Generation Space will be available on the anticipated commencement date for the Lease as to such Available Second Generation Space due to a holdover by the then- existing occupants of the Available Second Generation Space or for any other reason beyond Landlord’s reasonable control. 40.5 Parking Structure Construction. Effective as of the date (“PS1 Trigger Date”) which is the earlier of (i) the date upon which Tenant delivers an Expansion Notice to Landlord pursuant to Section 40 above, (ii) the date upon which the Expansion Exercise Period (as the same may be extended by the Land Rental Option pursuant to Section 40.1 above) ends, (iii) the date upon which the Term with respect to any Building expires or (iv) the expiration or earlier termination of this Lease (other than a termination due to a Landlord default), Tenant will be obligated to pay for the cost to construct a parking structure (“PS1”) in the location labelled “Parking Structure 1” on the Site Plan attached hereto as Exhibit A (as such Site Plan may be modified as permitted hereunder). Landlord will perform the construction of PS1 in accordance with the plans and specifications included within the Approved Plans. For clarity, Tenant’s obligation to pay to construct PS1 will apply regardless of whether Tenant leases any space in Building C and is independent of any right of expansion, extension or otherwise in this Lease. In the event Tenant determines that it requires additional parking spaces prior to the PS1 Trigger Date, Tenant may deliver written notice to Landlord requesting to accelerate the PS1 Trigger Date to an earlier date as specified in such notice, in which case Landlord will construct PS1 as soon as reasonably practicable after such accelerated PS1 Trigger Date. Landlord will provide Tenant with monthly invoices for all costs incurred by Landlord during the construction of PS1, which costs shall constitute Additional Rent due hereunder. All such invoices will be paid by Tenant within thirty (30) days after Tenant’s receipt thereof. In the event Tenant fails to pay any costs incurred by Landlord in connection with construction of PS1, Landlord will have all rights and remedies against Tenant as it has for non- payment of any other Rent due hereunder, including all rights set forth in Section 46 below. In addition, in the event this Lease terminates prior to the construction of PS1 for any reason other than a Landlord default, in lieu of making monthly payments during construction of PS1 as set

 
77 forth above, Tenant will pay to Landlord a lump sum equal to the anticipated cost (based on a competitive bid to at least three (3) general contractors selected by Landlord) to construct PS1 within thirty (30) days after receipt of an invoice from Landlord for such costs, which invoice will be accompanied by the general contractor’s bid, without any deduction or offset whatsoever, which obligation will survive the expiration or earlier termination of this Lease. 41. Right of First Refusal to Purchase. Provided that Tenant is not then in monetary or material non-monetary default under this Lease, then if Landlord receives an offer to purchase the Project or any individual Buildings within the Project on terms which Landlord would agree to sell such Building(s) or Project to such third party (the applicable Building(s) or Project to which such offer to purchase applies shall be referred to in this Article 41 as the “Interest”), then Landlord shall provide Tenant with a summary of the pertinent economic and non-economic terms of such offer, including the purchase price and any earnest money deposits required (the “Offer Summary”), and Tenant shall have a period of ten (10) business days from receipt thereof (the “ROFR Period”) within which to exercise its right (the “ROFR”) to purchase the Interest under the terms contained in the Offer Summary. If Tenant is in default, the foregoing shall not be read to prevent Tenant from curing the applicable default and then exercising the ROFR once the default is cured if such cure is completed within the applicable cure period, if any, expressly set forth in this Lease and the ROFR is exercised within the period set forth herein (which period shall not be extended to allow for a cure of the default). 41.1 For the avoidance of confusion, Tenant’s rights under this Article 41: (a) shall be personal to the Tenant originally named in this Lease (i.e., Illumina, Inc.), may not be transferred to any other entity, and may not be assigned separately from this Lease except in connection with an assignment of Tenant’s entire interest in this Lease to a Tenant’s Affiliate; (b) shall be continuing and binding on Landlord's successors and assigns, and; (c) shall apply only to a proposed sale of Landlord’s fee simple interest to a third party for consideration and shall not apply in the event of: (i) a multi-asset portfolio sale by persons holding a controlling interest in Landlord (and/or their affiliates), or (ii) a recapitalization or financing transaction, including grants of easements, rights and restrictions and the like (iii) any larger securities transaction involving the Interest or (iv) a sale, transfer or other conveyance of any Interest in the Project to any parent, subsidiary or affiliate of Landlord. 41.2 Tenant shall notify Landlord of its election to exercise the ROFR by giving Landlord written notice (“ROFR Exercise Notice”) within the ROFR Period, in the manner set forth herein for the giving of notice to Landlord. Within ten (10) business days thereafter, Landlord and Tenant shall enter into a purchase agreement incorporating the economic and other terms contained in the Offer Summary, which purchase agreement will otherwise contain commercially reasonable terms consistent with comparable transactions involving the sale of a project to the occupant thereof in the market area of the Project, including a thirty (30) day

 
78 diligence period within which to obtain and review the then-current title report and secure an ALTA survey for the Interest or conduct any other commercially reasonable diligence desired by Tenant. Title will be insured by a title company reasonably acceptable to Landlord and Tenant, and the parties will cooperate as required to allow the title company to issue a 2006 Form American Land Title Association extended coverage Owner’s Policy of Title Insurance (or equivalent) in the amount of the purchase price upon closing, with such endorsements or exceptions as Tenant may negotiate with the title company, at Tenant’s sole option and cost. Landlord and Tenant shall consummate the purchase and sale of the Interest pursuant to the terms of such purchase agreement, provided that such purchase agreement shall provide Tenant at least thirty (30) days after entry into the purchase agreement to complete its due diligence and fifteen (15) days thereafter within which to complete the purchase of the Interest. If Landlord and Tenant are unable to agree on the terms of the purchase agreement within the ten (10) business day period set forth above, then the ROFR Exercise Notice will be deemed rescinded and Tenant’s ROFR shall thereafter be null and void and Landlord will be free to convey the Interest to a third party on the terms set forth in the Offer Summary or terms substantially equivalent thereto, and this ROFR will thereafter terminate as to such Interest. No brokerage fees will be payable in connection with the exercise of this ROFR, and each party will be responsible for the payment of any brokerage fee payable to any broker who claims to have represented such party in connection with the purchase or sale pursuant to this ROFR. 41.3 Failure of Tenant to deliver the ROFR Exercise Notice within the required time period shall be deemed an election by Tenant to not exercise the ROFR, and: (a) Tenant shall have no further rights to exercise the ROFR thereafter (except as set forth in (c) and (d) below), and (b) Landlord shall then have the right for the next two hundred forty (240) days to complete the transaction described in the Offer Summary for a purchase price that is equal to or greater than ninety-five percent (95%) of the price set forth in the Offer Summary, whether with the third party who submitted the unsolicited offer to purchase or with another third party, unencumbered by the provisions of this Article, and (c) If a sale of the Interest complying with subparagraph (b) does not occur within the two hundred seventy (270) day period described therein, Landlord shall again comply with the provisions of this Article 41 with respect to any further offer Landlord receives to purchase the Interest which Landlord deems acceptable, and (d) If Landlord intends to sell its Interest in response to an offer with respect to which Tenant failed to deliver the ROFR Exercise Notice within the required time period, for less than ninety-five percent (95%) of the price set forth in the applicable Offer Summary, Landlord shall again provide Tenant with the opportunity to deliver a ROFR Exercise Notice with respect thereto, and the ROFR Period shall be ten (10) business days as to such revised Offer Summary. Notwithstanding the foregoing, Tenant’s first refusal rights under this Article 41 shall be null and void and of no further effect if Tenant delivers a ROFR Exercise Notice and then fails to close on

 
79 the purchase of the Interest for any reason (other than as a result of a default by Landlord under the purchase agreement). If Tenant completes a purchase of any Interest which is less than the entire Project, Landlord and Tenant will enter into an amendment to this Lease terminating the Lease as to the Interest purchased by Tenant and making such other adjustments as necessary to reflect that the Premises no longer includes the Interest. 42. Multi-Tenant Provisions. In the event that (i) Tenant fails to exercise the Expansion Option and/or Land Rental Option as to Building C or (ii) the Term with respect to any Building(s) expires prior to the Term with respect to any other Building(s), the terms and conditions of Exhibit G attached hereto will automatically apply, and the Lease will automatically be modified in accordance with the terms and conditions set forth therein, effective as of the date (“Trigger Date”) set forth in Landlord’s written notice to Tenant advising Tenant that the Project is anticipated to become a multi-tenant Project. 43 Secured Areas. Notwithstanding anything to the contrary set forth in this Lease, Tenant may designate certain areas of the Premises as "Secured Areas" should Tenant require such areas for the purpose of securing certain valuable property or confidential information. Landlord shall at all times be accompanied by a representative of Tenant before entering any Secured Area, and Landlord will otherwise follow Tenant’s commercially reasonable security procedures. Landlord may not enter such Secured Areas except in the case of emergency or in the event of a Landlord inspection, in which case Landlord shall provide Tenant with one (1) business day prior written notice of the specific date and time of such Landlord inspection. Notwithstanding the foregoing, Landlord will be permitted to enter into a Secured Area without a representative of Tenant in the event of an emergency which poses an imminent risk of injury to persons or property where no representative of Tenant is readily available, or in the event Tenant fails to provide a representative after Landlord has made such request at least one (1) business day in advance. 44 Fiber Optic/Internet Services. Subject to the terms of this Lease, including without limitation, Article 14 above, Tenant shall have the right, at Tenant’s sole cost, to contract with a third party to connect fiber optic cable, including any equipment ancillary to such fiber optic cabling (the “Fiber Optic Lines”) to any Buildings within the Project. Tenant may select the service provider, subject to Landlord’s approval, which will not be unreasonably withheld, conditioned or delayed. Landlord will have the right to review and reasonably approve any agreements with such third parties, and in the event Landlord is required to execute any access agreement, easement or similar agreement, such agreement will be in a form reasonably acceptable to Landlord, and Tenant will pay all of Landlord’s reasonable documented costs to review, negotiate and perform such agreement. The method of installation of such Fiber Optic Lines, including location of any trenches and conduit, will be subject to Landlord’s reasonable prior consent, and Tenant or its service provider will repair any damage to the Project and restore all surface areas disturbed by the installation and maintenance of such Fiber Optic Lines. In addition, Tenant will have the right to contract with its preferred internet service provider for internet service to the Premises, at Tenant’s sole cost and expense. In the event any conduit, cabling or similar equipment needs to be connected to the Premises in order to provide such internet service, the terms and conditions set forth above relating to Fiber Optic Lines will apply to the installation of such lines.

 
80 45 Solar. Tenant may elect to install a solar power generating system and all equipment relating thereto (“Solar Panels”) on the roof of any Building wholly leased by Tenant in order to supply electrical power to the Premises, subject to Tenant’s compliance with all terms and conditions of Articles 14 and 38 above. Tenant shall comply with any roof or roof-related warranties and Applicable Laws. Tenant will be responsible for engaging a qualified structural engineer to assess the weight distribution and requirements for the Solar Panels and Tenant will provide and pay for any roof or structural support required to accommodate such Solar Panels and preserve the roof warranty and structural integrity of the Building. All plans for the installation of such Solar Panels will be subject to Landlord’s prior written consent, which shall not be unreasonably withheld. Upon the expiration or earlier termination of this Lease, Landlord may elect to require Tenant to remove such Solar Panels and repair all damage caused by such removal and restore the Building to its condition prior to the installation of such system. Tenant, at its sole cost and expense, shall inspect the Solar Panels at least annually (or more often, if more frequent inspections are in keeping with industry standards), and correct any loose bolts, fittings or other appurtenances and repair any damage to the roof caused by the installation or operation of the Solar Panels. Tenant shall not permit the installation, maintenance or operation of the Solar Panels to violate any Applicable Laws. 46. Completion Guaranty. In order to induce Landlord to enter into the Lease, and in consideration of Landlord’s investment in the Project, and further acknowledging that Landlord intends to rely on the guaranty set forth in this Section 46 in entering into this Lease and investing in the Project, Tenant hereby irrevocably, absolutely and unconditionally warrants and guarantees to Landlord, independently of all other obligations and rights of Tenant under this Lease, and regardless of whether Tenant determines that it will not occupy the Premises under this Lease for any reason, that it will (i) complete the Tenant Improvements in Building D and complete the Tenant Improvements in a minimum of 160,000 square feet of Rentable Area in Building A and/or Building B in accordance with the Approved TI Plans (as defined in the Tenant Work Letter attached hereto as Exhibit B), with reasonable diligence after the Premises are delivered to Tenant in TI Ready Condition (but in any event prior to the date which is two (2) years after the date of delivery in TI Ready Condition, subject to Uncontrollable Delays (provided that no Uncontrollable Delays shall exceed 90 days regardless of the actual number of days of Uncontrollable Delay)), (ii) prior to the expiration of the initial Term of this Lease, complete Tenant Improvements in the remaining portions of Building A and Building B to a minimum level such that such remaining portions of Building A and Building B are in “warm shell” condition, with such warm shell improvements constructed in a good and workmanlike manner, in compliance with all Applicable Laws and constructed with finishes and materials equal or better in quality to the materials and finishes used in the 160,000 square feet of Rentable Area completed in accordance with the Approved TI Plans (e.g., with similar type and quality/quantity of base building systems (including base building HVAC, electrical, plumbing and fire life safety systems), with finished lobbies and restrooms, and complete elevators with finished cabs); and (iii) reimburse Landlord for the cost to construct PS1 as set forth in Section 40.5 above (items (i), (ii) and (iii) the “Guaranteed Obligations”). Tenant makes this guaranty with the expectation that it will receive substantial benefits from this Lease and from the investment of Landlord in the Project.

 
81 46.1 If Tenant fails to perform any part of the Guaranteed Obligations when due, Tenant shall, immediately upon written demand of Landlord to Tenant, cure such failure to perform the applicable part of the Guaranteed Obligations by performing, or causing to be performed, the following: (a) recommencing construction of the Guaranteed Obligations (or payment of the costs of PS1, as applicable) within thirty (30) days of notice from Landlord and diligently prosecuting construction and/or completion of the Guaranteed Obligations at Tenant’s sole cost and expense (subject only to Landlord’s obligation to disburse the TI Allowance); (b) fully paying and discharging all claims, including for labor performed and material and services furnished in connection with the construction and completion of the Guaranteed Obligations; and (c) paying Landlord all reasonable attorneys’ fees and costs Landlord incurs in enforcing the performance by Tenant of the Guaranteed Obligations, with interest at the Default Rate on all past due portions of, and/or sums Landlord has advanced to satisfy portions of, the Guaranteed Obligations pursuant to this Lease. Unless otherwise required by law or a specific agreement to the contrary, all payments received by Landlord from Tenant shall be applied by Landlord to the Guaranteed Obligations in such manner and order as Landlord desires in Landlord’s sole discretion. It is expressly understood and agreed that Landlord may exercise all of its rights and remedies under the Lease or at law or at equity, should any Default relating to any of the Guaranteed Obligations exist that is not cured promptly after a demand by Landlord to Tenant pursuant to this Section 46. If Tenant shall fail to perform the Guaranteed Obligations hereunder, then Landlord shall have the right to, in addition to and cumulative of any other remedies Landlord may have hereunder, at Landlord’s option and without any obligation to do so, upon giving prior written notice to Tenant, proceed to perform the Guaranteed Obligations on behalf of Tenant, and Tenant shall, upon written demand from Landlord, including an invoice, pay to Landlord all such sums expended by Landlord in the performance of the Guaranteed Obligations with interest thereon at the Default Rate. In connection with such completion, Landlord may make changes to the Approved Plans as Landlord may reasonably deem necessary or as may be required by any Governmental Authority. Notwithstanding anything to the contrary, Tenant further agrees to indemnify and hold harmless Landlord against any loss, damage, cost or expense (including, without limitation, reasonable attorneys’ fees and costs) that Landlord may suffer or incur by reason of the breach or failure of the Tenant’s undertakings and agreements pursuant to this Section 46; provided, however that Tenant’s indemnity obligation shall not extend to loss of business, loss of profits or other consequential damage which may be suffered by Landlord. This guaranty is not a guaranty of collection, but rather this guaranty is an irrevocable, absolute, and unconditional guarantee of performance of the Guaranteed Obligations; and if all or any part of the Guaranteed Obligations are not performed by Tenant as and when required herein, Tenant shall perform the same immediately upon written demand by Landlord. 46.2 Landlord’s rights hereunder shall not be exhausted by any action taken by Landlord until all Guaranteed Obligations have been fully performed and this guaranty shall continue until the Guaranteed Obligations have been fully performed. The liability of Tenant hereunder shall be reinstated and revived, and the rights of Landlord shall continue with respect to any amount at any time paid on account of the Guaranteed Obligations that shall thereafter be required to be restored or returned by Landlord upon bankruptcy, insolvency, or reorganization of Tenant, or any other person, or otherwise, all as though such amount had not been paid. The

 
82 obligations of Tenant pursuant to this Section 46 shall survive the expiration or earlier termination of this Lease. [REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

 
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date first above written. LANDLORD: BMR–LINCOLN CENTRE LP, a Delaware limited partnership By: Name: Title: TENANT: ILLUMINA, INC., a Delaware corporation By: Name: Title:

 
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POOLED PATENTS AGREEMENT
This Pooled Patents Agreement (the “ Agreement ”) is made and entered as of 11:59 P.M. Pacific Time on December 2, 2014 (such date and time the “ Effective Date ”) by and among:
Illumina Inc., a Delaware corporation, having a place of business at 5200 Illumina Way, San Diego, CA 92122 (“ Illumina ”), and
Sequenom, Inc., a Delaware corporation, having a place of business at 3595 John Hopkins Court, San Diego CA 92121 (“ Sequenom” ),
W I T N E S S E T H :
WHEREAS, the Parties and others have entered into the Settlement Agreement dated as of the Effective Date (the “ Settlement Agreement ”) pursuant to which the Parties and others finally settled and resolved certain disputes on the terms and conditions thereof;
WHEREAS, both of the Parties desire to continue their current businesses related to the sale of services in the NIPT LDT Field;
WHEREAS, the Parties desire to pool together certain patent rights which each Party or its Affiliates owns or in-licenses in the Licensed NIPT Field, as Pooled Patents, and to offer them to third parties as a package license in an effort to help facilitate the broader exploitation in the marketplace of the technology claimed by the Pooled Patents;
WHEREAS, the Parties have agreed upon a price schedule for such licenses in the NIPT LDT Field, and upon mechanisms for adjusting such prices in response to changes in market conditions;
WHEREAS, the Parties desire for Illumina to have the exclusive right to Exploit the Pooled Patents in the NIPT IVD Field and have agreed on royalties that shall be payable by Illumina to Sequenom upon sale of NIPT IVD Products in the NIPT IVD Field;
WHEREAS, the Parties desire that the Pooled Patents be prosecuted, enforced, and licensed or sublicensed by Illumina or its Affiliates as set forth in this Agreement, and have set forth or referenced in this Agreement certain assignments, licenses, rights and obligations in that regard;
WHEREAS, the Parties have agreed upon one-time and recurring payments to be made between and among them in recognition of the rights and obligations each is receiving and incurring under this Agreement and the Ancillary Agreements; and
NOW THEREFORE, in consideration of the foregoing and the mutual covenants and promises contained herein, the Parties, intending to be legally bound, agree as follows:


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ARTICLE I

DEFINITIONS AND INTERPRETATION
1.1      Definitions . Unless otherwise specifically provided herein, the following Capitalized terms shall have the following meanings:
“ Affiliate ” means, with respect to a Person, any other Person directly or indirectly controlling, controlled by, or under common control with, such Person at any time during the period for which the determination of affiliation is being made. For purposes of this definition, the term “control” means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of management policies of such Person, whether through the ownership of voting securities or by contract or otherwise.
“ Agreement ” has the meaning set forth in the preamble.
“ Ancillary Agreement ” means any agreement that is executed and delivered pursuant to the terms of this Agreement, including any agreement the execution and delivery of which is a condition precedent to the effectiveness of this Agreement, including as stated in Sections 2.4, 2.5, 2.6 and 2.7.
“ Annual Report ” has the meaning set forth in Section 3.4(c)(i).
“ Authorized Lab ” has the meaning set forth in Section 2.8(b).
“ Business Day ” means all days other than Saturdays, Sundays or a national or local holiday recognized in the United States or Hong Kong.
“ Change of Control ” means, with respect to a Person: (a) a transaction or series of related transactions that results in the sale or other disposition of all or substantially all of such Person’s assets; or (b) a merger or consolidation in which such Person is not the surviving corporation or in which, if such Person is the surviving corporation, the shareholders of such Person immediately prior to the consummation of such merger or consolidation do not, immediately after consummation of such merger or consolidation, possess, directly or indirectly through one or more intermediaries, a majority of the voting power of all of the surviving entity’s outstanding stock and other securities and the power to elect a majority of the members of such Person’s board of directors; or (c) a transaction or series of related transactions (which may include a tender offer for such Person’s stock or the issuance, sale or exchange of stock of such Person) if the shareholders of such Person immediately prior to the initial such transaction do not, immediately after consummation of such transaction or any of such related transactions, own, directly or indirectly through one or more intermediaries, stock or other securities of the entity that possess a majority of the voting power of all of such Person’s outstanding stock and other securities and the power to elect a majority of the members of such Person’s board of directors.

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“ Claims ” means, collectively, all losses, liabilities, damages, costs and expenses of any type or nature whatsoever, and all claims, demands, suits, actions, causes of action or other proceedings of any type or nature whatsoever relating thereto.
“ Combined Product ” means a bundle of products consisting of at least one NIPT IVD Product and any other product (including any Illumina Product) that is not itself an NIPT IVD Product where the bundle is sold or transferred for a single price in a territory in any royalty reporting period, where such NIPT IVD Product and other product are also sold and priced separately in such territory in such royalty reporting period.
“ Confidential Information ” means all information that (a) is provided by one Party to the other Party pursuant to this Agreement, and (b) if disclosed in writing or other tangible medium is marked or identified as confidential at the time of disclosure to the recipient or, if disclosed other than in writing, is acknowledged at the time of disclosure to be confidential and is documented as confidential by written notice to the recipient within thirty (30) days after disclosure. Notwithstanding the foregoing, all reports, payments made and notices provided under this Agreement shall be Confidential Information of the providing Party, and all information subject to audits hereunder shall be Confidential Information of the audited Party, in each case whether or not so marked or identified, and subject to the exclusions (i) through (iv) immediately below. Notwithstanding the foregoing, Confidential Information of a Party shall not include that portion of such information that, and only to the extent that, the recipient can establish by satisfactory evidence: (i) was known to the recipient without an obligation of confidentiality to disclosing Party or any other Person before receipt thereof from the disclosing Party, (ii) is disclosed to the recipient free of confidentiality obligations by a Third Party who has the right to make such disclosure, (iii) is or becomes part of the public domain through no fault of the recipient, or (iv) was independently developed by Persons on behalf of recipient without use of the information disclosed by the disclosing Party.
“ CUHK Licenses ” means, collectively, the CUHK Licenses (2008/2011) and CUHK Licenses 2014.
“ CUHK Licenses (2008/2011) ” means (a) that license agreement between the Chinese University of Hong Kong (“ CUHK ”) and Sequenom, No TS094849 titled License Agreement, effective as of September 16, 2008, (b) that license agreement between CUHK and Sequenom, No TS116378 titled License Agreement, effective as of May 3, 2011 and (c) that license agreement between CUHK and Sequenom, No TS116379 titled License Agreement, effective as of May 3, 2011, as each of (a), (b) and (c) is amended as of the Effective Date and transferred by Sequenom to Illumina by assignment and novation as of the Effective Date.
“ CUHK Licenses (2014) ” means (a) that license agreement between CUHK and Illumina, No TS148570 titled License Agreement, effective as of the Effective Date, pursuant to which CUHK grants to Illumina certain licenses and other rights related to the inventions and other technology described in CUHK’s University Docket No. 10/MED/401/ITF, and (b) that license agreement between CUHK and Illumina, No TS148571 titled License Agreement, effective as of the Effective Date, pursuant to which CUHK grants to Illumina certain licenses

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and other rights related to the inventions and other technology described in CUHK’s University Docket No. 11/MED/403.
“ CUHK Patent ” means any Patent licensed to Illumina or Sequenom under a CUHK License.
“ Current Illumina Product ” means, collectively:
(a) any NIPT LDT Test that is first commercially performed by an Illumina Party as of or before the Effective Date;
(b) any Illumina Product first commercially sold by an Illumina Party as of or before the Effective Date solely to the extent such Product was used by any Person on or prior to the Effective Date for NIPT, and any line extension or natural evolution of such Illumina Product, provided that such line extension or natural evolution is first commercially sold by an Illumina Party and used for NIPT prior to the fifth (5 th ) anniversary of the Effective Date and solely to the extent such Illumina Product is used by any Person for NIPT as set forth in subsections (a), (c), (d) and (e) herein;
(c) any NIPT LDT Test that is a line extension or natural evolution of any NIPT LDT Test set forth in the foregoing clause (a), provided that such line extension or natural evolution is first commercially performed by an Illumina Party prior to the fifth (5 th ) anniversary of the Effective Date;
(d) any NIPT LDT Test:
(i) which is first commercially performed by an Illumina Party prior to the fifth (5th) anniversary of the Effective Date;
(ii) for which a Test Fee is paid in accordance with this Agreement; and
(iii) which is developed and performed solely and exclusively by or on behalf of Illumina or its Affiliates as its own product, and is sold
(A)
under brand names of Illumina or its Affiliates or
(B) under a private label for a Third Party sales agent, distributor or other reseller, provided that an NIPT LDT Test shall be excluded from this clause (d) if such NIPT LDT Test is performed in collaboration with a Third Party sales agent, distributor or other reseller; and
(e) any NIPT IVD Product:
(i)      which is first commercially sold by an Illumina Party prior to the fifth (5 th ) anniversary of the Effective Date;

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(ii)      for which a Royalty is paid in accordance with this Agreement; and
(iii)      which is developed and made solely and exclusively by or on behalf of Illumina or its Affiliates as its own product, and is sold
(A)
under brand names of Illumina or its Affiliates; or
(B)      under a private label for a Third Party sales agent, distributor or other reseller, provided that an NIPT IVD Product shall be excluded from this clause (e) if such NIPT IVD Product is developed or manufactured for or in collaboration with a Third Party sales agent, distributor or other reseller in accordance with the product design of, such Third Party, including by an Illumina Party acting as a foundry, contract developer or manufacturer, or original equipment or device manufacturer.
For the avoidance of doubt,
(x) porting an NIPT LDT Test from one sequencing instrument to a different sequencing instrument for performance thereon is a natural evolution or line extension of that NIPT LDT Test;
(y) nothing in this Agreement prohibits Illumina from using a foundry, contract developer or manufacturer to develop and/or manufacture on its behalf any NIPT IVD Product; and
(z) NIPT IVD Product that is covered by the elements of clauses (e)(i), (ii) and (iii) herein is not excluded from Current Illumina Product solely by as a result of being developed on its behalf, made on its behalf or distributed or re-sold by a Third Party.
“ Current Sequenom Product ” means, collectively, (a) any NIPT LDT Test that is first commercially performed by a Sequenom Party as of or before the Effective Date; (b)   any NIPT LDT Test that is a line extension or natural evolution of any NIPT LDT Test set forth in the foregoing clause (a), provided that such line extension or natural evolution is first commercially performed by a Sequenom Party prior to the fifth (5 th ) anniversary of the Effective Date; and (c) any NIPT LDT Test (i) which is first commercially performed by a Sequenom Party prior to the fifth (5 th ) anniversary of the Effective Date, (ii) for which a Test Fee is paid in accordance with this Agreement, and (iii) which is developed and performed solely and exclusively by or on behalf of Sequenom or its Affiliates as its own product and sold (A) under brand names of Sequenom or its Affiliates or (B) under a private label for a Third Party sales agent, distributor or other reseller, provided that an NIPT LDT Test shall be excluded from this clause (c) if such NIPT LDT Test is performed in collaboration with a Third Party sales agent, distributor or other reseller. For the avoidance of doubt, porting an NIPT LDT Test from one sequencing instrument to a different sequencing instrument for performance thereon is a natural evolution or line extension of that NIPT LDT Test.
“ Existing Illumina License ” has the meaning set forth in Section 2.11(a).

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“ Existing Illumina Licensee ” has the meaning set forth in Section 2.11(a).
“ Existing Illumina Litigant ” has the meaning set forth in Section 2.8(e).
“ Existing Sequenom License ” has the meaning set forth in Section 2.10(a).
“ Existing Sequenom Licensee ” has the meaning set forth in Section 2.10(a).
“ Existing Sequenom Litigant ” has the meaning set forth in Section 2.8(d).
“ Expire ” and grammatical variations “expired” or “expiration” (with corresponding meaning for “unexpired”) in relation to a Patent shall include abandonment, failure to maintain, or a holding of invalidity or unenforceability by a final decision of a court or a governmental agency of competent jurisdiction (including without limitation any patent office of competent jurisdiction), from which no further appeal is possible, in addition to the ordinary expiration of a patent term of an issued patent.
“ Exploit ” means (a) with respect to NIPT LDT Tests, Current Sequenom Products and those Current Illumina Products that are NIPT LDT Tests, to research, develop, offer for sale, have offered for sale, sell, have sold, market, have marketed and perform, and (b) with respect to NIPT IVD Products and all Current Illumina Products not addressed in clause (a), to research, develop, make, have made, use, have used, sell, have sold, offer to sell and have offered to sell, import and have imported, market and have marketed, perform and all other acts that, but for a license, would infringe a Patent in the country in which the act occurred.
“ Granting Illumina Affiliate ” has the meaning set forth in Section 2.2(c).
“ Granting Sequenom Affiliate ” has the meaning set forth in Section 2.3(c).
“ Gross Test Fees ” has the meaning set forth in Section 3.2(d).
“ HDFN Product ” has the meaning set forth in Section 2.16.
“ Illumina Customer ” means any Person that purchases Illumina Products.
“ Illumina Customer License ” has the meaning set forth in Section 2.8(a).
“ Illumina In-Licensed Patents ” means all Patents in-licensed by Illumina or its Affiliates under, and as set forth in, the Stanford License, […***…] and, on and after the Effective Date, the CUHK Licenses. The Illumina In-Licensed Patents as of the Effective Date are set forth on Annex II, provided that on and after the Effective Date, the Patents set forth on Annex IV (in-licensed by Sequenom from CUHK) shall be deemed added to Annex II, and Annex IV shall be deemed to no longer include any Patents.
“ Illumina Owned Patents ” means, collectively, (a) those United States and foreign patents and patent applications, including provisional applications, owned by Illumina or its Affiliates set forth on Annex I, (b) all divisional, continuation, continuation-in-part, and

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substitute applications of any of the patents or patent applications set forth in the foregoing clause (a), (c) all patents that have issued or in the future issue from any of the patent applications set forth in the foregoing clauses (a) and (b), including utility model and design patents and certificates of invention, (d) all extensions, supplemental protection certificates, registrations, confirmations, reissues, reexaminations, inter partes reviews, post-grant reviews, restorations and renewals of or to any of the foregoing described patents and (e) any equivalents of any of the foregoing in clauses (a), (b), (c) and (d) in any jurisdiction.
“ Illumina Patents ” means, collectively, the Illumina In-Licensed Patents and Illumina Owned Patents.
“ Illumina Parties ” means, collectively, Illumina and its Affiliates.
“ Illumina Products ” refers to any and all consumables, reagents, instruments, software and accessories commercialized by or on behalf of Illumina or its Affiliates.
“ Illumina Technology Partner ” has the meaning set forth in Section 2.12(a).
“ Isis License ” means that license agreement between Isis Innovation Limited (“Isis”) and Sequenom, titled Exclusive License of Technology, effective as of October 14, 2005, and as amended on October 19, 2006 (1st amendment), November 5, 2007 (2nd amendment), November 3, 2009 (3rd amendment), November 29, 2012 (4th amendment), the letter amendment dated 26 October 2012, as further amended prior to the Effective Date, and which was terminated on or before the Effective Date.
“ Isis Patents ” means the Patents originally owned by Isis and licensed by Isis to Sequenom under the Isis License, and that were sold, assigned and transferred to Sequenom before the Effective Date. The Isis Patents are set forth on Annex III.
“ Lapidus Patents ” means the Patents on Annex V.
“ Law ” means, individually and collectively, any and all laws, ordinances, orders, rules, rulings, directives and regulations of any kind whatsoever of any governmental or regulatory authority within the applicable jurisdiction.
“ Licensed NIPT Field ” means, collectively, the NIPT IVD Field and NIPT LDT Field.
[…***…].
[…***…].
“ Net IVD Sales ” means the gross sales price of any NIPT IVD Product invoiced by Illumina or its Affiliates, a Person that is sublicensee described in Section 3.3(c) or its Affiliates, for the first (and not any subsequent) arms-length sale of that NIPT IVD Product to any non-Affiliate Person and any use, transfer or sale set forth in (i), (ii) or (iii) hereinbelow, less, to the extent reasonable in the in vitro diagnostic industry and actually paid, applied or accrued,

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(a) credits, allowances, discounts and rebates to, and chargebacks from the account of, such Person for spoiled, damaged, outdated and returned product; (b) freight and insurance costs incurred in transporting such product to such Persons; (c) cash, quantity and trade discounts, rebates and other price reductions for such product given to such Persons under price reduction programs that are consistent with price reductions given for in vitro diagnostic products; (d) sales, use, value-added and other direct taxes, incurred on the sale of such product to such customers; and (e) customs duties, surcharges and other governmental charges incurred in exporting or importing such product to such customers. To the extent any NIPT IVD Product in any calendar quarter is (i) used by Illumina or its Affiliates or a Person that is a sublicensee described in Section 3.3(c) or its Affiliates (excluding NIPT IVD Products purchased from Illumina or its Affiliates in an arms-length sale, for which gross sales price is included in Net IVD Sales) in conjunction with a fee-for-service arrangement, or (ii) is transferred to a customer in the course of a reagent rental sales structure, or (iii) is sold in other than an arm’s length sale (including as part of a reagent rental program, operating or capital lease or comparable sales arrangement), the gross sales price of the NIPT IVD Product for purposes of calculating Net IVD Sales shall be the weighted average gross invoiced sales price of the applicable NIPT IVD Product for sales of such NIPT IVD Product to Persons purchasing comparable volumes of such NIPT IVD Product in an arm’s length sale in the applicable territory during such calendar quarter.
In the event an NIPT IVD Product is sold, transferred or bundled as part of a Combined Product, the gross invoiced sales price of such Combined Product shall be multiplied by the fraction A / (A+B) to determine the gross invoiced sales price of such NIPT IVD Product for purposes of calculating the Net Sales of such NIPT IVD Product, where A equals the weighted average gross invoiced sales price of such NIPT IVD Product sold separately, and B equals the weighted average gross invoiced sales price of such other product comprising such Combined Product sold separately, in each case sold to Persons purchasing comparable volumes of such NIPT IVD Product and/or other product in the applicable territory during the applicable royalty reporting period.
In the event an NIPT IVD Product is sold, transferred or bundled as part of a reagent rental program, operating or capital lease or comparable sales arrangement, then the gross invoiced sales price of such NIPT IVD Product shall equal the weighted average gross invoiced sales price of such NIPT IVD Product sold separately (other than as part of a reagent rental program, operating or capital lease or comparable sales arrangement) to Persons purchasing comparable volumes of such NIPT IVD Product in the applicable territory during the applicable royalty reporting period.
In the event of an NIPT IVD Product that is not a single use consumable and, instead, is intended for repeated use (e.g., software), the gross invoiced sales price of that NIPT IVD Product shall be (x) the actual gross invoiced sales price of that NIPT IVD Product at the time of sale and (y) any additional sales price that is based on usage, subscription, or other recurring occurrences, both (x) and (y) subject to applicable deductions permitted herein. Each of the sales prices described in clause (x) and (y) constitutes Net IVD Sales for the calendar

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quarter in which such sales price is invoiced or payable, subject to applicable deductions permitted herein.
Notwithstanding anything in this Agreement to the contrary, in the case of NIPT IVD Product that is software, Illumina has sole discretion to transfer such NIPT IVD Product by license instead of sale, provided that all amounts payable to Illumina, its Affiliates, or a Person that is a sublicensee described in Section 3.3(c) or its Affiliates, in exchange for such transfer shall, for the purpose of the immediately preceding paragraph, be considered as the sales price set forth in (x) and (y). For the avoidance of doubt, separately invoiced services regarding installation, training, maintenance and similar activities that a software seller/licensor provides to a software purchaser/licensee shall not be included in Net IVD Sales.
“ Net LDT Sales ” has the meaning […***…].
“ New Illumina Licensee ” has the meaning set forth in Section 2.8(a).
“ New Sequenom Licensee ” has the meaning set forth in Section 2.9(b).
“ NIPT ” means in vitro cell-free nucleic acid-based non-invasive prenatal testing (including, without limitation, testing by massively parallel sequencing or digital PCR) of a biological sample (including but not limited to plasma, serum, whole blood, and urine) obtained from a pregnant woman, excluding oncology testing.
“ NIPT IVD Field ” means the field of conducting or performance of NIPT (in whole or in part) by use of an NIPT IVD Product.
“ NIPT IVD Product ” means a distributable in vitro diagnostic device that has either (a) received applicable Regulatory Approval for sale and use to conduct or perform (in whole or in part) NIPT or (b) is otherwise particularly labeled and marketed for use to conduct or perform NIPT (in whole or in part,) excluding from (a) and (b) general purpose products and components labeled for research use only. For the purposes of this Agreement, an item is distributable if it is distributed on tangible medium or if accessed remotely (e.g., available in the cloud).
“ NIPT LDT Field ” means the field of conducting or performance of NIPT by use of an NIPT LDT Test, in a clinical laboratory, excluding the NIPT IVD Field.
“ NIPT LDT Test ” means a non-distributable in vitro test (including a Site-specific IVD) performed in a clinical laboratory to conduct or perform NIPT, excluding all NIPT IVD Products, but in all cases (other than Site-specific IVD tests), whether or not the test requires Regulatory Approval for sale or use before or after the Effective Date. As of the Effective Date, NIPT LDT Tests include, without limitation, the verifi® test that is performed by Illumina and its Affiliates and the MaterniT21® test and VisibiliT™ test that is performed by Sequenom and its Affiliates.
“ Nominal Amount ” has the meaning set forth in Section 3.4(c)(ii).

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“ Other Platform License ” has the meaning set forth in Section 2.8(f).
“ One-Time Payment ” has the meaning set forth in Section 3.1.
“ Party ” means Illumina or Sequenom and “ Parties ” means Illumina and Sequenom.
“ Patent ” means (a) any United States or foreign issued patent or pending patent application, including provisional application, together with (b) all divisional, continuation, continuation-in-part, and substitute applications of any such patent or patent application set forth in the foregoing clause (a), (c) all patents that have issued or in the future issue from any of the patent applications set forth in the foregoing clauses (a) and (b), including utility model and design patents and certificates of invention, and (d) all extensions, supplemental protection certificates, registrations, confirmations, reissues, reexaminations, inter partes reviews, post-grant reviews, restorations and renewals of or to any of the foregoing described patents and any foreign equivalents of any of the foregoing.
“ Patent Royalty Term ” means, on a country-by-country and product-by-product basis with respect to a particular NIPT IVD Product in the NIPT IVD Field, the time period beginning on the Effective Date and ending upon the date of expiration of the last to Expire Pooled Patent having at least one Valid Issued Claim covering the applicable NIPT IVD Product or its use in the NIPT IVD Field.
“ Person ” means any individual, corporation, partnership, firm, company, joint venture, association (including trust association), joint-stock company, limited liability company, trust, unincorporated organization, governmental body, organization or other entity.
“ Pooled Patents ” means the Illumina Patents and the Sequenom Patents.
“ Protective Action ” has the meaning as set forth in Section 5.1(b).
“ Regulatory Approval ” means any governmental approvals, licenses, registrations, clearances or authorizations necessary for the marketing, sale, or use of an in vitro diagnostic device; provided that , (a) in the United States, as of the Effective Date Regulatory Approval is only that sought from the Federal Food and Drug Administration, (b) in the European Union, as of the Effective Date Regulatory Approval is only that sought through compliance with the In Vitro Diagnostic Medical Devices Directive (which on the Effective Date is Directive 98/79/EC) and (c) in jurisdictions not requiring any governmental approvals, licenses, registrations, clearances or authorizations for the marketing, sale, or use of an in vitro diagnostic device, Regulatory Approval shall be deemed to have been provided for a particular in vitro diagnostic device upon the first commercial sale or marketing of that in vitro diagnostic device if that in vitro diagnostic device would require Regulatory Approval in the United States if marketed in the United States.
“ Royalty ” and “ Royalties ” have the meaning set forth in Section 3.3(d).

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“Sample Agreement” means the Sample Transfer Agreement made and entered into as of the Effective Date, between the Parties.
“ Sequenom In-Licensed Patents ” means all Patents in-licensed by Sequenom or its Affiliates immediately prior to the Effective Date under, and as set forth in, the CUHK Licenses (2008/2011). The Sequenom In-Licensed Patents immediately prior to the Effective Date are set forth on Annex IV, provided that on and after the Effective Date, the Patents set forth on Annex IV shall be deemed added to Annex II, and Annex IV shall be deemed to no longer include any Patents.
“ Sequenom Owned Patents ” means, collectively, (a) those United States and foreign patents and patent applications and provisional applications owned by Sequenom or its Affiliates set forth on Annex III and (solely if and to the extent Sequenom owns and has the right to grant licenses under the Lapidus Patents) the Lapidus Patents on Annex V, (b) all divisional, continuation, continuation-in-part, and substitute applications of any of the patents or patent applications set forth in the foregoing clauses (a), (c) all patents that have issued or in the future issue from any of the patent applications set forth in the foregoing clauses (a) and (b), including utility model and design patents and certificates of invention, (d) all extensions, supplemental protection certificates, registrations, confirmations, reissues, reexaminations, inter partes reviews, post-grant reviews, restorations and renewals of or to any of the foregoing described patents, and (e) any equivalents of any of the foregoing in clauses (a), (b), (c) and (d) in any jurisdiction.
“ Sequenom Parties ” means, collectively, Sequenom and its Affiliates.
“ Sequenom Patents ” means, collectively, the Sequenom In-Licensed Patents, Sequenom Owned Patents and Isis Patents.
“ Sequencing Platform Manufacturer ” means a Person, other than Illumina or its Affiliates, (a) that has raised at least $[…***…] in financing transaction(s) and is engaged as a primary business in the business of […***…], collectively, “ Sequencing Platform Products ”), or (b) the annual aggregated revenue of such Person and its Affiliates for the most recent full calendar year is greater than $[…***…] and […***…].
“ Sequenom Technology Partner ” has the meaning set forth in Section 2.12(a).
“ Site-specific IVD ” means a non-distributable in vitro diagnostic test that received Regulatory Approval for sale or use, which Regulatory Approval in the United States is pursuant to 21 CFR 814 or 21 CFR 807 Subpart E.
“ Stanford License ” means that license agreement between Verinata and the Trustees of Leland Stanford Junior University (“ Stanford ”), titled the Second Amended and Restated Co-Exclusive Agreement, effective on September 14, 2012, as amended as of the Effective Date.

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“ Stanford Sublicense Agreement ” means the sublicense agreement from Illumina Parties to Sequenom Parties (excluding Affiliates that are Sequencing Platform Manufacturers) under the Stanford License, effective on the Effective Date.
“ Technology Agreement ” has the meaning as set forth in Section 2.12(a).
“ Term ” has the meaning as set forth in Section 4.1.
“ Test Fee ” has the meaning as set forth in Section 3.2(a).
“ Test Fee and Royalty Report ” has the meaning set forth in Section 3.4(a).
“ Third Party ” means any Person that is not a Party to this Agreement and is not an Affiliate of a Party to this Agreement.
“ United States ” means the United States of America and its territories and possessions.
“ University Licenses ” means the CUHK Licenses, Stanford License, […***…].
“ University Licensors ” means CUHK, Stanford, […***…].
“ Valid Claim ” means (a) any claim of an issued and unexpired Pooled Patent that has not been held unenforceable, unpatentable, or invalid by a final decision of a court or a governmental agency of competent jurisdiction (including without limitation any patent office of competent jurisdiction), from which no further appeal is possible (“ Valid Issued Claim ”), and (b) solely in the case of Pooled Patents other than Illumina Owned Patents, Isis Patents and Sequenom Owned Patents, any claim of a pending patent application that is a Pooled Patent, excluding such claims that have been abandoned and such claims for which no further prosecution is possible in order to seek allowance and issuance of such claim (“ Valid Pending Claim ”).
“ Verinata ” means Verinata Health, Inc.
1.2      Interpretation . Except where expressly stated otherwise in this Agreement, the following rules of interpretation apply to this Agreement:
(a)      all references to a particular section or schedule or annex shall be a reference to that section or schedule or annex in or to this Agreement as it may be amended from time to time pursuant to this Agreement;
(b)      the headings are inserted for convenience only and shall be ignored in construing this Agreement;
(c)      words importing the masculine gender shall include the feminine and vice versa and words in the singular include the plural and vice versa;

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(d)      any phrase introduced by the terms “including”, “include”, “in particular” or any similar expression shall be construed as illustrative and shall not limit the sense of the words preceding or following those terms;
(e)      reference to any statute or regulation includes any modification or re-enactment of that statute or regulation;
(f)      all references to a “license,” “licensed” or “licensing” include the grant or receipt of either a direct license from the owner of the rights licensed, a sublicense from a Party or Affiliate of rights licensed or sublicensed to such Party or Affiliate, or both, in each case as applicable to the particular rights being licensed and so referred to;
(g)      all references in this Agreement to “Illumina Patent” or “Illumina Patents” or to “Sequenom Patent” or “Sequenom Patents” is a reference to the defined terms, and is not a reference to all Patents of Illumina or all Patents of Sequenom;
(h)      all references in this Agreement to “Schedule 1” or the “Test Fee Schedule” is a reference to Schedule 1 as it may be amended from time to time in accordance with this Agreement; and
(i)      all references in this Agreement to NIPT LDT Tests in the NIPT LDT Field are understood to mean NIPT LDT Tests performed in the NIPT LDT Field, and all references in this Agreement to NIPT IVD Products in the NIPT IVD Field are understood to mean NIPT IVD Products in, for, or for use in the NIPT IVD Field.
ARTICLE II     

RIGHTS OF SEQUENOM AND ILLUMINA UNDER POOLED PATENTS
2.1      Rights Under Pooled Patents Generally . This Section 2.1 is not intended to, and does not, convey any license rights under any Pooled Patent. In the event of any conflict between the language in this Section 2.1 and the provisions of any Ancillary Agreement granting a license under any Pooled Patent, or the licenses granted pursuant to Sections 2.2 (License to Sequenom Under Illumina Owned Patents) and 2.3 (Licenses to Illumina Under Sequenom Owned Patents and Isis Patents) of this Agreement, the applicable provisions in the Ancillary Agreement, Section 2.2, or Section 2.3 shall control.
(a)      Illumina Rights . Pursuant and subject to this Agreement (including the license grants in Sections 2.2 and 2.3), and the Ancillary Agreements, and the rights retained by Sequenom (and by Isis and its Affiliates as described in Schedule 7.1(b)) under the Sequenom Patents, the Illumina Parties will have:
(i)      the exclusive (even as to the Sequenom Parties), worldwide, sublicensable right under the Pooled Patents to Exploit NIPT IVD Products in the NIPT IVD Field,

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(ii)      the exclusive, worldwide, sublicensable right under the Pooled Patents (excluding the Isis Patents) to Exploit NIPT LDT Tests in the NIPT LDT Field, subject to the non-exclusive rights granted to, or reserved by, the Sequenom Parties, and
(iii)      the nonexclusive, worldwide, sublicensable right under the Isis Patents to Exploit NIPT LDT Tests in the NIPT LDT Field.
Notwithstanding the foregoing, for the avoidance of doubt:
(1)      each of Sections 2.1(a)(i), 2.1(a)(ii) and 2.1(a)(iii) is subject to any and all applicable terms in the CUHK Licenses, including without limitation any territory restrictions and rights reserved by CUHK thereunder,
(2)      each of Sections 2.1(a)(i), 2.1(a)(ii) and 2.1(a)(iii) is subject to Section 2.8 (Conditions for Illumina Grant of Licenses Under Pooled Patents), and
(3)      Section 2.1(a)(ii) is subject to rights granted under Existing Sequenom Licenses.
(b)      Sequenom Rights . Pursuant and subject to this Agreement (including the license grants in Sections 2.2 and 2.3, the exclusive rights of Illumina in Section 2.8(f)), the Ancillary Agreements, and the rights retained by the Sequenom Parties under the Isis Patents:
(i)      neither Sequenom nor any of its Affiliates will have any rights under the Pooled Patents (including under the Isis Patents) to Exploit NIPT IVD Products anywhere in the world,
(ii)      the Sequenom Parties will have a non-exclusive, worldwide, non-sublicensable right under the Pooled Patents to Exploit NIPT LDT Tests in the NIPT LDT Field, except that, with respect to the Isis Patents, the Sequenom Parties will have the right to grant sublicenses to Persons […***…] and thereby authorize, only under the Isis Patents, each such sublicensee to Exploit NIPT LDT Tests in the NIPT LDT Field in that sublicensee’s, or as applicable its Affiliates’, clinical laboratory,
(iii)      the Sequenom Parties will retain the rights under the Isis Patents, subject to the rights granted to Illumina Parties under the Isis Patents (exclusive to Exploit NIPT IVD Products in the NIPT IVD Field, and nonexclusive to Exploit NIPT LDT Tests in the NIPT LDT Field).
Notwithstanding the foregoing, for the avoidance of doubt, (A) Sequenom acknowledges and agrees that the Sequenom Parties do not have any rights under Pooled Patents with respect to Exploiting NIPT IVD Products, and (B) each of Sections 2.1(b)(ii) and 2.1(b)(iii) is subject to:
(1)      rights granted under Existing Sequenom Licenses, and

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(2)      any and all applicable terms in the University Licenses, including without limitation any field limitations, any territory restrictions and rights reserved by the applicable University Licensor thereunder or Isis.
2.2      License to Sequenom Under Illumina Owned Patents . On the terms and conditions of this Agreement, Illumina, on behalf of itself and its Affiliates, hereby grants to Sequenom and its Affiliates […***…] a non-exclusive, irrevocable and perpetual (subject to Section 2.2(b)), non-transferable and non-assignable (except as permitted under Section 9.1) worldwide non-sublicensable Test Fee -bearing license under the Illumina Owned Patents to Exploit NIPT LDT Tests in the NIPT LDT Field.
(a)      The license rights set forth in Section 2.2(a) granted to any Affiliate of Sequenom shall automatically terminate with respect to such Person when it ceases to be an Affiliate of Sequenom. Persons (other than […***…]) that become Affiliates of Sequenom after the Effective Date shall be licensed under the license rights set forth in Section 2.2(a) only for those licensed acts that occur on and after the date it becomes an Affiliate.
(b)      Illumina agrees on behalf of itself, its Affiliates, and their respective successors and assigns that, to the extent any Illumina Affiliate (a “ Granting Illumina Affiliate ”) is the owner (including joint owner) or in-licensee of any Pooled Patents for which Sequenom Parties have been granted rights hereunder (including under Ancillary Agreements), or the Granting Illumina Affiliate has granted rights hereunder (including under Ancillary Agreements) to any Sequenom Party, such rights granted to Sequenom Parties (i) shall not terminate following the date, if any, that such Granting Illumina Affiliate ceases to be an Affiliate of Illumina and that such rights shall continue after such date, with such rights under Illumina Owned Patents continuing to be perpetual and irrevocable on and after such date, subject to Section 2.2(b) and (ii) to the extent the Sequenom Parties received rights only from a Granting Illumina Affiliate under Pooled Patents and not from Illumina or another Affiliate that is not a Granting Illumina Affiliate, such rights shall become a direct license from Illumina under Illumina Owned Patents or, if applicable, a direct license from the applicable University Licensor under, and pursuant to the terms of, the applicable Illumina In-Licensed Patents.
2.3      License to Illumina Under Sequenom Owned Patents and Isis Patents .On the terms and conditions of this Agreement, Sequenom, on behalf of itself and its Affiliates, hereby grants to Illumina and its Affiliates an exclusive, irrevocable and perpetual (subject to Section 2.3(b)), non-transferable and non-assignable (except as permitted under Section 9.1), worldwide license, with the exclusive right to grant sublicenses, under the Sequenom Owned Patents and Isis Patents, to Exploit NIPT LDT Tests in the NIPT LDT Field and to Exploit NIPT IVD Products in the NIPT IVD Field, provided that the license is Royalty-bearing with respect to NIPT IVD Products and the license is Test Fee-bearing with respect to NIPT LDT Tests. The foregoing license grant in the NIPT LDT Field is subject to (i) any and all Existing Sequenom Licenses, and (ii) the reservation of the non-exclusive right, on behalf of Sequenom and its Affiliates, to Exploit NIPT LDT Tests in the NIPT LDT Field and to grant sublicenses under the Isis Patents to Persons that are not Sequencing Platform Manufacturers for each such sublicensee

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to Exploit NIPT LDT Tests in the NIPT LDT Field in its, or as applicable its Affiliates’, clinical laboratories.
(a)      The license rights set forth in Section 2.3(a) granted to any Affiliate of Illumina shall automatically terminate with respect to such Person when it ceases to be an Affiliate of Illumina. Persons that become Affiliates of Illumina after the Effective Date shall be licensed under the license rights set forth in Section 2.3(a) only for those licensed acts that occur on and after the date it becomes an Affiliate.
(b)      Sequenom agrees on behalf of itself, its Affiliates, and their respective successors and assigns that, to the extent any such Sequenom Affiliate (a “ Granting Sequenom Affiliate ”) is the owner (including joint owner) or in-licensee of any Pooled Patents for which Illumina Parties have been granted rights hereunder (including under Ancillary Agreements), or has granted rights hereunder (including under Ancillary Agreements) to any Illumina Party, such rights granted to Illumina Parties (i) shall not terminate following the date, if any, that such Granting Sequenom Affiliate ceases to be an Affiliate of Sequenom and that such rights shall continue to be perpetual and irrevocable on and after such date, subject to Section 2.3(b) and (ii) to the extent the Illumina Parties received rights only from a Granting Sequenom Affiliate under Pooled Patents and not from Sequenom or another Affiliate that is not a Granting Sequenom Affiliate, such rights shall become a direct license from Sequenom under Sequenom Patents.
2.4      Amendments, Assignments, Licenses and Sublicenses Under CUHK Licenses . The effectiveness of this Agreement is subject to the satisfaction in full, or the waiver by the Parties, of the due execution and delivery of the Settlement Agreement and the agreements required to be duly executed and delivered pursuant to the terms of ARTICLE V thereof, of the satisfaction of the conditions precedent set forth therein, and of the following additional conditions precedent:
(a)      The due execution and delivery by Sequenom and CUHK, and acknowledgement by Illumina, of the amendments to each of the CUHK Licenses (2008/2011) and the satisfaction of the conditions precedent set forth therein.
(b)      The due execution and delivery by Sequenom, Illumina, and CUHK, of the assignment and novation from Sequenom to Illumina of each of the CUHK Licenses (2008/2011) and the satisfaction of the conditions precedent set forth therein.
(c)      The due execution and delivery by Sequenom and Illumina of the sublicenses from Illumina to Sequenom Parties (excluding Affiliates that are Sequencing Platform Manufacturers) under each of the CUHK Licenses (2008/2011) and the satisfaction of the conditions precedent set forth therein.
(d)      The due execution and delivery by Illumina and CUHK of each of the CUHK Licenses (2014), and the satisfaction of the conditions precedent set forth therein.

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(e)      The due execution and delivery by Sequenom and Illumina of the sublicenses from Illumina to Sequenom Parties (excluding Affiliates that are Sequencing Platform Manufacturers) under each of the CUHK Licenses (2014), and the satisfaction of the conditions precedent set forth therein.
2.5      Sublicense Under Stanford License . The effectiveness of this Agreement is subject to the satisfaction in full, or the waiver by the Parties, of the due execution and delivery by Sequenom and Illumina of the Stanford Sublicense Agreement.
2.6      Sublicense Under […***…] . The effectiveness of this Agreement is subject to the satisfaction in full, or the waiver by the Parties, of the due execution and delivery by Sequenom and Illumina of the sublicense from Illumina Parties to Sequenom Parties (excluding Affiliates that are Sequencing Platform Manufacturers) under the […***…].
2.7      Isis Patents . The effectiveness of this Agreement is subject to the due execution and delivery by Sequenom and Isis of a valid and binding agreement pursuant to which Sequenom purchases from Isis all right title and interest in and to the Isis Patents and receives full legal and beneficial title thereto, subject to the rights described in Schedule 7.1(b), and the satisfaction of any and all conditions precedent set forth therein. Sequenom represents and warrants that the Isis Patents were sold, assigned and transferred to Sequenom, and the provisions of this Section 2.7 have been satisfied in full, before the Effective Date.
2.8      Conditions for Illumina to Grant Licenses Under Pooled Patents .
(a)      Test Fee; Conveyance of Customer License to Illumina Customers . Subject to the terms and conditions of this Agreement (including Section 2.8(f) (Non-Illumina Platforms) and Section 2.9(a)(i) (Sequenom Granting Licenses Under Isis Patents), and rights expressly retained by Sequenom to grant sublicenses to Persons to Exploit NIPT LDT Tests in the NIPT LDT Field in such Person’s, or as applicable its Affiliates’, clinical laboratory under the Isis Patents), the Illumina Parties have the exclusive right to grant licenses to perform NIPT LDT Tests in the NIPT LDT Field to any Person under any and all the Pooled Patents, provided the license obligates the Person to pay a Test Fee on terms consistent with Section 3.2 of this Agreement (each a “ New Illumina Licensee ”). Subject to the immediately preceding sentence, including obligations regarding Test Fees, the Illumina Parties may grant licenses under Pooled Patents to Illumina Customers who purchase Illumina Products, which licenses authorize the Illumina Customer, with each unit of consumable Illumina Product purchased, to Exploit, including a subset of the rights constituting Exploitation, NIPT LDT Tests in the NIPT LDT Field using Illumina Products (each such license an “ Illumina Customer License ”).
(b)      […***…].
(c)      Conveyance of License for NIPT IVD Product . With each NIPT IVD Product that is covered by a Valid Claim of a Pooled Patent that is sold by Illumina and its Affiliates, Illumina and its Affiliates shall include a label license under Pooled Patents authorizing use of that unit of NIPT IVD Product for the labeled intended use in the NIPT IVD Field under the applicable Pooled Patents.

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(d)      Third Parties in Litigation with Sequenom . A Third Party in litigation over a Pooled Patent with Sequenom or a Sequenom Affiliate as of the Effective Date is an “ Existing Sequenom Litigant .” Sequenom has identified Existing Sequenom Litigants, and the Pooled Patents subject to each such litigation as of the Effective Date, on Schedule 2.8(d), which Schedule 2.8(d) shall be amended by notice from Sequenom in the event that a litigant settles or is dismissed or is otherwise dropped from the applicable litigation, and may be amended by mutual agreement of the Parties in writing from time to time. […***…].
(e)      Third Parties in Litigation with Illumina . A Third Party in litigation over any Pooled Patent with Illumina or an Illumina Affiliate as of the Effective Date is an “ Existing Illumina Litigant .” […***…]. Illumina shall provide Sequenom with a written accounting of any such amounts collected in settlement or as an award or reimbursements, and the allocations pursuant to the terms of this Section 2.8(e). […***…].
(f)      Non-Illumina Platforms .
(i)      Subject to the terms and conditions of this Agreement, including the right of Sequenom Parties to grant sublicenses under Isis Patents only to a Person to Exploit NIPT LDT Tests in the NIPT LDT Field in that Person’s, or as applicable its Affiliates’, clinical laboratory, Illumina has the exclusive right to grant licenses to or to authorize any Person under the Pooled Patents to Exploit NIPT LDT Tests in the NIPT LDT Field or Exploit NIPT IVD Products in the NIPT IVD Field on any manufacturers’ platform, including non-Illumina platforms, subject to Sequenom’s prior written consent to the overall economic terms for any such license that expressly permits such Exploitation in the Licensed NIPT Field on a non-Illumina platform under terms that are less favorable to Sequenom set forth in this Agreement (“ Other Platform License ”), which consent shall not be unreasonably withheld, delayed or conditioned. As between Sequenom and Illumina, Illumina shall have the right to retain all types of economic consideration (whether one-time payments, royalties, continuing payments or other payment types) paid by all Persons under an Other Platform License described in the preceding sentence until such time as Illumina has received under this sentence the aggregate amount of […***…]. Thereafter, with respect to consideration received under Other Platform Licenses (A) consideration received for Exploitation of NIPT LDT Tests under Pooled Patents will be treated as Test Fees and shared between the Parties in accordance with Section 3.2(d), (B) consideration received for all sales of NIPT IVD Products under Pooled Patents will be treated under, and Illumina shall pay Royalties to Sequenom in accordance with, Section 3.3(c), and (C) all other types of economic consideration that are not within (A) or (B), (whether one-time payments, continuing payments or other payment types) paid by a Person under any such Other Platform License shall be shared between Illumina and Sequenom in the same proportion as for the Test Fees in accordance with Section 3.2(d)(i).
(ii)      In the event that Sequenom undergoes a Change of Control […***…] (including as part of an assignment of this Agreement in a bankruptcy or other financial restructuring of Sequenom), the provisions of this Section 2.8(f) shall apply with respect to how rights under the Pooled Patents to Exploit NIPT LDT Tests in the NIPT LDT Field or Exploit

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NIPT IVD Products on non-Illumina platforms may be made available to such Person, provided that in such event […***…].
2.9      Conditions for Sequenom Grant of Licenses under Isis Patents . Right to License Only Under Isis Patents; No Right to License for NIPT IVD Products .
(i)      Without limiting the foregoing in Section 2.9(a)(i), Sequenom and its Affiliates may not, and shall not, grant licenses under the Pooled Patents, including the Isis Patents, to Exploit any NIPT IVD Product.
(b)      Test Fees . […***…], Sequenom agrees that any license granted by a Sequenom Party to a Person after the Effective Date that authorizes performance in the NIPT LDT Field under any Isis Patent(s) (“ New Sequenom Licensee ”), will include an obligation for that Person to pay a Test Fee on terms (including amounts) consistent with Section 3.2 of this Agreement and Sequenom will share Test Fees and other consideration received for such sublicenses in accordance with Section 3.2.
(c)      Settlement with Existing Sequenom Litigants . No term in this Agreement, or any Ancillary Agreement prohibits Sequenom from settling any litigation with an Existing Sequenom Litigant, and Sequenom shall be entitled as part of any such settlement to grant rights to an Existing Sequenom Litigant under rights Sequenom retains under any Isis Patent, provided that Sequenom shall use commercially reasonable efforts to negotiate and enter into an agreement with such Existing Sequenom Litigant obligating such Existing Sequenom Litigant to pay a Test Fee in at least the amount set forth in Schedule 1 for rights under any Isis Patent or group of Isis Patents that authorizes the Existing Sequenom Litigant to perform NIPT LDT Tests in NIPT LDT Field in its, or its Affiliates’, clinical laboratory. […***…]. Sequenom shall provide Illumina with a written accounting of any such amounts collected in settlement or as an award or reimbursements, and the allocations pursuant to the terms of this Section 2.9(c). Nothing in this Section 2.9(c) alters Illumina’s exclusive rights regarding NIPT IVD Product.
2.10      Existing Sequenom Licensees .
(a)      Sequenom and its Affiliates are parties to written agreements with Third Parties, entered into prior to the Effective Date and remaining effective as of the Effective Date, under which such Third Party (“ Existing Sequenom Licensee ”) is expressly authorized or licensed by Sequenom or its Affiliate to Exploit an NIPT LDT Test under one or more Sequenom Patents in the NIPT LDT Field (“ Existing Sequenom License ”). The Existing Sequenom Licensees and Existing Sequenom Licenses are set forth on Schedule 2.10(a), which indicates which Existing Sequenom Licensees are Sequenom Technology Partners and other information.
(b)      As set forth in and on the terms and conditions of this Agreement, Sequenom shall be responsible for collecting, and shall use commercially reasonable efforts to collect, Test Fees for Licensed NIPT LDT Tests performed by Existing Sequenom Licensees under a grant of any rights under any Pooled Patents on and after the Effective Date. […

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***…]. All Test Fees paid by Existing Sequenom Licensees on and after the Effective Date are subject to sharing between Illumina and Sequenom in accordance with Section 3.2(d).
(c)      For avoidance of doubt, no rights are granted under this Agreement to Existing Sequenom Licensees or Existing Illumina Licensees, however this Agreement shall not result in such existing licensees losing the rights under Sequenom Patents or under Illumina Patents that each was granted or received from Sequenom Party or an Illumina Party, respectively, prior to the Effective Date.
(i)      […***…].
(ii)      […***…].
(iii)      Notwithstanding the foregoing, if an Existing Sequenom Licensee is obligated as of the Effective Date under a written Agreement, to which it is a party with a Sequenom Party and was granted a right under Sequenom Patents (prior to assignment of CUHK License (2008/2011)) to perform a Licensed NIPT LDT Test in the NIPT LDT Field, in exchange for payment of Test Fees, in an amount that is $[…***…] or higher (based on currency exchange rates in effect on the Effective Date), for performance of such Licensed NIPT LDT Tests in its, or as applicable its Affiliates’, clinical laboratory, then the provisions of clause (i) of this Section 2.10(c) shall apply to that Existing Sequenom Licensee.
2.11      Existing Illumina Licensees .
(a)      Illumina or its Affiliates are parties to written agreements with Third Parties, entered into prior to the Effective Date and remaining effective as of the Effective Date, under which such Third Party (“ Existing Illumina Licensee ”) is expressly authorized or licensed by an Illumina Party to Exploit NIPT LDT Test under one or more Pooled Patent in the NIPT LDT Field (“ Existing Illumina License ”). The Existing Illumina Licensees and Existing Illumina Licenses are set forth on Schedule 2.11(a), which indicates which Existing Illumina Licensees are Illumina Technology Partners and other information. Existing Illumina Licenses include licenses or rights granted pursuant to supply agreements in effect on the Effective Date.
(b)      On the terms and conditions of this Agreement, Illumina shall be responsible for collecting, and shall use commercially reasonable efforts to collect, Test Fees for Licensed NIPT LDT Tests performed in NIPT LDT Field by Existing Illumina Licensees under a grant of any rights under any Pooled Patents on and after the Effective Date. For the avoidance of doubt, and as set forth in Section 3.2, the amount of Test Fees paid by Existing Illumina Licensees on an per test or annual basis may be less or more than the amounts, or at a less or more expensive price tier of annual Test Fees, on Schedule 1. All Test Fees paid by Existing Illumina Licensees on and after the Effective Date are subject to sharing between Illumina and Sequenom in accordance with Section 3.2(d).

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2.12      Transfers of NIPT Technology and Know How .
(a)      Subject to Section 2.12(b) Illumina and Sequenom and their respective Affiliates each may enter into and perform under Technology Agreements with Third Parties as set forth in this Section 2.12. “ Technology Agreement ” means a written agreement under which (i) a Third Party receives from an Illumina Party certain know how and transfer of technology, and is authorized under Illumina Patents (for Technology Agreements entered into prior to Effective Date) or Pooled Patents (for Technology Agreements entered into on and after Effective Date) to use same to perform an NIPT LDT Test in NIPT LDT Field that is the same or substantially similar to the Illumina verifi® test or another Licensed NIPT LDT Test covered by Pooled Patents, or (ii) a Third Party receives from Sequenom or its Affiliates certain know how and transfer of technology, and is authorized under Sequenom Patents (for Technology Agreements entered into prior to the Effective Date) or Isis Patents (for Technology Agreements entered into on and after Effective Date) to use same to perform an NIPT LDT Test in NIPT LDT Field that is the same or substantially similar to the Sequenom MaterniT21® test or another Licensed NIPT LDT Tests covered by Pooled Patents. A Third Party who enters into a Technology Agreement with an Illumina Party is an “ Illumina Technology Partner ,” and a Third Party who enters into a Technology Agreement with Sequenom or an Affiliate is a “ Sequenom Technology Partner .” The Illumina Technology Partners and Sequenom Technology Partners as of the Effective Date are identified on Schedules 2.11(a) and 2.10(a), respectively. This Agreement shall be amended by the Parties on a quarterly basis or otherwise upon notification by one Party to the other, to revise Schedules 2.11(a) and 2.10(a) to identify any new Third Party that becomes an Illumina Technology Partner or a Sequenom Technology Partner after the Effective Date and to identify which Existing Illumina Licenses and Existing Sequenom Licenses (including those with existing Technology Partners) are terminated or expired.
(b)      Illumina shall obligate Illumina Technology Partners and Sequenom shall obligate Sequenom Technology Partners to pay a Test Fee on terms consistent with Section 3.2 of this Agreement. […***…].
(c)      Illumina represents that all Illumina Technology Partners under a Technology Agreement in effect as of the Effective Date have received rights under one or more Illumina Patents (prior to assignment and novation of the CUHK Licenses (2008/2011)) and, therefore, are Existing Illumina Licensees and, except as set forth on Schedule 7.1(c)(ix), are subject to payment of Test Fees on terms consistent with Section 3.2 of this Agreement.
(d)      Sequenom represents that all Sequenom Technology Partners under a Technology Agreement in effect as of the Effective Date have received rights under one or more Sequenom Patents (prior to assignment and novation of the CUHK Licenses (2008/2011)) and, therefore, are Existing Sequenom Licensees and are subject to payment of Test Fees on terms consistent with Section 3.2 of this Agreement.
2.13      Non-Assertion Covenants .Sequenom, on behalf of itself and its Affiliates and their respective predecessors, successors and assigns (each a “ Sequenom Covenant Party ”), hereby covenants not to directly (e.g., by itself) or indirectly (e.g., through a “strawman”, other

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involvement for or with a Third Party, or otherwise) (i) sue (or purport to sue) in any forum, (ii) assign to any Third Party any right to sue in any forum, nor (iii) in any way support or encourage any Third Party in suing in any forum, any Illumina Protected Party (as defined below) for infringement of any Patent that (x) is owned or controlled by Sequenom or any of its Affiliates as of or after the Effective Date and (y) has its earliest priority date as of or before the Effective Date, in each case excluding (1) the Pooled Patents, (2) in the event of the Change of Control of Sequenom, all Patents of the Third Party acquirer, successor or survivor in such Change of Control, and its Affiliates, immediately prior to such Change of Control, and (3) in the event of the Change of Control of either Sequenom or Illumina, all Patents first owned or controlled by Sequenom or any of its Affiliates immediately after such Change of Control, wherein such suit for infringement of any such Patent alleges that the Exploitation of any Current Illumina Product by Illumina or its Affiliates and, solely to the extent any of the following Persons are expressly authorized to Exploit any Current Illumina Product and are acting within the scope of such express authorization (including paying Test Fees if a (sub)licensee or if otherwise so required to make payment as a condition of authorization): manufacturers, distributors, resellers, (sub)licensees and customers (each of the Illumina Parties and the foregoing Persons an “ Illumina Protected Party ”), infringes, or induces or contributes to the infringement of, any such Patent. With respect to subclause (3) herein, applications (and patents that issue therefrom) that are continuations, divisionals, continuation-in-parts, or substitute applications claiming earliest priority from a Patent that was subject to the covenant in this Section 2.13(a) prior to the date of the Change of Control, are deemed to be Patents first owned or controlled by Sequenom or any of its Affiliates before the date of that Change of Control. Notwithstanding the foregoing or anything in this Agreement, the covenant in this Section 2.13(a) shall not apply to the extent any Illumina Protected Party infringes (directly or indirectly) a Patent claim that covers general platform technology of a Sequencing Platform Manufacturer that is an Affiliate of Sequenom solely to the extent claiming multi-purpose (i.e., useful in multiple fields of use) consumables, reagents, instruments (or components of instruments), software or accessories. This non-assertion covenant shall be a covenant that transfers with, and burdens, any sale, license, assign, or other disposition, transfer or grant of rights under the applicable Patent including with respect to the disposition of any rights in any license agreement pertaining thereto. Each Sequenom Covenant Party shall impose the foregoing non-assertion covenant on any Third Party to which such Sequenom Covenant Party may sell, license, assign or otherwise dispose of, transfer or grant any rights to or under the applicable Patent, but only to the extent such rights sold, licensed, assigned or otherwise disposed of, transferred or granted give the Third Party the right to enforce such Patent against an Illumina Protected Party.
(a)      Illumina, on behalf of itself, its Affiliates and their respective predecessors, successors and assigns (each an “ Illumina Covenant Party ”), hereby covenants not to directly (e.g., by itself) or indirectly (e.g., through a “strawman”, other involvement for or with a Third Party, or otherwise) (i) sue (or purport to sue) in any forum, (ii) assign to any Third Party any right to sue in any forum, nor (iii) in any way support or encourage any Third Party in suing in any forum any Sequenom Protected Party (as defined below) for infringement of any Patent that is (x) is owned or controlled by Illumina or any of its Affiliates as of or after the Effective Date and (y) has its earliest priority date as of or before the Effective Date, in each case excluding (1) the Pooled Patents, (2) in the event of the Change of Control of

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Illumina, all Patents of the Third Party acquirer, successor or survivor in such Change of Control, and its Affiliates, immediately prior to such Change of Control, and (3) in the event of the Change of Control of either Sequenom or Illumina, all Patents first owned or controlled by Illumina or any of its Affiliates immediately after such Change of Control, wherein such suit for infringement of any such Patent alleges that the Exploitation of any Current Sequenom Product by any Sequenom Party and, solely to the extent any of the following Persons are expressly authorized to Exploit any Current Sequenom Product and are acting within the scope of such express authorization (including payment of Test Fees if a (sub)licensee or if otherwise so required to make payment as a condition of authorization): distributors, resellers, (sub)licensees and customers (each of the Sequenom Parties and the foregoing Persons, a “ Sequenom Protected Party ”), infringes, or induces or contributes to the infringement of, any such Patent. With respect to subclause (3) herein, applications (and patents that issue therefrom) that are continuations, divisionals, continuation-in-parts, or substitute applications claiming earliest priority from a Patent that was subject to the covenant in this Section 2.13(b) prior to the date of the Change of Control, are deemed to be Patents first owned or controlled by Illumina or any of its Affiliates before the date of that Change of Control. Notwithstanding the foregoing or anything in this Agreement, the covenant in this Section 2.13(b) shall not apply to the extent any Sequenom Protected Party infringes (directly or indirectly) a Patent claim that covers general platform technology of an Illumina Party solely to the extent claiming multi-purpose (i.e., useful in multiple fields of use) consumables, reagents, instruments (or components of instruments), software or accessories. This non-assertion covenant shall be a covenant that transfers with and burdens any sale, license assign, or other disposition, transfer or grant of rights under the applicable Patent, including with respect to the disposition of any rights in any license agreement pertaining thereto. Each Illumina Covenant Party shall impose the foregoing non-assertion covenant on any Third Party to which such Illumina Covenant Party may sell, license, assign or otherwise dispose of, transfer or grant any rights to or under the applicable Patent, but only to the extent such rights sold, licensed, assigned or otherwise disposed of, transferred or granted give the Third Party the right to enforce such Patent against a Sequenom Protected Party.
(b)      Each Sequenom Covenant Party hereby covenants not to directly (e.g., by itself) or indirectly (e.g., through a “strawman”, other involvement for or with a Third Party, or otherwise) (i) sue (or purport to sue) in any forum, (ii) assign to any Third Party any right to sue in any forum, nor (iii) in any way support or encourage any Third Party in suing in any forum alleging that the Exploitation of any Current Illumina Product by any Illumina Party infringes any Pooled Patent. Nothing in this Section 2.13(c) alters any obligation to pay Test Fees and/or Royalties in accordance with the terms of this Agreement.
(c)      Each Illumina Covenant Party hereby covenants not to directly (e.g., by itself) or indirectly (e.g., through a “strawman”, other involvement for or with a Third Party, or otherwise) (i) sue (or purport to sue) in any forum, (ii) assign to any Third Party any right to sue in any forum, nor (iii) in any way support or encourage any Third Party in suing in any forum alleging that the Exploitation of any Current Sequenom Product by any Sequenom Party infringes any Pooled Patent. Nothing in this Section 2.13(d) alters any obligation to pay Test Fees and Royalties in accordance with the terms of this Agreement.

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2.14      […***…] Patents . Sequenom, on behalf of itself and its Affiliates, agrees […***…], it shall not undertake to expand the scope of the claims of the Patents as such claims exist as of the Effective Date.
2.15      […***…] Patents . Illumina, on behalf of itself and its Affiliates, represents and warrants […***…].
2.16      HDFN Products . Notwithstanding anything to the contrary in this Agreement, solely with respect to NIPT LDT Tests in each case that are solely directed to fetal blood antigen testing associated with hemolytic disease of the fetus and newborn (“ HDFN Products ”), each Party shall be permitted to Exploit such HDFN Product in the NIPT LDT Field and, if such Exploitation of an HDFN Product is covered by a Valid Claim of an Isis Patent, but not covered by a Valid Claim of any other Pooled Patent, then such Party shall have no obligation under this Agreement to collect or share a Test Fee or other consideration with the other Party.
2.17      Additional Rights .
(a)      The Patents set forth on Schedule 2.17(a) are exclusively licensed by Sequenom from CUHK and are not Pooled Patents. Upon Illumina’s request, Sequenom will negotiate in good faith commercially reasonable terms under which Sequenom would grant Illumina a sublicense under the Patents on Schedule 2.17(a).
(b)      The Patents set forth on Schedule 2.17(b) are solely owned by Sequenom and are not Pooled Patents. In the event Sequenom licenses any of the Patents on Schedule 2.17(b) to any Third Party (other than in settlement of litigation), then upon Illumina’s request, Sequenom will negotiate in good faith with Illumina a license under the Patents on Schedule 2.17(b) […***…].
ARTICLE III     

CONSIDERATION
3.1      One-Time Payment . A one-time, non-refundable payment of fifty million dollars (US$50,000,000) shall be payable by Illumina, in three installments, in recognition of the settlement of the disputes, grants of exclusivity and other rights granted to Illumina as set forth in this Agreement and the Ancillary Agreements (the “ One-Time Payment ”). Within one (1) Business Day after the Effective Date, Illumina shall pay to Sequenom forty four million dollars (US$44,000,000) of the One-Time Payment. Within five (5) Business Days after the […***…], Illumina shall pay to Sequenom two million dollars (US$2,000,000). Within five (5) Business Days after the […***…], Illumina shall pay to Sequenom four million dollars (US$4,000,000). In the event […***…], Illumina shall have the right to credit one million dollars (US$1,000,000) of the One-Time Payment against any and all amounts owed by Illumina to Sequenom under this Agreement until the full one million dollars (US$1,000,000) has been credited. In the event […***…], Illumina shall have the right to credit two million dollars (US$2,000,000) of the One-Time Payment against any and all amounts owed by Illumina to Sequenom under this Agreement until the full two million dollars (US$2,000,000) has been

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credited. Notwithstanding anything to the contrary in this Agreement, nothing in this Agreement is intended by the Parties to, and nothing in this Agreement shall […***…].
3.2      Test Fees for Performance of Licensed NIPT LDT Test .
(c)      Selected Definitions . For purposes of this Agreement:
(i)      A “ Licensed NIPT LDT Test ” means an NIPT LDT Test the performance of which is covered by a Valid Claim of a Pooled Patent, wherein the Person performing the NIPT LDT Test received the right, license or other authorization to Exploit that NIPT LDT Test under that Pooled Patent, subject to Section 3.2(b).
(ii)      An “ Authorized Lab ” means any Person that receives the right, license or other authorization pursuant to the terms and conditions of this Agreement to Exploit a Licensed NIPT LDT Test under at least one Pooled Patent. Without limitation, each of the following is an Authorized Lab to the extent of its rights under the Pooled Patent(s) under which it received right, license or other authorization: (A) each Sequenom Party, (B) Sequenom Technology Partners, (C) Existing Sequenom Licensees (which includes Sequenom Technology Partners existing on Effective Date), (D) Illumina Parties, (E)  Illumina Technology Partners, (F) Existing Illumina Licensees (which includes Illumina Technology Partners existing on Effective Date), (G) any and all Illumina Customers who receive an Illumina Customer License with purchase of Illumina Products, (H) any New Sequenom Licensee, and (I) any New Illumina Licensee. For the avoidance of doubt, an Authorized Lab may be described by more than one category of (A) through (I). An Authorized Lab shall be an Authorized Lab only for so long as it has a right, license or other authorization to Exploit Licensed NIPT LDT Tests under one or more Pooled Patents pursuant to the terms and conditions of this Agreement.
(iii)      A “ Test Fee ” means the per test amount that is payable by an Authorized Lab when a Licensed NIPT LDT Test is performed by such Authorized Lab as a fee-for-service or reimbursable offering (whether or not Authorized Lab is paid or reimbursed for the test), such amount set in accordance with Section 3.2(c) and payable and/or creditable in accordance with Section 3.2(b).
(d)      Payment and Collection of Test Fees . Illumina or Sequenom, as applicable, shall obligate, pursuant to written agreements therewith (or this Agreement with respect to Sequenom Parties and Illumina Parties), every Authorized Lab to pay a Test Fee for any and all (subject to Section 3.2(c)(ii)) Licensed NIPT LDT Tests performed by such Authorized Lab as follows:
(i)      Sequenom shall be responsible for all Test Fees that are payable under this Agreement for any and all Licensed NIPT LDT Tests performed by Sequenom Parties (Authorized Labs A), and Illumina shall be responsible for all Test Fees that are payable under this Agreement for any and all Licensed NIPT LDT Tests performed by Illumina Parties (Authorized Labs D).

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(ii)      Illumina shall use commercially reasonable efforts to collect Test Fees that are payable by Illumina Technology Partners, Existing Illumina Licensees, and Illumina Customers who receive an Illumina Customer License (Authorized Labs – E, F, G), and any other Authorized Lab (I) that receives the applicable right, license or authorization from an Illumina Party, for any and all Licensed NIPT LDT Tests performed by such Persons.
(iii)      Sequenom shall use commercially reasonable efforts to collect Test Fees that are payable by its Sequenom Technology Partners, Existing Sequenom Licensees, and any New Sequenom Licensees (Authorized Labs – B, C and H) for any and all Licensed NIPT LDT Tests performed by such Persons.
(iv)      In the event there is an Authorized Lab that is not in a category addressed in this Section 3.2(b), Illumina and Sequenom shall mutually agree on which of them shall be responsible for using commercially reasonable efforts to collect Tests Fees payable by such an Authorized Lab.
(v)      Each Party shall and shall cause its Affiliates to forego any conduct the intent of which is to prevent the collection or sharing of Test Fees or other consideration between the Parties in accordance with the terms of this Agreement.
(vi)      Any consideration received by an Illumina Party or a Sequenom Party from any Person for a license under a Pooled Patent to Exploit an NIPT LDT Test in the NIPT LDT Field, that is not in the form of Test Fees, shall be shared between Illumina and Sequenom in accordance with Section 3.2(d).
(vii)      To the extent any Illumina Party or Sequenom Party entered into prior to the Effective Date any agreement that obligates an Authorized Lab to pay a Test Fee for performance of an NIPT LDT Test that is covered by a Valid Issued Claim or any pending claim of a Pooled Patent (including pending claims of the Illumina Owned Patents, Sequenom Owned Patents and Isis Patents), and such Authorized Lab pays such Test Fee, then such NIPT LDT Test shall be deemed to be a Licensed NIPT LDT Test and all such Test Fees collected under such agreements shall be shared between the Parties in accordance with this Agreement.
(e)      Determination of Test Fee Amounts . Test Fee amounts will be determined as follows:
(i)      Except as expressly stated otherwise in this Agreement (including in Section 3.2(c)(ii) (Exceptions to Amount of Test Fee), Section 2.8(e) (Third Parties in Litigation with Illumina), Section 2.8(f) (Non-Illumina Platforms) and Section 2.9(c) (Settlement with Existing Sequenom Litigants)), each Illumina Party or Sequenom Party shall enter into written agreements with Persons it grants rights, licenses, or authorizations as an Authorized Labs such that the Authorized Lab is obligated to pay Test Fees on a quarterly basis, and Sequenom Parties and Illumina Parties shall be obligated to pay Test Fees on a quarterly basis. (A) Except as stated below with respect to Licensed NIPT LDT Test for which the Test Fee is equal to […***…]. With respect to Licensed LDT Tests performed by an Authorized Lab during the first calendar year of its agreement under which it received the right to perform Licensed

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NIPT LDT Tests, the Test Fee amount that the Authorized Lab shall pay for Licensed NIPT LDT Tests performed during the first calendar year of that agreement shall be no lower than the amount of Test Fee on Schedule 1, Section 3 that corresponds to the good faith estimate of the volume that Authorized Lab will achieve at the end of that first calendar year. For agreements entered into within six months before the end of a calendar year, the first annual calculation of the Test Fee amount payable by the Authorized Lab will be for the period ending on December 31 of the first full calendar year of that agreement. The quarterly Test Fees for an Authorized Lab shall be in amounts that result in at least the product of (1) the number of Licensed NIPT LDT Tests performed by that Authorized Lab in that quarter with (2) the Test Fee amount in effect for that Authorized Lab in that quarter, plus an amount equal to the product of the annual number of Licensed NIPT LDT Tests in (1) that are subject to the additional $[…***…] fee as set forth on Schedule 1 multiplied by $[…***…]. (B) With respect to each Licensed NIPT LDT Test for which the Test Fee is equal to […***…]. For the avoidance of doubt, notwithstanding the minimum amounts payable in accordance with the first sentence of this Section 3.2(c), the full amount of all Test Fees collected by Illumina and Sequenom from Authorized Labs shall be shared between the Parties as set forth in Section 3.2(d) (Sharing of Test Fee Amounts.)
(ii)      Exceptions to Amount of Test Fee .
(1)      Illumina Licensees . Illumina shall use commercially reasonable efforts to collect a Test Fee from Existing Illumina Licensees (including Illumina Technology Partners in existence as of the Effective Date) and New Illumina Licensees in the amounts governed by the terms of the applicable Existing Illumina License (including an applicable Technology Agreement) as modified by this Section 3.2(c)(ii). […***…]. Notwithstanding anything to the contrary in this Agreement, any and all amounts for Test Fees received by Illumina from an Existing Illumina Licensee or New Illumina Licensee, including amounts in excess of the Test Fee that would otherwise be due under this Agreement, shall be subject to sharing with Sequenom in the same manner and amount as set forth in Section 3.2(d) (Sharing of Test Fees).
(2)      Existing Sequenom Licensees . Sequenom shall use commercially reasonable efforts to collect a Test Fee from Existing Sequenom Licensees (including Sequenom Technology Partners in existence as of the Effective Date) and New Sequenom Licensees in the amounts governed by the terms of the applicable Existing Sequenom License (including an applicable Technology Agreement) as modified by this Section 3.2(c)(ii). If an Existing Sequenom Licensee is obligated under an Existing Sequenom License to pay a per test fee upon performance of a NIPT LDT Test that is less than the amount that Sequenom would otherwise be obligated to charge under the provisions of Sections 3.2(c)(i), then Sequenom shall not be under any obligation to raise the Test Fee amounts payable by that Existing Sequenom Licensee from the amount set forth in that Existing Sequenom License and the Test Fees amounts collected by Sequenom on such basis shall be shared with Illumina in accordance with this Agreement. […***…]. Notwithstanding anything to the contrary in this Agreement, any and all amounts for Test Fees (and their equivalents) received by Sequenom from an Existing Sequenom Licensee or New Sequenom Licensee, including amounts in excess of the Test Fee due under this

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Agreement shall be subject to sharing with Illumina in the same manner and amount as set forth in Section 3.2(d) (Sharing of Test Fees).
(3)      With respect to Existing Sequenom Licensees and New Sequenom Licensees that are Authorized Labs, which have received less than full rights under all Pooled Patents to perform NIPT LDT Tests in the NIPT LDT Field, in the event an Illumina Party enters into a later agreement with such Authorized Lab to extend the rights under the Pooled Patents granted to such Authorized Lab under which such Authorized Lab is authorized to perform Licensed NIPT LDT Tests, Illumina shall be entitled to offer such extended rights at Test Fee amounts lower than those set forth in Schedule 1 in order to facilitate the later agreement with such Authorized Lab in view of the Test Fee amounts already owed pursuant the earlier agreement. In any such case, Illumina shall not require such Authorized Lab or any existing Illumina Licensee to pay an additional amount of Test Fees (for the total rights received from Sequenom and from Illumina) that would result in the aggregate amount of Test Fees paid by that Authorized Lab to be in excess of the Test Fees set forth in Schedule 1.
(4)      Research and Development .     The Test Fee is […***…] for a Licensed NIPT LDT Test (A) that is performed by an Authorized Lab for internal research or development in the NIPT LDT Field, and (B) for which the Authorized Lab did not receive compensation on a per test basis (individually or as a lot of tests) for such Licensed NIPT LDT Test, and (C) the results of such Licensed NIPT LDT Test were not reported back to a subject or her physician or used for commercial purposes.
(iii)      […***…].
(1)      Adjustment to Test Fee Schedule . Illumina shall have the right to adjust the Test Fee Schedule […***…] on a market segment (including geographic or product segment) basis to reflect such market changes, upon written notice to and consent of Sequenom. Upon receipt of such notice […***…], Sequenom shall consider in good faith whether or not to consent, such consent not to be unreasonably withheld, delayed or conditioned. As promptly as practicable, […***…], Sequenom shall notify Illumina of its decision to consent or to withhold consent and its reasons therefor. If Sequenom has not responded in writing within the specified time, then it shall be deemed to have consented and Illumina may proceed with such reduced Test Fee structure for that market segment. In the event of a dispute between the Parties regarding adjustment of amounts in this clause (1), the procedures set forth on Schedule 2 shall govern the resolution of such Dispute.
(2)      […***…] Test Fees for Potential Future Authorized Labs . Each Party shall have the right to request that Test Fees be adjusted […***…] for a particular Person that is a potential future Authorized Lab, upon notice to and consent from the other Party. Upon receipt of such notice requesting a reduced Test Fee structure for a particular Person (other than the Parties or their respective Affiliates), the other Party shall consider in good faith whether or not to consent, such consent not to be unreasonably withheld, delayed or conditioned, on a case by case basis, to charging […***…] to such Person if such […***…] is reasonably necessary or useful to promote adoption of Licensed NIPT LDT Tests in that Person’s clinical laboratory […***…]. As promptly as practicable, but in no event later than […***…] after

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receiving such notice, the other Party shall notify the requesting Party of its decision to consent or to withhold consent and its reasons therefor. If the other Party has not responded in writing within the specified time, then the other Party shall be deemed to have consented and the requesting Party may proceed with such […***…] for that Authorized Lab […***…].
(3)      In the event the Test Fee Schedule is adjusted […***…] pursuant to the procedure in clause (1) in this Section 3.2(c)(iii), then Schedule 1 automatically shall be amended to reflect such […***…] adjustment for the applicable market segment, and thereafter shall be applicable to Test Fees payable by the Illumina Parties, Sequenom Parties and new Authorized Labs authorized after the adjustment date and, pursuant to each Party’s rights to adjust Test Fees as set forth in Section 3.2(c)(ii), payable by the Parties’ then-existing licensees.
(f)      Sharing of Test Fees .
(i)      Sharing of Test Fees Between Illumina and Sequenom . The aggregate Test Fees collected by Illumina and Sequenom in a particular calendar quarter from Authorized Labs, including the Test Fees payable by Sequenom Parties and Illumina Parties as Authorized Labs (in amounts prior to any allocation of Test Fees between Illumina and Sequenom or deductions or credits), are the “ Gross Test Fees ” Illumina and Sequenom will share Gross Test Fees as follows:
(1)      For Licensed NIPT LDT Tests performed by Authorized Labs anywhere in the world, excluding […***…], Illumina shall be entitled […***…] of the Gross Test Fees collected and Sequenom shall be entitled to […***…] of the Gross Test Fees collected, subject to Section 3.2(d)(ii).
(2)      For Licensed NIPT LDT Tests performed by Authorized Labs in […***…], Illumina shall be entitled to […***…] of the Gross Test Fees collected and Sequenom shall be entitled to […***…] of the Test Fees collected, subject to Section 3.2(d)(ii).
(ii)      Illumina shall be responsible for any amounts owed to its third party licensors (including University Licensors), and Sequenom shall be responsible for any amounts owed to its third party licensors or Isis, provided that , Illumina may credit or […***…] of all of Illumina’s payments to CUHK pursuant to the CUHK Licenses (including all amounts paid or payable to CUHK after termination or expiration of such CUHK Licenses, pursuant to the terms of any such CUHK License), based on performance of NIPT LDT Tests by Authorized Labs (including royalties, milestone payments, and any recurring payments to the extent related to performance of NIPT LDT Tests, and minimum guarantees, bonus payments, any payments to make up for shortfalls in payments not made by sub-licensee or a sublicensee of a sublicensee, but excluding Patent Costs, the sharing of which is addressed in Section 5.2) against the amounts owing to Sequenom based on the sharing of Gross Fees hereunder. Subject to Section 3.5 (Minimum Payments), payments by one Party to the other Party necessary to effectuate the sharing of Gross Test Fees set forth in this Section 3.2(d) shall be made in accordance with Section 3.4 (Payments and Reports).

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(iii)      If any University License, pursuant to which any Illumina In-Licensed Patents are licensed to Illumina, is terminated and Sequenom and its Affiliates obtain a direct license from the applicable University Licensor under such Illumina In-Licensed Patents, thereafter (1) Sequenom shall be responsible for the payment of all amounts owing to such University Licensor for sales by Sequenom and its Affiliates under such Illumina In-Licensed Patents, (2) Sequenom shall continue to be responsible for all payment obligations to Illumina set forth in this Agreement, including payment of Test Fees, and (3) Sequenom shall have the right to credit against Illumina’s portion of shared consideration under this Agreement all such amounts owing to such University Licensor (other than CUHK) for sales by Sequenom and its Affiliates under such Illumina In-Licensed Patents up to the amounts that Illumina would have paid to University Licensor if it had remained the direct licensee.
3.3      Royalties on NIPT IVD Products .
(f)      For any country, in which there is, at the time of sale of the applicable NIPT IVD Product, a Valid Issued Claim in such country covering that NIPT IVD Product, Illumina shall pay Sequenom a royalty of […***…] of Net IVD Sales of such NIPT IVD Product sold by Illumina and its Affiliates during the Patent Royalty Term in the NIPT IVD Field in such country. Notwithstanding the foregoing […***…] shall be due under this Agreement for sales of instruments, hardware or sale or sale/license of general or multi-purpose software.
(g)      For any country, other than […***…], (i) in which there is not, at the time of sale of the applicable NIPT IVD Product, a Valid Issued Claim in that country covering that NIPT IVD Product, and (ii) if that NIPT IVD Product had been sold in another country at the same time, the sale or use thereof in such other country would be covered by a Valid Issued Claim in such other country, then in the case of (i) and (ii) Illumina shall pay Sequenom a royalty of […***…] of Net IVD Sales of such NIPT IVD Product sold by Illumina and its Affiliates in the NIPT IVD Field during the period beginning on the Effective Date and ending on the […***…] anniversary thereof. Notwithstanding the foregoing […***…] shall be due under this Agreement for sales of instruments, hardware or sale/license of general or multi-purpose software.
(h)      Illumina shall share with Sequenom any royalties received by Illumina or an Illumina Affiliate from a sublicensee (and its Affiliates), that is licensed under Pooled Patents to Exploit an NIPT IVD Product in the NIPT IVD Field, for sale of NIPT IVD Products in the NIPT IVD Field under such license to Pooled Patents, in the proportion set forth in Section 3.2(d). Illumina agrees that any sublicense granted to any Person under Pooled Patents to Exploit an NIPT IVD Product in the NIPT IVD Field will be for a royalty that is no less than […***…]% of Net IVD Sales of NIPT IVD Products sold by such sublicensee (and its Affiliates) in the NIPT IVD Field. For the avoidance of doubt, for the purpose of this Section 3.3(c), a Person that purchases NIPT IVD Product is not a sublicensee under Pooled Patents. Notwithstanding the foregoing no Royalty shall be due under this Agreement for sales of instruments, hardware or sale/license of general or multi-purpose software.

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(i)      “ Royalty ” and “ Royalties ” means the amount payable to Sequenom pursuant to Sections 3.3(a), 3.3(b), 3.3(c) and 3.3(g). Notwithstanding anything to the contrary in this Agreement, (i) except as stated in part (iii) herein, a Royalty shall be calculated and due under this Agreement with respect to any and all NIPT IVD Products in the NIPT IVD Field sold, and subject to, and solely with respect to, the terms of Section 3.3(g), NIPT Components sold and used with NIPT IVD Product(s) to perform (in whole) NIPT, (ii) in the event any Person (including Illumina Parties, Sequenom Parties or any other Authorized Lab) purchases any NIPT IVD Product from or on behalf of an Illumina Party or a sublicensee as permitted hereunder, (except as stated in part (iii) herein) including to perform an NIPT LDT Test in the NIPT LDT Field and a Royalty is payable in accordance with Section 3.3(a)-(c) or 3.3(g) for such sale of the NIPT IVD Product, then no Test Fee shall be payable under this Agreement for the performance of such NIPT LDT Test, (iii) in the event of sale of an NIPT IVD Product in the NIPT IVD Field wherein the purchaser is expressly authorized by Illumina Party or sublicensee as permitted hereunder to use such product to perform NIPT for tests not included in the product label or protocols for use (e.g., for genetic conditions not included in label), then no Royalty shall be payable in accordance with Section 3.3(a)- (c) or 3.3(g) for such sale of the NIPT IVD Product, however a Test Fee shall be payable under this Agreement for the performance of such NIPT (whether the NIPT is deemed to be performed in the NIPT IVD Field or the NIPT LDT Field) and (iv) except as set forth in clauses (x) and (y) of the fourth paragraph of the definition of Net IVD Sales, under no circumstances shall more than one Royalty be payable for the same unit of NIPT IVD Product or NIPT Component sold.
(j)      With respect to Net IVD Sales for NIPT IVD Products, Illumina shall be responsible for any amounts owed to its third party licensors (including University Licensors), and Sequenom shall be responsible for any amounts owed to its third party licensors, provided that , Illumina may credit or offset the full amount of all of Illumina’s payments to CUHK pursuant to the CUHK Licenses (including all amounts paid or payable to CUHK after termination or expiration of such CUHK Licenses, pursuant to the terms of any such CUHK License), based on sales of NIPT IVD Product (by Illumina Parties or sublicensees and their Affiliates) (including royalties, milestone payments, and any recurring payments to the extent related to sale of NIPT IVD Product, and minimum guarantees, bonus payments, any payments to make up for shortfalls in payments not made by sub-licensee or a sublicensee of a sublicensee, but excluding Patent Costs, the sharing of which is addressed in Section 5.2) against the Royalties owing to Sequenom on Net IVD Sales.
(k)      Subject to Section 3.5, payments by one Party to the other Party necessary to effectuate the Royalties provisions set forth in this Section 3.3 shall be made in accordance with Section 3.4 (d).
(l)      To the extent Illumina, its Affiliates, or sublicensees described in Section 3.3(c),
(i)      sells an NIPT IVD Product in the NIPT IVD Field for conduct or performance (in part, but not in whole) of NIPT,

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(A)      for which a Royalty is payable pursuant to Section 3.3(a), (b) or (c) upon such sale, and
(B)      which sale (alone or together with NIPT Component(s)) conveys to the purchaser particular rights to conduct or perform (in whole) NIPT in accordance with product labeling or protocols of use without risk of infringing any Pooled Patent (e.g., convey through patent exhaustion, license, or covenant), and
(ii)      sells together (whether under a single purchase order or under separate purchase orders) with such NIPT IVD Product other product(s) (whether NIPT IVD Product(s) or a non-NIPT IVD Product(s)) that is not an instrument, hardware, or general or multi-purpose software (such software being sold or licensed), but that is a required component, with NIPT IVD Product(s), to conduct or perform (in whole) NIPT, and (A) if each such other product(s) is the same or substantially the same as a product that, at the time of sale, is a component of an NIPT IVD Product of the seller that has received Regulatory Approval in the United States for conducting or performing (in whole) NIPT, or (B) in the event there is not such an NIPT IVD Product in (A), would be a component of an NIPT IVD Product of the seller for which an application for Regulatory Approval in the United States would be required for sale of such NIPT IVD Product for conducting or performing (in whole) NIPT (each such product an “ NIPT Component ”), then
(iii)      Illumina shall pay Sequenom
(A)      a Royalty upon sale of such NIPT IVD Product sold, payable in accordance with Section 3.3(a), (b) or (c), as required,
(B)      a Royalty on each NIPT Component sold, payable (1) only during the time period stated in the applicable clause (a), (b) or (c) of Section 3.3, (2) as a percentage of net sales of each such NIPT Component calculated in the same manner as set forth for calculation of Net IVD Sales (for the purpose of this Section 3.3(g)(iii)(B), each instance of NIPT IVD Product in “Net IVD Sales” is replaced with NIPT Component) and (3) in the percentage stated in such applicable clause (a), (b) or (c) of Section 3.3, as required, and
(C)      Notwithstanding the foregoing or anything contrary in this Agreement, Illumina is not obligated to pay a Royalty on any NIPT Component that is used by an Authorized Lab to perform a Licensed NIPT LDT Test for which a Test Fee is owed to an Illumina Party or a Sequenom Party.
3.4      Payment and Reports .
(a)      Not later than forty five (45) calendar days after the last day of each calendar quarter, Sequenom and Illumina each shall provide the other with a written Test Fee and Royalty Report (each a “ Test Fee and Royalty Report ”), detailing separately for Japan and the rest of the world other than Japan (i) the names of all Third Party Authorized Labs for which that Party is obligated to collect Test Fees, (ii) the degree of compliance by each such Third Party Authorized Lab with its payment obligations under the applicable agreement

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therewith, (iii) the aggregate number of Licensed NIPT LDT Tests performed by all such Authorized Labs, including by Sequenom Parties and Illumina Parties, during that period, including the number of Licensed NIPT LDT Tests that are subject to the additional $[…***…] added to the Test Fee and that are subject to a Test Fee in an amount equal to percentage of Net LDT Sales, (iv) the aggregate amount of Test Fees collected by such Party during that period, including for its own Licensed NIPT LDT Test and those of its applicable Affiliates, (v) the amount of the Test Fees collected by the reporting Party that is owed to the other Party during that period based on the sharing obligations set forth in Section 3.2(d) (Sharing of Test Fees), (vi) in the case of Illumina, the aggregate Net IVD Sales and the Royalties owed to Sequenom based on the Net IVD Sales, and the corresponding net sales and Royalties owed to Sequenom based on sales of NIPT Components as provided for in Section 3.3(g)(iii)(B) above, (vii) all other consideration received by such Party during that period that is subject to sharing hereunder and the amount thereof owing to the other Party hereunder, (viii) in the case of Illumina, all amounts paid by Illumina to CUHK during such period pursuant to the CUHK Licenses (including all amounts paid or payable to CUHK after termination of such CUHK Licenses, pursuant to the terms of any such CUHK License), including as set forth in this Agreement in Section 3.2(d)(ii) and 3.3(e), (ix) a reasonably detailed report on any anomalous activity during the period, such as a Third Party’s licensee’s refusal to pay an owed amount or any other material exception to the expected performance by such Authorized Lab in relation to this Agreement, (x) the aggregate Net LDT Sales, and the number of tests upon which Net LDT Sales is based, by such Party or its Affiliates or (sub)licensees under any Pooled Patent, as applicable, (xi) the Patent Cost incurred by that Party, (xii) in the case of Illumina, all amounts creditable in accordance with Section 3.1, and (xiii) based on the foregoing (i) through (xii), the net amount owed to the other Party for that period before taking into consideration the other Party’s Test Fee and Royalty Report for the same period. Each Party shall provide its quarterly Test Fee and Royalty Report in a Microsoft excel-compatible spreadsheet (electronic and hard copy), or in another mutually acceptable spreadsheet format. In the event that a University Licensor of Illumina under any Pooled Patent requires in its University License additional reporting relating to sales of NIPT LDT Tests, which reporting is not set forth in this Agreement, upon Illumina’s request therefor, Sequenom shall include in its Test Fee and Royalty Report such additional reporting.
(b)      Not later than sixty (60) calendar days after the last day of each calendar quarter, or thirty (30) days after a Party receives the applicable Test Fee and Royalty Report from the other Party for such calendar quarter, whichever is later, (i) each Party shall reconcile the amount subject to sharing hereunder that is owed to the other Party under the Test Fee and Royalty Reports provided for such calendar quarter, after application of all offsets and credits permitted under this Agreement, including under Sections 3.1, 3.2(d)(ii), 3.3(e) and 3.4(b) and Patent Costs, and (ii)(A) if such reconciliation shows that Illumina owes to Sequenom a net aggregate amount of consideration subject to sharing hereunder for such calendar quarter, then Illumina shall pay such net aggregate amount to Sequenom, and (B) if such reconciliation shows that Sequenom owes to Illumina a net aggregate amount of consideration subject to sharing hereunder or subject to reimbursement hereunder for such calendar quarter, then Sequenom shall pay such net aggregate amount to Illumina. Making or accepting a payment made under this

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Section 3.4(b) shall not constitute an admission by a Party or conclusive evidence of the correctness of any amount so paid or accepted.
(c)      Annual Reporting and True-Up .
(iv)      Not later than ninety (90) calendar days after the last day of each calendar year, or forty five (45) days after a Party receives from the other Party the Test Fee and Royalty Report for the last calendar quarter of such calendar year, whichever is later, each Party shall provide the other with an annual report (the “ Annual Report ”) in reasonable detail showing for the previous calendar year all categories of information set forth in parts (i) through (xii) of the quarterly Test Fee and Royalty Report, and in each case, any difference between the information reported on the Annual Report and the information reported in the quarterly Test Fee and Royalty Reports. The Annual Report provided by Sequenom shall also report the number of NIPT LDT Tests in the NIPT LDT Field (A) performed during that calendar year period using Illumina equipment and consumables and (B) performed during that period using non-Illumina equipment and consumables, and any adjustments to those number permitted in accordance with Section 3.5(b) (Adjustment Due to Third Party Platforms and Products). Each Party shall provide its Annual Report in a Microsoft excel spreadsheet (electronic and hard copy), or in another mutually acceptable spreadsheet format.
(v)      The Parties shall each calculate and also include such calculation in such Annual Report the sum of (A) payments received by Sequenom from Illumina for shared Test Fees and other shared consideration, (B)  Royalties received by Sequenom from Illumina for Net IVD Sales, (C) the amounts retained by Sequenom for Test Fees and other shared consideration in relation to Licensed NIPT LDT Tests, and, in the case of Illumina, (D) the amounts paid by Illumina to CUHK pursuant to the CUHK Licenses and deducted by Illumina from payments to Sequenom as specifically permitted under this Agreement and (E) for 2015, any amounts that Illumina credited in accordance with Section 3.1, in each case during the previous calendar year (such sum, the “ Nominal Amount ”). For the avoidance of doubt, the Nominal Amount for a calendar year shall not include any amount of shared consideration that was retained or received by Sequenom or Illumina, as applicable, in that year pursuant to Section 5.1(c), to the extent such amount was in a prior year actually credited against a Minimum Payment, as permitted pursuant to Section 3.5(b)(ii) (Credit Due to Illumina Enforcing Pooled Patents).
(vi)      The Parties shall each calculate and also include in such Annual Report any adjustments to the Minimum Payment pursuant to Section 3.5(b). If, for any calendar year, there is any amount paid by Illumina to CUHK pursuant to the CUHK Licenses (except for the Patent Costs, which are addressed in ARTICLE V) that has not been credited or reimbursed by Sequenom, then Sequenom shall pay to Illumina along with the payment otherwise due for the first calendar quarter of the following calendar year, that amount of un-credited or not reimbursed payments made by Illumina to CUHK as set forth in Illumina’s annual report.
(vii)      If, for any calendar year starting with 2015 and ending with 2020, the Nominal Amount for that calendar year is less than the Minimum Payment amount for the applicable year set forth in Section 3.5(a) as that Minimum Payment is adjusted pursuant to

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Section 3.5(b), then Illumina shall pay to Sequenom along with the payment otherwise due for the first calendar quarter of the following calendar year, the difference between such Minimum Payment and such Nominal Amount.
(d)      To the extent that, with respect to any calendar year for which a Minimum Payment is set forth in Section 3.5(a), the aggregate amount that Sequenom retains and receives of shared revenues hereunder is in excess of the applicable Minimum Payment for such calendar year, then the excess amount over such Minimum Payment for such calendar year shall be credited against the amount (if any) owing by Illumina to Sequenom under Section 3.5 for the immediately following calendar year in excess of the aggregate amount that Sequenom retains and receives of shared revenues hereunder for such immediately following calendar year; provided, however, that the operation of this Section 3.4(d), together with any adjustment under Section 3.5(b) that is subject to a floor, shall not reduce the amount of the Minimum Payment below the amount of such floor therefor set forth in the first paragraph of Section 3.5(b).
(e)      All calculations and payments under this Section shall be made subject to Section 3.6 (Foreign Exchange).
3.5      Minimum Payments . Unadjusted Minimum Payments . Beginning in calendar year 2015 and continuing through calendar year 2020, the unadjusted minimum aggregate annual amounts payable to Sequenom including all amounts expressly stated to be payable under this Agreement, other than the One-Time Payment (each, a “ Minimum Payment ”), shall be:
(viii)      for calendar year 2015, […***…];
(ix)      for calendar year 2016 […***…];
(x)      for calendar year 2017, […***…];
(xi)      for calendar year 2018, […***…];
(xii)      for calendar year 2019, […***…]; and
(xiii)      for calendar year 2020, […***…].
(b)      Adjustments and Credits to the Minimum Payment Obligations . To the extent that any of the events or circumstances set forth in this Section 3.5(b) arises in any year after 2016, the Minimum Payment for the applicable year shall be adjusted downward as set forth below, provided that any such reduction shall not bring the Minimum Payment owed for such year below a floor of (1) in 2017 calendar year, […***…]dollars (US$[…***…]), (2) in calendar year 2018, […***…] dollars (US$[…***…]), and (3) in calendar year 2019, […***…] dollars (US$[…***…]) (with no floor applicable to calendar year 2020), except as expressly stated otherwise.
(viii)      Adjustment Due to Average Test Fee Collected . The Minimum Payments set forth in Section 3.5(a) are based on an average annual Test Fee collected by

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Illumina and Sequenom in the amount of $[…***…] per NIPT Test. If the average Test Fee collected for a calendar year is lower than $[…***…] per NIPT Test by […***…] or more, then the Minimum Payment for the calendar year shall be adjusted downward by multiplying the then current Minimum Payment amount by the quotient of the average Test Fee actually collected and subject to sharing between Illumina and Sequenom during that calendar year divided by […***…].
(ii)      Credit Due to Illumina Enforcing Pooled Patents . To the extent an Illumina Party is suing in good faith any Person (other than an Existing Illumina Litigant) for patent infringement under any Pooled Patent, and is diligently prosecuting such suit:
(A)      […***…] shall be used to calculate the annual amount of Test Fees that would have been collected by such Illumina Party, […***…] Sequenom as if such sales were made by such Illumina Party, in each case if those sales had been licensed under the Pooled Patents and amounts had been paid in accordance with this Agreement;
(B)      the applicable amounts that would have been paid hereunder to Sequenom, […***…]; and
(C)      […***…] of the applicable amounts calculated under clause (B) above shall be credited against the minimum amounts set forth in Section 3.5(a) for such year, subject to Section 3.4(c)(ii).
(iii)      Credit Due to Test Fees Not Paid by Sequenom . In the event that Sequenom fails to pay any Test Fee owing under this Agreement based on Licensed NIPT LDT Tests performed by a Sequenom Party, then the full amount of such unpaid debt (i.e., not just the share due to Sequenom) shall be credited against the Annual Minimum in the same year. The provisions of Section 3.5(b) to establish a floor for adjustments shall not be applicable to this Section 3.5(b)(iii).
(iv)      Adjustment Due to Third Party Platforms and Products. If in any calendar quarter a Sequenom Party employs non-Illumina equipment and consumables (excluding library prep) for more than […***…]% of its laboratory services for NIPT, when Illumina equipment and consumables are otherwise available to Sequenom Party on non-discriminatory economic terms consistent with the intent of this Agreement and any applicable Ancillary Agreements, then the annual Minimum Payment amounts set forth in Section 3.5(a) will be reduced by […***…]% for the calendar year during which such calendar quarter occurs and the immediately following calendar year. The provisions of Section 3.5(b) to establish a floor for adjustments shall not be applicable to this Section 3.5(b)(iv).
(v)      Adjustment Due to Impairment of Pooled Patents . If one or more key Patents within the Patent Pool are held invalid so as to be or otherwise become unenforceable in a country, then the Parties shall engage in good faith renegotiation of the Minimum Payment amounts set forth in Section 3.5(a) with the intention of reducing those minimum amounts commensurate with the impact of such an event in such country on the market. Notwithstanding the foregoing, the provisions of this Section 3.5(b)(v) shall not be

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applicable if one or more key Patents within the Patent Pool are held invalid so as to be or otherwise become unenforceable in a country as a result of a challenge by an Illumina Party pursuant to Section 4.2.2(e) of the Settlement Agreement and the Illumina Party controlled, participated in, or assisted (other than being named as a nominal party or a real party in interest, or paying or reimbursing costs, or taking an action that it is required to take under a University License as set forth in Schedule 3.5(b)(v)) in such challenge The provisions of Section 3.5(b) to establish a floor for adjustments shall not be applicable to this Section 3.5(b)(v).
(vi)      Adjustment Due to Decreased Value of Pooled Patents in Market . If after the Effective Date either Party or its Affiliates, or any Third Party, sells a competitive NIPT LDT Test or NIPT IVD Product in a country that does not infringe any of the Pooled Patents in such country, and all such competitive NIPT LDT Tests and NIPT IVD Products achieve in aggregate a market share for the applicable products or services of at least […***…], then the Parties shall engage in good faith renegotiation of the Minimum Payment amounts set forth in Section 3.5(a) with the intention of reducing those minimum amounts commensurate with the impact of such an event in such country on the market.
3.6      Foreign Exchange . For the purpose of calculating all amounts received hereunder subject to sharing with the other Party hereunder, where the consideration is received in a currency other than U.S. Dollars, conversion from such foreign currency to U.S. Dollars will be calculated and reported for each date in a calendar month based on the rate of exchange quoted by OANDA.com on last calendar day of the applicable month, with respect to the currency in which such consideration is received for each day during the applicable calendar quarter.
3.7      Records . Sequenom and Illumina each will keep, and will require all other Authorized Labs to keep, for […***…] years from the date of each payment of Test Fees or Royalties, or the date of receipt of any other amount that is subject to sharing between the Parties under this Agreement, records in sufficient detail to allow the determination of the accuracy and completeness of reports submitted hereunder with respect to any payment hereunder. Further, Sequenom and Illumina will obtain from the Authorized Labs with which they or their applicable Affiliates are in contract, the right for the contracting Party to audit the records of such Authorized Labs of a scope at least as beneficial to the auditing party as set forth herein. Sequenom and Illumina each will have the right for a period of […***…] years after receiving any report or statement with respect to amounts due and payable hereunder to appoint an independent certified public accountant reasonably acceptable to the other Party, and which auditor shall receive the same consideration for performing the audit regardless of outcome, to inspect the relevant records of the other Party to the extent necessary to verify the accuracy and completeness of such report or statement. The auditor shall have the right to report to the auditing party whether the Test Fees, Royalties and Test Fee Reports and Annual Reports were accurate and complete, and if they are not, then the nature and amount of the inaccuracy or incompleteness, and no further information. The audited Party will make its records and the relevant records of its Affiliates available (including any applicable reports received from Authorized NIPT Labs) for inspection by such independent certified public accountant during regular business hours on Business Days at such place or places where such records are customarily kept, upon reasonable prior notice (of at least thirty (30) days) from the auditing

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party, to verify the accuracy and completeness of the reports and payments. Such inspection right will not be exercised more than once in any calendar year and no period may be audited by a Party more than once. The auditing Party will bear all costs and expenses associated with an audit conducted pursuant to this Section 3.7, provided , however , that if the designated auditor discovers an underpayment of […***…] or more for the audited period between the amount of payments made under this Agreement and the amount of payments actually owed under this Agreement, then the audited Party will bear all reasonable costs and expenses associated with such audit. Any amount of underpayment shall be made, with interest calculated in accordance with Section 3.9, within ten (10) Business Days after a final audit report. The auditing Party agrees to hold in confidence all information learned in the course of any audit or inspection, in accordance with the terms and conditions set forth in ARTICLE VI. Neither Party will have any obligation under this Agreement to maintain records pertaining to such reports or payments beyond such three-year period. The University Licensors’ of the Pooled Patents shall have the audit rights stated in their respective University Licenses. In the event the written agreement between an Illumina Party or a Sequenom Party and its Existing Illumina Licensee or Existing Sequenom Licensee, respectively, does not include audit rights of at least the scope of this Section 3.7, then Illumina or Sequenom, as applicable, shall use commercially reasonable efforts to seek such audit rights from the existing licensee and execute an amendment to that agreement that contains audits rights of at least the scope of this Section 3.7.
3.8      Taxes .
(d)      All payments under this Agreement will be made without deduction or withholding for taxes except to the extent that any such deduction or withholding is required by Law in effect at the time of payment.
(e)      Any tax required to be withheld on amounts payable under this Agreement will promptly be paid by payor on behalf of the payee to the appropriate governmental authority, and the payor will furnish the payee with proof of payment of such tax. Any such tax required to be withheld will be an expense of and borne by the payee.
(f)      Illumina and Sequenom will cooperate with respect to all documentation required by any taxing authority or reasonably requested by Illumina or Sequenom to attempt to minimize or eliminate the rate of applicable withholding taxes.
3.9      Interest on Late Payments . For any payment due hereunder that is not made when due, in addition to paying the amount of such payment, the Party making such payment shall pay an additional amount as interest on such late amount calculated at a rate equal to the lower of […***…], or the highest rate permitted by applicable Law, calculated daily from the date that such late amount was due until and including the date actually paid.
3.10      CUHK Licenses . Illumina and Sequenom acknowledge that certain of the CUHK Licenses include certain […***…] to CUHK. Notwithstanding anything to the contrary in this Agreement or any Ancillary Agreement, any and all of Sequenom’s obligations under this Agreement to reimburse Illumina (whether by credit, repayment, or any other means of reimbursement satisfactory to Illumina) for payments that Illumina is obligated to make to

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CUHK under a CUHK License shall continue for so long as Illumina is so obligated to CUHK and shall be […***…].
ARTICLE IV     

TERM
4.1      Term . Unless earlier terminated by mutual written agreement of the Parties, the term of this Agreement, including the licenses granted under this Agreement, shall be from the Effective Date until the date of Expiration of the last to Expire Pooled Patent (the “ Term ”). Neither Party may terminate this Agreement except by mutual written agreement of the Parties. Upon termination of the Agreement, the following terms and provisions shall survive: (a) ARTICLE I, (b) Section 5.1 (Infringement Claims Against Third Parties) shall survive for six years after Expiration of each Pooled Patent, (c) ARTICLE VI (Confidentiality) shall survive, (d) all payment obligations under the Agreement shall survive until satisfied, (e) Section 3.7 (Records) shall survive for three years after the last day of the Term, (f) Section 7.2 (No Implied Warranty), (g) ARTICLE VIII, and (h) ARTICLE IX.
4.2      Effect of Material Breach . If a Party materially breaches this Agreement and such breach is not cured within thirty (30) days after written notice thereof from the other Party, the non-breaching Party shall have a right to pursue a claim in accordance with the enforcement procedures set forth in Section 9.7.
ARTICLE V     

ENFORCEMENT AND PROSECUTION OF POOLED PATENTS
5.1      Infringement Claims Against Third Parties . Notices . Sequenom will advise Illumina promptly upon its becoming aware of: (i) any unlicensed activities which it believes may be an actual or impending infringement of any Pooled Patent in the Licensed NIPT Field; (ii) any attack on or appeal of the grant of any Pooled Patent; (iii) any published application for Patent by, or the grant of a Patent to, a Person which claims the same subject matter as any Pooled Patent; or (iv) any application made for a compulsory license under any Pooled Patent.
(m)      Right to Take Action . Subject to Section 5.1(f) (Secondary Enforcement Rights) and Section 5.1(d) (University Licensors) and any applicable University License, as between Sequenom and Illumina and their respective Affiliates, Illumina shall have the sole right (which it may exercise through its Affiliates at its sole discretion), at its sole expense, to enforce the Pooled Patents against Third Parties that Exploit NIPT LDT Tests in the NIPT LDT Field and against Third Parties that Exploit NIPT IVD Products in the NIPT IVD Field, except to the extent (i) such sole right is inconsistent with an applicable Ancillary Agreement or University License, (ii) that Sequenom and its Affiliates retains the enforcement rights under the Isis Patents in the NIPT LDT Field, or (iii) subject to Section 5.1(e) (Existing Litigation). Subject to the foregoing, solely with respect to infringement of the Isis Patents in the NIPT LDT Field, Sequenom, and in all other cases, Illumina, on behalf of itself and its respective Affiliates, will have the sole right to determine whether or not to take whatever legal or other

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action is required in response to activities described under Section 5.1(a), including such activities of which Sequenom becomes aware and provides notice under Section 5.1(a) (“ Protective Action ”). If the applicable Party determines in its sole discretion that such Protective Action is warranted, then such Party or its Affiliates shall, at such Party’s expense, commence and prosecute and control such Protective Action. The other Party may be represented by counsel of its own selection at its own expense in such Protective Action to the extent it is a party of record in such Protective Action, provided that such counsel shall not in any way control such Protective Action.
(n)      Recovery . Any recovery obtained as a result of such Protective Action, whether by judgment, award, decree or settlement, (i) first, will be […***…], and (ii) then […***…] (A) with recovery of amounts for NIPT LDT Tests […***…], and (B) with recovery of amounts for NIPT IVD Products […***…]. To the extent such recovery is insufficient to reimburse the Parties’ associated reasonable costs and expenses fully, then a Party’s share of the recovery will be […***…].
(o)      University Licensors . Each Party agrees to enforce the provisions of any agreement it has with any of the University Licensors, which provisions permit such Party to solicit or compel the cooperation of, including the naming as a party to a litigation of, any such University Licensor, as may be necessary or useful to bring or maintain an action to enforce any Pooled Patent hereunder.
(p)      Existing Litigation . Nothing in this ARTICLE V is intended to alter or divest rights of any Party to continue to prosecute and settle any enforcement action of any Pooled Patent against a Third Party, which Third Parties as of the Effective Date are set forth on Schedules 2.8(d) and 2.8(e), and which enforcement action had begun as of the Effective Date, or to take any appeal therefrom.
(q)      Secondary Enforcement Rights . Notwithstanding anything to the contrary in this Agreement, in the event Sequenom provides notice to Illumina pursuant to Section 5.1(a) with respect to any Patent on Schedule 5.1(f), and Illumina does not within three (3) months of such written notice take Protective Action in response to such notice and thereafter diligently prosecute such Protective Action to eliminate the applicable activity described in Section 5.1(a), or if Illumina provides written notice earlier than such three (3) months that it does not intend to take Protective Action, then Sequenom shall have the same right to take action with respect to the applicable Patent as Illumina has to enforce the Pooled Patents set forth in Section 5.1(b), provided that Sequenom takes such action within three (3) months of such notice and diligently prosecutes such action to eliminate the applicable activity described in Section 5.1(a). In the event Sequenom chooses to take Protective Action, then Illumina shall have the same rights set forth in Section 5.1(b) as Sequenom has when Illumina takes Protective Action. Any recovery obtained as a result of any such Protective Action pursued by Sequenom in accordance with this Section 5.1(f) shall be treated as set forth in Section 5.1(c), except that with respect to the division set forth in clause (ii) therein (A) recovery of amounts for NIPT LDT Tests treated as Test Fees shall be shared between the Parties with Sequenom receiving the portion that Illumina would have received if Illumina

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pursued the Protective Action and with Illumina receiving the portion that Sequenom would have received if Illumina pursued the Protective Action, and (B) with recovery of amounts for NIPT IVD Products being treated as royalties received and Sequenom shall pay a portion of such amount equal to the Royalties that would have been payable by Illumina to Sequenom in accordance with Section 3.3(c) if Illumina had pursued the Protective Action.
5.2      Prosecution and Maintenance of Pooled Patents .
(f)      As between the Parties and subject to the applicable University Licenses and Section 5.2(e), Illumina and its Affiliates shall control the prosecution and maintenance of the Illumina Patents and the Sequenom Patents.
(g)      As between the Parties, Sequenom and its Affiliates shall control at their sole cost the prosecution and maintenance of the Isis Patents.
(h)      Subject to Section 5.2(b) (regarding Isis Patents), Illumina and Sequenom shall share the reasonable costs and expenses directly incurred by Illumina and Sequenom for prosecution (including responding to interferences declared and oppositions filed and post-grant proceedings) and maintenance of the Pooled Patents, other than Interference Expenses as that term is defined in each of the CUHK Licenses, including without limitation costs and expenses for litigating (in any forum or procedure, including arbitration) Patent Interference Nos. 105,920, 105,922, 105,923 and 105,924 before the United States Patent and Trademark Office, Patent Trial & Appeal Board, or for appealing or settling such interferences, (such shared costs and expenses “ Patent Costs ”) on a […***…] Illumina:Sequenom basis. The Patent Costs include out-of-pocket costs and expenses and costs and expenses incurred by Illumina and Sequenom for activities that occur on and after the Effective Date for outside counsel and in-house patent attorneys and patent agents prosecuting the Pooled Patents (whether directly or through review and oversight of outside counsel), provided that such in-house expenses shall be at an hourly rate of $[…***…] per hour (which shall increase annually by […***…] on January 1, 2016 and on each January 1 thereafter during the Term). Payments owed shall be made or credited in accordance with Section 3.4. For the avoidance of doubt, (1) […***…] are not creditable against the Minimum Payments, (2) […***…] is included in Patent Costs and (3) […***…] shall be paid by Illumina and Sequenom shall reimburse Illumina for 100% of such amounts paid. Notwithstanding the foregoing, Patent Costs shall not include any costs incurred by […***…]. Unless there was reasonable basis for delay, neither Party will be responsible for payment of costs or expenses that were incurred by the other Party and arising more than six (6) months prior to the receipt by such first Party of the invoice from such other Party. Each Party shall provide the other Party with reasonable detail regarding costs for services and shall include, at a minimum, the date services were performed, a description of each service provided, specific and accurate time for each service provided and the hourly rate for the service provider. A party shall have the right to audit the invoices in accordance with the audit process set forth in Section 3.7.
(i)      Illumina will use commercially reasonable efforts to (i) prosecute (including responding to interferences declared and oppositions filed) and maintain Sequenom-Owned Patents by filing all necessary papers and paying any fees required for such purpose by

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the patent Laws of the particular country in which such Sequenom-Owned Patent is prosecuted and was granted, and (ii) obtain such patent extensions or restorations of patent terms as may become available from time to time in any country regarding Sequenom-Owned Patents. In the event Illumina decides not to prosecute or maintain any pending application or issued patent within Sequenom-Owned Patents, or obtain any patent extensions or restorations of patent term, Illumina will give Sequenom written notice of such decision at least sixty (60) days prior to Illumina allowing such application to go abandoned or prior to Illumina not taking a necessary step to maintain, extend or restore such patent. Sequenom will have the option of taking over the activities in (i) and (ii) with respect to such application or patent, and shall notify Illumina in writing if it chooses to assume such control of the prosecution or maintenance of any such application or patent. If Sequenom so assumes control of the prosecution or maintenance of any such application or patent, promptly after such notification, Illumina shall transfer its files with respect thereto to Sequenom, and Sequenom will use commercially reasonable efforts to prosecute (including responding to interferences declared and oppositions filed) and maintain any such application or patent to the same extent Illumina is required as set forth and pursuant to parts (i) and (ii) of this Section 5.2(d).
(j)      Each Party prosecuting Pooled Patents pursuant to Sections 5.2(a)-(d) shall use commercially reasonable efforts and reasonably experienced patent professionals of its choosing (in-house or law firm) in so doing to maintain and, if reasonably possible under applicable patent Laws, to prosecute to allowance Valid Issued Claims in the Pooled Patents in the Licensed NIPT Field so maintained and prosecuted, and shall consider in good faith the interests of the other Party in so doing. […***…]. Notwithstanding the foregoing, a Party prosecuting a Pooled Patent shall give good faith consideration to any such comments on prosecution of a Pooled Patent in the Licensed NIPT Field received by the other Party.
5.3      Cooperation . Each Party shall reasonably cooperate with the other Party in the exercise of its rights or performance of its obligations under this ARTICLE V. For any action or proceeding brought by a Party under this ARTICLE V, the other Party shall join as a party plaintiff in any such action or proceeding if necessary for standing or otherwise necessary to enable the initiating Party or its Affiliates to bring or continue such action or proceeding. Each Party shall enter into a common interest agreement if requested by the other Party in connection with performing its obligations or exercising its rights under this Article V.
ARTICLE VI     

CONFIDENTIALITY
6.1      Confidentiality . During the Term and for a period of five (5) years thereafter, each Party shall maintain in confidence the Confidential Information of the other Party, shall not use or grant the use of the Confidential Information of the other Party except as expressly permitted hereby, and shall not disclose the Confidential Information of the other Party except on a need-to-know basis to such Party’s directors, officers, employees, agents and consultants, to the extent such disclosure is necessary or useful in connection with performance of such Party’s obligations or exercise of such Party’s rights under this Agreement or any of the Ancillary Agreements. To the extent that disclosure to any Person is authorized by this Agreement, prior to

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disclosure, a Party shall have obtained written agreement of such Person (which written agreement may be a general employee confidentiality agreement) to hold in confidence and not disclose, use or grant the use of the Confidential Information of the other Party except as expressly permitted under this Agreement. Each Party shall notify the other Party promptly upon discovery of any unauthorized use or disclosure of the other Party’s Confidential Information.
6.2      Terms of Agreement . Neither Party shall disclose any terms or conditions of this Agreement to any Third Party without the prior consent of the other Party; provided , however , that a Party may disclose the terms or conditions of this Agreement, (a) on a need-to-know basis to such Party’s directors, officers, employees and consultants, and its legal and accounting advisors, in each case, to the extent such disclosure is necessary, and (b) to a Third Party, other than a Sequencing Platform Manufacturer, in connection with (i) an equity investment in or financing of the operations of such Party, (ii) a merger, consolidation or similar transaction by such Party, or (iii) the sale of all or substantially all of the assets of such Party to which the Agreement and the Ancillary Agreement are related, provided in each case that such Third Party is bound by written confidentiality obligations respecting such disclosures in accordance with the terms of this Agreement.
6.3      Permitted Disclosures . Notwithstanding Section 6.4, if required by Law, including without limitation by the U.S. Securities and Exchange Commission or any stock exchange or Nasdaq, or by other applicable law, regulation, court or administrative order then a Party may issue a press release or other public announcement regarding this Agreement, or make a disclosure required by Law, provided that the other Party has received prior written notice of such intended press release or public announcement, or the disclosure required by Law, if practicable under the circumstances, and the other Party has been provided sufficient opportunity to object to any such disclosure or to request confidential treatment thereof , and an opportunity to seek a protective order (if applicable), or to have discussion between the Parties and their counsel regarding the requirement, in each case to the extent reasonably practicable under the circumstances, and the Party subject to the requirement cooperates with the other Party to limit the disclosure and includes in such press release or public announcement or required disclosure only such information relating to this Agreement as is required by such Law to be publicly disclosed. In the event this Agreement or an Ancillary Agreement is required by applicable Law to be made public (e.g., SEC filing), the Parties will make reasonable attempts to diligently and in good faith work together to redact this Agreement and any applicable Ancillary Agreement to a mutually acceptable extent and in compliance with applicable Law, and in any event the Party required to make the applicable agreement public shall provide the other Party with a copy of the proposed redaction prior to public disclosure.
6.4      Publicity; Use of Names . Each Party shall obtain the prior written consent of the other Party on all press releases or other public announcements relating to this Agreement, including its existence or its terms, provided that a Party is not required to obtain prior written consent of the other Party for press releases or public disclosures that repeat information that has been previously authorized for public disclosure pursuant to terms of this Agreement. Notwithstanding anything to the contrary in this Agreement, the Parties have mutually agreed on the form of the press release attached hereto as Schedule 6.4, and any Party may disclose free

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from confidentiality obligations the content of such press release, provided that, except as permitted hereunder, no more than one (1) press release may be issued by any Party in relation to the transactions contemplated by this Agreement and the Ancillary Agreements unless the other Party consents in writing to any additional press release, such consent to be given or withheld in such other Party’s sole and absolute discretion. Neither Party shall use the name or trademarks of the other Party without the express prior written consent of the other Party.
ARTICLE VII     

REPRESENTATIONS AND WARRANTIES
7.1      Representations and Warranties .Except as set forth on Schedule 7.1(a), each of the Parties represents and warrants, as of the Effective Date, that:
(ix)      it has legal power, authority and right to enter into this Agreement;
(x)      the execution and performance by it of its obligations hereunder will not constitute a breach of, or conflict with, its organizational documents nor any other material agreement or arrangement, whether written or oral, by which it is bound;
(xi)      it has full power and authority and has taken all action necessary to enter into and perform this Agreement, and that this Agreement has been duly authorized, executed and delivered by such Party;
(xii)      this Agreement is a valid, binding, and legally enforceable obligation of that Party in accordance with its terms;
(xiii)      it has the right to grant the rights granted hereunder, including the licenses and covenants not to sue granted hereunder, and undertake the obligations it assumes hereunder and that it has not previously licensed, assigned, or otherwise conveyed rights in any intellectual property, which license, assignment or other conveyance is inconsistent with the terms of, or could otherwise undermine any exclusivity set forth in, the terms of this Agreement;
(xiv)      each of its Existing Illumina Licensees or Existing Sequenom Licensees (as applicable) as of the Effective Date that is authorized by an Illumina Party under any Illumina Patent (excluding CUHK Patents) or by a Sequenom Party under any Sequenom Patent (prior to assignment and novation of the CUHK Licenses (2008/2011)) or Isis Patent to perform or have performed an NIPT LDT Test is obligated on a per-test basis to pay a fixed fee (or fixed fee dependent upon volume tiers) on performance of such NIPT LDT Test, which fee will be treated as a Test Fee hereunder; and
(xv)      it has no knowledge or reasonable belief, without a duty to investigate, that any Person, other than Illumina, Sequenom, CUHK, Isis, Stanford, […***…] and any of their Affiliates (a) owns any right, title or interest in a Pooled Patent, or (b) has asserted or alleged that it owns any right, title or interest in a Pooled Patent.

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(c)      Except as set forth on Schedule 7.1(b), Sequenom represents and warrants, as of the Effective Date, that:
(iv)      it is the sole and exclusive beneficial and record owner of the Sequenom Owned Patents and Isis Patents licensed to Illumina hereunder;
(v)      this Agreement is not in conflict in any material respect with, and will not result in breach of another agreement to which Sequenom or any of its Affiliates is a party;
(vi)      other than as set forth in the Settlement Agreement, it is not aware of any legal action challenging the ownership, validity or enforceability of any of the Sequenom Patents or CUHK Patents;
(vii)      that the Sequenom Patents (prior to assignment and novation of the CUHK Licenses (2008/2011)) include all Patents owned or in-licensed by Sequenom and its Affiliates with a right to sublicense that claim the verifi® test, MaterniT21® test, VisibiliT™ test and other methods of performing NIPT (including targeted sequencing, PCR, arrays), in each case as currently commercially performed and sold by Sequenom and Illumina, […***…];
(viii)      it intends to continue prosecuting the ongoing disputes it has with Existing Sequenom Litigants in a manner that, if successful, would lead to an obligation, on each such Existing Sequenom Litigant that intends to perform on a going forward basis an NIPT LDT Test that is covered by a Valid Issued Claim under the Isis Patents, to take a license under the Isis Patents in exchange for consideration payable to Sequenom that is consistent with the Test Fee amounts set forth on Schedule 1;
(ix)      other than as set forth in the Settlement Agreement, it has no reasonable basis to believe that (A) any of the Sequenom Owned Patents, Isis Patents or CUHK Patents will Expire prior to the ordinary date that would be calculated for any such Patent based on the filing and priority dates of the applications leading to such Patent and (B) it will allow any Expiration to occur for Pooled Patents under its control that is prior to the ordinary date that would be calculated for any such Patent based on the filing and priority dates of the applications leading to such Patent;
(x)      it is not a party to any agreement with any Person that would conflict with the obligations regarding Test Fees collection and sharing with Illumina hereunder or that includes a right for a Person other than a Sequenom Party to sublicense any rights under any Sequenom Patent or CUHK Patent;
(xi)      it is not in material breach of any existing agreement under which it has obtained any right in any Sequenom Patent (prior to assignment and novation of the CUHK Licenses (2008/2011)), including Isis Patents;
(xii)      It has not reserved any rights for any Sequenom Party, nor granted any right or license to any Person under any of the Sequenom Patents, including Isis Patents, or

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CUHK Patents that results in Illumina Parties receiving less than full exclusive rights under Sequenom Patents, including Isis Patents, and CUHK Patents to Exploit NIPT IVD Products in the NIPT IVD Field;
(xiii)      It has not reserved any rights for any Sequenom Party, nor granted any right or license to any Person under any of the Sequenom Patents, including Isis Patents, or CUHK Patents to Exploit NIPT IVD Products in the NIPT IVD Field;
(xiv)      any agreement entered into by Sequenom or any Affiliate of Sequenom prior to the Effective Date granting rights under any Sequenom Patent (prior to assignment and novation of the CUHK Licenses (2008/2011)) includes an obligation for the grantee to pay Test Fees to Sequenom or such Affiliate that are in an amount that is materially consistent with (or higher than) the Test Fee amounts (based on currency exchange rates in effect on the Effective Date) set forth on Schedule 1 (excluding the additional $[…***…] fee pursuant to Section 3 of Schedule 1);
(xv)      no Existing Sequenom Licensee has been granted a right under any Sequenom Patent (prior to assignment and novation of the CUHK Licenses (2008/2011)) greater than a right to Exploit an NIPT LDT Test in the NIPT LDT Field;
(xvi)      it and none of its Affiliates has neither granted any license to, nor entered into any agreement with, any Person that would prohibit Illumina from granting licenses to Exploit NIPT IVD Products in the NIPT IVD Field and NIPT LDT Tests in the NIPT LDT Field under the Pooled Patents anywhere in the world;
(xvii)      other than an obligation to make an up-front payment, all payment obligations of Existing Sequenom Licensees (including existing Sequenom Technology Partners) to Sequenom or its Affiliates pursuant to and under an Existing Sequenom License are in consideration of the grant of a license or right under at least one Sequenom Patent (prior to assignment and novation of the CUHK Licenses   (2008/2011));
(xviii)      […***…];
(xix)      […***…];
(xx)      it owns all right, title and interest in the Isis Patents, including the sole and exclusive right to assert, bring, settle, and release claims of infringement and collect for past damages;
(xxi)      other than rights granted by Sequenom or its Affiliates under Existing Sequenom Licenses, no other Person has any right under any Isis Patent;
(xxii)      it has the sole right to grant licenses under the Isis Patents; and
(xxiii)      it has not granted any rights under any Sequenom Patent to an Existing Sequenom Licensee that is performing NIPT on a non-Illumina platform.

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(d)      Illumina represents and warrants, as of the Effective Date, that:
(ii)      Except as set forth on Schedule 7.1(c)(i), it (and/or its Affiliates) is the sole and exclusive beneficial and record owner of the Illumina Owned Patents licensed to Sequenom hereunder;
(iii)      this Agreement is not in conflict in any material respect with, and will not result in breach of another agreement to which Illumina or any of its Affiliates is a party;
(iv)      other than as set forth in the Settlement Agreement, it is not aware of any legal action challenging the ownership, validity or enforceability of any of the Illumina Patents (excluding the CUHK Patents);
(v)      the Illumina Patents (excluding the CUHK Patents) include all Patents owned or in-licensed by Illumina and its Affiliates with a right to sublicense that claim the verifi® test, MaterniT21® test, VisibiliT™ test and other methods of performing NIPT (including targeted sequencing, PCR, arrays), in each case as currently commercially performed and sold by Sequenom and Illumina, but excluding those claims of Patents solely to the extent they cover Illumina’s and its Affiliates’ general purpose consumables, reagents, instruments, accessories and software and use thereof;
(vi)      it intends to continue prosecuting the ongoing disputes it has with Existing Illumina Litigants in a manner that, if successful, would lead to an obligation, on each such Existing Illumina Litigant that intends to perform on a going forward basis an NIPT LDT Test that is covered by a Valid Issued Claim under the Illumina Patents (excluding the CUHK Patents), to take a license under such Illumina Patents in exchange for consideration payable to Illumina that is consistent with the Test Fee amounts set forth on Schedule 1 (excluding the additional $[…***…] fee pursuant to Section 3 of Schedule 1);
(vii)      other than as set forth in the Settlement Agreement, it has no reasonable basis to believe that (A) any of the Illumina Owned Patents or Illumina In-Licensed Patents (excluding the CUHK Patents) will Expire prior to the ordinary date that would be calculated for any such Patent based on the filing and priority dates of the applications leading to such Patent and (B) it will allow any Expiration to occur for Pooled Patents under its control that is prior to the ordinary date that would be calculated for any such Patent based on the filing and priority dates of the applications leading to such Patent;
(viii)      it is not a party to any agreement with any Person that would conflict with the obligations regarding Test Fees collection and sharing with Sequenom hereunder or that includes a right for a Person, other than the Illumina Parties or its University Licensors, to sublicense any rights under any Illumina Patent (excluding the CUHK Patents);
(ix)      it is not in material breach of any existing agreement under which it has obtained any right in any Illumina Patent (excluding any CUHK Patents);

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(x)      except as set forth on Schedule 7.1(c)(ix), any agreement entered into by Illumina or any Affiliate of Illumina prior to the Effective Date granting rights under any Illumina Patent (excluding the CUHK Patents) includes an obligation for the grantee to pay Test Fees to Illumina or such Affiliate that are materially consistent with (or higher than) the Test Fee amounts (based on currency exchange rates in effect on the Effective Date) set forth on Schedule 1 (excluding the additional $[…***…] fee pursuant to Section 3 of Schedule 1);
(xi)      no Existing Illumina Licensee has been granted a right under any Illumina Patent (excluding the CUHK Patents) greater than a right to Exploit an NIPT LDT Test in the NIPT LDT Field;
(xii)      it and none of its Affiliates has neither granted any license to, nor entered into any agreement with, any Person that would prohibit Sequenom from granting licenses to Persons for Exploiting NIPT LDT Tests in the NIPT LDT Field in such Person’s, or its Affiliates’, clinical laboratory under the Isis Patents anywhere in the world; and
(xiii)      Except as set forth on Schedule 7.1(c)(xiii), all payment obligations of Existing Illumina Licensees (including existing Illumina Technology Partners) to Illumina or an Illumina Affiliate pursuant to and under an Existing Illumina License are in consideration of the grant of a license or right under at least one Illumina Patent (excluding CUHK Patents).
7.2      No Implied Agreements or Warranties . Nothing contained in this Agreement will be construed as:
(a)      a warranty or representation that any manufacture, importation, offer for sale, sale, lease, use, performance or other disposition of NIPT LDT Tests or NIPT IVD Product hereunder will be free from infringement of Third Party Patents;
(b)      a warranty or representation of the validity of any claims of the Pooled Patents;
(c)      an agreement or other obligation to bring or prosecute actions or suits for infringement of or otherwise enforce any of the Pooled Patents generally or against any particular Person or Persons;
(d)      conferring any right to use in advertising, publicity, or otherwise, any trademark, trade name or names, or any contraction, abbreviation or simulation thereof, of any Party; and
(e)      conferring by implication, estoppel or otherwise, upon any Party hereunder, any license or other right under any class or type of Patent or other intellectual property right, except the licenses and rights expressly granted hereunder or under the Ancillary Agreements. The Parties reserve for themselves any rights not so expressly granted to the other Party or its Affiliates hereunder or under the Ancillary Agreements.

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ARTICLE VIII     

INDEMNIFICATION
8.1      Indemnification .
(f)      Illumina shall fully and unconditionally indemnify, defend and hold harmless Sequenom, its Affiliates, and each of their respective directors, officers, employees, agents and representatives, successors and assigns, for any Claims by a Third Party to the extent (i) arising from a breach or misrepresentation of any representation or warranty made by Illumina (on behalf of itself and its Affiliates) under this Agreement, (ii) arising from infringement or alleged infringement of any […***…] by the Exploitation of any NIPT LDT Test in the NIPT LDT Field by Sequenom or its Affiliates that are not Sequencing Platform Manufacturers in accordance with this Agreement and with the sublicense under the […***…] executed and delivered in accordance with Section 2.6, or (iii) arising from, resulting from or relating to the failure of Illumina to pay any and all applicable royalties owing to […***…] for activities for which Sequenom has paid the applicable consideration in accordance with […***…].
(g)      Sequenom shall fully and unconditionally indemnify, defend and hold harmless Illumina, its Affiliates, and each of their respective directors, officers, employees, agents and representatives, successors and assigns, for any Claims (i) by a Third Party to the extent arising from (A) a breach or misrepresentation of any representation or warranty made by Sequenom (on behalf of itself and its Affiliates) under this Agreement, (B) infringement or alleged infringement of any […***…], in each case by Illumina or its Affiliates in accordance with this Agreement, (C) any act or omission of Sequenom, or an Affiliate of Sequenom pursuant to any sublicense granted to Sequenom or an Affiliate of Sequenom under this Agreement or any Ancillary Agreement to the extent Illumina has an express indemnification obligation in respect of such Claim under an applicable University License, in each case to the extent such obligation is expressly disclosed by Illumina to Sequenom prior to the Effective Date or exists in a CUHK License as of the Effective Date, (D) the transaction that resulted in Sequenom taking assignment and ownership of the Isis Patents, (E) any and all Pre-Novation Liability (as defined in the assignment and novation agreements referenced in Section 2.4(b) of this Agreement), (F) any act or omission of Sequenom, or its sublicensees or their sub-sublicensees under the Sequenom Sublicense (as defined in the sublicenses referenced in Section 2.4(c) and (e) of this Agreement), any Existing Sequenom Sublicense or any sub-sublicense granted under an Existing Sequenom License, including a breach of any of the foregoing sublicenses or sub-sublicenses, (G) any duties, obligations act or omission of Sequenom or an Existing Sequenom Licensee, for which Illumina and Sequenom are jointly and severally liable to CUHK under any or all of the assignment and novation agreement referenced in Section 2.4(b) (other than due to any failure by Illumina or its Affiliates to comply with the terms and conditions of such novation or assignment), or (H) or arising under, or otherwise in relation to the novation or assignment of any or all of the CUHK Licenses (2008/2011) referenced in Section 2.4(b) to Illumina (other than due to any failure by Illumina or its Affiliates to comply with the terms and conditions of such novation or assignment), or

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(ii) arising out of (A) a suit or other action by or on behalf of Sequenom or an Affiliate of Sequenom for infringement or alleged infringement of any […***…] by the Exploitation of any NIPT LDT Test in the NIPT LDT Field or Exploitation of any NIPT IVD Products in the NIPT IVD Field by Illumina or its Affiliates, or (B) a Claim that would have been released under Section 4.1.1 of the Settlement Agreement if Claims for infringement of any Patents licensed by […***…] to Sequenom as of the Effective Date had not been excluded from such release pursuant to Section 4.1.1 of the Settlement Agreement.
8.2      Procedure . The indemnified Party promptly shall notify the indemnifying Party of any Claim in respect of which the indemnified Party intends to claim such indemnification, and the indemnifying Party shall have the right to assume the defense thereof with reasonable counsel selected by the indemnifying Party. The indemnity agreement in this ARTICLE VIII shall not apply to amounts paid in settlement of any Claim if such settlement is effected without the consent of the indemnifying Party, which consent shall not be unreasonably withheld, delayed or conditioned. The failure to deliver notice to the indemnifying Party within a reasonable time after the commencement of any such Claim, if prejudicial to its ability to defend such action, shall relieve the indemnifying Party of liability to the indemnified Person under this ARTICLE VIII to the extent of such prejudice, but the omission so to deliver notice to the indemnifying Party shall not relieve it of any liability that it may have to the indemnified Person otherwise than under this ARTICLE VIII. The indemnified Party under this ARTICLE VIII, its directors, officers, employees, agents and representatives shall reasonably cooperate with the indemnifying Party and its legal representatives in the investigation and defense of any Claim covered by this indemnification.
8.3      Limitation of Liability . Notwithstanding anything to the contrary, the maximum economic liability of a Party under Section 8.1 shall be limited to (a) […***…] of the shared Test Fees and related revenues collected pursuant to Section 3.2(b)(vi) paid to or retained by such Party under this Agreement, plus (b)(i) in the case of Sequenom, […***…], and (ii) in the case of Illumina, […***…].
ARTICLE IX     

MISCELLANEOUS PROVISIONS

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9.1      No Assignment Without Consent .No Party shall, without the prior written consent of the other Party, assign or transfer this Agreement (in whole or in part) or assign, transfer, declare a trust of or dispose of in any manner any of its rights and obligations hereunder to any Third Party, except that Illumina and Sequenom (a) may assign or transfer this Agreement (in whole or in part) to an Affiliate or (b) may assign or transfer this Agreement, only together with all the Ancillary Agreements to which it is a party, to a Third Party as part of a merger, sale of stock or shares, or sale of assets in each case relating to the entire business of either Illumina or Sequenom to which this Agreement and the Ancillary Agreements relate, as applicable, in each case without any further consent required of any other Party, subject in all cases to Section 2.8(f). Any purported assignment or transfer in violation of this Section 9.1(a) shall be null and void ab initio.
(g)      Subject to the foregoing, all of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the respective successors and assigns of the Parties.
(h)      For the avoidance of doubt, the provisions of Section 2.8(f) shall be applicable in the event of a Change of Control of Sequenom to a Sequencing Platform Manufacturer (including as part of an assignment of this Agreement in a bankruptcy or other financial restructuring of Sequenom).
9.2      Notices . All notices required or permitted to be given hereunder will be in writing and will be valid and sufficient if dispatched by internationally recognized overnight courier (such as UPS, FedEx or DHL), freight prepaid, or delivered personally with written receipt as follows:
If to Illumina:
Illumina, Inc.
5200 Illumina Way
San Diego, CA 92122
Attn: Senior Vice President, Corporate Development
With a copy to:
Illumina, Inc.
5200 Illumina Way
San Diego, CA 92122
Attn: General Counsel
If to Sequenom:
Sequenom, Inc.
3595 John Hopkins Court
San Diego CA 92121
Attn: President

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With a copy to:
Sequenom, Inc.
3595 John Hopkins Court
San Diego CA 92121
Attn: General Counsel

Either Party may give written notice of a change of address and, after notice of such change has been received, any notice or request will thereafter be given to such Party as above provided at such changed address.
9.3      Counterparts . This Agreement may be executed in one or more counterparts (whether delivered by facsimile or otherwise), each of which will be considered one and the same agreement and will become effective when counterparts have been signed by each of the Parties and delivered to the other Party.
9.4      Entire Agreement . This Agreement along with the Ancillary Agreements: (i) constitutes the entire agreement and supersedes all prior agreements, negotiations, arrangements and understandings, both written and oral, between the Parties with respect to the subject matter hereof, and (ii) is not intended to confer upon any Person, other than the Parties, any rights, benefits or remedies of any nature whatsoever.
9.5      Severability . Any term or provision of this Agreement that is held to be invalid, void or unenforceable in any situation in any jurisdiction will not affect the validity or enforceability of the remaining terms and provisions hereof, or the validity or enforceability of the invalid, void or unenforceable term or provision in any other situation or in any other jurisdiction. If any term or provision of this Agreement is declared invalid, void or unenforceable, the Parties agree that the authority making such determination will have the power to and shall, subject to the discretion of such authority, reduce the scope, duration, area or applicability of the term or provision, to delete specific words or phrases, or to replace any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the original intention of the invalid or unenforceable term or provision.
9.6      Governing Law . This Agreement and any action related thereto shall be governed, controlled, interpreted and defined by and under the Laws of the State of California, without regard to any choice of law or conflicts of laws provisions thereof.
9.7      Enforcement .Illumina and Sequenom each agree that all disputes arising out of or relating to this Agreement (other than disputes between the Parties regarding adjustment of Test Fee amounts in accordance with Section 3.2(c)(iii)) shall be presented in writing to the Presidents of the Parties who shall use good faith efforts to resolve such disputes. If any such dispute is not resolved by the Presidents within thirty (30) days (or such longer period as the Parties mutually agree in writing) after first presentation in writing to each of such dispute, then either Party shall be entitled to commence proceedings in the state or federal courts, as applicable, located in San Diego, California. Each Party agrees (i) that all such disputes shall be instituted exclusively in the state or federal courts in California; (ii) irrevocably to submit and

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consent to the exclusive jurisdiction of the foregoing courts for any action properly brought pursuant to clause (i) above; and (iii) to waive any objection they may have now or hereafter to the venue of any action brought pursuant to clause (i) above.
(a)      Irreparable damage may occur if any of the provisions of this Agreement were not performed in accordance with their specific terms. Accordingly, the Parties will be entitled to seek specific performance of the terms of this Agreement, this being in addition to any other remedy to which they are entitled at Law or in equity.
(b)      No failure or delay on the part of either Party in the exercise or assertion of any right under this Agreement will impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation or agreement herein, nor will any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available.
(c)      Any agreement on the part of a Party to any extension, waiver, amendment, modification or supplement of this Agreement or its rights hereunder will be valid only if set forth in an instrument in writing signed on behalf of such Party.
(d)      All rights and licenses granted under or pursuant to this Agreement by one Party to the other are, and will otherwise be deemed to be, for purposes of Article 365(n) of the Bankruptcy Code, licenses of rights to “intellectual property” as defined under Article 101(52) of the Bankruptcy Code. The Parties agree that either Party in its capacity as a licensee of such rights under this Agreement will retain and may fully exercise all of its rights and elections under the Bankruptcy Code.
9.8      Export Control Laws . Anything contained in this Agreement to the contrary notwithstanding, the obligations of the Parties will be subject to all Laws, present and future and including export control laws and regulations, of any government having jurisdiction over the Parties hereto, and to orders, regulations, directions or requests of any such government. Each Party will undertake to comply with and be solely responsible for complying with such Laws applicable to such Party.
9.9      Construction . Any reference to a Party will include such Party’s permitted successors and permitted assigns. If any ambiguity or question of intent or interpretation arises, this Agreement will be construed as if drafted jointly by the Parties, and no presumption or burden of proof will arise favoring or disfavoring any Party by virtue of the authorship of any provision of this Agreement. No prior draft of this Agreement will be used in the interpretation or construction of this Agreement. Headings are used for convenience only and will not in any way affect the construction or interpretation of this Agreement. The doctrine of election of remedies will not apply in constructing or interpreting the remedies provisions of this Agreement or the equitable power of a court considering this Agreement or the transactions contemplated hereby.

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9.10      No Implied Warranty . EXCEPT AS SPECIFIED IN SECTION VII (REPRESENTATIONS AND WARRANTIES), AND ANY OTHER EXPRESS REPRESENTATION OR WARRANTY IN THIS AGREEMENT, THE LICENSES GRANTED HEREUNDER ARE GRANTED WITHOUT ANY WARRANTY OF ANY KIND. EACH PARTY HEREBY DISCLAIMS ANY IMPLIED WARRANTIES OF ANY KIND INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT.
9.11      Damage Limitation . EXCEPT FOR INFRINGEMENT OF THE OTHER PARTY’S INTELLECTUAL PROPERTY RIGHTS, ANY EXPRESS OBLIGATION OF A PARTY TO INDEMNIFY, HOLD HARMLESS AND DEFEND UNDER THIS AGREEMENT, AND FOR BREACH OF THE CONFIDENTIALITY OBLIGATIONS SET FORTH IN ARTICLE VI (CONFIDENTIALITY). NEITHER PARTY WILL BE LIABLE TO THE OTHER FOR ANY INDIRECT, CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, OR FOR LOST PROFITS OR COSTS ASSOCIATED WITH OBTAINING SUBSTITUTE PERFORMANCE HEREUNDER, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE BREACH THEREOF, REGARDLESS OF WHETHER SUCH PARTY HAD BEEN WARNED OF SUCH DAMAGES, AND REGARDLESS OF THE THEORY UPON WHICH SUCH DAMAGES ARE CLAIMED, INCLUDING, FOR BREACH OF CONTRACT, WARRANTY, TORT, NEGLIGENCE OR STRICT LIABILITY.
[ signature page follows ]



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Illumina and Sequenom have duly executed and delivered this Pooled Patents Agreement as of the Effective Date.
Illumina Inc.
Sequenom, Inc.
 
 
 
 
 
 
By:
By:
Name:
Name:
Title:
Title:


CONFIDENTIAL TREATMENT REQUESTED;
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SUBSIDIARIES OF THE COMPANY

 
 
 
 
 
Name of Subsidiary
 
Jurisdiction
 
Doing Business As
 
Advanced Liquid Logic Inc.
 
Delaware
 
Advanced Liquid Logic Inc.
BlueGnome, Ltd.
 
United Kingdom
 
BlueGnome, Ltd.
Epicentre Technologies Corporation
 
Wisconsin
 
Epicentre Biotechnologies
Illumina Australia Pty. Ltd.
 
Australia
 
Illumina Australia Pty. Ltd.
Illumina Brasil Produtos de Biotecnologia Ltda.
 
Brazil
 
Illumina Brazil
Illumina Cambridge, Ltd.
 
United Kingdom
 
Illumina Cambridge, Ltd.
Illumina Canada, Inc.
 
New Brunswick, Canada
 
Illumina Canada, Inc.
Illumina France Holding Sarl
 
France
 
Illumina France Holding Sarl
Illumina France Sarl
 
France
 
Illumina France Sarl
Illumina GmbH
 
Germany
 
Illumina GmbH
Illumina Hong Kong Limited
 
Hong Kong
 
Illumina Hong Kong Limited
Illumina Iceland ehf
 
Iceland
 
Illumina Iceland ehf
Illumina Italy S.r.l.
 
Italy
 
Illumina Italy S.r.l.
Illumina K.K. Japan
 
Japan
 
Illumina K.K. Japan
Illumina Netherlands B.V.
 
Netherlands
 
Illumina Netherlands B.V.
Illumina New Zealand Limited
 
New Zealand
 
Illumina New Zealand Limited
Illumina Singapore Pte. Ltd.
 
Singapore
 
Illumina Singapore Pte. Ltd
Illumina Trading (Shanghai) Co., Ltd.
 
China
 
Illumina Trading (Shanghai) Co., Ltd.
Illumina Switzerland GmbH
 
Switzerland
 
Illumina Switzerland GmbH
Illumina Europe Limited
 
United Kingdom
 
Illumina Europe Limited
Illumina Denmark ApS
 
Denmark
 
Illumina Denmark ApS
Illumina Productos de Espana, S.L.U.
 
Spain
 
Illumina Productos de Espana, S.L.U.
Illumina AB
 
Sweden
 
Illumina AB
NextBio
 
California
 
NextBio
Verinata Health, Inc.
 
Delaware
 
Verinata Health, Inc.
**All listed subsidiaries are wholly-owned, direct or indirect, subsidiaries of Illumina, Inc.

**As permitted under Rule 601 of Regulation S-K, we have omitted the names of subsidiaries, which if considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” (as defined in Rule 1-02(w) of Regulation S-X) as of the end of the year covered by this report




Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statements (Form S-3 Nos. 333-111496, 333-125100, 333-134012, 333-144953, 333-145408 and 333-168395) of Illumina, Inc.,
(2) Registration Statement (Form S-4 No. 333-139111) of Illumina, Inc., and
(3) Registration Statements (Form S-8 Nos. 333-42866, 333-69058, 333-88808, 333-104190, 333-114633, 333-124074, 333-125133, 333-129611, 333-134399, 333-140416, 333-147389, 333-151625, 333-159662, 333-168393, 333-188037 and 333-190322) of Illumina, Inc.;

of our reports dated February 17, 2015 , with respect to the consolidated financial statements and schedule of Illumina, Inc., and the effectiveness of internal control over financial reporting of Illumina, Inc., included in this Annual Report (Form 10-K) for the fiscal year ended December 28, 2014 .


/s/ Ernst & Young LLP
 

San Diego, California
February 17, 2015




Exhibit 31.1
CERTIFICATION OF JAY T. FLATLEY PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jay T. Flatley, certify that:

1
 
I have reviewed this Annual Report on Form 10-K of Illumina, Inc.;
 
 
 
 
2
 
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
 
3
 
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
 
4
 
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
 
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
 
 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
 
 
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
 
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
 
 
5
 
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
 
 
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
 
 
 
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 17, 2015
 
By:
 
/s/ J AY  T. F LATLEY
 
 
 
Jay T. Flatley
 
 
 
Chief Executive Officer





Exhibit 31.2
CERTIFICATION OF MARC A. STAPLEY PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Marc A. Stapley, certify that:

1
I have reviewed this Annual Report on Form 10-K of Illumina, Inc.;
 
 
 
2
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
 
 
3
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
 
 
4
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
 
 
 
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
 
 
 
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
 
 
 
c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
 
 
 
d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 
 
5
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
 
 
 
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
 
 
 
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: February 17, 2015
 
By:
 
/s/ M ARC  A. S TAPLEY
 
 
 
Marc A. Stapley
 
 
 
Senior Vice President and Chief Financial Officer





Exhibit 32.1
CERTIFICATION OF JAY T. FLATLEY PURSUANT TO 18 U.S.C. SECTION
1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-
OXLEY ACT OF 2002
In connection with the Annual Report of Illumina, Inc. (the “Company”) on Form 10-K for the year ended December 28, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jay T. Flatley, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 17, 2015

 
By:
 
/s/ J AY  T. F LATLEY
 
 
 
Jay T. Flatley
 
 
 
Chief Executive Officer

This certification accompanying the Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before, on or after the date of the Report), irrespective of any general incorporation language contained in such filing.




Exhibit 32.2
CERTIFICATION OF MARC A. STAPLEY PURSUANT TO 18 U.S.C.
SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Illumina, Inc. (the “Company”) on Form 10-K for the year ended December 28, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Marc A. Stapley, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 17, 2015

 
By:
 
/s/ M ARC  A. S TAPLEY
 
 
 
Marc A. Stapley
 
 
 
Senior Vice President and Chief Financial Officer

This certification accompanying the Report is not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities such Section, and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before, on or after the date of the Report), irrespective of any general incorporation language contained in such filing.