Biogen Idec Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unaudited consolidated results; comparisons are with Q1 2013 unless otherwise noted. Biogen Idec is a biotechnology company focused on multiple sclerosis (MS), autoimmune and neurodegenerative diseases, and hemophilia.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $2,129.8 million | $1,415.1 million | +50.5% |
| Income from operations | $671.3 million | $510.5 million | +31.5% |
| Net income attributable to Biogen Idec | $480.0 million | $426.7 million | +12.5% |
| Diluted EPS | $2.02 | $1.79 | +12.7% |
| Operating cash flow | $104.6 million | $178.9 million | -41.5% |
- Revenue mix: Product revenue was $1,742.8 million; unconsolidated joint-business revenue was $296.9 million; other revenue was $90.1 million. Product sales included AVONEX $761.5 million, TYSABRI $441.0 million, and TECFIDERA $505.7 million. TECFIDERA had no comparable Q1 2013 product revenue.
- Margins: Approximate operating margin was 31.5%, versus 36.1% in Q1 2013; approximate net margin was 22.5%, versus 30.2%. Higher expenses and the higher effective tax rate weighed on profit growth relative to revenue growth.
- Expenses and tax: Total costs and expenses rose 60.8% to $1,462.3 million. R&D increased 86.0% to $528.9 million, including $137.8 million of milestone and upfront expenses; SG&A increased 45.1% to $511.7 million. Amortization of acquired intangibles increased to $143.3 million. The effective tax rate was 26.8%, compared with 13.2%.
- Cash flow: Operating cash flow was $104.6 million; capital spending was $54.3 million, implying approximate cash flow after capital spending of $50.3 million. The company attributed lower operating cash flow to working-capital growth, particularly receivables.
- Liquidity and debt: Cash, cash equivalents and marketable securities totaled $1,984.5 million at March 31, up from $1,848.5 million at year-end. Working capital was $1,930.8 million. Borrowings totaled $594.6 million, principally $550 million of 6.875% senior notes due 2018. The $750 million revolving credit facility expired in March 2014 and was not renewed.
Material changes and business developments
- Revenue growth reflected TECFIDERA’s launch, increased TYSABRI revenue recognition following the April 2013 acquisition of Elan’s remaining rights, and growth in other products and partner revenue. TYSABRI revenue rose 41.3%; the filing notes that the U.S. increase was principally due to recognizing 100% of in-market revenue, despite a 22% decline in U.S. unit sales volume.
- AVONEX revenue rose 2.1% overall, but U.S. revenue fell 3.1%, with unit sales volume down 16%, primarily as patients moved to oral therapies. Management expects continued MS competition.
- Higher R&D included $117.7 million recorded upon entering an Eisai collaboration and a $20.0 million upfront payment to Sangamo. The company also amended an agreement to fund up to approximately $45 million of clinical-trial costs for an Isis spinal muscular atrophy program, recognized as incurred.
- ALPROLIX received U.S. FDA and Canadian approval in March 2014 for hemophilia B. TECFIDERA received EU approval in February 2014, and TYSABRI received marketing approval in Japan. The FDA extended its review of PLEGRIDY by three months.
- RITUXAN/GAZYVA joint-business revenue was $296.9 million, up 12.2%. U.S. RITUXAN unit sales volume declined approximately 3.2%; higher revenue also reflected the absence of a prior-year $41.5 million charge associated with the Hoechst arbitration.
Outlook, risks and contingencies
- The filing provides no specific company-wide revenue or earnings guidance. Management expects to fund operating needs primarily through operating cash flow and existing cash, which it believes, together with potential financing access, is sufficient for foreseeable requirements. It plans continued investment in R&D and commercial capabilities.
- Management identifies reliance on four principal products—AVONEX, TYSABRI, TECFIDERA and RITUXAN—as a key business exposure. Risks include competition from other MS therapies and potential generics or biosimilars, pricing and reimbursement pressure, product safety, regulatory outcomes, development and launch execution, and manufacturing or supply disruption. TYSABRI carries PML-related safety risks.
- Italy/TYSABRI: A proposed arrangement to remove the reimbursement limit from February 2013 was pending AIFA Board approval. The company had deferred an aggregate $143.2 million of TYSABRI revenue as of March 31, 2014, and estimated approximately $53 million of incremental revenue could be recorded upon approval, based on amounts deferred through that date. Discussions continued over the earlier period; the company retained a €15.4 million liability and continued to defer revenue pending an approved pricing agreement.
- Legal and regulatory matters: Patent litigation, a False Claims Act case concerning drug-pricing rebate calculations (trial scheduled for December 2014), and government investigations into sales and promotional practices and pharmacy-benefit-manager relationships remain outstanding. The company is cooperating with authorities; the filing does not provide a clear estimate of potential loss for the False Claims Act claims.
- Tax and commitments: The IRS proposed disallowing approximately $130 million of deductions for 2007–2009; the company disputes the position. Uncertain-tax-position liabilities were approximately $116.1 million. Potential milestone payments under collaborations could total up to approximately $3.0 billion if milestones are achieved; approximately $87.4 million was anticipated for the remainder of 2014, subject to achievement.
- Unusual items: A $34.7 million impairment charge was recorded for an out-licensed patent. A $25 million Fumapharm sales-based contingent payment was paid. Amortization, cost of sales and operating responsibilities increased after the TYSABRI rights acquisition, limiting direct comparability with 2013.
Important facts for investors to verify
- Whether TECFIDERA’s launch trajectory and European rollout continue, and how much sales growth represents new market demand versus switching from Biogen’s other MS products.
- Underlying TYSABRI U.S. demand and the status and financial effect of AIFA approval and the deferred Italian revenue.
- Whether receivables and operating cash flow improve; overdue receivables in Spain, Italy and Portugal were $15.5 million at March 31, down from $45.9 million at year-end.
- Progress, costs and approval status for PLEGRIDY, ELOCTATE and the hemophilia franchise, including commercial launch investment and contingent payments.
- Developments in the cited litigation, government investigations, IRS dispute, and potential collaboration milestones and obligations.