Biogen Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Biogen is a global biopharmaceutical company focused on therapies for multiple sclerosis (MS), hematologic conditions and autoimmune disorders, with additional development programs in areas including Alzheimer’s disease. This unaudited report covers the three months ended March 31, 2016; comparisons are with the three months ended March 31, 2015, unless otherwise noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparator | Change |
|---|---|---|---|
| Total revenue | $2,726.8 million | $2,555.0 million | +6.7% |
| Operating income | $1,378.4 million | $1,117.9 million | +23.3% |
| Net income attributable to Biogen | $970.9 million | $822.5 million | +18.0% |
| Diluted EPS | $4.43 | $3.49 | +26.9% |
| Operating cash flow | $963.4 million | $733.0 million | +31.4% |
Operating margin was approximately 50.5%, up from 43.8%; net margin was approximately 35.6%, versus 32.2%. Weighted-average diluted shares fell to 219.3 million from 235.6 million, contributing to EPS growth.
- Revenue mix: Product revenue was $2,309.4 million (+6.3%); anti-CD20 program revenue was $329.5 million (-0.3%); other revenue was $87.9 million (+69.0%). TECFIDERA revenue rose 14.7% to $945.9 million. Interferon revenue declined 11.1% to $670.4 million, while ELOCTATE and ALPROLIX revenue increased to $107.7 million and $75.0 million, respectively. BENEPALI sales began in the EU during the quarter.
- Costs: Total costs and expenses declined 6.2% to $1,348.4 million. R&D fell 5.0% to $437.3 million and SG&A fell 11.3% to $497.3 million; Q1 2016 included $9.7 million of restructuring charges.
- Liquidity: Cash, cash equivalents and marketable securities totaled $6,775.2 million at March 31, up from $6,188.9 million at year-end. Working capital was $4,424.7 million; current assets were $7,201.3 million and current liabilities $2,776.6 million.
- Debt: Borrowings totaled $6,540.5 million, primarily senior notes. Cash and marketable securities exceeded borrowings by approximately $234.7 million. The $1.0 billion revolving credit facility had no outstanding borrowings, and Biogen reported compliance with its covenants.
- Cash flows: Investing activities used $1,203.2 million, including net purchases of marketable securities, $126.9 million of capital expenditures and a $300.0 million Fumapharm contingent payment. Financing activities provided $47.4 million. Cash and cash equivalents ended the quarter at $1,130.7 million.
Material changes and management commentary
- Revenue growth was led by TECFIDERA, hemophilia products and new BENEPALI sales, partly offset by declining Interferon sales. Management said Interferon revenue is expected to continue declining amid competition, including from Biogen’s own products. TECFIDERA growth continued in newly launched markets, while market growth and switching in mature markets had returned to historical averages.
- Management attributed lower operating expenses to restructuring-related savings, reduced incentive compensation, lower R&D milestone and early-stage program costs, and lower intangible amortization. Higher late-stage R&D spending reflected advancement of aducanumab and nusinersen.
- The 2015 restructuring included an 11% workforce reduction and termination of certain pipeline programs. Biogen expects approximately $250 million in annual operating-expense run-rate savings, to be reinvested in pipeline advancement and commercial activities. Approximately $105 million of net restructuring charges were expected in total; substantially incurred and paid by year-end 2016.
- Management stated that existing funds, operating cash flows and access to financing should be sufficient for foreseeable operating, investment and debt-service needs. The filing provides no specific quarterly or full-year revenue or EPS guidance.
Risks, contingencies and unusual items
- Product and market exposure: Biogen identified substantial reliance on principal products, especially MS products and TECFIDERA, and risks from competition, pricing and reimbursement pressure, safety events, patent challenges and biosimilar or generic competition.
- Patent and legal matters: Forward Pharma litigation and proceedings challenge TECFIDERA-related patent rights; the European Patent Office revoked a relevant patent in March, and Biogen intended to appeal. The USPTO instituted inter partes review of another TECFIDERA-related patent. Biogen also disclosed a Pfizer patent licensing matter concerning ALPROLIX, securities litigation, a False Claims Act action, and government investigations into sales and promotional practices, including a March subpoena concerning patient-assistance organizations. Possible losses for several matters could not be estimated.
- Tax: Danish tax authorities’ assessments for 2009, 2011 and 2013 were estimated at $67 million including interest; Biogen disputes them. The 2011 and 2013 assessments were received in April 2016. The company also disclosed approximately $64 million of liabilities for uncertain tax positions.
- Italy TYSABRI matter: Approximately EUR75 million was recorded in long-term liabilities for the AIFA pricing/reimbursement dispute. Biogen said a settlement offer, if accepted, could result in approximately EUR40 million of revenue; the dispute remained unresolved.
- Contingent payments and commitments: Biogen paid $300 million on reaching a Fumapharm sales milestone and accrued another $300 million in Q1. Additional $300 million payments may arise for each further $1 billion of cumulative sales, subject to the agreement’s conditions and cap. Potential future collaboration milestones were up to approximately $2.6 billion and were not recorded because milestones had not been achieved. The Solothurn manufacturing facility had approximately $180 million of construction commitments.
- Other exposures: Foreign-exchange hedges had $1,375.1 million notional value; a hypothetical adverse 10% currency move was estimated to reduce their fair value by about $210 million. Management also cited pricing, collection, manufacturing, clinical-development, collaboration and cybersecurity risks.
Key facts investors should verify
- Whether TECFIDERA growth and hemophilia-product momentum can offset ongoing Interferon declines and competitive pressure.
- How patent proceedings, particularly those involving TECFIDERA, affect product exclusivity and potential financial exposure.
- Outcomes of the AIFA reimbursement dispute, Danish tax assessments and disclosed government investigations and litigation.
- Timing and cash impact of Fumapharm contingent payments, collaboration milestones and the Solothurn facility investment.
- Whether restructuring savings are achieved and reinvested as planned, and how higher debt-related interest expense affects future earnings and cash generation.