SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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
incorporation or organization) Identification No.)
14 CAMBRIDGE CENTER, CAMBRIDGE, MA 02142
(617) 679-2000
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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 [ ]
The number of shares of the registrant's Common Stock, $0.01 par value,
outstanding as of October 26, 2001 was 147,902,305 shares.
BIOGEN, INC.
INDEX
PAGE NUMBER
PART I - FINANCIAL INFORMATION
Condensed Consolidated Statements of Income - Three and nine
months ended September 30, 2001 and 2000 3
Condensed Consolidated Balance Sheets - September 30, 2001 and
December 31, 2000 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II - OTHER INFORMATION 18
Note concerning trademarks: AVONEX(R) is a registered trademark of Biogen, Inc.
2
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUES:
Product $ 249,203 $ 193,242 $ 712,417 $ 557,847
Royalties 15,990 40,512 50,485 123,269
--------- --------- --------- ---------
Total revenues 265,193 233,754 762,902 681,116
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of revenues 36,458 33,027 100,806 92,445
Research and development 78,895 94,498 230,783 229,205
Selling, general and administrative 60,253 41,745 164,079 123,849
--------- --------- --------- ---------
Total costs and expenses 175,606 169,270 495,668 445,499
--------- --------- --------- ---------
Income from operations 89,587 64,484 267,234 235,617
Other income, net 10,147 33,204 38,143 148,965
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 99,734 97,688 305,377 384,582
Income taxes 29,911 29,307 91,579 122,775
--------- --------- --------- ---------
NET INCOME $ 69,823 $ 68,381 $ 213,798 $ 261,807
========= ========= ========= =========
BASIC EARNINGS PER SHARE $ 0.47 $ 0.46 $ 1.44 $ 1.76
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.46 $ 0.44 $ 1.40 $ 1.69
========= ========= ========= =========
SHARES USED IN COMPUTING:
Basic earnings per share 148,412 148,074 148,401 149,026
========= ========= ========= =========
Diluted earnings per share 152,636 153,702 153,155 155,188
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
3
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 59,611 $ 48,737
Marketable securities 730,118 633,675
Accounts receivable, net 158,998 143,178
Deferred tax assets 49,536 40,047
Other current assets 61,280 62,634
------------ -----------
Total current assets 1,059,543 928,271
------------ -----------
Property, plant and equipment
Cost 668,747 537,072
Less accumulated depreciation 163,472 136,643
------------ -----------
Property, plant and equipment, net 505,275 400,429
------------ -----------
Patents, net 15,707 13,510
Marketable securities 31,729 71,982
Other assets 32,330 17,664
------------ -----------
$ 1,644,584 $ 1,431,856
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 46,482 $ 37,869
Current portion of long-term debt 4,888 4,888
Accrued expenses and other 203,580 178,264
------------ -----------
Total current liabilities 254,950 221,021
------------ -----------
Long-term debt, less current portion 43,936 47,185
Other long-term liabilities 53,230 57,248
Commitments and contingencies - -
Shareholders' equity
Common stock 1,517 1,517
Additional paid-in capital 800,500 772,172
Retained earnings 667,965 543,913
Accumulated other comprehensive income 4,603 22,376
Treasury stock, at cost (182,117) (233,576)
------------ -----------
Total shareholders' equity 1,292,468 1,106,402
------------ -----------
$ 1,644,584 $ 1,431,856
============ ===========
See Notes to Condensed Consolidated Financial Statements.
4
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
September 30,
2001 2000
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 213,798 $ 261,807
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation and amortization 28,113 21,884
Tax benefit of stock options 27,396 78,732
Other 954 2,897
Gain on sale of non-current marketable securities (4,321) (101,129)
Changes in:
Accounts receivable (15,819) (8,327)
Other current and other assets (18,066) (32,024)
Accounts payable, accrued expenses and
other current and long-term liabilities 27,249 45,999
--------- ---------
Net cash from operating activities 259,304 269,839
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (758,033) (530,518)
Proceeds from sales and maturities of marketable securities 681,479 505,894
Proceeds from sales of non-current marketable securities 4,816 120,199
Acquisitions of property and equipment (131,675) (132,655)
Additions to patents (3,481) (3,316)
--------- ---------
Net cash from investing activities (206,894) (40,396)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt (3,249) (3,249)
Purchases of treasury stock (63,131) (280,406)
Issuance of common and treasury stock
related to stock option exercises 24,844 33,141
--------- ---------
Net cash from financing activities (41,536) (250,514)
--------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
10,874 (21,071)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 48,737 56,920
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 59,611 $ 35,849
========= =========
See Notes to Condensed Consolidated Financial Statements.
5
BIOGEN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
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 the
Consolidated Financial Statements in the Company's 2000 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 three
and nine months ended September 30, 2000 have been reclassified to conform to
the current period presentation.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined under
the first-in/first-out ("FIFO") method and are included in other current assets.
Included in inventory are raw materials used in the production of pre-clinical
and clinical products which are expensed as research and development costs when
consumed. The components of inventories are as follows:
September 30, December 31,
(in thousands) 2001 2000
------------- ------------
Raw materials $ 12,839 $ 7,775
Work in process 15,743 17,582
Finished goods 12,260 14,172
-------- --------
$ 40,842 $ 39,529
======== ========
2. FINANCIAL INSTRUMENTS
On June 15, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities", ("SFAS 133"). The Company elected to adopt SFAS 133 in
the fourth quarter of 1998. All derivatives are recognized 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 assesses, both at its inception and on an
on-going basis, whether the derivatives that are used in hedging transactions
are highly effective in offsetting the changes in cash flows of hedged items.
The Company assesses hedge ineffectiveness on a quarterly basis and records the
gain or loss related to the ineffective portion to current earnings to the
extent significant. If the Company determines that a hedged forecasted
transaction is no longer probable of occurring, the Company discontinues hedge
accounting for the affected portion of the transaction, and any unrealized gain
or loss on the contract is recognized in current earnings.
As of September 30, 2001, the Company had $15.0 million outstanding under a
floating rate loan secured by one of the Company's laboratory and office
buildings in Cambridge, Massachusetts and $33.8 million outstanding under a
floating rate loan agreement for financing the construction of its biological
manufacturing facility in North Carolina. The Company uses interest rate swap
agreements to mitigate the risk associated with its floating rate debt. The fair
value of the interest rate swap agreements, representing the cash requirements
of the Company to settle the agreements, was approximately $4.4 million at
6
September 30, 2001 and $291,000 at September 30, 2000 and was included in
accrued expenses and other. The Company has designated the interest rate swaps
as cash flow hedges. There were no amounts of hedge ineffectiveness related to
the Company's interest rate swaps during the three and nine months ended
September 30, 2001 or in the comparable period of 2000, and no gains or losses
were excluded from the assessment of hedge effectiveness. The Company records
the differential to be paid or received on the interest rate swaps as
incremental interest expense.
The Company has foreign currency forward contracts to hedge specific forecasted
transactions denominated in foreign currencies. All foreign currency forward
contracts have durations of ninety days to nine months. These contracts have
been designated as cash flow hedges and accordingly, to the extent effective,
any unrealized gains or losses on these foreign currency forward contracts are
reported in other comprehensive income. Realized gains and losses for the
effective portion are recognized with the underlying hedge transaction. The
notional settlement amount of the foreign currency forward contracts outstanding
at September 30, 2001 was approximately $77.5 million. These contracts had a
fair value of approximately $65,500, representing an unrealized loss, and were
included in accrued expenses and other at September 30, 2001.
For the three and nine months ended September 30, 2001 and 2000, there were no
significant amounts recognized in earnings due to hedge ineffectiveness. For the
three and nine months ended September 30, 2001, there were no significant
amounts recognized as a result of the discontinuance of cash flow hedge
accounting because it was no longer probable that the hedge forecasted
transaction would occur. For the three and nine months ended September 30, 2000,
approximately $585,620 and $977,224, respectively, in gains were recognized as a
result of the discontinuance of cash flow hedge accounting because it was no
longer probable that the hedge forecasted transaction would occur. The Company
recognized $426,000 of losses and $6.3 million of gains in product revenue for
the settlement of certain effective cash flow hedge instruments for the three
and nine months ended September 30, 2001, respectively. The Company recognized
$29,000 of losses and $1.8 million of gains in royalty revenue for the
settlement of certain effective cash flow hedge instruments for the three and
nine months ended September 30, 2001, respectively. The Company recognized $4.1
million and $8.8 million of gains in product revenue for the settlement of
certain effective cash flow hedge instruments for the three and nine months
ended September 30, 2000, respectively. The Company recognized $1.3 million and
$2.4 million of gains in royalty revenue for the settlement of certain effective
cash flow hedge instruments for the three and nine months ended September 30,
2000, respectively. These settlements were recorded in the same period as the
related forecasted transactions affecting earnings.
3. COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive income.
Other comprehensive income includes certain changes in equity that are excluded
from net income, such as translation adjustments and unrealized holding gains
and losses on available-for-sale marketable securities, net of tax and
unrealized gains and losses on certain derivative instruments, net of tax.
Comprehensive income for the three months ended September 30, 2001 and 2000 was
$60.7 million and $73.2 million, respectively. Comprehensive income for the nine
months ended September 30, 2001 and 2000 was $196 million and $250.6 million,
respectively.
4. EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share". Basic earnings per
share is computed by dividing the net income available to common shareholders by
the weighted average number of shares of common stock outstanding. For purposes
of calculating diluted earnings per share the denominator includes both the
weighted average number of shares of common stock outstanding and the number of
dilutive common stock equivalents such as stock options and warrants. Options to
purchase approximately 3.6 million and 1.8 million shares were outstanding at
September 30, 2001 and 2000, respectively, but not included in the computation
of diluted earnings per share because the options' exercise prices were greater
than the average market price during the period. The put warrants sold in
connection with the Company's stock repurchase program did not have
7
a material additional dilutive effect. Shares used in calculating basic and
diluted earnings per share for the three and nine month periods ending September
30, are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(in thousands) 2001 2000 2001 2000
------- ------- ------- -------
Weighted average number of shares
of common stock outstanding 148,412 148,074 148,401 149,026
Dilutive stock options 4,224 5,628 4,754 6,162
------- ------- ------- -------
Shares used in calculating diluted
earnings per share 152,636 153,702 153,155 155,188
======= ======= ======= =======
5. SHARE REPURCHASE PROGRAM
On December 18, 2000, the Company announced that its Board of Directors had
authorized the repurchase of up to 4 million shares of the Company's common
stock. The repurchased stock will provide the Company with treasury shares for
general corporate purposes, such as stock to be issued under employee stock
option and stock purchase plans. Stock purchases are expected to occur from time
to time throughout 2001. To enhance the 2000 stock repurchase program, the
Company entered into agreements with independent third parties under which the
Company committed to purchase up to 1,500,000 shares of the Company's stock
subject to the terms of the agreements at strike prices ranging from $57.82 to
$63.06. The agreement permits a net share settlement at the Company's option.
The Company purchased 1,050,000 shares through September 30, 2001 at a cost of
$63.1 million. The stock repurchase program may be discontinued at any time. In
November of 2000, the Company completed a previous stock repurchase program.
During 2000, the Company repurchased approximately 4.6 million shares of its
common stock under this program at a cost of $300.2 million.
6. OTHER INCOME, NET
Other income, net consists of the following (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- ---------
Interest income $ 10,787 $ 11,067 $ 33,266 $ 32,174
Interest expense (936) (1,100) (3,025) (3,285)
Other income 296 23,237 7,902 120,076
-------- -------- -------- ---------
Total other income, net 10,147 $ 33,204 $ 38,143 $ 148,965
======== ======== ======== =========
Other income for the three and nine months ended September 30, 2001 includes
gains on the sale of certain non-current marketable securities totaling
approximately $1 million and $4.3 million, respectively. Other income for the
three months ended September 30, 2000 includes realized gains of approximately
$24.1 million upon the acquisition by third parties of two of the companies in
which the Company had invested in separate business combinations. Other income
for the nine months ended September 30, 2000 includes gains on the sale of
certain non-current marketable securities totaling approximately $125.3 million.
7. INCOME TAX EXPENSE
Income tax expense as a percentage of pre-tax income for the three months ended
September 30, 2001 and 2000 was approximately 30%. Income tax expense as a
percentage of pre-tax income for the nine months ended September 30, 2001 and
2000 was approximately 30% and 32%, respectively. The effective tax rate varied
from the U.S. statutory rates for the first nine months of 2001 and 2000
primarily due to higher sales in European jurisdictions with lower tax rates and
to the utilization of research and development credits.
8
The Company's effective tax rate outside the U.S. is lower than the U.S. tax
rate, and the Company expects that the U.S. tax rate will decline as a
percentage of its total tax rate as international sales increase.
8. LITIGATION
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 (U.S. Patent No.
5,376,567) in the United States in the production of Biogen's AVONEX(R)
(Interferon beta-1a) product. In November 1996, Berlex's New Jersey action was
transferred to the United States District Court in Massachusetts and
consolidated for pre-trial purposes with a related declaratory judgment action
previously filed by Biogen. On August 18, 1998, Berlex filed a second suit
against Biogen alleging infringement by Biogen of a patent which was issued to
Berlex in August 1998 and which is related to the McCormick patent (U.S. Patent
No. 5,795,779). On September 23, 1998, the cases were consolidated for pre-trial
and trial purposes. Berlex sought a judgment granting it damages, trebling of
any damages awarded and a permanent injunction restraining Biogen from the
alleged infringement. A hearing on the parties' summary judgment motions in the
case was completed in March 2000. In September 2000, the District Court rendered
final judgment in favor of Biogen and against Berlex determining that Biogen's
production of AVONEX(R) did not infringe any of the claims of the Berlex
patents. Berlex has appealed this decision to the Court of Appeals for the
Federal Circuit and the oral argument on the appeal was held on November 7,
2001. Biogen filed a contingent cross-appeal asserting that the Berlex patents
are invalid because they fail to meet one of the statutory requirements of
patentability. An unfavorable ruling on the appeal filed by Berlex could result
in the case being remanded to the District Court for trial. If Berlex were to be
successful in its appeal and the case were to be remanded, an unfavorable ruling
in the remanded case could have a material adverse effect on the Company's
results of operations and financial position. The Company believes that the
decision of the District Court that Biogen does not infringe the Berlex patents
is sound, but the ultimate outcome of the appeal is not currently determinable.
As a result, an estimate of any potential loss or range of loss cannot be made
at this time.
In 1995, the Company filed an opposition with the Opposition Division of the
European Patent Office to oppose a European patent (the "Rentschler I Patent")
issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler") relating to
compositions of matter of beta interferon. In 1997, the European Patent Office
issued a decision to revoke the Rentschler I Patent. Rentschler appealed that
decision and an oral hearing on the appeal took place in December 2000. At the
oral hearing in order to gain reinstatement of the patent, Rentschler narrowed
the patent claims so as to claim only a specific cell line. Biogen does not use
the specific cell line now claimed. On October 13, 1998, the Company filed
another opposition with the Opposition Division of the European Patent Office to
oppose a second European patent issued to Rentschler (the "Rentschler II
Patent") with certain claims regarding compositions of matter of beta interferon
with specific regard to the structure of the glycosylated molecule. A hearing on
the Company's opposition has not yet been scheduled by the European Patent
Office. While Biogen believes that the Rentschler II Patent will be revoked, if
the Rentschler II Patent were to be upheld and if Rentschler were to obtain,
through legal proceedings, a determination that the Company's sale of AVONEX(R)
in the European countries giving effect to the patent infringes a valid claim of
the patent, such result could have a material adverse effect on the Company's
results of operation and financial position.
9. SEGMENT INFORMATION
The chief operating decision makers review the profit and loss of the Company on
an aggregate basis and manage the operations of the Company as a single
operating segment. Accordingly, the Company operates in one segment, which is
the business of developing, manufacturing and marketing drugs for human health
care. The Company currently derives product revenues from sales of its AVONEX(R)
(Interferon beta-1a) product for the treatment of relapsing forms of multiple
sclerosis. The Company also derives revenue from royalties on sales by the
Company's licensees of a number of products covered under patents controlled by
the Company.
9
10. NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
will be effective for fiscal years beginning after December 15, 2001, and will
thus be adopted by the Company, as required, in fiscal year 2002. The impact of
SFAS No. 141 and SFAS No. 142 on the Company's financial statements is not
expected to be material.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The impact of SFAS No. 144 on the Company's financial
statements is not expected to be material.
10
BIOGEN, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Biogen, Inc. (the "Company" or "Biogen") 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 its AVONEX(R) (Interferon beta-1a) product for the treatment of relapsing
forms of multiple sclerosis ("MS"). The Company also derives revenue from
royalties on sales by the Company's licensees of a number of products covered
under patents controlled by the Company.
RESULTS OF OPERATIONS
For the quarter ended September 30, 2001, the Company reported net income of
$69.8 million or $0.46 per diluted share as compared to $68.4 million or $0.44
per diluted share for the comparable period of 2000. For the nine months ended
September 30, 2001, the Company reported net income of $213.8 million or $1.40
per diluted share as compared to $261.8 million or $1.69 per diluted share for
the comparable period of 2000.
Total revenues for the quarter ended September 30, 2001 were $265.2 million, as
compared to $233.8 million in the same period of 2000, an increase of $31.4
million or approximately 13%. Total revenues for the nine months ended September
30, 2001 were $762.9 million, as compared to $681.1 million in the same period
of 2000, an increase of $81.8 million or approximately 12%.
Product revenues in the current quarter were $249.2 million as compared to
$193.2 million for the same period of 2000, an increase of $56 million or
approximately 29%. Product revenues in the nine months ended September 30, 2001
were $712.4 million as compared to $557.8 million for the same period of 2000,
an increase of $154.6 million or approximately 28%. Product revenues from
AVONEX(R) represent approximately 94% of the Company's total revenues in the
current quarter and 93% for the nine months ended September 30, 2001 as compared
to 83% and 82% for the three and nine month periods of 2000, respectively. The
growth in product revenues in the three and nine month periods ended September
30, 2001 over the comparable periods in 2000 was primarily attributable to
increases in the sales volume of AVONEX(R) in the United States and in the
fifteen member countries of the European Union ("EU"). AVONEX(R) sales outside
of the United States were approximately $65.3 million and $193.5 million in the
three and nine months ended September 30, 2001 as compared to $55 million and
$154.5 million in the same periods of 2000, respectively.
Revenues from royalties in the three months ended September 30, 2001 were $16
million, a decrease of $24.5 million or approximately 60% as compared to $40.5
million of royalty revenue for the same period in 2000. Revenues from royalties
in the nine months ended September 30, 2001 were $50.5 million, a decrease of
approximately 59% as compared to $123.3 million of royalty revenue for the same
period in 2000. Revenues from royalties represented approximately 6% of total
revenues for the current quarter and 7% for the nine months ended September 30,
2001 as compared to 17% and 18%, respectively, for the same periods in 2000. The
decline in royalty revenues in the three and nine month periods ended September
30, 2001 over the comparable periods in 2000 was primarily attributable to a
significant decline in the amount of royalties received from Schering-Plough
Corporation on sales of its alpha interferon product. For a more detailed
discussion of the decline in royalties from Schering-Plough and the related
dispute, see "Outlook".
COSTS AND EXPENSES
Total costs and expenses for the three months ended September 30, 2001 were
$175.6 million as compared to $169.3 million in the same period of 2000, an
increase of approximately 4%. Total costs and expenses
11
for the nine months ended September 30, 2001 were $495.7 million as compared to
$445.5 million in the same period of 2000, an increase of approximately 11%.
Cost of revenues in the three months ended September 30, 2001 totaled $36.5
million compared to $33 million in the same period of 2000, an increase of $3.5
million or 11%. Cost of revenues in the nine months ended September 30, 2001
totaled $100.8 million compared to $92.4 million in the same period of 2000, an
increase of $8.4 million or 9%. The increase in cost of revenues was
attributable to the higher sales volume of AVONEX(R). Included in cost of
revenues for the three months ended September 30, 2001 and 2000 is $35.4 million
and $29.9 million, respectively, of costs related to product revenues and $1.1
million and $3.2 million, respectively, of costs related to royalty revenue.
Included in cost of revenues for the nine months ended September 30, 2001 and
2000 is $97.6 million and $83.4 million, respectively, of costs related to
product revenues and $3.2 million and $9 million, respectively, of costs related
to royalty revenue. Gross margins on product revenues increased to 86% for the
three and nine months ended September 30, 2001 compared to 85% for the same
periods in 2000. Gross margins on royalty revenue increased to approximately 93%
for the three months ended September 30, 2001 compared to 92% for the same
period in 2000. Gross margins on royalty revenue increased to approximately 94%
for the nine months ended September 30, 2001 compared to 93% in the same period
in 2000. The Company expects that gross margins on royalty revenue will
fluctuate in the future based on changes in sales volumes for specific products.
Research and development expenses in the current quarter were $78.9 million, a
decrease of $15.6 million or 17% as compared to $94.5 million in the same period
of 2000. The decrease is primarily due to a reduction of upfront costs
associated with new collaborative efforts from $21.4 million for the three
months ended September 30, 2000 to $8 million for the similar period in 2001.
Research and development expenses in the nine months ended September 30, 2001
were $230.8 million, an increase of $1.6 million or 1% as compared to $229.2
million in the same period of 2000. For the nine months ended September 30, 2001
upfront costs associated with new collaborative efforts decreased $13.4 million
compared to the same period in 2000, while other research and development costs
increased $15 million over the same periods. The Company expects that, in the
near and long-term, research and development expenses will increase as the
Company continues to expand its development efforts with respect to new
products, conducts clinical trials of these products and continues work on new
formulations and delivery methods for AVONEX(R).
Selling, general and administrative expenses in the third quarter of 2001 were
$60.3 million, an increase of $18.6 million or 45% as compared to the same
period of 2000. Selling, general and administrative expenses in the nine months
ended September 30, 2001 were $164.1 million, an increase of $40.3 million or
33% compared to the same period of 2000. This increase was primarily due to an
increase in selling and marketing expenses related to the sale of AVONEX(R). The
Company expects that selling, general and administrative expenses will continue
to increase in the near term as the Company continues to expand its sales and
marketing organizations and efforts necessary to sell AVONEX(R) worldwide.
OTHER INCOME, NET
Other income, net consists primarily of interest income, partially offset by
interest expenses and other non-operating income and expenses. Other income, net
in the current quarter of 2001 was $10.1 million as compared to $33.2 million in
2000, a decrease of $23.1 million. Other income, net in the nine months ended
September 30, 2001 was $38.1 million as compared to $149 million in 2000, a
decrease of $110.9 million. Interest income for the three months ended September
30, 2001 was $10.8 million compared to $11.1 million in the same period of 2000,
a decrease of $0.3 million or 3%. Interest income for the first nine months of
2001 was $33.3 million compared to $32.2 million in the same period of 2000, an
increase of $1.1 million or 3%. The increases in both three and nine months were
due primarily to higher average yields and an increase in funds invested. The
Company expects interest income to vary based on changes in the amount of funds
invested and fluctuations in interest rates.
In the three months ended September 30, 2001 interest expense was $0.9 million,
compared to $1.1 million for the same period in 2000, a decrease of $0.2 million
or 18%. In the nine months ended September 30, 2001 interest expense decreased
to $3 million from $3.3 million compared to the same period in 2000, a decrease
of 9%.
Other income for the three and nine months ended September 30, 2001 includes
gains on the sale of certain non-current marketable securities totaling
approximately $1 million and $4.3 million, respectively. Other income for the
three and nine months ended September 30, 2000 includes gains on the sale of
certain non-current marketable securities totaling approximately $24.1 million
and $125.3, respectively. Other income decreased by $22.9 million in the three
months ended September 30, 2001 from the same period in 2000. The decrease is
due primarily to the Company realizing gains of approximately $24.1 million in
the third quarter 2000 upon the acquisition by third parties of two of the
companies in which the Company had invested in separate business combinations.
Other income decreased by $112.2 million in the nine months ended September 30,
2001 from the same period in 2000. This decrease was due primarily
12
to the sale of certain non-current marketable securities generating gains of
approximately $125.3 million in the nine months ended September 30, 2000.
Other income, net consists of the following (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2001 2000 2001 2000
------- ------- ------- --------
Interest income $10,787 $11,067 $33,266 $ 32,174
Interest expense (936) (1,100) (3,025) (3,285)
Other income (expense) 296 23,237 7,902 120,076
------- ------- ------- --------
Total other income, net $10,147 $33,204 $38,143 $148,965
======= ======= ======= ========
INCOME TAXES
Income tax expense as a percentage of pre-tax income for the three months ended
September 30, 2001 and 2000 was approximately 30%. Income tax expense as a
percentage of pre-tax income for the nine months ended September 30, 2001 and
2000 was approximately 30% and 32%, respectively. During the three and nine
months ended September 30, 2000, the Company recognized gains on the sale of
certain non-current marketable securities. Excluding the tax effect on these
gains the Company's effective tax rate for the three and nine months ended
September 30, 2001 and 2000 was approximately 30%. The effective tax rate varied
from the U.S. statutory rates for the first nine months of 2001 and 2000
primarily due to higher sales in European jurisdictions with lower tax rates and
to the utilization of research and development credits. The Company's effective
tax rate outside the U.S. is lower than the U.S. tax rate, and the Company
expects that the U.S. tax rate will decline as a percentage of its total tax
rate as international sales increase.
FINANCIAL CONDITION
At September 30, 2001, cash, cash equivalents and short-term marketable
securities were $789.7 million compared with $682.4 million at December 31,
2000, an increase of $107.3 million. Working capital increased $97.3 million to
$804.6 million. Net cash from operating activities for the nine-month period
ended September 30, 2001 was $259.3 million compared with $269.8 million for the
same period in 2000. Cash outflows from investing activities during the first
nine months of 2001 included investments in property and equipment and patents
of $135.2 million. Net cash outflows from investing activities related to
marketable securities was $71.7 million. Significant cash outflows from
financing activities included $63.1 million for purchases of the Company's
common stock under its stock repurchase program and $3.2 million for repayments
on loan agreements with banks. Cash inflows included $24.8 million from common
stock option exercises and employee stock purchase plan activity.
On December 18, 2000, the Company announced that its Board of Directors had
authorized the repurchase of up to 4 million shares of the Company's common
stock. The repurchased stock will provide the Company with treasury shares for
general corporate purposes, such as stock to be issued under employee stock
option and stock purchase plans. Stock purchases are expected to occur from time
to time throughout 2001. To enhance the 2000 stock repurchase program, the
Company entered into agreements with independent third parties under which the
Company committed to purchase up to 1,500,000 shares of the Company's stock
subject to the terms of the agreement at stock prices ranging from $57.82 to
$63.06. The agreements permit net share settlement at the Company's option. The
Company purchased 1,050,000 shares through September 30, 2001 at a cost of $
63.1 million. In November of 2000, the Company completed a previous stock
repurchase program. During 2000, the Company repurchased approximately 4.6
million shares of its common stock under this program at a cost of $300.2
million.
The Company is building a large scale manufacturing plant in Research Triangle
Park, North Carolina. The Company expects that construction will be completed at
the end of 2001 at a total cost of approximately $175 million, of which $171
million had been committed at September 30, 2001.
13
Several legal proceedings were pending during the current quarter, which involve
the Company. See Note 8 of the Notes to the Condensed Consolidated Financial
Statements. See also Item 1 - Business, "Patents and Other Proprietary Rights"
of the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 2000 for discussions of these legal proceedings.
On a quarterly basis, as of the end of the quarter, the Company determines
whether a decline in fair value of a marketable security is other than
temporary. Unrealized gains and losses on marketable securities are included in
other comprehensive income in shareholders' equity, net of related tax effects.
If a decline in the fair value of a marketable security below the Company's cost
basis is determined to be other than temporary, such marketable security is
written down to its estimated fair value with a charge to current earnings. The
Company has concluded that all unrealized losses on marketable securities at
September 30, 2001 are temporary in nature. Should any portion of these
unrealized losses subsequently be determined to be other than temporary, the
Company would be required to record the related amount as a charge to current
earnings.
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 raise additional capital to
take advantage of favorable conditions in the market or in connection with the
Company's development activities.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all
business combinations be accounted for under the purchase method only and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. SFAS No. 142 requires that ratable amortization of
goodwill be replaced with periodic tests of the goodwill's impairment and that
intangible assets other than goodwill be amortized over their useful lives. SFAS
No. 141 is effective for all business combinations initiated after June 30, 2001
and for all business combinations accounted for by the purchase method for which
the date of acquisition is after June 30, 2001. The provisions of SFAS No. 142
will be effective for fiscal years beginning after December 15, 2001. The impact
of SFAS No. 141 and SFAS No. 142 on the Company's financial statements is not
expected to be material.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The impact of SFAS No. 144 on the Company's financial
statements is not expected to be material.
OUTLOOK
SAFE HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
In addition to historical information, this quarterly report 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 product sales, royalty revenues,
expenses and profits and predictions as to the anticipated outcome of pending
litigation and patent-related proceedings. 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
financial condition and 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
The Company's ability to sustain increases in revenues and profitability in the
near term 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)
14
worldwide; the extent to which AVONEX(R) receives and maintains reimbursement
coverage; successful resolution of the lawsuit with Berlex related to the
"McCormick" patents, which if ultimately decided in Berlex's favor could have a
material adverse effect on the Company's financial position and results of
operations; success in revoking the Rentschler patent since if the patent were
to be upheld and if Rentschler were to obtain, through legal proceedings, a
determination that the Company's sale of AVONEX(R) in Europe infringes a valid
Rentschler patent, such result could have a material adverse effect on the
Company's results of operation and financial condition; the success of ongoing
development work related to AVONEX(R) in expanded MS indications; the continued
accessibility of third parties to vial, label, and distribute AVONEX(R) on
acceptable terms; and the Company's ability to sustain market share of AVONEX(R)
in light of the impact of competitive products for the treatment of MS. In the
United States, one of the Company's competitors, Serono Laboratories, Inc.,
("Serono") is seeking to use the results of a head-to-head study of its drug
Rebif(R), a recombinant interferon beta-1a product, and AVONEX(R) to overcome
the orphan drug status of AVONEX(R) and to get Rebif(R) approved before the May
2003 expiration of AVONEX's orphan drug status. If Serono is successful,
competition in the United States multiple sclerosis marketplace will increase
sooner than expected.
ROYALTY REVENUE
The Company receives royalty revenues which contribute a significant amount to
its overall profitability. The Company expects to continue to experience a
decline in royalty revenues as a result of patent expirations and other
patent-related events in the range of up to approximately $12 million per
quarter for 2001 compared to 2000 (not including amounts that
are subject to a dispute with Schering-Plough Corporation ("Schering-Plough") as
discussed below). See "Outlook - Patents and Other Proprietary Rights" in the
Company's Annual Report on Form 10-K for the period ended December 31, 2000. The
Company expects the most significant decline to be in the amount of royalties
received from Schering-Plough on sales of INTRON(R) A as the result of patent
expirations in the EU and Japan and the royalty dispute with Schering-Plough in
the United States. The extent of the decline in royalties related to United
States sales of INTRON(R) A will depend on the outcome of a dispute with
Schering-Plough. Schering-Plough has taken the position that a Court of Appeals'
decision narrowing the scope of the claims of Biogen's United States alpha
interferon patent (the "901 Patent") permits it to discontinue payment of
royalties on U.S. sales of its alpha interferon products. Biogen has filed for
arbitration to compel payment of unpaid past royalties and to ensure payment of
royalties due in the future under the license agreement. Given Schering-Plough's
history of taking aggressive positions in contract interpretation, Biogen has
included claims which would resolve issues related to future royalty payments to
pre-empt any potential challenges by Schering-Plough. These claims include
Schering-Plough's obligation to commence royalty payments in July 2002 (the
expiration date of the 901 Patent) based on a patent application owned by F.
Hoffman-LaRoche ("Roche") and Genentech, Inc. ("Genentech"). The agreement
between Biogen and Schering-Plough extending Schering-Plough's royalty
obligation beyond the expiration date of the 901 Patent was part of the
settlement of a lawsuit between Biogen and Roche/Genentech. In return for
Schering-Plough's agreement to extend its royalty obligation, Biogen settled the
lawsuit with Roche/Genentech and Roche granted Schering-Plough an exclusive
license for Schering-Plough to sell its products under the Roche/Genentech
patent right that was the subject of the dispute. Biogen intends to vigorously
pursue its claims against Schering-Plough in the arbitration. The decline in
royalties on United States sales of alpha interferon products as a result of the
dispute with Schering-Plough will range up to approximately an additional $13
million per quarter in 2001 compared to 2000.
There are a number of other factors which could also cause the actual level of
royalty revenue to differ from the Company's expectations. For example, pricing
reforms, health care reform initiatives, other legal and regulatory developments
and the introduction of competitive products may have an impact on product sales
by the Company's licensees. In addition, sales levels of products sold by the
Company's licensees may fluctuate from quarter to quarter due to the timing and
extent of major events such as new indication approvals or government sponsored
programs. Since the Company is not involved in the development or sale of
products by its licensees, the Company can not be certain of the timing or
potential impact of factors which may affect sales by the Company's licensees.
In the long term, the Company expects its royalty
15
revenue to be affected most significantly by patent expirations, patent
litigation and a potential decrease in sales by licensees of licensed products.
See "Outlook - Patents and Other Proprietary Rights."
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" patents, competition in the MS market and regulatory matters, see
the Company's Annual Report on Form 10-K for the period ended December 31, 2000
under the headings "Business - Risks Associated with Drug Development",
"Business - Patents and Other Proprietary Rights", "Business - Competition and
Marketing - AVONEX(R) (interferon beta-la)", "Business - Regulation", "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Outlook."
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 and development activities
and collaborations. On August 6, 2001 the Company filed for registration in the
United Sates and Europe of its AMEVIVE(R) (alefacept) product as a treatment for
moderate-to-severe chronic plaque psoriasis. The Company continues 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. Only a small
number of research and development programs result in the commercialization of a
product. Success in preclinical and early clinical trials does not ensure that
later stage or large scale clinical trials will be successful. Many important
factors affect the Company's ability to successfully develop and commercialize
AMEVIVE(R) and its other potential products, 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 overcome
technical hurdles that may arise, to meet applicable regulatory standards, to
receive required regulatory approvals, to be capable of producing drug
candidates in commercial quantities at reasonable costs, to obtain reimbursement
coverage for the products, to compete successfully against other products and to
market products successfully. For example, unexpected concerns may arise from
additional data or additional analysis of data related to the Company's
products. Technical hurdles may arise. Issues may be identified in connection
with review of data with regulatory authorities or regulatory authorities may
disagree with the Company's view of data or may require additional data or
studies. There can be no assurance that the Company will be successful in its
efforts to develop and commercialize new products.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company has numerous issued patents and patent applications pending on a
number of its processes and products. The Company has also obtained rights to
certain patents under licenses with third parties which provide for the payment
of royalties. There can be no assurance that the Company's existing patents or
others, if obtained, will provide substantial protection or commercial benefit
to the Company. In addition, the Company does not know to what extent its
pending patent applications or patent applications licensed from third parties
will be granted or whether any of its patents will prevail if they are
challenged in litigation. Also, there can be no assurance that third parties
will not be granted patents claiming subject matter necessary to the Company's
business. The Company is aware of certain patents held by Genentech relating to
immunoadhesion technology that may cover the Company's AMEVIVE(R) (alefacept)
product. The Company is evaluating these patents to determine if a license
should be taken.
The Company has granted an exclusive worldwide license to Schering-Plough under
its alpha interferon patents. Schering-Plough's royalty obligation to the
Company under these patents is discussed above in "Royalty Revenue".
16
The Company has licensed its recombinant hepatitis B antigen patent rights to
manufacturers and marketers of hepatitis B vaccines and diagnostic test kits,
and receive royalties on sales of the vaccines and test kits by the Company's
licensees. The obligation of SmithKline Beecham Biological S.A. and Merck & Co.,
Inc. to pay royalties on sales of hepatitis B vaccines and the obligation of the
Company's other licensees under the Company's hepatitis B patents to pay
royalties on sales of diagnostic products will terminate upon expiration of the
Company's hepatitis B patents. In August 2001 a United States patent was issued
to the Company covering a pharmaceutical composition for stimulating production
of antibodies in humans against a hepatitis B virus, a method of using the
pharmaceutical composition, a diagnostic kit for detecting antibodies against a
hepatitis B virus, and an in vitro method for detecting antibodies against a
hepatitis B virus. This patent will expire in 2018. The Company's European
hepatitis B patents expired at the end of 1999, except in those countries in
which the Company obtained supplemental protection certificates. The Company has
received supplemental protection certificates in Australia, Belgium, France,
Great Britain, Ireland, Italy, Luxembourg, The Netherlands, Sweden and
Switzerland, and has a number of granted or pending registrations of the Great
Britain supplementary protection certificates in various British territories.
The additional coverage afforded by supplemental protection certificates, or
related registrations, ranges from two to eight years. There can be no assurance
as to the extent of coverage available under the supplemental protection
certificates, or that protection will be available in additional countries.
17
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 5 - Other Information
None.
Item 6 - Exhibits and Reports on Form 8-K
None.
18
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: November 12, 2001 /s/ Peter N. Kellogg
------------------------------------------
Executive Vice President - Finance and
Chief Financial Officer
19