1
EXHIBIT 13
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Product sales $394,863 $239,988 $ 78,202 $ -- $ --
Royalty revenue 162,724 171,921 181,502 134,653 140,433
Total revenues 557,587 411,909 259,704 134,653 140,433
Total expenses 366,948 285,787 234,541 138,245 125,847
Income (loss) before income taxes(a) 210,193 148,968 40,829 7,445 (1,907)
Net income (loss) (a) 138,697 89,167 40,530 5,660 (4,897)
Diluted earnings (loss) per share 1.80 1.17 0.55 0.08 (0.07)
Cash, cash equivalents and short-
term marketable securities 516,914 440,088 321,381 307,948 267,802
Total assets 924,715 813,825 634,572 469,201 377,862
Long-term debt, less current
portion 56,960 61,846 62,254 32,826 --
Shareholders' equity 718,613 536,293 484,370 382,980 329,934
Shares used in calculating diluted
earnings per share 77,135 76,500 73,221 72,890 65,548
(a) Net loss for the year ended December 31, 1994 includes a pre-tax
charge of $25 million as a result of the Company's decision to
discontinue its activities associated with the development of the
Hirulog(R) thrombin inhibitor product. Net income for the year ended
December 31, 1996 includes a tax benefit of approximately $23 million
resulting from the reversal of a deferred tax asset valuation
allowance.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
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 AVONEX(R) (Interferon beta-1a) 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, including alpha interferon and hepatitis B
vaccines and diagnostic products.
RESULTS OF OPERATIONS 1998 AS COMPARED TO 1997
REVENUES
Total revenues in 1998 were $557.6 million, as compared to $411.9 million in
1997, an increase of $145.7 million or approximately 35%.
Product sales in 1998 were $394.9 million as compared to $240 million in 1997,
an increase of $154.9 million or approximately 65%. Product sales from AVONEX(R)
represent approximately 71% of the Company's total revenues in 1998 as compared
to 58% in 1997. AVONEX(R) sales outside of the United States were approximately
$92 million in 1998 as compared to $19.1 million in 1997. The Company began
selling AVONEX(R) in the United States in May 1996. In March 1997, the Company
received regulatory approval to market AVONEX(R) in the fifteen member countries
of the European Union ("EU"). By the end of 1997, AVONEX(R) had received
reimbursement approval and was on the market in all of the EU countries. In
April of 1998, the Company received approval and began marketing AVONEX(R) in
Canada. The Company expects product sales as a percentage of total revenues to
increase in the near term as the Company continues to market AVONEX(R)
worldwide. The Company also expects sales from AVONEX(R) in Europe to increase
as a percentage of total product sales. The Company, however, faces increasing
competition worldwide. See "Outlook - Competition".
Revenues from royalties in 1998 were $162.7 million, a decrease of $9.2 million
or 5% as compared to $171.9 million of royalty revenue in 1997. Included in
royalty revenue in 1997 is a one-time non-refundable licensing payment of $15
million from Merck & Co., Inc. ("Merck"). Merck paid the $15 million license fee
to Biogen for the transfer of technology, rights granted and the research and
development previously performed by Biogen. Revenues from royalties represented
approximately 29% of total revenues in 1998 as compared to 42% in 1997. In May
1998, the Company and Schering Corporation, a subsidiary of Schering-Plough,
amended the terms of the license agreement under which Schering-Plough pays the
Company royalties on worldwide sales of Schering-Plough's alpha interferon
product, Intron(R) A. Under the terms of the amendment, Schering-Plough acquired
the Biogen alpha interferon patent application which was the subject of a
lawsuit filed by the Company against F. Hoffman-LaRoche, Inc. and Genentech Inc.
related to an interference involving the Biogen patent application and a patent
application jointly-owned by the two defendants. The lawsuit has since been
settled. As consideration for the acquisition of the Biogen patent application,
Schering-Plough agreed to pay certain sums on U.S. sales of alpha interferon
products from July 2002 until the expiration of the alpha interferon patent
expected to be issued to F. Hoffman-LaRoche, Inc. and Genentech Inc. as a result
of the settlement. In the near term, the Company expects overall sales of
licensee products and royalty revenues to fluctuate depending on changes in
sales volumes for specific products, patent expirations, new licensing
arrangements, if any, or other developments. For a discussion of some of the
factors that may affect royalty revenues in the future, see "Outlook - Royalty
Revenue" and see "Outlook - Patents and Other Proprietary Rights".
3
COSTS AND EXPENSES
Total expenses in 1998 were $366.9 million as compared to $285.8 million in
1997, an increase of approximately 28%.
Cost of sales in 1998 totaled $74.5 million, an increase of $24.3 million or 48%
as compared to 1997. The increase in cost of sales was attributable to the
higher sales volume of AVONEX(R). Included in cost of sales in 1998 and 1997 is
$62.1 million and $37.1 million, respectively, from product sales and $12.4
million and $13.1 million, respectively, relating to royalty revenue. The
Company expects that gross margins on royalty revenue will fluctuate in the
future based on the impact of one-time royalty and milestone payments, and
changes in sales volumes for specific products.
Research and development expenses in 1998 were $177.2 million, an increase of
$31.7 million or 22% as compared to $145.5 million in 1997. The increase was
primarily due to the costs associated with funding of collaboration agreements,
an increase in clinical trial costs and an increase in the Company's other
development efforts related to its ongoing research and development programs.
The Company expects that, in the near and long-term, research and development
expenses will increase as the Company expands its pipeline and related
development efforts with respect to potential new product candidates and
continues clinical trials and work on new formulations and delivery methods for
AVONEX(R).
Selling, general and administrative expenses in 1998 were $115.2 million, an
increase of $25.1 million or 28% as compared to 1997. This increase was
primarily due to selling and marketing expenses related to the sale of AVONEX(R)
and an increase in legal fees. The Company expects that selling, general, and
administrative expenses will continue to increase in the near term as the
Company continues to expand the sales and marketing organizations necessary to
sell AVONEX(R) in existing and new markets.
OTHER INCOME, NET
Other income, net consists primarily of interest income, partially offset by
interest and other financing expenses, and other non-operating income and
expenses. Interest income increased $6.2 million from 1997 to 1998, which was
offset by increases in financing related and other non-operating expenses. The
increase in interest income is a result of increased funds invested. The Company
expects interest income to vary based on changes in the amount of funds invested
and fluctuations in interest rates.
INCOME TAXES
The Company's effective tax rate in 1998 was 34%. Income tax expense for 1998
varied from the amount computed at the U.S. federal statutory rates primarily
due to the benefit of research and development and investment tax 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.
RESULTS OF OPERATIONS 1997 AS COMPARED TO 1996
REVENUES
Total revenues in 1997 were $411.9 million, as compared to $259.7 million in
1996, an increase of approximately 59%.
Product sales in 1997 were $240 million as compared to $78.2 million in 1996, an
increase of approximately 207%. AVONEX(R) sales outside of the United States
were approximately $19.1 million in 1997 as compared to $593,000 in 1996.
Revenues from royalties in 1997 were $171.9 million, a decrease of $9.6 million
or 5% as compared to $181.5 million of royalty revenue in 1996. Included in
royalty revenue in 1997 was a one-time non-
4
refundable licensing payment of $15 million from Merck paid under a
collaborative research, development and license agreement (the "Merck
Agreement"). Merck paid the $15 million license fee to Biogen for the transfer
of technology, rights granted and the research and development previously
performed by Biogen. Under the Merck Agreement, Merck will have rights to
develop and market small molecule VLA-4 inhibitors in all therapeutic areas
other than certain small indications such as multiple sclerosis and kidney
diseases and disorders, which Biogen will continue to work on itself. The Merck
Agreement also provides for payments to be made by either party upon the
achievement of certain development milestones by the other party. In addition,
if either party successfully develops a product, the other party will receive
royalties on sales of the product. Included in royalty revenue in 1996 was a
one-time royalty payment of $30 million for sales that occurred prior to 1996
received under a license agreement with Pharmacia & Upjohn A.B. ("Pharmacia &
Upjohn"). Under the terms of this license agreement Biogen granted Pharmacia &
Upjohn a sublicense under certain patents related to a proprietary protein
secretion technology licensed exclusively to Biogen by Harvard University.
Excluding the one-time payments from Merck in 1997 and Pharmacia & Upjohn in
1996, royalty revenue increased 3.6% from 1996 to 1997.
COSTS AND EXPENSES
Total expenses in 1997 were $285.8 million as compared to $234.5 million in
1996, an increase of approximately 22%.
Cost of sales in 1997 totaled $50.2 million, an increase of $21.7 million or 76%
as compared to 1996. The increase was due to the higher sales volume of
AVONEX(R). Included in cost of sales in 1997 and 1996 is $37.1 million and $11.4
million, respectively, from product sales and $13.1 million and $17.1 million,
respectively, relating to royalty revenue. Gross margins for product sales
remained flat at 85% in both 1997 and 1996. Cost of sales relating to royalty
revenue for 1997 decreased $4 million, or approximately 23% as compared to 1996,
due to a lower percentage of royalty revenue with associated royalty costs.
Research and development expenses in 1997 were $145.5 million, an increase of
$13.1 million or 10% as compared to 1996. This increase was primarily due to the
costs associated with funding of collaboration agreements, an increase in
clinical trial costs and an increase in the Company's other development efforts
related to its ongoing research and development programs. In 1997, the Company
completed Phase 2 trials of several of its drug candidates, including LFA3TIP, a
T-cell inhibiting protein being tested as a potential treatment for moderate to
severe psoriasis and CVT-124, which is being developed for treatment of edema
associated with congestive heart failure.
Selling, general and administrative expenses in 1997 were $90.1 million, an
increase of $16.5 million or 22% as compared to 1996. The increase was primarily
due to the selling and marketing expenses related to the sale of AVONEX(R),
principally in support of the European launch.
OTHER INCOME, NET
Other income, net consists primarily of interest income, partially offset by
interest and other financing expenses, and other non-operating income and
expenses. The increase in other income, net from 1996 to 1997 of $7.2 million
was primarily attributable to the increase interest income and other
non-operating income partially offset by financing related expenses. The
increase in interest income was attributable to increased funds invested and
higher average yields.
INCOME TAXES
The Company's effective tax rate in 1997 was 40.1%. Income tax expense for 1997
varied from the amount computed at U.S. federal statutory rates primarily due to
the benefit of research and development and investment tax credits offset by
foreign losses for which the Company will receive no current tax benefit. During
the third quarter of 1996, the Company determined it was more likely than not
that it would realize the benefits of its net deferred tax assets, and reversed
the related valuation allowance. The reversal of the valuation allowance
resulted in a realization of income tax benefit of approximately $23 million and
an increase in additional paid-in capital of $38.6 million that related to
deductions for non-qualified stock options.
5
FINANCIAL CONDITION
At December 31, 1998, cash, cash equivalents and short-term marketable
securities were $516.9 million compared with $440.1 million at December 31,
1997, an increase of $76.8 million. Working capital increased $86.9 million to
$559.1 million. Net cash from operating activities for the year ended December
31, 1998 was $167.8 million compared with $97.6 million in 1997. Cash outflows
during 1998 included investments in property and equipment and patents of $33.6
million and $5 million related to investments under collaborative agreements.
Significant cash outflows from financing activities included $65.6 million for
purchases of the Company's common stock under its stock repurchase program and
$29.7 million for repayments on loans and note payable agreements with banks.
Cash inflows included $41.2 million from common stock option exercises and
related tax benefits and employee stock purchase plan activity.
In August 1995, the Company entered into a loan agreement with a bank for
financing the construction of its biological manufacturing facility in North
Carolina (the "Construction Loan"). During 1997, the Company completed
construction of the facility and the funds advanced under the Construction Loan
were converted to a floating rate ten-year term loan with principal and interest
payable quarterly. As of December 31, 1998, the Company had $42.7 million
outstanding under the Construction Loan. The loan is secured by the underlying
building. The Company also entered an interest rate swap agreement with the same
bank, fixing its interest rate on the Construction Loan at 7.75% during the
remaining term of the loan with interest payable quarterly. As of December 31,
1998, the Company also had $19.2 million outstanding under a floating rate loan
with a bank (the "Term Loan"). The Term Loan is secured by the Company's
laboratory and office building in Cambridge, Massachusetts. The Company has
fixed its interest rate on the Term Loan at 7.5% under the terms of a swap
agreement. Terms of the Company's loan agreements include various covenants,
including financial covenants which require the Company to maintain minimum net
worth, cash flow and various financial ratios.
On February 22, 1999, the Company announced that its Board of Directors has
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. The stock purchases are expected to occur from
time to time over a two year period and the program may be discontinued at any
time. Under a previous stock repurchase program, the Company in 1998 repurchased
1.8 million shares of its common stock at a cost of $65.6 million and in 1997
repurchased 200,000 shares of its common stock at a cost of $7 million.
The Company has several research programs and collaborations underway. In
December 1997, the Company entered into a collaborative research, development
and license agreement with Merck. Merck paid a $15 million non-refundable
license fee to Biogen for the transfer of technology, the rights granted and the
research and development previously performed by Biogen. Under the Merck
Agreement, Merck will have rights to develop and market small molecule VLA-4
inhibitors in all therapeutic areas other than certain small indications such as
multiple sclerosis and kidney diseases and disorders, which Biogen will continue
to work on itself. The Merck Agreement also provides for payments to be made to
either party upon the achievement of certain development milestones by the other
party. In addition, if a product is successfully developed by a party, the other
party will receive royalties on sales of the product.
In October 1997, the Company signed a research and option agreement (the
"CuraGen Agreement") with CuraGen Corporation ("CuraGen") under which the
Company and CuraGen will collaborate in the discovery of novel genes using
CuraGen's functional genomics technologies. The Company has also agreed to fund
research activities of CuraGen related to the collaboration up to a maximum of
$7.5 million over the next four years, and in return, has an option to acquire
an exclusive license to certain discoveries arising out of the collaborative
efforts. The Company provided $1.9 million in research and development funding
in 1998. In March of 1998, under the terms of the CuraGen Agreement, the Company
purchased approximately 435,000 shares of CuraGen common stock for a total of $5
million. Additionally, 100,000 shares of Series E Preferred Stock purchased by
Biogen in 1997 for $1 million were automatically converted into 100,000 shares
of CuraGen common stock. The investment is classified as available-for-sale and
is included in long-term marketable securities as of December 31, 1998. In
addition, pursuant to the terms of the agreement, the
6
Company has extended to CuraGen a $10 million line of credit. At December
31, 1998, there were no borrowings outstanding under the line of credit.
In March 1997, the Company signed a research collaboration and license agreement
(the "CVT Agreement") with CV Therapeutics, Inc. ("CVT") under which Biogen
obtained rights to develop and market CVT's therapeutic CVT-124, now known as
BG9719, for the treatment of edema associated with congestive heart failure.
Under the terms of the CVT Agreement, the Company purchased approximately
670,000 shares of CVT common stock for $7 million and paid a one-time license
fee of $5 million, which was charged to research and development expense. The
investment in CVT is classified as available-for-sale and is included in
long-term marketable securities. In addition, pursuant to the terms of the CVT
Agreement, the Company established a $12 million line of credit that CVT may use
for operating purposes. At December 31, 1998, the Company had advanced $7.7
million under the line of credit to CVT.
In December 1996, the Company signed a research collaboration and license
agreement (the "CBM Agreement") with Creative BioMolecules, Inc. ("CBM") under
which Biogen obtained rights to develop and market CBM's morphogenic protein,
OP-1, for the treatment of renal disorders. Under the CBM Agreement, Biogen paid
a license fee of $10 million, which was charged to research and development
expense, and purchased 1.5 million shares of CBM common stock for $18 million.
The payment for the common stock included a $1.2 million premium over the fair
value of the common stock which was charged to research and development expense.
The investment is classified as available-for-sale and is included in long term
marketable securities. In 1998, Biogen and CBM agreed to amend the CBM Agreement
to return to CBM responsibility for the development of OP-1. Under the terms of
the amendment, Biogen has the option, exercisable through the end of 1999, to
resume responsibility for development of OP-1. If Biogen does not exercise its
option, the CBM Agreement will terminate at the end of 1999. The Company
provided $10 million in research and development funding and material purchases
to CBM in 1998.
In July 1996, the Company signed a collaborative research and commercialization
agreement (the "Ontogeny Agreement") with Ontogeny, Inc. ("Ontogeny"), a private
biotechnology company, for the development and commercialization of three
specific hedgehog cell proteins. Under the Ontogeny Agreement, the Company
purchased 400,000 shares of preferred stock of Ontogeny for $1 million and
acquired certain exclusive, worldwide rights related to products based on the
hedgehog proteins for most disease areas. The Company accounts for its
investment in Ontogeny, which is included in other assets, using the cost method
of accounting. In November 1998, the Company extended and expanded its
collaboration with Ontogeny and provided to Ontogeny a $4 million convertible
loan. The Company provided $3.6 million of research funding to Ontogeny in 1998.
The Company has agreed to fund up to an additional $8 million in research
funding over the next three years. If the Company exercises its option to
proceed with development and commercialization of a hedgehog protein, the
Company would be committed to additional funding in the form of license fees,
equity investments and lines of credit.
In August 1995, the Company signed a collaborative research agreement (the
"Genovo Agreement") for the development of human gene therapy treatments with
Genovo, Inc. ("Genovo"), a gene therapy research company. Under the Genovo
Agreement, the Company acquired 380,000 shares of Genovo Series A Preferred
stock for $4.5 million and acquired certain licensing rights. The Company
accounts for this investment, which is included in other assets, using the
equity method of accounting. The Company recorded its proportion of Genovo's net
losses as research and development, which totaled $9 million, $7.7 million, and
$5.6 million in 1998, 1997 and 1996, respectively. At December 31, 1998, the
Company had remaining funding commitments to Genovo of approximately $10
million.
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
December 31, 1998 are temporary in nature. The Company expects that the market
value of such investments will recover to at least the Company's cost basis
within a reasonable period of time. 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. See
Outlook-Stock Price.
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.
7
LEGAL MATTERS
On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen
in the United States District Court for the District of New Jersey alleging
infringement by Biogen of Berlex's "McCormick" patent in the United States in
the production of AVONEX(R) (Interferon beta-1a). In November 1996, Berlex's New
Jersey action was transferred to the U.S. District Court in Massachusetts and
consolidated for pre-trial purposes with a related declaratory judgement 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. On September
23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex
seeks a judgment granting it damages, a trebling of any damages awarded and a
permanent injunction restraining Biogen from the alleged infringement. An
unfavorable ruling in the Berlex suit could have a material adverse effect on
the Company's results of operations and financial position. The Company believes
that it has meritorious defenses to the Berlex claim; however, the ultimate
outcome is not determinable at this time. A trial is currently scheduled for the
fall of 1999 but may be postponed.
On October 14, 1998 the Company filed an opposition with the Opposition
Division of the European Patent Office to oppose a European patent (the
"Rentschler patent") issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler")
with certain claims regarding compositions of matter of beta interferon with
specific regard to the structure of the glycosylated molecule. While Biogen
believes that the patent will be revoked, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and
Statement of Financial Accounting Standards No. 131 "Disclosures about Segments
of an Enterprise and Related Information ("SFAS 131"). SFAS 130 establishes
standards for reporting comprehensive income and its components in the
consolidated financial statements. SFAS 131 establishes standards for reporting
information on operating segments in interim and annual financial statements.
SFAS 130 and SFAS 131 require disclosure only and will have no impact on the
Company's consolidated financial position or results of operations. The Company
adopted SFAS 130 and SFAS 131 on January 1, 1998.
In February 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 132 "Employers Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 revises standards for
disclosures of employers' pension and other post retirement benefit plans. SFAS
132 does not change the measurement or recognition of those plans. The Company
adopted SFAS 132 on January 1, 1998. The adoption of SFAS 132 had no impact on
the Company's consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters for all
fiscal years beginning after June 15, 1999. The Company elected to adopt SFAS
133 in the fourth quarter of 1998. SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at 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. See Notes 1
and 2 to the Company's Consolidated Financial Statements.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 provides guidance on the
8
financial reporting of start-up costs and organization costs, requiring those
costs to be expensed as incurred. SOP 98-5 is effective for financial statements
for fiscal years beginning after December 15, 1998. SOP 98-5 will have not have
a material impact on the Company's consolidated financial position or results
of operations.
OUTLOOK
SAFE HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996
In addition to historical information, this annual 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 the timing of clinical trials and
predictions as to the anticipated outcome of pending litigation and
patent-related proceedings and the Company's expectations as to the value of its
investments in certain marketable securities. 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.
DEPENDENCE ON AVONEX(R) SALES
The Company's ability to sustain increases in revenues and profitability for the
next several years will be primarily dependent on the level of revenues and
profitability from AVONEX(R) sales. The Company's ability to sustain
profitability from sales of AVONEX(R) will depend on a number of factors,
including: continued market acceptance of AVONEX(R) worldwide; the Company's
ability to maintain a high level of patient satisfaction with AVONEX(R); the
nature of regulatory and pricing decisions related to AVONEX(R) worldwide; the
extent to which AVONEX(R) receives reimbursement coverage; the impact of
competitive products and the impact of adverse decisions in patent-related
proceedings. The profitability from AVONEX(R) sales is also dependent on the
successful resolution of the Berlex suit, which is described above under "Legal
Matters".
COMPETITION
The Company faces increasing competition from other products for the treatment
of relapsing forms of multiple sclerosis. AVONEX(R) competes with interferon
beta-1b which is sold in the United States under the brand name Betaseron(R) by
Berlex Laboratories, Inc., a United States affiliate of Schering AG, Germany
("Schering AG"), and is sold in Europe under the brand name Betaferon(R) by
Schering AG. AVONEX(R) also faces competition from Copaxone(R) glatiramer
acetate (also known as copolymer-1). In the United States Copaxone(R) is
marketed by a partnership between Teva Pharmaceuticals and Hoechst Marion
Roussel, Inc. In addition, in Europe and Canada, AVONEX(R) competes with
Rebif(R), a recombinant interferon beta-1a product sold by Ares Serono S.A.
("Serono"). Serono is unable to sell Rebif(R) in the United States for relapsing
multiple sclerosis because of the orphan drug status afforded to AVONEX(R) and
Betaseron(R) for that indication. AVONEX(R) may also in the future face
competition from off-label uses of drugs approved for other indications, and
from new drugs in development. There can be no assurance that the Company will
be able to sustain market share of AVONEX(R) in light of competition from other
products for the treatment of multiple sclerosis.
ROYALTY REVENUE
The Company receives royalty revenues which contribute a significant amount to
its overall profitability. In the near term, the Company expects overall sales
of licensee products and royalty revenues to fluctuate depending on changes in
sales volumes for specific products, patent expirations, new licensing
arrangements, if any, or other developments. 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,
9
licensee sales levels may fluctuate from quarter to quarter due to the timing
and extent of major events such as new indication approvals or government
sponsored vaccination programs. Since the Company is not involved in the
development or sale of products by its licensees, the Company is unable to
predict the timing or potential impact of factors which may affect licensee
sales. In the long term, the Company expects its royalty revenue to be affected
most significantly by patent expirations. See "Outlook - Patents and Other
Proprietary Rights."
In 1998, Schering-Plough received marketing clearance from the FDA for
REBETRON(R) for the treatment of chronic hepatitis C. REBETRON(R) is a product
containing Intron(R) A and REBETOL(R) (ribavirin, USP capsules). In late 1998,
Biogen filed for arbitration against Schering-Plough in a dispute over the
method used by Schering-Plough to determine the amount of royalties payable to
Biogen on sales of REBETRON(R).
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 assurances that Biogen's existing patents or
others, if obtained, will be of substantial protection or commercial benefit to
Biogen. In addition, it is not known to what extent Biogen's pending patent
applications or patent applications licensed from third parties will be granted
or whether any of the Company's patents will prevail if they are challenged in
litigation. There is also no assurance that third parties will not be granted
patents claiming subject matter necessary to Biogen's business.
Biogen has granted an exclusive worldwide license to Schering-Plough Corporation
under Biogen's alpha interferon patents, and receives royalties from
Schering-Plough on sales of its Intron(R) A brand of alpha interferon.
Schering-Plough's royalty obligation to Biogen on sales of alpha interferon
products in Japan and in most European countries will terminate upon expiration
of Biogen's Japanese and European alpha interferon patents in 2001. Biogen's
existing U.S. alpha interferon patent expires in 2002, but in connection with
the acquisition of a related Biogen patent application from Biogen,
Schering-Plough has agreed to pay to Biogen certain sums on sales by
Schering-Plough of alpha interferon products in the United States until the
expiration of the alpha interferon patent expected to issue to F. Hoffman La
Roche, Inc. and Genentech, Inc.
Biogen has licensed its recombinant hepatitis B antigen patent rights to
manufacturers and marketers of hepatitis B vaccines and diagnostic test kits,
and receives royalties on sales of the vaccines and test kits by its licensees.
The obligation of SmithKline and Merck to pay royalties on sales of hepatitis B
vaccines and the obligation of Biogen's other licensees under its hepatitis B
patents to pay royalties on sales of diagnostic products will terminate upon
expiration of Biogen's existing hepatitis B patents. Biogen's existing United
States hepatitis B patents will expire in 2004. Biogen's European hepatitis B
patents will expire at the end of 1999, except in those countries in which
Biogen has or is able to obtain supplemental protection certificates. To date,
Biogen has received supplemental protection certificates in France, Italy,
Luxembourg, The Netherlands, Sweden, Switzerland and Ireland, and has a number
of additional applications pending. The additional coverage afforded by
supplemental protection certificates ranges from two to six 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.
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. See also "Legal Matters".
NEW PRODUCTS
AVONEX(R) is currently the only product sold by the Company. The Company's
long-term viability and growth will depend on the successful development and
commercialization of other products from its research activities and
collaborations. The Company 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
10
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 drugs, including the ability to obtain and maintain
necessary patents and licenses, to demonstrate safety and efficacy of drug
candidates at each stage of the clinical trial process, to meet applicable
regulatory standards and to receive required regulatory approvals, to be capable
of producing drug candidates in commercial quantities at reasonable costs, to
compete successfully against other products and to market products successfully.
There can be no assurance that the Company will be successful in its efforts to
develop and commercialize new products.
MARKET RISK
The Company has exposure to financial risk in several areas including changes in
foreign exchange rates and interest rates. The Company attempts to minimize its
exposures by using certain financial instruments, for purposes other than
trading, in accordance with the Company's overall risk management guidelines.
Further information regarding the Company's accounting policies for financial
instruments and disclosures of financial instruments can be found in Notes 1, 2
and 3 to the Company's Consolidated Financial Statements.
FOREIGN EXCHANGE
The Company has operations in several European countries in connection with the
sale of its product AVONEX(R). The Company also receives royalty revenues based
on worldwide product sales by its licensees. As a result, the Company's
financial position, results of operations and cash flows can be affected by
fluctuations in foreign currency exchange rates (primarily the British pound,
Euro, and Japanese yen).
The Company uses foreign currency forward contracts to manage foreign currency
risk and does not engage in currency speculation. The Company uses these forward
contracts to hedge certain transactions denominated in foreign currencies. A
hypothetical adverse 10% movement in market rates of currencies on the net
unhedged exposures would not have materially decreased 1998 net income.
INTEREST RATES
The Company is exposed to risk of interest rate fluctuations in connection with
its variable rate long-term debt. The Term Loan requires annual principal
payments of $1.7 million through 2004, with the balance due in 2005. The
Construction Loan requires principal payments of $805,000 quarterly through
2006, with the balance due in 2007. At December 31, 1998, the carrying values of
the Term Loan and the Construction Loan approximated fair value.
The Company has fixed its interest rates on the Term Loan and Construction Loan
by entering swap agreements under which the Company exchanges the difference
between 7.5% and 7.75%, respectively, and a floating rate. The notional
principal balance on the swap agreements approximates the principal on the
underlying debt agreements. The fair value of the swap agreements at December
31, 1998, representing the cash requirements of the Company to settle the
agreements, was approximately $4.1 million. Terms of the Company's loan
agreements include various covenants, including financial covenants which
require the Company to maintain minimum net worth, cash flow and various
financial ratios.
The fair value of the Company's marketable securities, long-term debt and
interest rate swap agreements are subject to change as a result of potential
changes in market interest rates. The potential change in fair value for
interest rate sensitive instruments has been assessed on a hypothetical 100
basis point adverse movement across all maturities. The Company estimates that
such hypothetical adverse 100 basis point movement would not have materially
impacted net income.
11
STOCK PRICE
The stock prices of biotechnology companies are subject to significant
fluctuations. The stock price may be affected by a number of factors including,
but not limited to clinical trial results and other product development events,
the outcome of litigation, the financial impact of changes in the value of
investments, including investments in other biotechnology companies, the
decisions relating to intellectual property rights and the entrance of
competitive products into the market, changes in reimbursement policies or other
practices related to the pharmaceutical industry or other industry and market
changes or trends. In addition, if revenues or earnings in any quarter fail to
meet the investment community's expectations, there could be an immediate
adverse impact on the Company's stock price.
YEAR 2000 ISSUES
Year 2000 is the problem resulting from the use of a two-digit date field to
identify the year in computer software. Consequently, computer programs may not
accurately reflect the appropriate date, confusing "00" as the year 1900 rather
than the year 2000. Year 2000 is a pervasive problem affecting many information
technology systems and embedded technologies (e.g. microprocessors in
communications systems) in all companies, in all industries. Failure by the
Company or failure by third parties upon which the Company relies to effectively
address Year 2000 issues could have a material adverse impact on the Company's
financial position or results of operations.
The Company has developed a plan to address the Year 2000 issues. The plan is
segregated into four phases:
1. Information Collection - Identify all Year 2000 risk areas and assign
accountability.
2. Assess Risk - Assign each item a category of risk:
* Commercial Risk - Has a significant impact on sale, delivery and support
of AVONEX(R) or a significant impact on the Company's financial position
or results of operations.
* Operational Risk - Has a significant impact on productivity but does not
materially impact the Company's financial position or results of
operations.
* Convenience Risk - Has a minor impact on productivity.
3. Remediate - Fix or replace, test and implement changes required for Year
2000 compliance.
4. Contingency Plan - Define procedures to be implemented should a disruption
due to Year 2000 occur.
The Company has completed the first two phases of the project and has completed
the testing and upgrading of all individual software applications and equipment
that fall within the Commercial Risk category. Additionally, approximately 70%
of the software applications and equipment in the Operational and Convenience
Risk categories have been remediated. All of the Company's major software
applications are purchased from major software vendors and the Company performs
only minor customizations to those applications. The Company's major software
providers have attested to Year 2000 compliance. The Company has reviewed its
operations equipment for embedded technologies which may be Year 2000
susceptible and does not believe necessary modifications to be material.
The Company is communicating with its significant vendors and customers to
determine the progress that those vendors and customers are making in
remediating their own Year 2000 issues. The Company is requiring that
significant vendors and customers certify those products and services to be Year
2000 compliant and in some cases is performing on-site reviews.
To date, Year 2000 costs have been immaterial and the Company believes that
future costs will also be immaterial. The Company expects the remainder of the
Year 2000 compliance program to be substantially complete by the third quarter
of 1999.
The most reasonably likely worst case scenario, if significant Year 2000 issues
arise, is that the Company would execute its contingency plans to produce,
package, and deliver AVONEX(R), resulting in lower
12
productivity. These contingency plans include producing and maintaining a
sufficient level of inventory of AVONEX(R) in both bulk and packaged format,
developing secondary sources of packaging and delivery, providing for manual and
backup processes. Additionally, third parties from whom the Company receives
royalty revenues could encounter difficulties in their efforts to produce and
sell products which generate royalty revenue for the Company.
13
CONSOLIDATED STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------------
For the years ended December 31,
- -------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------
REVENUES:
Product sales $394,863 $239,988 $ 78,202
Royalties 162,724 171,921 181,502
- -------------------------------------------------------------------------------------------
Total revenues 557,587 411,909 259,704
- -------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of sales 74,509 50,188 28,525
Research and development 177,228 145,501 132,384
Selling, general and administrative 115,211 90,098 73,632
- -------------------------------------------------------------------------------------------
Total costs and expenses 366,948 285,787 234,541
- -------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 190,639 126,122 25,163
Other income, net 19,554 22,846 15,666
- -------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 210,193 148,968 40,829
Income taxes 71,496 59,801 299
- -------------------------------------------------------------------------------------------
NET INCOME $138,697 $ 89,167 $ 40,530
- -------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE $ 1.88 $ 1.21 $ 0.57
- -------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE $ 1.80 $ 1.17 $ 0.55
- -------------------------------------------------------------------------------------------
SHARES USED IN CALCULATING:
Basic earnings per share 73,768 73,812 71,595
- -------------------------------------------------------------------------------------------
Diluted earnings per share 77,135 76,500 73,221
- -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
14
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------
As of December 31,
- -------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 25,445 $ 70,358
Marketable securities 491,469 369,730
Accounts receivable, less allowances of
$1,642 in 1998 and $1,645 in 1997 101,281 86,802
Deferred tax asset 26,584 37,203
Other current assets 49,365 31,973
- -------------------------------------------------------------------------------------
Total current assets 694,144 596,066
- -------------------------------------------------------------------------------------
Property and equipment, net 182,551 174,492
Patents, net 15,869 14,935
Marketable securities 12,668 17,095
Other assets 19,483 11,237
- -------------------------------------------------------------------------------------
$ 924,715 $813,825
- -------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 24,896 $ 15,820
Note payable -- 24,817
Current portion of long-term debt 4,888 4,888
Accrued expenses and other 105,305 78,358
- -------------------------------------------------------------------------------------
Total current liabilities 135,089 123,883
- -------------------------------------------------------------------------------------
Long-term debt, less current portion 56,960 61,846
Other long-term liabilities 14,053 15,132
Put options -- 76,671
Commitments and contigencies -- --
Shareholders' equity
Common stock, par value $0.01 per share (110,000,000
shares authorized; 74,149,391 shares issued) 741 741
Additional paid-in capital 538,847 516,880
Retained earnings 213,507 25,327
Accumulated other comprehensive income (13,165) (2,270)
Treasury stock, at cost, 579,931 shares in 1998 and
125,534 shares in 1997 (21,317) (4,385)
- -------------------------------------------------------------------------------------
Total shareholders' equity 718,613 536,293
- -------------------------------------------------------------------------------------
$ 924,715 $813,825
- -------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
15
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the years ended December 31, 1998 1997 1996
----------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 138,697 $ 89,167 $ 40,530
Adjustments to reconcile net income to net
cash provided from operating activities
Depreciation and amortization 24,590 19,296 15,264
Other (888) 2,695 682
Deferred income taxes 7,486 22,462 (5,541)
Changes in:
Accounts receivable (14,479) (43,850) (23,340)
Other current and other assets (25,638) (8,643) (7,727)
Accounts payable, accrued expenses and
other current and long-term liabilities 38,077 16,505 22,413
----------------------------------------
Net cash flows from operating activities 167,845 97,632 42,281
----------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities (574,021) (481,783) (369,893)
Proceeds from sales and maturities of
marketable securities 453,952 373,130 370,252
Investment in collaborative partners (5,000) (11,000) (16,774)
Acquisitions of property and equipment (29,049) (28,896) (62,030)
Additions to patents (4,562) (6,654) (3,606)
----------------------------------------
Net cash flows from investing activities (158,680) (155,203) (82,051)
----------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from note payable -- 24,817 --
Repayments on note payable (24,817) -- --
Proceeds from issuance of long-term debt -- 4,545 33,444
Repayments on long-term debt (4,886) (4,082) (1,666)
Purchases of treasury stock (65,550) (7,000) --
Issuance of common stock, and option
exercises and related tax benefits 41,175 47,617 24,254
----------------------------------------
Net cash flows from financing activities (54,078) 65,897 56,032
----------------------------------------
Net increase (decrease) in cash and cash equivalents (44,913) 8,326 16,262
Cash and cash equivalents, beginning of the year 70,358 62,032 45,770
----------------------------------------
Cash and cash equivalents, end of the year $ 25,445 $ 70,358 $ 62,032
========================================
SUPPLEMENTAL CASH FLOW DATA
Cash paid during the year for:
Interest $ 5,909 $ 5,940 $ 4,038
Income taxes $ 35,828 $ 3,783 $ 1,516
See accompanying notes to consolidated financial statements.
16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
ADDITIONAL RETAINED OTHER TOTAL
COMMON PAID-IN TREASURY EARNINGS COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL STOCK (DEFICIT) INCOME EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 $710 $408,793 $ -- $(27,699) $ 1,176 $382,980
Net income 40,530 40,530
Unrealized losses on marketable securities, net
of tax (1,988) (1,988)
Translation adjustment 3 3
--------
Total comprehensive income 38,545
--------
Exercise of options and related tax benefits 15 62,137 62,152
Issuance of common stock 693 693
------------------------------------------------------------------------
Balance, December 31, 1996 $725 $471,623 $ -- $ 12,831 $ (809) $484,370
Net income 89,167 89,167
Unrealized losses on marketable securities, net
of tax (1,490) (1,490)
Translation adjustment 29 29
--------
Total comprehensive income 87,706
--------
Reclassification of put option obligation (76,671) (76,671)
Treasury stock purchased (7,000) (7,000)
Exercise of options and related tax benefits 16 44,005 2,548 46,569
Issuance of common stock 981 67 1,048
Compensation expense related to stock options 271 271
------------------------------------------------------------------------
Balance, December 31, 1997 $741 $516,880 $ (4,385) $ 25,327 $ (2,270) $536,293
Net income 138,697 138,697
Unrealized losses on marketable securities, net
of tax (7,072) (7,072)
Unrealized losses on interest rate swaps (4,132) (4,132)
Translation adjustment 309 309
--------
Total comprehensive income 127,802
--------
Exercise of options and related tax benefits 19,745 48,618 (27,188) 41,175
Reclassification of put option obligation 76,671 76,671
Treasury stock purchased (65,550) (65,550)
Compensation expense related to stock options 2,222 2,222
------------------------------------------------------------------------
Balance, December 31, 1998 $741 $538,847 $(21,317) $213,507 $(13,165) $718,613
========================================================================
See accompanying notes to consolidated financial statements.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Biogen, Inc. ("Biogen" or the "Company") is a biopharmaceutical company
principally engaged in the business of developing, manufacturing and marketing
drugs for human health care. The Company currently derives revenues from sales
of AVONEX(R) (Interferon beta-la) for the treatment of relapsing forms of
multiple sclerosis and from royalties on worldwide sales by the Company's
licensees of a number of products covered under patents controlled by the
Company, including alpha interferon and hepatitis B vaccines and diagnostic
products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All material intercompany balances and
transactions have been eliminated. Certain items in prior years' financial
statements have been reclassified to conform with the current year's
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and use assumptions
that affect certain reported amounts and disclosures; actual amounts may differ.
TRANSLATION OF FOREIGN CURRENCIES
Adjustments resulting from the translation of the financial statements of the
Company's foreign operations into U.S. dollars are excluded from the
determination of net income and are accumulated in a separate component of
shareholders' equity. Foreign exchange transaction gains and losses are included
in the results of operations in other income, net. Foreign exchange gains
totaled $2.5 million, $8.2 million and $1.9 million in 1998, 1997 and 1996,
respectively.
CASH AND CASH EQUIVALENTS
The Company considers only those investments which are highly liquid, readily
convertible to cash and which mature within three months from date of purchase
to be cash equivalents.
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 for the periods ending December 31, are
as follows:
(in thousands) 1998 1997
------- -------
Raw materials $ 4,878 $ 4,957
Work in process 17,585 8,132
Finished goods 13,402 9,870
------- -------
$35,865 $22,959
======= =======
18
MARKETABLE SECURITIES
The Company invests its excess cash balances in short-term marketable
securities, principally corporate notes and government securities. The Company
classifies these securities as "available for sale". All available for sale
securities are recorded at fair market value and unrealized gains and losses are
included in accumulated other comprehensive income in shareholders' equity, net
of related tax effects. Realized gains and losses and declines in value, if any,
judged to be other than temporary on available for sale securities are reported
in other income or expense.
As part of its strategic product development efforts, the Company also invests
in equity securities of certain biotechnology companies with which it has
collaborative agreements. Such investments, which are included in long-term
marketable securities and other assets, are classified as available for sale if
a readily determinable market value exists. These investments are accounted for
under the cost or equity method depending on the facts and circumstances of the
investment and are reviewed regularly for impairment.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost and depreciation is calculated on the
straight-line basis over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of the useful life or the term of the
respective lease. Maintenance of computer systems, including maintenance to make
software Year 2000 compliant, is expensed as incurred. The Company capitalizes
certain incremental costs associated with the validation effort required for
licensing by the FDA of a manufacturing facility for the production of a
commercially approved drug. These costs include a partial allocation of direct
labor and material. Buildings and equipment are depreciated over estimated
useful lives ranging from 30 to 40 and 3 to 10 years, respectively.
PATENTS
The costs associated with successful patent defenses and patent applications are
capitalized and amortized on a straight-line basis over estimated useful lives
up to 15 years. Accumulated amortization of patent costs was $15.5 million and
$11.8 million as of December 31, 1998 and 1997, respectively. The carrying value
of patents is regularly reviewed by the Company and impairments are recognized
when the expected future operating cash flows derived from the patent are less
than their carrying value.
DERIVATIVES AND HEDGING ACTIVITIES
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"). SFAS 133 is effective for all fiscal
quarters for all fiscal years beginning after June 15, 1999. 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. When it is determined that a derivative is not
highly effective as a hedge or that it has ceased to be a highly effective
hedge, the Company discontinues hedge accounting prospectively.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS
130"). The Company adopted SFAS 130 on January 1, 1998. Under SFAS 130, the
Company is required to display comprehensive income and its components as part
of the Company's full set of financial statements. The measurement and
presentation of net income did not change. 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, unrealized holding gains and losses on
available-for-sale marketable securities and certain derivative instruments. The
Consolidated Statements of Shareholders' Equity reflect comprehensive income for
years ended December 31, 1998, 1997 and 1996.
19
SEGMENT INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS 131"). The Company adopted SFAS 131
on January 1, 1998. SFAS 131 establishes standards for reporting information on
operating segments in interim and annual financial statements. SFAS 131 had no
impact on the Company's consolidated financial position or results of
operations.
REVENUES
Revenues from product sales are recognized when product is shipped and are net
of applicable allowances for returns, rebates and other applicable discounts and
allowances. The Company receives revenues under license agreements with a number
of third parties that sell products based on technology developed by the
Company. All of the license agreements provide for the payment of royalties to
the Company based on sales of the licensed product. The Company records these
revenues based on estimates of the sales that occurred during the relevant
period. Many of the license agreements also provide for the payment of one-time,
non-refundable fees when the agreement is signed or when commercial goals are
achieved. These fees are recorded as revenue in accordance with the terms of the
particular agreement.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs, including amounts funded in research
collaborations, are expensed as incurred.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which
changed the method of calculating earnings per share. SFAS 128 requires the
presentation of "basic" earnings per share and "diluted" 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. The Company adopted SFAS 128 in the fourth quarter of
1997. All prior period per share amounts have been restated to comply with the
standard.
Dilutive securities include outstanding options under the Company's stock option
plans. Shares used in calculating basic and diluted earnings per share for the
periods ending December 31, are as follows:
(in thousands) 1998 1997 1996
------ ------ ------
Weighted average number of shares
of common stock outstanding 73,768 73,812 71,595
Dilutive stock options 3,367 2,688 1,626
------ ------ ------
Shares used in calculating diluted
earnings per share 77,135 76,500 73,221
====== ====== ======
2. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to concentrations of
credit risk are accounts receivable and marketable securities. Wholesale
distributors and large pharmaceutical companies account for the majority of the
accounts receivable and collateral is generally not required. To mitigate the
risk, the Company monitors the financial performance and credit worthiness of
its customers. The Company invests its excess cash balances in marketable debt
securities, primarily U.S. government securities and corporate bonds and notes,
with strong credit ratings. The Company limits the amount of investment exposure
as to institution, maturity and investment type.
The average maturity of the Company's marketable securities as of December 31,
1998 and 1997 was 21 months and 16 months, respectively. Proceeds from
maturities and other sales of marketable securities,
20
which were primarily reinvested, for the years ended December 31, 1998, 1997 and
1996 were $454 million, $373.1 million and $370.3 million, respectively. The
cost of securities sold is determined based on the specific identification
method. Realized gains and (losses) on these sales for the years ended December
31, 1998, 1997 and 1996 were $645,000, $(510,000) and $(783,000), respectively.
The following is a summary of marketable securities:
Unrealized Amortized
(in thousands) Fair Value Gains Losses Cost
---------- ------ ------- ---------
December 31, 1998:
U.S. Government securities $259,411 $ 627 $ 57 $258,841
Corporate debt securities 232,058 3,810 -- 228,248
--------------------------------------------
$491,469 $4,437 $ 57 $487,089
============================================
Marketable securities,
noncurrent $ 12,668 $ -- $16,192 $ 28,860
============================================
December 31, 1997:
U.S. Government securities $197,375 $ 250 $ 207 $197,332
Corporate debt securities 172,355 1,751 -- 170,604
--------------------------------------------
$369,730 $2,001 $ 207 $367,936
============================================
Marketable securities,
noncurrent $ 17,095 $ 228 $ 5,974 $ 22,841
============================================
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
December 31, 1998 are temporary in nature. The Company expects that the market
value of such investments will recover to at least the Company's cost basis
within a reasonable period of time.
The Company uses swap agreements to mitigate the risk associated with its
floating rate debt and records the differential to be paid or received as
interest expense. The fair value of the swap agreements at December 31, 1998 and
1997, representing the cash requirements of the Company to settle the
agreements, approximated $4.1 million and $2.1 million, respectively.
The Company has foreign currency forward contracts to hedge specific
transactions denominated in foreign currencies. All foreign currency forward
contracts have durations of ninety days to one year. These contracts are
designated as cash flow hedges and accordingly, when effective, any unrealized
gains or losses on these contracts are reported in other comprehensive income.
Realized gains and losses for the effective portion are recognized with the
underlying hedge transaction. The contract amount of the forwards outstanding at
December 31, 1998 was $112.4 million with a fair value of approximately $111.6
million.
In 1998, the Company recorded an adjustment to other comprehensive income to
recognize at fair value all derivatives that are designated as cash-flow hedging
instruments. Additionally, the Company recognized $686,000 in other expense, for
the ineffective portion of certain cash flow hedge transactions. The Company
also recognized a $322,000 gain in product revenue and a $485,000 loss in
royalty revenue for the settlement of certain cash flow hedge instruments during
the period.
21
During 1997, to minimize the cost of the Company's stock repurchase program, the
Company sold put options and purchased call options covering a large portion of
the shares intended to be repurchased. There were no put or call options
outstanding at December 31, 1998. The maximum potential repurchase obligation
for put options outstanding at December 31, 1997 was $76.7 million. Below is a
summary of the contract amounts, weighted average strike price and fair value of
these instruments at December 31, 1997.
Contract Amount Weighted Average Fair Value
(in millions) Strike Price (in millions)
--------------- ---------------- -------------
Put Options Sold $76.7 $33.34 $(4.9)
Call Options Purchased 65.6 36.42 7.9
3. BORROWINGS
As of December 31, 1998, the Company had $19.2 million outstanding under a
floating rate loan with a bank (the "Term Loan"). The Term Loan is secured by
the Company's laboratory and office building in Cambridge, Massachusetts. The
Term Loan provides for annual principal payments of $1.7 million in each of the
years 1996 through 2004 with the balance due May 8, 2005. The Company also
entered into an interest rate swap agreement, with the same bank, fixing its
interest rate at 7.5% during the remaining term of the loan, payable
semi-annually.
As of December 31, 1998, the Company had $42.7 million outstanding under a
floating rate loan agreement with a bank for financing the construction of its
biological manufacturing facility in North Carolina (the "Construction Loan").
The Construction Loan is secured by the facility. Payments of $805,000 are due
quarterly through 2006 with the balance due in 2007. The Company also entered
into an interest rate swap agreement, with the same bank, fixing its interest
rate at 7.75% during the remaining term of the loan, payable quarterly.
The Term Loan and Construction Loan agreements include various covenants,
including financial covenants, which require the Company to maintain minimum net
worth, cash flow and various financial ratios. The Company's long-term debt
obligations are carried at face value, which approximates fair market value.
Long-term debt at December 31, consists of the following:
(in thousands) 1998 1997
- ------------------------------------ -------- --------
Term Loan due 2005 $19,167 $20,834
Construction Loan due 2007 42,681 45,900
-------- --------
61,848 66,734
Current portion (4,888) (4,888)
======== ========
$56,960 $61,846
======== ========
During 1997, the Company entered into a $30 million variable rate multicurrency
line of credit agreement with a bank. Under the line of credit, the Company
could borrow or enter into commitments to borrow amounts in various currencies,
at which time the exchange rate for these commitments was set. Any amounts
outstanding were revalued using exchange rates at each balance sheet date.
During 1998, the Company terminated the line of credit and at December 31, 1998
there were no obligations outstanding under this facility. At December 31, 1997
there was $24.8 million outstanding under this agreement.
22
4. CONSOLIDATED BALANCE SHEET DETAILS
Property and equipment:
December 31 (in thousands) 1998 1997
--------- --------
Land $ 8,359 $ 8,359
Buildings 87,190 83,565
Leasehold improvements 52,602 49,795
Equipment 120,887 98,794
--------- --------
Total cost 269,038 240,513
Less accumulated depreciation 86,487 66,021
========= ========
$ 182,551 $174,492
========= ========
Depreciation expense was $21.4 million, $15.9 million and $12.7 million for
1998, 1997 and 1996, respectively. The Company capitalized interest costs of
$685,000 and $1.7 million in 1997 and 1996, respectively with respect to
qualifying construction projects. The Company did not capitalize any interest
costs in 1998. The Company completed construction of its biological
manufacturing facility in North Carolina in 1997. As of December 31, 1997, the
Company had capitalized $65.5 million relating to the North Carolina facility.
Accrued expenses and other:
December 31 (in thousands) 1998 1997
-------- -------
Royalties and licensing fees $ 23,029 $17,676
Income taxes 28,056 20,196
Other 54,220 40,486
======== =======
$105,305 $78,358
======== =======
5. PENSIONS
In February 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits", ("SFAS 132"). SFAS 132 revises standards for
disclosures of employers' pension and other post retirement benefit plans. SFAS
132 does not change the measurement or recognition of those plans.
The Company has a defined benefit pension plan which provides benefits to
substantially all of its employees. The Company also has a supplemental
retirement benefit plan which covers certain employees. The pension plans are
noncontributory with benefit formulas based on employee earnings and credited
years of service. The Company's funding policy for its pension plans is to
contribute amounts deductible for federal income tax purposes. Funds contributed
to the plans are invested in fixed income and equity securities.
The components of net periodic pension cost for each of the three years ended
December 31 are summarized below:
(in thousands) 1998 1997 1996
------ ------ ------
Service cost $2,225 $1,873 $1,381
Interest cost 1,041 876 659
Expected return on plan assets (722) (497) (293)
Amortization of transition asset (21) (21) (21)
Amortization of prior service cost 43 43 37
Amortization of net actuarial loss -- 40 57
------ ------ ------
Net pension cost $2,566 $2,314 $1,820
====== ====== ======
23
Reconciliations of projected benefit obligations, fair value of plan assets and
the funded status of the plans as of December 31, are presented below:
Change in projected benefit obligation (in thousands) 1998 1997
- ---------------------------------------------------------------- --------- ---------
Net projected benefit obligation at the beginning of the year $(12,727) $ (9,466)
Service cost (2,225) (1,873)
Interest cost (1,041) (876)
Actuarial loss (341) (845)
Gross benefits paid 331 333
-------- --------
Net projected benefit obligation at the end of the year (16,003) (12,727)
-------- --------
Change in plan assets (in thousands)
- ----------------------------------------------------------------
Fair value of plan assets at the beginning of the year 8,393 5,579
Actual return on plan assets 2,142 1,416
Employer contributions 1,557 1,752
Gross benefits paid (213) (216)
Administrative expenses (106) (138)
-------- --------
Fair value of plan assets at the end of the year 11,773 8,393
-------- --------
Funded status at the end of the year (in thousands)
- ----------------------------------------------------------------
Funded status at the end of the year (4,230) (4,334)
Unrecognized net actuarial (gain) loss (173) 905
Unrecognized prior service cost 358 401
Unrecognized net transition asset 0 (21)
-------- --------
Net amount recognized at the end of the year $ (4,045) $ (3,049)
======== ========
Weighted average assumptions at the end of the year
- ----------------------------------------------------------------
Discount rate 6.75% 7.25%
Expected return on plan assets 8.00% 8.00%
Rates of compensation increase 5.00% 5.00%
The Company has an unfunded supplemental retirement plan. As of December 31,
1998 and 1997 the projected benefit and the accumulated benefit obligations were
$3.2 million and $2.3 million, and $3 million and $1.6 million, respectively.
24
6. INCOME TAXES
The components of income (loss) before income taxes and of income tax expense
(benefit) for each of the three years ended December 31, are as follows:
(in thousands) 1998 1997 1996
-------- -------- --------
Income (loss) before income taxes:
Domestic $200,181 $172,973 $ 65,250
Foreign 10,012 (24,005) (24,421)
-------- -------- --------
$210,193 $148,968 $ 40,829
======== ======== ========
Income tax expense (benefit):
Current
Federal $ 58,152 $ 33,688 $ 4,636
State 3,937 2,735 789
Foreign 887 916 415
-------- -------- --------
$ 62,976 $ 37,339 $ 5,840
-------- -------- --------
Deferred
Federal $ 8,314 $ 21,416 $ (4,082)
State 206 1,046 (1,459)
-------- -------- --------
8,520 22,462 (5,541)
-------- -------- --------
Total income tax expense $ 71,496 $ 59,801 $ 299
======== ======== ========
The Company's foreign subsidiaries generated operating losses in 1997 and 1996
reflecting the costs of building a commercial infrastructure in Europe and the
foreign subsidiaries' investment in the Company's research and development
efforts.
Deferred tax assets (liabilities) are comprised of the following at December 31:
(in thousands) 1998 1997
------- --------
Tax credits $13,454 $ 32,273
Inventory and other reserves 10,762 3,810
Other 2,368 5,297
------- --------
Deferred tax assets 26,584 41,380
------- --------
Depreciation and amortization (7,095) (14,405)
------- --------
Deferred tax liabilities (7,095) (14,405)
------- --------
$19,489 $ 26,975
======= ========
During the third quarter of 1996, the Company determined that it was more likely
than not that it would realize the benefits of its net deferred tax assets and
therefore released the related valuation allowance. The reversal of the
valuation allowance resulted in a realization of income tax benefits of
approximately $23 million. The income tax benefit represented the balance of
tax-loss carryforwards and tax credits that had not been recognized through the
third quarter in 1996 and tax credits generated during the quarter. The reversal
of the valuation allowance also resulted in an increase in additional paid-in
capital of $38.6 million relating to deductions for non-qualified stock options.
25
A reconciliation of the U.S. federal statutory tax rate to the effective tax
rate for the periods ending December 31 is as follows:
1998 1997 1996
---- ---- -----
Statutory rate 35.0% 35.0% 35.0%
State taxes 3.0 2.7 1.3
Foreign taxes -- 6.3 21.8
Credits, net operating loss utilization and
release of valuation allowance (4.2) (3.8) (56.3)
Other 0.2 (0.1) (1.1)
---- ---- -----
Effective tax rate 34.0% 40.1% 0.7%
==== ==== =====
At December 31, 1998, the Company had tax credits of $13.5 million, most of
which expire at various dates through 2013.
7. RESEARCH COLLABORATIONS
The Company has several research programs and collaborations underway. In
December 1997, the Company entered into a collaborative research, development
and license agreement (the "Merck Agreement") with Merck & Co., Inc.("Merck").
Merck paid a $15 million non-refundable license fee to Biogen for the transfer
of technology, the rights granted and the research and development previously
performed by Biogen. Under the Merck Agreement, Merck will have rights to
develop and market small molecule VLA-4 inhibitors in all therapeutic areas
other than certain small indications such as multiple sclerosis and kidney
diseases and disorders, which Biogen will continue to work on itself. The Merck
Agreement also provides for payments to be made to either party upon the
achievement of certain development milestones by the other party. In addition,
if a product is successfully developed by a party, the other party will receive
royalties on sales of the product.
In October 1997, the Company signed a research and option agreement (the
"CuraGen Agreement") with CuraGen Corporation ("CuraGen") under which the
Company and CuraGen will collaborate in the discovery of novel genes using
CuraGen's functional genomics technologies. The Company has also agreed to fund
research activities of CuraGen related to the collaboration up to a maximum of
$7.5 million over the next four years, and in return, has an option to acquire
an exclusive license to certain discoveries arising out of the collaborative
efforts. The Company provided $1.9 million in research and development funding
in 1998. In March of 1998, under the terms of the CuraGen Agreement, the Company
purchased approximately 435,000 shares of CuraGen common stock for a total of $5
million. Additionally, 100,000 shares of Series E Preferred Stock purchased by
Biogen in 1997 for $1 million were automatically converted into 100,000 shares
of CuraGen common stock. The investment is classified as available-for-sale and
is included in long-term marketable securities. In addition, pursuant to the
terms of the agreement, the Company has extended to CuraGen a $10 million line
of credit. At December 31, 1998, there were no borrowings outstanding under the
line of credit.
In March 1997, the Company signed a research collaboration and license agreement
(the "CVT Agreement") with CV Therapeutics, Inc. ("CVT") under which Biogen
obtained rights to develop and market CVT's therapeutic CVT-124, now known as
BG9719, for the treatment of edema associated with congestive heart failure.
Under the terms of the CVT Agreement, the Company purchased approximately
670,000 shares of CVT common stock for $7 million and paid a one-time license
fee of $5 million, which was charged to research and development expense. The
investment in CVT is classified as available-for-sale and is included in
long-term marketable securities. In addition, pursuant to the terms of the CVT
Agreement, the Company established a $12 million line of credit that CVT may use
for operating purposes. At December 31, 1998, the Company had advanced $7.7
million under the line of credit to CVT.
In December 1996, the Company signed a research collaboration and license
agreement (the "CBM Agreement") with Creative BioMolecules, Inc. ("CBM") under
which Biogen obtained rights to develop and market CBM's morphogenic protein,
OP-1, for the treatment of renal disorders. Under the CBM Agreement, Biogen paid
a license fee of $10 million, which was charged to research and development
expense, and purchased 1.5 million shares of CBM common stock for $18 million.
The payment for the common stock included a $1.2 million premium over the fair
value of the common stock which was
26
charged to research and development expense. The investment is classified as
available-for-sale and is included in long term marketable securities. In 1998,
Biogen and CBM agreed to amend the CBM Agreement to return to CBM responsibility
for the development of OP-1. Under the terms of the amendment, Biogen has the
option, exercisable through the end of 1999, to resume responsibility for
development of OP-1. If Biogen does not exercise its option, the CBM Agreement
will terminate at the end of 1999. The Company provided $10 million in research
and development funding and material purchases to CBM in 1998.
In July 1996, the Company signed a collaborative research and commercialization
agreement (the "Ontogeny Agreement") with Ontogeny, Inc. ("Ontogeny"), a private
biotechnology company, for the development and commercialization of three
specific hedgehog cell proteins. Under the Ontogeny Agreement, the Company
purchased 400,000 shares of preferred stock of Ontogeny for $1 million and
acquired certain exclusive, worldwide rights related to products based on the
hedgehog proteins for most disease areas. The Company accounts for its
investment in Ontogeny, which is included in other assets, using the cost method
of accounting. In November 1998, the Company extended and expanded its
collaboration with Ontogeny and provided to Ontogeny a $4 million convertible
loan. The Company provided $3.6 million of research funding to Ontogeny in 1998.
The Company has agreed to fund up to an additional $8 million in research
funding over the next three years. If the Company exercises its option to
proceed with development and commercialization of a hedgehog protein, the
Company would be committed to additional funding in the form of license fees,
equity investments and lines of credit.
In August 1995, the Company signed a collaborative research agreement (the
"Genovo Agreement") for the development of human gene therapy treatments with
Genovo, Inc. ("Genovo"), a gene therapy research company. Under the Genovo
Agreement, the Company acquired 380,000 shares of Genovo Series A Preferred
stock for $4.5 million and acquired certain licensing rights. The Company
accounts for this investment, which is included in other assets, using the
equity method of accounting. The Company recorded its proportion of Genovo's net
losses as research and development, which totaled $9 million, $7.7 million, and
$5.6 million in 1998, 1997 and 1996, respectively. At December 31, 1998, the
Company had remaining funding commitments to Genovo of approximately $10
million.
8. COMMITMENTS AND CONTINGENCIES
The Company rents laboratory and office space and certain equipment under
noncancellable operating leases. The rental expense under these leases, which
terminate at various dates through 2012, amounted to $9.4 million in 1998, $7.5
million in 1997 and $6.6 million in 1996. The lease agreements contain various
clauses for renewal at the option of the Company and, in certain cases,
escalation clauses linked generally to rates of inflation. At December 31, 1998,
minimum annual rental commitments under noncancellable leases were as follows:
Year (in thousands)
---------------------------------------------------------
1999 $ 9,798
2000 8,128
2001 5,122
2002 4,836
2003 2,914
Thereafter 14,260
-------
Total minimum lease payments $45,058
=======
On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen
in the United States District Court for the District of New Jersey alleging
infringement by Biogen of Berlex's "McCormick" patent in the United States in
the production of AVONEX(R) (Interferon beta-1a). In November 1996, Berlex's New
Jersey action was transferred to the U.S. District Court in Massachusetts and
consolidated for pre-trial purposes with a related declaratory judgement 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. On September
23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex
seeks a judgment granting it damages, a trebling of any damages awarded and a
permanent injunction restraining Biogen from the alleged infringement. An
unfavorable ruling in the Berlex suit could have a material adverse effect on
the Company's results of operations and financial position. The Company believes
that it has meritorious defenses to the Berlex
27
claim; however, the ultimate outcome is not determinable at this time. A trial
is currently scheduled for the fall of 1999 but may be postponed.
On October 14, 1998 the Company filed an opposition with the Opposition Division
of the European Patent Office to oppose a European patent (the "Rentschler
patent") issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler") with
certain claims regarding compositions of matter of beta interferon with specific
regard to the structure of the glycosylated molecule. While Biogen believes that
the patent will be revoked, 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.
9. SHAREHOLDERS' EQUITY
CONVERTIBLE EXCHANGEABLE PREFERRED STOCK
The Company has authority to issue 20,000,000 shares of $.01 par value preferred
stock.
SHAREHOLDER RIGHTS PLAN
In 1989, the Company's Board of Directors declared a dividend of one preferred
share purchase right (a "right") for each share of common stock outstanding.
Each right entitles the holder to purchase from the Company one two-hundredth of
a share of $0.01 par value Series A junior participating preferred stock at a
price of $34.00 per two-hundredth of a share, subject to certain adjustments.
The rights are exercisable only if a person or group acquires 20% or more of the
outstanding common stock of the Company or commences a tender offer which would
result in the ownership of 20% or more of the outstanding common stock of the
Company; or if 10% of the Company's common stock is acquired and the acquirer is
determined by the Board of Directors to be an adverse person (as defined in the
rights plan). Once a right becomes exercisable, the plan allows the Company's
shareholders to purchase common stock at a substantial discount. Unless earlier
redeemed, the rights expire on May 8, 1999. The Company is entitled to redeem
the rights at $.005 per right, subject to adjustment for any future stock split,
stock dividend or similar transaction.
As of December 31, 1998, the Company has authorized the issuance of 400,000
shares of Series A junior participating preferred stock for use in connection
with the shareholder rights plan.
SHARE OPTION AND PURCHASE PLANS
The Company has several stock-based compensation plans. The Company applies APB
Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for its
plans. In 1996, the Company adopted Statement of Financial Accounting Standards
No. 123 "Accounting for Stock Issued to Employees" ("SFAS 123") for disclosure
purposes only. The SFAS 123 disclosures include pro forma net income and
earnings per share as if the fair value-based method of accounting had been
used. Stock issued to non-employees is accounted for in accordance with SFAS 123
and related interpretations. Included in compensation expense for the periods
ending December 31, 1998 and 1997 were approximately $2.2 million and $271,000,
respectively, related to stock based compensation plans. There were no such
compensation costs in 1996.
28
The Company has several plans and arrangements under which it may grant options
to employees, Directors and Scientific Board members to purchase common stock.
Option grants are typically made under the 1985 Non-Qualified Stock Option Plan
and the 1987 Scientific Board Stock Option Plan (the "Plans"). Options under the
Plans are granted at no less than 100% of the fair market value on the date of
grant. Options generally become exercisable over various periods, typically 5 to
7 years for employees and 3 years for Directors and Scientific Board members and
have a maximum term of 10 years. Activity under these plans for the periods
ending December 31, is as follows (shares are in thousands):
1998 1997 1996
--------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding, Jan. 1 11,152 $23.95 11,748 $20.77 11,772 $17.59
Granted 1,809 67.75 1,556 37.65 1,935 34.46
Exercised (1,306) 15.29 (1,652) 14.08 (1,478) 12.89
Canceled (467) 26.65 (500) 24.39 (481) 20.92
------ ------ ------ ------ ------ ------
Outstanding, Dec. 31 11,188 $31.93 11,152 $23.95 11,748 $20.77
====== ====== ====== ====== ====== ======
Options exercisable 5,499 5,208 5,692
Available for grant 1,912 1,135 2,310
Weighted average fair
value of options
granted $29.25 $16.78 $16.59
The table below summarizes options outstanding and exercisable at December 31,
1998 (shares are in thousands):
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- --------------------------- ----------- ----------- -------- ----------- --------
$0.00-$10.00 467 2.15 $ 8.50 394 $ 8.27
$10.01-$20.00 2,680 4.49 16.00 2,080 15.84
$20.01-$30.00 3,550 5.71 25.07 2,258 24.64
$30.01-$40.00 2,565 8.07 35.37 675 35.13
$40.01-$50.00 584 8.67 45.68 32 45.34
$50.01-$60.00 116 9.60 52.56 -- --
$60.01-$70.00 106 9.74 64.79 -- --
$70.01-$80.00 38 9.85 75.79 -- --
Over $80.00 1,082 9.95 81.47 60 81.47
------ ------ -----
Total 11,188 $31.93 5,499
====== ====== =====
The Company also has two employee stock purchase plans covering substantially
all of its employees. The plans allow employees to purchase common stock at 85%
of the lower of the fair market value at either the date of the beginning of the
plan period or the purchase date. Purchases under the plans are subject to
certain limitations and may not exceed an aggregate of 560,000 shares during the
term of the plans; no shares may be issued after December 31, 2007. Through
December 31, 1998, 322,673 shares have been issued under the stock purchase
plans.
29
If compensation cost for the Company's 1998, 1997 and 1996 grants under the
stock-based compensation plans had been determined based on SFAS 123, the
Company's pro forma net income, and pro forma diluted earnings per share for the
years ending December 31, would have been as follows (in thousands except per
share data):
1998 1997 1996
-------- ------- -------
Pro forma net income $122,342 $83,244 $36,679
Pro forma diluted earnings per share $ 1.59 $ 1.09 $ 0.50
The fair value of options granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
1998 1997 1996
---- -------- --------
Expected dividend yield 0% 0% 0%
Expected stock price volatility 36% 36% 36%
Risk-free interest rate 5.5% 5.5-5.9% 5.5-5.9%
Expected option term in years 5.6 5.8 6.3
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 did not apply to awards prior to 1995, and
additional awards in future years are anticipated.
STOCK REPURCHASE PROGRAM
On October 6, 1997, the Company announced that its Board of Directors had
authorized the repurchase of up to 2.5 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 stock purchases occurred from time to time.
In 1998, the Company repurchased 1.8 million shares of its common stock at a
cost of $65.6 million. In 1997, the Company repurchased 200,000 shares of its
common stock at a cost of $7 million.
During 1997, to minimize the cost of the Company's stock repurchase program, the
Company sold put options and purchased call options covering a large portion of
the shares intended to be repurchased. There were no put or call options
outstanding at December 31, 1998. The maximum potential repurchase obligation
for put options outstanding at December 31, 1997 was $76.7 million.
10. SEGMENT INFORMATION
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 AVONEX(R) (Interferon beta-1a) 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, including alpha
interferon and hepatitis B vaccines and diagnostic products. The Company's
geographic information is as follows (in thousands):
December 31, 1998: US EUROPE ASIA OTHER TOTAL
- --------------------------------- -------- ------- ------- ------ --------
Product revenue from external
customers $303,591 $91,237 $ -- $ 35 $394,863
Royalty revenue from external
customers 108,177 37,573 13,940 3,034 162,724
Long-lived assets 213,053 15,912 -- 105 229,070
30
December 31, 1997: US EUROPE ASIA OTHER TOTAL
- --------------------------------- -------- ------- ------- ------- --------
Product revenue from external
customers $220,385 $17,885 $ -- $ 1,718 $239,988
Royalty revenue from external
customers 88,424 50,279 15,362 17,856 171,921
Long-lived assets 204,800 11,888 -- -- 216,688
December 31, 1996: US EUROPE ASIA OTHER TOTAL
- --------------------------------- -------- ------- ------- ------- --------
Product revenue from external
customers $ 77,945 $ 257 $ -- -- $ 78,202
Royalty revenue from external
customers 53,813 62,200 50,342 15,147 181,502
Long-lived assets 195,958 1,430 -- -- 197,388
The Company received revenue from five unrelated parties in 1998 accounting for
a total of 16%, 13%, 11%, 11% and 10% of total product and royalty revenue. The
Company received revenue from four unrelated parties in 1997 accounting for a
total of 19%, 11%, 11% and 10% of total product and royalty revenue. The Company
received revenue from three unrelated parties in 1996 accounting for 27%, 17%
and 13% of total product and royalty revenue.
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
(in thousands, except per share amounts)
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
1998
Total revenues $114,472 $128,812 $145,904 $168,399 $557,587
Product revenue 76,100 87,073 107,492 124,198 394,863
Royalties revenue 38,372 41,739 38,412 44,201 162,724
Total expenses and taxes 93,623 103,602 114,024 127,195 438,444
Other income, net 6,922 6,239 5,685 708 19,554
Net income 27,771 31,449 37,565 41,912 138,697
Basic earnings per share 0.38 0.43 0.51 0.57 1.88
Diluted earnings per share 0.36 0.41 0.49 0.54 1.80
1997
Total revenues $94,831 92,447 $100,613 $124,018 $411,909
Product revenue 52,616 56,440 60,413 70,519 239,988
Royalties revenue 42,215 36,007 40,200 53,499 171,921
Total expenses and taxes 82,394 77,895 85,787 99,512 345,588
Other income, net 4,573 5,396 5,659 7,218 22,846
Net income 17,010 19,948 20,485 31,724 89,167
Basic earnings per share 0.23 0.27 0.28 0.43 1.21
Diluted earnings per share 0.22 0.26 0.27 0.42 1.17
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Biogen, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Biogen, Inc.
and its subsidiaries at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 14, 1999
32
SHAREHOLDER INFORMATION
BIOGEN, INC. AND SUBSIDIARIES
CORPORATE HEADQUARTERS:
Biogen, Inc.
14 Cambridge Center
Cambridge, MA 02142
Telephone: (617) 679-2000
Fax: (617) 679-2617
ANNUAL MEETING:
Friday, June 11, 1999 at 10:00 a.m.
at the Company's offices at 12 Cambridge Center
All shareholders are welcome.
MARKET FOR SECURITIES:
Biogen's securities are quoted on the
NASDAQ National Market System.
Common stock symbol: BGEN
As of March 15, 1999, there were approximately 2,579 holders of record of the
Company's Common Stock. The Company has not paid any cash dividends on its
Common Stock since its inception, and does not intend to pay any dividends in
the foreseeable future. The quarterly high and low closing sales price of the
Company's Common Stock on the NASDAQ National Market System for 1998 and 1997
are as follows:
HIGH LOW
FISCAL 1998
First Quarter 49 11/16 33 1/4
Second Quarter 49 11/16 41 1/16
Third Quarter 68 46 1/4
Fourth Quarter 86 7/8 62
FISCAL 1997
First Quarter 51 7/8 37 3/8
Second Quarter 39 1/4 30
Third Quarter 41 3/16 31 7/8
Fourth Quarter 37 5/16 31 5/8
SEC FORM 10-K:
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K is available without charge upon written request to the Corporate
Communications Department, Biogen, Inc., 14 Cambridge Center, Cambridge, MA
02142
TRANSFER AGENT:
For shareholder questions regarding lost certificates, address changes and
changes of ownership or name in which the shares are held, direct inquiries to:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
Telephone: (800) 426-5523
INDEPENDENT ACCOUNTANTS:
PricewaterhouseCoopers LLP
160 Federal Street
Boston, MA 02110
U.S. LEGAL COUNSEL:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center
Boston, MA 02111
NEWS RELEASES
As a service to our shareholders and prospective investors, copies of Biogen
news releases issued in the last 12 months are now available almost immediately
24 hours a day, seven days a week on the Internet's World Wide Web at
http://www.prnewswire.com and via automated fax by calling "Company News On
Call" at 1 800 758-5804, ext. 101550. Biogen news releases are usually posted on
both systems within one hour of being issued and are available at no cost.
THE BIOGEN LOGO IS A REGISTERED TRADEMARK OF BIOGEN, INC. AVONEX(R) IS A
REGISTERED TRADEMARK OF BIOGEN, INC. HIRULOG(R) IS A REGISTERED TRADEMARK OF THE
MEDICINES COMPANY. INTRON(R) A IS A REGISTERED TRADEMARK OF SCHERING-PLOUGH
CORPORATION.