BIOGEN INC. quarterly report, Q2 FY2011

Business context and reporting period

Biogen Idec Inc. (the registrant named in the filing) is a biotechnology company focused on serious diseases, particularly neurological disorders. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Its principal products were AVONEX, TYSABRI, RITUXAN and FUMADERM.

Financial results and liquidity

Metric	Q2 2011	Q2 2010	Six months 2011	Six months 2010
Total revenue	$1.209 billion	$1.213 billion	$2.412 billion	$2.322 billion
Operating income	$410.8 million	$395.9 million	$827.1 million	$699.6 million
Net income attributable to Biogen Idec	$288.0 million	$293.4 million	$582.4 million	$510.9 million
Diluted EPS	$1.18	$1.12	$2.38	$1.91

Q2 operating margin was approximately 34.0%, compared with 32.6%; six-month operating margin was approximately 34.3%, compared with 30.1%. Q2 attributable net income declined 1.8% despite higher operating income; six-month attributable income rose about 14.0%. Lower weighted-average shares contributed to EPS growth.

Six-month operating cash flow was $683.2 million, down from $765.4 million. Capital expenditures were $86.2 million. At June 30, cash and cash equivalents were $697.5 million and marketable securities totaled $1.813 billion, or $2.510 billion combined. Total borrowings were approximately $1.195 billion, implying net financial assets of about $1.315 billion. Working capital was $1.734 billion and the current ratio approximately 2.8x. The $360 million revolving credit facility was undrawn; the company reported compliance with its covenants.

Material changes versus the prior comparable period

• Q2 total revenue was nearly flat: product revenue grew 11.3% to $956.7 million, while unconsolidated joint-business revenue fell 29.3% to $216.5 million. The latter included an approximately $50 million accrual related to the Hoechst-Genentech arbitration concerning RITUXAN.
• Q2 AVONEX revenue increased 5.0% to $659.2 million; TYSABRI revenue increased 28.4% to $281.4 million. RITUXAN joint-business revenue fell, reflecting the arbitration accrual, royalty expirations outside the U.S., lower reimbursed selling and development expenses, and a prior-year royalty catch-up.
• For the first six months, total revenue increased 3.9%, supported by product growth, while joint-business revenue decreased 15.8%. Operating income increased as total expenses declined 2.3%; R&D expense fell 9.3%, partly reflecting restructuring and discontinued programs.
• Share repurchases were $386.6 million for the first half, versus $1.609 billion in the first half of 2010. The company repurchased 5.0 million shares under a new authorization of up to 20 million shares.
• Total assets rose to $8.622 billion from $8.092 billion at year-end 2010, largely alongside higher marketable securities; total liabilities declined to $2.566 billion from $2.643 billion.

Outlook, management commentary, risks and unusual items

• Management expected approximately $300 million of annual operating-expense savings from its restructuring initiatives, beginning in the second half of 2011, partly offset by growth investments. It estimated total restructuring charges of about $100 million, substantially incurred and paid by year-end 2011; $16.6 million was recorded in the first half of 2011.
• Management expected 2011 cost of sales to increase versus 2010, citing production costs, higher contract manufacturing activity, AVONEX PEN and the JC virus antibody assay. It planned significant 2011 investment in BG-12 and Factor VIII/IX programs, among other pipeline priorities.
• BG-12 met endpoints in the DEFINE Phase 3 trial; results from the CONFIRM trial were expected in the second half of 2011. After quarter-end, the European Commission granted conditional marketing authorization for FAMPYRA, triggering a $25 million milestone payable to Acorda.
• TYSABRI sales growth faces material PML safety and regulatory risks. The company reported broader EU availability of its JC virus antibody assay and expected U.S. availability later in 2011, subject to regulatory approval; risk stratification could also affect prescribing.
• European payment delays pose collection risk: receivables from Italy, Spain and Portugal totaled $277.5 million at June 30, 2011. The filing states that approximately $53.5 million across the listed higher-risk countries was outstanding for more than one year.
• Other significant exposures include Massachusetts tax assessments totaling $142.4 million for disputed periods, which the company contested; potential RITUXAN-related damages; and patent disputes involving RITUXAN, AVONEX and TYSABRI. The company had accrued approximately $50 million for estimated RITUXAN arbitration damages, while outcomes of the other proceedings remained uncertain.
• In July 2011, the company signed 15-year leases for Cambridge buildings with approximately $340 million in minimum rent commitments, excluding additional operating costs. It estimated a future $35 million charge on vacating its Weston facility and about $25 million of additional depreciation through the expected move.
• Other notable items included $15.5 million of net gains on investment sales in the first half, including a $13.8 million gain on a strategic investment sale, and $3.4 million of expense from remeasuring Panima acquisition contingent consideration.

Important facts for investors to verify

• Whether the $50 million RITUXAN arbitration accrual adequately reflects the eventual damages and any ongoing effect on collaboration revenue.
• Progress, regulatory status and commercial prospects for BG-12, FAMPYRA and other late-stage programs, alongside TYSABRI PML developments and assay availability.
• Collections, aging and potential credit losses on European government-related receivables, especially in Italy, Spain and Portugal.
• Resolution and potential financial effects of Massachusetts tax disputes and the cited patent litigation.
• Delivery of projected restructuring savings, remaining charges and the costs and commitments associated with the Cambridge relocation.
• Product concentration, pricing pressure, competition and patent or royalty expirations affecting AVONEX, TYSABRI and RITUXAN.