Business context and reporting period
Biogen Idec Inc. (now Biogen Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. The company develops, manufactures and markets therapies, principally for multiple sclerosis (MS), and also participates in hemophilia and other therapeutic areas. Comparisons below are with the prior-year quarter or six-month period, as applicable.
A major reporting change was the April 2, 2013 acquisition of full ownership and commercial rights to TYSABRI from Elan. From April 2, the company recorded 100% of relevant TYSABRI revenue, costs and operating expenses; prior periods reflected the collaboration structure.
Financial performance and position
Amounts are in millions except per-share figures. Margins are calculated from reported figures.
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Total revenue | $1,723.5 | $1,421.0 | $3,138.6 | $2,713.0 |
| Operating income | $662.5 | $505.7 | $1,173.1 | $875.1 |
| Operating margin | 38.4% | 35.6% | 37.4% | 32.3% |
| Net income attributable to Biogen Idec | $490.7 | $386.8 | $917.4 | $689.5 |
| Diluted EPS | $2.06 | $1.61 | $3.85 | $2.86 |
| Net margin | 28.5% | 27.2% | 29.2% | 25.4% |
Q2 revenue increased 21.3%, operating income 31.0%, net income 26.8% and diluted EPS 27.8%. Product revenue was $1,385.9 million, including AVONEX $774.4 million, TYSABRI $386.8 million and newly launched TECFIDERA $192.1 million. The company’s share of RITUXAN-related unconsolidated joint business revenue was $288.8 million.
For the first half, operating cash flow was $804.2 million, compared with $830.2 million a year earlier. Cash and cash equivalents were $392.5 million at June 30; cash, cash equivalents and marketable securities totaled $774.8 million, down from $3,742.4 million at December 31, 2012. The decline chiefly reflected the $3.25 billion TYSABRI rights payment and repayment of $450 million of senior notes, partly offset by operating cash generation and securities maturities and sales.
At June 30, total borrowings were $729.6 million, versus $1,140.8 million at year-end. The company had no borrowings under its $750 million revolving credit facility and reported compliance with its covenants. Working capital was $1,219.1 million, compared with $1,586.9 million at year-end. First-half operating cash flow was affected by increases in accounts receivable, inventory and accrued balances.
Material changes versus prior periods
- TECFIDERA launch: FDA-approved in March; U.S. sales began in April. Q2 revenue was $192.1 million, of which approximately $82 million represented inventory held by wholesalers and specialty pharmacies.
- TYSABRI ownership: The Elan acquisition increased recognized U.S. revenue and costs and ended collaboration profit sharing after April 2013. From May 1, contingent payments to Elan are 12% of worldwide net sales for the first 12 months, then 18% on annual sales up to $2 billion and 25% above that threshold.
- Expenses and earnings: Q2 total costs and expenses rose 16.5%. Cost of sales increased 65.9%, selling, general and administrative expense rose 42.8%, and acquired-intangible amortization rose 57.3%; collaboration profit sharing fell to zero for the quarter. First-half R&D expense declined 10.8%, primarily reflecting lower late-stage program activity and fewer milestone and upfront payments.
- Product trends: Q2 AVONEX revenue increased 1.6%; U.S. unit volume fell 5%, partly attributed to patients switching to TECFIDERA. TYSABRI revenue increased 37.9%, largely reflecting full U.S. revenue recognition after the acquisition; U.S. unit volume fell 5% in the quarter. RITUXAN joint-business revenue rose 1.5% in Q2.
Outlook, commentary and risks
- The filing gives no specific full-year revenue or earnings guidance. Management said operating needs and planned investment are expected to be funded principally from operating cash flow and existing resources, and it considers available funding sufficient for the foreseeable future.
- Management estimated that international pricing and austerity measures would reduce 2013 revenue by approximately $50–$60 million, excluding the AIFA matter. It expects at least $80 million of incremental TYSABRI revenue to be recognized if the proposed Italian settlement is approved.
- The July 2013 agreement in principle with Italy’s medicines agency, AIFA, provides for a €33.3 million repayment and removal of the TYSABRI reimbursement limit from February 2013. Required approvals remained pending at the filing date. The company had recorded a €15.4 million liability and revenue reduction at June 30; additional deferred revenue recognition depends on settlement approval.
- Key development milestones included FDA applications under review for ELOCTATE and ALPROLIX, and FDA and EMA applications submitted for PLEGRIDY. TECFIDERA’s EU launch timing remained uncertain because of regulatory data-protection issues; it had received a positive CHMP opinion, but European Commission authorization was still needed.
- Principal business risks include competition in MS, including potential generic or biosimilar competition; TECFIDERA launch and supply execution; TYSABRI’s PML safety risk and possible prescribing effects of risk-stratification efforts; regulated pricing and reimbursement; and delayed collections from some European government customers. Receivables from Spain, Italy and Portugal totaled $231.6 million, with approximately $27 million overdue more than one year.
- Material legal and tax uncertainties include the Genentech-Hoechst arbitration award, which the company was appealing and which reduced first-half RITUXAN-related revenue by approximately $41.5 million; pending patent and government matters; and disputed tax assessments. The IRS had proposed disallowing approximately $130 million in deductions, and a Massachusetts assessment was $103.5 million. Unfavorable resolutions could affect results.
- Other notable items: the company recorded a $203.7 million deferred charge related to Daclizumab intellectual-property transfers, to be amortized to income-tax expense over the program’s economic life; discontinuation of the program would accelerate remaining amortization. Management also expected a $20–$30 million charge related to vacating part of its Weston facility as headquarters relocation to Cambridge proceeds.
Important facts for investors to verify
- Whether TECFIDERA demand persists after launch, how much sales growth reflects channel inventory, and the effect on AVONEX and TYSABRI.
- Approval and execution of the AIFA settlement, including the timing and amount of deferred TYSABRI revenue recognized.
- TYSABRI sales, Elan contingent-payment costs, and developments in PML incidence, labeling and risk management.
- Progress and regulatory outcomes for TECFIDERA in Europe and for ELOCTATE, ALPROLIX and PLEGRIDY.
- European customer collections, pricing pressure, and any changes to receivable reserves or revenue estimates.
- Outcomes of the Hoechst, patent, government-practice and tax matters, and potential related charges or liabilities.