-----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, HLI0MGxAQObTrpzv8Sem/oAT6YVLRMzlQYwrRyqZ8GnTC15McI/7DHDMn1+ljfE0 WL6Y4xBUiY+KIU2IzJDYCg== /in/edgar/work/0000950135-00-005087/0000950135-00-005087.txt : 20001116 0000950135-00-005087.hdr.sgml : 20001116 ACCESSION NUMBER: 0000950135-00-005087 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIOGEN INC CENTRAL INDEX KEY: 0000714655 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 043002117 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12042 FILM NUMBER: 768943 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-Q 1 b37154bie10-q.txt FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 0-12042 BIOGEN, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3002117 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 CAMBRIDGE CENTER, CAMBRIDGE, MA 02142 (617) 679-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of October 30, 2000 was 147,919,983 shares. 1 2 BIOGEN, INC. INDEX PAGE PART I - FINANCIAL INFORMATION NUMBER Condensed Consolidated Statements of Income - Three and nine months ended September 30, 2000 and 1999 3 Condensed Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 4 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 PART II - OTHER INFORMATION 16 Note concerning trademarks: AVONEX(R) is a registered trademark of Biogen, Inc. 2 3 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited) (in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 -------- -------- -------- -------- REVENUES: Product $193,242 $163,448 $557,847 $440,620 Royalties 40,512 44,983 123,269 128,460 -------- -------- -------- -------- Total revenues 233,754 208,431 681,116 569,080 -------- -------- -------- -------- COSTS AND EXPENSES: Cost of revenues 33,027 28,498 92,445 80,329 Research and development 94,498 58,958 229,205 160,886 Selling, general and administrative 41,745 36,484 123,849 107,344 -------- -------- -------- -------- Total costs and expenses 169,270 123,940 445,499 348,559 -------- -------- -------- -------- Income from operations 64,484 84,491 235,617 220,521 Other income, net 33,204 8,092 148,965 5,006 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 97,688 92,583 384,582 225,527 Income taxes 29,307 30,554 122,775 74,426 -------- -------- -------- -------- NET INCOME $ 68,381 $ 62,029 $261,807 $151,101 ======== ======== ======== ======== BASIC EARNINGS PER SHARE $ 0.46 $ 0.41 $ 1.76 $ 1.01 ======== ======== ======== ======== DILUTED EARNINGS PER SHARE $ 0.44 $ 0.39 $ 1.69 $ 0.96 ======== ======== ======== ======== SHARES USED IN COMPUTING: Basic earnings per share 148,074 150,108 149,026 149,851 ======== ======== ======== ======== Diluted earnings per share 153,702 158,198 155,188 157,768 ======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements. 3 4 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) September 30, December 31, 2000 1999 ------------- ------------ (unaudited) ASSETS Current assets Cash and cash equivalents $ 35,849 $ 56,920 Marketable securities 623,185 597,619 Accounts receivable, net 145,690 137,363 Deferred tax assets 56,279 50,565 Other current assets 68,237 67,759 ----------- ----------- Total current assets 929,240 910,226 ----------- ----------- Property, plant and equipment Cost 479,701 351,566 Less accumulated depreciation 128,997 111,789 ----------- ----------- Property, plant and equipment, net 350,704 239,777 ----------- ----------- Patents, net 13,415 13,871 Marketable securities 86,780 98,017 Other assets 22,917 16,082 ----------- ----------- $ 1,403,056 $ 1,277,973 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 20,382 $ 30,125 Current portion of long-term debt 4,888 4,888 Accrued expenses and other 210,542 155,257 ----------- ----------- Total current liabilities 235,812 190,270 ----------- ----------- Long-term debt, less current portion 48,824 52,073 Other long-term liabilities 57,214 56,100 Commitments and contingencies - - Shareholders' equity Common stock 1,516 1,507 Additional paid-in capital 767,229 676,673 Retained earnings 472,328 352,016 Accumulated other comprehensive income 34,400 45,618 Treasury stock, at cost (214,267) (96,284) ----------- ----------- Total shareholders' equity 1,061,206 979,530 ----------- ----------- $ 1,403,056 $ 1,277,973 =========== =========== See Notes to Condensed Consolidated Financial Statements. 4 5 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Nine Months Ended September 30, 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 261,807 $ 151,101 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 21,884 22,563 Deferred income taxes 216 1,711 Other 2,681 1,610 Gain on sale of non-current marketable securities (101,129) - Write-down of non-current marketable securities - 15,287 Changes in: Accounts receivable (8,327) (28,582) Other current and other assets (32,024) 1,116 Accounts payable, accrued expense and other current and long-term liabilities 45,999 (1,969) --------- --------- Net cash from operating activities 191,107 162,837 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities (530,518) (468,988) Proceeds from sales and maturities of marketable securities 505,894 356,681 Proceeds from sales of non-current marketable securities 120,199 - Acquisitions of property and equipment (132,655) (43,845) Additions to patents (3,316) (2,927) --------- --------- Net cash from investing activities (40,396) (159,079) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (3,249) (3,249) Purchases of treasury stock (280,406) (106,453) Proceeds from put warrants - 19,947 Issuance of common stock, stock option exercises and related tax benefits 111,873 134,046 --------- --------- Net cash from investing activities (171,782) 44,291 --------- --------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (21,071) 48,049 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 56,920 25,445 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,849 $ 73,494 ========= =========
See Notes to Condensed Consolidated Financial Statements. 5 6 BIOGEN, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows of Biogen, Inc. and its subsidiaries (the "Company"). The Company's accounting policies are described in the Notes to the Consolidated Financial Statements in the Company's 1999 Annual Report on Form 10-K. Interim results are not necessarily indicative of the operating results for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES Inventories are stated at the lower of cost or market with cost determined under the first-in/first-out ("FIFO") method and are included in other current assets. Included in inventory are raw materials used in the production of pre-clinical and clinical products which are expensed as research and development costs when consumed. The components of inventories are as follows:
September 30, December 31, (in thousands) 2000 1999 ------------- ------------ Raw materials $ 5,491 $ 5,679 Work in process 14,304 15,110 Finished goods 16,597 19,242 -------- -------- $ 36,392 $ 40,031 ======== ========
2. FINANCIAL INSTRUMENTS On June 15, 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). The Company elected to adopt SFAS 133 in the fourth quarter of 1998. All derivatives are recognized on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. The Company assesses, both at its inception and on an on-going basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in cash flows of hedged items. The Company assesses hedge ineffectiveness on a quarterly basis and records the gain or loss related to the ineffective portion to current earnings to the extent significant. If the Company determines that a hedged forecasted transaction is no longer probable of occurring, the Company discontinues hedge accounting for the affected portion of the transaction, and any unrealized gain or loss on the contract is recognized in current earnings. As of September 30, 2000, the Company had $16.7 million outstanding under a floating rate loan secured by the Company's laboratory and office building in Cambridge, Massachusetts and $37.0 million outstanding under a floating rate loan agreement for financing the construction of its biological manufacturing facility in North Carolina. The Company uses interest rate swap agreements to mitigate the risk associated with its floating rate debt. The fair value of the interest rate swap agreements at September 30, 2000, representing the cash requirements of the Company to settle the agreements, was approximately 6 7 $291,000, and was included in accrued expenses and other. The Company has designated the interest rate swaps as cash flow hedges. There were no amounts of hedge ineffectiveness related to the Company's interest rate swaps during the three and nine months ended September 30, 2000 or in the comparable period of 1999, and no gains or losses were excluded from the assessment of hedge effectiveness. The Company records the differential to be paid or received on the interest rate swaps as incremental interest expense. The Company has foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies. All foreign currency forward contracts have durations of 90 days to 18 months. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in other comprehensive income. Realized gains and losses for the effective portion are recognized with the underlying hedge transaction. The notional settlement amount of the foreign currency forward contracts outstanding at September 30, 2000 was approximately $99.0 million. These contracts had a fair value of approximately $14.0 million, representing an unrealized gain, and was included in other current assets at September 30, 2000. For the three and nine months ended September 30, 2000 and 1999, there were no significant amounts recognized in earnings due to hedge ineffectiveness for outstanding foreign currency forward contracts. For the three and nine months ended September 30, 2000, approximately $585,620 and $977,224, respectively, in gains were recognized as a result of the discontinuance of cash flow hedge accounting because it was no longer probable that the hedge forecasted transaction would occur. For the three and nine months ended September 30, 1999, there were no significant amounts recognized as a result of the discontinuance of cash flow hedge accounting because it was no longer probable that the hedge forecasted transaction would occur. The Company recognized $4.1 million and $8.8 million of gains in product revenue for the settlement of certain effective cash flow hedge instruments for the three and nine months ended September 30, 2000, respectively. The Company recognized $1.3 million and $2.4 million of gains in royalty revenue for the settlement of certain effective cash flow hedge instruments for the three and nine months ended September 30, 2000, respectively. For the three and nine months ended September 30, 1999, the Company recognized $1.7 million and $4.5 million of gains in product revenue for the settlement of certain cash flow hedge instruments, respectively. For the three and nine months ended September 30, 1999, the Company recognized $429,000 and $1.7 million, respectively, of gains in royalty revenue for the settlement of certain cash flow hedge instruments during the period. These settlements were recorded in the same period as the related forecasted transactions affected earnings. 3. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net income, such as translation adjustments and unrealized holding gains and losses on available-for-sale marketable securities, net of tax and certain derivative instruments, net of tax. Comprehensive income for the three months ended September 30, 2000 and 1999 was $73.2 million and $62.6 million, respectively. Comprehensive income for the nine months ended September 30, 2000 and 1999 was $250.6 million and $169.8 million, respectively. 4. EARNINGS PER SHARE The Company calculates earnings per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share". Basic earnings per share is computed by dividing the net income available to common shareholders by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share the denominator includes both the weighted average number of shares of common stock outstanding and the number of dilutive common stock equivalents such as stock options and warrants. Options to purchase approximately 1.8 million shares were outstanding at September 30, 2000 but not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the Company's common stock during the period. The put warrants sold in connection with the Company's stock repurchase program did not have a material additional dilutive effect. 7 8 Shares used in calculating basic and diluted earnings per share are as follows:
Three Months Ended Nine Months Ended September 30, September 30, (in thousands) 2000 1999 2000 1999 ------- ------- ------- ------- Weighted average number of shares of common stock outstanding 148,074 150,108 149,026 149,851 Dilutive stock options 5,628 8,090 6,162 7,917 ------- ------- ------- ------- Shares used in calculating diluted earnings per share 153,702 158,198 155,188 157,768 ======= ======= ======= =======
5. SHARE REPURCHASE PROGRAM On February 22, 1999, the Company announced that its Board of Directors authorized the repurchase of up to 8 million shares of the Company's common stock. The repurchased stock will provide the Company with treasury shares for general corporate purposes, such as stock to be issued under employee stock option and stock purchase plans. Stock purchases are expected to occur from time to time through 2000. The stock repurchase program may be discontinued at any time. During the first nine months of 2000, the Company repurchased approximately 4.3 million shares of its common stock at a cost of $280.4 million. To enhance the 1999 stock repurchase program, the Company sold put warrants to and purchased call options from independent third parties for a total of 4 million shares, of which 400,000 were outstanding at September 30, 2000 at a strike price of $49.47. All of the Company's put warrants outstanding are exercisable only at the date of expiration, with expiration dates ranging from October through November of 2000. The outstanding put warrants permit a net-share settlement at the Company's option and, therefore, did not result in a put obligation on the Company's Consolidated Balance Sheets. 6. OTHER INCOME, NET Other income, net consists of the following (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ----------------------- 2000 1999 2000 1999 -------- ------- --------- -------- Interest income $ 11,067 $ 9,450 $ 32,174 $ 25,713 Interest expense (1,100) (1,171) (3,285) (3,527) Other income (expense) 23,237 (187) 120,076 (17,180) -------- ------- --------- -------- Total other income, net $ 33,204 $ 8,092 $ 148,965 $ 5,006 ======== ======= ========= ========
During the three months ended September 30, 2000, the Company realized gains of approximately $24.1 million upon the acquisition by third parties of two of the companies in which the Company had invested in separate business combinations. Additionally, other income for the nine months ended September 30, 2000 included gains on the sale of certain non-current marketable securities totaling approximately $101.1 million. Other expense for the nine months ended September 30, 1999 included a $15.3 million write-down of certain non-current marketable securities. The Company had determined that the decline in fair value below cost of the marketable securities was other than temporary. 7. INCOME TAX EXPENSE Income tax expense as a percentage of pre-tax income for the three months ended September 30, 2000 and 1999 was approximately 30% and 33%, respectively. Income tax expense as a percentage of pre-tax income 8 9 for the nine months ended September 30, 2000 and 1999 was approximately 32% and 33%, respectively. During the three and nine months ended September 30, 2000, the Company recognized gains relating to certain non-current marketable securities. Excluding the tax effect on these gains the Company's effective tax rate for the three and nine months ended September 30, 2000 was approximately 30%. The effective tax rate varied from the U.S. statutory rates for the first nine months of 2000 and 1999 primarily due to increasing European sales and to the utilization of research and development credits. The Company's effective tax rate outside the U.S. is lower than the U.S. tax rate, and the Company expects that the U.S. tax rate will decline as a percentage of its total tax rate as international sales increase. 8. LITIGATION On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent (U.S. Patent No. 5,376,567) in the United States in the production of Biogen's AVONEX(R) (Interferon beta-1a) product. In November 1996, Berlex's New Jersey action was transferred to the United States District Court in Massachusetts and consolidated for pre-trial purposes with a related declaratory judgment action previously filed by Biogen. On August 18, 1998, Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent (U.S. Patent No. 5,795,779). On September 23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex sought a judgment granting it damages, a trebling of any damages awarded and a permanent injunction restraining Biogen from the alleged infringement. A hearing on the parties' summary judgment motions in the case was completed in March 2000. In September 2000, the District Court rendered final judgment in favor of Biogen and against Berlex determining that Biogen's production of AVONEX(R) did not infringe any of the claims of the Berlex patents. Berlex has appealed this decision with the Court of Appeals for the Federal Circuit. An unfavorable ruling on appeal would result in the case being remanded to the District Court for trial. If Berlex were to be successful in its appeal and the case were remanded, an unfavorable ruling in the remanded case could have a material adverse effect on the Company's results of operations and financial position. The Company believes that the decision of the District Court that Biogen does not infringe the Berlex patents is sound, but the ultimate outcome of the appeal is not currently determinable. As a result, an estimate of any potential loss or range of loss cannot be made at this time. In 1995, the Company filed an opposition with the Opposition Division of the European Patent Office to oppose a European patent (the "Rentschler I Patent") issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler") relating to compositions of matter of beta interferon. In 1997, the European Patent Office issued a decision to revoke the Rentschler I Patent. Rentschler has appealed that decision and the appeal is still pending. A hearing on the appeal has been scheduled for December 2000. On October 13, 1998, the Company filed another opposition with the Opposition Division of the European Patent Office to oppose a second European patent issued to Rentschler (the "Rentschler II Patent") with certain claims regarding compositions of matter of beta interferon with specific regard to the structure of the glycosylated molecule. A hearing on the Company's opposition previously scheduled for October 2000 has been postponed, and will likely be held in 2001. While Biogen believes that the Rentschler II Patent will be revoked and that the revocation of the Rentschler I Patent will be upheld on appeal, if either the Rentschler I Patent or the Rentschler II Patent were to be upheld and if Rentschler were to obtain, through legal proceedings, a determination that the Company's sale of AVONEX(R) in Europe infringes a valid Rentschler patent, such result could have a material adverse effect on the Company's results of operation and financial position. 9. SEGMENT INFORMATION The chief operating decision makers review the profit and loss of the Company on an aggregate basis and manage the operations of the Company as a single operating segment. Accordingly, the Company operates in one segment, which is the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives product revenues from sales of its AVONEX(R) (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis. The Company also derives revenue from royalties on 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. 10. NEW ACCOUNTING PRONOUNCEMENT In December 1999, the United States Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues, as well as examples of how the staff applies revenue recognition to specific circumstances. The Company is currently assessing the impact, if any; however, the Company does not currently anticipate that SAB 101 will have a material effect on the Company's financial position and results of operations. 9 10 BIOGEN, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Biogen, Inc. (the "Company" or "Biogen") is a biopharmaceutical company principally engaged in the business of developing, manufacturing and marketing drugs for human health care. The Company currently derives revenues from sales of its AVONEX(R) (Interferon beta-1a) product for the treatment of relapsing forms of multiple sclerosis ("MS"). The Company also derives revenue from royalties on worldwide sales by the Company's licensees of a number of products covered under patents controlled by the Company, including alpha interferon and hepatitis B vaccines and diagnostic products. RESULTS OF OPERATIONS For the quarter ended September 30, 2000, the Company reported net income of $68.4 million or $0.44 per diluted share as compared to $62.0 million or $0.39 per diluted share for the comparable period of 1999. For the nine months ended September 30, 2000, the Company reported net income of $261.8 million or $1.69 per diluted share as compared to $151.1 million or $0.96 per diluted share for the comparable period of 1999. Total revenues for the quarter ended September 30, 2000 were $233.8 million, as compared to $208.4 million in the same period of 1999, an increase of $25.4 million or approximately 12%. Total revenues for the nine months ended September 30, 2000 were $681.1 million, as compared to $569.1 million in the same period of 1999, an increase of $112 million or approximately 20%. Product revenues in the current quarter were $193.2 million as compared to $163.4 million for the same period of 1999, an increase of $29.8 million or approximately 18%. Product revenues in the nine months ended September 30, 2000 were $557.8 million as compared to $440.6 million for the same period of 1999, an increase of $117.2 million or approximately 27%. Product revenues from AVONEX(R) represent approximately 83% of the Company's total revenues in the current quarter as compared to 78% for the same period of 1999. Product revenues from AVONEX(R) represent approximately 82% of the Company's total revenues in the nine months ended September 30, 2000 as compared to 77% for the same period of 1999. The growth in product revenues in the three and nine month periods ended September 30, 2000 over the comparable periods in 1999 was primarily attributable to increases in the sales volume of AVONEX(R) in the United States and in the fifteen member countries of the European Union ("EU"). AVONEX(R) sales outside of the United States were approximately $55 million and $154.5 million, respectively in the three and nine months ended September 30, 2000 as compared to $48 million and $126.1 million in the same periods of 1999, respectively. Revenues from royalties in the three months ended September 30, 2000 were $40.5 million, a decrease of $4.5 million or approximately 10% as compared to $45 million of royalty revenue for the same period in 1999. Revenues from royalties in the nine months ended September 30, 2000 were $123.3 million, a decrease of approximately 4% as compared to $128.5 million of royalty revenue for the same period in 1999. Revenues from royalties represented approximately 17% and 18%, respectively, of total revenues for the three and nine months ended September 30, 2000 as compared to 22% and 23%, respectively, for the same periods in 1999. The Company expects product sales as a percentage of total revenues to continue to increase in the near term as the Company continues to market AVONEX(R) worldwide. The Company, however, expects to face increasing competition in the MS marketplace from existing and new MS treatments that may impact sales of AVONEX(R). In the near and long term, the Company expects its royalty revenue to be affected most significantly by patent expirations. See "Business - Patents and Other Proprietary Rights" of the 10 11 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. In the near term, Biogen's royalty revenues may also be significantly affected as a result of a potential dispute with Schering Plough over twelve to eighteen months of royalties payable by Schering Plough on U.S. sales of INTRON(R) A. See "Outlook - Dependence on AVONEX(R) Sales and Royalty Revenue." In addition, sales levels of products sold by the Company's licensees may fluctuate from quarter to quarter due to the timing and extent of major events such as new indication approvals or government sponsored programs. COSTS AND EXPENSES Total costs and expenses for the three months ended September 30, 2000 were $169.3 million as compared to $123.9 million in the same period of 1999, an increase of approximately 37%. Total costs and expenses for the nine months ended September 30, 2000 were $445.5 million as compared to $348.6 million in the same period of 1999, an increase of approximately 28%. Cost of revenues in the three months ended September 30, 2000 totaled $33 million compared to $28.5 million in the same period of 1999, an increase of $4.5 million or 16%. Cost of revenues in the nine months ended September 30, 2000 totaled $92.4 million compared to $80.3 million in the same period of 1999, an increase of $12.1 million or 15%. The increase in cost of revenues was attributable to the higher sales volume of AVONEX(R). Included in cost of revenues for the three months ended September 30, 2000 and 1999 is $29.9 million and $25.8 million, respectively, of costs related to product revenues and $3.2 million and $2.7 million, respectively, of costs related to royalty revenue. Included in cost of revenues for the nine months ended September 30, 2000 and 1999 is $83.4 million and $70 million, respectively, of costs related to product revenues and $9 million and $10.3 million, respectively, of costs related to royalty revenue. Gross margins on product revenues increased to approximately 85% for the three months and nine months ended September 30, 2000 compared to 84% in the same periods in 1999. Gross margins on royalty revenue decreased to approximately 92% for the three months ended September 30, 2000 compared to 94% in the same period in 1999. Gross margins on royalty revenue increased to approximately 93% for the nine months ended September 30, 2000 compared to 92% in the same period in 1999. The Company expects that gross margins on royalty revenue will fluctuate in the future based on changes in sales volumes for specific products. Research and development expenses in the current quarter were $94.5 million, an increase of $35.5 million or 60% as compared to $59 million in the same period of 1999. Research and development expenses in the nine months ended September 30, 2000 were $229.2 million, an increase of $68.3 million or 42% as compared to $160.9 million in the same period of 1999. The increases were primarily due to up-front costs associated with new collaborative efforts of approximately $21.4 million, an increase in clinical trial costs and the costs associated with 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 continues to expand its development efforts with respect to new products, conducts clinical trials of these products and continues work on new formulations and delivery methods for AVONEX(R). 11 12 Selling, general and administrative expenses in the third quarter of 2000 were $41.7 million, an increase of $5.3 million or 14% as compared to the same period of 1999. Selling, general and administrative expenses in the nine months ended September 30, 2000 were $123.8 million, an increase of $16.5 million or 15% compared to the same period of 1999. This increase was primarily due to an increase in selling and marketing expenses related to the sale of AVONEX(R). The Company expects that selling, general and administrative expenses will continue to increase in the near term as the Company continues to expand its sales and marketing organizations and efforts necessary to sell AVONEX(R) worldwide. OTHER INCOME, NET Other income, net consists primarily of interest income, partially offset by interest expenses and other non-operating income and expenses. Other income, net in the third quarter of 2000 was $33.2 million as compared to $8.1 million in the same period in 1999, an increase of $25.1 million. Other income, net in the nine months ended September 30, 2000 was $149 million as compared to $5 million in the same period in 1999, an increase of $144 million. Interest income for the three months ended September 30, 2000 was $11.1 million compared to $9.5 million in the same period of 1999, an increase of $1.6 million or 17%. Interest income for the nine months ended September 30, 2000 was $32.2 million compared to $25.7 million in the same period of 1999, an increase of $6.5 million or 25%. The increase in interest income for the three and nine months ended September 30, 2000 is due primarily to an increase in funds invested and an increase interest rates. In the three months ended September 30, 2000 and 1999 interest expense was $1.1 million and $1.2 million, respectively. In the nine months ended September 30, 2000 interest expense was $3.3 million compared to $3.5 million in the same period in 1999. Other non-operating income (expense) increased by $23.4 million in the three months ended September 30, 2000 from the same period in 1999. Other non-operating income (expense) increased by $137.3 million in the nine months ended September 30, 2000 from the same period in 1999. The increase in non-operating income is due primarily to gains on certain non-current marketable securities of approximately $24.1 million and $125.3 million in the three and nine months ended September 30, 2000. Additionally, other expense in the nine months ended September 30, 1999 included the write-down of certain non-current marketable securities totaling $15.3 million. The Company expects interest income to vary based on changes in the amount of funds invested and fluctuations in interest rates. INCOME TAXES Income tax expense as a percentage of pre-tax income for the three months ended September 30, 2000 and 1999 was approximately 30% and 33%, respectively. Income tax expense as a percentage of pre-tax income for the nine months ended September 30, 2000 and 1999 was approximately 32% and 33%, respectively. During the three and nine months ended September 30, 2000, the Company recognized gains on certain non-current marketable securities. Excluding the tax effect on these gains the Company's effective tax rate for the three and nine months ended September 30, 2000 was approximately 30%. The effective tax rate varied from the U.S. statutory rates for the first nine months of 2000 and 1999 primarily due to increasing European sales and to the utilization of research and development credits. The Company's effective tax rate outside the U.S. is lower than the U.S. tax rate, and the Company expects that the U.S. tax rate will decline as a percentage of its total tax rate as international sales increase. FINANCIAL CONDITION At September 30, 2000, cash, cash equivalents and short-term marketable securities were $659 million compared with $654.6 million at December 31, 1999, an increase of $4.4 million. Working capital decreased $26.5 million to $693.4 million. Net cash from operating activities for the nine month period ended September 30, 2000 was $191.1 million compared with $162.8 million for the same period in 1999. Significant cash inflows from investing activities during the first nine months of 2000 included $120.2 million in proceeds from the sale of certain non-current marketable securities. Cash outflows during the first nine months of 2000 included investments in property and equipment and patents of $136 million. Significant cash outflows from financing activities included $280.4 million for purchases of the Company's common stock under its stock repurchase program and $3.2 million for repayments on loan agreements 12 13 with banks. Cash inflows included $111.9 million from common stock option exercises and related tax benefits and employee stock purchase plan activity. On February 22, 1999, the Company announced that its Board of Directors had authorized the repurchase of up to 8 million shares of the Company's common stock. The repurchased stock will provide the Company with treasury shares for general corporate purposes, such as stock to be issued under employee stock option and stock purchase plans. Stock purchases are expected to occur from time to time through 2000. The stock repurchase program may be discontinued at any time. During the first nine months of 2000, the Company repurchased approximately 4.3 million shares of its common stock at a cost of $280.4 million. To enhance the 1999 stock repurchase program, the Company sold put warrants to and purchased call options from independent third parties for a total of 4 million shares, of which 400,000 were outstanding at September 30, 2000 at a strike price of $49.47. All of the Company's put warrants outstanding are exercisable only at the date of expiration, with expiration dates ranging from October through November of 2000. The outstanding put warrants permit a net-share settlement at the Company's option and, therefore, did not result in a put obligation on the Company's Consolidated Balance Sheets. On October 4, 1999, the Company began construction of its new research and development center in Cambridge, Massachusetts. The new 224,000 square foot building is expected to be completed in the spring of 2001 at a total cost of approximately $95 million, of which $86 million had been committed at September 30, 2000. Additionally, the Company is building a large scale manufacturing plant in Research Triangle Park, North Carolina. The Company expects that construction will be completed at the end of 2001 at a total cost of approximately $175 million, of which $137 million had been committed at September 30, 2000. Several legal proceedings were pending during the current quarter which involve the Company. See Note 8 of the Notes to the Condensed Consolidated Financial Statements. The Company believes that existing funds and cash generated from operations are adequate to satisfy its working capital and capital expenditure requirements in the foreseeable future. However, the Company may raise additional capital to take advantage of favorable conditions in the market or in connection with the Company's development activities. NEW ACCOUNTING PRONOUNCEMENT In December 1999, the United States Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides the staff's views in applying generally accepted accounting principles to selected revenue recognition issues, as well as examples of how the staff applies revenue recognition guidance to specific circumstances. The Company is currently assessing the impact, if any; however, the Company does not currently anticipate that SAB 101 will have a material effect on the Company's financial position and results of operations. 13 14 OUTLOOK SAFE HARBOR STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 In addition to historical information, this quarterly report contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Reference is made in particular to forward-looking statements regarding the anticipated level of future product sales, royalty revenues, expenses and profits and predictions as to the anticipated outcome of pending litigation and patent-related proceedings. These and all other forward-looking statements are made based on the Company's current belief as to the outcome and timing of such future events. Factors which could cause actual results to differ from the Company's expectations and which could negatively impact the Company's financial condition and results of operations are discussed below and elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations. DEPENDENCE ON AVONEX(R) SALES AND ROYALTY REVENUE The Company's ability to sustain increases in revenues and profitability in the near term will be primarily dependent on the level of revenues and profitability from AVONEX(R) sales. The Company's ability to sustain profitability from sales of AVONEX(R) will depend on a number of factors, including: continued market acceptance of AVONEX(R) worldwide; the Company's ability to maintain a high level of patient satisfaction with AVONEX(R); the nature of regulatory and pricing decisions related to AVONEX(R) worldwide and the extent to which AVONEX(R) receives and maintains reimbursement coverage; the Company's ability to sustain market share of AVONEX(R) in light of the impact of competitive products for the treatment of MS; the success of ongoing development work related to AVONEX(R) in expanded MS indications and the continued accessibility of third parties to vial, label, and distribute AVONEX(R) on acceptable terms. The Company's level of revenue related to AVONEX(R) may also depend on the Company's continued success in its litigation with Berlex on the "McCormick" patents which has been decided in Biogen's favor, but which if Biogen were to lose on appeal would be remanded to the District Court for trial, and if ultimately decided in Berlex's favor could have a material adverse effect on the Company's results of operations and financial condition. Another factor which could impact AVONEX(R) revenues will be the outcome of the Company's efforts to revoke the Rentschler patents since if the patents 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 operations and financial condition. The Company also receives royalty revenues which contribute significantly to its overall profitability. The Company's ability to maintain the anticipated level of its royalty revenues will depend on a number of factors. 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, 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 licensees, the Company is unable to predict the timing or potential impact of factors which may affect licensee sales. In the near and long term, the Company expects its royalty revenue to be affected most significantly by patent expirations. See "Business - Patents and Other Proprietary Rights" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. In the near term, Biogen's royalty revenues may also be significantly affected as a result of a potential dispute with Schering Plough over twelve to eighteen months of royalties payable by Schering Plough on U.S. sales of INTRON(R) A. As discussed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999, a District Court narrowed the scope of Biogen's United States alpha interferon patent in connection with litigation between Schering Plough, Biogen's exclusive licensee of the patent, and Amgen Inc. related to alleged infringement by Amgen of such patent. In the third quarter of 2000, a Court of Appeals affirmed the District Court's decision. As part of an arbitration with Biogen related to Schering Plough's REBETRON(R) product, Schering Plough claimed that as a result of the District Court's decision, it would no longer owe royalties to Biogen on sales of INTRON(R) A under such patent. As noted in the Company's Form 10-K for the fiscal year ended December 31, 1999, if Schering Plough were to pursue this argument and were to be successful, there would be a twelve to eighteen month gap in royalties from Schering Plough on sales of INTRON(R) A in the U.S. commencing with product manufactured after the expiration of Biogen's Irish patent in January 2001. 14 15 In any event, commencing in July 2002, Schering Plough is obligated to pay royalties on sales of its alpha interferon products in the U.S., including INTRON(R) A, during the term of a certain Roche/Genentech U.S. alpha interferon patent right under an agreement between Biogen and Schering Plough in connection with settlement of a lawsuit with Roche/Genentech related to the Roche/Genentech patent right. Biogen is currently in discussions with Schering Plough to determine Schering Plough's position and to work to resolve the twelve to eighteen month royalty issue and to resolve claims by Biogen related to underpayment of royalties by Schering Plough. There can be no assurance that the Company will achieve a positive outcome with respect to any of the factors discussed in this Section or that the timing and extent of the Company's success with respect to any combination of these factors will be sufficient to result in sustained increases in revenues or profitability or the sustained profitability of the Company. For a further discussion of risks regarding drug development, patent matters, including competition in the MS market and regulatory matters, see the Company's Annual Report on Form 10-K for the period ended December 31, 1999 under the headings "Business - Risks Associated with Drug Development", "Business - Patents and Other Proprietary Rights", "Business - Competition and Marketing - AVONEX(R) (interferon beta-la)", "Business - Regulation", "Legal Proceedings" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Outlook." PRODUCTS AVONEX(R) is currently the only product sold by the Company. The Company's long-term viability and growth will depend on the successful development and commercialization of other products from its research 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 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 overcome technical hurdles that may arise, to meet applicable regulatory standards, to receive required regulatory approvals, to be capable of producing drug candidates in commercial quantities at reasonable costs, to 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. 15 16 PART II - OTHER INFORMATION Item 3 - Litigation On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent (U.S. Patent No. 5,376,567) in the United States in the production of Biogen's AVONEX(R) (Interferon beta-la) product. In November 1996, Berlex's New Jersey action was transferred to the United States District Court in Massachusetts and consolidated for pre-trial purposes with a related declaratory judgment action previously filed by Biogen. On August 18, 1998, Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent (U.S. Patent No. 5,795,779). On September 23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex sought a judgment granting it damages, a trebling of any damages awarded and a permanent injunction restraining Biogen from the alleged infringement. A hearing on the parties' summary judgment motions in the case was completed in March 2000. In September 2000, the District Court rendered final judgement in favor of Biogen and against Berlex determining that Biogen's production of AVONEX(R) did not infringe any of the claims of the Berlex patents. Berlex has appealed this decision with the Court of Appeals for the Federal Circuit. An unfavorable ruling on appeal would result in the case being remanded to the District Court for trial. If Berlex were to be successful in its appeal and the case were remanded, an unfavorable ruling in the remanded case could have a material adverse effect on the Company's results of operations and financial position. The Company believes that the decision of the District Court that Biogen does not infringe the Berlex patents is sound, but the ultimate outcome of the appeal is not currently determinable. As a result, an estimate of any potential loss or range of loss cannot be made at this time. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits No. 27 Financial Data Schedule (for EDGAR filing purposes only). 16 17 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BIOGEN, INC. Dated: November 14, 2000 /s/ Peter N. Kellogg ------------------------------ Chief Financial Officer And Vice President Finance EXHIBITS - -------- Index to Exhibit. No. 27 Financial Data Schedule (for EDGAR filing purposes only). 17 EX-27 2 b37154biex27.txt FIANACIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS DEC-31-2000 JUL-01-2000 SEP-30-2000 1 35,849 623,185 145,690 1,717 36,392 929,240 479,701 128,997 1,403,056 235,812 48,824 0 0 1,516 1,059,690 1,403,056 193,242 233,754 29,858 169,270 0 0 1,100 97,688 29,307 68,381 0 0 0 68,381 0.46 0.44
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