e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2006
Commission File Number 0-19311
BIOGEN IDEC INC.
(Exact name of registrant as specified in its charter)
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Delaware
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33-0112644 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
14 Cambridge Center, Cambridge, MA 02142
(617) 679-2000
(Address, including zip code, and telephone number, including
area code, of registrants principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days: Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): Yes o No þ
The number of shares of the registrants Common Stock, $0.0005 par value, outstanding as of April
28, 2006, was 343,862,263 shares.
BIOGEN IDEC INC.
FORM 10-Q Quarterly Report
For the Quarterly Period Ended March 31, 2006
TABLE OF CONTENTS
2
PART I
BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
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|
|
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|
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Three Months Ended |
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March 31, |
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2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
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Product |
|
$ |
406,519 |
|
|
$ |
397,584 |
|
Unconsolidated joint business |
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|
183,380 |
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|
|
160,453 |
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Royalty |
|
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20,561 |
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26,749 |
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Corporate partner |
|
|
715 |
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3,016 |
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|
|
|
|
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Total revenues |
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|
611,175 |
|
|
|
587,802 |
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|
|
|
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|
|
|
Costs and expenses: |
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|
|
|
|
|
|
|
Cost of product revenues, excluding amortization of
acquired intangible assets |
|
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66,391 |
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|
|
98,481 |
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Cost of royalty revenues |
|
|
1,103 |
|
|
|
1,128 |
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Research and development |
|
|
145,892 |
|
|
|
172,477 |
|
Selling, general and administrative |
|
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154,391 |
|
|
|
158,472 |
|
Amortization of acquired intangible assets |
|
|
70,707 |
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|
|
75,677 |
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Facility impairments and loss on sale |
|
|
(298 |
) |
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|
6,293 |
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|
|
|
|
|
|
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Total costs and expenses |
|
|
438,186 |
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|
|
512,528 |
|
|
|
|
|
|
|
|
Income from operations |
|
|
172,989 |
|
|
|
75,274 |
|
Other income (expense), net |
|
|
18,665 |
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|
|
(8,926 |
) |
|
|
|
|
|
|
|
Income before income tax provision and cumulative effect
of accounting change |
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|
191,654 |
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|
|
66,348 |
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Income tax provision |
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|
72,464 |
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|
|
22,890 |
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|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
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119,190 |
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43,458 |
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Cumulative effect of accounting change, net of income tax |
|
|
3,779 |
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|
|
|
|
|
|
|
|
|
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Net income |
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$ |
122,969 |
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|
$ |
43,458 |
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|
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|
|
|
|
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|
|
|
|
|
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Basic earnings per share: |
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|
|
|
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|
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Income before cumulative effect of accounting change |
|
$ |
0.35 |
|
|
$ |
0.13 |
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Cumulative effect of accounting change, net of income tax |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
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Basic earnings per share |
|
$ |
0.36 |
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|
$ |
0.13 |
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|
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|
|
|
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Diluted earnings per share: |
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|
|
|
|
|
|
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Income before cumulative effect of accounting change |
|
$ |
0.35 |
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$ |
0.12 |
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Cumulative effect of accounting change, net of income tax |
|
|
0.01 |
|
|
|
|
|
|
|
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|
|
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Diluted earnings per share |
|
$ |
0.36 |
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$ |
0.12 |
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|
|
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Shares used in calculating: |
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Basic earnings per share |
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339,653 |
|
|
|
335,279 |
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|
|
|
|
|
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Diluted earnings per share |
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|
345,815 |
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|
352,173 |
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|
|
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|
See accompanying notes to the condensed consolidated financial statements.
3
BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
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March 31, |
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December 31, |
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2006 |
|
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2005 |
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ASSETS |
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Current assets |
|
|
|
|
|
|
|
|
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Cash and cash equivalents |
|
$ |
535,865 |
|
|
$ |
568,168 |
|
Marketable securities available-for-sale |
|
|
313,490 |
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282,585 |
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Accounts receivable, net |
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276,441 |
|
|
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265,742 |
|
Due from unconsolidated joint business |
|
|
140,975 |
|
|
|
141,059 |
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Deferred tax assets |
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|
33,730 |
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|
41,242 |
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Inventory |
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191,022 |
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|
182,815 |
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Other current assets |
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79,624 |
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78,054 |
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Assets held for sale |
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24,534 |
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58,416 |
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Total current assets |
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1,595,681 |
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1,618,081 |
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Marketable securities available-for-sale |
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1,407,541 |
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1,204,378 |
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Property and equipment, net |
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1,191,968 |
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1,174,396 |
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Intangible assets, net |
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2,904,838 |
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|
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2,975,601 |
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Goodwill |
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1,130,430 |
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1,130,430 |
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Investments and other assets |
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293,768 |
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264,061 |
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$ |
8,524,226 |
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$ |
8,366,947 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities |
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Accounts payable |
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$ |
58,119 |
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$ |
99,780 |
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Deferred revenue |
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|
19,226 |
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|
16,928 |
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Taxes payable |
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|
208,215 |
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|
200,193 |
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Accrued expenses and other |
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|
235,237 |
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|
266,135 |
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|
|
|
|
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Total current liabilities |
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520,797 |
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|
|
583,036 |
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|
|
|
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Notes payable |
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|
43,978 |
|
|
|
43,444 |
|
Long-term deferred tax liability |
|
|
736,255 |
|
|
|
762,282 |
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Other long-term liabilities |
|
|
80,354 |
|
|
|
72,309 |
|
Commitments and contingencies |
|
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|
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Shareholders equity |
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Convertible preferred stock, par value $0.001 per share |
|
|
|
|
|
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|
Common stock, par value $0.0005 per share |
|
|
173 |
|
|
|
173 |
|
Additional paid-in capital |
|
|
8,203,521 |
|
|
|
8,206,911 |
|
Accumulated other comprehensive income (loss) |
|
|
4,594 |
|
|
|
(13,910 |
) |
Deferred stock-based compensation |
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|
|
|
|
|
(42,894 |
) |
Accumulated deficit |
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|
(928,178 |
) |
|
|
(1,021,644 |
) |
|
|
|
|
|
|
|
|
|
|
7,280,110 |
|
|
|
7,128,636 |
|
Less treasury stock, at cost |
|
|
137,268 |
|
|
|
222,760 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
7,142,842 |
|
|
|
6,905,876 |
|
|
|
|
|
|
|
|
|
|
$ |
8,524,226 |
|
|
$ |
8,366,947 |
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
4
BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
|
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|
|
|
|
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|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net Income |
|
$ |
122,969 |
|
|
$ |
43,458 |
|
Adjustments to reconcile net income to net cash flows from operating
activities |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
123,230 |
|
|
|
96,111 |
|
Stock-based compensation |
|
|
23,620 |
|
|
|
7,851 |
|
Non-cash interest expense and amortization of investment premium |
|
|
(108 |
) |
|
|
16,753 |
|
Deferred income taxes |
|
|
(26,532 |
) |
|
|
(25,829 |
) |
Realized loss on sale of marketable securities |
|
|
804 |
|
|
|
1,679 |
|
Write-down of inventory to net realizable value |
|
|
3,298 |
|
|
|
41,304 |
|
Impact of inventory step-up related to inventory sold |
|
|
4,002 |
|
|
|
3,537 |
|
Facility impairments and loss on sale |
|
|
(298) |
|
|
|
6,293 |
|
Impairment of investments |
|
|
2,107 |
|
|
|
14,588 |
|
Tax benefit from stock options |
|
|
(15,195 |
) |
|
|
16,438 |
|
Other |
|
|
1,193 |
|
|
|
(1,369 |
) |
Changes in assets and liabilities, net: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(9,485 |
) |
|
|
1,335 |
|
Due from unconsolidated joint business |
|
|
84 |
|
|
|
(497 |
) |
Inventory |
|
|
(15,507 |
) |
|
|
(30,449 |
) |
Other current and other assets |
|
|
(3,880 |
) |
|
|
14,758 |
|
Accrued expenses and other current liabilities |
|
|
(59,952 |
) |
|
|
(7,797 |
) |
Deferred revenue |
|
|
2,298 |
|
|
|
7,083 |
|
Other long-term liabilities |
|
|
3,605 |
|
|
|
7,639 |
|
|
|
|
|
|
|
|
Net cash flows from operating activities |
|
|
156,253 |
|
|
|
212,886 |
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
Purchases of marketable securities available-for-sale |
|
|
(596,216 |
) |
|
|
(290,452 |
) |
Proceeds from sales and maturities of marketable securities
available-for-sale |
|
|
357,877 |
|
|
|
354,839 |
|
Acquisitions of property, plant and equipment |
|
|
(65,630 |
) |
|
|
(65,846 |
) |
Proceeds from sale of property, plant and equipment |
|
|
33,851 |
|
|
|
|
|
Purchases of other investments |
|
|
(2,094 |
) |
|
|
(3,255 |
) |
|
|
|
|
|
|
|
Net cash flows from investing activities |
|
|
(272,212 |
) |
|
|
(4,714 |
) |
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
(168,475 |
) |
Issuance of treasury stock for stock-based compensation arrangements |
|
|
56,356 |
|
|
|
49,910 |
|
Change in cash overdrafts |
|
|
7,664 |
|
|
|
(22,611 |
) |
Tax benefit from stock options |
|
|
15,195 |
|
|
|
|
|
Loan
proceeds from joint venture partner |
|
|
4,441 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows from financing activities |
|
|
83,656 |
|
|
|
(141,176 |
) |
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(32,303 |
) |
|
|
66,996 |
|
Cash and cash equivalents, beginning of the period |
|
|
568,168 |
|
|
|
209,447 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of the period |
|
$ |
535,865 |
|
|
$ |
276,443 |
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
5
BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Business Overview and Summary of Significant Accounting Policies
Overview
Biogen Idec creates new standards of care in oncology, neurology and immunology. As a global
leader in the development, manufacturing, and commercialization of novel therapies, we transform
scientific discoveries into advances in human healthcare. We currently have four products:
AVONEX® (interferon beta-1a). AVONEX is approved for the treatment of relapsing forms of
multiple sclerosis, or MS, and is the most prescribed therapeutic product in MS worldwide. Globally
over 130,000 patients have chosen AVONEX as their treatment of choice.
RITUXAN® (rituximab). RITUXAN is approved worldwide for the treatment of relapsed or
refractory low-grade or follicular, CD20-positive, B-cell non-Hodgkins lymphomas, or B-cell NHLs.
In February 2006, RITUXAN was approved by the U.S. Food and Drug Administration, or FDA, to treat
previously untreated patients with diffuse, large B-cell NHL in combination with
anthracycline-based chemotherapy regimens. In addition, in February 2006, the FDA approved the
supplemental Biologics License Application, or sBLA, for use of RITUXAN, in combination with
methotrexate, for reducing signs and symptoms in adult patients with moderately-to-severely active
rheumatoid arthritis, or RA, who have had an inadequate response to one or more TNF antagonist
therapies. We market RITUXAN in the United States, or U.S., in collaboration with Genentech, Inc.,
or Genentech. All U.S. sales of RITUXAN are recognized by Genentech and we record our share of the
pretax copromotion profits on a quarterly basis. F. Hoffman-La Roche
Ltd., or Roche, sells RITUXAN outside the U.S., except in
Japan where it co-markets RITUXAN in collaboration with Zenyaku Kogyo
Co. Ltd., or Zenyaku. We are working with Genentech and
Roche on the development of RITUXAN in additional oncology and other indications.
TYSABRI® (natalizumab). TYSABRI was approved by the FDA in November 2004 to treat relapsing
forms of MS to reduce the frequency of clinical relapses. In February 2005, in consultation with
the FDA, we and Elan Corporation plc, or Elan, voluntarily suspended the marketing and commercial
distribution of TYSABRI, and we informed physicians that they should suspend dosing of TYSABRI
until further notification. In addition, we suspended dosing in clinical studies of TYSABRI in MS,
Crohns disease and RA. These decisions were based on reports of cases of progressive multifocal
leukoencephalopathy, or PML, a rare and frequently fatal, demyelinating disease of the central
nervous system, in patients treated with TYSABRI in clinical studies. We and Elan conducted a
safety evaluation of patients treated with TYSABRI in MS, Crohns disease and RA clinical studies.
The safety evaluation included the review of any reports of potential PML in MS patients receiving
TYSABRI in the commercial setting. In October 2005, we completed the safety evaluation of TYSABRI
and found no new confirmed cases of PML. Three confirmed cases of PML were previously reported, two
of which were fatal. In September 2005, we submitted an sBLA for TYSABRI to the FDA for the
treatment of MS. The sBLA includes: final two-year data from the Phase 3 AFFIRM monotherapy trial
and SENTINEL combination trial with AVONEX in MS; the integrated safety assessment of patients
treated with TYSABRI in clinical trials; and a revised label and a risk minimization action plan.
We and Elan have also submitted a similar data package to the European Medicines Agency, or EMEA.
This information was supplied as part of the ongoing EMEA review process, which was initiated in
the summer of 2004 with the filing for approval of TYSABRI as a treatment for MS. On March 8, 2006,
the Peripheral and Central Nervous System Drugs Advisory Committee of the FDA voted unanimously to
recommend reintroduction of TYSABRI as a treatment for relapsing forms of MS. We anticipate action
by the FDA regarding the reintroduction of TYSABRI in the U.S. on or before June 28, 2006. In April
2006, the Committee for Medicinal Products for Human Use, the scientific committee of the EMEA,
issued a positive opinion recommending marketing authorization for TYSABRI as a treatment for
relapsing-remitting MS to delay the progression of disability and reduce the frequency of relapses.
We anticipate action by the EMEA regarding the introduction of TYSABRI in the EU this summer. In
March 2006, we and Elan began an open-label, multi-center safety extension study of TYSABRI
monotherapy in the U.S. and internationally. We plan to work with regulatory authorities to
determine if dosing in other clinical studies will be re-initiated. We cannot predict the outcome
of our work with regulatory authorities. TYSABRI could be permanently withdrawn from the market or
re-introduced to the market with significant restrictions on its permissible uses, black box or
other significant safety warnings in its label and such other restrictions, requirements and
limitations as the FDA, EMEA or other
6
regulatory authorities may require. While we presently believe that we will be able to find a path
forward for TYSABRI, there are no assurances as to the likelihood of success.
ZEVALIN® (ibritumomab tiuxetan). The ZEVALIN therapeutic regimen, which features ZEVALIN, is
a radioimmunotherapy that is approved for the treatment of patients with relapsed or refractory
low-grade, follicular, or transformed B-cell NHL, including patients with RITUXAN relapsed or
refractory NHL. ZEVALIN is approved in the EU for the treatment of adult patients with CD20
follicular B-cell NHL who are refractory to or have relapsed following RITUXAN therapy. We sell
ZEVALIN to Schering AG for distribution in the EU, and receive royalty revenues from Schering AG on
sales of ZEVALIN in the EU.
In the opinion of management, the accompanying unaudited condensed consolidated financial
statements include all adjustments, consisting of only normal recurring accruals, necessary for a
fair statement of our financial position, results of operations and cash flows as well as that of
our subsidiaries. The information included in this Quarterly Report on Form 10-Q should be read in
conjunction with our Consolidated Financial Statements and the accompanying Notes included in our
Annual Report on Form 10-K for the year ended December 31, 2005. Our accounting policies are
described in the Notes to the Consolidated Financial Statements in our 2005 Annual Report on Form
10-K and updated, as necessary, in this Form 10-Q. The year-end condensed balance sheet data was
derived from audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the US. Interim results are not necessarily indicative
of the operating results for the full year or for any other subsequent interim period.
The preparation of the condensed consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
In April 2006, we sold the worldwide rights to AMEVIVE® (alefacept), including inventory on
hand, to Astellas Pharma US, Inc., or Astellas. AMEVIVE is approved in the U.S. and other
countries for the treatment of adult patients with moderate-to-severe chronic plaque psoriasis who
are candidates for systemic therapy or phototherapy. We will continue to manufacture AMEVIVE and
supply this product to Astellas.
Principles of Consolidation
The condensed consolidated financial statements include our financial statements and those of
our wholly owned subsidiaries, and joint ventures in Italy and Switzerland, in which we are the
primary beneficiary. We also consolidate a limited partnership investment, in which we are the
majority investor. All material intercompany balances and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market with cost determined under the first-in,
first-out, or FIFO, method. Included in inventory are raw materials used in the production of
pre-clinical and clinical products, which are charged to research and development expense when
consumed.
The components of inventories are as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Raw materials |
|
$ |
46,974 |
|
|
$ |
44,417 |
|
Work in process |
|
|
112,849 |
|
|
|
107,987 |
|
Finished goods |
|
|
31,199 |
|
|
|
30,411 |
|
|
|
|
|
|
|
|
|
|
$ |
191,022 |
|
|
$ |
182,815 |
|
|
|
|
|
|
|
|
We capitalize inventory costs associated with our products prior to regulatory approval, when,
based on managements judgment, future commercialization is considered probable and the future
economic benefit is expected to be realized. In the first quarter of 2006, in light of expectations
of re-introduction of TYSABRI, we began a new manufacturing campaign and, at March 31, 2006,
included in inventory approximately $11.7 million
7
related to TYSABRI. Although approval for reintroduction has been applied for, we have yet to
receive FDA approval. We considered numerous attributes in evaluating whether the costs to
manufacture a particular product should be capitalized as an asset. We assess the regulatory
approval process and where the product stands in relation to that approval process including any
known constraints and impediments to approval, including safety, efficacy and potential labeling
restrictions. We evaluate our anticipated research and development initiatives and constraints
relating to the particular product and the indication in which it will be used. We consider our
manufacturing environment including our supply chain in determining logistical constraints that
could possibly hamper approval or commercialization. We consider the shelf life of the product in
relation to the expected timeline for approval and we consider patent related or contract issues
that may prevent or cause delay in commercialization. We are sensitive to the significant
commitment of capital to scale up production and to launch commercialization strategies. We also
base our judgment on the viability of commercialization, trends in the marketplace and market
acceptance criteria. Finally, we consider the reimbursement strategies that may prevail with
respect to the product and assess the economic benefit that we are likely to realize. We would be
required to expense previously capitalized costs related to pre-approval inventory upon a change in
such judgment, due to, among other potential factors, a denial or delay of approval by necessary
regulatory bodies.
We manufactured TYSABRI during the first and second quarter of 2005 and completed our
scheduled production of TYSABRI during July 2005. Because of the uncertain future commercial
availability of TYSABRI at the time, and our inability to predict to the required degree of
certainty that TYSABRI inventory would be realized in commercial sales prior to the expiration of
its shelf life, we expensed $23.2 million of costs related to the manufacture of TYSABRI in the
first quarter of 2005 to cost of product revenues. At the time of production, the inventory was
believed to be commercially saleable. Beginning in the second quarter of 2005 through the end of
2005, as we were working with clinical investigators to understand the possible risks of PML, we
charged the costs related to the manufacture of TYSABRI to research and development expense.
We periodically review our inventories for excess or obsolete inventory and write-down
obsolete or otherwise unmarketable inventory to its estimated net realized value. If the actual
realizable value is less than that estimated by us, or if there are any further determinations that
inventory will not be marketable based on estimates of demand, additional inventory write-downs may
be required. This periodic review led to the expensing of costs associated with the manufacture of
TYSABRI during 2005, as described above, and may lead us to expense costs associated with the
manufacture of TYSABRI or other inventory in subsequent periods.
Our products are subject to strict quality control and monitoring throughout the manufacturing
process. Periodically, certain batches or units of product may no longer meet quality
specifications or may expire. As a result, included in cost of product revenues were write-downs of
commercial inventory that did not meet quality specifications or became obsolete due to dating
expiration, in all cases this product inventory was written-down to its net realizable value.
We wrote-down the following unmarketable inventory, which was charged to cost of product
revenues (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March, 31 |
|
|
|
2006 |
|
|
2005 |
|
AVONEX |
|
$ |
254 |
|
|
$ |
9,039 |
|
AMEVIVE |
|
|
2,433 |
|
|
|
7,163 |
|
ZEVALIN |
|
|
|
|
|
|
1,902 |
|
TYSABRI |
|
|
611 |
|
|
|
23,200 |
|
|
|
|
|
|
|
|
|
|
$ |
3,298 |
|
|
$ |
41,304 |
|
|
|
|
|
|
|
|
The write-downs for the three months ended March 31, 2006 and 2005, respectively, were the
result of the following (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March, 31 |
|
|
|
2006 |
|
|
2005 |
|
New components for alternative presentations |
|
$ |
|
|
|
$ |
8,417 |
|
Failed quality specifications |
|
|
3,044 |
|
|
|
7,785 |
|
Excess and/or obsolescence |
|
|
254 |
|
|
|
1,902 |
|
Costs for voluntary suspension of TYSABRI |
|
|
|
|
|
|
23,200 |
|
|
|
|
|
|
|
|
|
|
$ |
3,298 |
|
|
$ |
41,304 |
|
|
|
|
|
|
|
|
8
We sold the worldwide rights to AMEVIVE, including inventory on hand, to
Astellas in April 2006. As of March 31, 2006, we had $45.2 million of AMEVIVE included in
inventory.
In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, or SFAS
151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, which amends the guidance in ARB No.
43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material (spoilage). SFAS 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should
be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production
facilities. The provisions of SFAS 151 were effective for inventory costs incurred during our
fiscal year beginning on January 1, 2006. We did not experience any impact on our results of
operations in the first quarter of 2006 as a result of our adoption of SFAS 151.
Intangible Assets and Goodwill
In connection with our merger with Biogen, Inc. on November 12, 2003, or the Merger, we
recorded intangible assets related to patents, trademarks, and core technology as part of the
purchase price. These intangible assets were recorded at fair value, and at March 31, 2006 and
December 31, 2005 are net of accumulated amortization and impairments. Intangible assets related to
out-licensed patents and core technology are amortized over their estimated useful lives, ranging
from 12 to 20 years, based on the greater of straight-line method or economic consumption each
period. These amortization costs are included in Amortization of acquired intangible assets in
the accompanying condensed consolidated statements of income. Intangible assets related to
trademarks have indefinite lives, and as a result are not amortized, but are subject to review for
impairment. We review our intangible assets for impairment periodically and whenever events or
changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Goodwill associated with the Merger represents the difference between the purchase price and
the fair value of the identifiable tangible and intangible net assets when accounted for by the
purchase method of accounting. Goodwill is not amortized, but rather subject to periodic review for
impairment. Goodwill is reviewed annually and whenever events or changes in circumstances indicate
that the carrying amount of the goodwill might not be recoverable.
As of March 31, 2006 and December 31, 2005, intangible assets and goodwill, net of accumulated
amortization and impairment charges and adjustments, were as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Historical |
|
|
Accumulated |
|
|
|
|
|
|
|
March 31, 2006: |
|
Life |
|
|
Cost |
|
|
Amortization |
|
|
Adjustments |
|
|
Net |
|
Out-licensed patents |
|
12 years |
|
$ |
578,000 |
|
|
$ |
114,797 |
|
|
$ |
|
|
|
$ |
463,203 |
|
Core/developed technology |
|
15-20 years |
|
|
2,984,000 |
|
|
|
601,073 |
|
|
|
(7,993 |
) |
|
|
2,374,934 |
|
Trademarks & tradenames |
|
Indefinite |
|
|
64,000 |
|
|
|
|
|
|
|
|
|
|
|
64,000 |
|
In-licensed patents |
|
14 years |
|
|
3,000 |
|
|
|
299 |
|
|
|
|
|
|
|
2,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
3,629,000 |
|
|
$ |
716,169 |
|
|
$ |
(7,993 |
) |
|
$ |
2,904,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
Indefinite |
|
$ |
1,151,105 |
|
|
$ |
|
|
|
$ |
(20,675 |
) |
|
$ |
1,130,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Historical |
|
|
Accumulated |
|
|
|
|
|
|
|
December 31, 2005: |
|
Life |
|
|
Cost |
|
|
Amortization |
|
|
Adjustments |
|
|
Net |
|
Out-licensed patents |
|
12 years |
|
$ |
578,000 |
|
|
$ |
102,756 |
|
|
$ |
|
|
|
$ |
475,244 |
|
Core/developed technology |
|
15-20 years |
|
|
2,984,000 |
|
|
|
542,407 |
|
|
|
(7,993 |
) |
|
|
2,433,600 |
|
Trademarks & tradenames |
|
Indefinite |
|
|
64,000 |
|
|
|
|
|
|
|
|
|
|
|
64,000 |
|
In-licensed patents |
|
14 years |
|
|
3,000 |
|
|
|
243 |
|
|
|
|
|
|
|
2,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
3,629,000 |
|
|
$ |
645,406 |
|
|
$ |
(7,993 |
) |
|
$ |
2,975,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
Indefinite |
|
$ |
1,151,105 |
|
|
$ |
|
|
|
$ |
(20,675 |
) |
|
$ |
1,130,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Revenue Recognition and Accounts Receivable
We recognize revenue when all of the following criteria are met: persuasive evidence of an
arrangement exists; delivery has occurred or services have been rendered; the sellers price to the
buyer is fixed or determinable; collectibility is reasonably assured; and title and the risks and
rewards of ownership have transferred to the buyer.
Product revenue consists of sales from four products: AVONEX, AMEVIVE, ZEVALIN, and TYSABRI.
The timing of distributor orders and shipments can cause variability in earnings. Revenues from
product sales are recognized when product is shipped and title and risk of loss has passed to the
customer, typically upon delivery. Revenues are recorded net of applicable allowances for returns,
patient assistance, trade term discounts, Medicaid rebates, Veterans Administration rebates,
managed care discounts and other applicable allowances. Included in our condensed consolidated
balance sheets at March 31, 2006 and December 31, 2005 are allowances for returns, rebates,
discounts and other allowances which totaled $60.9 million and $48.8 million, respectively. At
March 31, 2006, our allowance for product returns, which is a component of allowances for returns,
rebates, discounts, and other allowances, was $6.1 million. At March 31, 2006, total reserves for
discounts and allowances were approximately 3.8% of total current assets and less than 1% of total
assets. We prepare our estimates for sales returns and allowances, discounts and rebates quarterly
based primarily on historical experience updated for changes in facts and circumstances, as
appropriate.
For the three months ended March 31, 2006 and 2005, we recorded $58.8 million and $53.8
million, respectively, in our condensed consolidated statements of income related to sales returns
and allowances, discounts, and rebates. In the three months ended March 31, 2006 and 2005, the
amount of product returns was approximately 1.8% and 3.0%, respectively, of product revenue for all
our products. Product returns, which is a component of allowances for returns, rebates, discounts,
and other allowances, were $7.3 million and $12.0 million for the three months ended March 31, 2006
and 2005, respectively. The decrease of product returns in the first quarter of 2006 is primarily a
result of $9.0 million included in the first three months of 2005 due to the voluntary suspension
of TYSABRI, offset by a higher number of replacement units and higher credit amounts on distributor
returns. Product returns in the first three months of 2006 included $2.8 million related to product
sales made prior to 2006, which represents less than 1% of total product revenue, of which $1.6
million was in reserves at December 31, 2005.
In November 2004, we received regulatory approval in the U.S. of TYSABRI for the treatment of
MS and paid a $7.0 million approval-based milestone to Elan. Upon approval, we also became
obligated to provide Elan with $5.3 million in credits against reimbursement of commercialization
costs. Elan can apply $1.5 million of the credits per year. The approval and credit milestones were
capitalized upon approval in investments and other assets and are being amortized over the
remaining patent life of 14.4 years. The amortization of the approval and credit milestones is
being recorded as a reduction of revenue. In February 2005, in consultation with the FDA, we and
Elan voluntarily suspended the marketing and commercial distribution of TYSABRI, and we informed
physicians that they should suspend dosing of TYSABRI until further notification.
Under our agreement with Elan, we manufacture TYSABRI and, in the U.S. prior to the
suspension, sold TYSABRI to Elan who then distributed TYSABRI to third party distributors. Prior to
the suspension, we recorded revenue when TYSABRI was shipped from Elan to third party distributors.
As of March 31, 2005, we deferred $14.0 million in revenue under our revenue recognition policy
with Elan, which has been fully paid by Elan, related to sales of TYSABRI which had not yet been
shipped by Elan and remains deferred at March 31, 2006.
As of March 31, 2006, Elan owed us $19.5 million, representing commercialization and
development expenses incurred by us. This is included in other current assets on our condensed
consolidated balance sheets, and $9.7 million has been received
to date.
Revenues from unconsolidated joint business consist of our share of the pretax copromotion
profits generated from our copromotion arrangement with Genentech, reimbursement from Genentech of
our RITUXAN-related sales force and development expenses and royalties from Genentech for sales of
RITUXAN outside the U.S. by Roche and Zenyaku. Under the copromotion arrangement, all U.S. sales of
RITUXAN and associated costs and expenses are recognized by Genentech and we record our share of
the pretax copromotion profits on a quarterly basis, as defined in our amended and restated
collaboration agreement with Genentech. Pretax copromotion profits under the copromotion
arrangement are derived by taking U.S. net sales of RITUXAN to third-party customers
10
less cost of sales, third-party royalty expenses, distribution, selling and marketing expenses
and joint development expenses incurred by Genentech and us.
Under the amended and restated collaboration agreement, our current pretax copromotion
profit-sharing formula, which resets annually, is as follows:
|
|
|
|
|
Copromotion Operating Profits |
|
Biogen Idecs Share of Copromotion Profits |
First $50 million |
|
|
30 |
% |
Greater than $50 million |
|
|
40 |
% |
In both 2005 and 2006, the 40% threshold was met during the first quarter. For each calendar year
or portion thereof following the approval date of the first new anti-CD20 product, the pretax
copromotion profit-sharing formula for RITUXAN and other anti-CD20 products sold by us and
Genentech will change to the following:
|
|
|
|
|
|
|
|
|
|
|
New Anti-CD20 U.S. |
|
Biogen Idecs Share |
Copromotion Operating Profits |
|
Gross Product Sales |
|
of Copromotion Profits |
First $50 million (1) |
|
|
N/A |
|
|
|
30 |
% |
|
Greater than $50 million |
|
Until such sales exceed $150 |
|
|
38 |
% |
|
|
million in any calendar year(2) |
|
|
|
|
|
|
|
Or |
|
|
|
|
|
|
|
After such sales exceed $150 |
|
|
35 |
% |
|
|
million in any calendar year |
|
|
|
|
|
|
and until such sales exceed |
|
|
|
|
|
|
$350 million in any calendar year (3) |
|
|
|
|
|
|
|
Or |
|
|
|
|
|
|
|
After such sales exceed $350 |
|
|
30 |
% |
|
|
million in any calendar year (4) |
|
|
|
|
|
|
|
(1) |
|
not applicable in the calendar year the first new anti-CD20 product is approved if $50
million in copromotion operating profits has already been achieved in such calendar year
through sales of RITUXAN. |
|
(2) |
|
if we are recording our share of RITUXAN copromotion profits at 40%, upon the approval date
of the first new anti-CD20 product, our share of copromotion profits for RITUXAN and the new
anti-CD20 product will be immediately reduced to 38% following the approval date of the first
new anti-CD20 product until the $150 million new product sales level is achieved. |
|
(3) |
|
if $150 million in new product sales is achieved in the same calendar year the first new
anti-CD20 product receives approval, then the 35% copromotion profit-sharing rate will not be
effective until January 1 of the following calendar year. Once the $150 million new product
sales level is achieved then our share of copromotion profits for the balance of the year and
all subsequent years (after the first $50 million in copromotion operating profits in such
years) will be 35% until the $350 million new product sales level is achieved. |
|
(4) |
|
if $350 million in new product sales is achieved in the same calendar year that $150
million in new product sales is achieved, then the 30% copromotion profit-sharing rate will
not be effective until January 1 of the following calendar year (or January 1 of the second
following calendar year if the first new anti-CD20 product receives approval and, in the same
calendar year, the $150 million and $350 million new product sales levels are achieved). Once
the $350 million new product sales level is achieved then our share of copromotion profits for
the balance of the year and all subsequent years will be 30%. |
Currently, we record our share of expenses incurred for the development of new anti-CD20
products in research and development expense until such time as a new product is approved, at which
time we will record our share of pretax copromotion profits related to the new product in revenues
from unconsolidated joint business. We record our royalty revenue on sales of RITUXAN outside the
U.S. on a cash basis. Under the amended and restated collaboration agreement, we will receive lower
royalty revenue from Genentech on sales by Roche and
11
Zenyaku of new anti-CD20 products, as compared to royalty revenue received on sales of
RITUXAN. The royalty period with respect to all products is 11 years from the first commercial sale
of such product on a country-by-country basis.
We receive royalty revenues under license agreements with a number of third parties that sell
products based on technology we have developed or to which we have rights. The license agreements
provide for the payment of royalties to us based on sales of the licensed product. We record these
revenues based on estimates of the sales that occurred during the relevant period. The relevant
period estimates of sales are based on interim data provided by licensees and analysis of
historical royalties we have been paid (adjusted for any changes in facts and circumstances, as
appropriate). We maintain regular communication with our licensees in order to gauge the
reasonableness of our estimates. Differences between actual royalty revenues and estimated royalty
revenues are reconciled and adjusted for in the period which they become known, typically the
following quarter. Historically, adjustments have not been material based on actual amounts paid by
licensees. There are no future performance obligations on our part under these license agreements.
To the extent we do not have sufficient ability to accurately estimate revenue, we record it on a
cash basis.
Research and Development Expenses
Research and development expenses consist of upfront fees and milestones paid to collaborators
and expenses incurred in performing research and development activities including salaries and
benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing
expenses, share-based compensation expense, contract services and other outside expenses. Research
and development expenses are expensed as incurred. We have entered into certain research agreements
in which we share expenses with our collaborator. We have entered into other collaborations where
we are reimbursed for work performed on behalf of our collaborative partners. We record these
expenses as research and development expenses. If the arrangement is a cost-sharing arrangement and
there is a period during which we receive payments from the collaborator, we record payments by the
collaborator for their share of the development effort as a reduction of research and development
expense. If the arrangement is a reimbursement of research and development expenses, we record the
reimbursement as corporate partner revenue.
Reclassification
Certain reclassifications of prior year amounts have been made to conform to current year
presentation.
Share-Based Payments
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004) Share-Based Payment, or SFAS 123(R), which requires compensation cost relating to
share-based payment transactions to be recognized in the financial statements using a fair-value
measurement method. See Note 5 for a complete discussion on accounting for share-based payments.
Assets Held for Sale
We consider AMEVIVE, certain real property in Oceanside, CA and certain other miscellaneous
assets as held for sale, since they meet the criteria of held for sale under SFAS 144, Accounting
for the Impairment or Disposal of Long-Live Assets.
As
discussed, we sold the worldwide rights to AMEVIVE for
$60.0 million, including inventory on hand, to
Astellas in April 2006. As of March 31, 2006 and December 31, 2005, our AMEVIVE assets held for
sale include $8.0 million related to intangible assets, net, and $5.4 million for property, plant
and equipment, net, and were reported separately in current assets on the condensed consolidated
balance sheets.
In February 2006, we sold our NICO clinical manufacturing facility in Oceanside, California to
Genentech. The assets associated with the NICO clinical manufacturing facility were included in
assets held for sale on our condensed consolidated balance sheet as of December 31, 2005. In
addition, we are seeking to divest several other non-core assets, including certain real property
in Oceanside, California.
12
2. Financial Instruments
Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, or SFAS 133, requires that all derivatives be recognized on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. We assess, both at their
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. We also assess hedge
ineffectiveness on a quarterly basis and record the gain or loss related to the ineffective portion
to current earnings to the extent significant. If we determine that a forecasted transaction is no
longer probable of occurring, we discontinue hedge accounting for the affected portion of the hedge
instrument, and any related unrealized gain or loss on the contract is recognized in current
earnings.
We have foreign currency forward contracts to hedge specific forecasted transactions
denominated in foreign currencies. All foreign currency forward contracts have durations of three
to nine months. These contracts have been designated as cash flow hedges and accordingly, to the
extent effective, any unrealized gains or losses on these foreign currency forward contracts are
reported in other comprehensive income. Realized gains and losses for the effective portion are
recognized with the underlying hedge transaction. The notional settlement amount of the foreign
currency forward contracts outstanding at March 31, 2006 was approximately $167.6 million. These
contracts had a fair value of $3.5 million, representing an unrealized loss, and were included in
other current liabilities at March 31, 2006. The notional settlement amount of the foreign currency
forward contracts outstanding at December 31, 2005 was approximately $214.0 million. These
contracts had a fair value of $0.9 million, representing an unrealized loss, and were included in
other current liabilities at December 31, 2005.
For the three months ended March 31, 2006, there was $0.7 million recognized in earnings due
to hedge ineffectiveness. There were no amounts in the three months ended March 31, 2006 related
to the discontinuance of cash flow hedge accounting because it was no longer probable that the
hedge forecasted transaction would occur. For the three months ended March 31, 2005, there were no
significant amounts recognized in earnings due to hedge ineffectiveness or as a result of the
discontinuance of cash flow hedge accounting because it was no longer probable that the hedge
forecasted transaction would occur. We recognized approximately $0.9 million and $1.8 million of
losses in product revenue for the settlement of certain effective cash flow hedge instruments for
the three months ended March 31, 2006 and 2005, respectively. We recognized no significant losses
and $0.2 million of losses in royalty revenue for the settlement of certain effective cash flow
hedge instruments for the three months ended March 31, 2006 and 2005. These settlements were
recorded in the same period as the related forecasted transactions affecting earnings.
3. Comprehensive Income
Comprehensive income for the three months ended March 31, 2006 and 2005 was $141.5
million and $40.8 million, respectively. Comprehensive income consists of net income and other comprehensive income. Other
comprehensive income includes certain changes in equity that are excluded from net income,
including changes of $4.8 million of translation adjustments, $15.4 million in unrealized holding
gains and losses on available-for-sale marketable securities and other investments, offset by the
decrease of $1.6 million related to certain derivative instruments, net of tax, for the first
quarter of 2006. For the three months ended March 31, 2005,
other comprehensive income included increased losses to translation
adjustments of $1.5 million, unrealized losses of
$7.8 million on available-for-sale marketable securities and
other investments, offset by $6.8 million increase in unrealized
gains on our derivative instruments.
4. Earnings per Share
We calculate earnings per share in accordance with Statement of Financial Accounting Standards
No. 128, Earnings per Share, or SFAS 128, and EITF 03-06, Participating Securities and the
Two-Class Method Under SFAS 128. SFAS 128 and EITF 03-06 together require the presentation of
basic earnings per share and diluted earnings per share. Basic earnings per share is computed
using the two-class method. Under the two-class method, undistributed net income is allocated to
common stock and participating securities based on their respective rights to share in dividends.
We have determined that our preferred shares meet the definition of participating securities, and
have allocated a portion of net income to our preferred shares on a pro rata basis. Net income
allocated to preferred shares is excluded from the calculation of basic earnings per share. For
basic earnings per share, net income available to holders of common stock is divided by the
weighted average number of shares of common stock outstanding. For purposes of calculating diluted
earnings per share, net income is adjusted
13
for the after-tax amount of interest associated with convertible debt and net income allocable
to preferred shares, and the denominator includes both the weighted average number of shares of
common stock outstanding and the potential dilutive shares of common stock from stock options,
unvested restricted stock awards, restricted stock units and other convertible securities, to the
extent they are dilutive.
Basic and diluted earnings per share are calculated as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Income before cumulative effect of accounting change |
|
$ |
119,190 |
|
|
$ |
43,458 |
|
Cumulative effect of accounting change |
|
|
3,779 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
122,969 |
|
|
$ |
43,458 |
|
Adjustment for net income allocable to preferred shares |
|
|
(179 |
) |
|
|
(64 |
) |
|
|
|
|
|
|
|
Net income used in calculating basic earnings per share |
|
|
122,790 |
|
|
|
43,394 |
|
Adjustment for interest, net of tax |
|
|
|
|
|
|
535 |
|
|
|
|
|
|
|
|
Net income used in calculating diluted earnings per share |
|
$ |
122,790 |
|
|
$ |
43,929 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding |
|
|
339,653 |
|
|
|
335,279 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Stock options |
|
|
2,205 |
|
|
|
6,625 |
|
Restricted stock awards |
|
|
747 |
|
|
|
1,535 |
|
Restricted stock units |
|
|
89 |
|
|
|
|
|
Convertible promissory notes due 2019 |
|
|
3,048 |
|
|
|
|
|
Convertible promissory notes due 2032 |
|
|
73 |
|
|
|
8,734 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
6,162 |
|
|
|
16,894 |
|
|
|
|
|
|
|
|
Shares used in calculating diluted earnings per share |
|
|
345,815 |
|
|
|
352,173 |
|
|
|
|
|
|
|
|
The following amounts were not included in the calculation of net income per share because
their effects were anti-dilutive (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income allocable to preferred shares |
|
$ |
179 |
|
|
$ |
64 |
|
Adjustment for interest, net of tax |
|
|
|
|
|
|
4,006 |
|
|
|
|
|
|
|
|
Total |
|
$ |
179 |
|
|
$ |
4,070 |
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Stock options |
|
|
18,119 |
|
|
|
8,889 |
|
Convertible preferred stock |
|
|
493 |
|
|
|
493 |
|
Convertible promissory notes due 2032 |
|
|
|
|
|
|
8,661 |
|
|
|
|
|
|
|
|
Total |
|
|
18,612 |
|
|
|
18,043 |
|
|
|
|
|
|
|
|
5. Share-Based Payments
Fair Value Method Accounting
Our share-based compensation programs consist of our share-based awards granted to employees
including stock options, restricted stock awards, performance share units and restricted stock
units, as well as our employee stock purchase plan, or ESPP. These are defined more fully below.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised
2004) Share-Based Payment, or SFAS 123(R). This Statement requires compensation cost relating to
share-based payment transactions to be recognized in the financial statements using a fair-value
measurement method. Under the fair value method, the estimated fair value of awards is charged
against income over the requisite service period, which is generally the vesting period. We
selected the modified prospective method as prescribed in SFAS 123(R) and therefore, prior periods
were not restated. Under the modified prospective application, this Statement was applied to new
awards granted in 2006, as well as to the unvested portion of previously granted share-based awards
for which the requisite service had not been rendered as of December 31, 2005.
On December 6, 2005, our Board of Directors approved the acceleration of vesting of unvested
stock options then outstanding having an exercise price per share of $55.00 or higher, granted under our stock
option plans that were held by current employees, including executive officers. Options held by our
non-employee directors were excluded from this vesting acceleration. As a result, the vesting of
options granted predominantly from 2001 to 2005 with respect to approximately 4,518,809 shares of
our common stock were accelerated.
The purpose of this acceleration was to eliminate future compensation expense that we
would otherwise have recognized in our results of operation upon adoption of SFAS 123(R) in 2006.
The approximate future expense eliminated by the acceleration, based on a Black-Scholes
calculation, was estimated to be approximately $93.1 million between 2006 and 2009 on a pre-tax
basis. The acceleration did not result in any compensation expense in 2005.
In the first quarter of 2006, we recorded pre-tax share-based compensation expense associated
with the SFAS 123(R) adoption and the restricted stock units of $23.6 million. This expense is net
of a cumulative effect pre-tax adjustment of $5.6 million, or $3.8 million after-tax, resulting from the
application of an estimated forfeiture rate for current and prior period unvested restricted stock
awards.
For the three months ended March 31, 2006, share-based compensation expense reduced our
results of operations as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before |
|
|
Cumulative effect |
|
|
|
|
|
|
income taxes |
|
|
adjustment |
|
|
Effect on net income |
|
Effect Before Income Taxes |
|
$ |
(29,194 |
) |
|
$ |
5,574 |
|
|
$ |
(23,620 |
) |
Tax effect |
|
|
9,114 |
|
|
|
(1,795 |
) |
|
|
7,319 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
(20,080 |
) |
|
$ |
3,779 |
|
|
$ |
(16,301 |
) |
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share: |
|
|
|
|
|
|
|
|
|
$ |
(.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share: |
|
|
|
|
|
|
|
|
|
$ |
(.05 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the adoption of SFAS 123(R), we recorded share-based compensation for the three
months ended March 31, 2006 as follows (table in thousands):
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
Restricted Stock |
|
|
|
|
|
|
|
|
|
|
|
and Restricted |
|
|
|
|
|
|
|
Stock options & ESPP |
|
|
Stock Units |
|
|
Total |
|
Research and development |
|
$ |
4,764 |
|
|
$ |
6,391 |
|
|
$ |
11,155 |
|
Selling, general and administrative |
|
|
8,239 |
|
|
|
9,800 |
|
|
|
18,039 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,003 |
|
|
$ |
16,191 |
|
|
$ |
29,194 |
|
|
|
|
|
|
|
|
|
|
|
Pre-tax cumulative effect catch-up |
|
|
|
|
|
|
|
|
|
|
(5,574 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax effect of share-based compensation |
|
|
|
|
|
|
|
|
|
$ |
23,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2005, we recorded share-based compensation expense of
approximately $7.9 million, which was primarily related to expenses for restricted stock awards.
In accordance with SFAS 123(R), tax benefits from stock option exercises in the current
quarter of $15.2 million were recorded as cash outflows from
operating activities and cash inflows from financing activities in our condensed
consolidated statement of cash flows. Cash received from the exercise of stock options in the
quarter ended March 31, 2006 was approximately $52.0 million. For the three months ending March 31,
2006, we capitalized costs of $0.4 million associated with share-based compensation to inventory
and fixed assets. We did not capitalize stock based compensation cost in our pro forma footnotes
under SFAS 123.
At March 31, 2006, unrecognized compensation costs relating to unvested share-based
compensation was approximately $244.4 million. We expect to recognize the cost of these non-vested
awards over a weighted average period of 1.6 years. In accordance with FAS 123(R), deferred share
based compensation is no longer reflected as a separate component of shareholders equity in the
condensed consolidated balance sheet. As a result, we reclassed our deferred share based
compensation of $42.9 million at December 31, 2005 to additional paid in capital during the first
quarter of 2006.
Stock Based Compensation Plans:
We currently have six stock based compensation plans.
Directors Plan: We maintain the 1993 Non-Employee Directors Stock Option Plan, or the
Directors Plan, for options granted to directors upon their appointment or election to the Board of
Directors. The Directors Plan expired in January 2006. We do not expect to issue any new grants
under the Plan.
Omnibus Plans: In June 2005, our stockholders approved the 2005 Omnibus Equity Plan, or the
2005 Omnibus Plan. We also maintain the 2003 Omnibus Equity Plan, or the 2003 Omnibus Plan. We have
not made any equity grants or awards from the 2003 Omnibus Plan since our stockholders approved the
2005 Omnibus Plan and do not intend to make any awards from the plan in the future. Awards granted
from the 2005 Omnibus Plan may include options, shares of restricted stock, restricted stock units,
performance shares, shares of phantom stock, stock bonuses, stock appreciation rights and other
awards in such amounts and with such terms and conditions subject to
the provisions of the plan. We
have reserved a total of 15 million shares of common stock
for issuance under the 2005 Omnibus Plan, plus shares of common
stock that remained available for issuance under our 2003
Omnibus Plan on the date that our stockholders approved the 2005
Omnibus Plan, and shares that are subject to awards under our
2003 Omnibus Plan which remain unissued upon the cancellation,
surrender, exchange or termination of such awards. The plan
provides that awards other than stock options and stock
appreciation rights will be counted against the total number of
shares reserved under the plan in a
1.5-to-1
ratio.
Other Plans: We also maintain the 1988 Stock Option Plan, the Biogen, Inc. 1985
Non-Qualified Stock Option Plan and the Biogen, Inc. 1987 Scientific Board Stock Option Plan. We
have not made any equity grants or awards from these plans since the Merger, and do not intend to
issue any shares from these plans in the future. Under the 1988 Stock Option Plan, options for the
purchase of our common stock were granted to key employees (including officers) and directors.
15
Stock options
All stock option grants are for a ten-year term and generally vest ratably over a four-year
period. Options granted under all plans are exercisable at a price per share not less than the fair
market value of the underlying common stock on the date of grant. The estimated fair value of
options, including the effect of estimated forfeitures, is recognized over the options vesting
periods. The fair value of the first quarter 2006 stock option grants were estimated on the date of
grant using a Black-Scholes option valuation model that uses the following weighted-average
assumptions:
|
|
|
|
|
Option Grants |
|
|
|
2006 |
|
Expected dividend yield |
|
|
0 |
% |
Expected stock price volatility |
|
|
34.8 |
% |
Risk-free interest rate |
|
|
4.35 |
% |
Expected option life in years |
|
|
4.87 |
|
Per share grant date fair value |
|
$ |
16.82 |
|
Expected volatility is based primarily upon implied volatility for our exchange-traded options
and other factors, including historical volatility. After assessing all available information on
either historical volatility, implied volatility, or both, we have concluded that a combination of
both historical and implied volatility provides the best estimate of expected volatility. The
expected term of options granted is derived using assumed exercise rates based on historical
exercise patterns and represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate used is determined by the market yield curve based upon
risk-free interest rates established by the Federal Reserve, or non-coupon bonds that have
maturities equal to the expected term. The dividend yield is based upon the fact that we have not
historically granted cash dividends, and do not expect to issue dividends in the foreseeable
future. Stock options granted prior to January 1, 2006 were valued based on the grant date fair
value of those awards, using the Black-Scholes option pricing model, as previously calculated for
pro-forma disclosures under SFAS 123 Accounting for Stock-based Compensation.
A summary of stock option activity is presented in the following table (shares are in
thousands):
|
|
|
|
|
|
|
|
|
|
|
All Option Plans |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
Outstanding at December 31, 2005 |
|
|
31,306 |
|
|
$ |
45.71 |
|
Granted |
|
|
1,669 |
|
|
|
44.97 |
|
Exercised |
|
|
(2,081 |
) |
|
|
25.08 |
|
Cancelled |
|
|
(1,951 |
) |
|
|
53.12 |
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
28,943 |
|
|
$ |
46.66 |
|
|
|
|
|
|
|
|
Exercisable at March 31, 2006 |
|
|
23,512 |
|
|
$ |
47.82 |
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of stock options granted during the quarter ended
March 31, 2006 and 2005 was $16.82 and $26.32, respectively. The total intrinsic value of options
exercised for the three months ending March 31, 2006 and 2005 was $44.9 million and $55.5 million,
respectively. The weighted average remaining contractual terms for options outstanding and
exercisable at March 31, 2006 were 6.4 and 6.0 years, respectively.
Time Vested Restricted Stock Units
Time vested restricted stock units vest one-third per year over three years on the anniversary
of the date of grant, provided the employee remains continuously employed with us. Common shares
will be delivered to the employee upon vesting, subject to payment of applicable withholding taxes.
The fair value of all time vested restricted units is based on the market value of our stock on
the date of grant. Compensation
16
expense, including the effect of forfeitures, is recognized over the applicable service
period. For the three months ended March 31, 2006, we recorded $3.7 million of stock compensation
charges related to the restricted stock units.
A summary of restricted stock unit activity is presented in the following table (shares are in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Unvested at December 31, 2005 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
2,311 |
|
|
|
44.27 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(29 |
) |
|
|
44.24 |
|
|
|
|
|
|
|
|
Unvested at March 31, 2006 |
|
|
2,282 |
|
|
$ |
44.27 |
|
|
|
|
|
|
|
|
The weighted average grant-date fair value of the time-vested restricted stock units granted
during the quarter ended March 31, 2006 was $44.27. The weighted average remaining contractual
terms for the time-vested restricted stock units was 1.9 years as of March 31, 2006. There were no
time-vested restricted stock units awarded in the three months ended March 31, 2005.
Restricted Stock Awards:
In 2005 and 2004, we granted restricted common stock to employees under our 2005 and 2003
Omnibus Plans at no cost to the employees. The restricted stock will vest 100% three years from the
grant date, provided the employee remains continuously employed with us. During the vesting period,
shareholders have full voting rights, even though the restricted stock remains subject to transfer
restrictions and will generally be forfeited upon termination of employment prior to vesting. For
the three months ended March 31, 2006, we recorded $2.4 million of stock compensation charges
related to the restricted stock awards, prior to a pre-tax cumulative
effect catch-up credit of $5.6
million, or $3.8 million after-tax, resulting from the application of an estimated forfeiture rate
for current and prior period unvested restricted stock awards.
A summary of restricted stock award activity is presented in the following table (shares are
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Unvested at December 31, 2005 |
|
|
1,440 |
|
|
$ |
53.87 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(75 |
) |
|
|
55.76 |
|
|
|
|
|
|
|
|
Unvested at March 31, 2006 |
|
|
1,365 |
|
|
$ |
53.76 |
|
|
|
|
|
|
|
|
The
weighted average grant-date fair value of the restricted stock granted
during the quarter ended March 31, 2005 was $67.56. The weighted average remaining contractual
terms for the restricted stock was 1.3 years as of March 31, 2006.
Performance-Based Restricted Stock Units:
In the first quarter of 2006, our Board of Directors awarded 100,000 restricted stock units,
or RSUs, to our CEO, under our 2005 Omnibus Plan, subject to certain 2006 financial performance
criteria. If the performance criteria are attained and the employee is still in active employment,
up to 100,000 RSUs will vest and convert into common shares.
During the third quarter of 2005, we granted performance-based RSUs, to be settled in
shares of our common stock to a group of approximately 200 of our employees at the director-level
and above. The grants were made under our 2005 Omnibus Plan. The RSUs will convert into shares of
our common stock,
17
subject to attainment of certain performance goals and the employees continued employment. If
the performance goals are attained and the employee is still in active employment, 70% of the RSUs
will vest and convert into shares on September 14, 2006 and the remaining 30% of the RSUs will vest
and convert into shares on March 14, 2007. Shares will be delivered to the employee upon vesting,
subject to payment of applicable withholding taxes. In the first three months of 2006, we recorded
compensation charges of approximately $10.1 million. The fair value is based on the market price of
the Companys stock on the date of grant and assumes that the target payout level will be achieved.
Compensation cost is adjusted for subsequent changes in the outcome of performance-related
conditions until the vesting date.
A summary of performance-based restricted stock unit activity is presented in the following
table (shares are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
Unvested at December 31, 2005 |
|
|
1,154 |
|
|
$ |
40.67 |
|
Granted |
|
|
100 |
|
|
|
44.59 |
|
Vested |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(38 |
) |
|
|
40.67 |
|
|
|
|
|
|
|
|
Unvested at March 31, 2006 |
|
|
1,216 |
|
|
$ |
40.99 |
|
|
|
|
|
|
|
|
The
weighted average grant-date fair value of the performance-based restricted stock units granted
during the quarter ended March 31, 2006 was $44.59. The weighted average remaining contractual
terms for the time-vested restricted stock units was 0.6 years as of March 31, 2006. There were no
performance-based restricted stock units awarded in the three months ended March 31, 2005.
Employee Stock Purchase Plan:
We also maintain the 1995 Employee Stock Purchase Plan, or the Purchase Plan, or the ESPP.
Under the terms of the ESPP, employees can elect to have up to ten percent of their annual
compensation withheld to purchase shares of our common stock. The purchase price of the common
stock is at 85% of the lower of the fair market value of the common stock at the enrollment or
purchase date. During the three months ended March 31, 2006 and 2005, 0.1 million and 0.2 million
shares, respectively, were issued under the ESPP. We utilize the Black-Scholes model to calculate
the fair value of these awards. The fair value plus the 15% discount amount are recognized as
compensation expense over the purchase period. In the first three
months of 2006, we recorded compensation charges of approximately
$2.7 million.
Pro-forma Disclosure
The following table illustrates the effect on net income and earnings per share if the Company
were to have applied the fair-value based method to account for all stock-based awards for the
three months ended March 31, 2005 (table in thousands, except per share amounts).
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
Net income, as reported |
|
$ |
43,458 |
|
Stock-based compensation expense included in
net income, net of tax |
|
|
7,851 |
|
Pro forma stock compensation expense, net of tax |
|
|
(24,339 |
) |
|
|
|
|
Pro forma net income |
|
$ |
26,970 |
|
|
|
|
|
Reported basic earnings per share: |
|
$ |
.13 |
|
|
|
|
|
Pro forma basic earnings per share: |
|
$ |
.08 |
|
|
|
|
|
Reported diluted earnings per share: |
|
$ |
.12 |
|
|
|
|
|
Pro forma diluted earnings per share: |
|
$ |
.08 |
|
|
|
|
|
18
The pro-forma amounts and fair value of each option grant were estimated on the date of
grant using the Black-Scholes option pricing model with the following weighted-average assumptions
used for grants in the period:
|
|
|
|
|
Option Grants |
|
|
|
2005 |
|
Expected dividend yield |
|
|
0 |
% |
Expected stock price volatility |
|
|
35 |
% |
Risk-free interest rate |
|
|
4.2 |
% |
Expected option life in years |
|
|
5.4 |
|
6. Notes Payable
Our notes payable are as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
20-year subordinated convertible promissory notes, due 2019 at 5.5% |
|
$ |
37,522 |
|
|
$ |
37,016 |
|
30-year senior convertible promissory notes, due 2032 at 1.75% |
|
|
6,456 |
|
|
|
6,428 |
|
|
|
|
|
|
|
|
|
|
$ |
43,978 |
|
|
$ |
43,444 |
|
|
|
|
|
|
|
|
In April and May 2002, we raised through the issuance of our senior notes, approximately $696
million, net of underwriting commissions and expenses of $18.4 million. The senior notes are zero
coupon and were priced with a yield to maturity of 1.75% annually. On April 29, 2005, holders of
99.2% of the outstanding senior notes exercised their right under the indenture governing the
senior notes to require us to repurchase their senior notes. On May 2, 2005, we paid $746.4 million
in cash to repurchase those senior notes with an aggregate principal amount at maturity of
approximately $1.2 billion. The purchase price for the senior notes was $624.73 in cash per $1,000
principal amount at maturity, and was based on the requirements of the indenture and the senior
notes. Additionally, we made a cash payment in 2005 of approximately $62 million for the payment of
tax related to additional deductible interest expense for which deferred tax liabilities had been
previously established. As of March 31, 2006, our remaining indebtedness under the senior notes was
approximately $10.2 million at maturity.
In February 1999, we raised through the issuance of our subordinated notes, approximately
$112.7 million, net of underwriting commissions and expenses of $3.9 million. The subordinated
notes are zero coupon and were priced with a yield to maturity of 5.5% annually. Upon maturity, the
subordinated notes would have had an aggregate principal face value of $345.0 million. As of March
31, 2006, our remaining indebtedness under the subordinated notes was approximately $75.4 million
at maturity, due to conversion of subordinated notes into common stock. Each $1,000 aggregate
principal face value subordinated note is convertible at the holders option at any time through
maturity into 40.404 shares of our common stock at an initial conversion price of $8.36 per share.
The remaining holders of the subordinated notes may require us to purchase the subordinated notes
on February 16, 2009 or 2014 at a price equal to the issue price plus accrued original issue
discount to the date of purchase with us having the option to repay the subordinated notes plus
accrued original issue discount in cash,
common stock or a combination of cash and stock. We have the right to redeem at a price equal
to the issue price
19
plus the accrued original issue discount to the date of redemption all or a
portion of the subordinated notes for cash at any time.
7. Other Income (Expense), Net
Total other income (expense), net consists of the following (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Interest income |
|
$ |
23,557 |
|
|
$ |
15,705 |
|
Interest expense |
|
|
(293 |
) |
|
|
(6,911 |
) |
Other expense |
|
|
(4,599 |
) |
|
|
(17,720 |
) |
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
18,665 |
|
|
$ |
(8,926 |
) |
|
|
|
|
|
|
|
Interest income totaled $23.6 million for the three months ended March 31, 2006 compared to
$15.7 million for the comparable period of 2005. The increase in interest income is primarily due
to higher cash levels and higher yields on our marketable securities portfolio. Interest income
levels that may be achieved in the future are, in part, dependent upon market conditions.
Interest
expense totaled $0.3 million for the three months ended March 31, 2006 compared to
$6.9 million for the comparable period of 2005. The decrease in interest expense relates to the
repurchase of our senior notes due in 2032 in the second quarter of 2005.
Other expense for the three months ended March 31, 2006 consists primarily of $2.1 million for
the impairment of certain non-current marketable securities that were determined to be impaired on
an other-than-temporary basis and $2.0 million for our minority interest in joint ventures.
Other expense for the three months ended March 31, 2005 consists primarily of a $12.3 million
of expenses related to the impairment of certain marketable securities that were determined to be
impaired on an other-than-temporary basis, $2.4 million of foreign exchange remeasurement losses,
$2.3 million of loan impairments, and $1.6 million of realized losses on sales of marketable
securities.
8. Income Taxes
Our effective tax rate for the three months ended March 31, 2006 was 37.8% compared to 34.5%
for the comparable period in 2005. Our effective tax rate for the three months ended March 31, 2006
was higher than the normal statutory rate primarily due to the impact
of state taxes, non-deductible items such as certain stock-based
compensation charges, partially offset by the new domestic
manufacturing deduction. Our effective tax rate for the three months
ended March 31, 2005 was lower than then normal statutory rate
primarily due to tax credits allowed for research and development
expenditures in the U.S. and the new manufacturing deduction,
partially offset by the impact of state taxes. We have tax credit carryforwards for federal and state income tax purposes available
to offset future taxable income. The utilization of our tax credits may be subject to an annual
limitation under the Internal Revenue Code due to a cumulative change of ownership of more than 50%
in prior years. However, we anticipate that this annual limitation will result only in a modest
delay in the utilization of such tax credits.
20
9. Unconsolidated Joint Business Arrangement
Revenues from unconsolidated joint business arrangement consist of the following (table in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Copromotion profits |
|
$ |
124,057 |
|
|
$ |
123,116 |
|
Reimbursement of selling and development
expenses |
|
|
15,928 |
|
|
|
12,875 |
|
Royalty revenue on sales of RITUXAN outside the
U.S. |
|
|
43,395 |
|
|
|
24,462 |
|
|
|
|
|
|
|
|
|
|
$ |
183,380 |
|
|
$ |
160,453 |
|
|
|
|
|
|
|
|
We received royalties on sales of RITUXAN outside of the U.S. of $43.4 million as compared to
$24.5 million for the three months ended March 31, 2005, which we include under Unconsolidated
joint business revenues in our condensed consolidated statements of income. Our royalty revenue on
sales of RITUXAN outside the U.S. is based on Roche and Zenyakus net sales to third-party
customers and is recorded on a cash basis. Royalty revenues from sales of RITUXAN outside the U.S.
increased approximately $18.9 million, which is primarily related to an $11.3 million royalty
credit claimed by Genentech in the three months ended March 31, 2005.
Under the amended and restated collaboration agreement, we will receive lower royalty revenue
from Genentech on sales by Roche and Zenyaku of any new anti-CD20 products, as compared to royalty
revenue received on sales of RITUXAN. The royalty period with respect to all products is 11 years
from the first commercial sale of such product on a country-by-country basis.
10. Litigation
On March 2, 2005, we, along with William H. Rastetter, our former Executive Chairman, and
James C. Mullen, our Chief Executive Officer, were named as defendants in a purported class action
lawsuit, captioned Brown v. Biogen Idec Inc., et al., filed in the U.S. District Court for the
District of Massachusetts (the Court). The complaint alleges violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The action is
purportedly brought on behalf of all purchasers of our publicly-traded securities between February
18, 2004 and February 25, 2005. The plaintiff alleges that the defendants made materially false
and misleading statements regarding potentially serious side effects of TYSABRI in order to gain
accelerated approval from the FDA for the products distribution and sale. The plaintiff alleges
that these materially false and misleading statements harmed the purported class by artificially
inflating our stock price during the purported class period and that company insiders benefited
personally from the inflated price by selling our stock. The plaintiff seeks unspecified damages,
as well as interest, costs and attorneys fees. Substantially similar actions, captioned Grill v.
Biogen Idec Inc., et al. and Lobel v. Biogen Idec Inc., et al., were filed on March 10, 2005 and
April 21, 2005, respectively, in the same court by other purported class representatives. Those
actions have been assigned to District Judge Reginald C. Lindsay and Magistrate Judge Marianne C.
Bowler. On July 26, 2005, the three cases were consolidated and by Margin Order dated September
23, 2005, Magistrate Judge Bowler appointed lead plaintiffs and approved their selection of co-lead
counsel. An objection to the September 23, 2005 order was filed on October 7, 2005. The affected
plaintiffs objection is fully briefed and is pending with the Court. An amended, consolidated
complaint is to be filed no later than 30 days subsequent to the Courts resolution of such
objection. We believe that the actions are without merit and intend to contest them vigorously. At
this early stage of litigation, we cannot make any estimate of a potential loss or range of loss.
On March 9, 2005, two purported shareholder derivative actions, captioned Carmona v. Mullen,
et al. (Carmona) and Fink v. Mullen, et al. (Fink), were brought in the Superior Court of the
State of California, County of San Diego (the California Court), on our behalf, against us as
nominal defendant, our Board of Directors and our chief financial officer. The plaintiffs
derivatively claim breach of fiduciary duties, abuse of control, gross mismanagement, waste of
corporate assets and unjust enrichment against all defendants. The plaintiffs also derivatively
claim insider selling in violation of California Corporations Code § 25402 and breach of fiduciary
duty and misappropriation of information against certain defendants who sold our securities during
the period of February 18, 2004 to the date of the complaints. On May 11, 2005, the California
Court consolidated the
21
Carmona and Fink cases. On January 24, 2006, the parties submitted a proposed scheduling order
addressing amendments to the original pleading and motion to dismiss briefing, which the Court
entered on January 25, 2006. Pursuant to that scheduling order, on February 3, 2006, plaintiffs
filed an amended complaint, which, among other amendments to the allegations, added our former
general counsel as a defendant. On April 28, 2006, the court granted defendants motion to dismiss
with prejudice and instructed defendants to prepare a final judgment for entry. These purported
derivative actions do not seek affirmative relief from the Company. We believe the plaintiffs
claims lack merit and intend to litigate the dispute vigorously. We are currently unable to
determine whether resolution of this matter will have a material adverse impact on our financial
position or results of operations, or reasonably estimate the amount of the loss, if any, that may
result from resolution of this matter.
On June 20, 2005, a purported class action, captioned Wayne v. Biogen Idec Inc. and Elan
Pharmaceutical Management Corp., was filed in the U.S. District Court for the Northern District of
California (the California District Court). On August 15, 2005, the plaintiff filed an amended
complaint. The amended complaint purports to assert claims for strict product liability, medical
monitoring and concert of action arising out of the manufacture, marketing, distribution and sale
of TYSABRI. The action is purportedly brought on behalf of all persons in the U.S. who have had
infusions of TYSABRI and who have not been diagnosed with any medical conditions resulting from
TYSABRI use. The plaintiff alleges that defendants, acting individually and in concert, failed to
warn the public about purportedly known risks related to TYSABRI use. On January 20, 2006, the
parties filed a stipulation of dismissal with prejudice, which the Court entered on January 24,
2006. The disposition of this matter did not have a material adverse
effect on our business or financial condition.
Our Board of Directors has received letters, dated March 1, 2005, March 15, 2005 and May 23,
2005, respectively, on behalf of purported owners of our securities purportedly constituting
demands under Delaware law. A supplement to the March 1, 2005 letter was received on March 2, 2005. The
letters generally allege that certain of our officers and directors breached their fiduciary duty
to us by selling personally held shares of our securities while in possession of material,
non-public information about potential serious side effects of TYSABRI. The letters generally
request that our Board of Directors take action on our behalf to recover compensation and profits
from the officers and directors, consider enhanced corporate governance controls related to the
sales of securities by insiders, and pursue other such equitable relief, damages, and other
remedies as may be appropriate. A special litigation committee of our Board of Directors was
formed, and, with the assistance of independent outside counsel, investigated the allegations set
forth in the demand letters. By letters dated August 17, 2005 and October 1, 2005, our Board of
Directors informed those shareholders that it would not take action as demanded because it was the
Boards determination that such action was not in the best interests of the Company. On June 23,
2005, one of the purported shareholders who made demand filed a purported derivative action in the
Middlesex Superior Court for the Commonwealth of Massachusetts (the Massachusetts Court), on our
behalf, against us as nominal defendant, our former general counsel, a member of our Board of
Directors and our former Executive Chairman. The plaintiff derivatively claims that our former
Executive Chairman, former general counsel and the director defendant misappropriated confidential
company information for personal profit by selling our stock while in possession of material,
non-public information regarding the potentially serious side effects of TYSABRI. The plaintiff
seeks disgorgement of profits, costs and attorneys fees. On September 27, 2005, the plaintiff was
provided with a copy of the Delaware Order and responded on September 28, 2005, that he would not
be moving to intervene in Delaware. On October 4, 2005, all defendants filed motions seeking
dismissal of the action and/or judgment on the pleadings, and the Company also filed a supplemental
motion seeking judgment on the pleadings. Also on October 4, 2005, the plaintiff filed a
cross-motion seeking leave to amend the complaint, which the Company opposed. On November 14,
2005, the Massachusetts Court heard oral argument on the various motions. By Memorandum and Order
dated January 31, 2006, the Massachusetts Court granted leave to amend and, as to such amended
complaint, granted Defendants motion to dismiss. The time for filing an appeal in this action has
passed and no appeal has been taken.
On April 21, 2005, we received a formal order of investigation from the Boston District Office
of the SEC. The SEC is investigating whether any violations of the federal securities laws
occurred in connection with the suspension of marketing and commercial distribution of TYSABRI. We
continue to cooperate fully with the SEC in this investigation. We are unable to predict the
outcome of this investigation or the timing of its resolution at this time.
On June 9, 2005, we, along with numerous other companies, received a request for information
from the U.S. Senate Committee on Finance, or the Committee, concerning the Committees review of
issues relating to the Medicare and Medicaid programs coverage of prescription drug benefits. On
January 9, 2006, we, along with
22
numerous other companies, received a further request for information from the Committee. We
filed a timely response to the request on March 6, 2006 and are cooperating fully with the
Committees information requests. We are unable to predict the outcome of this review or the
timing of its resolution at this time.
On July 20, 2005, a products liability action captioned Walter Smith, as Personal
Representative of the Estate of Anita Smith, decedent, and Walter Smith, individually v. Biogen
Idec Inc. and Elan Corp., PLC, was commenced in the Superior Court of the Commonwealth of
Massachusetts, Middlesex County. The complaint purports to assert statutory wrongful death claims
based on negligence, agency principles, fraud, breach of warranties, loss of consortium, conscious
pain and suffering, and unfair and deceptive trade practices in violation of Mass. G.L., c. 93A.
This matter has been resolved in a mutually satisfactory manner and the parties have filed a
stipulation of dismissal with prejudice. The disposition of this
matter did not have a material adverse effect on our business or
financial condition.
On October 4, 2004, Genentech, Inc. received a subpoena from the U.S. Department of Justice
requesting documents related to the promotion of RITUXAN. We market RITUXAN in the U.S. in
collaboration with Genentech. Genentech has disclosed that it is cooperating with the associated
investigation, which they disclosed that they have been advised is both civil and criminal in
nature. The potential outcome of this matter and its impact on us cannot be determined at this
time.
On August 10, 2004, Classen Immunotherapies, Inc. filed suit against us, GlaxoSmithKline,
Chiron Corporation, Merck & Co., Inc., and Kaiser-Permanente, Inc., in the U.S. District Court for
the District of Maryland, contending that we induced infringement of U.S. patents 6,420,139,
6,638,739, 5,728,385, and 5,723,283, all of which are directed to various methods of immunization
or determination of immunization schedules. The inducement of infringement claims are based on
allegations that we provided instructions and/or recommendations on a proper immunization schedule
for vaccines to other defendants who are alleged to have directly infringed the patents at issue.
We are investigating the allegations, however, we do not believe them to be based in fact. On
November 19, 2004, we, along with GlaxoSmithKline, filed a joint motion to dismiss three of the
four counts of the complaint. The court granted that motion on July 22, 2005. On August 1, 2005,
Classen filed a motion for reconsideration, which the court denied on December 14, 2005. Classen
also filed a motion to dismiss the third, and final, count against us with prejudice. We did not
oppose that motion, and the Court dismissed that count against GlaxoSmithKline and us in its
December 14, 2005 order. On January 5, 2006, Classen filed a notice of appeal to the U.S. Court of
Appeals for the Federal Circuit of the Courts July 22, 2005 and December 14, 2005 decisions. On
April 10, 2006, the Court of Appeals for the Federal Circuit dismissed Classens appeal as
premature, since there has not been a final judgment in the case. Under our 1988 license agreement
with GlaxoSmithKline, GlaxoSmithKline is obligated to indemnify and defend us against these claims.
In the event that the nature of the claims change such that GlaxoSmithKline is no longer obligated
to indemnify and defend us and we are unsuccessful in the present or any subsequent litigation we
may be liable for damages suffered by Classen and such other relief as Classen may seek and be
granted by the court. At this stage of the litigation, we cannot make any estimate of a potential
loss or range of loss.
Along with several other major pharmaceutical and biotechnology companies, Biogen, Inc. (now
Biogen Idec MA, Inc., one of our wholly-owned subsidiaries) or, in certain cases, Biogen Idec,
Inc., was named as a defendant in lawsuits filed by the City of New York and the following Counties
of the State of New York: County of Albany, County of Allegany, County of Broome, County of
Cattaraugus, County of Cayuga, County of Chautauqua, County of Chenango, County of Columbia, County
of Cortland, County of Dutchess, County of Erie, County of Essex, County of Fulton, County of
Genesee, County of Greene, County of Herkimer, County of Jefferson, County of Lewis, County of
Madison, County of Monroe, County of Nassau, County of Niagara, County of Oneida, County of
Onondaga, County of Ontario, County of Orleans, County of Putnam, County of Rensselaer, County of
Rockland, County of St. Lawrence, County of Saratoga, County of Schuyler, County of Seneca, County
of Steuben, County of Suffolk, County of Tompkins, County of Warren, County of Washington, County
of Wayne, County of Westchester, and County of Yates. All of the cases, except for the County of
Erie and County of Nassau cases, are the subject of a Consolidated Complaint, which was filed on
June 15, 2005 in U.S. District Court for the District of Massachusetts in Multi-District Litigation
No. 1456. The County of Nassau, which originally filed its complaint on November 24, 2004, filed
an amended complaint on March 24, 2005 and that case is also pending in the U.S. District Court for
the District of Massachusetts. The County of Erie case is currently pending in the Supreme Court
of the State of New York.
23
All of the complaints allege that the defendants fraudulently reported the Average Wholesale
Price for certain drugs for which Medicaid provides reimbursement, also referred to as Covered
Drugs; marketed and promoted the sale of Covered Drugs to providers based on the providers ability
to collect inflated payments from the government and Medicaid beneficiaries that exceeded payments
possible for competing drugs; provided financing incentives to providers to over-prescribe Covered
Drugs or to prescribe Covered Drugs in place of competing drugs; and overcharged Medicaid for
illegally inflated Covered Drugs reimbursements. The complaints allege violations of New York
state law and advance common law claims for unfair trade practices, fraud, and unjust enrichment.
In addition, all of the complaints, with the exception of the County of Erie complaint, allege that
the defendants failed to accurately report the best price on the Covered Drugs to the Secretary
of Health and Human Services pursuant to rebate agreements entered into with the Secretary of
Health and Human Services, and excluded from their reporting certain drugs offered at discounts and
other rebates that would have reduced the best price. On April 8, 2005, the court dismissed the
claims brought by Suffolk County against Biogen Idec and eighteen other defendants in a complaint
filed on August 1, 2003. The court held that Suffolk Countys documentation was insufficient to
plead allegations of fraud. Biogen Idec, along with the other defendants, has filed a motion to
dismiss the complaints pending in the U.S. District Court for the District of Massachusetts and in
the Supreme Court for the State of New York. These motions are currently pending. Biogen Idec
intends to defend itself vigorously against all of the allegations and claims in these lawsuits.
At this stage of the litigation, we cannot make any estimate of a potential loss or range of loss.
Biogen Idec, Inc., along with several other major pharmaceutical and biotechnology companies,
was also named as a defendant in a lawsuit filed by the Attorney General of Arizona. The lawsuit
was filed in the Superior Court of the State of Arizona on December 6, 2005. The complaint alleges
that the defendants fraudulently reported the Average Wholesale Price for certain drugs covered by
the State of Arizonas Medicare and Medicaid programs, and marketed these drugs to providers based
on the providers ability to collect inflated payments from the government and other third-party
payors. The complaint alleges violations of Arizona state law based on consumer fraud and
racketeering. The defendants have removed this case to federal court and the Joint Panel on
Multi-District Litigation has conditionally transferred the case to Multi-District Litigation No.
1456 pending in the U.S. District Court for the District of Massachusetts. The Attorney General of
Arizona has filed an opposition to the Conditional Transfer Order, and has moved to remand the case
back to the Superior Court for the State of Arizona. Both of these motions are currently pending.
Biogen Idec intends to defend itself vigorously against all of the allegations and claims in this
lawsuit. At this stage of the litigation, we cannot make any estimate of a potential loss or range
of loss.
On January 6, 2006, we were served with a lawsuit, captioned United States of America ex rel.
Paul P. McDermott v. Genentech, Inc. and Biogen-Idec, Inc., filed in the United States District
Court for the District of Maine. The lawsuit was filed under seal on July 29, 2005 by a former
employee of our co-defendant Genentech pursuant to the False Claims Act, 31 U.S.C. § 3729 et seq.
On December 20, 2005, the U.S. government elected not to intervene, and the file was subsequently
unsealed and served. On February 27, 2006, we served a motion to dismiss the complaint on the
grounds that the court lacks subject matter jurisdiction, the compliant fails to state a claim and
the claims were not pleaded with particularity. On March 31, 2006, the plaintiff filed his
opposition to our motion to dismiss and a proposed first amended complaint. On April 4, 2006, the
plaintiff filed his first amended complaint alleging, among other things, that we directly
solicited physicians and their staff members to illegally market off-label uses of RITUXAN for
treating rheumatoid arthritis, provided illegal kickbacks to physicians to promote off-label uses,
trained our employees in methods of avoiding the detection of these off-label sales and marketing
activities, formed a network of employees whose assigned duties involved off-label promotion of
RITUXAN, intended and caused the off-label promotion of RITUXAN to result in the submission of
false claims to the government, and conspired with Genentech to defraud the government. The
plaintiff seeks entry of judgment on behalf of the United States of America against the defendants,
an award to the plaintiff as relator, and all costs, expenses, attorneys fees, interest and other
appropriate relief. On May 4, 2006, we filed a motion to dismiss
the first amended complaint on the grounds that the court lacks
subject matter jurisdiction, the complaint fails to state a claim and
the claims were not pleaded with particularity. Plaintiffs
opposition to our motion to dismiss is due May 25, 2006. At this stage
of the litigation, we cannot make any estimate of a potential loss or range of loss. On February
28, 2006, the FDA approved the sBLA for use of RITUXAN, in combination with methotrexate, for
reducing signs and symptoms in adult patients with moderately-to-severely active RA who have had an
inadequate response to one or more TNF antagonist therapies.
On February 24, 2006, a purported customer of TYSABRI in Louisiana commenced a Petition for
Redhibition in the U.S. District Court for the Eastern District of Louisiana, against Biogen Idec
and Elan Pharmaceuticals, captioned as Jill Czapla v. Biogen Idec and Elan Pharmaceuticals, Civil
Action No. 06-0945. The plaintiff
24
commenced the action on behalf of herself and all others similarly situated, specifically all
persons, natural and juridical, who purchased an infusion drug TYSABRI (natalizumab) in Louisiana.
The plaintiff seeks rescission of the sale, return of the purchase price, expenses incidental to
the sale, attorneys fees and interest, but excludes from the relief sought any damages related to
any personal injuries suffered because of the consumption of TYSABRI. We have not been served with
the complaint and are presently evaluating the plaintiffs contentions. We intend to defend
ourselves vigorously against all of the allegations and claims in this lawsuit. At this stage of
the litigation, we cannot make any estimate of potential loss or range of loss.
In addition, we are involved in certain other legal proceedings generally incidental to our
normal business activities. While the outcome of any of these proceedings cannot be accurately
predicted, we do not believe the ultimate resolution of any of these existing matters would have a
material adverse effect on our business or financial condition.
11. Share Repurchase Program
In October 2004, our Board of Directors authorized the repurchase of up to 20.0 million shares
of our common stock. The repurchased stock will provide us with treasury shares for general
corporate purposes, such as common stock to be issued under our employee equity and stock purchase
plans. This repurchase program will expire no later than October 4, 2006. We did not repurchase any
shares under this program for the three months ended March 31, 2006. Approximately 11.9 million
shares remain authorized for repurchase under this program at March 31, 2006.
12. Segment Information
We operate in one segment, which is the business of development, manufacturing and
commercialization of novel therapeutics for human health care. Our chief operating decision-makers
review our operating results on an aggregate basis and manage our operations as a single operating
segment. We currently have four products: AVONEX for the treatment of relapsing forms of MS,
RITUXAN for the treatment of certain B-cell NHLs and RA, ZEVALIN for the treatment of a certain
B-cell NHLs and, TYSABRI. We also receive revenues from royalties on sales by our licensees of a
number of products covered under patents that we control including sales of RITUXAN outside the
U.S. Revenues are primarily attributed from external customers to individual countries where earned
based on location of the customer or licensee.
13. Guarantees
We enter into indemnification provisions under our agreements with other companies in the
ordinary course of business, typically with business partners, contractors, clinical sites and
customers. Under these provisions, we generally indemnify and hold harmless the indemnified party
for losses suffered or incurred by the indemnified party as a result of our activities. These
indemnification provisions generally survive termination of the underlying agreement. The maximum
potential amount of future payments we could be required to make under these indemnification
provisions is unlimited. However, to date we have not incurred material costs to defend lawsuits or
settle claims related to these indemnification provisions. As a result, the estimated fair value of
these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as
of March 31, 2006.
In connection with the relocation from leased facilities to our new research and corporate
campus in San Diego, California, we entered into a lease assignment, in January 2005, with Tanox
West, Inc., or Tanox, for a manufacturing facility in San Diego for which we have outstanding lease
obligations through September 2008. Under the lease assignment, Tanox was assigned all of our
rights, title, and interest in the amended lease and assumed all of the terms, covenants,
conditions and obligations required to be kept, performed and fulfilled under the amended lease,
including the making of all payments under the amended lease. However, if Tanox were to fail to
perform under the lease assignment we would be responsible for all obligations under the amended
lease through September 2008. At March 31, 2006, our estimate of the maximum potential of future
payments under the amended lease through September 2008 is $12.0 million. Under the lease
assignment, Tanox has agreed to indemnify and hold us harmless from and against any and all claims,
proceedings and demands and all costs, expenses and liabilities arising out of their performance or
failure to perform under the lease assignment.
25
14. Impairment of Long-Lived Assets
As of March 31, 2005, after our voluntary suspension of TYSABRI, we reconsidered our
construction plans and determined that we would proceed with the bulk manufacturing component of
our large-scale biologic manufacturing facility in Hillerod, Denmark. Additionally, we added a
labeling and packaging component to the project, and determined that we would no longer proceed
with the fill-finish component of the large-scale biological manufacturing facility. As a result,
in the first quarter of 2005, we recorded an impairment charge to facility impairments and loss on
sale of approximately $6.3 million of engineering costs related to the fill-finish component that
had previously been capitalized.
15. Sale of Clinical Manufacturing Facility
In February 2006, we sold our NICO clinical manufacturing facility in Oceanside, California to
Genentech. The assets associated with the NICO clinical manufacturing facility were included in
assets held for sale on our condensed consolidated balance sheet as of December 31, 2005. Total
consideration for the purchase was $29.0 million. This sale was completed in the first quarter of
2006, and no additional loss resulted.
16. Severance and Other Costs from Restructuring Plan
In connection with our comprehensive strategic plan discussed in Note 1, we have recorded
restructuring charges associated with these activities, which consist primarily of severance and
other employee termination costs, including health benefits, outplacement and bonuses. Other costs
include write-downs of certain research assets that will no longer be utilized, consulting costs in
connection with the restructuring effort, and costs related to the acceleration of restricted
stock, offset by the reversal of previously recognized compensation due to unvested restricted
stock cancellations. The remaining costs at March 31, 2006 are included in accrued expenses and
other on our condensed consolidated balance sheet.
The components of the charges are as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability at |
|
|
|
|
|
|
Paid/Settled through |
|
|
Remaining Liability at |
|
|
|
December 31, |
|
|
Costs Incurred |
|
|
March 31, |
|
|
March 31, |
|
|
|
2005 |
|
|
During 2006 |
|
|
2006 |
|
|
2006 |
|
Severance and
employee
termination
costs |
|
$ |
17,426 |
|
|
$ |
687 |
|
|
$ |
(8,571 |
) |
|
$ |
9,542 |
|
Other costs |
|
|
31 |
|
|
|
84 |
|
|
|
(53 |
) |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,457 |
|
|
$ |
771 |
|
|
$ |
(8,624 |
) |
|
$ |
9,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We may have additional charges related to the plan in future periods. The amounts of those
charges cannot be determined at this time.
17. New Accounting Pronouncements
In February 2006, the FASB issued FSP No. FAS 123 (R) 4, Classification of Options and
Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the
Occurrence of a Contingent Event. This FSP addresses the classification of options and similar
instruments issued as employee compensation that allow for cash settlement upon the occurrence of a
contingent event. The guidance in this FSP amends SFAS 123(R), so that a cash settlement feature
that can be exercised only upon the occurrence of a contingent event that is outside the employees
control does not require the option or similar instrument to be classified as a liability, unless
it becomes probable that the event will occur. This FSP is effective in the first quarter of 2006,
the same period we are required to adopt SFAS 123(R). This FSP has not had any impact on our
results of operations for the three months ended March 31, 2006, nor do we expect it to have a
significant impact in future periods.
In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial
Instruments, which amends both SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS 140,
26
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. SFAS 155 allows the fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that would otherwise required bifurcation. SFAS 155 shall be
effective for entities that have fiscal years beginning after September 15, 2006. We do not expect
this statement to have any impact on our results of operations.
The FASB issued SFAS 156, Accounting for Servicing of Financial Assets, which amends FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, in March 2006. FASB 156 requires the recognition of a servicing asset or liability
during the undertaking of an obligation to service a financial asset through the creation of a
service contract. In addition, under SFAS 156, all recognized servicing assets and liabilities
should be recognized initially at fair value and subsequently by either the amortization or fair
value measurement method. SFAS 156 should be adopted for all fiscal years beginning after
September 15, 2006. We do not expect SFAS 156 to have any impact on our results of operations.
18. Subsequent Event
On May 2, 2006, we entered into an Agreement and Plan of Merger with Conforma Corporation, or
Conforma, under which a newly created Biogen Idec subsidiary will merge with and into Conforma in a
transaction to be accounted for as a purchase under GAAP, with us treated as the acquiror. Under
the terms of the merger agreement, all shares of Conforma preferred and common stock outstanding on
the closing date of the merger will be acquired for an initial payment of $150 million. An
additional $100 million may be paid upon the attainment of certain development milestone events for
Conformas heat shock protein 90 molecules. The board of directors of each company has unanimously
approved the merger. Completion of the merger is subject to the satisfaction of certain
conditions, including approval of the merger by the stockholders of Conforma and other customary
closing conditions. We expect the merger to be completed in the second quarter of 2006.
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Overview
Biogen Idec creates new standards of care in oncology, neurology and immunology. As a global
leader in the development, manufacturing, and commercialization of novel therapies, we transform
scientific discoveries into advances in human healthcare. We currently have four products:
AVONEX® (interferon beta-1a). AVONEX is approved for the treatment of relapsing forms of
multiple sclerosis, or MS, and is the most prescribed therapeutic product in MS worldwide.
Globally over 130,000 patients have chosen AVONEX as their treatment of choice.
RITUXAN® (rituximab). RITUXAN is approved worldwide for the treatment of relapsed or
refractory low-grade or follicular, CD20-positive, B-cell non-Hodgkins lymphomas, or B-cell NHLs.
In February 2006, RITUXAN was approved by the U.S. Food and Drug Administration, or FDA, to treat
previously untreated patients with diffuse, large B-cell NHL in combination with
anthracycline-based chemotherapy regimens. In addition, in February 2006, the FDA approved the
supplemental Biologics License Application, or sBLA, for use of RITUXAN, in combination with
methotrexate, for reducing signs and symptoms in adult patients with moderately-to-severely active
rheumatoid arthritis, or RA, who have had an inadequate response to one or more TNF antagonist
therapies. We market RITUXAN in the United States, or U.S., in collaboration with Genentech, Inc.,
or Genentech. All U.S. sales of RITUXAN are recognized by Genentech and we record our share of the
pretax copromotion profits on a quarterly basis. F. Hoffman-La Roche
Ltd., or Roche, sells RITUXAN outside the U.S., except in
Japan where it co-markets RITUXAN in collaboration with Zenyaku Kogyo
Co. Ltd., or Zenyaku. We are working with Genentech and
Roche on the development of RITUXAN in additional oncology and other indications.
TYSABRI® (natalizumab). TYSABRI was approved by the FDA in November 2004 to treat relapsing
forms of MS to reduce the frequency of clinical relapses. In February 2005, in consultation with
the FDA, we and Elan Corporation plc, or Elan, voluntarily suspended the marketing and commercial
distribution of TYSABRI, and we informed physicians that they should suspend dosing of TYSABRI
until further notification. In addition, we suspended dosing in clinical studies of TYSABRI in MS,
Crohns disease and RA. These decisions were based on reports of cases of progressive multifocal
leukoencephalopathy, or PML, a rare and frequently fatal, demyelinating disease of the central
nervous system, in patients treated with TYSABRI in clinical studies. We and Elan
27
conducted a safety evaluation of patients treated with TYSABRI in MS, Crohns disease and RA
clinical studies. The safety evaluation included the review of any reports of potential PML in MS
patients receiving TYSABRI in the commercial setting. In October 2005, we completed the safety
evaluation of TYSABRI and found no new confirmed cases of PML. Three confirmed cases of PML were
previously reported, two of which were fatal. In September 2005, we submitted an sBLA for TYSABRI
to the FDA for the treatment of MS. The sBLA includes: final two-year data from the Phase 3 AFFIRM
monotherapy trial and SENTINEL combination trial with AVONEX in MS; the integrated safety
assessment of patients treated with TYSABRI in clinical trials; and a revised label and a risk
minimization action plan. We and Elan have also submitted a similar data package to the European
Medicines Agency, or EMEA. This information was supplied as part of the ongoing EMEA review
process, which was initiated in the summer of 2004 with the filing for approval of TYSABRI as a
treatment for MS. On March 8, 2006, the Peripheral and Central Nervous System Drugs Advisory
Committee of the FDA voted unanimously to recommend reintroduction of TYSABRI as a treatment for
relapsing forms of MS. We anticipate action by the FDA regarding the reintroduction of TYSABRI in
the U.S. on or before June 28, 2006. In April 2006, the Committee for Medicinal Products for Human
Use, the scientific committee of the EMEA, issued a positive opinion recommending marketing
authorization for TYSABRI as a treatment for relapsing-remitting MS to delay the progression of
disability and reduce the frequency of relapses. We anticipate action by the EMEA regarding the
introduction of TYSABRI in the EU this summer. In March 2006, we and Elan began an open-label,
multi-center safety extension study of TYSABRI monotherapy in the U.S. and internationally. We plan
to work with regulatory authorities to determine if dosing in other clinical studies will be
re-initiated. We cannot predict the outcome of our work with regulatory authorities. TYSABRI could
be permanently withdrawn from the market or re-introduced to the market with significant
restrictions on its permissible uses, black box or other significant safety warnings in its label
and such other restrictions, requirements and limitations as the FDA, EMEA or other regulatory
authorities may require. While we presently believe that we will be able to find a path forward for
TYSABRI, there are no assurances as to the likelihood of success.
ZEVALIN® (ibritumomab tiuxetan). The ZEVALIN therapeutic regimen, which features ZEVALIN, is a
radioimmunotherapy that is approved for the treatment of patients with relapsed or refractory
low-grade, follicular, or transformed B-cell NHL, including patients with RITUXAN relapsed or
refractory NHL. ZEVALIN is approved in the EU for the treatment of adult patients with CD20
follicular B-cell NHL who are refractory to or have relapsed following RITUXAN therapy. We sell
ZEVALIN to Schering AG for distribution in the EU, and receive royalty revenues from Schering AG on
sales of ZEVALIN in the EU.
In September 2005, we began implementing a comprehensive strategic plan designed to position
us for long-term growth. The plan builds on the continuing strength of AVONEX and RITUXAN and other
expected near-term developments. The plan has three principal elements: reducing operating expenses
and enhancing economic flexibility by recalibrating our asset base, geographic site missions,
staffing levels and business processes; committing significant additional capital to external
business development and research opportunities; and changing our organizational culture to enhance
innovation and support the first two elements of the plan. In conjunction with the plan, we are
consolidated or eliminated certain internal management layers and staff functions, resulting in the
reduction of our workforce by approximately 17%, or approximately 650 positions worldwide. These
adjustments took place across company functions, departments and sites, and were substantially
implemented.
In
April 2006, we sold the worldwide rights to AMEVIVE® (alefacept), including inventory
on-hand, to Astellas Pharma US,
Inc., or Astellas. AMEVIVE is approved in the U.S. and other countries for the treatment of adult
patients with moderate-to-severe chronic plaque psoriasis who are candidates for systemic therapy
or phototherapy. We will continue to manufacture AMEVIVE and supply this product to Astellas. In
February 2006, we also sold our NICO clinical manufacturing facility to Genentech. In addition, we
are seeking to divest several other non-core assets.
28
Results of Operations
Revenues (table in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Product sales |
|
|
|
|
|
|
|
|
United States |
|
$ |
240,067 |
|
|
$ |
254,597 |
|
Rest of world |
|
|
166,452 |
|
|
|
142,987 |
|
|
|
|
|
|
|
|
Total product sales |
|
|
406,519 |
|
|
|
397,584 |
|
Unconsolidated joint business |
|
|
183,380 |
|
|
|
160,453 |
|
Royalties |
|
|
20,561 |
|
|
|
26,749 |
|
Corporate partner |
|
|
715 |
|
|
|
3,016 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
611,175 |
|
|
$ |
587,802 |
|
|
|
|
|
|
|
|
Product Sales (table in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
AVONEX |
|
$ |
393,427 |
|
|
$ |
373,586 |
|
AMEVIVE |
|
|
8,278 |
|
|
|
12,016 |
|
ZEVALIN |
|
|
5,010 |
|
|
|
6,036 |
|
TYSABRI |
|
|
(196 |
) |
|
|
5,946 |
|
|
|
|
|
|
|
|
Total product sales |
|
$ |
406,519 |
|
|
$ |
397,584 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006, sales of AVONEX generated worldwide revenues of
$393.4 million, of which $232.0 million was generated in the U.S. and $161.4 million was generated
outside the U.S., primarily the EU. For the three months ended March 31, 2005, sales of AVONEX
generated worldwide revenues of $373.6 million, of which $232.8 million was generated in the U.S.
and $140.8 million was generated outside the U.S., primarily the EU. The decrease in U.S. product
sales for AVONEX was primarily due to decreases in volume offset by price increases. Outside of the
U.S., AVONEX product sales increased primarily due to higher sales volume, offset by the effect of
foreign exchange losses. Product sales from AVONEX represented approximately 64% of our total
revenues for the three months ended March 31, 2006 and 2005. We expect to face increasing
competition in the MS marketplace in and outside the U.S. from existing and new MS treatments,
including TYSABRI if it is reintroduced to the market, which may impact sales of AVONEX. We expect
future sales of AVONEX to be dependent to a large extent on our ability to compete successfully.
For the three months ended March 31, 2006, AMEVIVE generated revenues of $8.3 million, of
which $3.8 million was generated in the U.S. and $4.5 million was generated outside the U.S. For
the three months ended March 31, 2005, AMEVIVE generated revenues of $12.0 million, of which $10.4
million was generated in the U.S. and $1.6 million was generated outside the U.S. The decrease in
U.S. product sales for AMEVIVE was primarily due to the decrease in our sales force, due to our
divesture of AMEVIVE which was completed in April 2006. Product sales from AMEVIVE represent approximately 1% of our total revenues
in the first three months of 2006 compared to 2% of our total revenues for the comparable period in
2005. As discussed above, we sold our worldwide rights to AMEVIVE in April 2006.
For the three months ended March 31, 2006 and 2005, sales of ZEVALIN generated revenues of
$5.0 million and $6.0 million, respectively. The decrease in product sales related to ZEVALIN is
attributable to lower sales volumes in the U.S. Product sales from ZEVALIN represented less than 1%
and approximately 1% of our total revenues in the three months ended March 31, 2006 and 2005,
respectively.
In November 2004, TYSABRI was approved by the FDA as treatment for relapsing forms of MS to
reduce the frequency of clinical relapses. In February 2005, in consultation with the FDA, we and
Elan voluntarily suspended the marketing and commercial distribution of TYSABRI, and we informed
physicians that they should suspend dosing of TYSABRI until further notification. In the U.S.,
prior to the suspension, we sold TYSABRI to Elan who then distributed TYSABRI to third party
distributors and other customers. In the first quarter of 2005, our revenue associated with sales
of TYSABRI was $5.9 million, which consists of revenue from sales which occurred prior to our
voluntary suspension. Sales from TYSABRI represent 1% of our total revenues in the first quarter of
2005. As
29
of March 31, 2005, and in connection with the voluntary suspension of TYSABRI, we recorded an
allowance for sales returns of approximately $9.0 million related to product sold in the first
quarter of 2005, which represented our best estimate of expected returns from our customers.
Additionally, as of March 31, 2005, we deferred $14.0 million in revenue under our revenue
recognition policy with Elan, which has been fully paid by Elan, related to sales of TYSABRI which
had not yet been shipped by Elan and remains deferred at March 31, 2006.
See also the risks affecting revenues described in Risk Factors Our Revenues Rely
Significantly on a Limited Number of Products and Risk Factors Safety Issues with TYSABRI Could
Significantly Affect our Growth.
Unconsolidated Joint Business Revenue
RITUXAN is currently marketed and sold worldwide for the treatment of certain B-cell NHLs. In
February 2006, RITUXAN was approved by the FDA to treat previously untreated patients with diffuse,
large B-cell NHL in combination with anthracycline-based chemotherapy regimens. In addition, in
February 2006, the FDA approved the sBLA for use of RITUXAN, in combination with methotrexate, for
reducing signs and symptoms in adult patients with moderately-to-severely active RA who have had an
inadequate response to one or more TNF antagonist therapies. We copromote RITUXAN in the U.S. in
collaboration with Genentech under a collaboration agreement between the parties. Under the
collaboration agreement, we granted Genentech a worldwide license to develop, commercialize and
market RITUXAN in multiple indications. In exchange for these worldwide rights, we have copromotion
rights in the U.S. and a contractual arrangement under which Genentech shares a portion of the
pretax U.S. copromotion profits of RITUXAN with us. This collaboration was created through a
contractual arrangement not through a joint venture or other legal entity. In June 2003, we amended
and restated our collaboration agreement with Genentech to include the development and
commercialization of one or more anti-CD20 antibodies targeting B-cell disorders, in addition to
RITUXAN, for a broad range of indications.
In the U.S., we contribute resources to selling and the continued development of RITUXAN.
Genentech is responsible for worldwide manufacturing of RITUXAN. Genentech also is responsible for
the primary support functions for the commercialization of RITUXAN in the U.S. including selling
and marketing, customer service, order entry, distribution, shipping and billing. Genentech also
incurs the majority of continuing development costs for RITUXAN. Under the arrangement, we have a
limited sales force as well as limited development activity.
Under the terms of separate sublicense agreements between Genentech and Roche,
commercialization of RITUXAN outside the U.S. is the responsibility of Roche, except in Japan where
Roche copromotes RITUXAN in collaboration with Zenyaku. There is no direct contractual arrangement
between us and Roche or Zenyaku.
Revenue from unconsolidated joint business consists of our share of pretax copromotion profits
which is calculated by Genentech, and includes reimbursement of our RITUXAN-related sales force and
development expenses, and royalty revenue from sales of RITUXAN outside the U.S. by Roche and
Zenyaku. Copromotion profit consists of U.S. sales of RITUXAN to third-party customers net of
discounts and allowances and less the cost to manufacture RITUXAN, third-party royalty expenses,
distribution, selling and marketing expenses, and joint development expenses incurred by Genentech
and us.
Under the amended and restated collaboration agreement, our current pretax copromotion
profit-sharing formula, which resets annually, is as follows:
|
|
|
|
|
Copromotion Operating Profits |
|
Biogen Idecs Share of Copromotion Profits |
First $50 million |
|
|
30 |
% |
Greater than $50 million |
|
|
40 |
% |
In both 2006 and 2005, the 40% threshold was met during the first quarter. For each calendar year
or portion thereof following the approval date of the first new anti-CD20 product, the pretax
copromotion profit-sharing formula for RITUXAN and other anti-CD20 products sold by us and
Genentech will change to the following:
30
|
|
|
|
|
|
|
|
|
Copromotion |
|
New Anti-CD20 U.S. |
|
Biogen Idecs Share |
Operating Profits |
|
Gross Product Sales |
|
of Copromotion Profits |
First $50 million (1) |
|
|
N/A |
|
|
|
30 |
% |
|
Greater than $50 million |
|
Until such sales exceed $150 |
|
|
38 |
% |
|
|
million in any calendar year(2) |
|
|
|
|
|
|
|
Or |
|
|
|
|
|
|
|
After such sales exceed $150 |
|
|
35 |
% |
|
|
million in any calendar year |
|
|
|
|
|
|
and until such sales exceed |
|
|
|
|
|
|
$350 million in any calendar year (3) |
|
|
|
|
|
|
|
Or |
|
|
|
|
|
|
|
After such sales exceed $350 |
|
|
30 |
% |
|
|
million in any calendar
year (4) |
|
|
|
|
|
|
|
(1) |
|
not applicable in the calendar year the first new anti-CD20
product is approved if $50 million in copromotion operating
profits has already been achieved in such calendar year
through sales of RITUXAN. |
|
(2) |
|
if we are recording our share of RITUXAN copromotion profits
at 40%, upon the approval date of the first new anti-CD20
product, our share of copromotion profits for RITUXAN and the
new anti-CD20 product will be immediately reduced to 38%
following the approval date of the first new anti-CD20
product until the $150 million new product sales level is
achieved. |
|
(3) |
|
if $150 million in new product sales is achieved in the same
calendar year the first new anti-CD20 product receives
approval, then the 35% copromotion profit-sharing rate will
not be effective until January 1 of the following calendar
year. Once the $150 million new product sales level is
achieved then our share of copromotion profits for the
balance of the year and all subsequent years (after the
first $50 million in copromotion operating profits in such
years) will be 35% until the $350 million new product sales
level is achieved. |
|
(4) |
|
if $350 million in new product sales is achieved in the same
calendar year that $150 million in new product sales is
achieved, then the 30% copromotion profit-sharing rate will
not be effective until January 1 of the following calendar
year (or January 1 of the second following calendar year if
the first new anti-CD20 product receives approval and, in the
same calendar year, the $150 million and $350 million new
product sales levels are achieved). Once the $350 million new
product sales level is achieved then our share of copromotion
profits for the balance of the year and all subsequent years
will be 30%. |
Copromotion profits consist of the following (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Product revenues, net |
|
$ |
476,978 |
|
|
$ |
440,549 |
|
Costs and expenses |
|
|
140,584 |
|
|
|
120,261 |
|
|
|
|
|
|
|
|
Copromotion profits |
|
$ |
336,394 |
|
|
$ |
320,288 |
|
|
|
|
|
|
|
|
Biogen Idecs share of copromotion profits |
|
$ |
124,057 |
|
|
$ |
123,116 |
|
|
|
|
|
|
|
|
The increase in our share of copromotion profits was primarily due to higher sales for RITUXAN
as a treatment for B-cell NHLs, chronic lymphocytic leukemia and RA, offset by increased expenses
in 2006.
31
Revenues from unconsolidated joint business consist of the following (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Copromotion profits |
|
$ |
124,057 |
|
|
$ |
123,116 |
|
Reimbursement of selling and development
expenses |
|
|
15,928 |
|
|
|
12,875 |
|
Royalty revenue on sales of RITUXAN outside the U.S. |
|
|
43,395 |
|
|
|
24,462 |
|
|
|
|
|
|
|
|
|
|
$ |
183,380 |
|
|
$ |
160,453 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006, revenues for our RITUXAN-related sales force and
development expenses were $15.9 million compared to $12.9 million for the comparable period in
2005. The increase is primarily due to the expansion of the oncology sales force and development
costs we incurred mainly related to the development of RITUXAN for RA.
We received royalties on sales of RITUXAN outside of the U.S. of $43.4 million for the three
months ended March 31, 2006 as compared to $24.5 million for the comparable period in 2005, which
we include under Unconsolidated joint business revenues in our condensed consolidated statements
of income. Our royalty revenue on sales of RITUXAN outside the U.S. is based on Roche and Zenyakus
net sales to third-party customers and is recorded on a cash basis. Royalty revenues from sales of
RITUXAN outside the U.S. increased approximately $18.9 million, which is primarily related to an
$11.3 million royalty credit claimed by Genentech in the three months ended March 31, 2005, which
we expect to pay in 2006.
Under the amended and restated collaboration agreement, we will receive lower royalty revenue
from Genentech on sales by Roche and Zenyaku of new anti-CD20 products, as compared to royalty
revenue received on sales of RITUXAN. The royalty period with respect to all products is 11 years
from the first commercial sale of such product on a country-by-country basis.
Total unconsolidated joint business revenue represented 30% of our total revenues for the
three months ended March 31, 2006 as compared to 27% for the comparable period in 2005.
Royalty Revenue
We receive revenues from royalties on sales by our licensees of a number of products covered
under patents that we control. Our royalty revenues on sales of RITUXAN outside the U.S. are
included in Unconsolidated joint business. For the three months ended March 31, 2006 and 2005, we
earned approximately $20.6 million and $26.7 million, respectively, in royalty revenues
representing 3% of total revenues for the three months ended March 31, 2006 compared to 5% of total
revenues for the three months ended March 31, 2005.
Royalty revenues may fluctuate as a result of fluctuations in sales levels of products sold by
our licensees from quarter to quarter due to the timing and extent of major events such as new
indication approvals or government-sponsored programs.
Corporate Partner Revenues
Corporate partner revenues consist of contract revenues and license fees. Corporate partner
revenues totaled $0.7 million and $3.0 million for the three months ended March 31, 2006 and 2005,
which represented less than 1% of total revenues for the first quarter of 2006 and 2005,
respectively.
Operating Costs and Expenses (table in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Cost of
product and royalty revenues, excluding amortization of intangibles |
|
$ |
67,494 |
|
|
$ |
99,609 |
|
Research and development |
|
|
145,892 |
|
|
|
172,477 |
|
Selling, general and administrative |
|
|
154,391 |
|
|
|
158,472 |
|
Amortization of acquired intangibles |
|
|
70,707 |
|
|
|
75,677 |
|
Facility impairments and loss on sale |
|
|
(298 |
) |
|
|
6,293 |
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
$ |
438,186 |
|
|
$ |
512,528 |
|
|
|
|
|
|
|
|
32
Cost of Product and Royalty Revenues
For the three months ended March 31, 2006, total cost of product and royalty revenues was
$67.5 million, consisting of product cost of revenues of $66.4 million and cost of royalty revenues
of $1.1 million. In the first quarter of 2006, cost of product revenues consisted of $55.6 million
related to AVONEX, $7.8 million related to AMEVIVE, $2.2 million related to ZEVALIN and $0.8
million related to TYSABRI. Approximately $4.0 million in cost of product revenues represents the
difference between the cost of AMEVIVE inventory recorded upon our merger with Biogen, Inc. on
November 12, 2003, and its historical manufacturing cost, which was recognized as cost of product
revenues when the acquired inventory was sold or written-down in the first quarter of 2006.
We capitalize inventory costs associated with our products prior to regulatory approval, when,
based on managements judgment, future commercialization is considered probable and the future
economic benefit is expected to be realized. In the first quarter of 2006, in light of expectations
of re-introduction of TYSABRI, we began a new manufacturing campaign and, at March 31, 2006,
included in inventory approximately $11.7 million related to TYSABRI, which has yet to receive FDA
approval. We considered numerous attributes in evaluating whether the costs to manufacture a
particular product should be capitalized as an asset. We assess the regulatory approval process and
where the product stands in relation to that approval process including any known constraints and
impediments to approval, including safety, efficacy and potential labeling restrictions. We
evaluate our anticipated research and development initiatives and constraints relating to the
particular product and the indication in which it will be used. We consider our manufacturing
environment including our supply chain in determining logistical constraints that could possibly
hamper approval or commercialization. We consider the shelf life of the product in relation to the
expected timeline for approval and we consider patent related or contract issues that may prevent
or cause delay in commercialization. We are sensitive to the significant commitment of capital to
scale up production and to launch commercialization strategies. We also base our judgment on the
viability of commercialization, trends in the marketplace and market acceptance criteria. Finally,
we consider the reimbursement strategies that may prevail with respect to the product and assess
the economic benefit that we are likely to realize. We would be required to expense previously
capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among
other potential factors, a denial or delay of approval by necessary regulatory bodies.
We manufactured TYSABRI during the first and second quarter of 2005 and completed our
scheduled production of TYSABRI during July 2005. Because of the uncertain future commercial
availability of TYSABRI at the time, and our inability to predict to the required degree of
certainty that TYSABRI inventory will be realized in commercial sales prior to the expiration of
its shelf life, we expensed $23.2 million of costs related to the manufacture of TYSABRI in the
first quarter of 2005 to cost of product revenues. At the time of production, the inventory was
believed to be commercially saleable. Beginning in the second quarter of 2005 through the end of
2005, as we were working with clinical investigators to understand the possible risks of PML, we
charged the costs related to the manufacture of TYSABRI to research and development expense.
We periodically review our inventories for excess or obsolete inventory and write-down
obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual
realizable value is less than that estimated by us, or if there are further determinations that
inventory will not be marketable based on estimates of demand, additional inventory write-downs may
be required. This periodic review led to the expensing of TYSABRI during 2005, as described above,
and may lead us to expense TYSABRI or other inventory in subsequent periods.
Our products are subject to strict quality control and monitoring throughout the manufacturing
process. Periodically, certain batches or units of product may no longer meet quality
specifications or may expire. As a result, included in product cost of revenues were write-downs of
commercial inventory that did not meet quality specifications or became obsolete due to dating
expiration, in all cases this product inventory was written-down to its net realizable value.
33
We wrote-down the following unmarketable inventory, which was charged to cost of product
revenues (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March, 31 |
|
|
|
2006 |
|
|
2005 |
|
AVONEX |
|
$ |
254 |
|
|
$ |
9,039 |
|
AMEVIVE |
|
|
2,433 |
|
|
|
7,163 |
|
ZEVALIN |
|
|
|
|
|
|
1,902 |
|
TYSABRI |
|
|
611 |
|
|
|
23,200 |
|
|
|
|
|
|
|
|
|
|
$ |
3,298 |
|
|
$ |
41,304 |
|
|
|
|
|
|
|
|
The write-downs for the three months ended March 31, 2006 and 2005, respectively, were the
result of the following (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March, 31 |
|
|
|
2006 |
|
|
2005 |
|
New components for alternative presentations |
|
$ |
|
|
|
$ |
8,417 |
|
Failed quality specifications |
|
|
3,044 |
|
|
|
7,785 |
|
Excess and/or obsolescence |
|
|
254 |
|
|
|
1,902 |
|
Costs for voluntary suspension of TYSABRI |
|
|
|
|
|
|
23,200 |
|
|
|
|
|
|
|
|
|
|
$ |
3,298 |
|
|
$ |
41,304 |
|
|
|
|
|
|
|
|
As discussed above, we sold worldwide rights to AMEVIVE, including inventory on hand, to
Astellas in April 2006. As of March 31, 2006, we had $45.2 million of AMEVIVE included in
inventory.
Research and Development Expenses
Research and development expenses totaled $145.9 million in the three months ended March 31,
2006 compared to $172.5 million in the comparable period of 2005, a decrease of $26.6 million, or
15%. The decrease primarily is a result of cost savings from our comprehensive strategic plan
initiated in the third quarter of 2005, and the sale of our NIMO manufacturing facility in the
second quarter of 2005. Approximately $17.7 million was the result of lower costs associated with
our biopharmaceutical operations and manufacturing activities, $11.8 million related to reduced
costs for clinical trials, primarily related to lower clinical trial expenses for TYSABRI and
AMEVIVE, and $3.8 million for expense savings in discovery research. These lower costs were offset
by $5.2 million of increased costs related to our joint development programs in the first quarter
of 2006. For the three months ended March 31, 2006,
approximately $11.2 million of share-based compensation costs are
included in research and development expenses in connection with the
adoption of FAS 123(R) in 2006.
We expect that research and development expenses will continue to increase in 2006 for a
number of reasons, including our plans to commit significant additional capital to external
business development and research opportunities.
34
Selling, General and Administrative Expenses
Selling, general and administrative expenses totaled $154.4 million for the three months ended
March 31, 2006 compared to $158.5 million in the comparable period of 2005, a decrease of $4.1
million, or 3%. The decrease related primarily the cost savings as a result of our comprehensive
strategic plan initiated in the third quarter of 2005, and the divestiture of AMEVIVE. Expenses
decreased by $13.8 million as a result of lower neurology sales and marketing spending, $4.9
million of lower costs in our immunology sales and marketing programs largely due to the AMEVIVE
divestiture, $3.1 million of lower costs associated with customer service and $4.4 million for
lower expenses in global medical affairs for Phase IV trials, primarily related to the EU. The
decrease in selling, general and administrative expenses were offset by increases of $4.9 million
for increased rheumatology sales and marketing activities as we began building our sales force for
RITUXAN in RA, $12.2 million related to joint development expenses on our TYSABRI collaboration
with Elan, $5.5 million for increased international neurology sales activities primarily in the EU
and $3.6 million for legal fees due to increased TYSABRI-related
litigation. For the three months ended March 31, 2006,
approximately $18.0 million of share-based compensation is
included in selling, general and administrative expenses in
connection with the adoption of FAS 123(R) in 2006.
We anticipate that total selling, general, and administrative expenses in 2006 will be higher
than 2005 due to sales and marketing and other general and administrative expenses to primarily
support AVONEX and TYSABRI, and legal expenses related to lawsuits, investigations and other
matters resulting from the suspension of TYSABRI.
Severance and Other Costs from Restructuring Plan
We have recorded restructuring charges associated with the comprehensive strategic plan in
2005, which consist primarily of severance and other employee termination costs, including health
benefits, outplacement and bonuses. Other costs include write-downs of certain research assets that
will no longer be utilized, consulting costs in connection with the restructuring effort and costs
related to the acceleration of restricted stock, offset by the reversal of previously recognized
compensation due to unvested restricted stock cancellations. These remaining unpaid costs at March
31, 2006 are included in accrued expenses and other on our condensed consolidated balance sheet.
The components of the charges are as follows (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs |
|
|
|
|
|
|
|
|
|
Remaining liability at |
|
|
incurred |
|
|
Paid/Settled through |
|
|
Remaining liability at |
|
|
|
December 31, 2005 |
|
|
during 2006 |
|
|
March 31, 2006 |
|
|
March 31, 2006 |
|
Severance and
employee
termination costs
incurred |
|
$ |
17,426 |
|
|
$ |
687 |
|
|
$ |
(8,571 |
) |
|
$ |
9,542 |
|
Other costs |
|
|
31 |
|
|
|
84 |
|
|
|
(53 |
) |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,457 |
|
|
$ |
771 |
|
|
$ |
(8,624 |
) |
|
$ |
9,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We may have additional charges in future periods related to our comprehensive strategic plan.
The amount of those charges cannot be determined at this time.
Amortization of Intangible Assets
For the three months ended March 31, 2006, we recorded amortization expense of $70.7 million
compared to $75.7 million for the comparable period in 2005 related to the intangible assets of
$3.7 billion acquired in the Merger with Biogen, Inc. The decrease in the three months ended March
31, 2006 relates to the application of the calculation of economic consumption for core technology.
Intangible assets consist of $3.0 billion in core technology, $578.0 million in out-licensed
patents and $64.0 million in trademarks. Amortization of the core technology is provided over the
estimated useful lives of the technology ranging from 15 to 20 years, based on the greater of
straight-line or economic consumption. Amortization of the out-licensed patents for which we
receive royalties is provided over the remaining lives of the patents of 10 years. Trademarks have
an indefinite life and, as such, are not amortized.
We review our intangible assets for impairment periodically and whenever events or changes in
circumstances indicate that the carrying value of an asset may not be recoverable. If future events
or circumstances indicate that
35
the carrying value of these assets may not be recoverable, we may be required to record
additional charges to our results of operations.
Facility Impairments and Loss on Sale
In March 2005, after our voluntary suspension of TYSABRI, we reconsidered our construction
plans and determined that we would proceed with the bulk-manufacturing component of our large-scale
biologic manufacturing facility in Hillerod, Denmark. Additionally, we added a labeling and
packaging component to the project. We also determined that we would no longer proceed with the
fill-finish component of our large-scale biological manufacturing facility in Hillerod, Denmark. As
a result, in the first quarter of 2005, we wrote-off $6.3 million to facility impairments and loss
on sale expense of engineering costs related to the fill-finish component that had previously been
capitalized.
Other Income (Expense), Net (table in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
Interest income |
|
$ |
23,557 |
|
|
$ |
15,705 |
|
Interest expense |
|
|
(293 |
) |
|
|
(6,911 |
) |
Other expense |
|
|
(4,599 |
) |
|
|
(17,720 |
) |
|
|
|
|
|
|
|
Total other income (expense), net |
|
$ |
18,665 |
|
|
$ |
(8,926 |
) |
|
|
|
|
|
|
|
Interest income totaled $23.6 million for the three months ended March 31, 2006 compared to
$15.7 million for the comparable period of 2005. The increase in interest income is primarily due
to higher cash levels and higher yields on our marketable securities portfolio. Interest income
levels that may be achieved in the future are, in part, dependent upon market conditions.
Interest
expense totaled $0.3 million for the three months ended March 31, 2006 compared to
$6.9 million for the comparable period of 2005. The decrease in interest expense relates to the
repurchase of our senior notes due in 2032 in the second quarter of 2005.
Other expense for the three months ended March 31, 2006 consists primarily of $2.1 million for
the impairment of certain non-current marketable securities that were determined to be impaired on
an other-than-temporary basis and $2.0 million for our minority interest in joint ventures.
Other expense for the three months ended March 31, 2005 consists primarily of $12.3 million of
expenses related to the impairment of certain marketable securities that were determined to be
impaired on an other-thantemporary basis, $2.4 million of foreign exchange remeasurement losses,
$2.3 million of loan impairments, and $1.6 million of realized losses on sales of marketable
securities.
Share-Based Payments
Our
share-based compensation programs consist of share-based awards
granted to employees including stock options, restricted stock, performance share units and restricted stock units, as well
as our employee stock purchase plan, or ESPP.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004) Share-Based Payment, or SFAS 123(R). This Statement requires compensation cost
relating to share-based awards to be recognized in the financial statements using a fair-value
measurement method. Under the fair value method, the estimated fair value of awards is charged
against income over the requisite service period, which is generally the
vesting period. We selected the modified prospective method as
prescribed in SFAS 123(R) and, therefore, prior periods were not
restated. Under the modified prospective method, this Statement
was applied to new awards granted in 2006, as well as to the unvested
portion of previously granted equity-based awards for which the
requisite service had not been rendered as of December 31, 2005.
The fair value of performance based stock units is based on the
market price of the Companys stock on the date of grant and
assumes that the performance criteria will be met and the target
payout level will be achieved. Compensation cost is adjusted for
subsequent changes in the outcome of performance-related conditions
until the vesting date. In the first quarter of 2006, we recorded share-based compensation expense
associated with the SFAS 123(R) adoption as follows (table in thousands):
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
Restricted Stock |
|
|
|
|
|
|
Stock options & |
|
|
and Restricted |
|
|
|
|
|
|
ESPP |
|
|
Stock Units |
|
|
Total |
|
Research and development |
|
$ |
4,764 |
|
|
$ |
6,391 |
|
|
$ |
11,155 |
|
|
Selling, general and administrative |
|
|
8,239 |
|
|
|
9,800 |
|
|
|
18,039 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,003 |
|
|
$ |
16,191 |
|
|
$ |
29,194 |
|
|
|
|
|
|
|
|
|
|
|
The
first quarter 2006 expense also consisted of a cumulative effect pre-tax adjustment of $5.6
million, or $3.8 million after-tax, resulting from the
application of an estimated forfeiture rate for
current and prior period unvested restricted stock awards. For the three months ended March 31,
2005, we recorded share-based compensation expense of approximately
$7.9 million, primarily related to compensation for restricted
stock awards.
For the current quarter, share-based compensation reduced diluted earnings per share by $0.05.
See Note 5 in the Notes to Condensed Consolidated Financial Statements for prior period pro-forma
data and additional discussion.
Income Tax Provision
Our effective tax rate for the three months ended March 31, 2006 was 37.8% compared to 34.5%
for the comparable period in 2005. Our effective tax rate for the three months ended March 31, 2006
was higher than the normal statutory rate primarily due to the impact
of state taxes, non-deductible items such as certain stock-based
compensation charges, partially offset by the new domestic
manufacturing deduction. Our effective tax rate for the three months
ended March 31, 2005 was lower than then normal statutory rate
primarily due to tax credits allowed for research and development
expenditures in the U.S. and the new manufacturing deduction,
partially offset by the impact of state taxes. We have tax credit carryforwards for federal and state income tax purposes available
to offset future taxable income. The utilization of our tax credits may be subject to an annual
limitation under the Internal Revenue Code due to a cumulative change of ownership of more than 50%
in prior years. However, we anticipate that this annual limitation will result only in a modest
delay in the utilization of such tax credits.
Financial Condition
We have financed our operating and capital expenditures principally through profits and other
revenues from our joint business arrangement with Genentech related to the sale of RITUXAN, sales
of AVONEX, AMEVIVE and ZEVALIN, royalty revenues, corporate partner revenues, debt financing
transactions and interest income. We expect to finance our current and planned operating
requirements principally through cash on hand, which includes funds from our joint business
arrangement with Genentech related to the sale of RITUXAN, commercial sales of AVONEX and ZEVALIN,
royalties and existing collaborative agreements and contracts, and sales of TYSABRI if we are able
to re-launch this product. We believe that these funds will be sufficient to meet our operating
requirements for the foreseeable future. However, we may, from time to time, seek additional
funding through a combination of new collaborative agreements, strategic alliances and additional
equity and debt financings or from other sources. Our working capital and capital requirements will
depend upon numerous factors, including: the continued commercial success of AVONEX and RITUXAN
and, to a lesser extent, ZEVALIN; the future commercial availability of TYSABRI if we are able to
re-launch this product; the timing and expense of obtaining regulatory approvals for products in
development; the cost of launching new products, and the success of those products; funding and
timing of payments related to several significant capital projects, the progress of our preclinical
and clinical testing; fluctuating or increasing manufacturing requirements and research and
development programs; levels of resources that we need to devote to the development of
manufacturing, sales and marketing capabilities, including resources devoted to the marketing of
AVONEX, RITUXAN, ZEVALIN and
37
future products, as well as the future marketing and manufacturing of TYSABRI if we are able
to re-launch this product; technological advances; status of products being developed by
competitors; our ability to establish collaborative arrangements with other organizations; and
working capital required to satisfy the options of holders of our senior notes and subordinated
notes who may require us to repurchase their notes on specified terms or upon the occurrence of
specified events. In connection with the strategic plan that we announced in September 2005, we
intend to commit significant additional capital to external research and development opportunities.
Until required for operations, we invest our cash reserves in bank deposits, certificates of
deposit, commercial paper, corporate notes, foreign and U.S. government instruments and other
readily marketable debt instruments in accordance with our investment policy.
Cash, cash equivalents and securities available-for-sale totaled $2.3 billion at March 31,
2006 and $2.1 billion at December 31, 2005. Our operating activities generated $156.3 million of
cash for the three months ended March 31, 2006, as compared to
$212.9 million for the three months
ended March 31, 2005.
Operating activities: The cash provided by operations during the three months ended March
31, 2006 is primarily attributable to higher cash receipts from our customers and partners driven
largely from growth in product sales primarily in the EU, and from our unconsolidated joint
business arrangement. Net cash from operating activities for the three months ended March 31, 2006,
includes our net income of $123.0 million. Operating cash flows differ from net income as a result
of non-cash charges or differences in the timing of cash flows and earnings recognition. Noncash
charges consisted primarily of $123.2 million for depreciation and amortization, $23.6 million of
stock based compensation expense, $3.3 million related to the write-down of inventory to net
realizable value, $4.0 million of impact on sales of stepped-up inventory and $2.1 million for the
impairment of other investments and other long-lived assets, offset by $26.5 million for deferred
income taxes and $15.2 million for tax benefits from stock
options. Other significant utilizations of cash from operating
activities included the changes in accrued expenses and other
liabilities since December 31, 2005, which resulted in cash
outflows of $60.0 million during the quarter. This outflow was
primarily due to a reduction of accounts payable since year-end,
payouts of annual bonuses to employees in the first quarter, and
payments of royalties that had been accrued at December 31, 2005. Additionally, inventory production generated net cash outflows
of $15.5 million, primarily due to the production and
capitalization of TYSABRI in the first quarter, as we prepare for
possible approval from the FDA for commercialization.
Investing activities: Our investing activities utilized $272.2 million of cash in the three
months ended March 31, 2006 compared to utilizing $4.7 million of cash in the three months ended
March 31, 2005. Approximately $238.3 million of net cash was utilized for net purchases of
available-for-sale securities. Cash used for investing activities also consisted of $65.6 million
to fund construction projects and purchase real property and equipment, including our research and
development and administration campus in Cambridge, and $2.1 million for investments in certain
strategic investments. Cash proceeds from investing activities were primarily from $29.0 for the
sale of NICO to Genentech completed in the first quarter of 2006, and $4.9 million of proceeds from
the sale of certain other assets during the quarter.
Financing activities: Cash generated from financing activities included $56.4 million from
the exercise of stock options and employee stock purchase plans for stock-based compensation
arrangements during the first three months of 2006, $4.4 million of loan proceeds from a joint
venture that we consolidate, $15.2 million of tax benefits related to stock option exercises and
$7.7 million related to the change in our cash overdraft since December 31, 2005. Proceeds from the
exercise of employee stock options will vary from period to period based upon, among other factors,
fluctuation in the market value of our stock relative to the exercise price of the options.
On May 2, 2006, we entered into an Agreement and Plan of Merger with Conforma Corporation, or
Conforma, under which a newly created Biogen Idec subsidiary will merge with and into Conforma in a
transaction to be accounted for as a purchase under GAAP, with us treated as the acquiror. Under
the terms of the merger agreement, all shares of Conforma preferred and common stock outstanding on
the closing date of the merger will be acquired for an initial payment of $150 million. An
additional $100 million may be paid upon the attainment of certain development milestone events for
Conformas heat shock protein 90 molecules. The board of directors of each company has unanimously
approved the merger. Completion of the merger is subject to the satisfaction of certain
conditions, including approval of the merger by the stockholders of Conforma and other customary
closing conditions. We expect the merger to be completed in the second quarter of 2006.
As of March 31, 2006, our remaining indebtedness under our subordinated notes was
approximately $75.4 million at maturity, due to conversion of subordinated notes into common stock.
Each $1,000 aggregate principal face value subordinated note is convertible at the holders option
at any time through maturity into 40.404 shares of our common stock at an initial conversion price
of $8.36 per share. The remaining holders of the subordinated notes may require us to purchase the
subordinated notes on February 16, 2009 or 2014 at a price equal to the issue price plus accrued
original issue discount to the date of purchase with us having the option to repay the
38
subordinated notes plus accrued original issue discount in cash, common stock or a combination
of cash and stock. We have the right to redeem at a price equal to the issue price plus the accrued
original issue discount to the date of redemption all or a portion of the subordinated notes for
cash at any time.
In August 2004, we restarted construction of our large-scale biologic manufacturing facility
in Hillerod, Denmark. In March 2005, after our voluntary suspension of TYSABRI, we reconsidered our
construction plans and determined that we would proceed with the bulk-manufacturing component of
our large-scale biologic manufacturing facility in Hillerod, Denmark. Additionally, we added a
labeling and packaging component to the project. We also determined that we would no longer proceed
with the fill-finish component of our large-scale biological manufacturing facility in Hillerod,
Denmark. The original cost of the project was expected to be $372.0 million. As of March 31, 2006,
we had committed approximately $223.0 million to the project, of which $172.0 million had been
paid. We expect the label and packaging facility to be substantially completed in 2006 and licensed
for operation in 2007.
The timing of the completion and anticipated licensing of the Hillerod facility is in part
dependent upon the commercial availability and potential market acceptance of TYSABRI. See Risk
Factors Safety Issues with TYSABRI Could Significantly Affect our Growth. If TYSABRI were
permanently withdrawn from the market, we would need to evaluate our long-term plan for this
facility. If we are able to reintroduce TYSABRI to the market, we would need to evaluate our
requirements for TYSABRI inventory and additional manufacturing capacity in light of the approved
label and our judgment of the potential U.S. market acceptance of TYSABRI in MS, the probability of
obtaining marketing approval of TYSABRI in MS in the EU and other jurisdictions, and the
probability of obtaining marketing approval of TYSABRI in additional indications in the U.S., EU
and other jurisdictions.
In October 2004, our Board of Directors authorized the repurchase of up to 20.0 million shares
of our common stock. The repurchased stock will provide us with treasury shares for general
corporate purposes, such as common stock to be issued under our employee equity and stock purchase
plans. This repurchase program will expire no later than October 4, 2006. Approximately 11.9
million shares remain authorized for repurchase under this program at March 31, 2006.
Off-Balance Sheet Arrangements
We do not have any other significant relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. As such, we are not exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such relationships.
Legal Matters
On March 2, 2005, we, along with William H. Rastetter, our former Executive Chairman, and
James C. Mullen, our Chief Executive Officer, were named as defendants in a purported class action
lawsuit, captioned Brown v. Biogen Idec Inc., et al., filed in the U.S. District Court for the
District of Massachusetts (the Court). The complaint alleges violations of Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The action is
purportedly brought on behalf of all purchasers of our publicly-traded securities between February
18, 2004 and February 25, 2005. The plaintiff alleges that the defendants made materially false
and misleading statements regarding potentially serious side effects of TYSABRI in order to gain
accelerated approval from the FDA for the products distribution and sale. The plaintiff alleges
that these materially false and misleading statements harmed the purported class by artificially
inflating our stock price during the purported class period and that company insiders benefited
personally from the inflated price by selling our stock. The plaintiff seeks unspecified damages,
as well as interest, costs and attorneys fees. Substantially similar actions, captioned Grill v.
Biogen Idec Inc., et al. and Lobel v. Biogen Idec Inc., et al., were filed on March 10, 2005 and
April 21, 2005, respectively, in the same court by other purported class representatives. Those
actions have been assigned to District Judge Reginald C. Lindsay and Magistrate Judge Marianne C.
Bowler. On July 26, 2005, the three cases were consolidated and by Margin Order dated September
23, 2005, Magistrate Judge Bowler appointed lead plaintiffs and approved their selection of co-lead
counsel. An objection to the September 23, 2005 order was filed on October 7, 2005. The affected
plaintiffs objection is fully briefed
39
and is pending with the Court. An amended, consolidated complaint is to be filed no later
than 30 days subsequent to the Courts resolution of such objection. We believe that the actions
are without merit and intend to contest them vigorously. At this early stage of litigation, we
cannot make any estimate of a potential loss or range of loss.
On March 9, 2005, two purported shareholder derivative actions, captioned Carmona v. Mullen,
et al. (Carmona) and Fink v. Mullen, et al. (Fink), were brought in the Superior Court of the
State of California, County of San Diego (the California Court), on our behalf, against us as
nominal defendant, our Board of Directors and our chief financial officer. The plaintiffs
derivatively claim breach of fiduciary duties, abuse of control, gross mismanagement, waste of
corporate assets and unjust enrichment against all defendants. The plaintiffs also derivatively
claim insider selling in violation of California Corporations Code § 25402 and breach of fiduciary
duty and misappropriation of information against certain defendants who sold our securities during
the period of February 18, 2004 to the date of the complaints. On May 11, 2005, the California
Court consolidated the Carmona and Fink cases. On January 24, 2006, the parties submitted a
proposed scheduling order addressing amendments to the original pleading and motion to dismiss
briefing, which the Court entered on January 25, 2006. Pursuant to that scheduling order, on
February 3, 2006, plaintiffs filed an amended complaint, which, among other amendments to the
allegations, added our former general counsel as a defendant. On April 28, 2006, the court granted
defendants motion to dismiss with prejudice and instructed defendants to prepare a final judgment
for entry. These purported derivative actions do not seek affirmative relief from the Company. We
believe the plaintiffs claims lack merit and intend to litigate the dispute vigorously. We are
currently unable to determine whether resolution of this matter will have a material adverse impact
on our financial position or results of operations, or reasonably estimate the amount of the loss,
if any, that may result from resolution of this matter.
On June 20, 2005, a purported class action, captioned Wayne v. Biogen Idec Inc. and Elan
Pharmaceutical Management Corp., was filed in the U.S. District Court for the Northern District of
California (the California District Court). On August 15, 2005, the plaintiff filed an amended
complaint. The amended complaint purports to assert claims for strict product liability, medical
monitoring and concert of action arising out of the manufacture, marketing, distribution and sale
of TYSABRI. The action is purportedly brought on behalf of all persons in the U.S. who have had
infusions of TYSABRI and who have not been diagnosed with any medical conditions resulting from
TYSABRI use. The plaintiff alleges that defendants, acting individually and in concert, failed to
warn the public about purportedly known risks related to TYSABRI use. On January 20, 2006, the
parties filed a stipulation of dismissal with prejudice, which the Court entered on January 24,
2006. The disposition of this matter did not have a material adverse
effect on our business or financial condition.
Our Board of Directors has received letters, dated March 1, 2005, March 15, 2005 and May 23,
2005, respectively, on behalf of purported owners of our securities purportedly constituting
demands under Delaware law. A supplement to the March 1, 2005 letter was received on March 2, 2005. The
letters generally allege that certain of our officers and directors breached their fiduciary duty
to us by selling personally held shares of our securities while in possession of material,
non-public information about potential serious side effects of TYSABRI. The letters generally
request that our Board of Directors take action on our behalf to recover compensation and profits
from the officers and directors, consider enhanced corporate governance controls related to the
sales of securities by insiders, and pursue other such equitable relief, damages, and other
remedies as may be appropriate. A special litigation committee of our Board of Directors was
formed, and, with the assistance of independent outside counsel, investigated the allegations set
forth in the demand letters. By letters dated August 17, 2005 and October 1, 2005, our Board of
Directors informed those shareholders that it would not take action as demanded because it was the
Boards determination that such action was not in the best interests of the Company. On June 23,
2005, one of the purported shareholders who made demand filed a purported derivative action in the
Middlesex Superior Court for the Commonwealth of Massachusetts (the Massachusetts Court), on our
behalf, against us as nominal defendant, our former general counsel, a member of our Board of
Directors and our former Executive Chairman. The plaintiff derivatively claims that our former
Executive Chairman, former general counsel and the director defendant misappropriated confidential
company information for personal profit by selling our stock while in possession of material,
non-public information regarding the potentially serious side effects of TYSABRI. The plaintiff
seeks disgorgement of profits, costs and attorneys fees. On September 27, 2005, the plaintiff was
provided with a copy of the Delaware Order and responded on September 28, 2005, that he would not
be moving to intervene in Delaware. On October 4, 2005, all defendants filed motions seeking
dismissal of the action and/or judgment on the pleadings, and the Company also filed a supplemental
motion seeking judgment on the pleadings. Also on October 4, 2005, the plaintiff filed a
cross-motion seeking leave to amend the complaint, which the Company opposed. On November 14,
2005, the Massachusetts Court heard oral argument on the various motions. By Memorandum and Order
dated January 31, 2006, the Massachusetts Court
40
granted leave to amend and, as to such amended complaint, granted Defendants motion to
dismiss. The time for filing an appeal in this action has passed and no appeal has been taken.
On April 21, 2005, we received a formal order of investigation from the Boston District Office
of the SEC. The SEC is investigating whether any violations of the federal securities laws
occurred in connection with the suspension of marketing and commercial distribution of TYSABRI. We
continue to cooperate fully with the SEC in this investigation. We are unable to predict the
outcome of this investigation or the timing of its resolution at this time.
On June 9, 2005, we, along with numerous other companies, received a request for information
from the U.S. Senate Committee on Finance, or the Committee, concerning the Committees review of
issues relating to the Medicare and Medicaid programs coverage of prescription drug benefits. On
January 9, 2006, we, along with numerous other companies, received a further request for
information from the Committee. We filed a timely response to the request on March 6, 2006 and are
cooperating fully with the Committees information requests. We are unable to predict the outcome
of this review or the timing of its resolution at this time.
On July 20, 2005, a products liability action captioned Walter Smith, as Personal
Representative of the Estate of Anita Smith, decedent, and Walter Smith, individually v. Biogen
Idec Inc. and Elan Corp., PLC, was commenced in the Superior Court of the Commonwealth of
Massachusetts, Middlesex County. The complaint purports to assert statutory wrongful death claims
based on negligence, agency principles, fraud, breach of warranties, loss of consortium, conscious
pain and suffering, and unfair and deceptive trade practices in violation of Mass. G.L., c. 93A.
This matter has been resolved in a mutually satisfactory manner and the parties have filed a
stipulation of dismissal with prejudice. The disposition of this
matter did not have a material adverse effect on our business or
financial condition.
On October 4, 2004, Genentech, Inc. received a subpoena from the U.S. Department of Justice
requesting documents related to the promotion of RITUXAN. We market RITUXAN in the U.S. in
collaboration with Genentech. Genentech has disclosed that it is cooperating with the associated
investigation, which they disclosed that they have been advised is both civil and criminal in
nature. The potential outcome of this matter and its impact on us cannot be determined at this
time.
On August 10, 2004, Classen Immunotherapies, Inc. filed suit against us, GlaxoSmithKline,
Chiron Corporation, Merck & Co., Inc., and Kaiser-Permanente, Inc., in the U.S. District Court for
the District of Maryland, contending that we induced infringement of U.S. patents 6,420,139,
6,638,739, 5,728,385, and 5,723,283, all of which are directed to various methods of immunization
or determination of immunization schedules. The inducement of infringement claims are based on
allegations that we provided instructions and/or recommendations on a proper immunization schedule
for vaccines to other defendants who are alleged to have directly infringed the patents at issue.
We are investigating the allegations, however, we do not believe them to be based in fact. On
November 19, 2004, we, along with GlaxoSmithKline, filed a joint motion to dismiss three of the
four counts of the complaint. The court granted that motion on July 22, 2005. On August 1, 2005,
Classen filed a motion for reconsideration, which the court denied on December 14, 2005. Classen
also filed a motion to dismiss the third, and final, count against us with prejudice. We did not
oppose that motion, and the Court dismissed that count against GlaxoSmithKline and us in its
December 14, 2005 order. On January 5, 2006, Classen filed a notice of appeal to the U.S. Court of
Appeals for the Federal Circuit of the Courts July 22, 2005 and December 14, 2005 decisions. On
April 10, 2006, the Court of Appeals for the Federal Circuit dismissed Classens appeal as
premature, since there has not been a final judgment in the case. Under our 1988 license agreement
with GlaxoSmithKline, GlaxoSmithKline is obligated to indemnify and defend us against these claims.
In the event that the nature of the claims change such that GlaxoSmithKline is no longer obligated
to indemnify and defend us and we are unsuccessful in the present or any subsequent litigation we
may be liable for damages suffered by Classen and such other relief as Classen may seek and be
granted by the court. At this stage of the litigation, we cannot make any estimate of a potential
loss or range of loss.
Along with several other major pharmaceutical and biotechnology companies, Biogen, Inc. (now
Biogen Idec MA, Inc., one of our wholly-owned subsidiaries) or, in certain cases, Biogen Idec,
Inc., was named as a defendant in lawsuits filed by the City of New York and the following Counties
of the State of New York: County of Albany, County of Allegany, County of Broome, County of
Cattaraugus, County of Cayuga, County of Chautauqua, County of Chenango, County of Columbia, County
of Cortland, County of Dutchess, County of Erie, County of Essex, County of Fulton, County of
Genesee, County of Greene, County of Herkimer, County of Jefferson, County
41
of Lewis, County of Madison, County of Monroe, County of Nassau, County of Niagara, County of
Oneida, County of Onondaga, County of Ontario, County of Orleans, County of Putnam, County of
Rensselaer, County of Rockland, County of St. Lawrence, County of Saratoga, County of Schuyler,
County of Seneca, County of Steuben, County of Suffolk, County of Tompkins, County of Warren,
County of Washington, County of Wayne, County of Westchester, and County of Yates. All of the
cases, except for the County of Erie and County of Nassau cases, are the subject of a Consolidated
Complaint, which was filed on June 15, 2005 in U.S. District Court for the District of
Massachusetts in Multi-District Litigation No. 1456. The County of Nassau, which originally filed
its complaint on November 24, 2004, filed an amended complaint on March 24, 2005 and that case is
also pending in the U.S. District Court for the District of Massachusetts. The County of Erie case
is currently pending in the Supreme Court of the State of New York.
All of the complaints allege that the defendants fraudulently reported the Average Wholesale
Price for certain drugs for which Medicaid provides reimbursement, also referred to as Covered
Drugs; marketed and promoted the sale of Covered Drugs to providers based on the providers ability
to collect inflated payments from the government and Medicaid beneficiaries that exceeded payments
possible for competing drugs; provided financing incentives to providers to over-prescribe Covered
Drugs or to prescribe Covered Drugs in place of competing drugs; and overcharged Medicaid for
illegally inflated Covered Drugs reimbursements. The complaints allege violations of New York
state law and advance common law claims for unfair trade practices, fraud, and unjust enrichment.
In addition, all of the complaints, with the exception of the County of Erie complaint, allege that
the defendants failed to accurately report the best price on the Covered Drugs to the Secretary
of Health and Human Services pursuant to rebate agreements entered into with the Secretary of
Health and Human Services, and excluded from their reporting certain drugs offered at discounts and
other rebates that would have reduced the best price. On April 8, 2005, the court dismissed the
claims brought by Suffolk County against Biogen Idec and eighteen other defendants in a complaint
filed on August 1, 2003. The court held that Suffolk Countys documentation was insufficient to
plead allegations of fraud. Biogen Idec, along with the other defendants, has filed a motion to
dismiss the complaints pending in the U.S. District Court for the District of Massachusetts and in
the Supreme Court for the State of New York. These motions are currently pending. Biogen Idec
intends to defend itself vigorously against all of the allegations and claims in these lawsuits.
At this stage of the litigation, we cannot make any estimate of a potential loss or range of loss.
Biogen Idec, Inc., along with several other major pharmaceutical and biotechnology companies,
was also named as a defendant in a lawsuit filed by the Attorney General of Arizona. The lawsuit
was filed in the Superior Court of the State of Arizona on December 6, 2005. The complaint alleges
that the defendants fraudulently reported the Average Wholesale Price for certain drugs covered by
the State of Arizonas Medicare and Medicaid programs, and marketed these drugs to providers based
on the providers ability to collect inflated payments from the government and other third-party
payors. The complaint alleges violations of Arizona state law based on consumer fraud and
racketeering. The defendants have removed this case to federal court and the Joint Panel on
Multi-District Litigation has conditionally transferred the case to Multi-District Litigation No.
1456 pending in the U.S. District Court for the District of Massachusetts. The Attorney General of
Arizona has filed an opposition to the Conditional Transfer Order, and has moved to remand the case
back to the Superior Court for the State of Arizona. Both of these motions are currently pending.
Biogen Idec intends to defend itself vigorously against all of the allegations and claims in this
lawsuit. At this stage of the litigation, we cannot make any estimate of a potential loss or range
of loss.
On January 6, 2006, we were served with a lawsuit, captioned United States of America ex rel.
Paul P. McDermott v. Genentech, Inc. and Biogen-Idec, Inc., filed in the United States District
Court for the District of Maine. The lawsuit was filed under seal on July 29, 2005 by a former
employee of our co-defendant Genentech pursuant to the False Claims Act, 31 U.S.C. § 3729 et seq.
On December 20, 2005, the U.S. government elected not to intervene, and the file was subsequently
unsealed and served. On February 27, 2006, we served a motion to dismiss the complaint on the
grounds that the court lacks subject matter jurisdiction, the compliant fails to state a claim and
the claims were not pleaded with particularity. On March 31, 2006, the plaintiff filed his
opposition to our motion to dismiss and a proposed first amended complaint. On April 4, 2006, the
plaintiff filed his first amended complaint alleging, among other things, that we directly
solicited physicians and their staff members to illegally market off-label uses of RITUXAN for
treating rheumatoid arthritis, provided illegal kickbacks to physicians to promote off-label uses,
trained our employees in methods of avoiding the detection of these off-label sales and marketing
activities, formed a network of employees whose assigned duties involved off-label promotion of
RITUXAN, intended and caused the off-label promotion of RITUXAN to result in the submission of
false
42
claims to the government, and conspired with Genentech to defraud the government. The
plaintiff seeks entry of judgment on behalf of the United States of America against the defendants,
an award to the plaintiff as relator, and all costs, expenses, attorneys fees, interest and other
appropriate relief. On May 4, 2006, we filed a motion to dismiss
the first amended complaint on the grounds that the court lacks
subject matter jurisdiction, the complaint fails to state a claim,
and the claims were not pleaded with particularity. Plaintiffs
opposition to our motion to dismiss is due May 25, 2006. At this stage
of the litigation, we cannot make any estimate of a potential loss or range of loss. On February
28, 2006, the FDA approved the sBLA for use of RITUXAN, in combination with methotrexate, for
reducing signs and symptoms in adult patients with moderately-to-severely active RA who have had an
inadequate response to one or more TNF antagonist therapies.
On February 24, 2006, a purported customer of TYSABRI in Louisiana commenced a Petition for
Redhibition in the U.S. District Court for the Eastern District of Louisiana, against Biogen Idec
and Elan Pharmaceuticals, captioned as Jill Czapla v. Biogen Idec and Elan Pharmaceuticals, Civil
Action No. 06-0945. The plaintiff commenced the action on behalf of herself and all others
similarly situated, specifically all persons, natural and juridical, who purchased an infusion
drug TYSABRI (natalizumab) in Louisiana. The plaintiff seeks rescission of the sale, return of the
purchase price, expenses incidental to the sale, attorneys fees and interest, but excludes from
the relief sought any damages related to any personal injuries suffered because of the consumption
of TYSABRI. We have not been served with the complaint and are presently evaluating the plaintiffs
contentions. We intend to defend ourselves vigorously against all of the allegations and claims in
this lawsuit. At this stage of the litigation, we cannot make any estimate of potential loss or
range of loss.
In addition, we are involved in certain other legal proceedings generally incidental to our
normal business activities. While the outcome of any of these proceedings cannot be accurately
predicted, we do not believe the ultimate resolution of any of these existing matters would have a
material adverse effect on our business or financial condition.
New Accounting Standards
In February 2006, the FASB issued FSP No. FAS 123 (R) 4, Classification of Options and
Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the
Occurrence of a Contingent Event. This FSP addresses the classification of options and similar
instruments issued as employee compensation that allow for cash settlement upon the occurrence of a
contingent event. The guidance in this FSP amends SFAS 123(R), so that a cash settlement feature
that can be exercised only upon the occurrence of a contingent event that is outside the employees
control does not require the option or similar instrument to be classified as a liability, unless
it becomes probable that the event will occur. This FSP is effective in the first quarter of 2006,
the same period we are required to adopt SFAS 123(R). This FSP has not had any impact on our
results of operations for the three months ended March 31, 2006, nor do we expect it to have a
significant impact in future periods.
In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial
Instruments, which amends both SFAS 133, Accounting for Derivative Instruments and Hedging
Activities, and SFAS 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. SFAS 155 allows the fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that would otherwise required
bifurcation. SFAS 155 shall be effective for entities that have fiscal years beginning after
September 15, 2006. This statement will have no impact to our results of operations.
The FASB issued SFAS 156, Accounting for Servicing of Financial Assets, which amends FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, in March 2006. FASB 156 requires the recognition of a servicing asset or liability
during the undertaking of an obligation to service a financial asset through the creation of a
service contract. In addition, under SFAS 156, all recognized servicing assets and liabilities
should be recognized initially at fair value and subsequently by either the amortization or fair
value measurement method. SFAS 156 should be adopted for all fiscal years beginning after
September 15, 2006. We do not expect SFAS 156 to have any impact on our results of operations.
CRITICAL ACCOUNTING ESTIMATES
We incorporate by reference the section Managements Discussion and Analysis of Financial
Condition and Results of Operation Critical Accounting Estimates of our Annual Report on Form
10-K for the fiscal year
43
ended December 31, 2005. Significant judgements and/or updates to the policies since December
31, 2005 are included below.
Inventory
Our products are subject to strict quality control and monitoring throughout the manufacturing
process. Periodically, certain batches or units of product may no longer meet quality
specifications or may expire. As a result, included in product cost of revenues were write-downs of
commercial inventory that did not meet quality specifications or became obsolete due to dating
expiration, in all cases this product inventory was written-down to its net realizable value. We
wrote-down the following unmarketable inventory, which was charged to cost of product revenues
(table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March, 31 |
|
|
|
2006 |
|
|
2005 |
|
AVONEX |
|
$ |
254 |
|
|
$ |
9,039 |
|
AMEVIVE |
|
|
2,433 |
|
|
|
7,163 |
|
ZEVALIN |
|
|
|
|
|
|
1,902 |
|
TYSABRI |
|
|
611 |
|
|
|
23,200 |
|
|
|
|
|
|
|
|
|
|
$ |
3,298 |
|
|
$ |
41,304 |
|
|
|
|
|
|
|
|
The write-downs for the three months ended March 31, 2006 and 2005, respectively, were the
result of the following (table in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March, 31 |
|
|
|
2006 |
|
|
2005 |
|
New components for alternative presentations |
|
$ |
|
|
|
$ |
8,417 |
|
Failed quality specifications |
|
|
3,044 |
|
|
|
7,785 |
|
Excess and/or obsolescence |
|
|
254 |
|
|
|
1,902 |
|
Costs for voluntary suspension of TYSABRI |
|
|
|
|
|
|
23,200 |
|
|
|
|
|
|
|
|
|
|
$ |
3,298 |
|
|
$ |
41,304 |
|
|
|
|
|
|
|
|
As discussed above, we sold worldwide rights to AMEVIVE, including inventory on hand, to
Astellas in April 2006. As of March 31, 2006, we had $45.2 million of AMEVIVE included in
inventory.
We capitalize inventory costs associated with our products prior to regulatory approval, when,
based on managements judgment, future commercialization is considered probable and the future
economic benefit is expected to be realized. In the first quarter of 2006, in light of expectations
of re-introduction of TYSABRI, we began a new manufacturing campaign and, at March 31, 2006,
included in inventory approximately $11.7 million related to TYSABRI, which has yet to receive FDA
approval. We considered numerous attributes in evaluating whether the costs to manufacture a
particular product should be capitalized as an asset. We assess the regulatory approval process and
where the product stands in relation to that approval process including any known constraints and
impediments to approval, including safety, efficacy and potential labeling restrictions. We
evaluate our anticipated research and development initiatives and constraints relating to the
particular product and the indication in which it will be used. We consider our manufacturing
environment including our supply chain in determining logistical constraints that could possibly
hamper approval or commercialization. We consider the shelf life of the product in relation to the
expected timeline for approval and we consider patent related or contract issues that may prevent
or cause delay in commercialization. We are sensitive to the significant commitment of capital to
scale up production and to launch commercialization strategies. We also base our judgment on the
viability of commercialization, trends in the marketplace and market acceptance criteria. Finally,
we consider the reimbursement strategies that may prevail with respect to the product and assess
the economic benefit that we are likely to realize. We cannot
predict the outcome of our work with regulatory authorities. TYSABRI could be permanently withdrawn
from the market or re-introduced to the market with significant restrictions on its permissible
uses, black box or other significant safety warnings in its label and such other restrictions,
requirements and limitations as the FDA, EMEA or other regulatory authorities may require. While we
presently believe that we will be able to find a path forward for TYSABRI, there are no assurances
as to the likelihood of success. We would be required to expense previously
capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among
other potential factors, a denial or delay of approval by necessary regulatory bodies.
44
In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4, which amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). SFAS 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In
addition, SFAS 151 requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151
were effective for inventory costs incurred during our fiscal year beginning on January 1, 2006. We
did not experience a significant impact on our results of operations in the first quarter of 2006
as a result of our adoption of SFAS 151. However, we may experience variability in future results
of operations due to abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage).
Share-Based Payments
Our
share-based compensation programs consist of share-based awards
granted to employees including stock options, restricted stock, performance share units and restricted stock units, as well
as our employee stock purchase plan, or ESPP.
Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004) Share-Based Payment, or SFAS 123(R). This Statement requires compensation cost
relating to share-based payment transactions to be recognized in the financial statements using a
fair-value measurement method. Prior to January 1, 2006, we accounted for stock options using the
intrinsic value method. This method measures share-based compensation expense as the amount by
which the market price of the stock on the date of grant exceeds the exercise price. We had not
recognized any significant share-based compensation expense under
this method related to stock options in recent years because we
granted stock options at the market price as of the date of grant.
The
estimated fair value of options, including the effect of estimated
forfeitures, is recognized over the options vesting periods.
The fair value of all time vested restricted units and restricted
stock is based on the market value of our stock on the date of
grant. Compensation expense for restricted stock and restricted stock units,
including the effect of forfeitures, is recognized over the
applicable service period. The fair value of performance based stock
units is based on the market price of the Companys stock on the
date of grant and assumes that the performance criteria will be met
and the target payout level will be achieved. Compensation cost is
adjusted for subsequent changes in the outcome of performance-related
conditions until the vesting dates. If actual forfeitures differ
significantly from our estimated forfeitures, there could be a
significant impact on our results of operations. Additionally, future
changes to our assumptions to the success of achieving the
performance criteria for restricted stock units could significantly
impact our future results of operations.
The fair value of the February 2006 stock option grants were estimated on the date of grant
using a Black-Scholes option valuation model that uses the following weighted-average
assumptions:
|
|
|
|
|
Option Grants |
|
|
|
|
|
2006 |
|
Expected dividend yield |
|
|
0 |
% |
Expected stock price volatility |
|
|
34.8 |
% |
Risk-free interest rate |
|
|
4.35 |
% |
Expected option life in years |
|
|
4.87 |
|
Per share grant date fair value |
|
$ |
16.82 |
|
Expected volatility is based primarily upon implied volatility for our exchange traded options
and other factors, including historical volatility. After assessing all available information on
either historical volatility, implied volatility, or both, we have concluded that a combination of
both historical and implied volatility provides its best estimate of expected volatility. The
expected term of options granted is derived from using assumed exercise rates based on historical
exercise patterns, and represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate used is determined by the market yield curve based upon
the risk-free interest rates established by the Federal Reserve, or non-coupon bonds that have
maturities equal to the expected term. The dividend yield is based upon the fact that we have not
historically granted cash dividends, and do not expect to issue dividends in the foreseeable
future. Stock options granted prior to January 1, 2006 were valued based on the grant date fair
value of those awards, using the Black-Scholes option pricing model, as previously calculated for
pro-forma disclosures under SFAS 123 Accounting for Stock-based Compensation. Alternative
estimates and judgements could yield materially different results.
Income tax expense
Income
tax expense includes a provision for income tax contingencies. We
utilize a best estimate approach for establishing loss
contingencies related to income tax uncertainties based on the
definition of a liability in FASB Concept Statement No. 6. These
provisions are adjusted when an event occurs or additional
information becomes available that impacts the amounts of our
estimates. While we believe that the amount of the tax estimates is
reasonable, it is possible that the ultimate outcome of current or
future examinations may differ from provisions for contingencies, and
these differences could be significant.
Contingencies and Litigation
There has been, and we expect there may be significant litigation in the industry regarding
commercial practices, regulatory issues, pricing, and patents and other intellectual property
rights. Certain adverse unfavorable rulings or decisions in the future, including in the litigation
described under Legal Matters, could create variability or have a material adverse effect on our
future results of operations and financial position.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our market risks, and the ways we manage them, are summarized in our Annual Report on Form
10-K for the fiscal year ended December 31, 2005. There have been no material changes in the first
three months of 2006 to such risks or our management of such risks.
45
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision and the participation of our
management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the
Securities Exchange Act) as of March 31, 2006. Based upon that evaluation, our principal executive
officer and principal financial officer concluded that, as of March 31, 2006, our disclosure
controls and procedures are effective in providing reasonable assurance that (a) the information
required to be disclosed by us in the reports that we file or submit under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms, and (b) such information is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and evaluating our disclosure controls
and procedures, our management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives, and our management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
Changes in Internal Control over Financial Reporting
We have not made any changes in our internal control over financial reporting during the first
quarter of 2006 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Part II OTHER INFORMATION
Item 1. Legal Proceedings.
The section entitled Litigation in Notes to Condensed Consolidated Financial Statements in Part
I of this Quarterly Report on Form 10-Q is incorporated into this item by reference.
Item 1A. Risk Factors
The SEC encourages public companies to disclose forward-looking information so that investors
can better understand a companys future prospects and make informed investment decisions. In
addition to historical information, this 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,
regulatory approvals, our long-term growth, our ability to continue development of TYSABRI and
reintroduce TYSABRI into the market, the development and marketing of additional products, the
impact of competitive products, the anticipated outcome of pending or anticipated litigation and
patent-related proceedings, our ability to meet our manufacturing needs, the value of investments
in certain marketable securities, and our
plans to spend additional capital on external business development and research opportunities.
These and all other forward-looking statements are made based on our current belief as to the
outcome and timing of such future events. Risk factors which could cause actual results to differ
from our expectations and which could
46
negatively impact our financial condition and results of
operations are discussed below and elsewhere in this report. Although we believe that the risks
described below represent all material risks currently applicable to our business, additional risks
and uncertainties not presently known to us or that are currently not believed to be significant to
our business may also affect our actual results and could harm our business, financial condition
and results of operations. Unless required by law, we do not undertake any obligation to publicly
update any forward-looking statements.
Our Revenues Rely Significantly on a Limited Number of Products.
Our current and future revenues depend substantially upon continued sales of our commercial
products. Revenues related to sales of two of our products, AVONEX and RITUXAN, represented
approximately 94% of our total revenues in three months ended March 31, 2006. We cannot assure you
that AVONEX or RITUXAN will continue to be accepted in the U.S. or in any foreign markets or that
sales of either of these products will not decline in the future. A number of factors may affect
market acceptance of AVONEX, RITUXAN and our other products, including:
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the perception of physicians and other members of the health care community of their safety
and efficacy relative to that of competing products; |
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patient and physician satisfaction with these products; |
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the effectiveness of our sales and marketing efforts and those of our marketing partners
and licensees in the U.S., the EU and other foreign markets; |
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the size of the markets for these products; |
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unfavorable publicity concerning these products or similar drugs; |
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the introduction, availability and acceptance of competing treatments; |
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the availability and level of third party reimbursement; |
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adverse event information relating to any of these products; |
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changes to product labels to add significant warnings or restrictions on use; |
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the success of ongoing development work on RITUXAN and new anti-CD20 product candidates; |
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the continued accessibility of third parties to vial, label, and distribute these products on acceptable terms; |
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the unfavorable outcome of patent litigation related to any of these products; |
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the ability to manufacture commercial lots of these products successfully and on a timely basis; and |
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regulatory developments related to the manufacture or continued use of these products. |
Any material adverse developments with respect to the commercialization of these products may
cause our revenue to grow at a slower than expected rate, or even decrease, in the future. In
addition, the successful development and commercialization of new anti-CD20 product candidates in
our collaboration with Genentech (which also includes RITUXAN) will adversely affect our
participation in the operating profits from such collaboration (including as to RITUXAN) in such a
manner that, although overall collaboration revenue might ultimately increase as the result of the
successful development and commercialization of any such product candidate, our share of the
operating profits will decrease.
Safety Issues with TYSABRI Could Significantly Affect our Growth.
47
TYSABRI was approved by the FDA in November 2004 to treat relapsing forms of MS to reduce the
frequency of clinical relapses. In February 2005, in consultation with the FDA, we and Elan
voluntarily suspended the marketing and commercial distribution of TYSABRI. We also suspended
dosing in all clinical trials of TYSABRI. These decisions were based on reports of cases of PML, a
rare and frequently fatal, demyelinating disease of the central nervous system in patients treated
with TYSABRI in clinical studies. We and Elan conducted a safety evaluation of patients treated
with TYSABRI in MS, Crohns disease and RA clinical studies. The safety evaluation included the
review of any reports of potential PML in MS patients receiving TYSABRI in the commercial setting.
In October 2005, we completed the safety evaluation and found no new confirmed cases of PML. Three
confirmed cases of PML were previously reported, two of which were fatal. On September 26, 2005, we
and Elan submitted an sBLA for TYSABRI to the FDA for the treatment of MS. We and Elan have also
recently submitted a data package to the EMEA. This information was supplied as part of the ongoing
EMEA review process, which was initiated in the summer of 2004 with the filing for approval of
TYSABRI as a treatment for MS. On March 8, 2006, the Peripheral and Central Nervous System Drugs
Advisory Committee of the FDA voted unanimously to recommend reintroduction of TYSABRI as a
treatment for relapsing forms of MS. We anticipate action by the FDA regarding reintroduction of
TYSABRI in the U.S. on or before June 28, 2006. In April 2006, the Committee for Medicinal
Products for Human Use, the scientific committee of the EMEA, issued a positive opinion
recommending marketing authorization for TYSABRI as a treatment for relapsing-remitting MS to delay
the progression of disability and reduce the frequency of relapses. We anticipate action by the
EMEA regarding the introduction of TYSABRI in the EU this summer. In March 2006, we and Elan began
an open-label, multi-center safety extension study of TYSABRI monotherapy in the U.S. and
internationally.
We plan to work with regulatory authorities to determine the path forward and future
commercial availability of the product. The path forward in the U.S. could range from the permanent
withdrawal of TYSABRI from the market and terminating clinical studies of TYSABRI, the need for
additional testing prior to approval, or the re-introduction of TYSABRI to the market in the U.S.
If we are allowed to re-introduce TYSABRI to the market in the U.S., it could be for a
significantly restricted use. The outcome of our work with the EMEA could result in the withdrawal
of our applications for approval of TYSABRI as a treatment for MS and Crohns disease in the EU,
or, if in consultation with the EMEA, we receive marketing approval for TYSABRI in one or both
indications, a product label with similar restrictions on use as those that may be required by the
FDA. If we are able to re-introduce TYSABRI into the U.S. market or get approval in the EU, we
expect that there will be an ongoing extensive patient risk management program and that the label
will include black box and other significant safety warnings. A black box warning is the most
serious warning placed in the labeling of a prescription medication. The success of any
reintroduction into the U.S. market and launch in the EU will depend upon its acceptance by the
medical community and patients, which cannot be certain given questions regarding the safety of
TYSABRI raised by these adverse events, the possibility of significant restrictions on use and the
significant safety warnings that we expect to be in the label. Our inability to return TYSABRI to
the market in the U.S. or to get TYSABRI approved in the EU or any significant restrictions on use
or lack of acceptance of TYSABRI by the medical community or patients would materially affect our
growth and impact various aspects of our business and our plans for the future. This could result
in, among other things, material write-offs of inventory, intangible assets or goodwill, impairment
of capital assets, and additional reductions in our workforce.
Our Long-Term Success Depends Upon the Successful Development and Commercialization of Other
Products from Our Research and Development Activities and External Growth Opportunities.
Our long-term viability and growth will depend upon the successful development and
commercialization of other products from our research and development activities and external
growth opportunities. We, along with Genentech, continue to expand our development efforts related
to RITUXAN and we are independently expanding development efforts around other potential products
in our pipeline. The expansion of our pipeline may include increases in spending on internal
projects, and is expected to include an increase in spending on external growth opportunities, such
as the acquisition and license of third party technologies or products, collaborations with other
companies and universities, the acquisitions of companies with commercial products and/or products
in their pipelines, and other types of investments. Product development and commercialization
involve a high degree of risk. Only a small number of research and development programs result in
the commercialization of a product. In addition, competition for collaborations and the acquisition
and in-license of third party technologies and products in the biopharmaceutical industry is
intense. We cannot be certain that we will be able to enter into collaborations
or agreements for desirable and compatible technologies or products on acceptable terms or at
all. Many important factors affect our ability to successfully develop and commercialize other
products, including the ability to:
48
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obtain and maintain necessary patents and licenses; |
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demonstrate safety and efficacy of drug candidates at each stage of the clinical trial process; |
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enroll patients in our clinical trials and complete clinical trials; |
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overcome technical hurdles that may arise; |
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manufacture successfully products in sufficient quantities to meet demand; |
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meet applicable regulatory standards; |
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obtain reimbursement coverage for the products; |
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receive required regulatory approvals; |
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produce drug candidates in commercial quantities at reasonable costs; |
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compete successfully against other products and market products successfully; |
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enter into agreements for desirable and compatible technologies or products on acceptable terms; |
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anticipate accurately the costs associated with any acquisition; |
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prevent the potential loss of key employees of any acquired business; |
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acquire a supplier base for the materials associated with any new product opportunity; |
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hire additional employees to operate effectively any acquired business, including employees
with specialized knowledge; |
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mitigate risks associated with entering into new markets in which we have no or limited prior experience; and |
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manage successfully any significant collaborations and/or integrate any significant acquisitions. |
Success in early stage clinical trials or preclinical work does not ensure that later stage or
larger scale clinical trials will be successful. Even if later stage clinical trials are
successful, the risk exists that unexpected concerns may arise from additional data or analysis or
that obstacles may arise or issues may be identified in connection with review of clinical data
with regulatory authorities or that regulatory authorities may disagree with our view of the data
or require additional data or information or additional studies.
Competition in Our Industry and in the Markets for Our Products is Intense.
The biotechnology industry is intensely competitive. We compete in the marketing and sale of
our products, the development of new products and processes, the acquisition of rights to new
products with commercial potential and the hiring of personnel. We compete with biotechnology and
pharmaceutical companies that have a greater number of products on the market, greater financial
and other resources and other technological or competitive advantages. We cannot be certain that
one or more of our competitors will not receive patent protection that dominates, blocks or
adversely affects our product development or business; will not benefit from significantly greater
sales and marketing capabilities; or will not develop products that are accepted more widely than
ours.
AVONEX competes with three other products:
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REBIF, which is co-promoted by Serono, Inc. and Pfizer Inc. in the U.S. and sold by Serono AG
in the EU; |
49
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BETASERON, sold by Berlex in the U.S. and sold under the name BETAFERON by Schering A.G. in
the EU; and |
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COPAXONE, sold by Teva in the U.S. and co-promoted by Teva and Aventis Pharma in the EU. |
In addition, a number of companies, including us, are working to develop products to treat MS
that may in the future compete with AVONEX. If we are able to reintroduce TYSABRI to the market, it
would compete with the products listed above, including AVONEX. AVONEX also faces competition from
off-label uses of drugs approved for other indications. Some of our current competitors are also
working to develop alternative formulations for delivery of their products, which may in the future
compete with AVONEX.
RITUXAN is typically used after patients fail to respond or relapse after treatment with
traditional radiation therapy or standard chemotherapy regimes, such as CVP and CHOP. ZEVALIN is
typically used after patients fail to respond or relapse following treatment with RITUXAN. ZEVALIN
received designation as an Orphan Drug from the FDA for the treatment of relapsed or refractory low
grade, follicular, or transformed B-cell non-Hodgkins lymphoma, including patients with RITUXAN
refractory follicular NHL. Marketing exclusivity resulting from this Orphan Drug designation
expires in February 2009. ZEVALIN competes with BEXXAR, a radiolabeled molecule developed by Corixa
Corporation, which is now being developed and commercialized by GlaxoSmithKline. BEXXAR received
FDA approval in June 2003 to treat patients with CD20, follicular, NHL, with and without
transformation, whose disease is refractory to RITUXAN and has relapsed following chemotherapy. A
number of other companies, including us, are working to develop products to treat B-cell NHLs and
other forms of non-Hodgkins lymphoma that may ultimately compete with RITUXAN and ZEVALIN.
In February 2006, the FDA approved the sBLA for use of RITUXAN, in combination with
methotrexate, for reducing signs and symptoms in adult patients with moderately-to-severely active
RA who have had an inadequate response to one or more TNF antagonist therapies. RITUXAN will
compete with several different types of therapies in the RA market, including:
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traditional therapies for RA, including disease-modifying anti-rheumatic drugs, such as
steroids, methotrexate and cyclosporine, and pain relievers such as acetaminophen; |
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anti-TNF therapies, such as REMICADE, a drug sold worldwide by Centocor, Inc., a subsidiary
of Johnson & Johnson, HUMIRA, a drug sold by Abbott Laboratories, and ENBREL, a drug sold by
Amgen,Inc. and Wyeth Pharmaceuticals, Inc.; |
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ORENCIA, a drug developed by Bristol-Myers Squibb Company, which was approved by the FDA to
treat moderate-to-severe RA in December 2005; |
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drugs in late-stage development for RA; and |
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drugs approved for other indications that are used to treat RA. |
In addition, a number of other companies, including us, are working to develop products to
treat RA that may ultimately compete with RITUXAN in the RA marketplace.
We are Subject to Risks Related to the Products that We Manufacture.
We manufacture and expect to continue to manufacture our own commercial requirements of bulk
AVONEX, and TYSABRI and the ZEVALIN bulk antibody. Our inability to manufacture successfully bulk
product and to maintain regulatory approvals of our manufacturing facilities would harm our ability
to produce timely sufficient quantities of commercial supplies of AVONEX, ZEVALIN and TYSABRI, if
we are able to re-launch this product, to meet demand. Problems with manufacturing processes could
result in product defects or manufacturing failures, which could require us to delay shipment of
products, recall, or withdraw products previously shipped, or impair our ability to expand into new
markets or supply products in existing markets. Any such problem would be exacerbated by unexpected
demand for our products. In June 2005, we sold our large-scale manufacturing facility in Oceanside,
California to Genentech. We previously had planned to use the Oceanside facility to manufacture
TYSABRI and
other commercial products. We currently manufacture TYSABRI at our manufacturing facility in
Research Triangle
50
Park, North Carolina, or RTP. We are proceeding with construction of the bulk
manufacturing component of our large-scale biologic manufacturing facility in Hillerod, Denmark and
have added a labeling and packaging component to the project. Our plans with respect to the
Hillerod large-scale manufacturing facility are, in part, dependent upon the commercial
availability and potential market acceptance of TYSABRI. See Risk Factors Safety Issues with
TYSABRI Could Significantly Affect our Growth. If we are able to re-introduce TYSABRI to the
market, we expect that we will be able to meet foreseeable manufacturing needs for TYSABRI from our
large-scale manufacturing facility in RTP. We would, however, need to evaluate our requirements for
additional manufacturing capacity in light of the approved label and our judgment of the potential
U.S. market acceptance of TYSABRI in MS, the probability of obtaining marketing approval of TYSABRI
in MS in the EU and other jurisdictions, and the probability of obtaining marketing approval of
TYSABRI in additional indications in the U.S., EU and other jurisdictions.
If we cannot produce sufficient commercial requirements of bulk product to meet demand, we
would need to rely on third party manufacturers, of which there are only a limited number capable
of manufacturing bulk products of the type we require as contract suppliers. We cannot be certain
that we could reach agreement on reasonable terms, if at all, with those manufacturers. Even if we
were to reach agreement, the transition of the manufacturing process to a third party to enable
commercial supplies could take a significant amount of time. Our ability to supply products in
sufficient capacity to meet demand is also dependent upon third party contractors to fill-finish,
package and store such products. For a discussion of the risks associated with using third parties
to perform manufacturing-related services for our products, see Risk Factors We Rely to a Large
Extent on Third Parties in the Manufacturing of Our Products. In the past, we have had to write
down and incur other charges and expenses for products that failed to meet specifications. Similar
charges may occur in the future. Any prolonged interruption in the operations of our existing
manufacturing facilities could result in cancellations of shipments or loss of product in the
process of being manufactured. Because our manufacturing processes are highly complex and are
subject to a lengthy FDA approval process, alternative qualified production capacity may not be
available on a timely basis or at all.
We Rely to a Large Extent on Third Parties in the Manufacturing of Our Products.
We rely on Genentech for all RITUXAN manufacturing. Genentech relies on a third party to
manufacture certain bulk RITUXAN requirements. If Genentech or any third party upon which it relies
does not manufacture or fill/finish RITUXAN in sufficient quantities and on a timely and
cost-effective basis, or if Genentech or any third party does not obtain and maintain all required
manufacturing approvals, our business could be harmed. We also rely heavily upon third party
manufacturers and suppliers to manufacture and supply significant portions of the product
components of ZEVALIN other than the bulk antibody.
We also source all of our fill-finish and the majority of our final product storage
operations, along with a substantial portion of our packaging operations of the components used
with our products, to a concentrated group of third party contractors. The manufacture of products
and product components, fill-finish, packaging and storage of our products require successful
coordination among ourselves and multiple third party providers. Our inability to coordinate these
efforts, the lack of capacity available at the third party contractor or any other problems with
the operations of these third party contractors could require us to delay shipment of saleable
products, recall products previously shipped or impair our ability to supply products at all. This
could increase our costs, cause us to lose revenue or market share, and damage our reputation. Any
third party we use to fill-finish, package or store our products to be sold in the U.S. must be
licensed by the FDA. As a result, alternative third party providers may not be readily available on
a timely basis.
Due to the unique nature of the production of our products, there are several single source
providers of raw materials. We make every effort to qualify new vendors and to develop contingency
plans so that production is not impacted by short-term issues associated with single source
providers. Nonetheless, our business could be materially impacted by long term or chronic issues
associated with single source providers.
The Manufacture of Our Products is Subject to Government Regulation.
We and our third party providers are generally required to maintain compliance with current
Good Manufacturing Practice, or cGMP, and are subject to inspections by the FDA or comparable
agencies in other jurisdictions to confirm such compliance. Any changes of suppliers or
modifications of methods of manufacturing require amending our application to the FDA and ultimate
amendment acceptance by the FDA prior to release of product to the market
place. Our inability or the inability of our third party service providers to demonstrate
ongoing cGMP compliance
51
could require us to withdraw or recall product and interrupt commercial
supply of our products. Any delay, interruption or other issues that arise in the manufacture,
fill-finish, packaging, or storage of our products as a result of a failure of our facilities or
the facilities or operations of third parties to pass any regulatory agency inspection could
significantly impair our ability to develop and commercialize our products. This could increase our
costs, cause us to lose revenue or market share and damage our reputation.
Royalty Revenues Contribute to Our Overall Profitability and Are Not Within Our Control.
Royalty revenues contribute to our overall profitability. Royalty revenues may fluctuate as a
result of disputes with licensees, collaborators and partners, future patent expirations and other
factors such as pricing reforms, health care reform initiatives, other legal and regulatory
developments and the introduction of competitive products that may have an impact on product sales
by our licensees and partners. In addition, sales levels of products sold by our licensees,
collaborators and partners may fluctuate from quarter to quarter due to the timing and extent of
major events such as new indication approvals or government-sponsored programs. Since we are not
involved in the development or sale of products by our licensees, collaborators and partners, we
cannot be certain of the timing or potential impact of factors which may affect their sales. In
addition, the obligation of licensees to pay us royalties generally terminates upon expiration of
the related patents.
Our Operating Results Are Subject to Significant Fluctuations.
Our quarterly revenues, expenses and net income have fluctuated in the past and are likely to
fluctuate significantly in the future. Fluctuation may result from a variety of factors, including:
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demand and pricing for our products; |
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physician and patient acceptance of our products; |
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amount and timing of sales orders for our products; |
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our achievement of product development objectives and milestones; |
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research and development and manufacturing expenses; |
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clinical trial enrollment and expenses; |
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our manufacturing performance and capacity and that of our partners; |
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percentage of time that our manufacturing facilities are utilized for commercial versus clinical manufacturing; |
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rate and success of product approvals; |
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costs related to obtain product approvals, launching new products and maintaining market
acceptance for existing products; |
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timing of regulatory approval, if any, of competitive products and the rate of market
penetration of competing products; |
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new data or information, positive or negative, on the benefits and risks of our products or
products under development; |
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expenses related to protecting our intellectual property; |
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expenses related to litigation and settlement of litigation; |
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payments made to acquire new products or technology; |
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write downs and write offs of inventories, intangible assets, goodwill or investments; |
52
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impairment of assets, such as buildings and manufacturing facilities; |
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government or private healthcare reimbursement policies; |
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collaboration obligations and copromotion payments we make or receive; |
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timing and nature of contract manufacturing and contract research and development payments and receipts; |
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interest rate fluctuations; |
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changes in our effective tax rate; |
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foreign currency exchange rates; and |
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overall economic conditions. |
Our operating results during any one quarter do not necessarily suggest the anticipated
results of future quarters.
Our Sales Depend on Payment and Reimbursement from Third Party Payors, and a Reduction in Payment
Rate or Reimbursement Could Result in Decreased Use or Sales of Our Products.
In both domestic and foreign markets, sales of our products are dependent, in part, on the
availability of reimbursement from third party payers such as state and federal governments under
programs such as Medicare and Medicaid in the U.S., and private insurance plans. In certain foreign
markets, the pricing and profitability of our products generally are subject to government
controls. In the U.S., there have been, there are, and we expect there will continue to be, a
number of state and federal proposals that could limit the amount that state or federal governments
will pay to reimburse the cost of pharmaceutical and biologic products. Recent Medicare reforms
have lowered the reimbursement rate for many of our products. We are not able to predict the full
impact of these reforms and their regulatory requirements on our business. However, we believe that
legislation or regulatory action that reduces reimbursement for our products could adversely impact
our business. In addition, we believe that private insurers, such as managed care organizations,
may adopt their own reimbursement reductions unilaterally, or in response to such action. Reduction
in reimbursement for our products could have a material adverse effect on our results of
operations. Also, we believe the increasing emphasis on management of the utilization and cost of
health care in the U.S. has and will continue to put pressure on the price and usage of our
products, which may adversely impact product sales. Further, when a new therapeutic product is
approved, the availability of governmental and/or private reimbursement for that product is
uncertain, as is the amount for which that product will be reimbursed. We cannot predict the
availability or amount of reimbursement for our approved products or product candidates, including
those at any stage of development, and current reimbursement policies for marketed products may
change at any time. In addition, benefit designs by government and private payers that provide
coverage but require more cash outlay from the patient may have the affect of reducing utilization
of our products.
Recent Medicare reforms also added an expanded prescription drug benefit beginning in 2006 for
all Medicare beneficiaries that choose to enroll. The temporary drug discount card program that was
established for the purpose of providing interim opportunities for discounts to Medicare
beneficiaries is being phased out in 2006. Meanwhile, the new Part D pharmacy benefit for Medicare
beneficiaries is undergoing enrollment for implementation in 2006. The federal government, through
the manner in which it has shaped this program, is encouraging the commercial plans and managed
care entities that administer the new benefit to demand discounts from pharmaceutical and
biotechnology companies. In addition, certain states have proposed and certain other states have
adopted various programs for seniors and low-income individuals where a condition of coverage is
that the manufacturer provide a discounted price, as well as programs involving importation from
other countries, such as Canada, and bulk purchasing of drugs.
If reimbursement for our marketed products changes adversely or if we fail to obtain adequate
reimbursement for our other current or future products, health care providers may limit how much or
under what circumstances they will
prescribe or administer them, which could reduce the use of our products or cause us to reduce
the price of our products.
53
In 2003, Congress revised the statutory provisions governing Medicare payment for drugs,
biologics and radiopharmaceuticals furnished by physicians, suppliers, and hospital outpatient
departments. For physicians and suppliers, beginning in 2005, Medicare began to set payment rates
for drugs and biologicals they furnish at ASP plus 6 percent, which lowered payment rates for our
products. These rates have been and will be updated quarterly. The revisions for payments to
hospital outpatient departments included a transitional change to the payment methodology in 2004
and 2005, which lowered payment rates for our products in those years. The methodology has changed
again in 2006, with payment rates being set at the same ASP plus 6 percent methodology used to
reimburse physicians and suppliers since 2005. While physicians and suppliers adjusted to the
change to the ASP payment methodology in 2005, that is not true for products dispensed in the
hospital outpatient setting. Some of our products, such as RITUXAN, are not frequently provided in
hospital outpatient departments so a majority of patients receiving the products should not be
affected by these rate changes. Other products, such as ZEVALIN, are used primarily in the hospital
outpatient setting and we are uncertain as to whether hospitals will view the 2006 rates favorably
and therefore choose to provide ZEVALIN to their patients.
We encounter similar regulatory and legislative issues in most other countries. In the EU and
some other international markets, the government provides health care at low direct cost to
consumers and regulates pharmaceutical prices or patient reimbursement levels to control costs for
the government-sponsored health care system. This international patchwork of price regulation may
lead to inconsistent prices and some third party trade in our products from markets with lower
prices. Such trade exploiting price differences between countries could undermine our sales in
markets with higher prices.
We May Be Unable to Adequately Protect or Enforce Our Intellectual Property Rights or Secure Rights
to Third Party Patents.
We have filed numerous patent applications in the U.S. and various other countries seeking
protection of inventions originating from our research and development, including a number of our
processes and products. Patents have been issued on many of these applications. We have also
obtained rights to various patents and patent applications under licenses with third parties, which
provide for the payment of royalties by us. The ultimate degree of patent protection that will be
afforded to biotechnology products and processes, including ours, in the U.S. and in other
important markets remains uncertain and is dependent upon the scope of protection decided upon by
the patent offices, courts and lawmakers in these countries. There is no certainty that our
existing patents or others, if obtained, will afford us substantial protection or commercial
benefit. Similarly, there is no assurance that our pending patent applications or patent
applications licensed from third parties will ultimately be granted as patents or that those
patents that have been issued or are issued in the future will prevail if they are challenged in
court.
A substantial number of patents have already been issued to other biotechnology and
biopharmaceutical companies. Competitors may have filed applications for, or have been issued
patents and may obtain additional patents and proprietary rights that may relate to products or
processes competitive with or similar to our products and processes. Moreover, the patent laws of
the U.S. and foreign countries are distinct and decisions as to patenting, validity of patents and
infringement of patents may be resolved differently in different countries. In general, we obtain
licenses to third party patents, which we deem necessary or desirable for the manufacture, use and
sale of our products. We are currently unable to assess the extent to which we may wish or be
required to acquire rights under such patents and the availability and cost of acquiring such
rights, or whether a license to such patents will be available on acceptable terms or at all. There
may be patents in the U.S. or in foreign countries or patents issued in the future that are
unavailable to license on acceptable terms. Our inability to obtain such licenses may hinder our
ability to market our products.
We are aware that others, including various universities and companies working in the
biotechnology field, have filed patent applications and have been granted patents in the U.S. and
in other countries claiming subject matter potentially useful to our business. Some of those
patents and patent applications claim only specific products or methods of making such products,
while others claim more general processes or techniques useful or now used in the biotechnology
industry. There is considerable uncertainty within the biotechnology industry about the validity,
scope and enforceability of many issued patents in the U.S. and elsewhere in the world, and, to
date, there is no consistent policy regarding the breadth of claims allowed in biotechnology
patents. We cannot currently determine the ultimate
scope and validity of patents which may be granted to third parties in the future or which
patents might be asserted to be infringed by the manufacture, use and sale of our products.
54
There has been, and we expect that there may continue to be significant litigation in the
industry regarding patents and other intellectual property rights. Litigation, including our
current patent litigation with Classen Immunotherapies, and other proceedings concerning patents
and other intellectual property rights may be protracted, expensive and distracting to management.
Competitors may sue us as a way of delaying the introduction of our products. Any litigation,
including any interference proceedings to determine priority of inventions, oppositions to patents
in foreign countries or litigation against our partners, may be costly and time consuming and could
harm our business. We expect that litigation may be necessary in some instances to determine the
validity and scope of certain of our proprietary rights. Litigation may be necessary in other
instances to determine the validity, scope and/or noninfringement of certain patent rights claimed
by third parties to be pertinent to the manufacture, use or sale of our products. Ultimately, the
outcome of such litigation could adversely affect the validity and scope of our patent or other
proprietary rights, or, conversely, hinder our ability to market our products.
Legislative or Regulatory Changes Could Harm Our Business.
Our business is subject to extensive government regulation and oversight. As a result, we may
become subject to governmental actions which could adversely affect our business, operations or
financial condition, including:
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new laws, regulations or judicial decisions, or new interpretations of existing laws,
regulations or decisions, related to health care availability, method of delivery and payment
for health care products and services; |
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changes in the FDA and foreign regulatory approval processes that may delay or prevent the
approval of new products and result in lost market opportunity; |
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new laws, regulations and judicial decisions affecting pricing or marketing; and |
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changes in the tax laws relating to our operations. |
Failure to Comply with Government Regulations Regarding Our Products Could Harm Our Business.
Our activities, including the sale and marketing of our products, are subject to extensive
government regulation and oversight, including regulation under the federal Food, Drug and Cosmetic
Act and other federal and state statutes. Pharmaceutical and biotechnology companies have been the
target of lawsuits and investigations alleging violations of government regulation, including
claims asserting antitrust violations and violations of the Prescription Drug Marketing Act, or
other violations related to environmental matters. Violations of governmental regulation may be
punishable by criminal and civil sanctions, including fines and civil monetary penalties. We cannot
predict with certainty the eventual outcome of any litigation in this area. If we were to be
convicted of violating laws regulating the sale and marketing of our products, our business could
be materially harmed.
Some of Our Activities may Subject Us to Risks under Federal and State Laws Prohibiting Kickbacks
and False or Fraudulent Claims.
We are subject to the provisions of a federal law commonly known as the Medicare/Medicaid
anti-kickback law, and several similar state laws, which prohibit payments intended to induce
physicians or others either to purchase or arrange for or recommend the purchase of healthcare
products or services. While the federal law applies only to products or services for which payment
may be made by a federal healthcare program, state laws may apply regardless of whether federal
funds may be involved. These laws constrain the sales, marketing and other promotional activities
of manufacturers of drugs and biologicals, such as us, by limiting the kinds of financial
arrangements, including sales programs, with hospitals, physicians, and other potential purchasers
of drugs and biologicals. Other federal and state laws generally prohibit individuals or entities
from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid,
or other third party payors that are false or fraudulent, or are for items or services that were
not provided as claimed. Anti-kickback and false claims laws prescribe civil and criminal penalties
for noncompliance that can be substantial, including the possibility of exclusion from federal
healthcare programs (including Medicare and Medicaid).
Pharmaceutical and biotechnology companies have been the target of lawsuits and investigations
alleging violations of government regulation, including claims asserting violations of the federal
False Claim Act, the federal
55
anti-kickback statute, and other violations in connection with
off-label promotion of products and Medicare and/or Medicaid reimbursement, or related to claims
under state laws, including state anti-kickback and fraud laws. For example, we and a number of
other major pharmaceutical and biotechnology companies are named defendants in certain Average
Wholesale Price litigation pending in the U.S. District Court for the District of Massachusetts
alleging, among other things, violations in connection with Medicaid reimbursement. See Legal
Proceedings for a description of this litigation. While we continually strive to comply with these
complex requirements, interpretations of the applicability of these laws to marketing practices is
ever evolving and even an unsuccessful challenge could cause adverse publicity and be costly to
respond to, and thus could have a material adverse effect on our business, results of operations
and financial condition.
Failure to Prevail in Litigation or Satisfactorily Resolve a Third Party Investigation Could Harm
Our Business.
Pharmaceutical and biotechnology companies have been the target of lawsuits relating to
product liability claims and disputes over intellectual property rights (including patents). See
Risk Factors We May Be Unable to Adequately Protect or Enforce Our Intellectual Property Rights
or Secure Rights to Third Party Patents. Additionally, the administration of drugs in humans,
whether in clinical studies or commercially, can result in lawsuits with product liability claims
whether or not the drugs are actually at fault in causing an injury. Our products or product
candidates may cause, or may appear to have caused, injury or dangerous drug interactions that we
may not learn about or understand until the product or product candidate has been administered to
patients for a prolonged period of time. For example, we may face lawsuits with product liability
and other related claims by patients treated with TYSABRI or related to TYSABRI, including lawsuits
filed by patients who have developed PML or other serious adverse events while using TYSABRI.
Public companies may also be the subject of certain other types of claims, including those
asserting violations of securities laws and derivative actions. For example, we face class action
lawsuits related to our announcement of the suspension of marketing and commercial distribution of
TYSABRI in February 2005. In April 2005, we received a formal order of investigation from the
Boston District Office of the SEC. The SEC is investigating whether any violations of the federal
securities laws occurred in connection with the suspension of marketing and commercial distribution
of TYSABRI. We continue to cooperate fully with the SEC in this investigation.
We cannot predict with certainty the eventual outcome of any pending litigation or third party
investigation. We may not be successful in defending ourselves or asserting our rights in the
litigation or investigation to which we are currently subject, or in new lawsuits, investigations
or claims brought against us, and, as a result, our business could be materially harmed. These
lawsuits, investigations or claims may result in large judgments or settlements against us, any of
which could have a negative effect on our financial performance and business. Additionally,
lawsuits and investigations can be expensive to defend, whether or not the lawsuit or investigation
has merit, and the defense of these actions may divert the attention of our management and other
resources that would otherwise be engaged in running our business.
We maintain product liability and director and officer insurance that we regard as reasonably
adequate to protect us from potential claims, however we cannot be certain that it will. Also, the
costs of insurance have increased dramatically in recent years, and the availability of coverage
has decreased. As a result, we cannot be certain that we will be able to maintain our current
product liability insurance at a reasonable cost, or at all.
Our Business Involves Environmental Risks.
Our business and the business of several of our strategic partners, including Genentech and
Elan, involve the controlled use of hazardous materials, chemicals, biologics and radioactive
compounds. Biologics manufacturing is extremely susceptible to product loss due to microbial or
viral contamination, material equipment failure, or vendor or operator error. Although we believe
that our safety procedures for handling and disposing of such materials comply with state and
federal standards, there will always be the risk of accidental contamination or injury. In
addition, microbial or viral contamination may cause the closure of a manufacturing facility for an
extended period of time. By law, radioactive materials may only be disposed of at state-approved
facilities. We currently store radioactive materials from our California operation on-site because
the approval of a disposal site in California for all California-based companies has been delayed
indefinitely. If and when a disposal site is approved, we may incur
substantial costs related to the disposal of these materials. If we were to become liable for
an accident, or if we were
56
to suffer an extended facility shutdown, we could incur significant
costs, damages and penalties that could harm our business.
We Rely Upon Key Personnel.
Our success will depend, to a great extent, upon the experience, abilities and continued
services of our executive officers and key scientific personnel. If we lose the services of any of
these individuals, our business could be harmed. We currently have an employment agreement with
James C. Mullen, our Chief Executive Officer and President. Our success also will depend upon our
ability to attract and retain other highly qualified scientific, managerial, sales and
manufacturing personnel and our ability to develop and maintain relationships with qualified
clinical researchers. Competition to obtain the services of these personnel and relationships is
intense and we compete with numerous pharmaceutical and biotechnology companies as well as with
universities and non-profit research organizations. We may not be able to continue to attract and
retain qualified personnel or develop and maintain relationships with clinical researchers. One
effect of recent workforce reductions is the loss of research, development and other personnel that
could have contributed to our future growth. It remains to be seen whether the loss of such
personnel will have an adverse effect on our ability to accomplish our research, development and
external growth objectives.
Future Transactions May Harm Our Business or the Market Price of Our Stock.
We regularly review potential transactions related to technologies, products or product rights
and businesses complementary to our business. These transactions could include:
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mergers; |
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acquisitions: |
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strategic alliances; |
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licensing and collaboration agreements; and |
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copromotion agreements. |
We may choose to enter into one or more of these transactions at any time, which may cause
substantial fluctuations to the market price of our stock. Moreover, depending upon the nature of
any transaction, we may experience a charge to earnings, which could also harm the market price of
our stock.
We are Subject to Market Risk.
We have exposure to financial risk in several areas including changes in foreign exchange
rates and interest rates. We attempt to minimize our exposures to such risks by using certain
financial instruments, for purposes other than trading, in accordance with our overall risk
management guidelines. See Critical Accounting Estimates in Managements Discussion and Analysis
of Financial Condition and Results of Operations for information regarding our accounting policies
for financial instruments and disclosures of financial instruments.
Our Financial Position, Results of Operations and Cash Flows can be Affected by Fluctuations in
Foreign Currency Exchange Rates.
We have operations in Europe, Japan, Australia and Canada in connection with the sale of
AVONEX. We also receive royalty revenues based on worldwide product sales by our licensees and
through Genentech on sales of RITUXAN outside of the U.S. As a result, our financial position,
results of operations and cash flows can be affected by fluctuations in foreign currency exchange
rates (primarily Euro, Swedish krona, British pound, Japanese yen, Canadian dollar and Swiss
franc).
We use foreign currency forward contracts to manage foreign currency risk and do not engage in
currency speculation. We use these forward contracts to hedge certain forecasted transactions
denominated in foreign
currencies. A hypothetical adverse 10% movement in foreign exchange rates compared to the U.S.
dollar across all
57
maturities (for example, a strengthening of the Euro) would result in a
hypothetical loss in fair value of approximately $21 million. Our use of this methodology to
quantify the market risk of such instruments should not be construed as an endorsement of its
accuracy or the accuracy of the related assumptions. The quantitative information about market risk
is necessarily limited because it does not take into account operating transactions.
We are Exposed to Risk of Interest Rate Fluctuations.
The fair value of our cash, cash equivalents and marketable securities 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. We estimate that such hypothetical adverse 100 basis point movement
would not have materially impacted net income or materially affected the fair value of interest
rate sensitive instruments.
Volatility of Our Stock Price.
The market prices for our common stock and for securities of other companies engaged primarily
in biotechnology and pharmaceutical development, manufacture and distribution are highly volatile.
For example, the selling price of our common stock fluctuated between $70.00 per share and $33.18
per share during 2005. The market price of our common stock likely will continue to fluctuate due
to a variety of factors, including:
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material public announcements; |
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the announcement and timing of new product introductions by us or others; |
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material developments relating to TYSABRI; |
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events related to our other products or those of our competitors, including the withdrawal or
suspension of products from the market; |
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technical innovations or product development by us or our competitors; |
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regulatory approvals or regulatory issues; |
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availability and level of third party reimbursement; |
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developments relating to patents, proprietary rights and Orphan Drug status; |
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results of late-stage clinical trials with respect to our products under development or those of our competitors; |
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new data or information, positive or negative, on the benefits and risks of our products or
products under development; |
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political developments or proposed legislation in the pharmaceutical or healthcare industry; |
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economic and other external factors, disaster or crisis; |
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period-to-period fluctuations in our financial results or results which do not meet or exceed
analyst expectations; and |
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market trends relating to or affecting stock prices throughout our industry, whether or not
related to results or news regarding us or our competitors. |
We Have Adopted Several Anti-takeover Measures As Well As Other Measures to Protect Certain Members
of Our Management Which May Discourage or Prevent a Third Party From Acquiring Us.
A number of factors pertaining to our corporate governance discourage a takeover attempt that
might be viewed as beneficial to stockholders who wish to receive a premium for their shares from a
potential bidder. For example:
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we are subject to Section 203 of the Delaware General Corporation Law, which provides that we
may not enter into a business combination with an interested stockholder for a period of three
years after the date of the transaction in which the person became an interested stockholder,
unless the business combination is approved in the manner prescribed in Section 203; |
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our stockholder rights plan is designed to cause substantial dilution to a person who
attempts to acquire us on terms not approved by our board of directors; |
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our board of directors has the authority to issue, without a vote or action of stockholders,
up to 8,000,000 shares of preferred stock and to fix the price, rights, preferences and
privileges of those shares, each of which could be superior to the rights of holders of common
stock; |
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our amended and restated collaboration agreement with Genentech provides that, in the event
we undergo a change of control, Genentech may present an offer to us to purchase our rights to
RITUXAN. We must then accept Genentechs offer or purchase Genentechs rights to RITUXAN. If
Genentech presents such an offer, then they will be deemed concurrently to have exercised a
right, in exchange for a share in the operating profits or net sales in the U.S. of any other
anti CD-20 products developed under the agreement, to purchase our interest in each such
product. The rights of Genentech described in this paragraph may limit our attractiveness to
potential acquirors; |
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our collaboration agreement with Elan provides Elan with the option to buy the rights to
TYSABRI in the event that we undergo a change of control, which may limit our attractiveness
to potential acquirors; |
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our directors are elected to staggered terms, which prevents the entire board from being
replaced in any single year; |
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advance notice is required for nomination of candidates for election as a director and for
proposals to be brought before an annual meeting of stockholders; and |
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our bylaws provide that, until November 12, 2006, the affirmative vote of at least 80% of our
board of directors (excluding directors who are serving as an officer or employee) is required
to remove James C. Mullen as our Chief Executive Officer and President. |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
A summary of our stock repurchase activity for the three months ended March 31, 2006 is set forth
in the table below:
Issuer Purchases of Equity Securities
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Total number of |
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shares purchased as |
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Number of shares |
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Total number of |
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part of publicly |
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that may yet be |
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shares purchased |
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Average price paid |
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announced program |
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purchased under our |
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Period |
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(#)(a) |
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per share ($) |
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(#)(a) |
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program (#) |
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January |
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1,160 |
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$ |
47.25 |
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1,160 |
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11,915,240 |
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February |
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6,880 |
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45.27 |
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6,880 |
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11,908,360 |
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March |
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11,908,360 |
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Total |
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8,040 |
(b) |
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$ |
45.56 |
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8,040 |
(b) |
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11,908,360 |
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(a) |
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In October 2004, our Board of Directors authorized the repurchase of up to 20 million shares
of our common stock. This repurchase program will expire no later than October 4, 2006. We
publicly announced the repurchase program in our press release dated October 27, 2004 which
was furnished to (and not filed with) the SEC as Exhibit 99.1 of our Current Report of Form
8-K filed on October 27, 2004. |
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All of these shares are shares that were used by certain employees to pay the exercise price
of their stock options in lieu of paying cash or utilizing our cashless option exercise
program. |
Item 6. Exhibits
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31.1 |
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Certification of the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
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32.1 |
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Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
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May 10, 2006
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BIOGEN IDEC INC.
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/s/ Peter N. Kellogg |
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Peter N. Kellogg |
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Executive Vice President, Finance and Chief |
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Financial Officer |
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