Biogen Inc. — Q3 2015 Form 10-Q
Business context and period. Biogen is a global biopharmaceutical company focused on neurological, autoimmune and hematologic disorders. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods. Amounts below are in millions of U.S. dollars, except per-share data and percentages.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $2,777.9 | $2,511.4 | $7,924.5 | $7,062.6 |
| Operating income | $1,371.8 | $1,152.6 | $3,722.8 | $2,812.7 |
| Net income attributable to Biogen | $965.6 | $856.9 | $2,715.4 | $2,051.3 |
| Diluted EPS attributable to Biogen | $4.15 | $3.62 | $11.57 | $8.64 |
| Operating margin | 49.4% | 45.9% | 47.0% | 39.8% |
- Q3 revenue increased 10.6%; product revenue rose 13.0% to $2,391.7. For nine months, revenue grew 12.2% and product revenue rose 14.3%.
- Q3 growth was led by TECFIDERA, whose revenue increased 19.1% year over year to $937.4, and by newer hemophilia products ALPROLIX and ELOCTATE. RITUXAN/GAZYVA joint-business revenue increased 16.0% to $337.2. AVONEX and TYSABRI revenue declined; other revenue fell 52.6%, primarily reflecting the expiration of U.S. ANGIOMAX royalty rights.
- Q3 operating income grew 19.0%, while total costs and expenses rose 3.1%. R&D increased 24.6% to $519.9; SG&A fell 16.2% to $477.8; acquired-intangible amortization fell 19.9% to $98.1. The 2014 comparison included a $49.4 gain from contingent-consideration remeasurement, versus a $0.2 expense in Q3 2015.
- The effective tax rate was 24.3% in Q3 and 24.6% for nine months, compared with 24.2% and 25.8%, respectively, in 2014. Lower anticipated taxes on foreign earnings benefited 2015; the nine-month comparison also includes a benefit from remeasurement of an uncertain tax position.
- Operating cash flow for nine months was $2,675.7, up from $2,009.3. Investing cash flow was an outflow of $2,746.1, including marketable-security purchases, $550.0 of Fumapharm contingent payments, capital expenditures and the Convergence acquisition. Financing cash flow was an inflow of $2,984.8, primarily from new debt, partly offset by share repurchases.
- At September 30, cash and cash equivalents were $4,089.0 and marketable securities totaled $3,700.9, together $7,789.9. Working capital was $6,636.9. Total borrowings were $6,534.4, up from $583.4 at year-end 2014; the company had no borrowings under its $1.0 billion revolving credit facility and reported covenant compliance.
- Biogen issued $6.0 billion of senior unsecured notes in September, with maturities from 2020 to 2045 and stated coupons of 2.90% to 5.20%. Nine-month share repurchases totaled $2,998.2 for approximately 9.7 million shares. The $5.0 billion repurchase authorization had approximately $1,105.5 remaining as of October 20, 2015.
Material changes, outlook and commentary
- Management cited TECFIDERA growth and contributions from newer products as revenue drivers, while noting moderating U.S. TECFIDERA patient growth, changing prescribing patterns, foreign-exchange headwinds and pricing pressure. Management said mature MS markets were returning toward historical growth and patient-switch rates.
- On October 21, 2015, after the reporting date, Biogen announced a restructuring that terminates several pipeline programs and reduces the workforce by 11%. It expects annual operating-expense run-rate savings of approximately $250 million, to be reinvested in selected commercial activities and pipeline programs. Expected restructuring charges are $85–$95 million, with cash payments of $115–$120 million, substantially all incurred and paid by year-end 2015.
- Pipeline developments included the start of Phase 3 aducanumab trials for early Alzheimer’s disease, triggering a $60 million milestone, and positive Phase 2 anti-LINGO-1 findings on a primary endpoint. Conversely, TYSABRI’s Phase 3 SPMS study failed its primary and secondary endpoints; Biogen discontinued its SPMS program after the quarter. Neublastin and anti-TWEAK programs were also discontinued following unsuccessful results.
- Biogen expected to complete the 2015 share-repurchase program by year-end. It stated that available funds, operating cash flow and access to financing were expected to meet requirements for the foreseeable future. The filing provides no clear full-year revenue or EPS guidance.
Risks, contingencies and unusual items
- Key business risks include reliance on principal products, competition and product transitions in MS, pricing and reimbursement pressure, clinical and regulatory uncertainty, manufacturing and supply risks, foreign-exchange exposure, and the company’s increased indebtedness.
- TECFIDERA and AVONEX/TYSABRI international revenue faced currency headwinds; management noted that hedging cannot fully offset sustained currency moves. A hypothetical adverse 10% currency movement would reduce the fair value of outstanding forward contracts by an estimated $195 million; a 100-basis-point increase in LIBOR was estimated to raise annual interest expense by about $6.8 million.
- Legal matters include investigations and subpoenas concerning sales and promotional practices and pharmacy-benefit-manager relationships; four unsealed qui tam actions; Forward Pharma litigation alleging TECFIDERA patent infringement; a securities class-action complaint; a pending Italian reimbursement dispute concerning TYSABRI; and a potential Pfizer patent-license claim relating to ALPROLIX. For several matters, Biogen could not assess the likelihood or estimate a potential loss.
- Biogen disclosed a $49.3 million Danish tax assessment for 2009, which it is contesting, and an IRS proposed disallowance of approximately $130 million in deductions for 2007–2009, also contested. It had approximately $53.9 million of uncertain-tax-position liabilities.
- Contingent obligations include potential future collaboration milestones of up to approximately $2.9 billion, remaining business-combination milestones of up to approximately $1.3 billion, and Fumapharm sales-based payments. Biogen paid $550 million in Fumapharm contingent payments in the first nine months and accrued a further $300 million after reaching a cumulative-sales threshold.
Investor verification priorities
- Verify the durability and geographic mix of TECFIDERA growth, and monitor declines in AVONEX and TYSABRI, pricing changes, and foreign-exchange effects.
- Track the impact of the announced restructuring: program terminations, delivery of expected savings, one-time costs, and whether planned reinvestment supports commercial and pipeline priorities.
- Assess the new $6.0 billion debt burden, future interest expense, debt maturities, cash deployment, and completion of the repurchase authorization.
- Follow clinical and regulatory milestones—particularly aducanumab, anti-LINGO-1, hemophilia products and biosimilars—and the commercial consequences of discontinued or unsuccessful programs.
- Monitor material legal, tax and reimbursement matters, Fumapharm contingent payments, and the potential obligations under collaboration agreements.