Biogen Idec Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual filing, not a standalone fourth-quarter filing; selected Q4 results are included below. Unless noted, amounts are U.S. dollars.
Business context and financial performance
Biogen Idec is a global biotechnology company focused on specialty medicines, principally in neurology, oncology and immunology. Results depended heavily on AVONEX, TYSABRI and RITUXAN, with substantial reliance on collaboration partners for RITUXAN and TYSABRI.
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Total revenue | $4,377.3 million | $4,097.5 million | +6.8% |
| Operating income | $1,295.4 million | $1,213.6 million | +6.7% |
| Operating margin | 29.6% | 29.6% | Flat |
| Net income attributable to Biogen Idec | $970.1 million | $783.2 million | +23.9% |
| Diluted EPS | $3.35 | $2.65 | +26.4% |
| Cash flow from operations | $1,074.9 million | $1,562.4 million | -31.2% |
| Cash, cash equivalents and marketable securities | $2,457.8 million | $2,262.8 million | +8.6% |
| Total borrowings | $1,100.0 million | $1,113.1 million | -1.2% |
| Working capital | $1,765.7 million | $1,534.8 million | +15.0% |
Net margin was approximately 22.2%, versus 19.1% in 2008. The filing attributes the earnings improvement partly to stronger product performance, lower investment impairment charges, lower amortization and a lower effective tax rate. The 2009 effective tax rate was 26.7%, compared with 31.6% in 2008; tax audit resolutions and state tax-law changes reduced 2009 tax expense.
Revenue drivers and material changes
- Product revenue rose 11.0% to $3,152.9 million. AVONEX revenue increased 5.5% to $2,322.9 million; U.S. growth reflected price increases despite lower sales volume. Rest-of-world AVONEX revenue was affected by unfavorable foreign exchange.
- TYSABRI revenue increased 31.8% to $776.0 million, supported by continued patient growth. Global in-market sales were $1,059.2 million. U.S. sales volume increased 16.3%; rest-of-world growth was partly offset by currency effects.
- RITUXAN revenue recognized by Biogen Idec through its unconsolidated joint business declined 3.0% to $1,094.9 million. U.S. co-promotion profit share rose 5.5% to $773.6 million, but rest-of-world revenue fell 23.7% to $255.7 million, primarily due to royalty expirations and foreign exchange.
- Other revenue was $129.5 million, essentially flat. Royalty revenue increased to $124.4 million, mainly due to ANGIOMAX sales; corporate partner revenue declined to $5.1 million.
- Research and development expense increased 19.7% to $1,283.1 million, including the $110 million fampridine upfront payment to Acorda and increased clinical-trial spending. Collaboration profit-sharing expense rose 58.8% to $215.9 million, largely with TYSABRI’s rest-of-world growth.
- Net income and EPS benefited from lower acquired-intangible amortization ($289.8 million versus $332.7 million) and lower investment impairment expense. The September 2009 AVONEX patent, expiring in 2026, extended the assumed remaining life of its core technology and reduced amortization.
Fourth quarter: Revenue was $1,127.0 million, up from $1,068.9 million in Q4 2008. Net income attributable to Biogen Idec was $305.6 million versus $206.7 million, and diluted EPS was $1.06 versus $0.70. Q4 2009 tax audit resolutions reduced income tax expense by $34.0 million.
Cash, debt and capital allocation
- Operating cash flow was $1,074.9 million; purchases of property, plant and equipment were $165.6 million. Cash flow from operations fell from 2008, primarily because of higher tax payments, including audit settlements, the Acorda upfront payment and payments of accrued liabilities.
- Cash and marketable securities totaled $2,457.8 million against $1,100.0 million of borrowings. The company reported $1,765.7 million of working capital and stated that existing funds, operating cash flow and financing access should meet foreseeable operating and capital requirements.
- Biogen Idec repurchased 16.0 million shares for $751.2 million in 2009. The new $1 billion repurchase authorization had $288.2 million remaining as of February 5, 2010, after further repurchases. The company did not anticipate paying cash dividends in the near term.
- Contractual obligations totaled $1,871.9 million, including $1,442.0 million of scheduled debt principal and interest and $381.8 million of operating leases. Potential collaboration milestone payments of up to approximately $1.5 billion were contingent and unrecorded; management anticipated approximately $82 million could be paid in 2010 if milestones were achieved.
Outlook, risks and unusual items
- Management expected 2010 R&D expense of 24%–27% of revenue and an effective tax rate of 28%–30%, excluding any potential renewal of the federal R&D tax credit. SG&A was expected to increase. No total revenue or EPS guidance is stated in the provided filing text.
- Amortization of acquired intangible assets was expected to be approximately $160 million–$220 million annually for each of the next five years. A $40 million Syntonix milestone was triggered in January 2010 and expected to be recorded as first-quarter 2010 IPR&D expense. The company also expected approximately $105 million of tax-audit settlement payments in the first half of 2010.
- TYSABRI carries a serious PML risk. U.S. labeling was revised in November 2009 to state that risk rises with treatment duration; in January 2010, the EMA recommended EU label changes and regular MRI monitoring. Additional PML cases or restrictions could impair sales.
- Revenue concentration, competition and reimbursement pressures remain material. AVONEX faced declining U.S. volume and new MS competitors; RITUXAN rest-of-world royalties were expected to continue declining as country patent/royalty periods expired; ANGIOMAX’s principal U.S. patent expired in March 2010, with marketing exclusivity through September 2010.
- Pipeline outcomes were uncertain. Ocrelizumab trials showed an opportunistic-infection imbalance, prompting stopped redosing in certain studies and closure of the lupus nephritis study; one RA study did not meet its single-infusion primary endpoint. Several other programs were discontinued or recruitment stopped for strategic or efficacy reasons.
- Litigation and tax contingencies include a Massachusetts tax assessment of $38.9 million, RITUXAN patent litigation and related arbitration, and pharmaceutical pricing-related claims. Management did not assess the outcomes or potential losses in certain matters as probable or remote, and did not provide a clear loss range.
- CEO James C. Mullen announced retirement effective June 8, 2010. The transition agreement provides for continued salary and bonuses, equity vesting and other benefits; management estimated approximately $21 million of first-half 2010 expense from modification of his equity awards. Activist-shareholder activity and board uncertainty were also identified as risks.
- Manufacturing and capacity risks include reliance on a single Biogen Idec facility for bulk TYSABRI, third-party fill-finish and storage providers, and single-source raw materials. The company was evaluating whether to delay completion of its Denmark manufacturing facility after improved TYSABRI yields reduced expected capacity needs.
Most important facts for investors to verify
- Whether TYSABRI patient growth continues despite evolving PML warnings, monitoring requirements and competing MS treatments.
- Whether AVONEX pricing offsets lower U.S. sales volume and whether the 2026 patent meaningfully supports the product’s expected commercial life.
- The pace of RITUXAN rest-of-world royalty declines, the effect of new anti-CD20 products on Biogen Idec’s collaboration economics, and outcomes of related patent matters.
- Pipeline trial, regulatory and safety milestones, especially BG-12, fampridine outside the U.S., daclizumab, ocrelizumab and hemophilia programs.
- Operating cash conversion, tax payments and investment portfolio risk, alongside the pace of share repurchases and remaining debt obligations.
- Any material change in legal or tax contingency estimates, manufacturing capacity plans, or costs associated with the CEO transition and Weston/Denmark facilities.