Biogen Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Biogen is a biopharmaceutical company focused on neurological, autoimmune and rare diseases; its portfolio includes multiple sclerosis (MS), hemophilia, psoriasis and anti-CD20 collaboration products. The interim financial statements are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $2,894.2 million | $2,591.6 million | $5,621.0 million | $5,146.6 million |
| Income from operations | $1,460.5 million | $1,233.1 million | $2,838.9 million | $2,351.0 million |
| Net income attributable to Biogen | $1,049.8 million | $927.3 million | $2,020.7 million | $1,749.8 million |
| Diluted EPS | $4.79 | $3.93 | $9.21 | $7.42 |
| Operating margin | 50.5% | 47.6% | 50.5% | 45.7% |
Q2 revenue increased 11.7% year over year; product revenue grew 12.2%. Management attributed product growth mainly to TECFIDERA, TYSABRI, interferons and newer hemophilia products, as well as BENEPALI sales. Anti-CD20 program revenue rose 3.5% to $349.2 million. Q2 operating income increased 18.4%; diluted EPS increased 21.9%. Calculated margins use reported operating income and revenue.
For the six months, operating cash flow was $1,959.2 million, compared with $1,780.3 million a year earlier. Investing cash outflow was $1,939.3 million, including $600.0 million of Fumapharm contingent payments and $263.7 million of capital expenditures. Cash and cash equivalents ended at $1,362.0 million.
At June 30, cash, cash equivalents and marketable securities totaled $7,274.4 million, versus $6,188.9 million at year-end 2015. Total borrowings were $6,543.1 million, leaving approximately $731 million more in these financial assets than borrowings. Working capital was $4,931.5 million. The company reported no borrowings under its $1.0 billion revolving credit facility and compliance with its covenants.
Material changes and notable items
- Q2 cost of sales, excluding acquired-intangible amortization, increased 29.4% to $370.3 million. This included $15.8 million of accelerated depreciation associated with planned closure or departure from Cambridge, Massachusetts manufacturing and Somerville warehouse facilities, and higher inventory write-downs and product volumes.
- Six-month R&D expense decreased 4.3% to $910.4 million; SG&A decreased 5.9% to $989.7 million. The company said it reduced annual operating expense run-rate by $250 million through its restructuring and reinvested savings in pipeline and commercial priorities.
- Other expense, net, increased to $111.3 million for the first half from $25.9 million, principally reflecting higher interest expense after the 2015 senior-note issuance. Six-month effective tax rate rose to 26.0% from 24.7%.
- TECFIDERA revenue increased, while interferon revenue for the first half declined, principally reflecting lower AVONEX volume and international pricing and currency effects. Biogen expects overall interferon revenue to continue declining amid competition.
- Biogen paid $600 million in Fumapharm contingent consideration during the first half and accrued a further $300 million after cumulative product sales reached $9 billion. Further $300 million payments may be due for each additional $1 billion of cumulative sales, subject to stated sales conditions, up to the $20 billion threshold.
- In July 2016, the board authorized a new share repurchase program of up to $5.0 billion with no expiration date. No shares were repurchased in the first half of 2016.
Outlook, developments and risks
- The company expected to complete a proposed hemophilia-business spin-off in early 2017, subject to board approval, tax treatment and other conditions. Until completion, hemophilia results remain consolidated. Biogen cautioned that the spin-off could be delayed, fail to qualify as tax-free or not deliver anticipated benefits.
- Management said it expects continued growth in ELOCTATE and ALPROLIX as markets expand, while investing in MS programs, aducanumab for Alzheimer’s disease, nusinersen and other development programs. The filing provides no consolidated numerical revenue or earnings guidance.
- Product and pipeline developments included U.S. approval of ZINBRYTA in May and EU approval in July; EU approvals of BENEPALI and FLIXABI; and a widened EU TYSABRI indication. Anti-LINGO missed primary and secondary efficacy endpoints in its Phase 2 SYNERGY trial. Roche reported positive Phase 3 GALLIUM results for GAZYVA in follicular lymphoma and a July 2016 Phase 3 GOYA failure in diffuse large B-cell lymphoma.
- In June, the European Patent Office revoked Biogen’s TECFIDERA-related European patent; Biogen intended to appeal. TECFIDERA patent proceedings in the U.S. and Europe and challenges to TYSABRI patents remained ongoing. Pfizer had proposed that Biogen license a patent and pay royalties on ALPROLIX; the possible loss could not be estimated.
- Government authorities were investigating sales and promotional practices, patient-assistance relationships and wholesaler service agreements relevant to Medicaid price reporting. Biogen said it was cooperating or responding. The securities class action was dismissed July 1, 2016; other litigation remained pending, including qui tam and patent matters.
- Other exposures include pricing and reimbursement pressure, competition and potential generic or biosimilar entry, foreign-exchange movements, international receivable collection, product safety, manufacturing continuity, and reliance on collaborators. The company also disclosed its CEO would step down after a successor is identified.
Important facts for investors to verify
- Whether growth in TECFIDERA and newer products can offset declining interferon sales and increasing MS competition.
- Progress, conditions, tax status, costs and expected financial effects of the proposed hemophilia spin-off.
- Potential outcomes and financial exposure from TECFIDERA and TYSABRI patent challenges, the ALPROLIX licensing dispute, and government investigations.
- Timing and amount of future Fumapharm contingent payments and other collaboration or milestone commitments.
- Execution and costs of the Cambridge/Somerville facility exit, including any additional closure, lease or asset charges.
- Use of the newly authorized $5.0 billion repurchase program alongside debt service, capital investment and pipeline funding.