Biogen Idec Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010. Unaudited consolidated results. Biogen Idec is a biotechnology company whose principal marketed products include AVONEX, RITUXAN, TYSABRI and FUMADERM.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Total revenue | $1,108.9 million | $1,036.5 million | +7.0% |
| Operating income | $303.7 million | $305.0 million | -0.4% |
| Net income attributable to Biogen Idec | $217.4 million | $244.0 million | -10.9% |
| Diluted EPS | $0.80 | $0.84 | -4.8% |
| Operating cash flow | $336.9 million | $300.8 million | +12.0% |
Operating margin was approximately 27.4%, versus 29.4% a year earlier. Product revenue was $824.2 million, up 12.4%; revenue from unconsolidated joint business was $254.9 million, down 8.6%, mainly reflecting lower rest-of-world RITUXAN revenue. AVONEX revenue rose 6.7% to $592.5 million, and Biogen Idec’s TYSABRI revenue rose 32.3% to $218.6 million. U.S. RITUXAN co-promotion profit share increased 11.6% to $200.3 million.
Total costs and expenses rose 10.1% to $805.2 million. R&D increased 9.9% to $307.0 million, SG&A rose 12.1% to $248.7 million, and collaboration profit-sharing expense increased 48.6% to $63.6 million. These increases included a $40.0 million Syntonix milestone charge; lower acquired-intangible amortization, down 45.2% to $48.9 million, partly offset them. Other expense was $8.4 million, compared with $6.8 million of other income in Q1 2009; investment impairment charges were $15.8 million.
Balance sheet, liquidity and cash flow
At March 31, 2010, cash and cash equivalents were $639.6 million and marketable securities totaled $1,545.3 million, for reported cash and marketable securities of approximately $2,184.9 million. Total borrowings were $1,095.3 million; current liabilities were $682.3 million and working capital was $1,726.7 million. The $360 million revolving credit facility had no borrowings outstanding, and the company reported covenant compliance. Total assets were $8,217.3 million and total liabilities were $2,266.7 million.
Operating activities provided $336.9 million. Investing activities provided $249.7 million, principally reflecting net sales of marketable securities; financing activities used $523.5 million, including $577.6 million for repurchases of approximately 10.5 million shares. Cash and cash equivalents ended the quarter at $639.6 million. Marketable securities and cash declined from year-end, largely due to repurchases and other cash uses.
Material changes, outlook and management commentary
- AVONEX U.S. revenue increased despite a 9.4% decline in U.S. sales volume, due to price increases; management cited competition and possible further price and volume pressure. TYSABRI growth reflected increased patient use, but PML safety concerns and prescribing restrictions could constrain growth.
- RITUXAN U.S. in-market sales increased 7.0%, but Biogen Idec’s rest-of-world RITUXAN revenue fell 54.4%, principally because royalty periods expired in several European countries. Management expects further declines as remaining royalty periods expire through 2012.
- Management estimated U.S. healthcare reform would reduce 2010 revenue by approximately $70–$90 million. Medicaid rebate increases and expanded discount programs were already affecting the business; Medicare Part D discounts and an industry fee were scheduled to begin in 2011. Longer-term effects remained uncertain.
- Management expected a full-year 2010 effective tax rate of 28%–30%, excluding any renewal of the federal R&D tax credit. Q1’s effective rate was 25.5%, versus 21.0% a year earlier. The filing states that existing funds, operating cash flow and financing access should be adequate for foreseeable needs.
- Management anticipated approximately $33 million of additional milestone payments during the remainder of 2010 if specified milestones were achieved, including a $30 million Daclizumab milestone expected in Q2. Potential future milestone payments under collaborations totaled up to $1.4 billion, contingent on development, regulatory or commercial achievements.
- In February, Biogen Idec assumed full development and manufacturing responsibilities for Factor VIII and Factor IX programs under a restructured Biovitrum collaboration, with increased rest-of-world marketing rights; management anticipated higher R&D expense. A registrational Factor IX study triggered the $40 million Syntonix payment.
- In March, the company and Roche suspended ocrelizumab treatment in rheumatoid arthritis studies following a safety board recommendation; the RRMS study continued. The CEO was scheduled to retire in June 2010, and an $18.6 million incremental equity-award charge was to be recognized over the transition service period.
- The prior $1.0 billion repurchase authorization was completed in Q1. In April, the board authorized a further $1.5 billion repurchase program with no expiration date. The company also appointed two directors under an agreement with Icahn-affiliated funds.
Risks, contingencies and unusual items
Key risks include dependence on AVONEX, RITUXAN and TYSABRI; TYSABRI-associated PML risk; competition, including potential biosimilars; pricing, reimbursement and healthcare reform; clinical and regulatory uncertainty; manufacturing concentration and capacity utilization; foreign-exchange and investment-market exposure; and reliance on collaborators and third parties. The company noted potential excess manufacturing capacity and continued evaluation of whether to delay completion of a Denmark facility.
Material disclosed legal matters include New York government claims concerning drug pricing and Medicaid reimbursement, RITUXAN-related patent litigation with Sanofi, and related Genentech arbitration with Hoechst. The company had not concluded that an unfavorable outcome was probable or remote and did not provide an estimate of possible losses. A Massachusetts tax assessment and related proceedings also remain unresolved; the company reported expected payments of approximately $88.5 million within six months related to certain tax audit settlements and $57.6 million of long-term liabilities for uncertain tax positions.
Investor verification points
- Verify whether TYSABRI growth continues and how PML monitoring, labeling and patient stratification affect use.
- Track AVONEX demand, RITUXAN royalty expirations, and the company’s estimates of healthcare-reform and international pricing impacts.
- Assess operating-cost growth, the nonrecurring Syntonix charge, investment impairments and the effect of CEO-transition compensation.
- Monitor cash and securities after the new $1.5 billion buyback, debt obligations, expected tax payments and contingent milestone commitments.
- Follow outcomes of the disclosed tax and litigation matters; the filing provides no clear loss range for several cases.