Biogen Inc. — Q1 2018 Form 10-Q Summary
Reporting period: Three months ended March 31, 2018. Financial statements are unaudited. 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 | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $3.131 billion | $2.811 billion; up 11.4% |
| Product revenue | $2.524 billion | $2.380 billion; up 6.0% |
| Operating income | $1.535 billion | $1.025 billion |
| Net income attributable to Biogen | $1.173 billion | $748 million |
| Diluted EPS | $5.54 | $3.46; up 60.1% |
| Operating cash flow | $1.457 billion | $235 million |
| Cash, cash equivalents and marketable securities | $7.116 billion | $6.746 billion at Dec. 31, 2017 |
| Total borrowings | $5.933 billion | $5.938 billion at Dec. 31, 2017 |
| Working capital | $7.043 billion | $4.505 billion at Dec. 31, 2017 |
Calculated operating margin was approximately 49.0%, versus 36.5% a year earlier; calculated net margin was approximately 37.4%, versus 26.6%. Higher operating income and EPS chiefly reflect much lower acquired-intangible amortization than in Q1 2017, when the company recorded a significant impairment-related charge. The effective tax rate declined to 21.6% from 24.2%, mainly reflecting U.S. tax reform. Cash and securities exceeded borrowings by approximately $1.18 billion at quarter-end.
Operating cash flow rose substantially year over year, partly because Q1 2017 included a $454.8 million Forward Pharma settlement payment and higher income-tax payments. Q1 2018 investing cash flow of $1.347 billion was supported by net proceeds from securities sales and maturities; it should not be interpreted as operating cash generation. Capital expenditures were $194.7 million, and operating cash flow less capital expenditures was approximately $1.262 billion.
Material changes and business drivers
- SPINRAZA revenue rose to $363.9 million from $47.4 million as sales volumes increased following launch.
- Anti-CD20 program revenue grew 30.1% to $443.2 million, principally due to OCREVUS royalties; Q1 OCREVUS royalties were $76.7 million.
- BENEPALI revenue increased to $120.9 million from $65.3 million, reflecting higher sales volumes. Other revenue increased 82.7% to $164.4 million, mainly from contract manufacturing activity.
- Core MS product trends were mixed: TECFIDERA revenue increased modestly overall, while interferon revenue fell to $550.3 million from $648.3 million and TYSABRI fell to $462.1 million from $545.0 million. The comparisons include foreign-exchange effects and, for TYSABRI, approximately $45 million of prior-year deferred Italian revenue.
- Hemophilia product revenue was absent in Q1 2018 following the February 2017 Bioverativ spin-off; the prior-year quarter included ELOCTATE and ALPROLIX revenue.
- Total expenses declined 10.6% to $1.596 billion. Acquired-intangible amortization fell to $103.9 million from $448.5 million, while R&D increased 17.3% to $496.7 million and cost of sales increased 16.0% to $446.0 million.
- Biogen repurchased $250 million of stock, or approximately 0.9 million shares, in the quarter. Approximately $2.8 billion remained under its repurchase authorization.
Outlook, commentary, risks and unusual items
- The filing gives no numerical full-year revenue or earnings guidance. Management anticipated modest global TECFIDERA demand growth in 2018, with international volume growth partly offset by U.S. declines; it expected continued declines in interferon and TYSABRI revenue and said SPINRAZA growth would moderate over time.
- Biogen and AbbVie announced the worldwide voluntary withdrawal of ZINBRYTA in March after reports of serious liver injury and inflammatory brain disorders. Biogen recorded $2.4 million of inventory charges and $12.8 million of contract and clinical-trial termination losses, net of expected AbbVie reimbursement.
- The company discontinued development of TYSABRI for acute ischemic stroke after the Phase 2b ACTION 2 trial missed its primary endpoint; Biogen stated this did not change TYSABRI’s benefit-risk profile in approved indications.
- The 2017 Tax Act reduced the federal statutory rate to 21%. Biogen reported a $989.6 million Transition Toll Tax liability, payable in installments over eight years; approximately $85 million was expected to be paid within one year. Adoption of the intra-entity transfer tax standard also increased retained earnings by approximately $0.5 billion, with deferred tax expense expected as related assets are used.
- Biogen’s 2017 restructuring program is expected to involve up to $170 million in non-recurring operating and capital expenditures, primarily in 2018, with a goal of redirecting up to $400 million annually by 2020. The Solothurn manufacturing facility was expected to be operational by the end of 2020; construction commitments were $260 million at quarter-end.
- Post-quarter developments include a $75 million upfront payment for Pfizer’s BIIB104 and an announced Ionis collaboration involving a $375 million upfront payment and a $500 million equity purchase, subject to closing conditions. Biogen also announced an IMRALDI commercialization agreement and expected a European launch in October 2018.
- Material business risks include dependence on principal MS products and SPINRAZA, competition from OCREVUS and generics/biosimilars, pricing and reimbursement pressure, product safety, clinical and regulatory uncertainty, patent disputes, manufacturing and supply risks, foreign-exchange exposure, and reliance on collaborators. The filing also identifies government investigations and legal proceedings; possible losses in several matters could not be estimated. Brazil issued approximately $30 million in tax assessments, which Biogen disputes.
- Potential future development, regulatory and commercial milestone payments were approximately $4.3 billion and were not recorded because achievement was not considered probable. Additional contingent Fumapharm payments may be due as cumulative sales thresholds are reached.
Most important facts for investors to verify
- Whether SPINRAZA and OCREVUS growth can offset continued MS franchise declines and the loss of ZINBRYTA.
- How much of the reported earnings and cash-flow improvement reflects recurring performance versus prior-year impairment, settlement, tax-payment and securities-transaction comparisons.
- Whether product discount and allowance estimates remain adequate; reserves reached $859.3 million, and reserves were 24.3% of gross product revenue versus 22.8% a year earlier.
- The outcomes and financial exposure of TECFIDERA patent disputes, generic challenges, government investigations, and tax matters, including the Danish and Brazilian matters.
- The cost, timing and returns from pipeline and strategic investments, including aducanumab, the Ionis collaboration, BIIB104 and the Solothurn facility, alongside the company’s debt and contingent-payment commitments.