Biogen Inc. — FY2018 Form 10-K
Business context and reporting period: Biogen is a global biopharmaceutical company focused on neurological and neurodegenerative diseases, including multiple sclerosis (MS) and spinal muscular atrophy (SMA), with additional revenue from anti-CD20 collaborations and European biosimilars. This annual report covers the year ended December 31, 2018; selected fourth-quarter results are also provided. The hemophilia business was spun off in February 2017, so 2017 results include its operations through January 31, unlike 2018.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $13.453 billion | $12.274 billion |
| Operating income | $5.889 billion | $5.346 billion |
| Net income attributable to Biogen | $4.431 billion | $2.539 billion |
| Diluted EPS | $21.58 | $11.92 |
| Operating cash flow | $6.188 billion | $4.551 billion |
| Cash, cash equivalents and marketable securities, year-end | $4.914 billion | $6.746 billion |
| Borrowings, year-end | $5.937 billion | $5.938 billion |
| Working capital, year-end | $4.346 billion | $4.505 billion |
FY2018 gross profit, as defined by the company before amortization and impairment of acquired intangibles, was $11.637 billion, or approximately 86.5% of revenue. Operating margin was approximately 43.8%, and net margin attributable to Biogen approximately 32.9%. Net debt on this measure—borrowings less cash and marketable securities—was approximately $1.0 billion.
Fourth-quarter 2018 revenue was $3.526 billion, compared with $3.307 billion in Q4 2017. Net income attributable to Biogen was $946.8 million versus a loss of $297.4 million; diluted EPS was $4.73 versus a loss of $1.40. The 2017 quarter included a $1.174 billion tax charge associated primarily with the Tax Cuts and Jobs Act.
Material changes versus the prior comparable period
- Revenue increased 9.6%. Product revenue grew 5.1%, anti-CD20 program revenue rose 27.0%, and other revenue rose 62.8%.
- SPINRAZA revenue increased to $1.724 billion from $883.7 million, while biosimilar revenue rose to $545.1 million from $379.8 million. IMRALDI sales began in Europe in Q4.
- MS product revenue declined 4.3% to $8.595 billion. Interferon revenue fell 10.7% and TYSABRI revenue fell 5.5%; TECFIDERA revenue increased 1.4%.
- Anti-CD20 program revenue rose to $1.980 billion, including higher OCREVUS royalties and increased U.S. RITUXAN and GAZYVA profit share.
- Net income and EPS benefited significantly from the effective tax rate falling to 24.2% from 47.9%, principally reflecting the lower U.S. statutory rate and the prior-year tax-law charge. Expenses also rose: total costs and expenses increased 9.2%, including higher R&D, selling and administrative, and cost-of-sales expenses.
- Operating cash flow increased 36.0%. Cash and marketable securities declined 27.2%, mainly reflecting share repurchases, Fumapharm contingent payments, business-development spending, capital expenditure, and the Samsung Bioepis investment.
Outlook, commentary, risks and unusual items
- Management outlook: Biogen anticipated higher global TECFIDERA demand in 2019, with U.S. volumes expected to stabilize; continued declines in interferon revenue; a slight global TYSABRI demand decline; and a moderation in SPINRAZA growth. It expected strong biosimilar revenue growth, primarily from IMRALDI’s continued launch. No consolidated 2019 revenue or EPS guidance is provided in the supplied filing text.
- Pipeline: Phase 3 aducanumab trials were fully enrolled, but remained investigational; approval and commercial success were uncertain. Diroximel fumarate’s NDA was submitted by Alkermes in December 2018. The filing reports a clinical hold on BIIB089, failure of the dapirolizumab pegol Phase 2b primary endpoint, and discontinuation of vixotrigine for painful lumbosacral radiculopathy and natalizumab for acute ischemic stroke.
- Unusual charges and payments: FY2018 included a $486.2 million R&D charge related to the Ionis agreement, $189.3 million of vixotrigine IPR&D impairment charges, and a $176.8 million impairment of the U.S. Forward Pharma license asset related to TECFIDERA. The company paid $1.5 billion in Fumapharm contingent payments and accrued a final $300 million payment for Q1 2019. The annual results also included $119.5 million of net investment gains in other income.
- Capital allocation and investment: Biogen repurchased approximately 14.8 million shares for about $4.4 billion during 2018. It paid $676.6 million to increase its Samsung Bioepis ownership to approximately 49.9% and invested in Ionis under a 10-year collaboration. The Solothurn, Switzerland biologics facility was expected to be operational by end-2020.
- Principal risks: Revenue concentration in MS products, SPINRAZA and anti-CD20 rights; increasing competition, including biosimilars and potential SMA gene therapy; pricing and reimbursement pressure; patent challenges; clinical and regulatory setbacks; product safety; reliance on collaborators and third-party manufacturers; foreign exchange, tax and international-market risks; and substantial contingent milestone and royalty obligations. Biogen reported $5.0 billion of possible future development, regulatory and commercial milestones, not recorded as liabilities because achievement was not considered probable.
- Legal and tax contingencies: TECFIDERA patent disputes and generic challenges continue, including inter partes review of a key U.S. patent instituted in February 2019. The filing also describes government investigations into sales, promotional, patient-assistance and pricing practices, as well as a Brazilian tax assessment of approximately $70 million that Biogen disputes. Possible losses for several matters were not estimable in the filing.
Most important facts for investors to verify
- Whether the 2019 outlook for SPINRAZA, MS therapies and biosimilars is borne out by reported sales, pricing and patient trends.
- Clinical, regulatory and safety developments for aducanumab and other late-stage pipeline candidates, and the financial implications of failures or delays.
- The timing and commercial impact of generic or biosimilar competition, especially for TECFIDERA and RITUXAN, and the status of associated patent proceedings.
- Whether cash generation can sustain planned R&D, contingent payments, facility investment and buybacks while liquidity declined during 2018.
- Final outcomes and potential financial exposure from the disclosed legal, regulatory and tax matters, including the Brazilian assessment and government investigations.
- The scale and timing of future collaboration milestones, royalties and the final Fumapharm payment, and the realized value of the Samsung Bioepis and Ionis investments.