Biogen Idec Inc. — Q2 2014 Form 10-Q
Business context and period: Biogen Idec is a global biotechnology company focused on therapies for neurological diseases, hematologic conditions and autoimmune disorders, with collaboration revenue from RITUXAN and GAZYVA. This unaudited filing covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $2.421B | $1.723B | $4.551B | $3.139B |
| Operating income | $988.7M | $662.5M | $1.660B | $1.173B |
| Operating margin | 40.8% | 38.4% | 36.5% | 37.4% |
| Net income attributable to Biogen Idec | $714.5M | $490.7M | $1.194B | $917.4M |
| Diluted EPS | $3.01 | $2.06 | $5.03 | $3.85 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $1.095B | $804.2M |
Q2 revenue grew 40.5%, operating income 49.2%, attributable net income 45.6% and diluted EPS 46.4% year over year. Six-month revenue grew 45.0% and operating cash flow grew 36.2%. Six-month net income growth was slower than revenue growth, with the effective tax rate rising to 26.9% from 19.6%.
Revenue mix and operating drivers
- Q2 product revenue was $2.056B, up from $1.386B. TECFIDERA revenue was $700.4M, TYSABRI $533.4M and AVONEX $773.8M. ALPROLIX contributed $10.4M following its U.S. launch.
- TECFIDERA grew rapidly following its U.S. launch in 2013 and E.U. approval in February 2014. TYSABRI growth reflected sales and pricing, the acquired rights, and $53.5M of previously deferred Italian revenue. AVONEX was essentially flat overall; U.S. unit volume declined as patients moved to oral therapies.
- Q2 revenue from the unconsolidated joint business was $303.3M, up 5.0%, primarily Biogen Idec’s share of RITUXAN and GAZYVA profits. Other revenue was $61.9M.
Margins, expenses and unusual items
Q2 operating margin improved year over year, while the six-month margin declined. Q2 total costs and expenses rose 34.7% to $1.437B. R&D increased 36.6% to $447.3M, mainly reflecting collaboration payments and investment in marketed and early-stage programs; SG&A rose 33.8% to $576.6M, driven by product launches and commercial investment. Six-month R&D included $117.7M related to the Eisai collaboration, $20.0M paid to Sangamo and $15.0M in Isis milestones.
- Q2 results included the $53.5M TYSABRI revenue release following an Italian pricing resolution. AIFA removed the reimbursement limit for sales from February 2013 forward; $86.9M remained deferred for earlier disputed periods.
- Six-month amortization of acquired intangibles was $260.1M, versus $133.5M, reflecting TYSABRI rights, higher AVONEX amortization and a $34.7M impairment of an out-licensed patent.
- The company recorded a $150.0M contingent payment accrual after Fumapharm product sales reached the $2.0B cumulative threshold. It also paid a $20.0M ALPROLIX-related milestone.
Financial position, liquidity and debt
At June 30, 2014, cash and cash equivalents were $863.2M and marketable securities totaled $1.721B, for combined cash and securities of $2.584B, up from $1.849B at year-end 2013. Working capital was $2.008B. Total borrowings were $589.5M, principally $550.0M of 6.875% senior notes due March 2018 and notes payable to Fumedica. The $750M revolving credit facility expired in March 2014 and was not renewed.
For the six months, investing cash outflow was $624.1M and financing cash outflow was $207.5M. Financing included $336.9M of share repurchases. Management said it expects to fund operating and planned requirements primarily with operating cash flow and existing resources and believes available resources and access to financing are sufficient for the foreseeable future. Approximately $830M of cash and securities was generated outside the U.S. and intended for foreign operations or non-U.S. business development.
Outlook, risks and contingencies
- Outlook: The filing provides no specific full-year revenue or earnings guidance. Management expects continued investment in R&D and commercial capabilities, including potential launches and pipeline development. It estimated U.S. ANGIOMAX royalty revenue could decline by approximately $140M in 2015 as the relevant patent expires in December 2014.
- Products and pipeline: ELOCTATE received U.S. approval in June 2014; ALPROLIX received approvals in several markets. The company reported positive top-line Phase 3 results for daclizumab HYP in June. The FDA extended the PLEGRIDY review date by three months; E.U. authorization followed in July, after the reporting period.
- Competition and safety: TECFIDERA’s growth may displace AVONEX or TYSABRI sales. Management cited increasing MS competition, potential biosimilars and pricing pressure. TYSABRI sales remain exposed to PML safety risks and associated prescribing restrictions.
- Legal and regulatory: Litigation includes patent disputes, a False Claims Act matter concerning average manufacturer price reporting (trial scheduled for May 2015), and investigations into sales and promotional practices. The company is cooperating with government inquiries. It could not estimate a potential loss range for the remaining AMP claims.
- Other exposures: The AIFA dispute remained under discussion; management considered settlement probable and retained a EUR 15.4M liability. Approximately $2.9B of potential collaboration milestone payments was disclosed, contingent on milestones and not recorded as liabilities. European government receivable delays, foreign exchange, healthcare pricing and reimbursement reforms, clinical-development uncertainty, manufacturing dependence, and product-liability and intellectual-property risks could affect results.
Important facts for investors to verify
- Whether TECFIDERA’s rapid uptake continues and how much it offsets declines or competitive pressure on AVONEX and TYSABRI.
- How much reported growth reflects recurring demand versus the $53.5M Italian TYSABRI revenue release and the change in TYSABRI rights ownership.
- The trajectory of R&D, launch-related SG&A, acquired-intangible amortization and contingent payments, and their effect on margins and cash generation.
- Resolution of the AIFA dispute and collection trends for overdue European receivables; approximately $15.5M of receivables in Spain, Italy and Portugal was overdue more than one year at June 30.
- Developments in the AMP litigation and government investigations, and any material outcomes from clinical, regulatory or product-safety risks.
- Liquidity and capital allocation following expiration of the revolving facility, including share repurchases and potential collaboration or milestone payments.