Biogen Idec Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. Comparisons are with Q1 2012 unless otherwise noted. The filing reports results for Biogen Idec Inc. and its consolidated subsidiaries.
Business context
Biogen Idec discovers, develops, manufactures and markets therapies, with its business focused on multiple sclerosis, autoimmune and neurodegenerative diseases, and hemophilia. Revenue depended substantially on AVONEX, TYSABRI and RITUXAN; TECFIDERA had just received U.S. approval and entered commercial launch.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $1,415.1 million | $1,292.0 million | +9.5% |
| Operating income | $510.5 million | $369.4 million | +38.2% |
| Operating margin | 36.1% | 28.6% | +7.5 percentage points |
| Net income attributable to Biogen Idec | $426.7 million | $302.7 million | +41.0% |
| Diluted EPS | $1.79 | $1.25 | +43.1% |
| Operating cash flow | $178.9 million | $194.6 million | −8.1% |
Product revenue was $1,095.8 million, up 12.3%. AVONEX revenue rose 12.8% to $746.1 million; TYSABRI revenue recognized by Biogen Idec under the then-existing collaboration rose 9.4% to $312.2 million; other product revenue increased 32.5% to $37.5 million. Unconsolidated joint business revenue fell 7.0% to $264.6 million, including a $41.5 million reduction for Genentech’s Hoechst arbitration award. Other revenue rose 70.9% to $54.7 million.
Total costs and expenses declined 1.4% to $909.6 million. Research and development fell 20.1% to $284.3 million, chiefly reflecting lower late-stage program activity and the absence of the $29.0 million Isis upfront payment recorded in Q1 2012. Selling, general and administrative expense increased 17.5% to $352.6 million, including spending to prepare for TECFIDERA and potential hemophilia launches. The filing does not present a gross margin measure.
Cash, liquidity and debt
- Cash and cash equivalents were $663.3 million at March 31, 2013; reverse repurchase agreements were $2,968.0 million. Together these totaled $3,631.3 million, versus $3,742.4 million in cash, equivalents and marketable securities at year-end 2012.
- Working capital was $4,047.1 million, compared with $1,586.9 million at December 31, 2012. Current assets were $5,328.8 million and current liabilities $1,281.7 million.
- Total borrowings were $915.1 million, down from $1,140.8 million at year-end. The company repaid $450.0 million of 6.0% senior notes and had $200.0 million outstanding under a new $750.0 million revolving credit facility, at a 1.5% weighted-average rate. It reported compliance with the facility’s covenants.
- Operating cash flow was $178.9 million. Investing cash flow was $155.9 million, largely reflecting securities sales and purchases of reverse repurchase agreements; financing cash flow was negative $238.4 million.
Material changes and outlook
- TYSABRI acquisition: On April 2, 2013, after quarter-end, Biogen Idec acquired full ownership and strategic, commercial and decision-making rights from Elan for an upfront $3.25 billion, funded from existing cash and reverse repurchase agreements. The acquisition was to be accounted for as an asset acquisition, with the payment capitalized as an intangible asset beginning in Q2. The company expected to report 100% of TYSABRI revenue and related costs going forward. It would share profits equally with Elan through April 30, 2013, then make contingent payments of 12% of worldwide net sales for the following 12 months, and subsequently 18% on annual sales up to $2.0 billion and 25% above that threshold.
- TECFIDERA and pipeline: TECFIDERA was approved by the FDA in March; the company reported a positive EU committee recommendation and Canadian approval in April. FDA applications had been submitted for long-lasting Factor VIII and Factor IX products. Management planned to submit PLEGRIDY applications in the U.S. and EU by mid-2013.
- Management outlook: The company expected 2013 European and other international pricing measures to reduce revenue by approximately $45–$60 million. It estimated the combined effect of sequestration-related and other potential U.S. reimbursement pressures at approximately 2% of estimated 2013 revenue. Management said existing funds, operating cash generation and access to financing were expected to support requirements for the foreseeable future, including after the TYSABRI acquisition. No specific revenue, earnings or EPS guidance was provided in the supplied filing text.
- Reported-period items: Q1 2013 net income included a $33.0 million tax benefit relating to a previously unrecognized U.S. manufacturing deduction. The effective tax rate was 13.2%, versus 21.4% in Q1 2012. Q1 2013 results also included a $5.1 million gain on sale of rights. The 2012 comparison included the $29.0 million Isis R&D payment and a $12.4 million AVONEX-related reduction from a voluntary product withdrawal and inventory write-off.
Risks and contingencies
- Product concentration, intensifying MS competition—including potential cannibalization among the company’s own products—and uncertainty around TECFIDERA’s launch and pipeline approvals.
- TYSABRI’s PML safety risk, potential label or prescribing changes, and competition; the company also continued to defer Italian TYSABRI revenue while resolving pricing with AIFA. Cumulative deferred revenue was $90.4 million, including $13.9 million in Q1 2013.
- European government payment delays and credit exposure: receivables in Italy, Spain and Portugal totaled $216.8 million at March 31, 2013; $15.6 million was overdue more than one year.
- Material legal and tax matters included the Hoechst arbitration award (Biogen Idec’s Q1 RITUXAN-related revenue reduction was $41.5 million, subject to Genentech’s appeal), the Massachusetts tax assessment of $103.5 million, and multiple patent, pricing and other proceedings. The company said it could not estimate potential loss ranges for certain matters, including the Novartis TYSABRI patent case and Knopp litigation.
- Potential future commitments included up to approximately $1.5 billion of development, regulatory and commercial milestone payments under collaborations, contingent on achievement; approximately $438.0 million of cancellable future CRO commitments; and $5.8 million due within a year for Samsung Bioepis.
- Management expected a $15–$30 million charge in the second half of 2013 related to vacating part of the Weston headquarters following the planned move to Cambridge.
Investor verification points
- Track TYSABRI sales, post-acquisition costs and Elan royalty payments, and assess the effect of the $3.25 billion purchase on liquidity and future amortization.
- Verify TECFIDERA launch performance, EU authorization status, and the timing and outcomes of Factor VIII, Factor IX and PLEGRIDY regulatory reviews.
- Assess whether revenue growth and margins persist after adjusting for the $33.0 million tax benefit and the Hoechst charge, and monitor R&D and launch-related SG&A spending.
- Monitor Italian TYSABRI pricing negotiations and revenue recognition, European receivable collections, and the disclosed legal and tax proceedings.
- Review the effect of pricing pressure, reimbursement changes, competition and TYSABRI safety developments on product demand and the company’s stated outlook.