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 MARCH 31, 2002
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 April 22, 2002 was 148,521,208 shares.
1
BIOGEN, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER
Condensed Consolidated Statements of Income - Three months ended March 31, 2002 and 2001 3
Condensed Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001 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 17
Note concerning trademarks: AVONEX(R) and AMEVIVE(R) are registered trademarks
of Biogen, Inc.
2
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
Three Months Ended
March 31,
2002 2001
REVENUES:
Product $ 265,985 $ 219,997
Royalties 22,358 17,050
------- -------
Total revenues 288,343 237,047
------- -------
COSTS AND EXPENSES:
Cost of revenues 39,318 29,146
Research and development 82,467 72,770
Selling, general and administrative 73,390 48,560
------- -------
Total costs and expenses 195,175 150,476
------- -------
Income from operations 93,168 86,571
Other income, net 7,028 16,463
------- -------
INCOME BEFORE INCOME TAXES 100,196 103,034
Income taxes 28,055 30,911
------- -------
NET INCOME $ 72,141 $ 72,123
======= =======
BASIC EARNINGS PER SHARE $ 0.49 $ 0.49
======= =======
DILUTED EARNINGS PER SHARE $ 0.47 $ 0.47
======= =======
SHARES USED IN COMPUTING:
Basic earnings per share 148,660 148,188
======= =======
Diluted earnings per share 152,202 153,491
======= =======
See Notes to Condensed Consolidated Financial Statements.
3
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31, December 31,
2002 2001
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 94,519 $ 54,042
Marketable securities 713,036 744,065
Accounts receivable, net 172,936 177,582
Deferred tax assets 48,083 44,108
Other current assets 87,495 77,930
----------- ----------
Total current assets 1,116,069 1,097,727
----------- ----------
Property, plant and equipment
Cost 775,833 727,825
Less accumulated depreciation 181,790 171,827
----------- ----------
Property, plant and equipment, net 594,043 555,998
----------- ----------
Patents, net 17,059 16,562
Marketable securities 6,955 12,183
Other assets 41,579 38,576
----------- ----------
$ 1,775,705 $1,721,046
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 42,186 $ 50,944
Current portion of long-term debt 4,888 4,888
Accrued expenses and other 229,941 239,110
----------- ----------
Total current liabilities 277,015 294,942
----------- ----------
Long-term debt, less current portion 41,492 42,297
Other long-term liabilities 31,875 34,975
Commitments and contingencies -- --
Shareholders' equity
Common stock 1,517 1,517
Additional paid-in capital 816,638 808,076
Treasury stock, at cost (150,767) (176,123)
Retained earnings 754,832 705,893
Accumulated other comprehensive income 3,103 9,469
----------- ----------
Total shareholders' equity 1,425,323 1,348,832
----------- ----------
$ 1,775,705 $1,721,046
=========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
March 31,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 72,141 $ 72,123
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation and amortization 10,446 8,777
Deferred income taxes (214) (70)
Tax benefit of stock options 8,395 12,224
Other (60) (66)
Realized loss (gain) on sale of non-current marketable 301 (2,540)
securities
Write-down of non-current marketable securities 2,182 --
Changes in:
Accounts receivable 4,646 (3,626)
Other current and other assets (15,996) 2,851
Accounts payable, accrued expenses and
other current and long-term liabilities (20,512) (319)
-------- --------
Net cash flows from operating activities 61,329 89,354
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of current marketable securities (73,638) (483,159)
Proceeds from sales and maturities of current marketable securities 99,932 403,624
Proceeds from sales of non-current marketable securities 493 2,774
Acquisitions of property and equipment (48,008) (36,553)
Additions to patents (980) (848)
-------- --------
Net cash flows from investing activities (22,201) (114,162)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on long-term debt (805) (805)
Purchases of treasury stock (8,384) (5,047)
Issuance of treasury stock related to stock option exercises 10,538 10,378
-------- --------
Net cash flows from financing activities 1,349 4,526
-------- --------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
40,477 (20,282)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 54,042 48,737
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94,519 $ 28,455
======== ========
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 2001 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.
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:
March 31, December 31,
(in thousands) 2002 2001
-------- --------
Raw materials $ 15,143 $ 14,754
Work in process 25,598 17,004
Finished goods 21,028 20,161
-------- --------
$ 61,769 $ 51,919
======== ========
Biogen capitalizes inventory costs associated with certain products prior to
regulatory approval, based on management's judgment of probable future
commercialization. Biogen would be required to expense previously capitalized
costs related to pre-approval inventory upon a change in such judgment, due to,
among other potential factors, a denial or significant delay of approval by
necessary regulatory bodies. At March 31, 2002, capitalized inventory related to
AMEVIVE(R) (alefacept), which has not yet received regulatory approval, was
$13.8 million, compared to $8.4 million at December 31, 2001.
Biogen writes down obsolete or otherwise unmarketable inventory to its estimated
net realizable value. If the actual realizable value is less than that estimated
by Biogen, additional inventory write-downs may be required. The Company has not
had any material write-downs of inventory for the three months ended March 31,
2002.
2. FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", ("SFAS 133") requires that all derivatives
be 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
6
Company determines that a hedged forecasted transaction is no longer probable of
occurring, the Company discontinues hedge accounting for the affected portion of
the hedge instrument, and any related unrealized gain or loss on the contract
is recognized in current earnings.
As of March 31, 2002, the Company had $14.2 million outstanding under a floating
rate loan collateralized by one of the Company's laboratory and office buildings
in Cambridge, Massachusetts and $32.2 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 $2.8 million at March 31, 2002 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
months ended March 31, 2002 or in the comparable period of 2001, 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 March 31, 2002 was approximately $88.1 million. These contracts had a fair
value of approximately $2.5 million, representing an unrealized gain, and were
included in other current assets at March 31, 2002.
For the three months ended March 31, 2002, approximately $114,000 was recognized
in earnings due to hedge ineffectiveness. For the three months ended March 31,
2001, there were no significant amounts recognized in earnings due to hedge
ineffectiveness. For the three months ended March 31, 2002 and 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. The Company recognized approximately $683,000 of gains
in product revenue and approximately $109,000 of gains in royalty revenue for
the settlement of certain effective cash flow hedge instruments for the three
months ended March 31, 2002. The Company recognized $3 million of gains in
product revenue and $830,000 of gains in royalty revenue for the settlement of
certain effective cash flow hedge instruments for the three months ended March
31, 2001. 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 certain
derivative instruments, net of tax. Comprehensive income for the three months
ended March 31, 2002 and 2001 was $65.8 million and $56.2 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.
7
Shares used in calculating basic and diluted earnings per share for the
three-month periods ending March 31, are as follows:
(in thousands) 2002 2001
Weighted average number of shares
of common stock outstanding 148,660 148,188
Dilutive stock options 3,542 5,303
------- -------
Shares used in calculating diluted
earnings per share 152,202 153,491
======= =======
Options to purchase approximately 6.5 million and 1.9 million shares were
outstanding at March 31, 2002 and 2001, 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 a
material additional dilutive effect.
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 provides the Company with treasury shares for
general corporate purposes, such as stock to be issued under employee stock
option and stock purchase plans. The Company purchased 145,000 shares during the
first three months of 2002 at a cost of $8.4 million. During 2001, the Company
repurchased approximately 1.5 million shares of its common stock under this
program at a cost of $197.7 million. Approximately 2.4 million shares remain
authorized for repurchase under this program at March 31, 2002.
6. OTHER INCOME, NET
Other income, net consists of the following (in thousands):
Three Months Ended
March 31,
2002 2001
Interest income $ 10,598 $ 11,785
Interest expense (1,013) (1,039)
Other income (expense) (2,557) 5,717
-------- ---------
Total other income, net $ 7,028 $ 16,463
======== =========
Other income (expense) for the three months ended March 31, 2002 includes a $2.2
million write-down on unrealized losses in certain non-current marketable
securities that were determined to be other than temporary. Other income
(expense) for the three months ended March 31, 2001 includes realized gains on
the sale of certain non-current marketable securities totaling approximately
$2.5 million.
8
7. INCOME TAX EXPENSE
Income tax expense as a percentage of pre-tax income for the three months ended
March 31, 2002 and 2001 was approximately 28% and 30%, respectively. The
effective tax rate varied from the U.S. statutory rates for the first quarter of
2002 and 2001 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.
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, a 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 did not infringe any of the claims of the Berlex patents.
Berlex has appealed this decision with the Court of Appeals for the Federal
Circuit. Oral arguments were presented by the parties to the Court of Appeals on
November 7, 2001 and a decision is expected in the first half of 2002. In
January 2002, Biogen and Berlex reached a settlement of the litigation pursuant
to which the parties agreed to end the dispute in return for a payment of $20
million from Biogen to Berlex and the possibility of a second and final payment
from Biogen to Berlex if the Court of Appeals were to reverse the District
Court's previous ruling granting summary judgment in favor of Biogen. If the
Court of Appeals were to rule against Biogen and return the case to the District
Court, Biogen believes that the most likely decision would require it to make a
second and final payment of $55 million to Berlex. In the event the ruling is
significantly adverse to Biogen, the second and final payment to Berlex would be
$230 million. As part of the settlement, Biogen and Berlex agreed not to pursue
further litigation about these patents. Biogen recorded a $20 million charge in
"Other Income, net" in the fourth quarter of 2001 to account for the first
payment to Berlex. The Company has determined that, based on information
currently available, the most probable outcome is that no additional payments
will be required.
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 previously scheduled for October 2000 has been
postponed, and will likely be held in 2002. 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 in Europe infringes a valid
Rentschler II Patent, such result could have a material adverse effect on the
Company's results of operation and financial position.
9
9. SEGMENT INFORMATION
The Company operates in one segment, which is the business of developing,
manufacturing and marketing drugs for human health care. 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. The
Company currently derives product revenues from sales of its AVONEX product for
the treatment of relapsing forms of multiple sclerosis. The Company also derives
revenue from royalties on worldwide sales by the Company's licensees of a number
of products covered under patents controlled by the Company.
10. SUBSEQUENT EVENTS
In April 2002, Biogen signed a development and marketing collaboration agreement
(the "Celltech agreement") with Celltech Research & Development Limited
("Celltech") for the research, development, manufacturing and commercialization
of CDP 571, Celltech's humanized anti-TNF alpha antibody product, which is being
developed as a potential treatment for Crohn's disease and other inflammatory
disorders. Under the terms of the Celltech agreement, Celltech and Biogen will
share ongoing research, development and registration costs. Biogen has committed
to paying Celltech additional amounts upon the completion of certain future
milestones. If all the milestones were achieved, the Company would be required
to pay Celltech up to an additional $5.5 million over the life of the agreement.
Additionally, Biogen has committed to paying certain significant technology
transfer costs to establish the manufacturing process for CDP 571 at the
Company's 90,000-liter facility in Research Triangle Park, North Carolina.
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 worldwide 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 March 31, 2002, the Company reported net income of $72.1
million or $0.47 per diluted share. The Company also reported net income of
$72.1 million or $0.47 per diluted share for the comparable period of 2001.
Total revenues for the quarter ended March 31, 2002 were $288.3 million, as
compared to $237 million in the same period of 2001, an increase of $51.3
million or approximately 22%. Product revenues in the current quarter were $266
million as compared to $220 million for the same period of 2001, an increase of
$46 million or approximately 21%. Product revenues from AVONEX represent
approximately 92% of the Company's total revenues in the current quarter as
compared to 93% for the same period in 2001. The growth in product revenues in
the first quarter of 2002 over the comparable period in 2001 was primarily
attributable to increases in the sales volume of AVONEX in the United States and
in the fifteen member countries of the European Union ("EU"). AVONEX sales
outside of the United States were approximately $68.7 million in the three
months ended March 31, 2002 as compared to $58.2 million in the same period of
2001.
The Company expects to face increasing competition in the MS marketplace in and
outside the United States from existing and new MS treatments that may impact
sales of AVONEX. In the United States, Biogen expects future growth in AVONEX
revenues to be dependent to a large extent on the Company's ability to compete
successfully with Serono, Inc. ("Serono") and its REBIF(R) interferon beta 1a
product which was launched in the United States in March 2002 as a treatment for
relapsing/remitting MS. The FDA approved REBIF for sale in the United States
over a year before the expected expiration of AVONEX's orphan drug marketing
exclusivity. Biogen expects Serono to compete aggressively in the United States
market. REBIF is already on the market in the EU. See "Outlook - Dependence on
AVONEX Sales"; see also the Company's Annual Report on Form 10-K for the period
ended on December 31, 2001 under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook -
Competition".
Revenues from royalties in the three months ended March 31, 2002 were $22.4
million, an increase of $5.3 million or approximately 31% as compared to $17.1
million of royalty revenue for the same period in 2001. Revenues from royalties
represented approximately 8% of total revenues for the first three months of
2002 as compared to 7% for the same period in 2001. The growth in royalty
revenues in the current quarter over the comparable period in 2001 was primarily
attributable to royalties received on increased sales of alpha interferon. For a
more detailed discussion of royalties, including a discussion on the Company's
current arbitration with Schering-Plough Corporation ("Schering-Plough"), see
"Outlook - Royalty Revenue".
COSTS AND EXPENSES
Total costs and expenses for the three months ended March 31, 2002 were $195.2
million as compared to $150.5 million in the same period of 2001, an increase of
approximately 30%.
Cost of revenues in the first three months of 2002 totaled $39.3 million
compared to $29.1 million in the same period of 2001, an increase of $10.2
million or 35%. The increase in cost of revenues was attributable to the higher
sales volume of AVONEX. Included in cost of revenues for the three months ended
March 31, 2002 and 2001 is $37.9 million and $28.3 million, respectively, of
costs related to product revenues and $1.4 million and $838,000, respectively,
of costs related to royalty revenue. Gross margins on product revenues decreased
to approximately 86% for the first quarter of 2002 compared to 87% for the same
periods in 2001. Gross margins on royalty revenue decreased to approximately 94%
for the first three months of 2002 compared to 95% for the same period in 2001.
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 $82.5 million, an
increase of $9.7 million, or 13%, as compared to $72.8 million for the same
period of 2001. The increase was due primarily to an increase in development
costs related to the Company's ongoing collaborative investments and increases
in clinical trial costs. The Company expects that, in the near and long-term,
research and development expenses will increase as the Company continues to
expand its
11
development efforts with respect to new products, conducts clinical trials of
these products and continues work on new formulations for AVONEX.
Selling, general and administrative expenses in the first quarter of 2002 were
$73.4 million, an increase of $24.8 million or 51% as compared to the same
period of 2001. This increase was primarily due to an increase in selling and
marketing expenses related to the sale of AVONEX and increased costs in
anticipation of the possible approval of AMEVIVE(R) (alefacept). 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 worldwide in
response to increased competition, and as the Company prepares for the
possible approval of additional products, including AMEVIVE.
OTHER INCOME, NET
Other income, net consists of the following (in thousands):
Three Months Ended
March 31,
-----------------------------
2002 2001
--------- ----------
Interest income $ 10,598 $ 11,785
Interest expense (1,013) (1,039)
Other income (expense) (2,557) 5,717
--------- ----------
Total other income, net $7,028 $ 16,463
========= ==========
Other income, net consists primarily of interest income, partially offset by
interest expense and other non-operating income and expenses. Other income, net
in the current quarter was $7 million as compared to $16.5 million in 2001, a
decrease of $9.5 million. Interest income for the first three months of 2002 was
$10.6 million compared to $11.8 million in the same period of 2001, a decrease
of $1.2 million or 10% due primarily to lower average yields. The Company
expects interest income to vary based on changes in the amount of funds invested
and fluctuations in interest rates. Interest expense was approximately $1
million for both the first quarter of 2002 and the same period in 2001. Other
income (expense) changed by $8.3 million for the first three months of 2002
compared to the same period in 2001. The decrease is due primarily to the
Company's realization of gains of approximately $2.5 million on the sale of
certain non-current marketable securities gains for the first quarter of 2001
compared to recognizing $2.5 million of expenses in the current period, of which
$2.2 million related to the write-down of certain non-current marketable
securities.
INCOME TAXES
Income tax expense as a percentage of pre-tax income for the three months ended
March 31, 2002 and 2001 was approximately 28% and 30%, respectively. The
effective tax rate varied from the U.S. statutory rates for the first three
months of 2002 and 2001 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 March 31, 2002, cash, cash equivalents and short-term marketable securities
were $807.6 million compared with $798.1 million at December 31, 2001, an
increase of $9.5 million. Working capital increased $36.3 million to $839.1
million. Net cash from operating activities (which included net income) for the
first quarter of 2002 was $61.3 million compared with $89.4 million for the same
period in 2001, and also included tax benefits related to stock options of $8.4
million, and a non-cash charge of $2.2 million related to the
12
write-down of non-current marketable securities. Cash outflows from investing
activities during the first three months of 2002 included investments in
property and equipment and patents of $49 million and net cash inflows from
investing activities related to marketable securities totaling $26.8 million.
Significant cash outflows from financing activities included $8.4 million for
purchases of the Company's common stock under its stock repurchase program. Cash
inflows included $10.5 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 provides the Company with treasury shares for
general corporate purposes, such as stock to be issued under employee stock
option and stock purchase plans. The Company purchased 145,000 shares during the
first three months of 2002 at a cost of $8.4 million. During 2001, the Company
repurchased approximately 1.5 million shares of its common stock under this
program at a cost of $197.7 million. Approximately 2.4 million shares remain
authorized for repurchase under this program at March 31, 2002.
The Company's construction of its large-scale manufacturing plant in Research
Triangle Park, North Carolina, was substantially completed in the first quarter
of 2002. Additionally, the Company began expansion of its Research Triangle
Park, North Carolina complex in 2001 by constructing a laboratory office
building and adding manufacturing capacity. The projects are expected to be
completed by the summer of 2003 at a total cost of approximately $89 million. As
of March 31, 2002, the Company had committed $69 million for construction costs,
of which $27.2 million had been spent. The Company is also completing plans to
build a fill-finish plant in Denmark. The Company expects that construction will
commence in 2003, at an estimated cost of $130 million. At March 31, 2002, $23
million had been committed for construction costs related to the fill-finish
plant in Denmark, of which $20 million had been spent.
In April 2002, Biogen signed a development and marketing collaboration agreement
(the "Celltech agreement") with Celltech Research & Development Limited
("Celltech") for the research, development, manufacturing and commercialization
of CDP 571, Celltech's humanized anti-TNF alpha antibody product, which is being
developed as a potential treatment for Crohn's disease and other inflammatory
disorders. Under the terms of the Celltech agreement, Celltech and Biogen will
share ongoing research, development and registration costs. Biogen has committed
to paying Celltech additional amounts upon the completion of certain future
milestones. If all the milestones were achieved, the Company would be required
to pay Celltech up to an additional $5.5 million over the life of the agreement.
Additionally, Biogen has committed to paying certain significant technology
transfer costs to establish the manufacturing process for CDP 571 at the
Company's 90,000-liter facility in Research Triangle Park, North Carolina.
Several legal proceedings involving the Company were pending during the current
quarter. 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, 2001 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 raise additional capital to
take advantage of favorable conditions in the market or in connection with the
Company's development activities.
13
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, statements regarding expectations regarding regulatory
approvals, the marketing of additional products and predictions as to the impact
of competitive products, predictions regarding the anticipated outcome of
pending or anticipated litigation, arbitration and patent-related proceedings,
statements regarding expectations regarding facility expansion and statements
regarding expectations as to the value of its investments in certain marketable
securities. These and all other forward-looking statements are made based on
Biogen's current belief as to the outcome and timing of such future events.
Factors which could cause actual results to differ from Biogen's expectations
and which could negatively impact Biogen'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
Biogen's ability to sustain increases in revenues and profitability until at
least approval and launch of a second product will be primarily dependent on the
level of revenues and profitability from AVONEX sales. The level of revenues
from sales of AVONEX will depend on a number of factors, including: continued
market acceptance of AVONEX worldwide; Biogen's ability to maintain a high level
of patient satisfaction with AVONEX; the nature of regulatory and pricing
decisions related to AVONEX worldwide; the extent to which AVONEX continues to
receive and maintains reimbursement coverage; the success of ongoing development
related to AVONEX in expanded MS indications; the continued accessibility of
third parties to vial, label, and distribute AVONEX on acceptable terms; success
in revoking the Rentschler II patent since if the patent were to be upheld and
if Rentschler were to obtain, through legal proceedings, a determination that
Biogen's sale of AVONEX in Europe infringes a valid Rentschler II patent, such
result could have a material adverse effect on the Company's results of
operation and financial condition; and the Company's ability to sustain market
share of AVONEX in light of the impact of competitive products for the treatment
of MS. In the United States, Biogen expects future growth in AVONEX revenues to
be dependent to a large extent on the Company's ability to compete successfully
with Serono, Inc. ("Serono") and its REBIF(R) interferon beta 1a product which
was launched in the United States in March 2002 as a treatment for
relapsing/remitting MS. The FDA approved REBIF for sale in the United States
over a year before the expected expiration of AVONEX's orphan drug marketing
exclusivity. Biogen expects Serono to compete aggressively in the United States
market. REBIF is already on the market in the EU. See the Company's Annual
Report on Form 10-K for the period ended on December 31, 2001 under the headings
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Outlook - Competition" and "Business - Patents and Other
Proprietary Rights".
ROYALTY REVENUE
Biogen receives royalty revenues which, prior to 2001, contributed a significant
amount to its overall profitability. Royalty revenues have decreased
significantly in recent years primarily as the result of patent expirations, see
"Outlook - Patents and Other Proprietary Rights," and a royalty dispute with
Schering-Plough. As noted above, Biogen is currently in arbitration with
Schering-Plough on the issue of whether and to what extent Schering-Plough has
an obligation to pay royalties in the United States on sales of its
14
alpha interferon products. Schering-Plough has taken the position that a Court
of Appeal's decision affirming a District Court's ruling which narrowed the
scope of the claims of Biogen's United States alpha interferon patent (the "901
Patent") allowed it to discontinue royalty payments to Biogen in the United
States on sales of its alpha interferon products. The Court of Appeals decision
came as part of a suit filed by Schering-Plough, as Biogen's exclusive licensee,
against Amgen, Inc. ("Amgen") to enforce the 901 Patent which Schering-Plough
claimed was infringed by Amgen's consensus interferon product. Biogen disagrees
with Schering-Plough's position and 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 in
the arbitration which would resolve issues related to future royalty payments to
pre-empt any potential challenges by Schering-Plough. These claims include
asking the arbitration panel to confirm 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 rights that were the subject of the dispute.
Biogen intends to vigorously pursue its claims against Schering-Plough, but
there is no guarantee that Biogen will be successful in its efforts.
There are a number of other factors which could also cause the actual level of
royalty revenue to differ from Biogen'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 Biogen's licensees. In addition, sales levels of products sold by Biogen'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 Biogen is not involved in the development or sale of products by its
licensees, it cannot be certain of the timing or potential impact of factors
which may affect sales by licensees. 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
regarding the "McCormick" patents, and regulatory matters, see the Company's
Annual Report on Form 10-K for the period ended December 31, 2001 under the
headings "Business - Risks Associated with Drug Development", "Business -
Patents and Other Proprietary Rights", "Business - Regulation", "Legal
Proceedings" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Outlook."
PRODUCTS
AVONEX is currently the only product sold by Biogen. Biogen'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. Biogen expects that its next product on the market will be
AMEVIVE. In the second quarter of 2001, the Company completed Phase 3 clinical
studies of both the intramuscular and intravenous formulations of AMEVIVE in
patients with moderate to severe psoriasis. In August of 2001, Biogen completed
a simultaneous filing for regulatory approval of AMEVIVE in the United States
and Europe, with submission of data from the clinical studies. The applications
are currently under review by both the FDA and regulatory authorities in the EU.
The Dermatologic and Opthalmic Drugs Advisory Committee of the FDA is scheduled
to review the registrational filing of AMEVIVE on May 23, 2002. Biogen 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. Many important factors affect Biogen's ability
to successfully develop and commercialize AMEVIVE and its
15
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 obtain reimbursement coverage
for the products, 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.
Success in early stage clinical trials or preclinical work does not ensure that
later stage or larger scale clinical trials will be successful. Even if later
stage clinical trials are successful, the risk exists that unexpected concerns
may arise from analysis of data or from additional data or that obstacles may
arise or issues be identified in connection with review of clinical data with
regulatory authorities or that regulatory authorities may disagree with the
Company's view of the data or require additional data or information or
additional studies. There can be no assurance that Biogen will be successful in
its efforts to develop and commercialize new products.
PATENTS AND OTHER PROPRIETARY RIGHTS
Biogen has numerous issued patents and patent applications pending on a number
of its processes and products. Biogen has also obtained rights to certain
patents under licenses with third parties which provide for the payment of
royalties. There can be no assurances that Biogen's existing patents or others,
if obtained, will substantially protect or commercially benefit Biogen. In
addition, Biogen does not know to what extent its pending patent applications or
patent applications licensed from third parties will be granted or whether any
of Biogen's patents will prevail if they are challenged in litigation. Also,
there is also no assurance that third parties have not or will not be granted
patents claiming subject matter necessary to Biogen's business. Biogen is aware
that others, including various universities and companies working in the
biotechnology field, have also filed patent applications and have been granted
patents in the United States and in other countries claiming subject matter
potentially useful or necessary to Biogen's business. Some of those patents and
patent applications claim only specific products or methods of making such
products, while others claim more general processes or techniques useful or now
used in the biotechnology industry. For example, Genentech has been granted
patents and is prosecuting other patent applications in the United States and
certain other countries which it may allege are currently used by Biogen and the
rest of the biotechnology industry to produce recombinant proteins in host
cells. Genentech has offered to Biogen and others in the industry non-exclusive
licenses under some of those patents and patent applications for various
proteins and in various fields of use, but not for others. Biogen is also aware
of certain patents held by Genentech relating to immunoadhesion technology that
Genentech may take the position are valid and infringed by Biogen's future
commercial activities with AMEVIVE. Biogen is evaluating these patents to
determine if a license should be taken. The ultimate scope and validity of
Genentech's patents, of other existing patents, or of patents which may be
granted to third parties in the future, and the extent to which Biogen may wish
or be required to acquire rights under such patents and the availability and
cost of acquiring such rights, currently cannot be determined by Biogen. There
has been, and Biogen expects that there may continue to be, significant
litigation in the industry regarding patents and other intellectual property
rights. Such litigation could create uncertainty and consume substantial
resources.
16
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.
17
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: May 3, 2002 /s/ Peter N. Kellogg
Executive Vice President - Finance and
Chief Financial Officer
18