Biogen Idec Inc. — Q2 2010 Form 10-Q
Business context and reporting period: The filing is for the quarter and six months ended June 30, 2010. The registrant is Biogen Idec Inc. (the company named in the filing). It is a global biotechnology company whose marketed products include AVONEX, RITUXAN, TYSABRI and FUMADERM; AVONEX, RITUXAN and TYSABRI generated substantially all first-half revenue. Financial statements are unaudited.
Financial performance and position
Amounts are in millions of dollars except per-share data and percentages. Comparisons are with the corresponding 2009 period.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $1,212.7 | $1,093.3 | $2,321.6 | $2,129.8 |
| Operating income | $395.9 | $222.9 | $699.6 | $527.9 |
| Operating margin | 32.6% | 20.4% | 30.1% | 24.8% |
| Net income attributable to Biogen Idec | $293.4 | $142.8 | $510.9 | $386.8 |
| Diluted EPS | $1.12 | $0.49 | $1.91 | $1.33 |
| Operating cash flow | Not presented separately | Not presented separately | $765.4 | $529.3 |
- Q2 revenue rose 10.9%; product revenue was $859.2 million and unconsolidated joint-business revenue was $306.4 million. Q2 product revenue included AVONEX $628.1 million (+6.3%) and TYSABRI $219.2 million (+16.8%).
- Q2 total costs and expenses declined 6.2% to $816.8 million. R&D fell 20.4% to $331.7 million, while SG&A rose 18.8% to $262.3 million and collaboration profit sharing rose 27.6% to $62.7 million.
- At June 30, cash and cash equivalents were $721.0 million and marketable securities totaled $814.8 million, or $1,535.8 million combined. Total borrowings were approximately $1,079.8 million; combined cash and securities exceeded borrowings by about $456 million.
- Current assets were $2,255.2 million, current liabilities $755.7 million, and working capital $1,499.5 million. Total assets were $7,502.2 million and total liabilities $2,290.9 million.
- First-half investing cash flow was positive $933.7 million, principally reflecting net marketable-security sales and maturities; financing cash flow was negative $1,549.6 million, primarily due to share repurchases.
Material changes versus the prior period
- First-half operating cash flow increased 44.6% to $765.4 million, supported by higher net income, lower inventory and lower comparative income-tax payments, partly offset by increased receivables due from the joint business.
- First-half net income attributable to Biogen Idec increased to $510.9 million from $386.8 million. Comparisons reflect lower amortization after a change in the AVONEX core-technology amortization estimate, and the absence in 2010 of the $110 million Acorda upfront R&D payment made in 2009.
- First-half R&D included a $40 million acquired in-process R&D charge for a Syntonix/Factor IX milestone and a $30 million Facet milestone. Q2 SG&A included $18.6 million of incremental expense associated with former CEO James Mullen’s equity-award transition arrangements.
- Approximately 31.3 million shares were repurchased for $1.609 billion in the first half, reducing shares outstanding about 11.4% from year-end 2009. The company also repurchased 4.7 million shares for $233.2 million from July 1 through July 16.
- RITUXAN U.S. co-promotion revenue grew, but first-half rest-of-world RITUXAN revenue declined 31.5%, reflecting royalty expirations; Q2 included a $21.3 million cumulative royalty underpayment expected to be received in Q3.
Outlook, commentary, risks and contingencies
- Management expected a 2010 effective tax rate of 26%–28%, excluding any potential renewal of the federal R&D tax credit. It estimated U.S. healthcare reform would reduce 2010 revenue by approximately $40–$60 million; implementation details remained uncertain. The filing does not provide general revenue or EPS guidance.
- Management said existing funds, operating cash generation and financing access were adequate for foreseeable operating, investment and debt-service needs. It also planned to return cash opportunistically and pursue business-development opportunities.
- TYSABRI revenue was growing, but its label carries a serious PML risk warning. Updated U.S. and European labeling addressed PML risk factors, including prior immunosuppressant use and treatment duration. Further safety developments, label changes or risk-stratification work could affect prescribing and sales.
- AVONEX faced increasing MS competition; U.S. sales volume declined despite revenue growth. Management also cited continued pricing and reimbursement pressure, healthcare reform, international austerity measures and foreign-exchange exposure.
- Receivables in Greece, Italy, Spain and Portugal totaled approximately $201.7 million at quarter-end. Management reported no significant collection losses to date but warned that payment delays or government actions could impair collections.
- The company delayed completion of its Hillerød, Denmark manufacturing facility after operational qualification, and said manufacturing would not begin there until additional capacity was needed. Underutilized facilities could lead to impairment or other costs.
- Contested Massachusetts tax assessments totaled $142.4 million, including interest and penalties, for 2002 and 2004–2006; the company intends to contest them. Separately, the company disclosed patent, pricing and other litigation, including a Hoechst arbitration claim that could result in a cost to the RITUXAN collaboration; it did not assess an unfavorable outcome as probable or remote.
- Potential future collaboration and licensing milestone payments were up to approximately $1.3 billion, contingent on achievement and not recorded as liabilities. Uncertain-tax-position liabilities were $137.8 million, of which approximately $81.8 million was expected to be paid within 12 months.
Most important facts for investors to verify
- Whether TYSABRI patient growth continues and how PML safety developments or updated labeling affect use and revenue.
- Whether AVONEX can sustain revenue amid declining U.S. volume, competition and pricing pressure, and whether TYSABRI growth offsets that exposure.
- The realized effect of healthcare reform on rebates, discounts and revenue versus the $40–$60 million 2010 estimate.
- Collection timing and recoverability of European government-related receivables, particularly the approximately $201.7 million exposure in Greece, Italy, Spain and Portugal.
- Cash and securities levels after substantial repurchases, remaining debt and the company’s ability to fund pipeline programs, milestone obligations and capital needs.
- Developments in the Massachusetts tax disputes, patent and collaboration litigation, and contingent milestone commitments.