Business context and reporting period
Biogen Idec Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. The company develops and markets therapies for neurodegenerative diseases, hematologic conditions and autoimmune disorders. Its principal products included AVONEX, TECFIDERA, TYSABRI and RITUXAN; ALPROLIX and ELOCTATE began commercial launches during 2014.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $2,511.4 million | $1,827.8 million | $7,062.6 million | $4,966.3 million |
| Income from operations | $1,152.6 million | $684.5 million | $2,812.7 million | $1,857.6 million |
| Net income attributable to Biogen Idec | $856.9 million | $487.6 million | $2,051.3 million | $1,405.0 million |
| Diluted EPS | $3.62 | $2.05 | $8.64 | $5.89 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $2,009.3 million | $1,476.1 million |
Q3 revenue increased 37.4%, operating income 68.4%, attributable net income 75.7% and diluted EPS 76.7% year over year. Nine-month revenue rose 42.2%, operating income 51.4%, attributable net income 46.0% and diluted EPS 46.7%. Calculated operating margin was approximately 45.9% for Q3 2014 versus 37.4% in Q3 2013, and 39.8% for the nine-month period versus 37.4%.
At September 30, 2014, cash and cash equivalents were $1,186.3 million and marketable securities totaled $2,046.5 million, for combined cash and securities of $3,232.8 million. Working capital was $2,431.5 million. Total borrowings were $587.2 million, mainly $550 million of 6.875% senior notes due in 2018 and notes payable to Fumedica. The $750 million revolving credit facility expired in March 2014 and was not renewed. Total assets were $13,704.1 million and total liabilities $3,273.3 million.
Material changes versus prior comparable periods
- Product revenue grew to $2,117.3 million in Q3, up 45.7%. TECFIDERA revenue rose 174.8% to $787.1 million; TYSABRI increased 25.0% to $501.2 million. AVONEX grew 1.1% to $741.8 million, while the company reported $25.3 million of ALPROLIX and $21.6 million of ELOCTATE revenue.
- Revenue from the unconsolidated joint business, principally RITUXAN and GAZYVA, declined 4.1% to $290.7 million in Q3. Other revenue increased 45.6% to $103.4 million.
- Q3 total costs and expenses rose 18.5% to $1,363.2 million. SG&A increased 40.6%, chiefly reflecting commercial launch investment; cost of sales rose 28.9%, and acquired-intangible amortization rose 22.4%.
- Nine-month operating cash flow increased 36.1%. Working capital growth and higher earnings contributed to liquidity; investing cash outflow was $1,164.7 million and financing cash outflow was $242.6 million.
- The company repurchased approximately 1.2 million shares for $360.0 million during the first nine months, compared with approximately 2.0 million shares for $400.3 million in the prior-year period.
Outlook, commentary, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided in the supplied filing text. Management said it expects to fund operating and capital requirements primarily from operating cash flow and existing resources, which it considers sufficient for the foreseeable future, and intends to continue investing in research and development.
- Management highlighted TECFIDERA’s rapid growth but noted limited product history makes future sales and effects on other MS therapies difficult to estimate. Competition, including competition from the company’s own newer MS products, may pressure AVONEX and TYSABRI. TYSABRI also faces PML-related safety and prescribing risks.
- The company recognized $53.5 million of previously deferred TYSABRI revenue following an Italian pricing resolution; $80.9 million remained deferred for periods from February 2011 through January 2013. A settlement discussion with Italy’s AIFA remained unresolved, and the related appeal was pending.
- Q3 included a $39.5 million incremental branded-drug fee accrual for periods from 2013 through the quarter. An impairment charge of $16.2 million on an acquired in-process R&D asset was accompanied by a $49.4 million gain from remeasurement of contingent consideration, following revised probabilities of success and a project delay.
- FUMADERM and TECFIDERA sales triggered a $200 million contingent payment accrual in Q3; $175 million of contingent consideration payments were made during the nine months. The filing also disclosed up to approximately $2.9 billion of potential future collaboration milestone payments, contingent on milestones being achieved.
- Risks include pricing and reimbursement pressure, delayed collections in parts of Europe, foreign-exchange volatility, product safety and liability matters, patent disputes, regulatory and tax proceedings, and reliance on collaborators and third-party manufacturers. Government authorities were investigating sales and promotional practices, and the company had received related subpoenas; it said it was cooperating.
- Other notable exposure includes a pending IRS dispute over approximately $130 million of deductions and litigation involving the ’755 patent and alleged reporting of average manufacturer price data. The filing states it had not determined whether an unfavorable outcome in the latter matter was probable or remote.
Important facts for investors to verify
- Whether TECFIDERA growth and new-product launches can sustain revenue momentum amid competition and potential pressure on established MS products.
- How much of reported earnings growth reflects recurring operations versus the AIFA revenue recognition, tax and branded-drug fee adjustments, impairment, and contingent-consideration remeasurement.
- Progress toward resolving the Italian TYSABRI reimbursement dispute, including the $80.9 million still deferred.
- Future cash requirements from FUMADERM/TECFIDERA contingent payments, TYSABRI royalties to Elan and collaboration milestones.
- Collection trends and credit exposure in Spain, Italy and Portugal, plus the implications of the expired revolving credit facility and foreign-held cash.
- Developments in product safety, clinical programs, patent and government proceedings, and pricing or reimbursement policy that could materially affect sales or costs.