Biogen Inc. — Q1 2020 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Biogen is a global biopharmaceutical company focused primarily on neurological and neurodegenerative diseases, with marketed MS and SMA therapies, anti-CD20 collaboration economics, and a biosimilars business. Amounts below are in millions of dollars except per-share data.
Financial performance
- Revenue: $3,534.3, up 1.3% year over year. Product revenue rose 8.4% to $2,904.6; anti-CD20 program revenue was $520.4 versus $517.4; other revenue fell to $109.3 from $292.4.
- Profit: Operating income increased to $1,819.9 from $1,502.7. Operating margin was approximately 51.5%, versus 43.1%. Net income attributable to Biogen was $1,399.1, down 0.7%; diluted EPS rose 13.0% to $8.08, with average diluted shares down to 173.1 million from 197.0 million.
- Key expenses and margin drivers: Total costs and expenses declined 13.7% to $1,714.4. Cost of sales fell 24.5% and R&D fell 15.5%; 2019 included a $115.5 Hillerød divestiture loss. Q1 2020 included $75.0 of acquired in-process R&D. Net margin on Biogen-attributable income was approximately 39.6%, versus 40.4%.
- Cash flow: Operating cash flow was $1,467.3, compared with $1,459.5. Investing activities provided $442.9, including net proceeds from marketable securities; financing used $2,245.3, largely reflecting $2,220.2 of share repurchases. Cash and cash equivalents ended at $2,591.3.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $4,829.9, down from $5,884.0 at year-end 2019. Working capital was $3,368.6; current assets were 1.73 times current liabilities. Notes payable totaled $5,961.7, including $1,501.8 due in September 2020. Cash and securities less notes payable equaled approximately $1.13 billion.
- Capital allocation: Biogen repurchased 7.3 million shares for about $2.2 billion during the quarter. From April 1–22, it repurchased a further 4.0 million shares for about $1.3 billion.
Material changes versus Q1 2019
- Product growth was led by fumarate products, TYSABRI, SPINRAZA and biosimilars. Product revenue growth included estimated COVID-related sales acceleration of approximately $100 million, principally in Europe, which may have shifted demand from later quarters.
- Other revenue decreased primarily because Q1 2019 included approximately $206.8 million of hemophilia inventory sales to Bioverativ.
- Other income swung from $357.3 of income to $120.5 of expense, primarily reflecting investment losses of $77.3 in Q1 2020 versus gains of $376.4 in Q1 2019.
- The effective tax rate decreased to 17.2% from 22.7%, principally because Q1 2019 included a $59.1 tax expense related to the planned Hillerød divestiture, as well as different tax effects from investment-value changes.
- Lower average shares outstanding materially supported EPS growth despite slightly lower attributable net income.
Outlook, commentary and risks
- COVID-19: Management reported continued product supply and no anticipated interruption at the filing date, but warned of potential future impacts on demand, manufacturing, collections, trials and operations. Hospital diversion and delayed treatment could affect therapies administered in clinical settings. A Phase 3 BIIB093 stroke study was delayed, and initiation of trials for known immunosuppressants was paused.
- Product outlook: Management expected 2020 growth in rest-of-world fumarate sales to offset U.S. volume declines; continued declines in interferon revenue; stable to slightly negative global TYSABRI demand; modest SPINRAZA growth; and modest-to-moderate biosimilar growth. These expectations were subject to COVID-19 variability and competition. The filing does not provide clear numerical full-year revenue or EPS guidance.
- Pipeline and transactions: Biogen expected to complete the U.S. aducanumab filing in Q3 2020 and began the EMBARK redosing study. It acquired Phase 1 asset BIIB118 for $75.0, with potential additional milestones up to $635.0. The Sangamo collaboration closed in April 2020; expected Q2 charges included $125.0 upfront R&D and approximately $85.0 related to the premium on Sangamo shares, alongside a $225.0 share purchase.
- Competitive and operating risks: TECFIDERA faces potential generic competition earlier than its February 2028 patent expiration under settlements with some defendants; other patent proceedings remain pending. Risks also include biosimilar competition to RITUXAN, competition to SPINRAZA, drug pricing and reimbursement pressure, clinical and regulatory uncertainty, foreign exchange, and pandemic-related disruption.
- Contingencies: Biogen disclosed pending patent, False Claims Act, government sales and promotional practices, and former Convergence shareholder disputes; estimates of possible losses were not available for several matters. A potential withholding-tax interpretation was under review, with any required reserve not expected to be material. The company had accrued its best estimate of minimum probable loss in a government matter, but the filing does not state the amount.
- Other unusual items and commitments: The Hillerød sale carries an estimated $74.0 adverse minimum-production commitment. Potential future collaboration milestones totaled up to approximately $7.3 billion, contingent on achievement and not recorded as liabilities. A $1.0 billion revolving credit facility was entered into in January 2020.
Important facts for investors to verify
- Whether COVID-related Q1 sales acceleration reverses in subsequent quarters and whether demand, patient starts, infusions, supply or clinical trials are materially affected.
- TECFIDERA patent litigation and settlements, expected timing of generic entry, and resulting revenue impact.
- Aducanumab regulatory filing timing and outcome, and the clinical, regulatory and commercial assumptions underlying its prospects.
- Performance of core products and collaboration revenues amid pricing pressure, biosimilar launches and competition, particularly for SPINRAZA, TYSABRI and anti-CD20 programs.
- Liquidity and capital allocation after substantial buybacks, including repayment or refinancing of the $1.5 billion notes due September 2020.
- Potential changes in investment valuations, tax reserves, legal exposures and contingent commitments, including the Hillerød guarantee.