SECURITIES AND EXCHANGE COMMISSION Total Pages- 19
WASHINGTON, D.C. 20549 Exhibit Index- 19
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-12042
BIOGEN, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3002117
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14 Cambridge Center, Cambridge, MA 02142
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 679-2000
Former name, former address and former fiscal year, if changed since
last report: Not Applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Number of shares outstanding of each of the issuer's classes of common stock, as
of August 12, 1998:
Common Stock, par value $0.01 73,732,655
(Title of each class) (Number of Shares)
B I O G E N , I N C . Page 2
----------------------
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Condensed Consolidated Statements of Income -
Three months and six months ended June 30, 1998 and 1997 . . 3
Condensed Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997. . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 1998 and 1997 . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements . . . . 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION 16
* * * * * * * * * * * * * * * * * *
Note concerning trademarks: AVONEX(R) is a registered trademark
of Biogen, Inc.
HIRULOG(R) is a registered trademark
of The Medicines Company.
Page 3
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ------------------
1998 1997 1998 1997
---------------------- ------------------
REVENUES
Product sales . . . . . . . . $ 87,073 $56,440 $163,173 $109,056
Royalties . . . . . . . . . . 41,739 36,007 80,111 78,222
Interest . . . . . . . . . . 6,963 5,206 13,931 10,113
------- ------ ------- -------
Total revenues . . . . . . 135,775 97,653 257,215 197,391
======= ====== ======= =======
EXPENSES
Cost of sales. . . . . . . . . 17,171 11,444 32,044 23,188
Research and development . . . 42,135 32,014 79,255 69,922
Selling, general and
administrative . . . . . . 28,481 20,960 54,484 42,124
Other, net . . . . . . . . . 724 (190) 770 144
------ ------ ------ -------
Total expenses . . . . . . . . . 88,511 64,228 166,553 135,378
------- ------ ------- -------
INCOME BEFORE INCOME TAXES . . . 47,264 33,425 90,662 62,013
Income taxes . . . . . . . . . . 15,815 13,477 31,442 25,055
------- ------ ------ -------
NET INCOME . . . . . . . . . . . $ 31,449 $19,948 $ 59,220 $ 36,958
====== ====== ======= =======
BASIC EARNINGS PER SHARE . . . . $ 0.43 $ 0.27 $ 0.80 $ 0.50
====== ====== ====== ======
DILUTED EARNINGS PER SHARE . . . $ 0.41 $ 0.26 $ 0.77 $ 0.48
====== ====== ====== ======
SHARES USED IN CALCULATING:
BASIC EARNINGS PER SHARE . . . 73,772 73,887 73,854 73,578
====== ====== ====== ======
DILUTED EARNINGS PER SHARE . . 76,764 76,248 76,809 76,546
====== ====== ====== ======
See Notes to Condensed Consolidated Financial Statements.
Page 4
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30,1998 Dec.31,1997
(unaudited)
ASSETS
Current assets
Cash and cash equivalents. . . . . . . . . $ 71,839 $ 70,358
Marketable securities. . . . . . . . . . . 388,775 369,730
Accounts receivable, net . . . . . . . . 85,623 86,802
Deferred tax asset . . . . . . . . . . . . 25,306 37,203
Other current assets . . . . . . . . . . . 40,782 31,973
------- -------
Total current assets . . . . . . . . . . . 612,325 596,066
------- -------
Property, plant and equipment
Cost . . . . . . . . . . . . . . . . . . . 254,053 240,513
Less accumulated depreciation . . . . . . 76,274 66,021
------- -------
Property, plant and equipment, net . . . . 177,779 174,492
------- -------
Other assets
Patents, net . . . . . . . . . . . . . . . 16,105 14,935
Marketable securities. . . . . . . . . . . 19,652 17,095
Other . . . . . . . . . . . . . . . . . . 7,710 11,237
------- -------
Total other assets. . . . . . . . . . . . 43,467 43,267
------- -------
$833,571 $813,825
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable . . . . . . . . . . . . . $ 17,842 $ 15,820
Note payable . . . . . . . . . . . . . . . 14,559 24,817
Current portion of long-term debt. . . . . 4,888 4,888
Accrued expenses and other . . . . . . . . 68,287 78,358
------- -------
Total current liabilities. . . . . . . . . 105,576 123,883
------- -------
Long-term debt, less current portion 59,401 61,846
Other long term liabilities . . . . . . . . . 15,798 15,132
Put options . . . . . . . . . . . . . . . . . 33,335 76,671
Commitments and contingencies . . . . . . . .
Shareholders' equity
Common stock . . . . . . . . . . . . . . . 741 741
Additional paid in capital . . . . . . . . 511,460 516,880
Retained earnings . . . . . . . . . . . . . 127,875 25,327
Unrealized loss on
marketable securities . . . . . . . . . . (6,937) (2,233)
Cumulative translation adjustment . . . . . (4) (37)
Treasury stock, at cost . . . . . . . . . . (13,674) (4,385)
------- -------
Total shareholders' equity . . . . . . . . . 619,461 536,293
------- -------
$833,571 $813,825
======= =======
See Notes to Condensed Consolidated Financial Statements.
Page 5
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Six Months Ended
June 30,
--------------------------------
1998 1997
-------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . $ 59,220 $ 36,958
Adjustments to reconcile net income
to net cash provided from
operating activities:
Depreciation and amortization . . . . . . 11,630 9,071
Deferred income taxes . . . . . . . . . . 13,208 (318)
Other . . . . . . . . . . . . . . . . . . 23 2,550
Changes in:
Accounts receivable . . . . . . . . . . 1,179 (16,855)
Other current and other assets . . . . . (9,372) (9,590)
Accounts payable, accrued expenses and
other current and long term
liabilities . . . . . . . . . . . . . . (7,383) (3,571)
------- -------
Net cash provided from operating
activities. . . . . . . . . . . . . . . . 68,505 18,245
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities . . . . (350,035) (217,012)
Proceeds from sales and maturities of
marketable securities. . . . . . . . . . 331,810 192,804
Investment in collaborative partners . . . (5,000) (11,000)
Acquisitions of property and equipment . . (13,113) (13,461)
Additions to patents . . . . . . . . . . . (2,974) (3,562)
-------- -------
Net cash used by investing activities. . (39,312) (52,231)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of note payable . . . . . . . . (10,258) -
Proceeds from issuance of long-term debt . - 4,545
Payments of long-term deb . . . . . . . . (2,445) (1,639)
Purchases of treasury stock . . . . . . . (28,800) -
Tax benefit related to stock options . . . 4,723 21,001
Issuance of common stock and option
exercises. . . . . . . . . . . . . . . . 9,068 21,297
-------- -------
Net cash (used by) provided from financing
activities . . . . . . . . . . . . . . . (27,712) 45,204
------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . 1,481 11,218
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD . . . . . . . . . . . . 70,358 62,032
------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD . . . . . . . . . . . . . . $ 71,839 $ 73,250
======= ========
See Notes to Condensed Consolidated Financial Statements.
Page 6
BIOGEN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of
only normal recurring accruals, necessary to present fairly the financial
position, results of operations and cash flows of Biogen, Inc. and its
subsidiaries (the "Company"). The Company's accounting policies are
described in the Notes to Consolidated Financial Statements in the
Company's 1997 Annual Report on Form 10-K. Interim results are not
necessarily indicative of the operating results for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Certain amounts for the six months ended June 30, 1997 have
been reclassified to conform to the current period presentation.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Number 130 "Reporting Comprehensive Income"
("SFAS 130") and Statement of Financial Accounting Standards Number 131
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). The Company adopted SFAS 130 and SFAS 131 on January 1,
1998. SFAS 130 establishes standards for reporting comprehensive income
and its components in the consolidated financial statements. Comprehensive
income for the three months and six months ended June 30, 1998 was $25.5
million and $54.5 million, respectively. SFAS 131 establishes standards
for reporting information on operating segments in interim and annual
financial statements.
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the
type of hedge transaction. The Company has not yet determined the impact
that the adoption of SFAS 133 will have on its financial position or
results of operations.
Page 7
Below is a summary of the shares used in calculating basic and diluted
earnings per share (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------------
1998 1997 1998 1997
--------- -------- ----------- --------------
Weighted average number
of shares of common
stock outstanding . . . 73,772 73,887 73,854 73,578
Dilutive stock options.. 2,992 2,361 2,955 2,968
------ ------ ------ ------
hares used in
calculating diluted
earnings per share. . . 76,764 76,248 76,809 76,546
====== ====== ====== ======
2. As of June 30, 1998, the Company had $20.0 million outstanding under a
term loan secured by a laboratory and office building in Cambridge,
Massachusetts. Principal payments of $833,000 are due semi-annually
through 2004 with the balance due on May 8, 2005.
As of June 30, 1998, the Company had $44.3 million outstanding under a
loan agreement with a bank for financing the construction of the Company's
biological manufacturing facility in North Carolina (the AConstruction
Loan@). The Construction Loan is secured by the facility. Payments of
$805,000 are due quarterly through 2006 with the balance due on March 31,
2007.
Terms of the loan agreements include various covenants, including
financial covenants, which require the Company to maintain minimum net
worth, cash flow and various financial ratios.
3. Inventories, which are included in other current assets, are stated at the
lower of cost or market with cost determined under the first-in/first-out
("FIFO") method. Raw materials include inventory used in the production of
pre-clinical and clinical products, which are expensed as research and
development costs when consumed. Inventories, net of applicable reserves
and allowances, at June 30, 1998 and December 31, 1997 are as follows:
(In Thousands)
June 30, 1998 December 31, 1997
------------------ -------------------
Raw materials $ 3,685 $ 4,957
Work in process 17,743 8,132
Finished goods 8,816 9,870
------ ------
$30,244 $22,959
====== ======
Page 8
4. On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against
Biogen in the United States District Court for the District of New Jersey
alleging infringement by Biogen of Berlex's "McCormick" patent in the United
States in the production of Biogen's AVONEX(R)(Interferon beta-1a). Berlex
seeks a judgment granting it damages, a trebling of any damages awarded and
a permanent injunction restraining Biogen from the alleged infringement. An
unfavorable ruling in the Berlex suit could have a material adverse effect
on the Company's results of operations and financial position. The Company
believes that it has meritorious defenses to the Berlex claim; however, the
ultimate outcome is not determinable at this time. Prior to the date of the
suit filed by Berlex on the McCormick patent, Biogen had filed a suit
against Schering AG ("Schering"), Berlex and the Board of Trustees of the
Leland Stanford Jr. University ("Stanford") in the United States District
Court for the District of Massachusetts for a declaratory judgment of
non-infringement and invalidity of the McCormick patent contending that
AVONEX(R), its manufacturing process and intermediates used in that process
do not infringe the McCormick patent and that such patent is not valid. In
November 1996, the U.S. District Court in Massachusetts ruled that it had
jurisdiction and Berlex's New Jersey action was transferred to Massachusetts
and consolidated for pre-trial purposes with the Massachusetts case. In
February 1997, the U.S. District Court in Massachusetts dismissed Biogen's
declaratory judgment action as to Schering without prejudice if such
dismissal is later shown to result in an injustice to Biogen. Biogen and
Stanford subsequently entered into an agreement voluntarily dismissing
Stanford from the suit. The suit involving Berlex is still pending.
A trial is not expected before the early part of 1999.
In June 1996, ASTA Medica Aktiengesellschaft ("ASTA") filed for
arbitration against Biogen with the International Chamber of Commerce
("ICC") in connection with a dispute with Biogen regarding a License,
Development and Supply Agreement, dated May 30, 1989 (the "1989 Agreement"),
among Biogen, ASTA and Bioferon Biochemische Substanzen GmbH & Co
("Bioferon"). Bioferon was a joint venture between Biogen and Rentschler
Arzneimittel GmbH & Co. of Laupheim, Germany, which entered bankruptcy in
1993. In the proceeding, ASTA had asked for a determination that Biogen
could not terminate the 1989 Agreement as to ASTA solely as a result of
Bioferon's bankruptcy and a further determination that Biogen was
required to supply ASTA with recombinant beta interferon. On March 13,
1998, the ICC arbitration panel ruled that, as between Biogen and ASTA,
the 1989 Agreement was not terminated as a result of the bankruptcy of
Bioferon, but that Biogen was not required to perform Bioferon's
obligations under the 1989 Agreement and, as a result, had no obligation
to supply recombinant beta interferon to ASTA. Under the 1989 Agreement,
ASTA was granted an exclusive license for a number of European countries
to certain intellectual property relating to recombinant beta interferon,
including Biogen's European Fiers patent which has since been revoked by
the European Patent Office. In light of the panel's decision, Biogen
has notified ASTA that it was terminating the 1989 Agreement based on
ASTA's conduct and failure to perform. On March 19, 1998, ASTA notified
Biogen that it deemed Biogen's termination of the 1989 Agreement to be
invalid. On or about May 14, 1998, ASTA filed a complaint against Biogen in
the United States District Court for the District of Massachusetts seeking
enforcement of the arbitration decision, injunctive relief, damages, relief
pursuant to the Massachusetts Consumer Protection Act (Mass. Gen L. ch. 93A)
and other
Page 9
relief arising out of additional tort and contract claims. ASTA alleges
that Biogen's termination of the 1989 Agreement based on ASTA's conduct is
invalid and that ASTA is Biogen's exclusive licensee of recombinant beta
interferon in the territories specified in the 1989 Agreement. To date,
ASTA has not served Biogen with the complaint in this case. If served,
Biogen intends to vigorously defend the lawsuit.
On May 6, 1998, a jury found in favor of the Company and rejected all of
the plaintiff's claims in a class action lawsuit initiated against the
Company in 1994 in the United States District Court for the District of
Massachusetts. The plaintiffs' claims in the lawsuit related to the
Company's 1994 public comments regarding HIRULOG(R) (bivalirudin) direct
thrombin inhibitor.
On or about July 17, 1998, Biogen received a letter demanding relief
pursuant to the Massachusetts Consumer Protection Act (Mass. Gen. L. ch.
93A) on behalf of an alleged class of persons who have filled
prescriptions at pharmacies owned and/or operated by CVS Pharmacy, Inc.
The demand purports to be made in connection with litigation filed against
CVS and others in the Massachusetts Superior Court styled Weld v. CVS
Pharmacy, Inc., et al. Civil Action No. 98-0897-F. Biogen understands that
the Weld plaintiffs filed an amended complaint on or about July 15, 1998,
naming Biogen (and other major pharmaceutical manufacturers) as additional
defendants. Plaintiffs have yet to serve this amended complaint on Biogen.
In pertinent part, the demand seeks unspecified monetary and equitable
relief from Biogen on account of Biogen's alleged participation in a
direct mailing program to CVS customers. Plaintiffs claim that this
alleged program violates these customers' statutory and common law rights
to privacy as well as Chapter 93A. Biogen disputes the claims raised in
the demand letter, and intends to vigorously oppose any subsequent legal
action that may be taken in connection with the demand letter. If served,
Biogen also intends to vigorously oppose the claims asserted in the Weld
action.
5. Income tax expense as a percent of pre-tax income for the quarters ended
June 30, 1998 and 1997 was 33.5% and 40.3%, respectively. The effective
tax rate varied from U.S. statutory rates in the current quarter primarily
due to an increase in European sales and to the utilization of research
and development credits. The effective tax rate varied from U.S. statutory
rates in the comparable period of 1997 primarily due to the benefit of
research and development and investment tax credits partially offset by
foreign losses for which the Company received no tax benefit.
Page 10
BIOGEN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Biogen, Inc. (the ACompany@ or ABiogen@) is a biopharmaceutical company
principally engaged in the business of developing, manufacturing and marketing
drugs for human health care. The Company currently derives revenues from sales
of AVONEX(R) (Interferon beta-1a) for the treatment of relapsing forms of
multiple sclerosis ("MS")and from royalties on worldwide sales by the Company=s
licensees of a number of products covered under patents controlled by the
Company, including alpha interferon and hepatitis B vaccines and diagnostic
products.
Results of Operations
For the quarter ended June 30, 1998, the Company reported net income of $31.4
million or $0.41 per diluted share as compared to $19.9 million or $0.26 per
diluted share for the comparable period of 1997. For the six months ended June
30, 1998, the Company recorded net income of $59.2 million or $0.77 per diluted
share as compared to $37 million or $0.48 per diluted share for the comparable
period of 1997.
Total revenues for the current quarter were $135.8 million, as compared to $97.7
million in the quarter ended June 30, 1997, an increase of $38.1 million or 39%.
The increase in total revenues was primarily due to increased sales of the
Company=s product AVONEX(R). Product sales for the current quarter were $87.1
million compared to $56.4 million for the comparable period in 1997, an increase
of $30.7 million or 54.4%. The growth in 1998 was due to an increase in the
sales volume of AVONEX(R)in the United States as well as expansion into several
new countries in the European Union ("EU"). In March 1997, the Company received
regulatory approval to market AVONEX(R) in the fifteen member countries of the
EU. By the end of 1997, AVONEX(R) had received reimbursement approval and was on
the market in all of the EU countries. In addition, in April 1998, the Company
received approval to market AVONEX(R) in Canada. AVONEX(R) sales outside of the
United States were approximately $19 million in the current quarter as compared
to approximately $3 million in the comparable period of 1997. Revenues from
royalties for the current quarter were $41.7 million as compared to $36 million
for the comparable period of 1997, an increase of $5.7 million or 15.8%,
primarily as a result of an increase in alpha interferon sales by
Schering-Plough Corporation ("Schering-Plough")as well as an increase in
royalties on sales of Hepatitis B vaccines sold by SmithKline and Merck. In May
1998, the Company and Schering Corporation, a subsidiary of Schering-Plough,
amended the terms of the license agreement under which Schering-Plough pays the
Company royalties on worldwide sales of Schering-Plough's alpha interferon
product, Intron(R) A. Under the terms of the amendment, Schering-Plough acquired
Biogen's patent application and agreed to pay certain sums on U.S. sales of
Intron(R) A from July 2002 until expiration of the alpha interferon patent
expected to be issued to F.Hoffman-LaRoche, Inc. and Genentech Inc., which was
the subject of a lawsuit filed by the Company. The lawsuit has been settled.
Total revenues for the six months ended June 30, 1998 were $257.2 million as
compared to $197.4 million in the comparable period of 1997, an increase of
$59.8 million or 30.3%, primarily due to increased sales of
Page 11
AVONEX(R). Revenues from product sales for the six-month period ended June 30,
1998 increased $54.1 million or 49.6% to $163.2 million, or 63.5% of total
revenues, compared to $109.1 million, or 55.3% of total revenues, in the
comparable period of 1997. Royalties during the six months ended June 30, 1998
increased $1.9 million, or 2.4% from the comparable period of 1997 to $80.1
million.
The Company expects product sales as a percentage of total revenues to continue
to increase in the near term as the Company continues to market AVONEX(R)
worldwide, and expects sales from AVONEX(R) in Europe to continue to increase as
a percentage of total product sales. The Company, however, expects to face
increasing competition in the MS marketplace from existing and new MS
treatments. In the near term, the Company expects overall sales of licensee
products and royalty revenues to fluctuate depending on changes in sales volumes
for specific products, patent expirations, new licensing arrangements, if any,
or other developments. Licensee sales levels may also fluctuate from quarter to
quarter due to the timing and extent of major events such as new indication
approvals or government sponsored vaccination programs.
Interest income for the current quarter was $7.0 million, an increase of $1.8
million or 34.6% as compared to $5.2 million in the comparable period of 1997.
For the six months ended June 30, 1998, interest income was $13.9 million
compared to $10.1 million in the comparable period of 1997, an increase of $3.8
million or 37.6%. The increase in interest income is primarily a result of
increased funds invested.
Total expenses for the current quarter were $88.5 million as compared to $64.2
million in the quarter ended June 30, 1997, an increase of $24.3 million or
37.9%. Cost of sales in the current quarter totaled $17.2 million, an increase
of $5.8 million from the quarter ended June 30, 1997. Cost of sales in the
current quarter includes product costs relating to sales of AVONEX(R) of $13.9
million compared to $8.8 million in the quarter ended June 30, 1997. Gross
margins for product sales remained flat at approximately 84% for both the
current quarter and the comparable period of 1997. Cost of sales relating to
royalty revenue for the current quarter was $3.3 million as compared to $2.6
million in the comparable period of 1997. Gross margins on royalty revenue
declined slightly to 92.1% for the current quarter as compared to 92.8% for the
comparable period of 1997. The Company expects that gross margins on royalty
revenue will fluctuate in the future based on the impact of one-time royalty and
milestone payments.
Research and development expenses for the current quarter were $42.1 million, an
increase of $10.1 million or 31.6% as compared to the quarter ended June 30,
1997. This increase was primarily due to an increase in clinical trial costs and
an increase in the Company=s development efforts related to other research and
development programs in its pipeline. The Company expects that, in the
long-term, research and development expenses will increase as the Company
continues to expand its development efforts with respect to new products and as
it conducts clinical trials of these products. Selling, general and
administrative expenses for the current quarter were $28.5 million, an increase
of $7.5 million or 35.7% as compared to the quarter ended June 30, 1997. This
increase was primarily due to higher selling and marketing expenses related to
sales of AVONEX(R), principally in support of the ongoing European launch and
higher legal costs. The Company expects that selling, general and administrative
expenses will increase in the near and long-term as the
Page 12
Company continues to put in place the commercial infrastructure and sales and
marketing organizations necessary to sell AVONEX(R) worldwide.
Total expenses for the six-month period ended June 30, 1998 were $166.6 million
as compared to $135.4 million in the comparable period of 1997, an increase of
$31.2 million or 23%. Cost of sales for the six months ended June 30, 1998 were
$32 million as compared to $23.2 million in the comparable period of 1997, an
increase of $8.8 million or 37.9%. Cost of sales for the six months ended June
30, 1998 and 1997 included $26 million and $16.6 million, respectively, of
product costs related to the sales of AVONEX(R). Gross margins for product sales
decreased slightly to 84.1% for the six months ended June 30, 1998 as compared
to 84.8% for the comparable period of 1997. Cost of sales relating to royalty
revenue decreased $0.6 million to $6 million for the six months ended June 30,
1998 as compared to $6.6 million for the comparable period of 1997. Gross
margins on royalty revenue increased slightly to 92.5% for the six months ended
June 30, 1998 as compared to 91.6% for the comparable period of 1997.
Research and development expenses for the current six-month period were $79.3
million as compared to $69.9 million in the comparable period of 1997. Included
in research and development expenses for the six months ended June 30, 1997 was
a one-time license fee of $5 million to CV Therapeutics, Inc. Excluding the
one-time license fee, research and development expenses for the six months ended
June 30, 1998, increased $14.4 million or 22.2% from the comparable period of
1997. This increase was primarily due to an increase in clinical trial costs and
an increase in the Company's development efforts related to other research and
development programs in its pipeline. Selling, general and administrative
expenses for the six-month period ended June 30, 1998 were $54.5 million as
compared to $42.1 million in the comparable period of 1997, an increase of $12.4
million or 29.5%. This increase was primarily due to the higher selling and
marketing expenses related to sales of AVONEX(R), primarily in Europe, and
higher legal fees.
Income tax expense as a percent of pre-tax income for the quarters ended June
30, 1998 and 1997 was 33.5% and 40.3%, respectively. The effective tax rate
varied from U.S. statutory rates in the current quarter primarily due to an
increase in European sales and to the utilization of research and development
credits. The effective tax rate in the comparable period of 1997 varied from
U.S. statutory rates primarily due to the benefit of research and development
and investment tax credits offset by foreign losses for which the Company
received no tax benefit. The Company=s effective tax rate for the six months
ended June 30, 1998 was 34.7%, and is expected to continue at or near this level
for the remainder of 1998.
Financial Condition
At June 30, 1998, cash, cash equivalents and short term marketable securities
were $460.6 million compared with $440.1 million at December 31, 1997, an
increase of $20.5 million. Working capital increased $34.6 million to $506.7
million from December 31, 1997 to June 30, 1998. Net cash provided from
operating activities for the six-month period ended June 30, 1998 was $68.5
million, compared with $18.2 million in the comparable period of 1997. Cash
outflows for the six months ended June 30, 1998, included investments in
property and equipment and patents of $16.1 million and $5 million related to
research collaboration agreements. Cash outflows from financing activities
included note payable and loan repayments of $12.7 million and repurchases of
the Company's common stock
Page 13
at a total cost of $28.8 million. Cash inflows from financing activities
included $13.8 million from common stock option and purchase plan activity,
including tax benefits related to stock options.
Several legal proceedings were pending during the current quarter which involve
the Company. See Note 4 of the Notes to the Condensed Consolidated Financial
Statements and Part II Item 1 - Legal Proceedings. See also Item 1 - Business,
APatents and Other Proprietary Rights@ of the Company=s Annual Report on Form
10-K for the fiscal year ended December 31, 1997 for discussions of these legal
proceedings.
The Company believes that existing funds and cash generated from operations
are adequate to satisfy its working capital and capital expenditure
requirements in the foreseeable future. However, the Company may seek to raise
additional capital to take advantage of favorable conditions in the market or
in connection with the Company's development activities.
Page 14
Outlook
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from those reflected in such
forward-looking statements. Reference is made in particular to forward-looking
statements regarding the anticipated level of future royalty revenues, product
sales, expenses and profits and predictions as to the anticipated outcome of
pending litigation. These and all other forward-looking statements are made
based on the Company=s current belief as to the outcome and timing of such
future events. Factors which could cause actual results to differ from the
Company=s expectations and which could negatively impact the Company=s results
of operations are discussed below and elsewhere in this Management=s Discussion
and Analysis of Financial Condition and Results of Operations.
Dependence on AVONEX(R) Sales and Royalty Revenue
The Company's ability to sustain increases in revenues and profitability will be
primarily dependent on the level of revenues and profitability from AVONEX(R)
sales. The Company's ability to sustain profitability from sales of AVONEX(R)
will depend on a number of factors, including: continued market acceptance of
AVONEX(R) worldwide; the Company's ability to maintain a high level of patient
satisfaction with AVONEX(R); the nature of regulatory and pricing decisions
related to AVONEX(R) worldwide and the extent to which AVONEX(R) receives
reimbursement coverage; market acceptance of AVONEX(R) outside the United
States; successful resolution of the lawsuit with Berlex related to the
"McCormick" patent, which if decided in Berlex's favor could have a material
adverse effect on the Company's financial position and results of operations;
the Company's ability to sustain market share of AVONEX(R) in light of the
introduction of competitive products for the treatment of multiple sclerosis;
the success of ongoing development work related to AVONEX(R) in expanded
multiple sclerosis indications and the continued accessibility of third parties
to vial, label, and distribute AVONEX(R) on acceptable terms. The Company also
receives royalty revenues which contribute significantly to its overall
profitability. The Company's ability to maintain the level of its royalty
revenues will depend on a number of factors, including: sustaining the scope and
validity of existing patents; the efforts of licensees in the clinical testing
and marketing of products from which the Company derives revenue; and the timing
and extent of royalties from additional licensing opportunities. In addition,
licensee sales levels may fluctuate from quarter to quarter due to the timing
and extent of major events such as new indication approvals or government
sponsored vaccination programs. There can be no assurance that the Company will
achieve a positive outcome with respect to any of the factors discussed in this
Section or that the timing and extent of the Company's success with respect to
any combination of these factors will be sufficient to result in sustained
increases in revenues or profitability or the sustained profitability of the
Company. For a further discussion of risks regarding drug development, patent
matters, including the Berlex lawsuit on the "McCormick" patent, competition in
the multiple sclerosis market and regulatory matters, see the Company's Annual
Report on Form 10-K for the period ended December 31, 1997 under the headings
"Business - Risks Associated with Drug
Page 15
Development", "Business - Patents and Other Proprietary Rights", "Business -
Competition and Marketing -AVONEX(R)(interferon beta-1a)", "Business -
Regulation", "Legal Proceedings" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Outlook."
New Products
AVONEX(R) is currently the only product sold by the Company. The Company=s
long-term viability and growth will depend on the successful development and
commercialization of other products from its research activities and
collaborations. The Company has begun to expand its development efforts related
to other potential products in its pipeline. The expansion of the pipeline may
include increases in spending on internal projects, the acquisition of third
party technologies or products or other types of investments. Product
development involves a high degree of risk. Many important factors affect the
Company=s ability to successfully develop and commercialize drugs, including the
ability to obtain and maintain necessary patents and licenses, to demonstrate
safety and efficacy of drug candidates at each stage of the clinical trial
process, to meet applicable regulatory standards and to receive required
regulatory approvals, to be capable of producing drug candidates in commercial
quantities at reasonable costs, to compete successfully against other products
and to market products successfully. There can be no assurance that the Company
will be successful in its efforts to develop and commercialize new products.
Page 16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On May 6, 1998, a jury found in favor of the Company and rejected all of the
plaintiff's claims in a class action lawsuit initiated against the Company in
1994 in the United States District Court for the District of Massachusetts. The
plaintiffs' claims in the lawsuit related to the Company's 1994 public comments
regarding HIRULOG(R) (bivalirudin) direct thrombin inhibitor.
On or about July 17, 1998, Biogen received a letter demanding relief pursuant to
the Massachusetts Consumer Protection Act (Mass. Gen. L. ch. 93A) on behalf of
an alleged class of persons who have filled prescriptions at pharmacies owned
and/or operated by CVS Pharmacy, Inc. The demand purports to be made in
connection with litigation filed against CVS and others in the Massachusetts
Superior Court styled Weld v. CVS Pharmacy, Inc., et al. Civil Action No.
98-0897-F. Biogen understands that the Weld plaintiffs filed an amended
complaint on or about July 15, 1998, naming Biogen (and other major
pharmaceutical manufacturers) as additional defendants. Plaintiffs have yet to
serve this amended complaint on Biogen. In pertinent part, the demand seeks
unspecified monetary and equitable relief from Biogen on account of Biogen's
alleged participation in a direct mailing program to CVS customers. Plaintiffs
claim that this alleged program violates these customers' statutory and common
law rights to privacy as well as Chapter 93A. Biogen disputes the claims raised
in the demand letter, and intends to vigorously oppose any subsequent legal
action that may be taken in connection with the demand letter. If served, Biogen
also intends to vigorously oppose the claims asserted in the Weld action.
In June 1996, ASTA Medica Aktiengesellschaft ("ASTA") filed for arbitration
against Biogen with the International Chamber of Commerce ("ICC") in connection
with a dispute with Biogen regarding a License, Development and Supply
Agreement, dated May 30, 1989 (the "1989 Agreement"), among Biogen, ASTA and
Bioferon Biochemische Substanzen GmbH & Co ("Bioferon"). Bioferon was a joint
venture between Biogen and Rentschler Arzneimittel GmbH & Co. of Laupheim,
Germany, which entered bankruptcy in 1993. In the proceeding, ASTA had asked for
a determination that Biogen could not terminate the 1989 Agreement as to ASTA
solely as a result of Bioferon's bankruptcy and a further determination that
Biogen was required to supply ASTA with recombinant beta interferon. On March
13, 1998, the ICC arbitration panel ruled that, as between Biogen and ASTA, the
1989 Agreement was not terminated as a result of the bankruptcy of Bioferon, but
that Biogen was not required to perform Bioferon's obligations under the 1989
Agreement and, as a result, had no obligation to supply recombinant beta
interferon to ASTA. Under the 1989 Agreement, ASTA was granted an exclusive
license for a number of European countries to certain intellectual property
relating to recombinant beta interferon, including Biogen's European Fiers
patent which has since been revoked by the European Patent Office. In light of
the panel's decision, Biogen notified ASTA that it was terminating the 1989
Agreement based on ASTA's conduct and failure to perform. On March 19, 1998,
ASTA notified Biogen that it deemed Biogen's termination of the 1989 Agreement
to be invalid. On or about May 14, 1998, ASTA filed a complaint against Biogen
in the United States District Court for the District of Massachusetts seeking
enforcement of the arbitration decision,
Page 17
injunctive relief, damages, relief pursuant to the Massachusetts Consumer
Protection Act (Mass. Gen L. ch. 93A) and other relief arising out of additional
tort and contract claims. ASTA alleges that Biogen's termination of the 1989
Agreement based on ASTA's conduct is invalid and that ASTA is Biogen's exclusive
licensee of recombinant beta interferon in the territories specified in the 1989
Agreement. To date, ASTA has not served Biogen with the complaint in this case.
If served, Biogen intends to vigorously defend the lawsuit.
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The information set forth in this Item 4 relates to matters
submitted to a vote at the Annual Meeting of stockholders of
Biogen, Inc. on June 19, 1998.
(b) Not applicable.
(c) A proposal to elect Alan Belzer, Dr. Mary L. Good, Dr. Kenneth
Murray and James W. Stevens to serve for three year terms
ending in 2001 and until their successors are duly elected and
qualified was approved with the following vote:
Nominee For Authority Withheld
------------------ --------------- ---------------------
Alan Belzer 55,661,193 222,728
Mary L. Good 55,655,853 228,068
Kenneth Murray 55,743,926 139,995
James W. Stevens 55,681,831 202,090
A proposal to ratify the selection of Price Waterhouse LLP
as the Company's independent accountants for the fiscal
year ending December 31, 1998 was approved with
55,760,281 affirmative votes, 39,934 negative votes, 83,706
abstentions and 0 broker non-votes.
(d) Not applicable.
Item 5 - Other Information
To be considered for inclusion in the proxy statement relating to the Annual
Meeting of stockholders to be held in 1999, stockholder proposals must be
received no later than January 8, 1999. To be considered for presentation at the
Annual Meeting, although not included in the proxy statement, proposals must be
received no later than 60 days, but not more than 90 days, prior to the Annual
Meeting. All stockholder proposals should be marked for the attention of the
Vice President-General Counsel, Biogen, Inc., 14 Cambridge Center, Cambridge, MA
02142.
Page 18
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
No. 27Financial Data Schedule (for EDGAR filing purposes only).
(b) On April 8, 1998, the Company filed a report on Form 8-K
disclosing the issuance of 3,350 shares of its Common Stock
under Regulation S of the Securities Act of 1933.
On May 7, 1998, the Company filed a report on Form 8-K to
disclose a decision by the U.S. Federal District Court for the
District of Massachusetts in connection with a class action
suit relating to the Company's 1994 public comments about
HIRULOG(R) (bivalirudin) direct thrombin inhibitor. The jury
rejected all claims made by the plaintiffs against the
Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOGEN, INC.
Dated: August 13, 1998 /s/Timothy M. Kish
----------------------------------
Timothy M. Kish
Vice President-Finance and
Chief Financial Officer
Page 19
PART II - OTHER INFORMATION
EXHIBITS
Index to Exhibit.
No. 10.1.1 Agreement and Amendment between the Company and Schering
Corporation dated May 1, 1998.*
No. 10.1.2 1985 Non-Qualified Stock Option Plan, as amended through
June 20, 1998 and restated.
No. 10.1.3 1982 Incentive Stock Option Plan, as amended through
June 20, 1998 and restated.
No. 27 Financial Data Schedule (for EDGAR filing purposes only).
*Confidential treatment requested as to certain portions, which
portions are omitted and filed separately with the Securities and
Exchange Commission.