Biogen Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results. Biogen is a global biopharmaceutical company focused on neurological and neurodegenerative diseases and biosimilars; it reports as one operating segment.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3.439B | $3.078B | $9.927B | $8.967B |
| Operating income | $1.698B | $1.654B | $4.446B | $3.880B |
| Net income attributable to Biogen | $1.444B | $1.226B | $3.484B | $2.837B |
| Diluted EPS | $7.15 | $5.79 | $16.83 | $13.30 |
| Operating margin | 49.4% | 53.7% | 44.8% | 43.2% |
Q3 revenue grew 11.7%, net income attributable to Biogen rose 17.8%, and diluted EPS increased 23.5%. Nine-month revenue rose 10.7%, net income 22.8%, and diluted EPS 26.5%. The lower Q3 operating margin reflects higher costs, including $189.3 million in vixotrigine-related impairment charges; gains from contingent consideration remeasurement partly offset expenses.
- Revenue mix and drivers: Q3 product revenue was $2.780B (+6.0%); anti-CD20 program revenue was $511.7M (+25.9%), mainly from OCREVUS royalties; other revenue was $147.2M, up from $48.8M, primarily reflecting higher contract manufacturing revenue. SPINRAZA and BENEPALI sales increased, while Interferon revenue declined. OCREVUS royalties were $136.8M versus $64.6M.
- Cash flow: Nine-month operating cash flow was $4.292B, versus $3.033B a year earlier. Investing used $421M and financing used $3.035B. Cash and cash equivalents ended the period at $2.387B, up from $1.574B at year-end 2017.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $5.673B, down from $6.746B at year-end. Working capital was $5.544B. Notes payable were $5.931B; the $1.0B revolving credit facility had no borrowings, and Biogen reported compliance with its covenants.
- Margins and taxes: Q3 cost of sales excluding acquired-intangible amortization rose 24.5%; R&D rose 13.8% and SG&A rose 14.8%. The effective tax rate fell to 20.4% from 23.8% in Q3, largely reflecting the 2017 Tax Act.
Material changes and unusual items
- Biogen repurchased and retired 10.5 million shares for $3.0B during the nine months under its 2016 program. A new $3.5B repurchase authorization was approved in August; no purchases had been made under it by September 30.
- Biogen paid $1.2B in Fumapharm-related contingent payments and accrued a further $300M after reaching a cumulative-sales milestone. It expected one further $300M payment when the next milestone was reached, then no further payments under that arrangement.
- The Ionis agreement involved a $375M upfront payment and $625M investment in Ionis shares. Biogen recorded $486.2M of net R&D expense associated with the agreement and share premium. The Ionis equity investment’s fair-value changes contributed to a $141.1M Q3 net gain on investments within other income.
- Vixotrigine studies in painful lumbosacral radiculopathy missed efficacy endpoints; Biogen discontinued development in that indication and recorded $189.3M of related impairment charges. It delayed Phase 3 planning in trigeminal neuralgia pending FDA discussions and further review. The lower program success estimate also contributed to a contingent-consideration gain.
- Biogen and AbbVie voluntarily withdrew ZINBRYTA worldwide in March following serious inflammatory brain events. Biogen recorded related inventory and contract-termination costs in Q1.
- In June, Biogen exercised an option to increase its Samsung Bioepis ownership from about 5% to about 49.9%, subject to regulatory approvals. The transaction was expected to close in Q4 for approximately $700M.
Outlook, management commentary and risks
Biogen gave no quantified full-year earnings or revenue guidance in the supplied filing text. Management expected modest global TECFIDERA demand growth and U.S. volumes to stabilize; continued declines in Interferon revenue; a slight 2018 decline in TYSABRI demand; and moderation over time in SPINRAZA’s revenue growth. Management said operating cash flow and existing resources should fund foreseeable operating, investment and debt-service needs. The 2017 restructuring was intended to redirect up to $400M annually to prioritized R&D and other opportunities by 2020, with up to $170M of non-recurring operating and capital expenditures.
- Pipeline: Enrollment was completed in the Phase 3 ENGAGE and EMERGE aducanumab studies. BAN2401’s 18-month Phase 2 analysis met statistical significance on secondary endpoints, although the study had not met its primary outcome measure in the earlier 12-month analysis. These are development updates, not assurances of approval or commercial success.
- Competition and concentration: Biogen identified pricing and reimbursement pressure, generic and biosimilar competition, and reliance on principal products and anti-CD20 financial rights as material risks. Two wholesalers represented 50.0% of gross product revenue in Q3 2018.
- Legal and regulatory matters: TECFIDERA patent disputes and generic challenges remain pending, including a U.S. appeal and an inter partes review petition. Biogen also disclosed qui tam claims and government investigations into sales, promotional, patient-support and pricing practices; it could not estimate possible losses for the cited qui tam matters. A Brazilian tax assessment of approximately $70M was disputed, and the filing did not characterize an unfavorable outcome as probable or remote.
- Other exposures: Biogen cited foreign-exchange, interest-rate, drug-pricing, European receivable-collection, manufacturing, clinical-development and tax risks. Transition Toll Tax liabilities were $695.9M, payable in installments over eight years; tax estimates remained subject to finalization. The planned Solothurn facility had approximately $1.6B capitalized construction costs and $200M of outstanding contractual commitments.
Most important facts for investors to verify
- Whether SPINRAZA and OCREVUS growth can offset continued pressure on legacy MS products, and how product demand and pricing evolve.
- Progress and outcomes of aducanumab and other major clinical programs, including FDA discussions and the implications of vixotrigine’s setback.
- TECfidera patent litigation and the timing and potential impact of U.S. generic competition; also monitor biosimilar competition for RITUXAN and OCREVUS.
- Completion, cost and economics of the planned Samsung Bioepis ownership increase, alongside remaining contingent payments and other milestone commitments.
- Resolution of government investigations, qui tam cases and tax disputes, and any resulting financial exposure not estimable in this filing.
- Cash generation after substantial repurchases, strategic investments and facility spending; confirm the assumptions behind management’s liquidity outlook.