Biogen Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited results; comparisons are with the corresponding 2014 periods. Biogen is a global biopharmaceutical company focused on neurological, autoimmune and hematologic disorders, with major products including TECFIDERA, AVONEX, TYSABRI, ALPROLIX and ELOCTATE.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $2.592bn | $2.421bn | $5.147bn | $4.551bn |
| Operating income | $1.233bn | $989m | $2.351bn | $1.660bn |
| Net income attributable to Biogen | $927m | $715m | $1.750bn | $1.194bn |
| Diluted EPS | $3.93 | $3.01 | $7.42 | $5.03 |
Q2 revenue grew 7.0%, operating income 24.7%, and Biogen-attributable net income 29.8%; diluted EPS increased 30.6%. Q2 operating margin was approximately 47.6%, compared with 40.8% a year earlier. For the first half, revenue rose 13.1%, operating income 41.6%, and attributable net income 46.5%; operating margin was approximately 45.7%, versus 36.5%.
Q2 product revenue was $2.199bn, up 6.9%. TECFIDERA revenue increased 26.1% to $883m; AVONEX fell to $690m from $774m and TYSABRI to $463m from $533m. Newer hemophilia products contributed $54m of ALPROLIX and $74m of ELOCTATE revenue. Biogen’s share of RITUXAN and GAZYVA operating profits was $338m, up 11.3%. Other revenue declined 10.2% to $56m, principally reflecting ANGIOMAX royalty expiration.
Q2 total costs and expenses decreased 5.4% to $1.359bn. R&D increased 9.7% to $491m, while SG&A decreased 14.7% to $492m and acquired-intangible amortization decreased 21.2% to $92m. The filing attributes the SG&A decline partly to lower corporate giving and notes favorable foreign-currency translation effects on costs.
Cash flow, liquidity and debt
Operating cash flow for the first half was $1.780bn, up from $1.095bn; capital expenditures were $228m. Investing cash outflow was $1.756bn, including marketable-security purchases, the Convergence acquisition and Fumapharm contingent payments. Financing cash flow was positive $77m, compared with an outflow of $207m in 2014.
At June 30, cash and cash equivalents were $1.282bn and marketable securities totaled $3.188bn, for combined cash and securities of $4.471bn. Working capital was $3.063bn. Total borrowings were approximately $580m, mainly $550m principal of 6.875% senior notes due 2018 and notes payable to Fumedica. Management said existing funds and expected operating cash flows should meet requirements for the foreseeable future; approximately $2.409bn of cash and securities was generated in foreign jurisdictions and primarily intended for foreign operations or business development abroad.
Material changes, outlook and notable items
- Revenue growth was led by TECFIDERA and newer hemophilia products, offset by lower AVONEX and TYSABRI sales. Management reported moderating TECFIDERA patient growth in the U.S. amid changing prescribing patterns and competition; German pricing moved to a negotiated annual price of EUR 12,800.
- Biogen completed its acquisition of Convergence Pharmaceuticals in February for $200m cash, with contingent consideration valued at $275m. Acquired in-process R&D was valued at $425m; the lead pain candidate’s development is expected to extend at least to 2020.
- In the first half, Biogen paid $250m of Fumapharm contingent consideration and accrued another $300m after reaching a cumulative sales milestone. Further $300m payments may arise for each additional $1bn of cumulative product sales, subject to the agreement’s conditions.
- Management plans continued significant R&D investment, including in MS, Alzheimer’s disease, autoimmune disorders and hematologic conditions. Aducanumab advanced to Phase 3, with two global studies being initiated; ZINBRYTA applications were accepted for review in the U.S. and EU. The Neublastin neuropathic-pain study missed its primary endpoint and development was discontinued.
- No specific full-year financial guidance is stated in the provided filing text. Management expects to fund operations and planned investment primarily through operating cash flow and existing resources, and authorized a new share-repurchase program of up to $5bn, expected to be executed over as long as five years.
- After quarter-end, Biogen announced a proposed AGTC gene-therapy collaboration with an expected $124m upfront payment and potential aggregate milestones exceeding $1bn; it was expected to close in Q3, subject to conditions. Biogen also entered an agreement to purchase a manufacturing facility in North Carolina, with closing expected in Q3.
Risks, contingencies and unusual items
- Biogen disclosed government investigations and subpoenas concerning sales and promotional practices and its relationship with certain pharmacy benefit managers. Four unsealed qui tam actions alleged unlawful sales and promotional activities; the company had not been served with the complaints and could not estimate a potential loss. The government had declined to intervene in two cases and had not decided on the other two.
- Other significant legal matters include TECFIDERA patent litigation brought by Forward Pharma in Germany, ongoing patent litigation involving interferon products, and the unresolved Italian TYSABRI reimbursement-limit dispute. Approximately EUR 75m was recorded for the Italian matter; a proposed settlement was not approved by the Italian Attorney General.
- Biogen reported a Danish tax assessment of $48m, including interest, and is contesting it. The IRS had proposed disallowing approximately $130m of deductions related to intercompany service payments; the matter remained under dispute.
- Foreign exchange and pricing pressures are material: Q2 foreign-currency losses reduced rest-of-world TECFIDERA, AVONEX and TYSABRI revenue, partly offset by hedges. A hypothetical adverse 10% currency move would reduce the fair value of outstanding forward contracts by approximately $192m, subject to stated limitations of the estimate.
- Key business risks include reliance on principal products and TECFIDERA growth, intensifying MS and biosimilar competition, drug pricing and reimbursement pressure, clinical and regulatory failure, product safety, manufacturing and supplier dependence, and collection delays in certain European markets. Controls and procedures were reported effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Assess whether TECFIDERA growth can offset continuing AVONEX and TYSABRI declines, competition and foreign-exchange impacts.
- Track regulatory and clinical progress, especially aducanumab Phase 3 studies, ZINBRYTA review and hemophilia product expansion.
- Monitor the Italian TYSABRI dispute, promotional-practices investigations and qui tam litigation, for which potential losses were not estimable.
- Verify the timing and cash impact of Fumapharm milestone payments, AGTC obligations, facility investments and the $5bn repurchase authorization.
- Review cash generation, foreign-held liquidity, tax disputes and the assumptions underlying acquired intangible assets and contingent consideration.