Biogen Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Comparisons are with the three months ended March 31, 2018, unless otherwise noted. Biogen is a global biopharmaceutical company focused principally on neurological and neurodegenerative diseases, with a biosimilars business.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $3,489.8 million | $3,131.1 million | +11.5% |
| Product revenue | $2,680.0 million | $2,523.5 million | +6.2% |
| Operating income | $1,502.7 million | $1,534.7 million | -2.1% |
| Net income attributable to Biogen | $1,408.8 million | $1,172.9 million | +20.1% |
| Diluted EPS | $7.15 | $5.54 | +29.1% |
| Operating cash flow | $1,459.5 million | $1,457.1 million | +0.2% |
Operating margin was approximately 43.1%, down from 49.0%. Net margin attributable to Biogen was approximately 40.4%, versus 37.5%; the increase in net income included a substantial investment gain, rather than stronger operating income. Other income, net, was $357.3 million, compared with a $41.0 million expense in Q1 2018, driven principally by a $376.4 million net gain on investments, including appreciation in Biogen’s Ionis investment.
Research and development expense was $563.7 million, up 13.5%; selling, general and administrative expense was $567.7 million, up 13.2%; and cost of sales excluding acquired-intangible amortization and impairment was $602.0 million, up 35.0%. Total costs and expenses increased 24.5% to $1,987.1 million. The effective tax rate rose to 22.7% from 21.6%.
Cash, cash equivalents and marketable securities totaled $5.28 billion at March 31, 2019, versus $4.91 billion at December 31, 2018. Notes payable were $5.94 billion, leaving cash and marketable securities approximately $0.66 billion below debt. Working capital was $5.79 billion and the current ratio was approximately 2.84. Operating cash flow was $1.46 billion; investing cash flow was $238.8 million provided, and financing cash flow was $679.3 million used. Capital expenditures were $127.1 million. Biogen repurchased approximately 2.4 million shares for $655.8 million during the quarter.
Revenue trends and material changes
- SPINRAZA revenue rose 42.5% to $518.5 million, supported by growth in U.S. and international sales. Q1 international revenue included approximately $14 million from a French reimbursement agreement covering prior periods.
- MS product revenue declined 2.1% to $1.98 billion. TECFIDERA revenue was $998.8 million; Interferon revenue fell 9.0% to $500.9 million; TYSABRI revenue was broadly stable at $460.4 million.
- Biosimilar revenue increased 36.8% to $174.4 million, primarily reflecting IMRALDI’s launch in late 2018.
- Anti-CD20 program revenue increased 16.7% to $517.4 million, including higher U.S. RITUXAN sales and OCREVUS royalties of $111.6 million versus $76.7 million.
- Other revenue rose to $292.4 million, principally reflecting $206.8 million of manufacturing and supply revenue from Bioverativ, compared with $47.0 million in the prior-year quarter. The filing says this increase included sales of most remaining hemophilia inventory on hand.
Reported earnings also reflect unusual items: a $115.5 million pre-tax loss on assets and liabilities held for sale relating to the proposed Hillerød divestiture; a separate $59.1 million tax expense associated with that transaction; and $28.7 million of equity-method loss on Samsung Bioepis. The filing describes the estimated total Hillerød transaction loss as approximately $174.6 million, including tax.
Outlook, management commentary and key risks
- Management anticipated higher global TECFIDERA demand in 2019, with international volume growth expected to exceed U.S. declines, while noting expected price reductions in some European markets. Interferon revenue was expected to continue declining; TYSABRI demand was expected to be broadly stable.
- Management expected SPINRAZA revenue growth to moderate in 2019 as new patient starts slow and patients transition to less frequent maintenance dosing. It warned that potential competing SMA treatments, including gene therapy, could affect future sales.
- Management expected strong biosimilar revenue growth in 2019, primarily from IMRALDI. A U.S. rituximab biosimilar could launch in 2019 and pressure Genentech collaboration profits.
- Biogen and Eisai discontinued the Phase 3 ENGAGE and EMERGE aducanumab trials in March 2019 after a futility analysis. Biogen accrued approximately $45 million for trial and contract termination costs, net of expected Eisai reimbursement. This removes a major late-stage Alzheimer’s program from development.
- The FDA accepted the diroximel fumarate (BIIB098) NDA for review; the target action date was Q4 2019. Biogen intended to market it as VUMERITY if approved.
- Biogen agreed to acquire Nightstar Therapeutics for an expected total transaction value of approximately $800 million, subject to customary approvals, with completion expected by mid-2019. It also agreed to sell its Hillerød manufacturing operations to FUJIFILM for up to $890 million, subject to adjustments and closing conditions; completion was expected in the second half of 2019. The Hillerød deal includes minimum production commitments, with an estimated adverse obligation of approximately $120 million, and indemnity obligations.
- The company reported $5.94 billion of notes payable and no borrowings under its $1.0 billion revolving credit facility; it stated it was in covenant compliance and believed existing funds and operating cash flows would meet foreseeable requirements. A $5.0 billion share repurchase authorization was approved in March; no purchases under it occurred in Q1.
- Potential milestone payments under collaborations could total up to approximately $6.9 billion if milestones are achieved; approximately $187 million was anticipated for the remainder of 2019. These contingent amounts were not recorded as liabilities. Other risks include pricing and reimbursement pressure, competition and biosimilar entry, product and patent litigation, clinical and regulatory uncertainty, foreign-exchange exposure, and uncertain European receivable collection periods.
Most important facts for investors to verify
- How much of the EPS increase reflects the $376.4 million investment gain, and whether underlying operating performance supports the reported earnings growth.
- Whether SPINRAZA growth, MS product trends and biosimilar launches meet management’s stated expectations, including pricing and competitive developments.
- Whether the Hillerød sale closes on expected terms and timing, and whether the estimated $120 million production-commitment exposure or total loss changes.
- Progress and final consideration for the Nightstar acquisition, and the funding and strategic impact of the proposed transaction.
- Developments in TECFIDERA patent challenges, IMRALDI litigation, government investigations and other legal or tax contingencies whose possible losses the filing says cannot currently be estimated.
- Whether share repurchases, contingent milestones and capital investment remain consistent with liquidity needs, particularly given debt of $5.94 billion and the expected Solothurn facility investment.