Biogen Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual report, not a standalone Q4 filing; quarterly figures below are included where material. Unless stated otherwise, amounts are U.S. dollars.
Business context and reporting period
Biogen is a global biopharmaceutical company focused on neurological and neurodegenerative diseases, with major commercial exposure to multiple sclerosis (MS), spinal muscular atrophy (SMA) and anti-CD20 programs. On February 1, 2017, Biogen spun off its hemophilia business as Bioverativ; 2017 results include that business only through January 31, while 2016 results include the full year. This limits direct year-over-year comparability.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Total revenue | $12.274B | $11.449B | +7.2% |
| Product revenue, net | $10.355B | $9.818B | +5.5% |
| Income from operations | $5.344B | $5.150B | +3.8% |
| Net income attributable to Biogen | $2.539B | $3.703B | -31.4% |
| Diluted EPS | $11.92 | $16.93 | -29.6% |
| Operating cash flow | $4.551B | $4.587B | -0.8% |
Operating margin was approximately 43.5%, compared with 45.0% in 2016; net margin attributable to Biogen was approximately 20.7%, versus 32.3%. The filing reports gross profit, excluding acquired-intangible amortization, of $10.644B, or approximately 86.7% of revenue. Research and development expense rose 14.2% to $2.254B; total costs and expenses rose 10.0% to $6.930B.
- Revenue drivers: TECFIDERA revenue rose 6.2% to $4.214B; SPINRAZA generated $883.7M versus $4.6M in its initial launch period; BENEPALI rose to $370.8M. Anti-CD20 program revenue increased 18.6% to $1.559B, driven in part by OCREVUS royalties and RITUXAN profit share.
- Offsets and concentration: Interferon revenue declined 5.3% to $2.646B. TECFIDERA, AVONEX and TYSABRI each generated more than 10% of total revenue; RITUXAN was also a significant revenue source. Two wholesale distributors together represented approximately 56% of gross product revenue.
- Cash, liquidity and debt: Cash, cash equivalents and marketable securities totaled $6.746B at year-end, down 12.7% from 2016. Current assets were $7.873B and current liabilities $3.368B, producing working capital of $4.505B and a current ratio of about 2.34. Borrowings totaled $5.938B; cash and marketable securities exceeded borrowings by approximately $808M. Operating cash flow less property, plant and equipment purchases was approximately $3.684B.
- Capital allocation and investment: Biogen repurchased approximately 4.9 million shares for $1.365B. Capital expenditures were $867M, including construction of the Solothurn biologics facility. It paid $1.2B in Fumapharm-related contingent payments and had accrued a further $600M for payment in early 2018.
Material changes versus the prior comparable period
- Revenue grew, led by SPINRAZA, TECFIDERA, BENEPALI and anti-CD20 programs, while U.S. product revenue was broadly flat and rest-of-world product revenue increased 20.6%.
- Biogen-attributable net income fell despite higher revenue and operating income, principally reflecting a $1.174B tax-reform charge, including $989.6M for the Transition Toll Tax, and higher amortization and impairment charges. The effective tax rate rose to 47.9% from 25.1%.
- Acquired-intangible amortization increased to $814.7M from $385.6M, including $444.2M of amortization and impairment related to Forward Pharma licenses. R&D increased with upfront and milestone payments and pipeline spending.
- The hemophilia spin-off reduced ongoing hemophilia product revenue and changed the composition of the business. 2017 hemophilia product revenue was $74.4M, recorded only through January 31.
Outlook, management commentary, risks and unusual items
- Management expected modest global TECFIDERA demand growth in 2018, with international volume growth partly offset by U.S. declines; it expected TYSABRI demand to decline and Interferon revenue to continue falling. Management said SPINRAZA growth would moderate as patients moved to maintenance dosing.
- The October 2017 restructuring is expected to require up to $170M in non-recurring operating and capital expenditures, primarily in 2018; management aims to redirect up to $400M annually by 2020 toward prioritized R&D and other value-creation opportunities.
- The 2017 Tax Act charge is based on a preliminary estimate subject to finalization. The company expected a modest positive effect on its income tax rate in 2018 and potentially additional benefit thereafter; toll-tax payments are scheduled over eight years.
- ZINBRYTA faced European restrictions following reports of fatal liver failure and serious liver injury. Biogen recorded approximately $190.8M of related asset impairments and noted an unrecorded tax benefit of approximately $93.8M. This creates material safety, commercial and asset-value uncertainty.
- In Q4 2017, Biogen reported a $297.4M net loss attributable to Biogen and diluted EPS of -$1.40. The quarter included the Tax Act charge and a $150M payment to Neurimmune to reduce royalties, among other R&D charges.
- Key legal and contingent exposures include TECFIDERA patent disputes and generic challenges, government investigations of sales and promotional practices and pricing reports, and a qui tam and securities lawsuit; the filing says possible losses for certain proceedings cannot be estimated. Genentech withheld approximately $120M from amounts due to Biogen over disputed collaboration expenses.
- Other material risks include competition and pricing or reimbursement pressure, reliance on a concentrated set of products and distributors, clinical-development and regulatory uncertainty, manufacturing and third-party supply risks, foreign-exchange and international collection risks, and collaboration obligations. Potential future development, regulatory and commercial milestone payments total up to approximately $4.2B and are contingent, not recorded liabilities.
Most important facts for investors to verify
- How much of 2017 revenue and earnings growth is sustainable after accounting for the hemophilia spin-off, launch timing, price increases, product mix and one-time items.
- SPINRAZA’s continued launch trajectory and the extent to which MS competition—particularly OCREVUS—affects TECFIDERA, TYSABRI and other MS products.
- The final tax-reform accounting, toll-tax cash payments and realized impact of the new tax regime.
- The consequences of ZINBRYTA’s safety restrictions and any further impairments, as well as the outcomes of TECFIDERA patent challenges and generic litigation.
- Cash generation after contingent payments, capital spending and R&D commitments; the $600M Fumapharm accrual; and the timing and scale of remaining debt obligations.
- Resolution of the $120M Genentech withholding and the status or potential financial effects of government investigations and other legal proceedings.