Biogen Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited consolidated results. Figures are in U.S. dollars; financial statement amounts are in millions except per-share data.
Business context
Biogen is a biopharmaceutical company focused on neurological and neurodegenerative diseases. On February 1, 2017, it spun off its hemophilia business as Bioverativ. Q1 2017 results include that business only through January 31, so comparisons with 2016 are affected by the separation. Biogen now has greater revenue concentration in multiple sclerosis products and SPINRAZA.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $2,810.7 | $2,726.8 | +3.1% |
| Product revenue, net | $2,380.1 | $2,309.4 | +3.1% |
| Operating income | $1,024.3 | $1,378.4 | -25.7% |
| Net income attributable to Biogen | $747.6 | $970.9 | -23.0% |
| Diluted EPS | $3.46 | $4.43 | -21.9% |
| Operating cash flow | $235.2 | $1,015.8 | -76.8% |
Operating margin was approximately 36.4%, compared with 50.5% in Q1 2016; net margin was approximately 26.6%, compared with 35.6%. These percentages are calculated from reported revenue and income figures. The effective tax rate was 24.2%, down from 26.9%.
Revenue growth reflected higher TYSABRI sales, SPINRAZA and BENEPALI, partly offset by the hemophilia spin-off. Anti-CD20 program revenue was $340.6 million, up 3.4%. Key product revenue included TECFIDERA $958.2 million, TYSABRI $545.0 million, interferon products $648.3 million, SPINRAZA $47.4 million and BENEPALI $65.3 million. TYSABRI growth included $44.6 million of previously deferred Italian revenue.
Balance sheet, liquidity and cash flow
- Cash and cash equivalents were $924.0 million; marketable securities totaled $4,781.4 million. Together, cash and marketable securities were $5,705.4 million, down 26.1% from year-end 2016.
- Total borrowings were $6,514.2 million, broadly unchanged from year-end; approximate net debt, using reported borrowings less cash and marketable securities, was $808.8 million. The $550 million 6.875% notes due March 2018 were classified as current. The $1.0 billion revolving credit facility was undrawn, and Biogen reported covenant compliance.
- Working capital was $3,867.2 million, down from $5,312.3 million. Current assets were $6,859.7 million and current liabilities $2,992.5 million.
- Operating cash flow fell to $235.2 million, primarily reflecting the $454.8 million payment of a previously accrued Forward Pharma charge and approximately $360 million in income tax payments. Investing cash outflow was $744.2 million and financing cash outflow $901.4 million.
- Major cash uses included $795.2 million for the Forward Pharma license asset, $300 million in Fumapharm contingent consideration, $302.7 million contributed to Bioverativ, $583.6 million of share repurchases and $210.0 million of capital expenditures.
Material changes and unusual items
- Total costs and expenses rose 32.5%, principally due to $353.6 million of impairment and amortization charges for TECFIDERA-related Forward Pharma intellectual property and a 22.9% increase in cost of sales. Acquired intangible amortization was $448.5 million versus $88.8 million a year earlier.
- Biogen paid Forward Pharma $1.25 billion under a settlement and license agreement. It recorded a $795.2 million intangible asset for rights covering the period through December 2020; the remaining $454.8 million had been expensed and accrued in Q4 2016 and was paid in Q1.
- The U.S. Forward Pharma patent dispute was decided in Biogen’s favor on March 31, 2017; Forward Pharma announced an appeal. The related European proceedings remained unresolved.
- Biogen completed the Bioverativ spin-off and made a net cash contribution of $302.7 million. The separation involves transition, supply and indemnification agreements; the tax-free treatment could be challenged by tax authorities.
- Q1 included $300 million of Fumapharm contingent payments and accrual of a further $300 million milestone after cumulative sales reached $12 billion.
Outlook, management commentary and risks
- Management anticipated relatively stable global demand for TECFIDERA and TYSABRI in 2017, with international patient growth offsetting modest U.S. declines. It expected interferon revenue to continue declining as patients transition to other MS therapies. No numerical full-year revenue or earnings guidance is provided in the filing text.
- OCREVUS was approved by the FDA in March 2017 for relapsing and primary progressive MS. Biogen is entitled to tiered U.S. royalties of 13.5% to 24%, depending on sales. In April, the EU medicines committee recommended SPINRAZA for approval.
- After quarter-end, Biogen agreed to license BMS-986168, an experimental medicine for Alzheimer’s disease and progressive supranuclear palsy, for a $300 million upfront payment and up to $410 million in additional milestones, plus potential royalties. Closing was expected in Q2 2017, subject to customary conditions.
- Principal risks include intense MS competition, drug pricing and reimbursement pressure, dependence on established products, SPINRAZA launch execution, patent and regulatory challenges, clinical-development uncertainty, manufacturing capacity and supply, foreign exchange and Bioverativ separation-related tax and indemnification risks.
- Legal matters include government investigations and subpoenas concerning sales, promotional practices, patient assistance and government price reporting; qui tam and securities litigation; and patent disputes. The filing states that loss estimates cannot be made for certain matters, including the qui tam action.
- Biogen reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Underlying product demand and pricing trends, particularly for TECFIDERA, TYSABRI and interferon, excluding one-time deferred revenue and spin-off effects.
- SPINRAZA’s commercial uptake and reimbursement, and the revenue and competitive impact of OCREVUS.
- Forward Pharma appeal and remaining European patent proceedings, including implications for TECFIDERA royalties and the recorded license asset.
- Cash generation after the unusually large license, tax, milestone and spin-off payments; debt maturities and continued repurchases.
- Potential outcomes and financial exposure from government investigations, litigation, tax matters and Bioverativ separation obligations.
- Whether the BMS-986168 transaction closed and the resulting cash, milestone and royalty commitments.