Biogen Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Results are unaudited. Biogen completed the spin-off of its hemophilia business, Bioverativ, on February 1, 2017; 2017 results include that business only through January 31, making comparisons with 2016 less like-for-like.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $3.078B | $2.894B | $5.889B | $5.621B |
| Operating income | $1.201B | $1.461B | $2.225B | $2.839B |
| Net income attributable to Biogen | $863M | $1.050B | $1.610B | $2.021B |
| Diluted EPS | $4.07 | $4.79 | $7.52 | $9.21 |
- Q2 revenue increased 6.4% year over year; product revenue rose 7.0% to $2.640B. Anti-CD20 program revenue increased 13.7% to $397M, while other revenue declined 47.3% to $42M.
- Q2 operating margin was approximately 39.0%, compared with 50.5% a year earlier; net margin was approximately 28.0%, versus 36.2%. Lower operating income and EPS primarily reflect higher R&D, acquired IPR&D and amortization charges.
- Product highlights: TECFIDERA revenue was $1.111B in Q2 (+12.6%); SPINRAZA contributed $203M; BENEPALI revenue was $89M. Interferon product revenue declined, and hemophilia product revenue was absent in Q2 following the spin-off.
- Operating cash flow for the first half was $1.404B, down from $2.014B. Capital expenditures were $408M. Cash and cash equivalents were $1.170B at quarter-end.
- Cash, cash equivalents and marketable securities totaled $5.526B, down 28.5% from year-end 2016. Total borrowings were $6.514B, broadly unchanged; $550M of notes is due March 2018. The $1.0B revolving credit facility was undrawn, and Biogen reported compliance with its covenants.
- Working capital was $3.729B, down from $5.312B at December 31, 2016.
Changes, notable items and management outlook
- Q2 total costs and expenses rose 31.0% to $1.878B. R&D increased 68.3% to $796M, including a $300M upfront license payment and $60M milestone related to BIIB092, plus a $120M acquired IPR&D charge for BIIB093. First-half acquired-intangible amortization was $566M and included $383M of amortization and impairment charges related to Forward Pharma TECFIDERA license rights.
- First-half cash uses included approximately $1.4B for share repurchases, $795M for TECFIDERA license rights, $600M of Fumapharm contingent payments, $408M for property and equipment, and a $303M net cash contribution to Bioverativ. A further $300M Fumapharm contingent payment was accrued in Q2.
- Management’s July strategic priorities include protecting the MS business, accelerating SMA, expanding neuroscience research, prioritizing investment for growth, and simplifying operations. No numerical full-year revenue or earnings guidance is stated in the supplied filing text.
- Management anticipated relatively stable 2017 global demand for TECFIDERA and TYSABRI, with international growth offsetting modest U.S. patient declines; it expected Interferon revenue to continue declining. SPINRAZA had received approvals in the EU and Canada in June and Japan in July, and was in early launch stages.
- In July, the EMA provisionally restricted ZINBRYTA use after reports of fatal fulminant liver failure and serious liver injury. This safety review creates material commercial and regulatory uncertainty.
- Biogen reported that Genentech withheld approximately $120M from amounts due for Q1 RITUXAN/GAZYVA collaboration activity over disputed expenses; discussions were ongoing. The filing does not provide a resolution or a clear estimate of potential loss for several legal and government investigations.
Risks and contingencies
- Revenue concentration in MS products and dependence on successful development and commercialization of new products; competition, pricing and reimbursement pressure, and generic or biosimilar entry could weigh on sales.
- Patent disputes include TECFIDERA-related proceedings and generic ANDA litigation; adverse outcomes could affect exclusivity, royalties or sales. Biogen also disclosed government investigations and subpoenas concerning sales, promotional practices, pricing and other matters.
- Other disclosed exposures include a qui tam action with no estimable loss range, Danish tax assessments under dispute, and possible future milestone payments of approximately $3.1B under development and licensing arrangements.
- Management cited foreign-exchange, collection, manufacturing, clinical-development, collaboration, cybersecurity and regulatory risks. The company was constructing a Solothurn, Switzerland manufacturing facility, with $798M capitalized as construction in progress and approximately $258M of contractual commitments.
Key facts investors should verify
- How much of revenue and earnings growth is attributable to SPINRAZA, anti-CD20 royalties and other ongoing products versus one-time or timing-related items.
- The ongoing effect of the Bioverativ spin-off on comparable revenue, cash generation and operating costs.
- Progress and commercial impact of the ZINBRYTA safety review, and the outlook for TECFIDERA amid competition and pending patent appeals.
- Resolution of the approximately $120M Genentech collaboration dispute and the status and potential financial impact of material litigation and government investigations.
- Cash deployment, upcoming debt repayment and contingent obligations, including Fumapharm payments and collaboration milestones.