-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Aln60MiZLMUUS4Tb3xAqFBWa7X7CZjq21K2KX7fxC7NaQg6Yv3NPuVpKjZUxCejp Fze/wfsi58V145KB+xUozQ== 0000950135-99-001478.txt : 19990325 0000950135-99-001478.hdr.sgml : 19990325 ACCESSION NUMBER: 0000950135-99-001478 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOGEN INC CENTRAL INDEX KEY: 0000714655 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 043002117 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-12042 FILM NUMBER: 99571842 BUSINESS ADDRESS: STREET 1: 14 CAMBRIDGE CTR CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6176792000 MAIL ADDRESS: STREET 1: 14 CAMBRIDGE CTR CITY: CAMBRIDGE STATE: MA ZIP: 02142 FORMER COMPANY: FORMER CONFORMED NAME: BIOGEN NV DATE OF NAME CHANGE: 19880622 10-K 1 BIOGEN, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-12042 BIOGEN, INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3002117 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 14 Cambridge Center, Cambridge, Massachusetts 02142 (Address of principal executive offices)(zip code) Registrant's telephone number, including area code: (617) 679-2000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Aggregate market value of Common Stock held by nonaffiliates of the Registrant at March 9, 1999 (excludes shares held by directors): $8,018,804,742. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant, or that such person is controlled by or under common control with the Registrant. Common Stock outstanding at March 9, 1999: 75,111,450 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report, and portions of the Registrant's 1998 Annual Report to Shareholders are incorporated by reference into Parts II and IV of this Report. 2 PART I ITEM 1 - BUSINESS OVERVIEW Biogen, Inc. ("Biogen" or the "Company") is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives revenues from sales of its AVONEX(R) (Interferon beta-1a) for the treatment of relapsing forms of multiple sclerosis and from sales by its licensees of a number of products, including alpha interferon, hepatitis B vaccines and hepatitis B diagnostic products. The Company's revenues from sales of AVONEX(R) in 1998 were approximately $394.9 million. The Company's royalty revenues in 1998 were approximately $162.7 million. Biogen continues to devote significant resources to its ongoing research and development efforts. The Company focuses its efforts on areas where it has particular scientific strengths such as: multiple sclerosis, inflammatory diseases, cardiovascular diseases, developmental biology, kidney diseases and disorders and gene therapy. In 1998, Biogen completed early-stage clinical trials of several of its product candidates, including the evaluation of results of two Phase 2a clinical studies of AMEVIVE(TM) (Human LFA-3/IgG(1) fusion protein), also known as LFA3TIP, in patients with moderate to severe psoriasis, two Phase 2a studies of BG9719 (adenosine A1 antagonist), formerly known as CVT-124, a small molecule being developed as a potential treatment for congestive heart failure, and a Phase 1 safety study of ANTOVA(TM) (Humanized anti-CD40 ligand monoclonal antibody), also known as humanized 5c8, in patients with immune thrombocytopenic purpura. Additional clinical trials of AMEVIVE(TM), ANTOVA(TM) and BG9719 are underway or planned. In addition, Biogen has many earlier stage research programs. These include: a program directed toward developing a novel inhibitor of a particular immune response pathway as a potential therapy for several autoimmune diseases; a program focused on finding oral small molecule drug candidates to inhibit the migration of white blood cells into tissue as a potential treatment for multiple sclerosis and certain chronic inflammatory diseases; a program in which the Company is exploring ways to treat central nervous system disorders through use of proteins involved in inducing the formation and regeneration of tissue; and a program directed at developing products based on human gene therapy technology. The Company is also exploring the use of functional genomics technology to find novel therapeutics. AVONEX(R) INTERFERON BETA-1A Biogen currently markets and sells AVONEX(R) (Interferon beta-1a) for the treatment of relapsing forms of multiple sclerosis. Multiple sclerosis is a progressive neurological disease in which the body loses the ability to transmit messages among nerve cells, leading to a loss of muscle control, paralysis and, in some cases, death. Patients with active relapsing multiple sclerosis experience an uneven pattern of disease progression characterized by periods of stability interrupted by flareups of the disease after which the patient returns to a new baseline of functioning. AVONEX(R) is a recombinant form of a protein produced by fibroblast cells in response to viral infection. AVONEX(R) has been shown in a pivotal clinical trial both to slow the accumulation of disability and to reduce the frequency of exacerbations in patients with relapsing forms of multiple sclerosis. 2 3 Biogen began selling AVONEX(R) in the United States in 1996, and in the European Union (EU) in 1997. AVONEX(R) is also on the market in Canada, Argentina, Norway, Israel, Cyprus, Australia, Chile, Columbia, Mexico, Hungary, Turkey, the Czech Republic, Slovakia, and Switzerland. In the United States, Canada and in most of the major countries of the EU, Biogen uses its own sales force to market AVONEX(R). In those countries, Biogen distributes AVONEX(R) principally through wholesale distributors of pharmaceutical products or mail order or specialty distributors or using shipping service providers. In other countries, including Spain, Sweden, Finland, Norway, Denmark, Italy, Greece, Portugal, Israel and New Zealand, Biogen sells AVONEX(R) to distribution partners who are then responsible for most marketing and distribution activities. The Company has also entered into distribution agreements covering Australia, Latin America, the Caribbean, South Africa, Eastern Europe, Turkey, the Middle East and Japan. Under most of these agreements the distribution partners are responsible for obtaining regulatory approval for AVONEX(R) as well as marketing and distribution. Biogen is currently conducting several additional clinical studies of AVONEX(R). These include: a clinical study of AVONEX(R) in patients who have had only one confirmed exacerbation, which was initiated in 1996; a dose comparison study, also initiated in 1996, comparing the approved dosage of AVONEX(R) with a higher dose; a four-year open-label follow-up study initiated in 1995 to obtain long-term safety and antigenicity data; a clinical study of AVONEX(R) in patients with secondary progressive multiple sclerosis, initiated in 1998; and a Phase 2 clinical study of AVONEX(R) in the treatment of idiopathic pulmonary fibrosis which also commenced in 1998. Biogen is also exploring new ways to improve the formulation and delivery of AVONEX(R). In February 1999, Biogen entered into a collaborative agreement with Inhale Therapeutic Systems, Inc. under which the parties will work towards development of a dry powder formulation of AVONEX(R) for pulmonary delivery using Inhale's deep-lung delivery system. Biogen is also working towards development of a pre-filled syringe formulation of AVONEX(R). Revenues from sales of AVONEX(R) in 1998 were $394.9 million or approximately 71% of total revenues. Revenues from sales of AVONEX(R) in 1997 were $240 million or approximately 58% of total revenues. Approximately 77% of AVONEX(R) sales in 1998 and approximately 92% of AVONEX(R) sales in 1997 were generated in the United States. Sales to three major wholesale distributors and a specialty distributor in the United States accounted for 13%, 11%, 11% and 10%, respectively, of total revenues in 1998. MAJOR RESEARCH AND DEVELOPMENT PROGRAMS Biogen's research is focused on biological systems and processes where its scientific expertise in molecular biology, cell biology, immunology and protein chemistry can lead to a greater understanding of disease processes and, as a result, to the creation of new pharmaceuticals. Biogen selects product candidates from its research programs to test in clinical trials, focusing its efforts on those agents which it believes have the greatest potential competitive advantages and large commercial markets. Described below are Biogen's major research programs. 3 4 AMEVIVE(TM) (LFA3TIP) Inflammation is the result of the body's immune response to infection and injury. In many autoimmune diseases, the inflammation process is directed inappropriately against the body's own tissues, causing temporary or permanent damage. Biogen has focused the efforts of its inflammation programs on developing drugs to inhibit specific cellular interactions critical to the inflammation process. Central to inflammation is the activation of T-cells, specialized white blood cells which initiate and control the immune response. One of the cellular pathways which is important for the activation of T-cells is the LFA-3/CD2 pathway. AMEVIVE(TM) (LFA3TIP) is a recombinantly engineered protein designed to modulate immune responses by binding to the CD2 receptor. Biogen is developing AMEVIVE(TM) as a treatment for certain autoimmune diseases. In 1998, the Company completed evaluation of the results of two Phase 2a safety studies of AMEVIVE(TM), and commenced a Phase 2b study of the safety and efficacy of AMEVIVE(TM) compared to a placebo as a systemic therapy in patients with moderate and severe psoriasis. The Company expects the Phase 2b study to be completed in mid-1999. Psoriasis is a chronic autoimmune disease that is characterized by inflammation and thickening of the skin. An estimated 500,000 psoriasis patients in the United States and Europe combined have a severe enough form of the disease to need systemic therapies. ANTOVA(TM) (HUMANIZED 5c8) The human immune system generates two types of responses: humoral (also known as antibody) responses and cell-mediated responses. When CD40 ligand ("CD40L") on the surface of an activated T-cell binds to CD40 on the surface of a B-cell, the production of antibodies is triggered. When CD40L on the surface of an activated T-cell binds to CD40 on the surface of a variety of other cells, such as macrophages and dendritic cells, the cells become activated, triggering an inflammatory response. The inhibition of the CD40-CD40L pathway offers a unique target for modulating both types of immune responses. Biogen is developing ANTOVA(TM), a humanized monoclonal antibody which binds to CD40L, as a treatment for a variety of autoimmune diseases and as a therapy for preventing organ and cellular transplant rejection. In 1998, the Company completed a Phase 1 safety study of ANTOVA(TM) in patients with immune thrombocytopenic purpura (ITP), and commenced a Phase 2 study in ITP. A Phase 2 study of ANTOVA(TM) in lupus nephritis which commenced in 1998 is currently being re-designed to enhance patient accrual. The study and patient accrual are expected to resume in 1999. In early 1999, Biogen commenced a Phase 2 study of ANTOVA(TM) in renal transplantation. Phase 2 studies of ANTOVA(TM) in pancreatic islet cell transplantation, Factor VIII inhibitor syndrome and multiple sclerosis are also expected to commence in 1999. BG9719 In March 1997, Biogen entered into a research collaboration and license agreement with CV Therapeutics, Inc. ("CVT") under which the Company obtained rights to develop and market BG9719 (formerly known as CVT-124). BG9719 is a highly selective antagonist of the adenosine A1 receptor which is expressed principally in the heart, brain and kidney, and which in the kidney mediates vasoconstriction and reabsorption of fluids. Biogen is developing BG9719 as a treatment for congestive heart failure. Congestive heart failure is a chronic progressive disease that affects approximately four to 4 5 five million people in the United States. Patients with the disease experience both a chronic course as well as acute episodes that usually require hospitalization. Reduction in kidney function and the formation of edema, or fluid retention, in lungs and extremities are significant symptoms of chronic heart failure, leading to increased morbidity and need for hospitalization. In 1998, Biogen completed two Phase 2a safety and dose finding clinical studies of BG9719. A Phase 2 study comparing BG9719 with an existing therapy and in combination with the existing therapy is ongoing and is expected to be completed by the end of 1999. LT-BETA RECEPTOR The lymphotoxin (LT): lymphotoxin-beta receptor pathway is involved in activation of dendritic cells and the formation of organized lymphoid tissue both of which normally increase the efficiency of the immune response, but which appear to be hyperactive in some autoimmune diseases. Blocking the pathway with soluble LT-Beta Receptor may inhibit cell-mediated immune reactions particularly in the skin, the gastrointestinal tract and joints. Biogen is developing its LT-Beta Receptor as a potential treatment for certain autoimmune diseases. VLA-4 INHIBITORS VLA-4 (Very Late Antigen-4) is a receptor which appears on the surface of most white blood cells except neutrophils and binds to VCAM-1, a protein found on the surface of vascular endothelial cells. The VLA-4/VCAM-1 pathway facilitates migration of white blood cells into tissue as part of the body's normal response during inflammation. This inflammatory response can be severely damaging or even life threatening when it is directed against the body's own tissue in chronic inflammatory diseases such as asthma. Biogen scientists have developed VLA-4-specific small molecule inhibitors designed to interrupt the cell adhesion activity of VLA-4 as a means of blocking the inflammation process in a highly specific manner. In December 1997, Biogen entered into a collaborative research, development and license agreement with Merck & Co., Inc. ("Merck") under which Biogen and Merck are collaborating on developing oral and aerosolized small molecule inhibitors of VLA-4. Under the agreement with Merck, Biogen has rights to develop, market and sell small molecule inhibitors of VLA-4 for the treatment of multiple sclerosis, kidney diseases and disorders, inflammatory bowel disease and most diseases with small patient populations. Merck has rights to develop, market and sell small molecule inhibitors of VLA-4 in all other indications, including asthma. Merck commenced a Phase 2a clinical trial of an aerosolized VLA-4 inhibitor in 1998. HEDGEHOG PROTEINS Hedgehog proteins are a class of novel human proteins that are responsible for inducing the formation or regeneration of tissue. In 1996, the Company entered into a research collaboration and license agreement with Ontogeny, Inc. ("Ontogeny") for the development of three specific "hedgehog" cell differentiation proteins. Under its agreement with Ontogeny, Biogen has access to exclusive worldwide rights to develop therapeutics directly based on Ontogeny's proprietary family of sonic, indian and desert hedgehogs for most disease indications. In 1998, Biogen and Ontogeny extended the hedgehog research program and broadened the collaboration to include gene therapy. The Company's current focus is the study of the hedgehog proteins for the treatment of central nervous system disorders. 5 6 GENE THERAPY In 1995, the Company entered into a collaborative research agreement with Genovo, Inc. ("Genovo") for the development of certain human gene therapy treatments. Under its agreement with Genovo, Biogen received certain rights related to diseases of the liver and lung. OP-1 In 1998, Biogen amended its collaborative research and license agreement with Creative BioMolecules, Inc. ("CBM") to return to CBM responsibility for development of CBM's morphogenic protein, OP-1, for the treatment of kidney diseases and disorders. OP-1 is a circulating human protein agonist expressed during development and regeneration of the kidney, spinal cord and bone. Under the terms of the amendment, Biogen has the option, exercisable prior to the end of 1999, to resume responsibility for development of OP-1. If Biogen does not exercise its option, the license agreement with CBM will terminate. OTHER RESEARCH PROGRAMS As part of its further research efforts, Biogen is exploring the use of growth factors to prevent or treat the degeneration of the kidney which results from renal failure. The Company is also investigating new ways to modify immune responses more specifically in order to treat diseases of the immune system. In addition, through its collaboration with CuraGen Corporation, Biogen is exploring the use of functional genomics technology to find novel therapeutics. RESEARCH AND DEVELOPMENT COSTS During 1998, 1997 and 1996, Biogen's research and development costs were approximately $177.2 million, $145.5 million and $132.4 million, respectively. RISKS ASSOCIATED WITH DRUG DEVELOPMENT AND COMMERCIALIZATION Certain of the statements set forth above regarding the Company's research and development programs, such as statements regarding the anticipated commencement of clinical trials of drugs in development, are forward-looking, and are based upon the Company's current belief as to the outcome and timing of such future events. These events are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Many important factors affect the Company's ability to successfully develop and commercialize drugs, including the need to demonstrate the safety and efficacy of drug candidates at each stage of the clinical trial process, to meet applicable regulatory standards and receive required regulatory approvals, to be capable of producing drug candidates in commercial quantities at reasonable costs, to obtain and maintain all necessary patents or licenses, to compete successfully against other products, and to market products successfully. There can be no assurance that any of the products described in this section or resulting from Biogen's research and development programs will be successfully developed, prove to be safe and efficacious at each stage of clinical trials, meet applicable regulatory standards, be capable of being produced in commercial quantities at reasonable costs, be successfully marketed or successfully meet challenges from competitive products. 6 7 For a detailed discussion of the outlook of the Company, see the "Outlook" section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated by reference under Item 7. PRINCIPAL PRODUCTS BEING MARKETED OR DEVELOPED BY BIOGEN'S LICENSEES ALPHA INTERFERON Alpha interferon is a naturally occurring protein produced by normal white blood cells. Biogen has been granted patents covering the production of alpha interferons through recombinant DNA techniques. See "Patents and Other Proprietary Rights." Biogen's worldwide licensee for recombinant alpha interferon, Schering-Plough Corporation ("Schering-Plough"), first began commercial sales of its Intron(R) A brand of alpha interferon in the United States in 1986 for hairy-cell leukemia. Schering-Plough now sells Intron(R) A worldwide for as many as 16 indications. The FDA has approved Intron(R) A for the treatment of chronic hepatitis B and hepatitis C, hairy cell leukemia, AIDS-related Kaposi's sarcoma, condylomata acuminata, for injection as an adjuvant treatment to surgery in patients at high risk for systemic recurrence of malignant melanoma, and for use in conjunction with anthracycline-containing combination chemotherapy for the initial treatment of patients with clinically aggressive non-Hodgkin's lymphoma. In 1998, Schering-Plough also received marketing clearance from the FDA for its REBETRON(R) product for the treatment of chronic hepatitis C. REBETRON(R) is a product containing Intron(R) A and REBETOL(R) (ribavirin, USP capsules). In late 1998, Biogen filed for arbitration against Schering-Plough in a dispute over the method used by Schering Plough to determine the amount of royalties payable to Biogen on sales of REBETRON(R). Royalties from Schering-Plough on sales of Intron(R)A accounted for approximately 16%, 19% and 27% of Biogen's revenues in 1998, 1997 and 1996, respectively. For a discussion of the length of Schering Plough's royalty obligation to Biogen on sales of alpha interferon products, see "Patents and Other Proprietary Rights - Recombinant Alpha Interferon." HEPATITIS B VACCINES AND DIAGNOSTICS Hepatitis B is a blood-borne disease which causes a serious infection of the liver and substantially increases the risk of liver cancer. More than 250 million people worldwide have chronic hepatitis B virus infections. Biogen holds several important patents related to hepatitis B antigens produced by genetic engineering techniques. See "Patents and Other Proprietary Rights." These antigens are used in recombinant hepatitis B vaccines and in diagnostic test kits used to detect hepatitis B infection. HEPATITIS B VACCINES At least 20 countries around the world, including the United States, recommend vaccination against hepatitis B for all infants. The United States Centers for Disease Control and the American Academy of Pediatrics have also recommended universal immunization of ten-year-old children and at-risk adolescents. The United States Occupational Safety and Health Administration has recommended 7 8 that all persons with an occupational exposure to blood and other infectious material receive the hepatitis B vaccine. SmithKline Beecham Biologicals s.a. ("SmithKline") and Merck are the two major worldwide marketers of hepatitis B vaccines. Biogen has licensed to SmithKline exclusive rights under Biogen's hepatitis B patents to market hepatitis B vaccines in the major countries of the world, excluding Japan. SmithKline's vaccine is approved in the United States and in over 60 other countries. In 1990, SmithKline and Biogen entered into a sublicense arrangement with Merck under which Biogen currently receives royalties. Biogen has also licensed rights under its hepatitis B patents to Merck and The Green Cross Corporation on a non-exclusive basis in Japan. Royalties from SmithKline and Merck together accounted for approximately 9%, 14% and 23% of Biogen's revenues in 1998, 1997 and 1996, respectively. HEPATITIS B DIAGNOSTICS Biogen has licensed its proprietary hepatitis B rights, on an antigen-by-antigen and nonexclusive basis, to diagnostic kit manufacturers. Biogen currently has hepatitis B license or license and supply agreements for diagnostic use with more than a dozen companies, including Abbott Laboratories, the major worldwide marketer of hepatitis B diagnostic kits, Ortho Diagnostic Systems, Inc., Roche Diagnostic Systems, Inc. and Organon Teknika B.V. For a discussion of the length of the royalty obligation of SmithKline and Merck on sales of hepatitis B vaccines and the obligation of Biogen's other licensees on sales of hepatitis B-related diagnostic products, see "Patents and Other Proprietary Rights - Recombinant Hepatitis B Antigens." OTHER PRODUCTS Under a license agreement with Eli Lilly and Company ("Lilly"), Biogen has granted Lilly rights under certain of Biogen's patents related to gene expression. Lilly uses the patented vectors and methods in several products that are on the market or in development. Under the license agreement Biogen receives royalties on sales of these products. See "Patents and Other Proprietary Rights - - Other Patents". In 1996, Biogen granted a sublicense to Pharmacia & Upjohn AB ("Pharmacia & Upjohn") under certain patent rights to proprietary protein secretion technology exclusively licensed to Biogen by Harvard University. Under the terms of the license agreement, Biogen receives ongoing royalties on sales of Pharmacia & Upjohn's recombinant human growth hormone product, Genotropin(R), in the United States, Canada and Japan. In March 1997, Biogen granted to The Medicines Company ("TMC") exclusive worldwide rights to develop and market Hirulog(R) (bivalirudin) direct thrombin inhibitor. Biogen will receive milestone and royalty payments from TMC if TMC is successful in its efforts to develop and commercialize the drug. Financial information about foreign operations and export sales is included in Note 10 of the Notes to Consolidated Financial Statements incorporated by reference under Item 8. 8 9 PATENTS AND OTHER PROPRIETARY RIGHTS Biogen has filed numerous patent applications in the United States and various other countries seeking protection of a number of its processes and products, and patents have been issued on a number of these applications. The Company has also obtained rights to various patents and patent applications under licenses with third parties which provide for the payment of royalties by the Company. Issues remain as to the ultimate degree of protection that will be afforded to Biogen by its patents. There is no certainty that Biogen's existing patents or others, if obtained, will be of substantial protection or commercial benefit to Biogen. Furthermore, it is not known to what extent Biogen's pending patent applications or patent applications licensed from third parties will ultimately be granted as patents or whether those patents that have been issued or are issued in the future will prevail if they are challenged in litigation. Trade secrets and confidential know-how are important to Biogen's scientific and commercial success. Although Biogen seeks to protect its proprietary information, there can be no assurance that others will not either develop independently the same or similar information or obtain access to Biogen's proprietary information. RECOMBINANT ALPHA INTERFERON Biogen has more than 50 patents in countries around the world, including the United States and countries of the European Patent Office, covering the production of recombinant alpha interferons. Biogen has granted an exclusive worldwide license to Schering Plough under Biogen's alpha interferon patents, and receives royalties from Schering-Plough on sales of its brand of alpha interferon. See "Principal Products Being Marketed or Developed by Biogen's Licensees - Alpha Interferon". Schering-Plough's royalty obligation to Biogen on sales of alpha interferon in Japan and Europe will terminate upon expiration of Biogen's alpha interferon patent in such territories in 2001, except in France and Italy where Biogen has obtained supplemental protection certificates extending the coverage in France until 2003 and in Italy until 2007. In 1998, Biogen and Schering-Plough entered into an agreement under which Biogen assigned to Schering-Plough a Biogen patent application claiming recombinant mature human alpha interferon. The Biogen patent application had been the subject of a lawsuit by Biogen against Genentech, Inc. ("Genentech") and F. Hoffman La Roche Inc. ("Roche") related to a decision in an interference proceeding involving the Biogen patent application and a patent application jointly owned by the two defendants. In consideration of assignment of the patent to it by Biogen, Schering-Plough has agreed to pay to Biogen certain sums on sales by Schering-Plough of alpha interferon products in the United States from July 2002 (when Biogen's existing U.S. alpha interferon patent expires) until expiration of the alpha interferon patent expected to be issued to Roche and Genentech. The lawsuit by Biogen against Roche and Genentech has also been settled. In December 1996, Schering-Plough filed suit in its own name, as Biogen's exclusive licensee, against Amgen, Inc. ("Amgen") to enforce Biogen's U.S. alpha interferon patent claiming it to be infringed by Amgen's consensus interferon product known as Infergen(R). In February 1999, a federal judge granted Schering-Plough's request for a judgment against it and ruled that Amgen did not infringe 9 10 the Biogen patent. Schering-Plough requested the adverse judgement so that it could begin its appeal of the judge's pretrial interpretation of one of the claims of the Biogen patent. Yamanouchi Pharmaceutical Co. Ltd., Amgen's licensee, has filed a declaratory judgment action against Biogen in France, Italy and Germany seeking a judgment that its consensus interferon product does not infringe Biogen's alpha interferon patent. RECOMBINANT HEPATITIS B ANTIGENS Biogen has more than 75 patents in countries around the world, including three in the United States and two in countries of the European Patent Office, and several patent applications, covering the recombinant production of hepatitis B surface, core and "e" antigens. Biogen has licensed its recombinant hepatitis B antigen patent rights to manufacturers and marketers of hepatitis B vaccines and diagnostic test kits, and receives royalties on sales of the vaccines and test kits by its licensees. See "Principal Products Being Marketed or Developed by Biogen's Licensees - Hepatitis B Vaccines and Diagnostics." The obligation of SmithKline and Merck to pay royalties on sales of hepatitis B vaccines and the obligation of Biogen's other licensees under its hepatitis B patents to pay royalties on sales of diagnostic products will terminate upon expiration of Biogen's existing hepatitis B patents. Biogen's existing United States hepatitis B patents will expire in 2004. Biogen's European hepatitis B patents will expire at the end of 1999, except in those countries in which Biogen has or is able to obtain supplemental protection certificates. To date, Biogen has received supplemental protection certificates in France, Italy, Luxembourg, The Netherlands, Sweden, Switzerland and Ireland, and has a number of additional applications pending. The additional coverage afforded by the supplemental protection certificates ranges from two to six years. RECOMBINANT BETA INTERFERON In 1997, the Technical Board of Appeal of the European Patent Office revoked Biogen's European patent covering the production of recombinant beta interferon. Although no formal appeal procedure exists, Biogen has asked the European Patent Office to overturn the revocation. A patent application in the United States with similar claims is still pending. The Company also has a patent with similar claims in Israel. In July 1997, Biogen sued InterPharm Laboratories Ltd. ("Interpharm"), an affiliate of Ares Serono, S.A. ("Serono"), and related defendants, claiming that the manufacture by InterPharm of Serono's Rebif(R) (Interferon Beta-1a) infringes Biogen's Israeli patent. In Germany, a patent with similar claims was the subject of a nullity proceeding instituted by Schering AG in the German Federal Patent Court. In March 1998, the German Federal Patent Court upheld the German patent but with substantially narrower claims. The Company has appealed the decision. Other parties have pending patent applications or issued patents in the United States, Europe and other countries with claims to key intermediates in the production of beta interferon (the "Taniguchi patents") and to beta interferon itself (the "Roche patents"). Biogen has obtained non-exclusive rights in various countries of the world, including the United States, Japan and most European countries, to manufacture, use and sell AVONEX(R) under the Taniguchi patents and has obtained worldwide, non-exclusive rights under the Roche patents. In October 1998, Biogen filed an opposition with the Opposition Division of the European Patent Office to oppose a European patent issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler") with 10 11 certain claims regarding compositions of matter of beta interferon with specific regard to the structure of the glycosylated molecule. Rentschler has appealed the decision of the Opposition Division to revoke an earlier Rentschler patent with claims related to a specific cell line, production method and form of recombinant beta interferon. On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent in the United States in the production of AVONEX(R). In November 1996, Berlex's New Jersey action was transferred to the U.S. District Court in Massachusetts and consolidated for pretrial purposes with a related declaratory judgment action previously filed by Biogen. In August 1998, Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent. In September 1998, the cases were consolidated for pretrial and trial purposes. Berlex seeks a judgment granting it damages, a trebling of any damages awarded and a permanent injunction restraining Biogen from alleged infringement. A trial is currently scheduled for fall of 1999, but may be postponed until a later date. For a further discussion, see Item 3 - Legal Proceedings and Note 8 of the Notes to Consolidated Financial Statements incorporated by reference under Item 8. OTHER PATENTS Biogen has granted Lilly a non-exclusive license under certain of Biogen's patents for gene expression. Lilly uses the patented vectors and methods in several products that are on the market or in development. Biogen's European patent relating to gene expression was opposed by Biotechnology General Corp. in December 1993. A hearing was held by the Opposition Division of the European Patent Office in March 1996. In March 1997, the Opposition Division decided to revoke Biogen's patent. Biogen has appealed the decision. In March 1995, Biogen filed suit in the U.S. District Court for the District of Massachusetts seeking to enjoin Amgen from manufacturing and selling its Neupogen(R) human granulocyte colony stimulating factor in the United States and asking for damages for infringing activities. Biogen believes that to make Neupogen(R) Amgen uses technology claimed in certain of Biogen's gene expression patents. In 1998, the court made a decision as to interpretation of the claims of the Biogen patent in such a way as to preclude Amgen's literal infringement of the patent. Amgen has filed a motion for summary judgment based on the court's decision. The court has requested briefs on whether Amgen is entitled to summary judgment on its claim that its vector is not an infringing equivalent. In July 1997, Biogen filed suit in the U.S. District Court for the District of Massachusetts to enjoin Amgen from manufacturing and selling its Infergen(R) consensus interferon in the United States and asking for damages for infringing activities. Biogen believes that to make Infergen(R) Amgen uses technology claimed in certain of Biogen's gene expression patents. Biogen's request to have the case consolidated with the Neupogen(R) suit was denied by the court. Biogen does not expect a trial in the case prior to the early part of 2000. In March 1999, Biogen was added as a plaintiff in a lawsuit filed by Plant Genetic Systems, N.V. ("PGS") against Dekalb Genetics Corporation in the United States District Court in Connecticut. PGS, the licensee of certain Biogen plant gene patents, is claiming that DeKalb infringes the patents in its production of genetically-engineered seeds. 11 12 THIRD PARTY PATENTS Biogen is aware that others, including various universities and companies working in the biotechnology field, have also filed patent applications and have been granted patents in the United States and in other countries claiming subject matter potentially useful or necessary to Biogen's business. Some of those patents and applications claim only specific products or methods of making such products, while others claim more general processes or techniques useful or now used in the biotechnology industry. For example, Genentech has been granted patents and is prosecuting other patent applications in the United States and certain other countries which it may allege are currently used by Biogen and the rest of the biotechnology industry to produce recombinant proteins in microbial hosts. Genentech has offered to Biogen and others in the industry non-exclusive licenses under those patents and patent applications for various proteins and in various fields of use, but not for others. Schering-Plough, Biogen's exclusive licensee for recombinant alpha interferon, is licensed under certain of these patents for the manufacture, use and sale of recombinant alpha interferon. The ultimate scope and validity of Genentech's patents, of other existing patents, or of patents which may be granted to third parties in the future, the extent to which Biogen may wish or be required to acquire rights under such patents, and the availability and cost of acquiring such rights currently cannot be determined by Biogen. There has been, and Biogen expects that there may continue to be, significant litigation in the industry regarding patents and other intellectual property rights. Such litigation could create uncertainty and consume substantial resources. COMPETITION AND MARKETING IN GENERAL Competition in the biotechnology and pharmaceutical industries is intense and comes from many and varied sources. Biogen does not believe that it or any of the other industry leaders can be considered dominant in view of the rapid technological change in the industry. Biogen experiences significant competition from specialized biotechnology firms in the United States, Europe and elsewhere and from many large pharmaceutical, chemical and other companies. Certain of these companies have substantially greater financial, marketing, research and development and human resources than Biogen. The pharmaceutical companies have considerable experience in undertaking clinical trials and in obtaining regulatory approval to market pharmaceutical products. In addition, certain of Biogen's products may be subject to competition from products developed using alternatives to biotechnology techniques. Much competition is directed towards establishing proprietary positions through research and development. A key aspect of such competition is recruiting and retaining qualified scientists and technicians. Biogen believes that it has been successful in attracting skilled and experienced scientific personnel. Biogen believes that leadership in the industry will be based on managerial and technological superiority and may be influenced significantly by patents and other forms of protection of proprietary information. See "Patents and Other Proprietary Rights". The achievement of a leadership position depends largely upon Biogen's continued ability to attract and retain skilled and experienced personnel, its ability to identify and exploit commercially the products resulting from biotechnology research and 12 13 the availability of adequate financial resources to fund facilities, equipment, personnel, clinical testing, manufacturing and marketing. Many of Biogen's competitors are working to develop products similar to those under development by Biogen. The timing of the entry of a new pharmaceutical product into the market can be an important factor in determining the product's eventual success and profitability. Early entry may have important advantages in gaining product acceptance and market share. Moreover, for certain diseases with limited patient populations, the FDA is prevented under the Orphan Drug Act, for a period of seven years, from approving more than one application for the "same" product for a single orphan drug designation, unless a later product is considered clinically superior. The European Union and other jurisdictions have or are considering similar laws. Accordingly, the relative speed with which Biogen can develop products, complete the testing and approval process and supply commercial quantities of the product to the market is expected to have an important impact on Biogen's competitive position. In addition, competition among products approved for sale may be based, among other things, on patent position, product efficacy, safety, reliability, availability and price. AVONEX(R) (INTERFERON BETA - 1a) As a treatment for multiple sclerosis, AVONEX(R) competes with interferon beta-1b which is sold in the United States under the brand name Betaseron(R) by Berlex Laboratories, Inc., a United States affiliate of Schering AG, and is sold in Europe under the brand name Betaferon(R) by Schering AG. AVONEX(R) also faces competition from Copaxone(R) glatiramer acetate (also known as copolymer-1). In the United States, Copaxone(R) is marketed by a partnership between Teva Pharmaceuticals ("Teva") and Hoechst Marion Roussel, Inc. In addition, in Europe and Canada, AVONEX(R) competes with Rebif(R), a recombinant interferon beta 1a product sold by Ares Serono S.A. ("Serono"). In response to Serono's application for approval of Rebif(R) in the United States for relapsing multiple sclerosis, the FDA has notified Serono that, based on the data from existing clinical trials, Rebif(R) cannot be cleared for marketing in the United States for relapsing multiple sclerosis while the orphan drug status afforded to AVONEX(R) and Betaseron(R) for that indication is still in effect. Betaseron(R)'s orphan drug status for relapsing multiple sclerosis expires in 2000. AVONEX(R)'s orphan drug status for relapsing forms of the disease expires in 2003. AVONEX(R) also competes in Italy and Spain with FRONE(R), an extracted form of beta interferon sold by Serono and in Germany with Imurek(R) azathioprine sold by Glaxo Wellcome GmbH. A number of other companies are working to develop products to treat multiple sclerosis which may in the future compete with AVONEX(R). AVONEX(R) may also in the future face competition from off-label uses of drugs approved for other indications. Biogen believes that competition among treatments for multiple sclerosis will be based on product performance, service and price. REGULATION Biogen's current and contemplated activities and the products and processes that will result from such activities are, and will be, subject to substantial government regulation. Before new pharmaceutical products may be sold in the United States and other countries, clinical trials of the products must be conducted and the results submitted to appropriate regulatory agencies for approval. These clinical trial programs generally involve a three-phase process. Typically, in Phase 1, trials are conducted in volunteers or patients to determine the early side effect profile and, perhaps, the pattern of drug distribution and metabolism. In Phase 2, trials are conducted in groups of 13 14 patients with a specific disease in order to determine appropriate dosages, expand evidence of the safety profile and, perhaps, determine preliminary efficacy. In Phase 3, large scale, comparative trials are conducted on patients with a target disease in order to generate enough data to provide the statistical proof of efficacy and safety required by national regulatory agencies. The receipt of regulatory approvals often takes a number of years, involving the expenditure of substantial resources and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. On occasion, regulatory authorities may require larger or additional studies, leading to unanticipated delay or expense. In connection with the commercialization of products resulting from Biogen's research and development projects, it is necessary, in a number of countries, to comply with certain regulations relating to the manufacturing and marketing of such products and to the products themselves. For example, the commercial manufacturing, marketing and exporting of pharmaceutical products require the approval of the FDA in the United States and of comparable agencies in other countries. The FDA has established mandatory procedures and safety standards which apply to the manufacture, clinical testing and marketing of pharmaceutical products in the United States. The regulatory requirements and approval processes for new products in the European Union operate under similar principles as those applied in the United States. The process of seeking and obtaining approval of the FDA or regulatory authorities in the European Union or other regulatory authorities worldwide for a new product and licensing of the facilities in which the product is produced are likely to take a number of years and involve the expenditure of substantial resources. In addition, the regulatory approval processes for products in the United States, the countries of the European Union and other countries around the world are undergoing or may undergo changes. Biogen cannot determine what effect any changes in regulatory approval processes may have on its business. In the United States, the federal government regularly considers reforming health care coverage and costs. Resulting legislation or regulatory actions may have a significant effect on the Company's business. Biogen's ability to commercialize successfully human pharmaceutical products also may depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available worldwide from government health administration authorities, private health insurers and other organizations. Currently, substantial uncertainty exists as to the reimbursement status of newly approved health care products by third-party payors. Biogen's policy is to conduct relevant research in compliance with the current United States National Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules (the "NIH Guidelines") and all other applicable federal and state regulations. By local ordinance, Biogen is required, among other things, to comply with the NIH Guidelines in relation to its facilities in Cambridge, Massachusetts, and is required to operate pursuant to certain permits. Various laws, regulations and recommendations relating to safe working conditions, laboratory practices, the experimental use of animals and the purchase, storage, movement, import and export and use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with Biogen's research work are or may be applicable to its activities. The extent of government regulation which might result from future legislation or administrative action cannot accurately be predicted. Certain agreements entered into by Biogen involving exclusive license rights may be subject to national or supranational antitrust regulatory control, the effect of which also cannot be predicted. 14 15 EMPLOYEES At December 31, 1998, Biogen employed 1,114 full-time employees worldwide, of whom 970 are located in the United States. Of the 1,114 employees, approximately 244 were engaged in, or directly supported, research and process development, approximately 365 were involved in, or directly supported, manufacturing, quality assurance/quality control, regulatory, medical operations and preclinical and clinical development and approximately 216 were involved in sales and marketing. In addition, Biogen maintains consulting arrangements with a number of scientists at various universities and other research institutions in Europe and the United States, including the nine outside members of its Scientific Board. ITEM 2 - PROPERTIES Biogen's principal executive offices and a majority of its administrative, manufacturing and research and development facilities are located in Cambridge, Massachusetts. The Company owns a 150,000 square foot building in Cambridge which houses laboratories and office space. The Company also leases a total of approximately 300,992 square feet of additional office, manufacturing and research and development space in all or part of four other buildings in Cambridge, consisting of a 67,362 square foot building housing manufacturing facilities, laboratories and office space, a building with 65,792 square feet of space containing laboratories, purification and aseptic bottling facilities and office space, a multi-tenant building where the Company leases approximately 150,838 square feet of office space, and a 17,000 square foot building housing office space and distribution facilities. The lease expiration dates for the leased sites range from 2000 to 2012. In 1999, Biogen intends to commence construction of a new 200,000 square foot facility in Cambridge primarily to house process development operations. The Company also has development options for additional property in Cambridge. In addition to its Cambridge facilities, the Company has a 100,000 square foot biologics manufacturing facility in Research Triangle Park, North Carolina. In 1998, the Company received approval from the FDA to use the Research Triangle Park facility as an additional site for the manufacture of AVONEX(R). The Company expects to commence construction in 1999 of a 170,000 square foot addition to the Research Triangle Park facility to add large scale cell culture manufacturing capacity. Biogen financed construction of the buildings which it owns in Cambridge, Massachusetts and Research Triangle Park, North Carolina with term loans. The loans are secured by the buildings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated by reference under Item 7. The Company's European headquarters consists of 2,900 square meters of office space in a multi-tenant building in Nanterre, France. The lease for this space terminates in 2008 with Biogen having the right to terminate the lease earlier under specified circumstances. The Company has also leased 3,000 square meters of office and manufacturing space in The Netherlands, and leases small offices in England, Germany, The Netherlands, Switzerland, Austria and Canada. The Company believes that its production plants in Cambridge, Massachusetts and Research Triangle Park, North Carolina and existing outside sources will allow it to meet, in the near term, its production needs for clinical trials and its production needs for AVONEX(R). Biogen believes that its 15 16 existing facilities are in compliance with applicable regulatory standards. The Company expects that additional facilities and outside sources will be required to meet the Company's future research and production needs. ITEM 3 - LEGAL PROCEEDINGS On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent in the United States in the production of AVONEX(R). In November 1996, Berlex's New Jersey action was transferred to the United States District Court in Massachusetts and consolidated for pretrial purposes with a related declaratory judgment action previously filed by Biogen. In August 1998, Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent. In September 1998, the cases were consolidated for pretrial and trial purposes. Berlex seeks a judgment granting it damages, a trebling of any damages awarded and a permanent injunction restraining Biogen from alleged infringement. An unfavorable ruling in the Berlex suit could have a material adverse effect on the Company's results of operations and financial condition. The Company believes that it has meritorious defenses to the Berlex claims; however, the ultimate outcome is not determinable at this time. A trial is currently scheduled for fall of 1999, but may be postponed until a later date. On December 28, 1998, Biogen settled its dispute with ASTA Medica ("ASTA") of Frankfurt, Germany related to a terminated 1989 agreement among Biogen, ASTA and Bioferon, a former Biogen joint venture, under which ASTA had obtained a license to certain intellectual property rights related to recombinant beta interferon for a number of European countries. Under the terms of the settlement agreement, ASTA dismissed its lawsuit against Biogen in the U.S. District Court in Massachusetts and released Biogen from all claims related to the 1989 agreement. As part of the settlement, Biogen made an insignificant cash payment to ASTA. In December, 1998, the plaintiffs in a class action suit filed in Massachusetts Superior Court against CVS and a number of pharmaceutical companies for alleged violations of privacy rights in connection with certain marketing practices dismissed Biogen as a defendant in the suit. For a description of legal proceedings relating to certain patent rights, see Item 1, "Business-Patents and Other Proprietary Rights." ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable EXECUTIVE OFFICERS The following is a list of the executive officers of the Company and their principal positions with the Company. Each individual officer serves at the pleasure of the Board of Directors. 16 17
Name Age Positions - ---- --- --------- James L. Vincent ......... 59 Chairman of the Board of Directors and Chief Executive Officer James C. Mullen .......... 40 President and Chief Operating Officer Burt A. Adelman, ......... 46 Vice President - Medical Research Michael J. Astrue ........ 42 Vice President - General Counsel, Secretary and Clerk Michael W. Bonney ........ 41 Vice President - Sales and Marketing Frank A. Burke, Jr........ 55 Vice President - Human Resources Lawrence S. Daniels....... 56 Vice President - Strategic Planning Joseph M. Davie .......... 59 Senior Vice President - Research David C. Dlesk ........... 40 Vice President - Operations Sylvie L. Gregoire........ 37 Vice President - Regulatory Affairs Timothy M. Kish .......... 47 Vice President - Finance and Chief Financial Officer Mark W. Leuchtenberger ... 42 Vice President - International David D. Pendergast ...... 50 Vice President - Product Development and Quality Assurance
The background of these officers is as follows: James L. Vincent has been Chairman of the Board of Directors of the Company since October 1985. Mr. Vincent's current term as Chief Executive Officer began in December 1998. He previously served as Chief Executive Officer of the Company from October 1985 until February 1997. He served in the additional capacities of Chief Operating Officer and President from April 1988 until February 1994. Before joining Biogen, Mr. Vincent served as Group Vice President, Allied Corporation and as President, Allied Health & Scientific Products Company, a subsidiary of Allied Corporation. Before joining Allied Corporation, Mr. Vincent was with Abbott Laboratories, Inc. where he served in various capacities, including Executive Vice President, Chief Operating Officer and Director of the parent corporation. Mr. Vincent is a director of CuraGen Corporation. James C. Mullen was appointed President and Chief Operating Officer of the Company in January 1999, after serving as Vice President - International since August 1996. Mr. Mullen was the Company's Vice President - Operations from December 1991 until August 1996 and served as Senior Director - Operations from February 1991 to December 1991. Mr. Mullen joined the Company in 1989. Before coming to Biogen, Mr. Mullen held various positions of responsibility from 1984 through 1988 at SmithKline-Beckman Corporation, most recently as Director, Engineering, SmithKline and French Laboratories, Worldwide. 17 18 Burt A. Adelman, M.D. was appointed Vice President - Medical Research in January 1999 after serving as Vice President - Development Operations since August 1996. Dr. Adelman served as Vice President - Regulatory Affairs of the Company from May 1995 until August 1996. From 1991 until May 1995, Dr. Adelman was Director of Medical Research at Biogen. Dr. Adelman has served as Lecturer of Medicine at Harvard Medical School and Brigham and Women's Hospital since 1992. Michael J. Astrue was appointed Vice President - General Counsel, Secretary and Clerk of the Company in June 1993. Prior to joining the Company, Mr. Astrue was a partner in the Boston law firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and a managing director of its wholly-owned consulting firm, ML Strategies, from November 1992 to June 1993. From June 1989 through November 1992, Mr. Astrue served as General Counsel of the United States Department of Health and Human Services. From April 1988 through June 1989, Mr. Astrue served as Associate Counsel to the President of the United States. Michael W. Bonney was appointed Vice President - Sales and Marketing in January 1999, after serving as Vice President - Sales since September 1995. Mr. Bonney is also the Program Executive for the Company's AVONEX(R) program. Prior to joining the Company, Mr. Bonney served as National Business Director for the U.S. pharmaceutical business of Zeneca Inc. from October 1994 to September 1995 and as Director of Core Business Systems and Re-engineering of Zeneca Inc.'s U.S. pharmaceutical business from January 1993 until January 1995. Frank A. Burke, Jr., was appointed Vice President - Human Resources in May 1986 after serving for 12 years in various human resource management positions at Allied-Signal, Inc., most recently as Director of Compensation and Employee Benefits of the Engineered Materials Sector. Lawrence S. Daniels was appointed Vice President - Strategic Planning of the Company in August 1993 after serving as Vice President Marketing and Business Development since November 1991. Prior to joining the Company, Mr. Daniels served for nine years in planning and administrative functions for Allied-Signal, Inc., most recently as Vice President, Corporate Strategy Development. Joseph M. Davie, M.D., Ph.D. was appointed Senior Vice President - Research of the Company in January 1999 after serving as Vice President - Research since April 1993. Prior to joining the Company, Dr. Davie was employed by Searle Corporation where he served as Senior Vice President - Science and Technology from January 1993 to April 1993, President - Research and Development from July 1987 to January 1993 and Senior Vice President - Discovery Research from January 1987 to July 1987. Dr. Davie is a director of Genovo, Inc. David C. Dlesk was appointed Vice President - Operations of the Company in August, 1996 after serving as Senior Director of Manufacturing and Engineering since May 1996. Prior to joining Biogen, Mr. Dlesk was Chief Executive Officer of Medical Media Systems, a developer of software for computer-aided surgery. From 1981 to 1993, Mr. Dlesk held a number of positions with Baxter Healthcare Corporation, including Director of Business Development, Venture Technology, General Manager Bentley Laboratories B.V. and Manager of Drug Delivery Technology Group for the I.V. Systems Division. 18 19 Sylvie L. Gregoire, Pharm.D. was appointed Vice President - Regulatory Affairs in January 1999. She is also the Program Executive for the Company's LT-Beta Receptor program, a role she assumed in July 1998. From 1995 until July 1998, Dr. Gregoire served as Director, European Regulatory Affairs of the Company. Prior to joining Biogen, Dr. Gregoire was Associate Director of European Regulatory Affairs for Merck Sharp and Dohme (Europe) Inc. from 1991 until the end of 1994. Timothy M. Kish was appointed Vice President - Finance and Chief Financial Officer of the Company in August 1993 after serving as Corporate Controller of the Company since 1986. Prior to joining Biogen, Mr. Kish was Director of Finance for Allied Health & Scientific Products Company, a subsidiary of Allied Corporation. Before joining Allied, Mr. Kish served in various capacities at Bendix Corp., most recently as Executive Assistant to the President. Mark W. Leuchtenberger was appointed Vice President - International in January 1999 after serving as Vice President - Sales, Marketing and Business Development since January 1998. Mr. Leuchtenberger was the Company's Vice President - Marketing and Sales from October 1996 until January 1998, Director of Distributor Operations, Europe from September 1996 until October 1996, Director of Marketing and the Program Executive for AVONEX(R) from 1993 until September 1996, a Product Manager from 1992 to 1993, and a Market Development Manager from 1990 to 1992. Prior to joining Biogen, Mr. Leuchtenberger worked for the consulting firm of Bain & Company from 1987 to 1990. David D. Pendergast, Ph.D. was appointed Vice President - Product Development and Quality Assurance in January 1998 after serving as Vice President - Quality Assurance and Quality Control of the Company since April 1996. Dr. Pendergast joined Biogen from Fisons Pharmaceuticals, Manchester U.K. where he served as Director, Quality Assurance/Quality Control of Fisons PLC from 1992 to 1996. Prior to joining Fisons, Dr. Pendergast served, over a twenty year period, in various capacities at The Upjohn Company, including Vice President - Quality Assurance from 1989 to 1992. PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The section entitled "Market for Securities" in the Company's 1998 Annual Report to Shareholders is hereby incorporated by reference. ITEM 6 - SELECTED FINANCIAL DATA The section entitled "Selected Financial Data" in the Company's 1998 Annual Report to Shareholders is hereby incorporated by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 1998 Annual Report to Shareholders is hereby incorporated by reference. ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19 20 The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook" in the Company's 1998 Annual Report to Shareholders is hereby incorporated by reference. ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The sections entitled "Consolidated Statements of Income," "Consolidated Balance Sheets," "Consolidated Statements of Cash Flows," "Consolidated Statements of Shareholders' Equity," "Notes to Consolidated Financial Statements" and "Report of Independent Accountants" in the Company's 1998 Annual Report to Shareholders are hereby incorporated by reference. ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders, which the Company intends to file with the Commission no later than April 30, 1999, are hereby incorporated by reference. Information concerning the Company's Executive Officers is set forth in Part I of this Annual Report on Form 10-K. ITEM 11 - EXECUTIVE COMPENSATION The sections entitled "Election of Directors" and "Executive Compensation", in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders, which the Company intends to file with the Commission no later than April 30, 1999, are hereby incorporated by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Share Ownership" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders, which the Company intends to file with the Commission no later than April 30, 1999, is hereby incorporated by reference. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Executive Compensation-Employment Arrangements with the Company and Certain Transactions" in the Company's definitive proxy statement for its 1999 Annual Meeting of Stockholders, which the Company intends to file with the Commission no later than April 30, 1999, is hereby incorporated by reference. 20 21 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements and Financial Statement Schedules. The following documents are filed as a part of this report: (1) Financial Statements, as required by Item 8 of this Form, incorporated by reference herein from the 1998 Annual Report to Shareholders attached hereto as Exhibit 13:
Item Location - ---- -------- Consolidated Statements of Income Annual Report under the caption "Biogen, Inc. and Subsidiaries Consolidated Statements of Income." Consolidated Balance Sheets Annual Report under the caption "Biogen, Inc. and Subsidiaries Consolidated Balance Sheets." Consolidated Statements of Cash Flows Annual Report under the caption "Biogen, Inc. and Subsidiaries Consolidated Statements of Cash Flows." Consolidated Statements of Shareholders' Equity Annual Report under the caption "Biogen, Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity." Notes to Consolidated Financial Statements Annual Report under the caption "Biogen, Inc. and Subsidiaries Notes to Consolidated Financial Statements." Reports of Independent Accountants Annual Report under the caption "Report of Independent Accountants."
With the exception of the portions of the 1998 Annual Report to Shareholders specifically incorporated herein by reference, such report shall not be deemed filed as part of this Annual Report on Form 10-K. (2) Financial Statement Schedules: Report of Independent Accountants on Financial Statement Schedule. Schedule II - Valuation and Qualifying Accounts and Reserves (3) Exhibits 21 22 Exhibit No. Description - ----------- ----------- (3.1) Articles of Organization, as amended (p) (3.2) By-Laws, as amended (g) (4.1) Form of Common Stock Share Certificate (i) (4.2) Certificate of Designation of Series A Junior Participating Preferred Stock (d) (4.3) Rights Agreement dated as of May 8, 1989 between Registrant and The First National Bank of Boston, as Rights Agent (d) (10.1) Independent Consulting and Project Agreement dated as of June 29, 1979 between Company and Kenneth Murray (a)** (10.2) Letter Agreement dated September 11, 1998 with Kenneth Murray related to renewal of Independent Consulting Agreement *, ** (10.3) Minute of Agreement dated February 5, 1981 among Registrant, The University Court of the University of Edinburgh and Kenneth Murray (a)** (10.4) Independent Consulting Agreement dated as of June 29, 1979 between Registrant and Phillip A. Sharp (a)** (10.5) Letter Agreement dated December 11, 1998 with Phillip A. Sharp related to chairmanship of Scientific Board and renewal of Independent Consulting Agreement *, ** (10.6) Project Agreement dated as of December 15, 1979 between Registrant and Phillip A. Sharp (a)** (10.7) Share Restriction and Repurchase Agreement dated as of December 15, 1979 between Registrant and Phillip A. Sharp (a)** (10.8) Consulting Agreement dated as of April 1, 1991, as amended, between Registrant and Alexander G. Bearn (f)** (10.9) Letter Agreement dated March 24, 1998 with Alexander G. Bearn relating to renewal of Independent Consulting Agreement *, ** (10.10) Form of Amendment dated July 1, 1988 to Independent Consulting Agreement between Registrant and Scientific Board Members (c)** (10.11) Letter regarding employment of James L. Vincent dated September 23, 1985 (b)** 22 23 (10.12) Letter agreement amending employment arrangement between the Registrant and James L. Vincent dated as of November 21, 1996 (q)** (10.13) Form of Stock Option Agreement with James L. Vincent under 1985 Non-Qualified Stock Option Plan (g)** (10.14) Form of Stock Option Agreement with James L. Vincent under 1985 Non-Qualified Stock Option Plan (1995) (o)** (10.15) Form of Stock Option Agreement with James L. Vincent under 1985 Non-Qualified Stock Option Plan (1997) (s)** (10.16) Letter dated April 7, 1993 regarding employment of Dr. Joseph M. Davie (h)** (10.17) Form of Indemnification Agreement between Registrant and each Director and Executive Officer (c)** (10.18) Cambridge Center Lease dated October 4, 1982 between Mortimer Zuckerman, Edward H. Linde and David Barrett, as Trustees of Fourteen Cambridge Center Trust, and B. Leasing, Inc. (a) (10.19) First Amendment to Lease dated January 19, 1989 amending Cambridge Center Lease dated October 4, 1982 (g) (10.20) Second Amendment to Lease dated March 8, 1990 amending Cambridge Center Lease dated October 4, 1982 (g) (10.21) Third Amendment to Lease dated September 25, 1991 amending Cambridge Center Lease dated October 4, 1982 (g) (10.22) Fourth Amendment to Lease dated October 6, 1993, amending Cambridge Center Lease dated October 4, 1982 (s) (10.23) Fifth Amendment to Lease dated October 9, 1997, amending Cambridge Center Lease dated October 4, 1982 (s). (10.24) Lease dated October 6, 1993 between North Parcel Limited Partnership and Biogen Realty Limited Partnership (j) (10.25) 1983 Employee Stock Purchase Plan, as amended and restated through September 12, 1997 (s)** (10.26) 1982 Incentive Stock Option Plan, as amended through April 25, 1995 and restated with form of Option Agreement (t)** (10.27) 1985 Non-Qualified Stock Option Plan, as amended through December 6, 1996 and restated with form of Option Agreement (t) ** 23 24 (10.28) 1987 Scientific Board Stock Option Plan, as amended through September 12, 1997 (s)** (10.29) Voluntary Executive Supplemental Savings Plan (m)** (10.30) Amendment No. 1 dated April 25, 1997 to Voluntary Executive Supplemental Savings Plan (s)** (10.31) Amendment No. 2 dated March 11, 1998 to Voluntary Executive Supplemental Savings Plan *,** (10.32) Amended and Restated Supplemental Executive Retirement Plan (s)** (10.33) Voluntary Board of Directors Savings Plan (m)** (10.34) Amendment No. 1 dated April 25, 1997 to Voluntary Board of Directors Savings Plan (s)** (10.35) Amendment No. 2 dated March 11, 1998 to Voluntary Board of Directors Savings Plan *,** (10.36) Exclusive License and Development Agreement dated December 8, 1979 between Registrant and Schering Corporation (a) (10.37) Amendatory Agreement dated May 14, 1985 to Exclusive License and Development Agreement dated December 8, 1979 (b) (10.38) Amendment and Settlement Agreement dated September 29, 1988 to Exclusive License and Development Agreement dated December 8, 1979 (g) (10.39) Amendment dated March 20, 1989 to Exclusive License and Development Agreement dated December 8, 1979 (g) (10.40) License Agreement (United States) dated March 28, 1988 between Registrant and SmithKline Beecham Biologicals, s.a. (as successor to Smith Kline-R.I.T, s.a.) (g) (10.41) License Agreement (International) dated March 28, 1988 between Registrant and SmithKline Beecham Biologicals, s.a. (as successor to Smith Kline-R.I.T., s.a.) (g) (10.42) Sublicense Agreement dated as of February 15, 1990 among Registrant, SmithKline Beecham Biologicals, s.a (as successor to SmithKline Biologicals, s.a.) and Merck and Co., Inc. (g) (10.43) Supplemental Amendment and Agreement dated as of March 1, 1994 between the Registrant and Schering Corporation (l) 24 25 (10.44) Agreement and Amendment between the Registrant and Schering Corporation dated May 1, 1998 (t). (13) Incorporated portions from Biogen, Inc. 1998 Annual Report to Shareholders * (21) Subsidiaries of the Registrant * (24.1) Consent of PricewaterhouseCoopers LLP * (27) Financial Data Schedule (a) Previously filed with the Commission as an exhibit to Registration Statement on Form S-1, File No. 2-81689 and incorporated herein by reference. (b) Previously filed with the Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1985, as amended, File No. 0-12042 and incorporated herein by reference. (c) Previously filed with the Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1988, File No. 0-12042 and incorporated herein by reference. (d) Previously filed with the Commission as an exhibit to Registration Statement on Form 8-A, File No. 0-12042, filed May 26, 1989 and incorporated herein by reference. (e) Previously filed with the Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1990, File No. 0-12042, and incorporated herein by reference. (f) Previously filed with the Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-12042, and incorporated herein by reference. (g) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 0-12042, and incorporated herein by reference. (h) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, File No. 0-12042, and incorporated herein by reference. (i) Previously filed with the Commission as an exhibit to Registration Statement on Form S-3, File No. 33-51639 filed December 21, 1993, and incorporated herein by reference. (j) Previously filed with the Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1993, File No. 0-12042, and incorporated herein by reference. 25 26 (k) Previously filed with the Commission as an exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1994, File No. 0-12042, and incorporated herein by reference. (l) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, File No. 0-12042, and incorporated herein by reference. (m) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, File No. 0-12042, and incorporated herein by reference. (n) Previously filed with the Commission as an exhibit to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, File No. 0-12042, and incorporated herein by reference. (o) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, File No. 0-12042, and incorporated herein by reference. (p) Previously filed with the Commission as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, File No. 0-12042, and incorporated herein by reference. (q) Previously filed with the Commission as an exhibit to an amendment to the Registrant's Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996, File No. 0-12042, and incorporated herein by reference. (r) Previously filed with the Commission as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-12042, and incorporated herein by reference. (s) Previously filed with the Commission as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, File No. 0-12042, and incorporated herein by reference. (t) Previously filed with the Commission as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, File No. 0-12042, and incorporated herein by reference. * Filed herewith ** Management contract or compensatory plan or arrangement (b) Reports on Form 8-K 26 27 During the fourth quarter of 1998, the Company filed a report on Form 8-K announcing the resignation of James R. Tobin as its President and Chief Executive Officer. 27 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BIOGEN, INC. By: /s/ James L. Vincent --------------------------------------- James L. Vincent, Chairman of the Board Dated March 23, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE - ---------- ----- ---- /s/ James L. Vincent Chairman of the Board and March 23, 1999 - ------------------------ Chief Executive Officer James L. Vincent (principal executive officer) /s/ Timothy M. Kish Vice President - Finance and Chief March 23, 1999 - ------------------------ Financial Officer (principal Timothy M. Kish financial and accounting officer) /s/ Alexander G. Bearn Director March 23, 1999 - ------------------------ Alexander G. Bearn /s/ Harold W. Buirkle Director March 23, 1999 - ------------------------ Harold W. Buirkle /s/ Alan Belzer Director March 23, 1999 - ------------------------ Alan Belzer /s/ Mary L. Good Director March 23, 1999 - ------------------------ Mary L. Good /s/ Thomas F. Keller Director March 23, 1999 - ------------------------ Thomas F. Keller /s/ Roger H. Morley Director March 23, 1999 - ------------------------ Roger H. Morley /s/ Kenneth Murray Director March 23, 1999 - ------------------------ Kenneth Murray
29
/s/ Phillip A. Sharp Director March 23, 1999 - ---------------------- Phillip A. Sharp /s/ Alan K. Simpson Director March 23, 1999 - --------------------- Alan K. Simpson /s/ James W. Stevens Director March 23, 1999 - ---------------------- James W. Stevens
30 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 10.2 Letter Agreement dated September 11, 1998, with Kenneth Murray related to renewal of Independent Consulting Agreement. 10.5 Letter Agreement dated December 11, 1998 with Phillip A. Sharp related to chairmanship of Scientific Board and renewal of Independent Consulting Agreement. 10.9 Letter Agreement dated March 24, 1998 with Alexander G. Bearn related to renewal of Independent Consulting Agreement. (10.31) Amendment No. 2 dated March 11, 1998 to Voluntary Executive Supplemental Savings Plan (10.35) Amendment No. 2 dated March 11, 1998 to Voluntary Board of Directors Savings Plan (13) Incorporated portions from Biogen, Inc. 1998 Annual Report to Shareholders (21) Subsidiaries of the Registrant (24.1) Consent of PricewaterhouseCoopers LLP (27) Financial Data Schedule 31 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Biogen, Inc. Our audits of the consolidated financial statements referred to in our report dated January 14, 1999 appearing in the 1998 Annual Report to Shareholders of Biogen, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Boston, Massachusetts January 14, 1999 32 BIOGEN, INC. Schedule II Valuation and Qualifying Accounts and Reserves Years ended December 31, 1998, 1997 and 1996 (in thousands)
Balance at Additions Charged Beginning of to Costs and Balance at Description Period Expenses Deductions End of Period - --------------------------------------- ------------- ----------------- ---------- ------------- Allowance For Doubtful Accounts: Year Ended December 31, 1998 $ 1,645 $ -- $ 3 $ 1,642 ============= ================ ========== ============= Year Ended December 31, 1997 $ 1,480 $ 1,196 $ 1,031 $ 1,645 ============= ================ ========== ============= Year Ended December 31, 1996 $ -- $ 1,480 $ -- $ 1,480 ============= ================ ========== ============= Sales Returns & Allowances, Discounts and Rebates: Year Ended December 31, 1998 $ 3,789 $ 26,172 $ 24,369 $ 5,592 ============= ================ ========== ============= Year Ended December 31, 1997 $ 1,350 $ 18,387 $ 15,948 $ 3,789 ============= ================ ========== ============= Year Ended December 31, 1996 $ -- $ 3,640 $ 2,290 $ 1,350 ============= ================ ========== =============
EX-10.2 2 LETTER AGREEMENT 1 EXHIBIT 10.2 [BIOGEN LETTERHEAD] September 11, 1998 Sir Kenneth Murray 4 Mortonhall Road Edinburgh EH9 2HW Scotland, United Kingdom Re: RENEWAL OF INDEPENDENT CONSULTING AND PROJECT AGREEMENT Dear Ken: Your Independent Consulting and Project Agreement with Biogen, Inc., dated June 29, 1979, as previously amended (the "Agreement"), under which you serve as a member of the Scientific Board of the Company expires on September 30, 1998. Biogen greatly values your input on the Scientific Board, and would like to renew the Agreement for an additional three-year period commencing as of September 30, 1998 and ending on September 30, 2001. The terms and conditions of the Agreement will continue to apply during the renewal term except that compensation for your services under the Agreement during the renewal term will be as follows: 1. You will receive (i) a $20,000 per year retainer, (ii) $2,000 per day for attendance at Scientific Board meetings, plus reasonable travel and lodging expenses and (iii) $500 per day for time spent in Biogen=s laboratories. 2. Subject to approval by the Stock and Option Plan Administration Committee, on your renewal date, you will be granted an option to purchase 30,000 shares of Biogen Common Stock. The option will vest over three years (33-1/3% per year) and will be exercisable at a price equal to the average of the high and low sales prices on your renewal date. If you agree to renewal of the Agreement on these terms, please sign both copies of this renewal letter and return one copy to the attention of Anne Marie Cook, Associate General Counsel, Biogen, Inc., 14 Cambridge Center, Cambridge, MA 02142. 2 We look forward to your continued participation on the Scientific Board. Very truly yours, BIOGEN, INC. By:________________________________ James R. Tobin President and Chief Executive Officer By:________________________________ Phillip A. Sharp, Ph.D. Chairman of Scientific Board AGREED TO AND ACCEPTED: ___________________________________ Sir Kenneth Murray, Ph.D. EX-10.5 3 LETTER AGREEMENT 1 EXHIBIT 10.5 [BIOGEN LETTERHEAD] December 11, 1998 Phillip A. Sharp, Ph.D. Salvador E. Luria Professor Department of Biology Center for Cancer Research Room E17-529B Massachusetts Institute of Technology 40 Ames Street Cambridge, MA 02139-4307 Re: RENEWAL OF INDEPENDENT CONSULTING AGREEMENT Dear Phil: Your Independent Consulting Agreement with Biogen, Inc., dated June 29, 1979, as previously amended (the "Agreement"), under which you serve as a member of the Scientific Board of the Company, and your service as Chairman of the Scientific Board expire on December 31, 1998. Biogen greatly values your input on the Scientific Board, and would like to renew the Agreement and your service as Chairman of the Scientific Board for an additional three-year period, commencing as of December 31, 1998 and ending on December 31, 2001 (the "Renewal Term"), on the following terms and conditions: 1. Your annual fee as Chairman of the Scientific Board will be $95,000 per year, payable quarterly in advance. The fee is to cover your service as Chairman, and is in lieu of the standard fee for Scientific Board members of $20,000 per year and the per diem fees for Scientific Board attendance, laboratory visits and consulting services. 2. Biogen will pay Margarita Siafaca, or any other person you may designate, $1,250 per calendar quarter (for a total of $5,000 per year), in advance, for secretarial and administrative services rendered and for office expenses incurred for or on behalf of the Scientific Board of the Company. 2 3. Subject to approval by the Stock and Option Plan Administration Committee, you will be granted an option to purchase 75,000 shares of Common Stock of the Company at an exercise price equal to the average of the high and low sales prices on the date of this renewal letter. The option will vest as to one-third of the shares upon completion of each of the first, second and third year of service after the date of this renewal letter during the Renewal Term. If you agree to renewal of the Agreement and your service as Chairman of the Scientific Board on these terms, please sign both copies of this renewal letter and return one copy to the attention of Anne Marie Cook, Biogen, Inc., 14 Cambridge Center, Cambridge, MA 02142. I look forward to your continued participation on the Scientific Board. Very truly yours, James R. Tobin President and Chief Executive Officer AGREED TO AND ACCEPTED: _____________________________ Phillip A. Sharp, Ph.D. EX-10.9 4 LETTER AGREEMENT 1 EXHIBIT 10.9 March 24, 1998 Alexander G. Bearn, M.D. Executive Director American Philosophical Society 104 South 5th St. Philadelphia, PA 19106-3387 Re: RENEWAL OF CONSULTANCY AGREEMENT Dear Alick: Your Consultancy Agreement with Biogen, Inc., dated April 1, 1991 (the "Agreement"), under which you serve as a member of the Scientific Board of the Company, expires on April 1, 1998. Biogen greatly values your input on the Board and would like to renew the Agreement for an additional three-year period commencing as of April 1, 1998 and ending on April 1, 2001. The terms and conditions of the Agreement will continue to apply during the renewal term except that compensation for your services under the Agreement during the renewal term will be as follows: 1. You will receive (i) a $20,000 per year retainer, (ii) $2,000 per day for attendance at Scientific Board meetings, plus reasonable travel and lodging expenses and (iii) $500 per day for time spent in Biogen's laboratories. 2. Subject to approval by the Stock and Option Plan Administration Committee, on your renewal date, you will be granted an option to purchase 30,000 shares of Biogen Common Stock. The option will vest over three years (33-1/3% per year) and will be exercisable at a price equal to the average of the high and low sales prices on your renewal date. 1 2 If you agree to renewal of the Agreement on the above terms, please sign both copies of this letter and return one copy to the attention of Anne Marie Cook, Associate General Counsel, Biogen, Inc., 14 Cambridge Center, Cambridge, MA 02142. BIOGEN, INC. By:____________________________ James R. Tobin President and Chief Executive Officer By:____________________________ Phillip A. Sharp Chairman of Scientific Board AGREED TO AND ACCEPTED: _______________________________ Alexander G. Bearn, M.D. 2 EX-10.31 5 AMENDMENT #2 TO SAVINGS PLAN 1 EXHIBIT 10.31 BIOGEN, INC. VOLUNTARY EXECUTIVE SUPPLEMENTAL SAVINGS PLAN SECOND AMENDMENT The Biogen, Inc. Voluntary Executive Supplemental Savings Plan, as heretofore amended, is hereby further amended effective as of January 1, 1998, as follows: 1. Section 4.1(a) is amended by deleting the number "25%" and by inserting in its place the number "50%". 2. Section 5.1(c) is amended by (a) deleting the words "mutual fund" and "mutual funds" in each place they occur and substituting in their place the words "investment fund" and "investment funds" respectively, and (b) deleting the parenthetical phrase at the end of the first paragraph thereby allowing participants to chose the Biogen stock fund as an investment option. BIOGEN, INC. Date: March 11, 1998 By:______________________________ Frank A. Burke, Jr. Vice President - Human Resources EX-10.35 6 AMENDMENT TO DIRECTORS SAVINGS PLAN 1 EXHIBIT 10.35 BIOGEN, INC. VOLUNTARY BOARD OF DIRECTORS SAVINGS PLAN SECOND AMENDMENT The Biogen, Inc. Voluntary Board of Directors Savings Plan, as heretofore amended, is hereby further amended effective as of January 1, 1998, as follows: 1. Section 5.1(b) is amended by (a) deleting the words "mutual fund" and "mutual funds" in each place they occur and substituting in their place the words "investment fund" and "investment funds" respectively, and (b) deleting the parenthetical phrase at the end of the first paragraph thereby allowing participants to chose the Biogen stock fund as an investment option. BIOGEN, INC. Date: March 11, 1998 By:________________________________ Frank A. Burke, Jr. Vice President - Human Resources EX-13 7 INCORPORATED PORTION OF A/R TO SHAREHOLDERS 1 EXHIBIT 13 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------ Product sales $394,863 $239,988 $ 78,202 $ -- $ -- Royalty revenue 162,724 171,921 181,502 134,653 140,433 Total revenues 557,587 411,909 259,704 134,653 140,433 Total expenses 366,948 285,787 234,541 138,245 125,847 Income (loss) before income taxes(a) 210,193 148,968 40,829 7,445 (1,907) Net income (loss) (a) 138,697 89,167 40,530 5,660 (4,897) Diluted earnings (loss) per share 1.80 1.17 0.55 0.08 (0.07) Cash, cash equivalents and short- term marketable securities 516,914 440,088 321,381 307,948 267,802 Total assets 924,715 813,825 634,572 469,201 377,862 Long-term debt, less current portion 56,960 61,846 62,254 32,826 -- Shareholders' equity 718,613 536,293 484,370 382,980 329,934 Shares used in calculating diluted earnings per share 77,135 76,500 73,221 72,890 65,548
(a) Net loss for the year ended December 31, 1994 includes a pre-tax charge of $25 million as a result of the Company's decision to discontinue its activities associated with the development of the Hirulog(R) thrombin inhibitor product. Net income for the year ended December 31, 1996 includes a tax benefit of approximately $23 million resulting from the reversal of a deferred tax asset valuation allowance. 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW Biogen, Inc. (the "Company" or "Biogen") is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives revenues from sales of AVONEX(R) (Interferon beta-1a) for the treatment of relapsing forms of multiple sclerosis ("MS"). The Company also derives revenue from royalties on worldwide sales by the Company's licensees of a number of products covered under patents controlled by the Company, including alpha interferon and hepatitis B vaccines and diagnostic products. RESULTS OF OPERATIONS 1998 AS COMPARED TO 1997 REVENUES Total revenues in 1998 were $557.6 million, as compared to $411.9 million in 1997, an increase of $145.7 million or approximately 35%. Product sales in 1998 were $394.9 million as compared to $240 million in 1997, an increase of $154.9 million or approximately 65%. Product sales from AVONEX(R) represent approximately 71% of the Company's total revenues in 1998 as compared to 58% in 1997. AVONEX(R) sales outside of the United States were approximately $92 million in 1998 as compared to $19.1 million in 1997. The Company began selling AVONEX(R) in the United States in May 1996. In March 1997, the Company received regulatory approval to market AVONEX(R) in the fifteen member countries of the European Union ("EU"). By the end of 1997, AVONEX(R) had received reimbursement approval and was on the market in all of the EU countries. In April of 1998, the Company received approval and began marketing AVONEX(R) in Canada. The Company expects product sales as a percentage of total revenues to increase in the near term as the Company continues to market AVONEX(R) worldwide. The Company also expects sales from AVONEX(R) in Europe to increase as a percentage of total product sales. The Company, however, faces increasing competition worldwide. See "Outlook - Competition". Revenues from royalties in 1998 were $162.7 million, a decrease of $9.2 million or 5% as compared to $171.9 million of royalty revenue in 1997. Included in royalty revenue in 1997 is a one-time non-refundable licensing payment of $15 million from Merck & Co., Inc. ("Merck"). Merck paid the $15 million license fee to Biogen for the transfer of technology, rights granted and the research and development previously performed by Biogen. Revenues from royalties represented approximately 29% of total revenues in 1998 as compared to 42% in 1997. In May 1998, the Company and Schering Corporation, a subsidiary of Schering-Plough, amended the terms of the license agreement under which Schering-Plough pays the Company royalties on worldwide sales of Schering-Plough's alpha interferon product, Intron(R) A. Under the terms of the amendment, Schering-Plough acquired the Biogen alpha interferon patent application which was the subject of a lawsuit filed by the Company against F. Hoffman-LaRoche, Inc. and Genentech Inc. related to an interference involving the Biogen patent application and a patent application jointly-owned by the two defendants. The lawsuit has since been settled. As consideration for the acquisition of the Biogen patent application, Schering-Plough agreed to pay certain sums on U.S. sales of alpha interferon products from July 2002 until the expiration of the alpha interferon patent expected to be issued to F. Hoffman-LaRoche, Inc. and Genentech Inc. as a result of the settlement. In the near term, the Company expects overall sales of licensee products and royalty revenues to fluctuate depending on changes in sales volumes for specific products, patent expirations, new licensing arrangements, if any, or other developments. For a discussion of some of the factors that may affect royalty revenues in the future, see "Outlook - Royalty Revenue" and see "Outlook - Patents and Other Proprietary Rights". 3 COSTS AND EXPENSES Total expenses in 1998 were $366.9 million as compared to $285.8 million in 1997, an increase of approximately 28%. Cost of sales in 1998 totaled $74.5 million, an increase of $24.3 million or 48% as compared to 1997. The increase in cost of sales was attributable to the higher sales volume of AVONEX(R). Included in cost of sales in 1998 and 1997 is $62.1 million and $37.1 million, respectively, from product sales and $12.4 million and $13.1 million, respectively, relating to royalty revenue. The Company expects that gross margins on royalty revenue will fluctuate in the future based on the impact of one-time royalty and milestone payments, and changes in sales volumes for specific products. Research and development expenses in 1998 were $177.2 million, an increase of $31.7 million or 22% as compared to $145.5 million in 1997. The increase was primarily due to the costs associated with funding of collaboration agreements, an increase in clinical trial costs and an increase in the Company's other development efforts related to its ongoing research and development programs. The Company expects that, in the near and long-term, research and development expenses will increase as the Company expands its pipeline and related development efforts with respect to potential new product candidates and continues clinical trials and work on new formulations and delivery methods for AVONEX(R). Selling, general and administrative expenses in 1998 were $115.2 million, an increase of $25.1 million or 28% as compared to 1997. This increase was primarily due to selling and marketing expenses related to the sale of AVONEX(R) and an increase in legal fees. The Company expects that selling, general, and administrative expenses will continue to increase in the near term as the Company continues to expand the sales and marketing organizations necessary to sell AVONEX(R) in existing and new markets. OTHER INCOME, NET Other income, net consists primarily of interest income, partially offset by interest and other financing expenses, and other non-operating income and expenses. Interest income increased $6.2 million from 1997 to 1998, which was offset by increases in financing related and other non-operating expenses. The increase in interest income is a result of increased funds invested. The Company expects interest income to vary based on changes in the amount of funds invested and fluctuations in interest rates. INCOME TAXES The Company's effective tax rate in 1998 was 34%. Income tax expense for 1998 varied from the amount computed at the U.S. federal statutory rates primarily due to the benefit of research and development and investment tax credits. The Company's effective tax rate outside the U.S. is lower than the U.S. tax rate, and the Company expects that the U.S. tax rate will decline as a percentage of its total tax rate as international sales increase. RESULTS OF OPERATIONS 1997 AS COMPARED TO 1996 REVENUES Total revenues in 1997 were $411.9 million, as compared to $259.7 million in 1996, an increase of approximately 59%. Product sales in 1997 were $240 million as compared to $78.2 million in 1996, an increase of approximately 207%. AVONEX(R) sales outside of the United States were approximately $19.1 million in 1997 as compared to $593,000 in 1996. Revenues from royalties in 1997 were $171.9 million, a decrease of $9.6 million or 5% as compared to $181.5 million of royalty revenue in 1996. Included in royalty revenue in 1997 was a one-time non- 4 refundable licensing payment of $15 million from Merck paid under a collaborative research, development and license agreement (the "Merck Agreement"). Merck paid the $15 million license fee to Biogen for the transfer of technology, rights granted and the research and development previously performed by Biogen. Under the Merck Agreement, Merck will have rights to develop and market small molecule VLA-4 inhibitors in all therapeutic areas other than certain small indications such as multiple sclerosis and kidney diseases and disorders, which Biogen will continue to work on itself. The Merck Agreement also provides for payments to be made by either party upon the achievement of certain development milestones by the other party. In addition, if either party successfully develops a product, the other party will receive royalties on sales of the product. Included in royalty revenue in 1996 was a one-time royalty payment of $30 million for sales that occurred prior to 1996 received under a license agreement with Pharmacia & Upjohn A.B. ("Pharmacia & Upjohn"). Under the terms of this license agreement Biogen granted Pharmacia & Upjohn a sublicense under certain patents related to a proprietary protein secretion technology licensed exclusively to Biogen by Harvard University. Excluding the one-time payments from Merck in 1997 and Pharmacia & Upjohn in 1996, royalty revenue increased 3.6% from 1996 to 1997. COSTS AND EXPENSES Total expenses in 1997 were $285.8 million as compared to $234.5 million in 1996, an increase of approximately 22%. Cost of sales in 1997 totaled $50.2 million, an increase of $21.7 million or 76% as compared to 1996. The increase was due to the higher sales volume of AVONEX(R). Included in cost of sales in 1997 and 1996 is $37.1 million and $11.4 million, respectively, from product sales and $13.1 million and $17.1 million, respectively, relating to royalty revenue. Gross margins for product sales remained flat at 85% in both 1997 and 1996. Cost of sales relating to royalty revenue for 1997 decreased $4 million, or approximately 23% as compared to 1996, due to a lower percentage of royalty revenue with associated royalty costs. Research and development expenses in 1997 were $145.5 million, an increase of $13.1 million or 10% as compared to 1996. This increase was primarily due to the costs associated with funding of collaboration agreements, an increase in clinical trial costs and an increase in the Company's other development efforts related to its ongoing research and development programs. In 1997, the Company completed Phase 2 trials of several of its drug candidates, including LFA3TIP, a T-cell inhibiting protein being tested as a potential treatment for moderate to severe psoriasis and CVT-124, which is being developed for treatment of edema associated with congestive heart failure. Selling, general and administrative expenses in 1997 were $90.1 million, an increase of $16.5 million or 22% as compared to 1996. The increase was primarily due to the selling and marketing expenses related to the sale of AVONEX(R), principally in support of the European launch. OTHER INCOME, NET Other income, net consists primarily of interest income, partially offset by interest and other financing expenses, and other non-operating income and expenses. The increase in other income, net from 1996 to 1997 of $7.2 million was primarily attributable to the increase interest income and other non-operating income partially offset by financing related expenses. The increase in interest income was attributable to increased funds invested and higher average yields. INCOME TAXES The Company's effective tax rate in 1997 was 40.1%. Income tax expense for 1997 varied from the amount computed at U.S. federal statutory rates primarily due to the benefit of research and development and investment tax credits offset by foreign losses for which the Company will receive no current tax benefit. During the third quarter of 1996, the Company determined it was more likely than not that it would realize the benefits of its net deferred tax assets, and reversed the related valuation allowance. The reversal of the valuation allowance resulted in a realization of income tax benefit of approximately $23 million and an increase in additional paid-in capital of $38.6 million that related to deductions for non-qualified stock options. 5 FINANCIAL CONDITION At December 31, 1998, cash, cash equivalents and short-term marketable securities were $516.9 million compared with $440.1 million at December 31, 1997, an increase of $76.8 million. Working capital increased $86.9 million to $559.1 million. Net cash from operating activities for the year ended December 31, 1998 was $167.8 million compared with $97.6 million in 1997. Cash outflows during 1998 included investments in property and equipment and patents of $33.6 million and $5 million related to investments under collaborative agreements. Significant cash outflows from financing activities included $65.6 million for purchases of the Company's common stock under its stock repurchase program and $29.7 million for repayments on loans and note payable agreements with banks. Cash inflows included $41.2 million from common stock option exercises and related tax benefits and employee stock purchase plan activity. In August 1995, the Company entered into a loan agreement with a bank for financing the construction of its biological manufacturing facility in North Carolina (the "Construction Loan"). During 1997, the Company completed construction of the facility and the funds advanced under the Construction Loan were converted to a floating rate ten-year term loan with principal and interest payable quarterly. As of December 31, 1998, the Company had $42.7 million outstanding under the Construction Loan. The loan is secured by the underlying building. The Company also entered an interest rate swap agreement with the same bank, fixing its interest rate on the Construction Loan at 7.75% during the remaining term of the loan with interest payable quarterly. As of December 31, 1998, the Company also had $19.2 million outstanding under a floating rate loan with a bank (the "Term Loan"). The Term Loan is secured by the Company's laboratory and office building in Cambridge, Massachusetts. The Company has fixed its interest rate on the Term Loan at 7.5% under the terms of a swap agreement. Terms of the Company's loan agreements include various covenants, including financial covenants which require the Company to maintain minimum net worth, cash flow and various financial ratios. On February 22, 1999, the Company announced that its Board of Directors has authorized the repurchase of up to 4 million shares of the Company's common stock. The repurchased stock will provide the Company with treasury shares for general corporate purposes, such as stock to be issued under employee stock option and stock purchase plans. The stock purchases are expected to occur from time to time over a two year period and the program may be discontinued at any time. Under a previous stock repurchase program, the Company in 1998 repurchased 1.8 million shares of its common stock at a cost of $65.6 million and in 1997 repurchased 200,000 shares of its common stock at a cost of $7 million. The Company has several research programs and collaborations underway. In December 1997, the Company entered into a collaborative research, development and license agreement with Merck. Merck paid a $15 million non-refundable license fee to Biogen for the transfer of technology, the rights granted and the research and development previously performed by Biogen. Under the Merck Agreement, Merck will have rights to develop and market small molecule VLA-4 inhibitors in all therapeutic areas other than certain small indications such as multiple sclerosis and kidney diseases and disorders, which Biogen will continue to work on itself. The Merck Agreement also provides for payments to be made to either party upon the achievement of certain development milestones by the other party. In addition, if a product is successfully developed by a party, the other party will receive royalties on sales of the product. In October 1997, the Company signed a research and option agreement (the "CuraGen Agreement") with CuraGen Corporation ("CuraGen") under which the Company and CuraGen will collaborate in the discovery of novel genes using CuraGen's functional genomics technologies. The Company has also agreed to fund research activities of CuraGen related to the collaboration up to a maximum of $7.5 million over the next four years, and in return, has an option to acquire an exclusive license to certain discoveries arising out of the collaborative efforts. The Company provided $1.9 million in research and development funding in 1998. In March of 1998, under the terms of the CuraGen Agreement, the Company purchased approximately 435,000 shares of CuraGen common stock for a total of $5 million. Additionally, 100,000 shares of Series E Preferred Stock purchased by Biogen in 1997 for $1 million were automatically converted into 100,000 shares of CuraGen common stock. The investment is classified as available-for-sale and is included in long-term marketable securities as of December 31, 1998. In addition, pursuant to the terms of the agreement, the 6 Company has extended to CuraGen a $10 million line of credit. At December 31, 1998, there were no borrowings outstanding under the line of credit. In March 1997, the Company signed a research collaboration and license agreement (the "CVT Agreement") with CV Therapeutics, Inc. ("CVT") under which Biogen obtained rights to develop and market CVT's therapeutic CVT-124, now known as BG9719, for the treatment of edema associated with congestive heart failure. Under the terms of the CVT Agreement, the Company purchased approximately 670,000 shares of CVT common stock for $7 million and paid a one-time license fee of $5 million, which was charged to research and development expense. The investment in CVT is classified as available-for-sale and is included in long-term marketable securities. In addition, pursuant to the terms of the CVT Agreement, the Company established a $12 million line of credit that CVT may use for operating purposes. At December 31, 1998, the Company had advanced $7.7 million under the line of credit to CVT. In December 1996, the Company signed a research collaboration and license agreement (the "CBM Agreement") with Creative BioMolecules, Inc. ("CBM") under which Biogen obtained rights to develop and market CBM's morphogenic protein, OP-1, for the treatment of renal disorders. Under the CBM Agreement, Biogen paid a license fee of $10 million, which was charged to research and development expense, and purchased 1.5 million shares of CBM common stock for $18 million. The payment for the common stock included a $1.2 million premium over the fair value of the common stock which was charged to research and development expense. The investment is classified as available-for-sale and is included in long term marketable securities. In 1998, Biogen and CBM agreed to amend the CBM Agreement to return to CBM responsibility for the development of OP-1. Under the terms of the amendment, Biogen has the option, exercisable through the end of 1999, to resume responsibility for development of OP-1. If Biogen does not exercise its option, the CBM Agreement will terminate at the end of 1999. The Company provided $10 million in research and development funding and material purchases to CBM in 1998. In July 1996, the Company signed a collaborative research and commercialization agreement (the "Ontogeny Agreement") with Ontogeny, Inc. ("Ontogeny"), a private biotechnology company, for the development and commercialization of three specific hedgehog cell proteins. Under the Ontogeny Agreement, the Company purchased 400,000 shares of preferred stock of Ontogeny for $1 million and acquired certain exclusive, worldwide rights related to products based on the hedgehog proteins for most disease areas. The Company accounts for its investment in Ontogeny, which is included in other assets, using the cost method of accounting. In November 1998, the Company extended and expanded its collaboration with Ontogeny and provided to Ontogeny a $4 million convertible loan. The Company provided $3.6 million of research funding to Ontogeny in 1998. The Company has agreed to fund up to an additional $8 million in research funding over the next three years. If the Company exercises its option to proceed with development and commercialization of a hedgehog protein, the Company would be committed to additional funding in the form of license fees, equity investments and lines of credit. In August 1995, the Company signed a collaborative research agreement (the "Genovo Agreement") for the development of human gene therapy treatments with Genovo, Inc. ("Genovo"), a gene therapy research company. Under the Genovo Agreement, the Company acquired 380,000 shares of Genovo Series A Preferred stock for $4.5 million and acquired certain licensing rights. The Company accounts for this investment, which is included in other assets, using the equity method of accounting. The Company recorded its proportion of Genovo's net losses as research and development, which totaled $9 million, $7.7 million, and $5.6 million in 1998, 1997 and 1996, respectively. At December 31, 1998, the Company had remaining funding commitments to Genovo of approximately $10 million. On a quarterly basis, as of the end of the quarter, the Company determines whether a decline in fair value of a marketable security is other than temporary. Unrealized gains and losses on marketable securities are included in other comprehensive income in shareholders' equity, net of related tax effects. If a decline in the fair value of a marketable security below the Company's cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value with a charge to current earnings. The Company has concluded that all unrealized losses on marketable securities at December 31, 1998 are temporary in nature. The Company expects that the market value of such investments will recover to at least the Company's cost basis within a reasonable period of time. Should any portion of these unrealized losses subsequently be determined to be other than temporary, the Company would be required to record the related amount as a charge to current earnings. See Outlook-Stock Price. The Company believes that existing funds and cash generated from operations are adequate to satisfy its working capital and capital expenditure requirements in the foreseeable future. However, the Company may raise additional capital to take advantage of favorable conditions in the market or in connection with the Company's development activities. 7 LEGAL MATTERS On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent in the United States in the production of AVONEX(R) (Interferon beta-1a). In November 1996, Berlex's New Jersey action was transferred to the U.S. District Court in Massachusetts and consolidated for pre-trial purposes with a related declaratory judgement action previously filed by Biogen. On August 18, 1998 Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent. On September 23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex seeks a judgment granting it damages, a trebling of any damages awarded and a permanent injunction restraining Biogen from the alleged infringement. An unfavorable ruling in the Berlex suit could have a material adverse effect on the Company's results of operations and financial position. The Company believes that it has meritorious defenses to the Berlex claim; however, the ultimate outcome is not determinable at this time. A trial is currently scheduled for the fall of 1999 but may be postponed. On October 14, 1998 the Company filed an opposition with the Opposition Division of the European Patent Office to oppose a European patent (the "Rentschler patent") issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler") with certain claims regarding compositions of matter of beta interferon with specific regard to the structure of the glycosylated molecule. While Biogen believes that the patent will be revoked, if the patent were to be upheld and if Rentschler were to obtain, through legal proceedings, a determination that the Company's sale of Avonex(R) in Europe infringes a valid Rentschler patent, such result could have a material adverse effect on the company's results of operation and financial condition. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 130 establishes standards for reporting comprehensive income and its components in the consolidated financial statements. SFAS 131 establishes standards for reporting information on operating segments in interim and annual financial statements. SFAS 130 and SFAS 131 require disclosure only and will have no impact on the Company's consolidated financial position or results of operations. The Company adopted SFAS 130 and SFAS 131 on January 1, 1998. In February 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 132 "Employers Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises standards for disclosures of employers' pension and other post retirement benefit plans. SFAS 132 does not change the measurement or recognition of those plans. The Company adopted SFAS 132 on January 1, 1998. The adoption of SFAS 132 had no impact on the Company's consolidated financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all fiscal quarters for all fiscal years beginning after June 15, 1999. The Company elected to adopt SFAS 133 in the fourth quarter of 1998. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. See Notes 1 and 2 to the Company's Consolidated Financial Statements. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 provides guidance on the 8 financial reporting of start-up costs and organization costs, requiring those costs to be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. SOP 98-5 will have not have a material impact on the Company's consolidated financial position or results of operations. OUTLOOK SAFE HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 In addition to historical information, this annual report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Reference is made in particular to forward-looking statements regarding the anticipated level of future product sales, royalty revenues, expenses and profits, statements regarding the timing of clinical trials and predictions as to the anticipated outcome of pending litigation and patent-related proceedings and the Company's expectations as to the value of its investments in certain marketable securities. These and all other forward-looking statements are made based on the Company's current belief as to the outcome and timing of such future events. Factors which could cause actual results to differ from the Company's expectations and which could negatively impact the Company's financial condition and results of operations are discussed below. DEPENDENCE ON AVONEX(R) SALES The Company's ability to sustain increases in revenues and profitability for the next several years will be primarily dependent on the level of revenues and profitability from AVONEX(R) sales. The Company's ability to sustain profitability from sales of AVONEX(R) will depend on a number of factors, including: continued market acceptance of AVONEX(R) worldwide; the Company's ability to maintain a high level of patient satisfaction with AVONEX(R); the nature of regulatory and pricing decisions related to AVONEX(R) worldwide; the extent to which AVONEX(R) receives reimbursement coverage; the impact of competitive products and the impact of adverse decisions in patent-related proceedings. The profitability from AVONEX(R) sales is also dependent on the successful resolution of the Berlex suit, which is described above under "Legal Matters". COMPETITION The Company faces increasing competition from other products for the treatment of relapsing forms of multiple sclerosis. AVONEX(R) competes with interferon beta-1b which is sold in the United States under the brand name Betaseron(R) by Berlex Laboratories, Inc., a United States affiliate of Schering AG, Germany ("Schering AG"), and is sold in Europe under the brand name Betaferon(R) by Schering AG. AVONEX(R) also faces competition from Copaxone(R) glatiramer acetate (also known as copolymer-1). In the United States Copaxone(R) is marketed by a partnership between Teva Pharmaceuticals and Hoechst Marion Roussel, Inc. In addition, in Europe and Canada, AVONEX(R) competes with Rebif(R), a recombinant interferon beta-1a product sold by Ares Serono S.A. ("Serono"). Serono is unable to sell Rebif(R) in the United States for relapsing multiple sclerosis because of the orphan drug status afforded to AVONEX(R) and Betaseron(R) for that indication. AVONEX(R) may also in the future face competition from off-label uses of drugs approved for other indications, and from new drugs in development. There can be no assurance that the Company will be able to sustain market share of AVONEX(R) in light of competition from other products for the treatment of multiple sclerosis. ROYALTY REVENUE The Company receives royalty revenues which contribute a significant amount to its overall profitability. In the near term, the Company expects overall sales of licensee products and royalty revenues to fluctuate depending on changes in sales volumes for specific products, patent expirations, new licensing arrangements, if any, or other developments. There are a number of other factors which could also cause the actual level of royalty revenue to differ from the Company's expectations. For example, pricing reforms, health care reform initiatives, other legal and regulatory developments and the introduction of competitive products may have an impact on product sales by the Company's licensees. In addition, 9 licensee sales levels may fluctuate from quarter to quarter due to the timing and extent of major events such as new indication approvals or government sponsored vaccination programs. Since the Company is not involved in the development or sale of products by its licensees, the Company is unable to predict the timing or potential impact of factors which may affect licensee sales. In the long term, the Company expects its royalty revenue to be affected most significantly by patent expirations. See "Outlook - Patents and Other Proprietary Rights." In 1998, Schering-Plough received marketing clearance from the FDA for REBETRON(R) for the treatment of chronic hepatitis C. REBETRON(R) is a product containing Intron(R) A and REBETOL(R) (ribavirin, USP capsules). In late 1998, Biogen filed for arbitration against Schering-Plough in a dispute over the method used by Schering-Plough to determine the amount of royalties payable to Biogen on sales of REBETRON(R). PATENTS AND OTHER PROPRIETARY RIGHTS The Company has numerous issued patents and patent applications pending on a number of its processes and products. The Company has also obtained rights to certain patents under licenses with third parties which provide for the payment of royalties. There can be no assurances that Biogen's existing patents or others, if obtained, will be of substantial protection or commercial benefit to Biogen. In addition, it is not known to what extent Biogen's pending patent applications or patent applications licensed from third parties will be granted or whether any of the Company's patents will prevail if they are challenged in litigation. There is also no assurance that third parties will not be granted patents claiming subject matter necessary to Biogen's business. Biogen has granted an exclusive worldwide license to Schering-Plough Corporation under Biogen's alpha interferon patents, and receives royalties from Schering-Plough on sales of its Intron(R) A brand of alpha interferon. Schering-Plough's royalty obligation to Biogen on sales of alpha interferon products in Japan and in most European countries will terminate upon expiration of Biogen's Japanese and European alpha interferon patents in 2001. Biogen's existing U.S. alpha interferon patent expires in 2002, but in connection with the acquisition of a related Biogen patent application from Biogen, Schering-Plough has agreed to pay to Biogen certain sums on sales by Schering-Plough of alpha interferon products in the United States until the expiration of the alpha interferon patent expected to issue to F. Hoffman La Roche, Inc. and Genentech, Inc. Biogen has licensed its recombinant hepatitis B antigen patent rights to manufacturers and marketers of hepatitis B vaccines and diagnostic test kits, and receives royalties on sales of the vaccines and test kits by its licensees. The obligation of SmithKline and Merck to pay royalties on sales of hepatitis B vaccines and the obligation of Biogen's other licensees under its hepatitis B patents to pay royalties on sales of diagnostic products will terminate upon expiration of Biogen's existing hepatitis B patents. Biogen's existing United States hepatitis B patents will expire in 2004. Biogen's European hepatitis B patents will expire at the end of 1999, except in those countries in which Biogen has or is able to obtain supplemental protection certificates. To date, Biogen has received supplemental protection certificates in France, Italy, Luxembourg, The Netherlands, Sweden, Switzerland and Ireland, and has a number of additional applications pending. The additional coverage afforded by supplemental protection certificates ranges from two to six years. There can be no assurance as to the extent of coverage available under the supplemental protection certificates, or that protection will be available in additional countries. There has been, and Biogen expects that there may continue to be significant litigation in the industry regarding patents and other intellectual property rights. Such litigation could create uncertainty and consume substantial resources. See also "Legal Matters". NEW PRODUCTS AVONEX(R) is currently the only product sold by the Company. The Company's long-term viability and growth will depend on the successful development and commercialization of other products from its research activities and collaborations. The Company continues to expand its development efforts related to other potential products in its pipeline. The expansion of the pipeline may include increases in spending on 10 internal projects, the acquisition of third party technologies or products or other types of investments. Product development involves a high degree of risk. Only a small number of research and development programs result in the commercialization of a product. Success in preclinical and early clinical trials does not ensure that later stage or large scale clinical trials will be successful. Many important factors affect the Company's ability to successfully develop and commercialize drugs, including the ability to obtain and maintain necessary patents and licenses, to demonstrate safety and efficacy of drug candidates at each stage of the clinical trial process, to meet applicable regulatory standards and to receive required regulatory approvals, to be capable of producing drug candidates in commercial quantities at reasonable costs, to compete successfully against other products and to market products successfully. There can be no assurance that the Company will be successful in its efforts to develop and commercialize new products. MARKET RISK The Company has exposure to financial risk in several areas including changes in foreign exchange rates and interest rates. The Company attempts to minimize its exposures by using certain financial instruments, for purposes other than trading, in accordance with the Company's overall risk management guidelines. Further information regarding the Company's accounting policies for financial instruments and disclosures of financial instruments can be found in Notes 1, 2 and 3 to the Company's Consolidated Financial Statements. FOREIGN EXCHANGE The Company has operations in several European countries in connection with the sale of its product AVONEX(R). The Company also receives royalty revenues based on worldwide product sales by its licensees. As a result, the Company's financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates (primarily the British pound, Euro, and Japanese yen). The Company uses foreign currency forward contracts to manage foreign currency risk and does not engage in currency speculation. The Company uses these forward contracts to hedge certain transactions denominated in foreign currencies. A hypothetical adverse 10% movement in market rates of currencies on the net unhedged exposures would not have materially decreased 1998 net income. INTEREST RATES The Company is exposed to risk of interest rate fluctuations in connection with its variable rate long-term debt. The Term Loan requires annual principal payments of $1.7 million through 2004, with the balance due in 2005. The Construction Loan requires principal payments of $805,000 quarterly through 2006, with the balance due in 2007. At December 31, 1998, the carrying values of the Term Loan and the Construction Loan approximated fair value. The Company has fixed its interest rates on the Term Loan and Construction Loan by entering swap agreements under which the Company exchanges the difference between 7.5% and 7.75%, respectively, and a floating rate. The notional principal balance on the swap agreements approximates the principal on the underlying debt agreements. The fair value of the swap agreements at December 31, 1998, representing the cash requirements of the Company to settle the agreements, was approximately $4.1 million. Terms of the Company's loan agreements include various covenants, including financial covenants which require the Company to maintain minimum net worth, cash flow and various financial ratios. The fair value of the Company's marketable securities, long-term debt and interest rate swap agreements are subject to change as a result of potential changes in market interest rates. The potential change in fair value for interest rate sensitive instruments has been assessed on a hypothetical 100 basis point adverse movement across all maturities. The Company estimates that such hypothetical adverse 100 basis point movement would not have materially impacted net income. 11 STOCK PRICE The stock prices of biotechnology companies are subject to significant fluctuations. The stock price may be affected by a number of factors including, but not limited to clinical trial results and other product development events, the outcome of litigation, the financial impact of changes in the value of investments, including investments in other biotechnology companies, the decisions relating to intellectual property rights and the entrance of competitive products into the market, changes in reimbursement policies or other practices related to the pharmaceutical industry or other industry and market changes or trends. In addition, if revenues or earnings in any quarter fail to meet the investment community's expectations, there could be an immediate adverse impact on the Company's stock price. YEAR 2000 ISSUES Year 2000 is the problem resulting from the use of a two-digit date field to identify the year in computer software. Consequently, computer programs may not accurately reflect the appropriate date, confusing "00" as the year 1900 rather than the year 2000. Year 2000 is a pervasive problem affecting many information technology systems and embedded technologies (e.g. microprocessors in communications systems) in all companies, in all industries. Failure by the Company or failure by third parties upon which the Company relies to effectively address Year 2000 issues could have a material adverse impact on the Company's financial position or results of operations. The Company has developed a plan to address the Year 2000 issues. The plan is segregated into four phases: 1. Information Collection - Identify all Year 2000 risk areas and assign accountability. 2. Assess Risk - Assign each item a category of risk: * Commercial Risk - Has a significant impact on sale, delivery and support of AVONEX(R) or a significant impact on the Company's financial position or results of operations. * Operational Risk - Has a significant impact on productivity but does not materially impact the Company's financial position or results of operations. * Convenience Risk - Has a minor impact on productivity. 3. Remediate - Fix or replace, test and implement changes required for Year 2000 compliance. 4. Contingency Plan - Define procedures to be implemented should a disruption due to Year 2000 occur. The Company has completed the first two phases of the project and has completed the testing and upgrading of all individual software applications and equipment that fall within the Commercial Risk category. Additionally, approximately 70% of the software applications and equipment in the Operational and Convenience Risk categories have been remediated. All of the Company's major software applications are purchased from major software vendors and the Company performs only minor customizations to those applications. The Company's major software providers have attested to Year 2000 compliance. The Company has reviewed its operations equipment for embedded technologies which may be Year 2000 susceptible and does not believe necessary modifications to be material. The Company is communicating with its significant vendors and customers to determine the progress that those vendors and customers are making in remediating their own Year 2000 issues. The Company is requiring that significant vendors and customers certify those products and services to be Year 2000 compliant and in some cases is performing on-site reviews. To date, Year 2000 costs have been immaterial and the Company believes that future costs will also be immaterial. The Company expects the remainder of the Year 2000 compliance program to be substantially complete by the third quarter of 1999. The most reasonably likely worst case scenario, if significant Year 2000 issues arise, is that the Company would execute its contingency plans to produce, package, and deliver AVONEX(R), resulting in lower 12 productivity. These contingency plans include producing and maintaining a sufficient level of inventory of AVONEX(R) in both bulk and packaged format, developing secondary sources of packaging and delivery, providing for manual and backup processes. Additionally, third parties from whom the Company receives royalty revenues could encounter difficulties in their efforts to produce and sell products which generate royalty revenue for the Company. 13
CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------------------------- For the years ended December 31, - ------------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------- REVENUES: Product sales $394,863 $239,988 $ 78,202 Royalties 162,724 171,921 181,502 - ------------------------------------------------------------------------------------------- Total revenues 557,587 411,909 259,704 - ------------------------------------------------------------------------------------------- COSTS AND EXPENSES: Cost of sales 74,509 50,188 28,525 Research and development 177,228 145,501 132,384 Selling, general and administrative 115,211 90,098 73,632 - ------------------------------------------------------------------------------------------- Total costs and expenses 366,948 285,787 234,541 - ------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 190,639 126,122 25,163 Other income, net 19,554 22,846 15,666 - ------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 210,193 148,968 40,829 Income taxes 71,496 59,801 299 - ------------------------------------------------------------------------------------------- NET INCOME $138,697 $ 89,167 $ 40,530 - ------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE $ 1.88 $ 1.21 $ 0.57 - ------------------------------------------------------------------------------------------- DILUTED EARNINGS PER SHARE $ 1.80 $ 1.17 $ 0.55 - ------------------------------------------------------------------------------------------- SHARES USED IN CALCULATING: Basic earnings per share 73,768 73,812 71,595 - ------------------------------------------------------------------------------------------- Diluted earnings per share 77,135 76,500 73,221 - -------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 14
CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------------- As of December 31, - ------------------------------------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------------- 1998 1997 - ------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 25,445 $ 70,358 Marketable securities 491,469 369,730 Accounts receivable, less allowances of $1,642 in 1998 and $1,645 in 1997 101,281 86,802 Deferred tax asset 26,584 37,203 Other current assets 49,365 31,973 - ------------------------------------------------------------------------------------- Total current assets 694,144 596,066 - ------------------------------------------------------------------------------------- Property and equipment, net 182,551 174,492 Patents, net 15,869 14,935 Marketable securities 12,668 17,095 Other assets 19,483 11,237 - ------------------------------------------------------------------------------------- $ 924,715 $813,825 - ------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 24,896 $ 15,820 Note payable -- 24,817 Current portion of long-term debt 4,888 4,888 Accrued expenses and other 105,305 78,358 - ------------------------------------------------------------------------------------- Total current liabilities 135,089 123,883 - ------------------------------------------------------------------------------------- Long-term debt, less current portion 56,960 61,846 Other long-term liabilities 14,053 15,132 Put options -- 76,671 Commitments and contigencies -- -- Shareholders' equity Common stock, par value $0.01 per share (110,000,000 shares authorized; 74,149,391 shares issued) 741 741 Additional paid-in capital 538,847 516,880 Retained earnings 213,507 25,327 Accumulated other comprehensive income (13,165) (2,270) Treasury stock, at cost, 579,931 shares in 1998 and 125,534 shares in 1997 (21,317) (4,385) - ------------------------------------------------------------------------------------- Total shareholders' equity 718,613 536,293 - ------------------------------------------------------------------------------------- $ 924,715 $813,825 - -------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 15 CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the years ended December 31, 1998 1997 1996 ---------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 138,697 $ 89,167 $ 40,530 Adjustments to reconcile net income to net cash provided from operating activities Depreciation and amortization 24,590 19,296 15,264 Other (888) 2,695 682 Deferred income taxes 7,486 22,462 (5,541) Changes in: Accounts receivable (14,479) (43,850) (23,340) Other current and other assets (25,638) (8,643) (7,727) Accounts payable, accrued expenses and other current and long-term liabilities 38,077 16,505 22,413 ---------------------------------------- Net cash flows from operating activities 167,845 97,632 42,281 ---------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities (574,021) (481,783) (369,893) Proceeds from sales and maturities of marketable securities 453,952 373,130 370,252 Investment in collaborative partners (5,000) (11,000) (16,774) Acquisitions of property and equipment (29,049) (28,896) (62,030) Additions to patents (4,562) (6,654) (3,606) ---------------------------------------- Net cash flows from investing activities (158,680) (155,203) (82,051) ---------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from note payable -- 24,817 -- Repayments on note payable (24,817) -- -- Proceeds from issuance of long-term debt -- 4,545 33,444 Repayments on long-term debt (4,886) (4,082) (1,666) Purchases of treasury stock (65,550) (7,000) -- Issuance of common stock, and option exercises and related tax benefits 41,175 47,617 24,254 ---------------------------------------- Net cash flows from financing activities (54,078) 65,897 56,032 ---------------------------------------- Net increase (decrease) in cash and cash equivalents (44,913) 8,326 16,262 Cash and cash equivalents, beginning of the year 70,358 62,032 45,770 ---------------------------------------- Cash and cash equivalents, end of the year $ 25,445 $ 70,358 $ 62,032 ======================================== SUPPLEMENTAL CASH FLOW DATA Cash paid during the year for: Interest $ 5,909 $ 5,940 $ 4,038 Income taxes $ 35,828 $ 3,783 $ 1,516
See accompanying notes to consolidated financial statements. 16 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
ACCUMULATED ADDITIONAL RETAINED OTHER TOTAL COMMON PAID-IN TREASURY EARNINGS COMPREHENSIVE SHAREHOLDERS' STOCK CAPITAL STOCK (DEFICIT) INCOME EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1995 $710 $408,793 $ -- $(27,699) $ 1,176 $382,980 Net income 40,530 40,530 Unrealized losses on marketable securities, net of tax (1,988) (1,988) Translation adjustment 3 3 -------- Total comprehensive income 38,545 -------- Exercise of options and related tax benefits 15 62,137 62,152 Issuance of common stock 693 693 ------------------------------------------------------------------------ Balance, December 31, 1996 $725 $471,623 $ -- $ 12,831 $ (809) $484,370 Net income 89,167 89,167 Unrealized losses on marketable securities, net of tax (1,490) (1,490) Translation adjustment 29 29 -------- Total comprehensive income 87,706 -------- Reclassification of put option obligation (76,671) (76,671) Treasury stock purchased (7,000) (7,000) Exercise of options and related tax benefits 16 44,005 2,548 46,569 Issuance of common stock 981 67 1,048 Compensation expense related to stock options 271 271 ------------------------------------------------------------------------ Balance, December 31, 1997 $741 $516,880 $ (4,385) $ 25,327 $ (2,270) $536,293 Net income 138,697 138,697 Unrealized losses on marketable securities, net of tax (7,072) (7,072) Unrealized losses on interest rate swaps (4,132) (4,132) Translation adjustment 309 309 -------- Total comprehensive income 127,802 -------- Exercise of options and related tax benefits 19,745 48,618 (27,188) 41,175 Reclassification of put option obligation 76,671 76,671 Treasury stock purchased (65,550) (65,550) Compensation expense related to stock options 2,222 2,222 ------------------------------------------------------------------------ Balance, December 31, 1998 $741 $538,847 $(21,317) $213,507 $(13,165) $718,613 ========================================================================
See accompanying notes to consolidated financial statements. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS Biogen, Inc. ("Biogen" or the "Company") is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives revenues from sales of AVONEX(R) (Interferon beta-la) for the treatment of relapsing forms of multiple sclerosis and from royalties on worldwide sales by the Company's licensees of a number of products covered under patents controlled by the Company, including alpha interferon and hepatitis B vaccines and diagnostic products. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany balances and transactions have been eliminated. Certain items in prior years' financial statements have been reclassified to conform with the current year's presentation. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and use assumptions that affect certain reported amounts and disclosures; actual amounts may differ. TRANSLATION OF FOREIGN CURRENCIES Adjustments resulting from the translation of the financial statements of the Company's foreign operations into U.S. dollars are excluded from the determination of net income and are accumulated in a separate component of shareholders' equity. Foreign exchange transaction gains and losses are included in the results of operations in other income, net. Foreign exchange gains totaled $2.5 million, $8.2 million and $1.9 million in 1998, 1997 and 1996, respectively. CASH AND CASH EQUIVALENTS The Company considers only those investments which are highly liquid, readily convertible to cash and which mature within three months from date of purchase to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market with cost determined under the first-in/first-out ("FIFO") method and are included in other current assets. Included in inventory are raw materials used in the production of pre-clinical and clinical products which are expensed as research and development costs when consumed. The components of inventories for the periods ending December 31, are as follows: (in thousands) 1998 1997 ------- ------- Raw materials $ 4,878 $ 4,957 Work in process 17,585 8,132 Finished goods 13,402 9,870 ------- ------- $35,865 $22,959 ======= ======= 18 MARKETABLE SECURITIES The Company invests its excess cash balances in short-term marketable securities, principally corporate notes and government securities. The Company classifies these securities as "available for sale". All available for sale securities are recorded at fair market value and unrealized gains and losses are included in accumulated other comprehensive income in shareholders' equity, net of related tax effects. Realized gains and losses and declines in value, if any, judged to be other than temporary on available for sale securities are reported in other income or expense. As part of its strategic product development efforts, the Company also invests in equity securities of certain biotechnology companies with which it has collaborative agreements. Such investments, which are included in long-term marketable securities and other assets, are classified as available for sale if a readily determinable market value exists. These investments are accounted for under the cost or equity method depending on the facts and circumstances of the investment and are reviewed regularly for impairment. PROPERTY AND EQUIPMENT Property and equipment is carried at cost and depreciation is calculated on the straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized over the lesser of the useful life or the term of the respective lease. Maintenance of computer systems, including maintenance to make software Year 2000 compliant, is expensed as incurred. The Company capitalizes certain incremental costs associated with the validation effort required for licensing by the FDA of a manufacturing facility for the production of a commercially approved drug. These costs include a partial allocation of direct labor and material. Buildings and equipment are depreciated over estimated useful lives ranging from 30 to 40 and 3 to 10 years, respectively. PATENTS The costs associated with successful patent defenses and patent applications are capitalized and amortized on a straight-line basis over estimated useful lives up to 15 years. Accumulated amortization of patent costs was $15.5 million and $11.8 million as of December 31, 1998 and 1997, respectively. The carrying value of patents is regularly reviewed by the Company and impairments are recognized when the expected future operating cash flows derived from the patent are less than their carrying value. DERIVATIVES AND HEDGING ACTIVITIES On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", ("SFAS 133"). SFAS 133 is effective for all fiscal quarters for all fiscal years beginning after June 15, 1999. The Company elected to adopt SFAS 133 in the fourth quarter of 1998. All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company assesses, both at its inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS 130"). The Company adopted SFAS 130 on January 1, 1998. Under SFAS 130, the Company is required to display comprehensive income and its components as part of the Company's full set of financial statements. The measurement and presentation of net income did not change. Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net income, such as, translation adjustments, unrealized holding gains and losses on available-for-sale marketable securities and certain derivative instruments. The Consolidated Statements of Shareholders' Equity reflect comprehensive income for years ended December 31, 1998, 1997 and 1996. 19 SEGMENT INFORMATION In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("SFAS 131"). The Company adopted SFAS 131 on January 1, 1998. SFAS 131 establishes standards for reporting information on operating segments in interim and annual financial statements. SFAS 131 had no impact on the Company's consolidated financial position or results of operations. REVENUES Revenues from product sales are recognized when product is shipped and are net of applicable allowances for returns, rebates and other applicable discounts and allowances. The Company receives revenues under license agreements with a number of third parties that sell products based on technology developed by the Company. All of the license agreements provide for the payment of royalties to the Company based on sales of the licensed product. The Company records these revenues based on estimates of the sales that occurred during the relevant period. Many of the license agreements also provide for the payment of one-time, non-refundable fees when the agreement is signed or when commercial goals are achieved. These fees are recorded as revenue in accordance with the terms of the particular agreement. RESEARCH AND DEVELOPMENT EXPENSES Research and development costs, including amounts funded in research collaborations, are expensed as incurred. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128"), which changed the method of calculating earnings per share. SFAS 128 requires the presentation of "basic" earnings per share and "diluted" earnings per share. Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and warrants. The Company adopted SFAS 128 in the fourth quarter of 1997. All prior period per share amounts have been restated to comply with the standard. Dilutive securities include outstanding options under the Company's stock option plans. Shares used in calculating basic and diluted earnings per share for the periods ending December 31, are as follows: (in thousands) 1998 1997 1996 ------ ------ ------ Weighted average number of shares of common stock outstanding 73,768 73,812 71,595 Dilutive stock options 3,367 2,688 1,626 ------ ------ ------ Shares used in calculating diluted earnings per share 77,135 76,500 73,221 ====== ====== ====== 2. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to concentrations of credit risk are accounts receivable and marketable securities. Wholesale distributors and large pharmaceutical companies account for the majority of the accounts receivable and collateral is generally not required. To mitigate the risk, the Company monitors the financial performance and credit worthiness of its customers. The Company invests its excess cash balances in marketable debt securities, primarily U.S. government securities and corporate bonds and notes, with strong credit ratings. The Company limits the amount of investment exposure as to institution, maturity and investment type. The average maturity of the Company's marketable securities as of December 31, 1998 and 1997 was 21 months and 16 months, respectively. Proceeds from maturities and other sales of marketable securities, 20 which were primarily reinvested, for the years ended December 31, 1998, 1997 and 1996 were $454 million, $373.1 million and $370.3 million, respectively. The cost of securities sold is determined based on the specific identification method. Realized gains and (losses) on these sales for the years ended December 31, 1998, 1997 and 1996 were $645,000, $(510,000) and $(783,000), respectively. The following is a summary of marketable securities: Unrealized Amortized (in thousands) Fair Value Gains Losses Cost ---------- ------ ------- --------- December 31, 1998: U.S. Government securities $259,411 $ 627 $ 57 $258,841 Corporate debt securities 232,058 3,810 -- 228,248 -------------------------------------------- $491,469 $4,437 $ 57 $487,089 ============================================ Marketable securities, noncurrent $ 12,668 $ -- $16,192 $ 28,860 ============================================ December 31, 1997: U.S. Government securities $197,375 $ 250 $ 207 $197,332 Corporate debt securities 172,355 1,751 -- 170,604 -------------------------------------------- $369,730 $2,001 $ 207 $367,936 ============================================ Marketable securities, noncurrent $ 17,095 $ 228 $ 5,974 $ 22,841 ============================================ On a quarterly basis, as of the end of the quarter, the Company determines whether a decline in fair value of a marketable security is other than temporary. Unrealized gains and losses on marketable securities are included in other comprehensive income in shareholders' equity, net of related tax effects. If a decline in the fair value of a marketable security below the Company's cost basis is determined to be other than temporary, such marketable security is written down to its estimated fair value with a charge to current earnings. The Company has concluded that all unrealized losses on marketable securities at December 31, 1998 are temporary in nature. The Company expects that the market value of such investments will recover to at least the Company's cost basis within a reasonable period of time. The Company uses swap agreements to mitigate the risk associated with its floating rate debt and records the differential to be paid or received as interest expense. The fair value of the swap agreements at December 31, 1998 and 1997, representing the cash requirements of the Company to settle the agreements, approximated $4.1 million and $2.1 million, respectively. The Company has foreign currency forward contracts to hedge specific transactions denominated in foreign currencies. All foreign currency forward contracts have durations of ninety days to one year. These contracts are designated as cash flow hedges and accordingly, when effective, any unrealized gains or losses on these contracts are reported in other comprehensive income. Realized gains and losses for the effective portion are recognized with the underlying hedge transaction. The contract amount of the forwards outstanding at December 31, 1998 was $112.4 million with a fair value of approximately $111.6 million. In 1998, the Company recorded an adjustment to other comprehensive income to recognize at fair value all derivatives that are designated as cash-flow hedging instruments. Additionally, the Company recognized $686,000 in other expense, for the ineffective portion of certain cash flow hedge transactions. The Company also recognized a $322,000 gain in product revenue and a $485,000 loss in royalty revenue for the settlement of certain cash flow hedge instruments during the period. 21 During 1997, to minimize the cost of the Company's stock repurchase program, the Company sold put options and purchased call options covering a large portion of the shares intended to be repurchased. There were no put or call options outstanding at December 31, 1998. The maximum potential repurchase obligation for put options outstanding at December 31, 1997 was $76.7 million. Below is a summary of the contract amounts, weighted average strike price and fair value of these instruments at December 31, 1997. Contract Amount Weighted Average Fair Value (in millions) Strike Price (in millions) --------------- ---------------- ------------- Put Options Sold $76.7 $33.34 $(4.9) Call Options Purchased 65.6 36.42 7.9 3. BORROWINGS As of December 31, 1998, the Company had $19.2 million outstanding under a floating rate loan with a bank (the "Term Loan"). The Term Loan is secured by the Company's laboratory and office building in Cambridge, Massachusetts. The Term Loan provides for annual principal payments of $1.7 million in each of the years 1996 through 2004 with the balance due May 8, 2005. The Company also entered into an interest rate swap agreement, with the same bank, fixing its interest rate at 7.5% during the remaining term of the loan, payable semi-annually. As of December 31, 1998, the Company had $42.7 million outstanding under a floating rate loan agreement with a bank for financing the construction of its biological manufacturing facility in North Carolina (the "Construction Loan"). The Construction Loan is secured by the facility. Payments of $805,000 are due quarterly through 2006 with the balance due in 2007. The Company also entered into an interest rate swap agreement, with the same bank, fixing its interest rate at 7.75% during the remaining term of the loan, payable quarterly. The Term Loan and Construction Loan agreements include various covenants, including financial covenants, which require the Company to maintain minimum net worth, cash flow and various financial ratios. The Company's long-term debt obligations are carried at face value, which approximates fair market value. Long-term debt at December 31, consists of the following: (in thousands) 1998 1997 - ------------------------------------ -------- -------- Term Loan due 2005 $19,167 $20,834 Construction Loan due 2007 42,681 45,900 -------- -------- 61,848 66,734 Current portion (4,888) (4,888) ======== ======== $56,960 $61,846 ======== ======== During 1997, the Company entered into a $30 million variable rate multicurrency line of credit agreement with a bank. Under the line of credit, the Company could borrow or enter into commitments to borrow amounts in various currencies, at which time the exchange rate for these commitments was set. Any amounts outstanding were revalued using exchange rates at each balance sheet date. During 1998, the Company terminated the line of credit and at December 31, 1998 there were no obligations outstanding under this facility. At December 31, 1997 there was $24.8 million outstanding under this agreement. 22 4. CONSOLIDATED BALANCE SHEET DETAILS Property and equipment: December 31 (in thousands) 1998 1997 --------- -------- Land $ 8,359 $ 8,359 Buildings 87,190 83,565 Leasehold improvements 52,602 49,795 Equipment 120,887 98,794 --------- -------- Total cost 269,038 240,513 Less accumulated depreciation 86,487 66,021 ========= ======== $ 182,551 $174,492 ========= ======== Depreciation expense was $21.4 million, $15.9 million and $12.7 million for 1998, 1997 and 1996, respectively. The Company capitalized interest costs of $685,000 and $1.7 million in 1997 and 1996, respectively with respect to qualifying construction projects. The Company did not capitalize any interest costs in 1998. The Company completed construction of its biological manufacturing facility in North Carolina in 1997. As of December 31, 1997, the Company had capitalized $65.5 million relating to the North Carolina facility. Accrued expenses and other: December 31 (in thousands) 1998 1997 -------- ------- Royalties and licensing fees $ 23,029 $17,676 Income taxes 28,056 20,196 Other 54,220 40,486 ======== ======= $105,305 $78,358 ======== ======= 5. PENSIONS In February 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits", ("SFAS 132"). SFAS 132 revises standards for disclosures of employers' pension and other post retirement benefit plans. SFAS 132 does not change the measurement or recognition of those plans. The Company has a defined benefit pension plan which provides benefits to substantially all of its employees. The Company also has a supplemental retirement benefit plan which covers certain employees. The pension plans are noncontributory with benefit formulas based on employee earnings and credited years of service. The Company's funding policy for its pension plans is to contribute amounts deductible for federal income tax purposes. Funds contributed to the plans are invested in fixed income and equity securities. The components of net periodic pension cost for each of the three years ended December 31 are summarized below: (in thousands) 1998 1997 1996 ------ ------ ------ Service cost $2,225 $1,873 $1,381 Interest cost 1,041 876 659 Expected return on plan assets (722) (497) (293) Amortization of transition asset (21) (21) (21) Amortization of prior service cost 43 43 37 Amortization of net actuarial loss -- 40 57 ------ ------ ------ Net pension cost $2,566 $2,314 $1,820 ====== ====== ====== 23 Reconciliations of projected benefit obligations, fair value of plan assets and the funded status of the plans as of December 31, are presented below:
Change in projected benefit obligation (in thousands) 1998 1997 - ---------------------------------------------------------------- --------- --------- Net projected benefit obligation at the beginning of the year $(12,727) $ (9,466) Service cost (2,225) (1,873) Interest cost (1,041) (876) Actuarial loss (341) (845) Gross benefits paid 331 333 -------- -------- Net projected benefit obligation at the end of the year (16,003) (12,727) -------- -------- Change in plan assets (in thousands) - ---------------------------------------------------------------- Fair value of plan assets at the beginning of the year 8,393 5,579 Actual return on plan assets 2,142 1,416 Employer contributions 1,557 1,752 Gross benefits paid (213) (216) Administrative expenses (106) (138) -------- -------- Fair value of plan assets at the end of the year 11,773 8,393 -------- -------- Funded status at the end of the year (in thousands) - ---------------------------------------------------------------- Funded status at the end of the year (4,230) (4,334) Unrecognized net actuarial (gain) loss (173) 905 Unrecognized prior service cost 358 401 Unrecognized net transition asset 0 (21) -------- -------- Net amount recognized at the end of the year $ (4,045) $ (3,049) ======== ======== Weighted average assumptions at the end of the year - ---------------------------------------------------------------- Discount rate 6.75% 7.25% Expected return on plan assets 8.00% 8.00% Rates of compensation increase 5.00% 5.00%
The Company has an unfunded supplemental retirement plan. As of December 31, 1998 and 1997 the projected benefit and the accumulated benefit obligations were $3.2 million and $2.3 million, and $3 million and $1.6 million, respectively. 24 6. INCOME TAXES The components of income (loss) before income taxes and of income tax expense (benefit) for each of the three years ended December 31, are as follows:
(in thousands) 1998 1997 1996 -------- -------- -------- Income (loss) before income taxes: Domestic $200,181 $172,973 $ 65,250 Foreign 10,012 (24,005) (24,421) -------- -------- -------- $210,193 $148,968 $ 40,829 ======== ======== ======== Income tax expense (benefit): Current Federal $ 58,152 $ 33,688 $ 4,636 State 3,937 2,735 789 Foreign 887 916 415 -------- -------- -------- $ 62,976 $ 37,339 $ 5,840 -------- -------- -------- Deferred Federal $ 8,314 $ 21,416 $ (4,082) State 206 1,046 (1,459) -------- -------- -------- 8,520 22,462 (5,541) -------- -------- -------- Total income tax expense $ 71,496 $ 59,801 $ 299 ======== ======== ========
The Company's foreign subsidiaries generated operating losses in 1997 and 1996 reflecting the costs of building a commercial infrastructure in Europe and the foreign subsidiaries' investment in the Company's research and development efforts. Deferred tax assets (liabilities) are comprised of the following at December 31: (in thousands) 1998 1997 ------- -------- Tax credits $13,454 $ 32,273 Inventory and other reserves 10,762 3,810 Other 2,368 5,297 ------- -------- Deferred tax assets 26,584 41,380 ------- -------- Depreciation and amortization (7,095) (14,405) ------- -------- Deferred tax liabilities (7,095) (14,405) ------- -------- $19,489 $ 26,975 ======= ======== During the third quarter of 1996, the Company determined that it was more likely than not that it would realize the benefits of its net deferred tax assets and therefore released the related valuation allowance. The reversal of the valuation allowance resulted in a realization of income tax benefits of approximately $23 million. The income tax benefit represented the balance of tax-loss carryforwards and tax credits that had not been recognized through the third quarter in 1996 and tax credits generated during the quarter. The reversal of the valuation allowance also resulted in an increase in additional paid-in capital of $38.6 million relating to deductions for non-qualified stock options. 25 A reconciliation of the U.S. federal statutory tax rate to the effective tax rate for the periods ending December 31 is as follows: 1998 1997 1996 ---- ---- ----- Statutory rate 35.0% 35.0% 35.0% State taxes 3.0 2.7 1.3 Foreign taxes -- 6.3 21.8 Credits, net operating loss utilization and release of valuation allowance (4.2) (3.8) (56.3) Other 0.2 (0.1) (1.1) ---- ---- ----- Effective tax rate 34.0% 40.1% 0.7% ==== ==== ===== At December 31, 1998, the Company had tax credits of $13.5 million, most of which expire at various dates through 2013. 7. RESEARCH COLLABORATIONS The Company has several research programs and collaborations underway. In December 1997, the Company entered into a collaborative research, development and license agreement (the "Merck Agreement") with Merck & Co., Inc.("Merck"). Merck paid a $15 million non-refundable license fee to Biogen for the transfer of technology, the rights granted and the research and development previously performed by Biogen. Under the Merck Agreement, Merck will have rights to develop and market small molecule VLA-4 inhibitors in all therapeutic areas other than certain small indications such as multiple sclerosis and kidney diseases and disorders, which Biogen will continue to work on itself. The Merck Agreement also provides for payments to be made to either party upon the achievement of certain development milestones by the other party. In addition, if a product is successfully developed by a party, the other party will receive royalties on sales of the product. In October 1997, the Company signed a research and option agreement (the "CuraGen Agreement") with CuraGen Corporation ("CuraGen") under which the Company and CuraGen will collaborate in the discovery of novel genes using CuraGen's functional genomics technologies. The Company has also agreed to fund research activities of CuraGen related to the collaboration up to a maximum of $7.5 million over the next four years, and in return, has an option to acquire an exclusive license to certain discoveries arising out of the collaborative efforts. The Company provided $1.9 million in research and development funding in 1998. In March of 1998, under the terms of the CuraGen Agreement, the Company purchased approximately 435,000 shares of CuraGen common stock for a total of $5 million. Additionally, 100,000 shares of Series E Preferred Stock purchased by Biogen in 1997 for $1 million were automatically converted into 100,000 shares of CuraGen common stock. The investment is classified as available-for-sale and is included in long-term marketable securities. In addition, pursuant to the terms of the agreement, the Company has extended to CuraGen a $10 million line of credit. At December 31, 1998, there were no borrowings outstanding under the line of credit. In March 1997, the Company signed a research collaboration and license agreement (the "CVT Agreement") with CV Therapeutics, Inc. ("CVT") under which Biogen obtained rights to develop and market CVT's therapeutic CVT-124, now known as BG9719, for the treatment of edema associated with congestive heart failure. Under the terms of the CVT Agreement, the Company purchased approximately 670,000 shares of CVT common stock for $7 million and paid a one-time license fee of $5 million, which was charged to research and development expense. The investment in CVT is classified as available-for-sale and is included in long-term marketable securities. In addition, pursuant to the terms of the CVT Agreement, the Company established a $12 million line of credit that CVT may use for operating purposes. At December 31, 1998, the Company had advanced $7.7 million under the line of credit to CVT. In December 1996, the Company signed a research collaboration and license agreement (the "CBM Agreement") with Creative BioMolecules, Inc. ("CBM") under which Biogen obtained rights to develop and market CBM's morphogenic protein, OP-1, for the treatment of renal disorders. Under the CBM Agreement, Biogen paid a license fee of $10 million, which was charged to research and development expense, and purchased 1.5 million shares of CBM common stock for $18 million. The payment for the common stock included a $1.2 million premium over the fair value of the common stock which was 26 charged to research and development expense. The investment is classified as available-for-sale and is included in long term marketable securities. In 1998, Biogen and CBM agreed to amend the CBM Agreement to return to CBM responsibility for the development of OP-1. Under the terms of the amendment, Biogen has the option, exercisable through the end of 1999, to resume responsibility for development of OP-1. If Biogen does not exercise its option, the CBM Agreement will terminate at the end of 1999. The Company provided $10 million in research and development funding and material purchases to CBM in 1998. In July 1996, the Company signed a collaborative research and commercialization agreement (the "Ontogeny Agreement") with Ontogeny, Inc. ("Ontogeny"), a private biotechnology company, for the development and commercialization of three specific hedgehog cell proteins. Under the Ontogeny Agreement, the Company purchased 400,000 shares of preferred stock of Ontogeny for $1 million and acquired certain exclusive, worldwide rights related to products based on the hedgehog proteins for most disease areas. The Company accounts for its investment in Ontogeny, which is included in other assets, using the cost method of accounting. In November 1998, the Company extended and expanded its collaboration with Ontogeny and provided to Ontogeny a $4 million convertible loan. The Company provided $3.6 million of research funding to Ontogeny in 1998. The Company has agreed to fund up to an additional $8 million in research funding over the next three years. If the Company exercises its option to proceed with development and commercialization of a hedgehog protein, the Company would be committed to additional funding in the form of license fees, equity investments and lines of credit. In August 1995, the Company signed a collaborative research agreement (the "Genovo Agreement") for the development of human gene therapy treatments with Genovo, Inc. ("Genovo"), a gene therapy research company. Under the Genovo Agreement, the Company acquired 380,000 shares of Genovo Series A Preferred stock for $4.5 million and acquired certain licensing rights. The Company accounts for this investment, which is included in other assets, using the equity method of accounting. The Company recorded its proportion of Genovo's net losses as research and development, which totaled $9 million, $7.7 million, and $5.6 million in 1998, 1997 and 1996, respectively. At December 31, 1998, the Company had remaining funding commitments to Genovo of approximately $10 million. 8. COMMITMENTS AND CONTINGENCIES The Company rents laboratory and office space and certain equipment under noncancellable operating leases. The rental expense under these leases, which terminate at various dates through 2012, amounted to $9.4 million in 1998, $7.5 million in 1997 and $6.6 million in 1996. The lease agreements contain various clauses for renewal at the option of the Company and, in certain cases, escalation clauses linked generally to rates of inflation. At December 31, 1998, minimum annual rental commitments under noncancellable leases were as follows: Year (in thousands) --------------------------------------------------------- 1999 $ 9,798 2000 8,128 2001 5,122 2002 4,836 2003 2,914 Thereafter 14,260 ------- Total minimum lease payments $45,058 ======= On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent in the United States in the production of AVONEX(R) (Interferon beta-1a). In November 1996, Berlex's New Jersey action was transferred to the U.S. District Court in Massachusetts and consolidated for pre-trial purposes with a related declaratory judgement action previously filed by Biogen. On August 18, 1998 Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent. On September 23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex seeks a judgment granting it damages, a trebling of any damages awarded and a permanent injunction restraining Biogen from the alleged infringement. An unfavorable ruling in the Berlex suit could have a material adverse effect on the Company's results of operations and financial position. The Company believes that it has meritorious defenses to the Berlex 27 claim; however, the ultimate outcome is not determinable at this time. A trial is currently scheduled for the fall of 1999 but may be postponed. On October 14, 1998 the Company filed an opposition with the Opposition Division of the European Patent Office to oppose a European patent (the "Rentschler patent") issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler") with certain claims regarding compositions of matter of beta interferon with specific regard to the structure of the glycosylated molecule. While Biogen believes that the patent will be revoked, if the patent were to be upheld and if Rentschler were to obtain, through legal proceedings, a determination that the Company's sale of Avonex(R) in Europe infringes a valid Rentschler patent, such result could have a material adverse effect on the company's results of operation and financial condition. 9. SHAREHOLDERS' EQUITY CONVERTIBLE EXCHANGEABLE PREFERRED STOCK The Company has authority to issue 20,000,000 shares of $.01 par value preferred stock. SHAREHOLDER RIGHTS PLAN In 1989, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "right") for each share of common stock outstanding. Each right entitles the holder to purchase from the Company one two-hundredth of a share of $0.01 par value Series A junior participating preferred stock at a price of $34.00 per two-hundredth of a share, subject to certain adjustments. The rights are exercisable only if a person or group acquires 20% or more of the outstanding common stock of the Company or commences a tender offer which would result in the ownership of 20% or more of the outstanding common stock of the Company; or if 10% of the Company's common stock is acquired and the acquirer is determined by the Board of Directors to be an adverse person (as defined in the rights plan). Once a right becomes exercisable, the plan allows the Company's shareholders to purchase common stock at a substantial discount. Unless earlier redeemed, the rights expire on May 8, 1999. The Company is entitled to redeem the rights at $.005 per right, subject to adjustment for any future stock split, stock dividend or similar transaction. As of December 31, 1998, the Company has authorized the issuance of 400,000 shares of Series A junior participating preferred stock for use in connection with the shareholder rights plan. SHARE OPTION AND PURCHASE PLANS The Company has several stock-based compensation plans. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" in accounting for its plans. In 1996, the Company adopted Statement of Financial Accounting Standards No. 123 "Accounting for Stock Issued to Employees" ("SFAS 123") for disclosure purposes only. The SFAS 123 disclosures include pro forma net income and earnings per share as if the fair value-based method of accounting had been used. Stock issued to non-employees is accounted for in accordance with SFAS 123 and related interpretations. Included in compensation expense for the periods ending December 31, 1998 and 1997 were approximately $2.2 million and $271,000, respectively, related to stock based compensation plans. There were no such compensation costs in 1996. 28 The Company has several plans and arrangements under which it may grant options to employees, Directors and Scientific Board members to purchase common stock. Option grants are typically made under the 1985 Non-Qualified Stock Option Plan and the 1987 Scientific Board Stock Option Plan (the "Plans"). Options under the Plans are granted at no less than 100% of the fair market value on the date of grant. Options generally become exercisable over various periods, typically 5 to 7 years for employees and 3 years for Directors and Scientific Board members and have a maximum term of 10 years. Activity under these plans for the periods ending December 31, is as follows (shares are in thousands):
1998 1997 1996 --------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- -------- ------- -------- ------- -------- Outstanding, Jan. 1 11,152 $23.95 11,748 $20.77 11,772 $17.59 Granted 1,809 67.75 1,556 37.65 1,935 34.46 Exercised (1,306) 15.29 (1,652) 14.08 (1,478) 12.89 Canceled (467) 26.65 (500) 24.39 (481) 20.92 ------ ------ ------ ------ ------ ------ Outstanding, Dec. 31 11,188 $31.93 11,152 $23.95 11,748 $20.77 ====== ====== ====== ====== ====== ====== Options exercisable 5,499 5,208 5,692 Available for grant 1,912 1,135 2,310 Weighted average fair value of options granted $29.25 $16.78 $16.59
The table below summarizes options outstanding and exercisable at December 31, 1998 (shares are in thousands):
Options Outstanding Options Exercisable --------------------------------------- ----------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price - --------------------------- ----------- ----------- -------- ----------- -------- $0.00-$10.00 467 2.15 $ 8.50 394 $ 8.27 $10.01-$20.00 2,680 4.49 16.00 2,080 15.84 $20.01-$30.00 3,550 5.71 25.07 2,258 24.64 $30.01-$40.00 2,565 8.07 35.37 675 35.13 $40.01-$50.00 584 8.67 45.68 32 45.34 $50.01-$60.00 116 9.60 52.56 -- -- $60.01-$70.00 106 9.74 64.79 -- -- $70.01-$80.00 38 9.85 75.79 -- -- Over $80.00 1,082 9.95 81.47 60 81.47 ------ ------ ----- Total 11,188 $31.93 5,499 ====== ====== =====
The Company also has two employee stock purchase plans covering substantially all of its employees. The plans allow employees to purchase common stock at 85% of the lower of the fair market value at either the date of the beginning of the plan period or the purchase date. Purchases under the plans are subject to certain limitations and may not exceed an aggregate of 560,000 shares during the term of the plans; no shares may be issued after December 31, 2007. Through December 31, 1998, 322,673 shares have been issued under the stock purchase plans. 29 If compensation cost for the Company's 1998, 1997 and 1996 grants under the stock-based compensation plans had been determined based on SFAS 123, the Company's pro forma net income, and pro forma diluted earnings per share for the years ending December 31, would have been as follows (in thousands except per share data): 1998 1997 1996 -------- ------- ------- Pro forma net income $122,342 $83,244 $36,679 Pro forma diluted earnings per share $ 1.59 $ 1.09 $ 0.50 The fair value of options granted is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 1998 1997 1996 ---- -------- -------- Expected dividend yield 0% 0% 0% Expected stock price volatility 36% 36% 36% Risk-free interest rate 5.5% 5.5-5.9% 5.5-5.9% Expected option term in years 5.6 5.8 6.3 The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 did not apply to awards prior to 1995, and additional awards in future years are anticipated. STOCK REPURCHASE PROGRAM On October 6, 1997, the Company announced that its Board of Directors had authorized the repurchase of up to 2.5 million shares of the Company's common stock. The repurchased stock provides the Company with treasury shares for general corporate purposes, such as stock to be issued under employee stock option and stock purchase plans. The stock purchases occurred from time to time. In 1998, the Company repurchased 1.8 million shares of its common stock at a cost of $65.6 million. In 1997, the Company repurchased 200,000 shares of its common stock at a cost of $7 million. During 1997, to minimize the cost of the Company's stock repurchase program, the Company sold put options and purchased call options covering a large portion of the shares intended to be repurchased. There were no put or call options outstanding at December 31, 1998. The maximum potential repurchase obligation for put options outstanding at December 31, 1997 was $76.7 million. 10. SEGMENT INFORMATION The Company operates in one segment, which is the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives product revenues from sales of AVONEX(R) (Interferon beta-1a) for the treatment of relapsing forms of multiple sclerosis. The Company also derives revenue from royalties on worldwide sales by the Company's licensees of a number of products covered under patents controlled by the Company, including alpha interferon and hepatitis B vaccines and diagnostic products. The Company's geographic information is as follows (in thousands):
December 31, 1998: US EUROPE ASIA OTHER TOTAL - --------------------------------- -------- ------- ------- ------ -------- Product revenue from external customers $303,591 $91,237 $ -- $ 35 $394,863 Royalty revenue from external customers 108,177 37,573 13,940 3,034 162,724 Long-lived assets 213,053 15,912 -- 105 229,070
30
December 31, 1997: US EUROPE ASIA OTHER TOTAL - --------------------------------- -------- ------- ------- ------- -------- Product revenue from external customers $220,385 $17,885 $ -- $ 1,718 $239,988 Royalty revenue from external customers 88,424 50,279 15,362 17,856 171,921 Long-lived assets 204,800 11,888 -- -- 216,688
December 31, 1996: US EUROPE ASIA OTHER TOTAL - --------------------------------- -------- ------- ------- ------- -------- Product revenue from external customers $ 77,945 $ 257 $ -- -- $ 78,202 Royalty revenue from external customers 53,813 62,200 50,342 15,147 181,502 Long-lived assets 195,958 1,430 -- -- 197,388
The Company received revenue from five unrelated parties in 1998 accounting for a total of 16%, 13%, 11%, 11% and 10% of total product and royalty revenue. The Company received revenue from four unrelated parties in 1997 accounting for a total of 19%, 11%, 11% and 10% of total product and royalty revenue. The Company received revenue from three unrelated parties in 1996 accounting for 27%, 17% and 13% of total product and royalty revenue. 11. QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands, except per share amounts)
First Second Third Fourth Total Quarter Quarter Quarter Quarter Year 1998 Total revenues $114,472 $128,812 $145,904 $168,399 $557,587 Product revenue 76,100 87,073 107,492 124,198 394,863 Royalties revenue 38,372 41,739 38,412 44,201 162,724 Total expenses and taxes 93,623 103,602 114,024 127,195 438,444 Other income, net 6,922 6,239 5,685 708 19,554 Net income 27,771 31,449 37,565 41,912 138,697 Basic earnings per share 0.38 0.43 0.51 0.57 1.88 Diluted earnings per share 0.36 0.41 0.49 0.54 1.80 1997 Total revenues $94,831 92,447 $100,613 $124,018 $411,909 Product revenue 52,616 56,440 60,413 70,519 239,988 Royalties revenue 42,215 36,007 40,200 53,499 171,921 Total expenses and taxes 82,394 77,895 85,787 99,512 345,588 Other income, net 4,573 5,396 5,659 7,218 22,846 Net income 17,010 19,948 20,485 31,724 89,167 Basic earnings per share 0.23 0.27 0.28 0.43 1.21 Diluted earnings per share 0.22 0.26 0.27 0.42 1.17
31 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Biogen, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of Biogen, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts January 14, 1999 32 SHAREHOLDER INFORMATION BIOGEN, INC. AND SUBSIDIARIES CORPORATE HEADQUARTERS: Biogen, Inc. 14 Cambridge Center Cambridge, MA 02142 Telephone: (617) 679-2000 Fax: (617) 679-2617 ANNUAL MEETING: Friday, June 11, 1999 at 10:00 a.m. at the Company's offices at 12 Cambridge Center All shareholders are welcome. MARKET FOR SECURITIES: Biogen's securities are quoted on the NASDAQ National Market System. Common stock symbol: BGEN As of March 15, 1999, there were approximately 2,579 holders of record of the Company's Common Stock. The Company has not paid any cash dividends on its Common Stock since its inception, and does not intend to pay any dividends in the foreseeable future. The quarterly high and low closing sales price of the Company's Common Stock on the NASDAQ National Market System for 1998 and 1997 are as follows: HIGH LOW FISCAL 1998 First Quarter 49 11/16 33 1/4 Second Quarter 49 11/16 41 1/16 Third Quarter 68 46 1/4 Fourth Quarter 86 7/8 62 FISCAL 1997 First Quarter 51 7/8 37 3/8 Second Quarter 39 1/4 30 Third Quarter 41 3/16 31 7/8 Fourth Quarter 37 5/16 31 5/8 SEC FORM 10-K: A copy of the Company's annual report to the Securities and Exchange Commission on Form 10-K is available without charge upon written request to the Corporate Communications Department, Biogen, Inc., 14 Cambridge Center, Cambridge, MA 02142 TRANSFER AGENT: For shareholder questions regarding lost certificates, address changes and changes of ownership or name in which the shares are held, direct inquiries to: State Street Bank and Trust Company P.O. Box 8200 Boston, MA 02266-8200 Telephone: (800) 426-5523 INDEPENDENT ACCOUNTANTS: PricewaterhouseCoopers LLP 160 Federal Street Boston, MA 02110 U.S. LEGAL COUNSEL: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, MA 02111 NEWS RELEASES As a service to our shareholders and prospective investors, copies of Biogen news releases issued in the last 12 months are now available almost immediately 24 hours a day, seven days a week on the Internet's World Wide Web at http://www.prnewswire.com and via automated fax by calling "Company News On Call" at 1 800 758-5804, ext. 101550. Biogen news releases are usually posted on both systems within one hour of being issued and are available at no cost. THE BIOGEN LOGO IS A REGISTERED TRADEMARK OF BIOGEN, INC. AVONEX(R) IS A REGISTERED TRADEMARK OF BIOGEN, INC. HIRULOG(R) IS A REGISTERED TRADEMARK OF THE MEDICINES COMPANY. INTRON(R) A IS A REGISTERED TRADEMARK OF SCHERING-PLOUGH CORPORATION. EX-21 8 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 BIOGEN, INC. Subsidiaries NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- Biogen Canada, Inc. Delaware Bio Holding I, Inc. Delaware Bio Holding II, Inc. Delaware Biogen Realty Corporation Massachusetts Biogen Realty Limited Partnership Massachusetts Biogen Securities Corporation Massachusetts Biogen Technologies, Inc. Delaware Biogen Belgium S.A. Belgium Biogen B.V. The Netherlands Biogen France S.A. France Biogen GmbH Austria Biogen GmbH Germany Biogen International BV The Netherlands Biogen Limited United Kingdom Biotech Manufacturing CV The Netherlands Biotech Manufacturing Limited Channel Islands EX-24.1 9 CONSENT OF PRICEWATERHOUSECOOPERS 1 EXHIBIT 24.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statements on Form S-3, as amended (Nos. 33-14741, 33-14743, 33-20183, 33-51639, and 333-71695) and in the Registration Statements on Form S-8, as amended (Nos. 2-87550, 2-96157, 33-9827, 33-14742, 33-37312, 33-22378, 33-41077, 33-69174, 33-63013, 33-63015, 333-42887, and 333-70701) of Biogen, Inc. and its subsidiaries of our report dated January 14, 1999 appearing in the 1998 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Boston, Massachusetts March 23, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF BIOGEN, INC. AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL REPORT ON FORM 10K FOR THE PERIOD ENDED DECEMBER 31, 1998. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 25,445 491,469 102,923 1,642 35,865 694,144 269,038 86,487 924,715 135,089 56,960 0 0 741 717,872 924,715 394,863 557,587 62,144 74,509 292,439 0 5,945 210,193 71,496 138,697 0 0 0 138,697 1.88 1.80
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