10-Q 1 b39229bie10-q.txt BIOGEN,INC 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 MARCH 31, 2001 COMMISSION FILE NUMBER 0-12042 BIOGEN, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3002117 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14 CAMBRIDGE CENTER, CAMBRIDGE, MA 02142 (617) 679-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of the registrant's Common Stock, $0.01 par value, outstanding as of April 30, 2001 was 148,627,468 shares. 2 BIOGEN, INC. INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBER Condensed Consolidated Statements of Income - Three months ended March 31, 2001 and 2000 3 Condensed Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 4 Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000 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 15
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 March 31, 2001 2000 -------- -------- REVENUES: Product $219,997 $174,596 Royalties 17,050 42,252 -------- -------- Total revenues 237,047 216,848 -------- -------- COSTS AND EXPENSES: Cost of revenues 29,146 28,623 Research and development 72,770 63,006 Selling, general and administrative 48,560 41,183 -------- -------- Total costs and expenses 150,476 132,812 -------- -------- Income from operations 86,571 84,036 Other income, net 16,463 99,024 -------- -------- INCOME BEFORE INCOME TAXES 103,034 183,060 Income taxes 30,911 61,694 -------- -------- NET INCOME $ 72,123 $121,366 ======== ======== BASIC EARNINGS PER SHARE $ 0.49 $ 0.81 ======== ======== DILUTED EARNINGS PER SHARE $ 0.47 $ 0.77 ======== ======== SHARES USED IN COMPUTING: Basic earnings per share 148,188 150,360 ======== ======== Diluted earnings per share 153,491 157,712 ======== ========
See Notes to Condensed Consolidated Financial Statements. 3 4 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
March 31, December 31, 2001 2000 ----------- ----------- (unaudited) ASSETS Current assets Cash and cash equivalents $ 28,455 $ 48,737 Marketable securities 719,572 633,675 Accounts receivable, net 146,804 143,178 Deferred tax assets 48,476 40,047 Other current assets 61,565 62,634 ----------- ----------- Total current assets 1,004,872 928,271 ----------- ----------- Property, plant and equipment Cost 573,625 537,072 Less accumulated depreciation 145,000 136,643 ----------- ----------- Property, plant and equipment, net 428,625 400,429 ----------- ----------- Patents, net 13,938 13,510 Marketable securities 39,393 71,982 Other assets 18,755 17,664 ----------- ----------- $ 1,505,583 $ 1,431,856 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 41,707 $ 37,869 Current portion of long-term debt 4,888 4,888 Accrued expenses and other 179,592 178,264 ----------- ----------- Total current liabilities 226,187 221,021 ----------- ----------- Long-term debt, less current portion 46,380 47,185 Other long-term liabilities 52,659 57,248 Commitments and contingencies -- -- Shareholders' equity Common stock 1,517 1,517 Additional paid-in capital 784,571 772,172 Retained earnings 571,189 543,913 Accumulated other comprehensive income 6,477 22,376 Treasury stock, at cost (183,397) (233,576) ----------- ----------- Total shareholders' equity 1,180,357 1,106,402 ----------- ----------- $ 1,505,583 $ 1,431,856 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 4 5 BIOGEN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands)
Three Months Ended March 31, 2001 2000 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 72,123 $ 121,366 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 8,777 8,233 Deferred income taxes (70) 273 Tax benefit of stock options 12,224 61,106 Other (66) (780) Gain on sale of non-current marketable securities (2,540) (92,447) Changes in: Accounts receivable (3,626) 1,869 Other current and other assets 2,851 4,705 Accounts payable, accrued expense and other current and long-term liabilities (319) (25,491) --------- --------- Net cash from operating activities 89,354 78,834 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities (483,159) (196,483) Proceeds from sales and maturities of marketable securities 403,624 229,990 Proceeds from sales of non-current marketable securities 2,774 91,958 Acquisitions of property and equipment (36,553) (34,653) Additions to patents (848) (1,249) --------- --------- Net cash from investing activities (114,162) 89,563 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Payments of long-term debt (805) (805) Purchases of treasury stock (5,047) (149,470) Proceeds from put warrants -- -- Issuance of common and treasury stock, related to stock option exercises 10,378 26,997 --------- --------- Net cash from investing activities 4,526 (123,278) --------- --------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (20,282) 45,119 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 48,737 56,920 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 28,455 $ 102,039 ========= =========
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 2000 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. Certain amounts for the three months ended March 31, 2000 have been reclassified to conform to the current period presentation. INVENTORIES Inventories are stated at the lower of cost or market with cost determined under the first-in/first-out ("FIFO") method and are included in other current assets. Included in inventory are raw materials used in the production of pre-clinical and clinical products which are expensed as research and development costs when consumed. The components of inventories are as follows:
March 31, December 31, (in thousands) 2001 2000 --------------------------- Raw materials $ 8,104 $ 7,775 Work in process 15,751 17,582 Finished goods 12,701 14,172 ------- ------- $36,556 $39,529 ======= =======
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 March 31, 2001, the Company had $15.8 million outstanding under a floating rate loan secured by one of the Company's laboratory and office buildings in Cambridge, Massachusetts and $35.4 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 March 31, 2001, representing the cash requirements of the Company to settle the agreements, was approximately $2.6 million. The fair value 6 7 of the interest rate swap agreements at March 31, 2000, representing the cash the Company would receive to settle the agreements, was approximately $691,000. The Company has designated the interest rate swaps as cash flow hedges. There were no amounts of hedge ineffectiveness related to the Company's interest rate swaps during the three months ended March 31, 2001 or in the comparable period of 2000, and no gains or losses were excluded from the assessment of hedge effectiveness. The Company records the differential to be paid or received on the interest rate swaps as incremental interest expense. The Company has foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies. All foreign currency forward contracts have durations of ninety days to 9 months. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in other comprehensive income. Realized gains and losses for the effective portion are recognized with the underlying hedge transaction. The notional settlement amount of the foreign currency forward contracts outstanding at March 31, 2001 was approximately $82.4 million. These contracts had a fair value of approximately $5 million, representing an unrealized gain, and were included in other current assets at March 31, 2001. For the three months ended March 31, 2001 and 2000, there were no significant amounts recognized in earnings due to hedge ineffectiveness or as a result of the discontinuance of cash flow hedge accounting because it was no longer probable that the hedge forecasted transaction would occur. The Company recognized $3 million of gains in product revenue and $830,000 of gains in royalty revenue for the settlement of certain effective cash flow hedge instruments during the three months ended March 31, 2001. For the three months ended March 31, 2000, the Company recognized a $2.4 million of gains in product revenue and $600,000 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 affecting earnings. 3. COMPREHENSIVE INCOME Comprehensive income is comprised of net income and other comprehensive income. Other comprehensive income includes certain changes in equity that are excluded from net income, such as translation adjustments and unrealized holding gains and losses on available-for-sale marketable securities, net of tax and certain derivative instruments, net of tax. Comprehensive income for the three months ended March 31, 2001 and 2000 was $56.2 million and $100.3 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 1.9 million shares were outstanding at March 31, 2001 but not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price during the period. Shares used in calculating basic and diluted earnings per share for the three-month periods ending March 31, are as follows:
(in thousands) 2001 2000 ------- ------- Weighted average number of shares of common stock outstanding 148,188 150,360 Dilutive stock options 5,303 7,352 ------- ------- Shares used in calculating diluted Earnings per share 153,491 157,712 ======= =======
7 8 5. SHARE REPURCHASE PROGRAM On December 18, 2000, the Company announced that its Board of Directors had authorized the repurchase of up to 4 million shares of the Company's common stock. The repurchased stock 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 throughout 2001. To enhance the current stock repurchase program, the Company entered into an agreement with an independent third party under which the Company committed to purchase up to 500,000 shares of the Company's stock subject to the terms of the agreement. The Company purchased 76,000 shares through March 31, 2001 at a cost of $5 million. The agreement permits a net share settlement at the Company's option. The stock repurchase program may be discontinued at any time. In November of 2000, the Company completed a previous stock repurchase program. During 2000, the Company repurchased approximately 4.6 million shares of its common stock under this program at a cost of $300.2 million. 6. OTHER INCOME, NET Other income, net consists of the following (in thousands):
March 31, --------------------------- 2001 2000 -------- -------- Interest income $ 11,785 $ 10,737 Interest expense (1,039) (1,108) Other income 5,717 89,395 -------- -------- Total other income, net $ 16,463 $ 99,024 ======== ========
Other income for the three-months ended March 31, 2001 includes non-recurring gains on the sale of certain non-current marketable securities totaling approximately $2.5 million. Other income for the three-months ended March 31, 2000 includes non-recurring gains on the sale of certain non-current marketable securities totaling approximately $92.4 million. 7. INCOME TAX EXPENSE Income tax expense as a percentage of pre-tax income for the quarters ended March 31, 2001 and 2000 was 30% and 33.7%, respectively. During the quarter ended March 31, 2000, the Company recognized non-recurring gains on the sale of certain non-current marketable securities. Excluding the tax effect on this non-recurring gain, the Company's effective tax rate for the quarter was 30%. The effective tax rate varied from the U.S. statutory rates for the first quarter of 2001 and 2000 primarily due to higher sales in European jurisdictions with lower tax rates and to the utilization of research and development credits. The Company's effective tax rate outside the U.S. is lower than the U.S. tax rate, and the Company expects that the U.S. tax rate will decline as a percentage of its total tax rate as international sales increase. 8. LITIGATION On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen in the United States District Court for the District of New Jersey alleging infringement by Biogen of Berlex's "McCormick" patent (U.S. Patent No. 5,376,567) in the United States in the production of Biogen's AVONEX(R) (Interferon beta-1a) product. In November 1996, Berlex's New Jersey action was transferred to the United States District Court in Massachusetts and consolidated for pre-trial purposes with a related declaratory judgment action previously filed by Biogen. On August 18, 1998, Berlex filed a second suit against Biogen alleging infringement by Biogen of a patent which was issued to Berlex in August 1998 and which is related to the McCormick patent (U.S. Patent No. 5,795,779). On September 23, 1998, the cases were consolidated for pre-trial and trial purposes. Berlex sought a judgment granting it damages, a trebling of any damages awarded and a permanent injunction restraining Biogen from the alleged infringement. A hearing on the parties' summary judgment motions in the case was completed in March 2000. In September 2000, the District Court rendered final judgment in favor of Biogen and against Berlex determining that Biogen's production of AVONEX(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 and the parties are in the process of briefing the appeal for oral argument. 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 8 9 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 appealed that decision and an oral hearing on the appeal took place in December 2000. At the oral hearing in order to gain reinstatement of the patent, Rentschler narrowed the patent claims so as to claim only a specific cell line. Biogen does not use the specific cell line now claimed. On October 13, 1998, the Company filed another opposition with the Opposition Division of the European Patent Office to oppose a second European patent issued to Rentschler (the "Rentschler II Patent") with certain claims regarding compositions of matter of beta interferon with specific regard to the structure of the glycosylated molecule. A hearing on the Company's opposition 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. 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 March 31, 2001, the Company reported net income of $72.1 million or $0.47 per diluted share as compared to $121.4 million or $0.77 per diluted share for the comparable period of 2000. Total revenues for the quarter ended March 31, 2001 were $237 million, as compared to $216.8 million in the same period of 2000, an increase of $20.2 million or approximately 9%. Product revenues in the current quarter were $220 million as compared to $174.6 million for the same period of 2000, an increase of $45.4 million or approximately 26%. Product revenues from AVONEX(R) represent approximately 93% of the Company's total revenues in the current quarter as compared to 81% for the same period of 2000. The growth in the first quarter of 2001 over the comparable period in 2000 is primarily attributable to an increase 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 $58.2 million in the first quarter of 2001 as compared to $48.4 million in 2000. Revenues from royalties in the period ended March 31, 2001 were $17.1 million, a decrease of $25.2 million or approximately 59.7% as compared to $42.3 million of royalty revenue for the same period in 2000. Revenues from royalties represented approximately 7% of total revenues for the first three months of 2001 as compared to 19% for the same period of 2000. The decrease in royalty revenues in the current quarter over the comparable period in 2000 is primarily the result of reductions attributable to a dispute with Schering-Plough Corporation ("Schering-Plough") over eighteen months of royalties payable by Schering-Plough on U.S. sales of its alpha interferon products, including INTRON(R) A, patent expirations and lower licensee sales. The Company expects product sales as a percentage of total revenues to continue to increase in the near and long 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). The Company expects to continue to experience declining royalty revenues as a result of patent expirations. In addition, sales levels of products sold by the Company's licensees may also 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 current quarter of 2001 were $150.5 million as compared to $132.8 million in the same period of 2000, an increase of approximately 13%. Cost of revenues in the first three months of 2001 totaled $29.1 million, an increase of $500,000 or 2% as compared to the comparable period in 2000. The increase in cost of revenues was attributable to the higher sales volume of AVONEX(R). Included in cost of revenues for the period ended March 31, 2001 and 2000 is $28.3 million and $26 million, respectively, of costs related to product revenues and $838,000 and $2.6 10 11 million, respectively, of costs related to royalty revenue. Gross margins on product revenues increased to approximately 87% for the period ended March 31, 2001 compared to 85% in the same period in 2000. Gross margins on royalty revenue increased to approximately 95% for the period ended March 31, 2001 compared to 94% in the same period in 2000. 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 $72.8 million, an increase of $9.8 million or 16% as compared to $63 million in the same period of 2000. The increase was primarily due to 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). Selling, general and administrative expenses in the first quarter of 2001 were $48.6 million, an increase of $7.4 million or 18% as compared to the same period of 2000. 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 efforts and organizations 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 current quarter of 2001 was $16.5 million as compared to $99 million in 2000, a decrease of $82.5 million. Interest income for the first quarter of 2001 was $11.8 million compared to $10.7 million in the same period of 2000, an increase of $1.1 million or 10% due primarily to higher average yields and an increase in funds invested. Other income decreased by $83.7 million in the first three months of 2001 from the same period in 2000, due primarily to the sale of certain non-current marketable securities generating non-recurring gains of approximately $92.4 million in the first quarter of 2000. 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 quarters ended March 31, 2001 and 2000 was 30% and 33.7%, respectively. During the quarter ended March 31, 2000, the Company recognized non-recurring gains on the sale of certain non-current marketable securities totaling approximately $92.4 million. Excluding the tax effect on these non-recurring gains, the Company's effective tax rate for the quarter was 30%. The effective tax rate varied from the U.S. statutory rates for the first quarter of 2001 and 2000 primarily due to higher sales in European jurisdictions with lower tax rates and to the utilization of research and development credits. The Company's effective tax rate outside the U.S. is lower than the U.S. tax rate, and the Company expects that the U.S. tax rate will decline as a percentage of its total tax rate as international sales increase. FINANCIAL CONDITION At March 31, 2001, cash, cash equivalents and short-term marketable securities were $748 million compared with $682.4 million at December 31, 2000, an increase of $65.6 million. Working capital 11 12 increased $71.4 million to $778.7 million. Net cash from operating activities for the period ended March 31, 2001 was $89.4 million compared with $78.8 million for the same period in 2000. Cash outflows from investing activities during the first quarter of 2001 included investments in property and equipment and patents of $37.4 million. Net cash outflows from investing activities related to marketable securities was $76.8 million. Significant cash outflows from financing activities included $5 million for purchases of the Company's common stock under its stock repurchase program and $805,000 for repayments on loan agreements with banks. Cash inflows included $10.4 million from common stock option exercises and employee stock purchase plan activity. On December 18, 2000, the Company announced that its Board of Directors had authorized the repurchase of up to 4 million shares of the Company's common stock. The repurchased stock 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 throughout 2001. To enhance the current stock repurchase program, the Company entered into an agreement with an independent third party under which the Company committed to purchase up to 500,000 shares of the Company's stock subject to the terms of the agreement. The Company purchased 76,000 shares through March 31, 2001 at a cost of $5 million. The agreement permits a net share settlement at the Company's option. The stock repurchase program may be discontinued at any time. In November of 2000, the Company completed a previous stock repurchase program. During 2000, the Company repurchased approximately 4.6 million shares of its common stock under this program at a cost of $300.2 million. 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 was completed in the spring of 2001 at a total cost of approximately $95 million, of which $87.6 million had been committed at March 31, 2001. 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 $158.7 million had been committed at March 31, 2001. 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. See also Item 1 - Business, "Patents and Other Proprietary Rights" of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 for discussions of these legal proceedings. The Company believes that existing funds and cash generated from operations are adequate to satisfy its working capital and capital expenditure requirements in the foreseeable future. However, the Company may raise additional capital to take advantage of favorable conditions in the market or in connection with the Company's development activities. 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 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; 12 13 successful resolution of the lawsuit with Berlex related to the "McCormick" patents, which if ultimately decided in Berlex's favor could have a material adverse effect on the Company's financial position and results of operations; success in revoking the Rentschler patent since 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; the success of ongoing development work related to AVONEX(R) in expanded MS indications; the continued accessibility of third parties to vial, label, and distribute AVONEX(R) on acceptable terms; and the Company's ability to sustain market share of AVONEX(R) in light of the impact of competitive products for the treatment of MS. In the United States, one of the Company's competitors, Serono Laboratories, Inc., is conducting a head-to-head study of its Rebif(R), a (recombinant interferon beta-1a) product and AVONEX(R) in an attempt to get Rebif(R) approved before expiration of AVONEX's orphan drug status in 2003. If Serono Laboratories, Inc. is successful, competition in the United States MS marketplace will increase. ROYALTY REVENUE The Company receives royalty revenues which contribute a significant amount to its overall profitability. The Company expects to continue to experience a decline in royalty revenues as a result of patent expirations and other patent-related events in the range of up to approximately $10 million per quarter for 2001 (not including amounts that are subject to a dispute with Schering-Plough as discussed below). See "Outlook - Patents and Other Proprietary Rights" in the Company's Annual Report on Form 10-K for the period ended December 31, 2000. The Company expects the most significant decline to be in the amount of royalties received from Schering-Plough on sales of INTRON(R) A as the result of patent expirations in the EU and Japan. The extent of the decline in royalties related to United States sales of INTRON(R) A will depend on the outcome of a dispute with Schering-Plough related to its royalty obligations. Schering-Plough has taken the position that a Court of Appeal's decision affirming a District Court's ruling which narrowed the scope of the claims of Biogen's United States alpha interferon patent has caused the patent to no longer cover Schering-Plough's alpha interferon products, and, that, as a result, Schering-Plough no longer has an obligation to pay royalties under that patent. Until expiration of Biogen's EU (Irish) patent in January 2001, Schering-Plough continued to pay royalties on sales of product in the United States based on manufacture of the product in Ireland. 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 vigorously opposing any attempt by Schering-Plough to discontinue payment of royalties. If Schering-Plough were to prevail in arbitration, the resulting decline in royalties on United States sales of alpha interferon products which is in the range of up to approximately $10 million per quarter would continue until July 2002. 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, 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. Since the Company is not involved in the development or sale of products by its licensees, the Company can not be certain of the timing or potential impact of factors which may affect sales by the Company's licensees. In the long term, the Company expects its royalty revenue to be affected most significantly by patent expirations and a potential decrease in sales by licensees of licensed products. See "Outlook - Patents and Other Proprietary Rights." There can be no assurance that the Company will achieve a positive outcome with respect to any of the factors discussed in this Section or that the timing and extent of the Company's success with respect to any combination of these factors will be sufficient to result in sustained increases in revenues or profitability or the sustained profitability of the Company. For a further discussion of risks regarding drug development, 13 14 patent matters, including the Berlex lawsuit on the "McCormick" patents and the Amgen appeal, competition in the MS market and regulatory matters, see the Company's Annual Report on Form 10-K for the period ended December 31, 2000 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. 14 15 PART II - OTHER INFORMATION Item 5 - Other Information None. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits None. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BIOGEN, INC. Dated: May 15, 2001 /s/ Peter N. Kellogg --------------------------------- Vice President - Finance and Chief Financial Officer 16