BIIB

Business Context and Reporting Period

Company: Biogen Idec Inc. (formed by the merger of IDEC Pharmaceuticals Corporation and Biogen, Inc. on November 12, 2003).
Reporting Period: Fiscal year ended December 31, 2003.
Business Overview: A global leader in the development, manufacturing, and commercialization of novel therapies in oncology and immunology. The company operates as a single segment. The 2003 results include the operations of Biogen, Inc. only from November 13, 2003, through December 31, 2003.

Key Financial Metrics

Revenue Composition (2003):

• Unconsolidated Joint Business (RITUXAN): $493.0 million (73% of total)
• Product Sales (AVONEX, ZEVALIN, AMEVIVE): $171.6 million
• Royalties: $12.0 million
• Corporate Partner Revenue: $2.6 million

Material Changes vs. Prior Period

The financial results for 2003 were significantly impacted by the acquisition of Biogen, Inc. and associated accounting adjustments:

• Net Loss: The company reported a net loss of $875.1 million in 2003 compared to net income of $148.1 million in 2002. This reversal was primarily driven by a non-cash charge of $823 million for the write-off of acquired in-process research and development (IPR&D) related to the merger.
• Revenue Growth: Total revenues increased 68% to $679.2 million, driven by the inclusion of Biogen's product sales (AVONEX and AMEVIVE) for the post-merger period and continued growth in RITUXAN copromotion profits.
• Inventory Write-downs: The company recorded $173.9 million in inventory write-downs, primarily related to AVONEX inventory that failed to meet quality specifications ($160.8 million) and fair market value adjustments from purchase accounting.
• Intangible Assets: The company recorded $33.2 million in amortization of acquired intangible assets (patents and core technology) from the Biogen acquisition.

Guidance, Outlook, and Risks

Outlook: Management anticipates that total product sales and royalty revenues in 2004 will be substantially higher than 2003, as the full year of AVONEX and AMEVIVE sales will be included. Gross margins on product sales are expected to increase significantly in 2004 as the inventory acquired at fair market value is sold.

Key Risks and Contingencies:

• Product Concentration: Revenues rely heavily on AVONEX and RITUXAN, which represented approximately 94% of total revenues in 2003.
• Manufacturing Issues: The company encountered problems with the pre-filled syringe formulation of AVONEX, leading to significant inventory write-downs and potential supply interruptions.
• Legal Proceedings:
  • Corixa/GlaxoSmithKline: Settled patent litigation regarding ZEVALIN for a $20 million payment plus future royalties (agreement reached Feb 2004).
  • Columbia University: Ongoing litigation regarding royalty obligations on RITUXAN; the company believes no additional amounts are payable.
  • Medicaid Fraud: Named as a defendant in lawsuits alleging overstatement of Average Wholesale Prices; outcome is uncertain.
• Regulatory: AMEVIVE approval in the EU was withdrawn pending additional data; ANTEGREN (natalizumab) BLA filing is expected mid-2004.

Investor Verification Checklist

• Merger Accounting Impact: Verify the sustainability of earnings excluding the $823 million IPR&D write-off and $174 million inventory write-down.
• AVONEX Supply Chain: Confirm resolution of manufacturing issues regarding the pre-filled syringe formulation and impact on future supply.
• RITUXAN Profit Share: Monitor the tiered profit-sharing arrangement with Genentech and the impact of RITUXAN sales growth on the company's share of profits.
• Legal Settlements: Track the finalization of the Corixa settlement and the status of the Columbia University and Medicaid fraud litigation.
• Debt Obligations: Review the terms of the $1.2 billion senior notes (due 2032) and $345 million subordinated notes (due 2019), including put options and conversion features.