Biogen Idec Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparative periods ended September 30, 2010. Unaudited consolidated results. Biogen Idec is a biotechnology company focused on serious diseases, particularly neurology, immunology and hemophilia.
Financial performance
| Metric | Q3 2011 | Q3 2010 | First nine months 2011 | First nine months 2010 |
|---|---|---|---|---|
| Total revenue | $1,309.9 million | $1,175.8 million | $3,721.9 million | $3,497.4 million |
| Operating income | $488.5 million | $194.1 million | $1,315.6 million | $893.7 million |
| Net income attributable to Biogen Idec | $351.8 million | $254.1 million | $934.2 million | $765.0 million |
| Diluted EPS attributable to Biogen Idec | $1.43 | $1.05 | $3.81 | $2.95 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1,253.8 million | $1,193.6 million |
Q3 revenue increased 11.4%, operating income 151.6%, attributable net income 38.5% and diluted EPS 36.2%. The prior-year quarter included a $205.0 million acquired in-process R&D charge, which materially affects the operating-income comparison. Operating margin, calculated from reported figures, was approximately 37.3% in Q3 2011 versus 16.5% in Q3 2010; nine-month operating margin was approximately 35.4% versus 25.6%. These comparisons are not adjusted for unusual charges.
Q3 product revenue was $975.8 million, up 11.3%. AVONEX revenue was $681.7 million, up 5.9%, while TYSABRI revenue was $277.3 million, up 25.6%. Unconsolidated joint-business revenue, principally RITUXAN-related, was $266.5 million, up 3.3% in the quarter; for the first nine months it was $739.1 million, down 9.8%, reflecting royalty expirations and a $50 million reduction related to the Hoechst arbitration estimate.
For the nine months, research and development expense fell 8.0% to $880.7 million; selling, general and administrative expense rose 2.3% to $772.2 million; and collaboration profit-sharing expense rose 28.4% to $244.3 million. No acquired IPR&D charge was recorded in 2011, compared with $245.0 million in the prior-year period. The 2011 period included $18.4 million of restructuring charges and $5.9 million of contingent-consideration remeasurement expense.
Liquidity, debt and cash flow
At September 30, 2011, cash and cash equivalents were $575.1 million and marketable securities totaled $2,293.7 million, for combined financial assets of $2,868.9 million, up 47.1% from December 31, 2010. Total borrowings were $1,064.1 million, down from $1,203.5 million; the filing reports $3.4 million current and $1,060.6 million long-term. Working capital was $1,951.9 million, versus $1,490.3 million at year-end. The company also had an undrawn $360 million revolving credit facility, terminating in June 2012, and reported compliance with its covenants.
Nine-month operating cash flow was $1,253.8 million. Investing activities used $1,260.8 million, mainly reflecting $1,114.9 million of net marketable-security purchases and $137.6 million of capital expenditures. Financing activities used $177.1 million, including $386.6 million for share repurchases and $91.7 million paid toward the purchase of the Dompé joint-venture interests. Cash and cash equivalents declined to $575.1 million from $759.6 million at year-end.
Material changes and unusual items
- On September 6, Biogen Idec acquired the remaining interests in its Italian and Swiss Dompé sales affiliates for $152.9 million cash, plus up to $42.5 million in contingent consideration. The affiliates became wholly owned; the company recorded a $38.8 million contingent-consideration liability at acquisition.
- In Q2, the company reduced its share of RITUXAN joint-business revenue by approximately $50 million based on its estimate of potential exposure in the Hoechst arbitration. Sanofi claimed approximately $224 million in damages for the relevant historical period; liability and damages proceedings were scheduled for 2012.
- Restructuring initiatives included a completed 13% workforce reduction, program discontinuations and facility consolidation. Management expected annual operating-expense savings of approximately $300 million, substantially offset by growth initiatives. Total restructuring charges were expected not to exceed $100 million, with substantially all remaining charges expected by year-end 2011.
- The European Commission granted conditional marketing authorization for FAMPYRA in July, triggering a $25 million milestone payment, capitalized as an intangible asset. The product launched in Germany in September and in the U.K. and Australia in October.
- On October 26, after quarter-end, Biogen Idec announced positive top-line results from the second pivotal Phase 3 BG-12 trial. Also on October 26, it entered a proposed worldwide Syk-inhibitor collaboration with Portola: $36 million upfront cash, a $9 million equity purchase and up to $508.5 million in development and regulatory milestones, subject to closing conditions.
Outlook, management commentary and risks
The filing provides no consolidated revenue or EPS guidance. Management said future growth depends on continued performance of AVONEX, TYSABRI and RITUXAN, successful development and commercialization of pipeline products, intellectual-property protection and external business development. It expected acquired-intangible amortization of approximately $150–$200 million annually through 2016, including approximately $105–$155 million annually for AVONEX core technology.
- Product and pipeline: TYSABRI growth is exposed to progressive multifocal leukoencephalopathy (PML) risk, prescribing restrictions and the effect of risk-stratification efforts. Competition, including oral MS therapies, BG-12 if approved, and potential biosimilars, could pressure AVONEX and TYSABRI sales. FAMPYRA’s authorization is conditional on additional long-term benefit and safety data.
- Pricing, reimbursement and collections: Austerity measures and pricing pressure in Europe could reduce revenue. At September 30, net receivables from Spain, Italy, Portugal and Greece totaled approximately $201.6 million; about $65 million of balances for these countries were more than one year outstanding. Management warned that collection delays or mandatory price deductions could worsen.
- Legal and tax contingencies: The IRS proposed disallowing approximately $130 million of deductions for 2007–2009 related to services from a Danish contract-manufacturing affiliate; the company said it would contest the proposal. Massachusetts tax assessments for 2004–2006 remained disputed and totaled $142.4 million including interest and penalties. The filing also describes patent disputes involving RITUXAN, AVONEX and TYSABRI, and a Medicaid Average Manufacturer Price lawsuit; outcomes and potential losses were uncertain.
- Other exposures: Foreign-exchange movements, investment-market risk, manufacturing disruption, product safety, development and regulatory uncertainty, and contingent milestone obligations could affect results. Potential future third-party development and regulatory milestone payments were approximately $1.3 billion as of September 30, excluding the subsequent Portola agreement.
Most important facts for investors to verify
- Whether revenue and earnings growth persists after accounting for the prior-year $205 million IPR&D charge and the 2011 RITUXAN arbitration estimate.
- Progress and regulatory status of BG-12, TYSABRI PML risk-management measures, and FAMPYRA’s conditional authorization requirements.
- Collection trends for European receivables, especially the aged balances in Spain and Portugal, and any effect of government reimbursement or pricing actions.
- Developments in the Hoechst arbitration, patent litigation, IRS proposal and Massachusetts tax dispute, including any change in estimated exposure.
- Realization of the projected $300 million annual restructuring savings, remaining restructuring costs, and the financial commitments associated with the Cambridge leases and contingent milestones.