Biogen Idec Inc. (now Biogen Inc.) — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing presents unaudited results. The company discovers, develops, manufactures and markets therapies, with substantial revenue dependence on AVONEX, TYSABRI and RITUXAN.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenue | $1,385.6 million | $1,309.9 million | $4,098.5 million | $3,721.9 million |
| Operating income | $535.3 million | $488.5 million | $1,410.3 million | $1,315.6 million |
| Net income attributable to Biogen Idec | $398.4 million | $351.8 million | $1,087.9 million | $934.2 million |
| Diluted EPS | $1.67 | $1.43 | $4.53 | $3.81 |
| Operating margin | 38.6% | 37.3% | 34.4% | 35.4% |
Q3 revenue rose 5.8%, operating income 9.6%, attributable net income 13.2% and diluted EPS 16.7% year over year. Q3 operating income included a $31.7 million gain from selling BENLYSTA royalty and other rights. Nine-month revenue increased 10.1%, while attributable net income rose 16.5%.
Revenue drivers: Q3 AVONEX revenue was $736.2 million (+8.0%); TYSABRI revenue was $274.8 million (-0.9%); and Biogen Idec’s share of RITUXAN-related joint-business revenue was $287.8 million (+8.0%). For the first nine months, these figures were $2,159.9 million (+8.9%), $840.7 million (+3.8%) and $774.9 million of U.S. RITUXAN co-promotion profits, respectively. Other product revenue included $12.2 million from FAMPYRA in Q3.
Costs and margins: Q3 total costs and expenses rose 7.4% to $882.0 million. Selling, general and administrative expense increased 14.6% to $299.6 million, reflecting commercial preparations for BG-12 and FAMPYRA and sales and marketing activity. Nine-month research and development expense rose 12.4% to $989.7 million, including $41.0 million in upfront payments to Isis. Q3 net margin was approximately 28.8%, compared with 26.9% a year earlier.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $1,372.0 million, versus $1,253.8 million in 2011. Investing activities used $574.9 million and financing activities used $862.0 million.
- Cash, cash equivalents and marketable securities totaled $3,347.3 million at September 30, 2012, up from $3,107.3 million at year-end 2011. Cash and cash equivalents alone were $451.7 million.
- Current assets were $3,055.4 million and current liabilities $1,521.1 million; working capital was $1,534.3 million, down from $2,062.5 million at year-end. The decline primarily reflected the $450.0 million 6.0% Senior Notes becoming current ahead of their March 2013 maturity.
- Total borrowings were $1,111.7 million, including $450.0 million of 6.0% Senior Notes due March 1, 2013 and $550.0 million of 6.875% Senior Notes due 2018, plus Fumedica notes. Management said it intended to repay the 2013 notes at maturity. The $360 million revolving credit facility expired in June 2012 and was not renewed; it had not been drawn.
- The company repurchased 7.7 million shares for $963.2 million during the first nine months. Approximately 6.3 million shares remained available under its authorization.
Material changes and unusual items
- Stromedix was acquired in March for a purchase price of $207.4 million, including $122.2 million of estimated contingent consideration; acquired in-process R&D was valued at $219.2 million. The company reported $23.6 million of contingent-consideration fair-value expense for the first nine months.
- The BENLYSTA rights sale generated $31.7 million of Q3 gain. Future payments tied to royalties through September 2014 are recognized as they become due; DRI retains the royalty rights, subject to specified exceptions.
- Biogen Idec deferred $46.6 million of TYSABRI revenue in Italy in the first nine months while contesting the Italian regulator’s reimbursement-limit position. It expected to continue deferring a portion of Italian revenue pending resolution.
- Inventory increased to $392.9 million from $326.8 million at year-end. The balance included $13.8 million capitalized ahead of regulatory approval.
- Revenue reserves for discounts, contractual adjustments and returns were $209.2 million, versus $155.6 million at year-end. Product-sales allowances were 13.9% of gross product revenue in Q3, compared with 10.9% a year earlier.
Outlook, risks and contingencies
- Pipeline: FDA review of BG-12 was extended by three months, with a target decision in late March 2013; the company said the FDA had not requested additional studies. Management was preparing for a potential U.S. launch in the first half of 2013. It planned to submit applications for long-acting rFIXFc by Q1 2013 after positive Phase 3 top-line results. Clinical readouts were expected for Factor VIII in Q4 2012, dexpramipexole by late 2012 or early 2013, and PEGylated interferon in early 2013.
- Pricing and collections: Management estimated international healthcare cost-control measures would reduce 2012 revenue by approximately $40–$60 million, with about $25–$30 million realized by September 30. Government payment delays and economic weakness in parts of Europe remained risks, although Spain and Portugal made significant payments during 2012.
- Commercial and safety risks: The company cited increasing MS competition and possible cannibalization by BG-12, as well as TYSABRI’s PML safety risk and potential effects of risk-stratification protocols on prescribing. It also highlighted reliance on its three principal products, collaborators and third-party manufacturers.
- Legal and tax matters: An arbitrator ruled that Genentech owed Hoechst royalties relating to RITUXAN; Hoechst claimed about EUR 181 million plus interest and costs, with damages still to be determined. Biogen Idec disclosed a $103.5 million Massachusetts tax assessment under appeal, an IRS proposed disallowance of approximately $130 million in deductions, and several patent, reimbursement and government-practices proceedings. Outcomes and potential losses were uncertain; the filing did not provide a clear estimate for several matters.
- Other commitments: Potential milestone payments under collaborations totaled up to approximately $1.9 billion, contingent on achievement of milestones and not recorded as liabilities. The company expected approximately $35 million of costs when vacating its Weston facility in connection with the planned Cambridge headquarters move in 2013.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management stated it expected to fund foreseeable operating and capital needs primarily from operating cash flow and existing resources.
Most important facts for investors to verify
- BG-12’s regulatory decision timing, approval outcome, launch readiness and potential effect on AVONEX and TYSABRI sales.
- Whether TYSABRI’s Italian revenue deferrals and the AIFA dispute are resolved, and how much revenue remains at risk.
- Product-level trends, especially AVONEX and TYSABRI competition, RITUXAN collaboration economics and the degree of revenue concentration in the three principal products.
- Repayment or refinancing of the $450 million notes due March 2013, alongside the scale of share repurchases and remaining liquidity.
- Developments in the Hoechst damages proceeding, tax disputes and other legal matters, plus any changes to contingent consideration or milestone exposures.