BIOGEN INC. annual report, FY2015

Business context and reporting period

Biogen Inc. filed this Form 10-K for the fiscal year ended December 31, 2015. The company develops, manufactures and commercializes therapies for neurological, hematologic and autoimmune diseases. Its portfolio was led by multiple sclerosis products, with newer hemophilia products and collaboration-derived revenues also contributing.

Financial performance and condition

Gross profit, as defined in the filing before acquired-intangible amortization, was $9.523 billion, an approximately 88.5% margin on revenue. Operating margin was approximately 45.4%; net income attributable to Biogen was approximately 33.0% of revenue. Operating cash flow less $643 million in capital expenditures was approximately $3.073 billion.

TECFIDERA revenue rose 25.1% to $3.638 billion. Interferon revenue (AVONEX and PLEGRIDY) declined 2.9% to $2.969 billion, while TYSABRI declined 3.7% to $1.886 billion. ELOCTATE and ALPROLIX revenue increased to $320 million and $235 million, respectively, as launches expanded. Biogen’s share of RITUXAN and GAZYVA joint-business revenue rose 12.0% to $1.339 billion.

At year-end, cash, cash equivalents and marketable securities totaled $6.189 billion, compared with $3.316 billion a year earlier. Total working capital was $4.123 billion; current assets of $6.700 billion exceeded current liabilities of $2.578 billion. Borrowings totaled approximately $6.526 billion, versus $583 million in 2014, principally following a $6.0 billion senior-note issuance. Cash and securities were therefore about $337 million below reported borrowings. Shareholders’ equity fell to $9.373 billion from $10.809 billion, substantially reflecting the $5.0 billion share repurchase.

Material changes versus the prior year

• Revenue growth reflected TECFIDERA and newer product launches, partly offset by declining AVONEX and TYSABRI sales. Foreign exchange reduced 2015 product revenue by $388 million, partly offset by $166 million in comparative hedge gains.
• Operating income grew faster than revenue as total costs and expenses increased 2.2% to $5.873 billion. R&D rose 6.3% to $2.013 billion; SG&A fell 5.3% to $2.113 billion; acquired-intangible amortization fell 21.9% to $383 million.
• Other revenues declined 22.5% to $236 million, primarily following expiration of U.S. ANGIOMAX royalty rights.
• Operating cash flow increased, while investing cash outflow widened to $4.554 billion, including marketable-security purchases, $850 million in Fumapharm contingent payments, capital spending and the Convergence acquisition.

Outlook, commentary, risks and unusual items

Management did not provide a numerical revenue, earnings or EPS forecast in the supplied filing text. The October 2015 restructuring—an 11% workforce reduction and termination of selected programs—is expected to lower the current annual operating-expense run rate by approximately $250 million, with savings to be reinvested in priority pipeline and commercial activities. The company anticipated approximately $120 million in cash payments and a net restructuring charge of $105 million, substantially incurred and paid by the end of 2016; $93.4 million was charged in 2015.

• Pipeline prospects were mixed: aducanumab entered Phase 3 Alzheimer’s trials; ZINBRYTA applications were under review; and partner-reported Phase 3 results for ocrelizumab were positive. TYSABRI development in secondary progressive MS was discontinued after ASCEND missed its primary and secondary endpoints. Other programs were also stopped as part of portfolio prioritization.
• Competition, pricing and reimbursement pressure, product safety, patent challenges and biosimilar entry are material risks. TECFIDERA patent litigation and challenges were pending. The filing also describes government investigations into sales and promotional practices, qui tam matters and securities litigation; possible losses could not be estimated for certain proceedings.
• Product and geographic concentration merit attention: TECFIDERA, AVONEX, TYSABRI and RITUXAN each exceeded 10% of total revenue in each of 2013–2015. Two wholesale distributors together represented approximately 60% of gross product revenue.
• Biogen reported $2.8 billion of potential collaboration milestone payments, contingent on milestones, and up to approximately $1.3 billion in remaining acquisition-related milestones. TYSABRI also carries contingent payments of 18% of annual worldwide net sales up to $2.0 billion and 25% above that threshold.
• Foreign earnings of approximately $6.0 billion were designated for indefinite reinvestment abroad; estimated residual U.S. tax if repatriated was $1.5–$2.0 billion. Currency movements and international pricing controls may affect results.

Important facts for investors to verify

• Whether TECFIDERA growth can offset ongoing pressure on AVONEX and TYSABRI, and how product-specific patent disputes develop.
• Clinical, regulatory and commercial progress for aducanumab, ZINBRYTA, nusinersen and other priority programs, including any changes to trial timing or expected investment.
• Actual restructuring savings, cash costs and reinvestment levels compared with management’s estimates.
• Debt service, contingent milestone and TYSABRI payment obligations alongside the company’s cash-generation and capital-allocation plans.
• Developments in the disclosed legal, tax, reimbursement, safety and distributor-concentration risks.