SECURITIES AND EXCHANGE COMMISSION Total Pages - 19
WASHINGTON, D.C. 20549 Exhibit Index - 19
-------------------------------------------
FORM 10-Q
(Mark one)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934.
For the quarterly period ended September 30, 1998
------------------------------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________________ to ______________________
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 Identification No.)
incorporation or organization)
14 Cambridge Center, Cambridge, MA 02142
- --------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617)679-2000
Former name, former address and former fiscal year, if changed since last
report: Not Applicable.
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 ___________
Number of shares outstanding of each of the issuer's classes of common stock, as
of October 23, 1998:
Common Stock, par value $0.01 73,599,511
- --------------------------------- ---------------------------------------
(Title of each class) Number of Shares
Page 2
BIOGEN, INC.
INDEX
PART I - FINANCIAL INFORMATION Page No.
Condensed Consolidated Statements of Income -
Three months and nine months ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1997 . . . . . 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 17
*********************************************
Note concerning trademarks: AVONEX(R) is a registered trademark of
Biogen, Inc.
Page 3
<TABLE>
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -----------------------
1998 1997 1998 1997
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES
Product sales . . . . $107,492 $ 60,413 $270,665 $169,469
Royalties . . . . . . 38,412 40,200 118,523 118,422
Interest. . . . . . . 7,033 5,588 20,964 15,701
------- ------- ------- -------
Total revenues. . . 152,937 106,201 410,152 303,592
======= ======= ======= =======
EXPENSES
Cost of sales . . . . 19,513 12,498 51,557 35,686
Research and
development . . . . 49,083 37,040 128,338 106,962
Selling, general and
administrative. . . 27,011 22,649 81,495 64,773
Other, net. . . . . . 1,348 (71) 2,118 73
------- ------- ------- -------
Total expenses . . . . . 96,955 72,116 263,508 207,494
------- ------- ------- -------
INCOME BEFORE INCOME
TAXES 55,982 34,085 146,644 96,098
Income taxes . . . . . . 18,417 13,600 49,859 38,655
------- ------- ------- -------
NET INCOME . . . . . . . $ 37,565 $ 20,485 $ 96,785 $ 57,443
======= ======= ======= =======
BASIC EARNINGS PER
SHARE $ 0.51 $ 0.28 $ 1.31 $ 0.78
======= ======= ======= =======
DILUTED EARNINGS PER
SHARE . . . . . . . . $ 0.49 $ 0.27 $ 1.26 $ 0.75
======= ======= ======= =======
SHARES USED IN
CALCULATING:
BASIC EARNINGS PER
SHARE . . . . . . . . 73,782 74,003 73,830 73,720
======= ======= ======= =======
DILUTED EARNINGS PER
SHARE . . . . . . . . 77,258 76,571 76,959 76,554
======= ======= ======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 4
<TABLE>
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
September 30, 1998 December 31, 1997
--------------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents . . . . $ 94,158 $ 70,358
Marketable securities . . . . . . 410,602 369,730
Accounts receivable, net. . . . . 90,175 86,802
Deferred tax asset. . . . . . . . 32,484 37,203
Other current assets . . . . . . 43,990 31,973
------- -------
Total current assets. . . . . . . 671,409 596,066
------- -------
Property, plant and equipment
Cost. . . . . . . . . . . . . . . 259,938 240,513
Less accumulated depreciation . . 81,260 66,021
------- -------
Property, plant and equipment, net 178,678 174,492
------- -------
Other assets
Patents, net. . . . . . . . . . . 16,068 14,935
Marketable securities . . . . . . 14,869 17,095
Other . . . . . . . . . . . . . . 7,527 11,237
------- -------
Total other assets. . . . . . . . 38,464 43,267
------- -------
$888,551 $813,825
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable. . . . . . . . . $ 17,515 $15,820
Note payable. . . . . . . . . . . 18,752 24,817
Current portion of long-term debt 4,888 4,888
Accrued expenses and other. . . . 90,416 78,358
------- -------
Total current liabilities . . . . 131,571 123,883
------- -------
Long-term debt, less current
portion . . . . . . . . . . . . . 58,596 61,846
Other long term liabilities. . . . 16,248 15,132
Put options. . . . . . . . . . . . 13,334 76,671
Commitments and contigencies . . . -- --
Shareholders' equity
Common stock. . . . . . . . . . . 741 741
Additional paid in capital. . . . 506,812 516,880
Retained earnings . . . . . . . . 185,441 25,327
Unrealized loss on
marketable securities . . . . . (6,975) (2,233)
Cumulative translation adjustment 264 ( 37)
Treasury stock, at cost . . . . . (17,481) (4,385)
------- -------
Total shareholders' equity . . . . 668,802 536,293
------- -------
$888,551 $813,825
======= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 5
<TABLE>
BIOGEN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income. . . . . . . . . . . . . . . . $ 96,785 $ 57,443
Adjustments to reconcile net income
to net cash provided from
operating activities:
Depreciation and amortization. . . . . . 17,980 13,615
Deferred income taxes. . . . . . . . . . 11,484 31,084
Other. . . . . . . . . . . . . . . . . . 552 (19,563)
Changes in:
Accounts receivable . . . . . . . . . . (3,373) (16,350)
Other current and other assets. . . . . (12,469) (8,595)
Accounts payable, accrued expenses
and other current and long term
liabilities. . . . . . . . . . . . . . 14,869 9,982
------- --------
Net cash provided from operating
activities . . . . . . . . . . . . . . . 125,828 67,616
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities. . . . (398,668) (349,255)
Proceeds from sales and maturities of
marketable securities. . . . . . . . . . 357,925 274,793
Investment in collaborative partners. . . (5,000) (11,000)
Acquisitions of property and equipment. . (19,473) (20,878)
Additions to patents. . . . . . . . . . . (3,854) (6,670)
------- --------
Net cash used by investing activities. . (69,070) (113,010)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of note payable. . . . . . . . (6,065) --
Proceeds from issuance of long-term debt. -- 4,545
Payments of long-term debt. . . . . . . . (3,250) (2,444)
Purchases of treasury stock . . . . . . . (50,850) --
Tax benefit related to stock options. . . 10,642 21,747
Issuance of common stock and option
exercises. . . . . . . . . . . . . . . . 16,565 22,088
------- --------
Net cash (used by) provided from financing
activities . . . . . . . . . . . . . . . (32,958) 45,936
------- --------
NET INCREASE IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . 23,800 542
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD. . . . . . . . . . . 70,358 62,032
------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD. . . . . . . . . . . . . . $ 94,158 $ 62,574
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
Page 6
BIOGEN, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. 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 Consolidated Financial
Statements in the Company's 1997 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 nine months ended
September 30, 1997 have been reclassified to conform to the current
period presentation.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards Number 130 "Reporting Comprehensive
Income" ("SFAS 130") and Statement of Financial Accounting Standards
Number 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). The Company adopted SFAS 130 and SFAS 131 on
January 1, 1998. SFAS 130 establishes standards for reporting
comprehensive income and its components in the consolidated financial
statements. Comprehensive income for the three months and nine months
ended September 30, 1998 was $37.8 million and $92.3 million,
respectively. SFAS 131 establishes standards for reporting information
on operating segments in interim and annual financial statements.
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards Number 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133
is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999. The Company plans to adopt SFAS 133 in the fourth
quarter of 1998. SFAS 133 requires that all derivative instruments be
recorded 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 expects that the impact of the adoption
of SFAS 133 will not have a material impact on its financial position
or results of operations.
Page 7
Below is summary of the shares used in calculating basic and diluted earnings
per share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1998 1997 1998 1997
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Weighted average number
of shares of common
stock outstanding . . . 73,782 74,003 73,830 73,720
Dilutive stock options 3,476 2,568 3,129 2,834
------- ------ ------ ------
Shares used in
calculating diluted
earnings per share . . . 77,258 76,571 76,959 76,554
======= ====== ====== ======
</TABLE>
2. As of September 30, 1998, the Company had $20.0 million outstanding
under a term loan secured by a laboratory and office building in
Cambridge, Massachusetts. Principal payments of $833,000 are due
semi-annually through 2004 with the balance due on May 8, 2005.
As of September 30, 1998, the Company had $43.5 million outstanding
under a loan agreement with a bank for financing the construction of
the Company's biological manufacturing facility in North Carolina (the
"Construction Loan"). The Construction Loan is secured by the facility.
Payments of $805,000 are due quarterly through 2006 with the balance
due on March 31, 2007.
Terms of the loan agreements include various covenants, including
financial covenants, which require the Company to maintain minimum net
worth, cash flow and various financial ratios.
3. Inventories, which are included in other current assets, are stated at
the lower of cost or market with cost determined under the
first-in/first-out ("FIFO") method. Raw materials include inventory
used in the production of pre-clinical and clinical products, which are
expensed as research and development costs when consumed. Inventories,
net of applicable reserves and allowances, are as follows:
<TABLE>
<CAPTION>
(In Thousands)
September 30, 1998 December 31, 1997
------------------------- -------------------
<S> <C> <C>
Raw materials $ 4,010 $ 4,957
Work in process 18,138 8,132
Finished goods 11,400 9,870
------ ------
$33,548 $22,959
====== ======
</TABLE>
Page 8
4. On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit
against Biogen in the United States District Court for the
District of New Jersey alleging infringement by Biogen of
Berlex's "McCormick" patent in the United States in the
production of Biogen's AVONEX(R) (Interferon beta-la). In
November 1996, Berlex's New Jersey action was transferred to the U.S.
District Court in Massachusetts and consolidated for pre-trial
purposes with a related declaratory judgement action previously filed
by Biogen. On August 18, 1998, Berlex filed a second suit against
Biogen alleging infringement by Biogen of a patent which was issued
to Berlex in August 1998 and which is related to the McCormick patent.
On September 23, 1998, the cases were consolidated for pre-trial and
trial purposes. Berlex seeks a judgement granting it damages, a
trebling of any damages awarded and a permanent injunction
restraining Biogen from the alleged infringement. An unfavorable
ruling in the Berlex suit could have a material adverse effect on the
Company's results of operations and financial position. The Company
believes that it has meritorious defenses to Berlex claims; however,
the ultimate outcome is not determinable at this time. A trial is not
expected before late 1999.
On October 14, 1998, the Company filed an opposition with the
Opposition Division of the European Patent Office to oppose a European
patent (the "Rentschler patent") issued to Dr. Rentschler
Biotechnologie GmbH ("Rentschler") with certain claims regarding
compositions of matter of beta interferon with specific regard to the
structure of the glycosolated molecule. While Biogen believes that the
patent will be revoked, if the patent were to be upheld and if
Rentschler were to obtain, through legal proceedings, a determination
that the Company's sale of AVONEX(R) in Europe infringes a valid
Rentschler patent, such result could have a material adverse effect on
the Company's results of operation and financial position.
In June 1996, ASTA Medica Aktiengesellschaft ("ASTA") filed for
arbitration against Biogen with the International Chamber of Commerce
("ICC") in connection with a dispute with Biogen regarding a License,
Development and Supply Agreement, dated May 30, 1989 (the "1989
Agreement"), among Biogen, ASTA and Bioferon Biochemische Substanzen
GmbH & Co ("Bioferon"). Bioferon was a joint venture between Biogen and
Rentschler Arzneimittel GmbH & Co. of Laupheim, Germany, which entered
bankruptcy in 1993. In the proceeding, ASTA had asked for a
determination that Biogen could not terminate the 1989 Agreement as to
ASTA solely as a result of Bioferon's bankruptcy and a further
determination that Biogen was required to supply ASTA with recombinant
beta interferon. On March 13, 1998, the ICC arbitration panel ruled
that, as between Biogen and ASTA, the 1989 Agreement was not terminated
as a result of the bankruptcy of Bioferon, but that Biogen was not
required to perform Bioferon's obligations under the 1989 Agreement
and, as a result, had no obligation to supply recombinant beta
interferon to ASTA. Under the 1989 Agreement, ASTA was granted an
exclusive license for a number of European countries to certain
intellectual property relating to recombinant beta interferon,
including Biogen's European Fiers patent which has since been revoked
by the European Patent Office. In light of the panel's decision, Biogen
notified ASTA that it was terminating the 1989 Agreement based on
ASTA's conduct and failure to perform.
Page 9
On March 19, 1998, ASTA notified Biogen that it deemed Biogen's
termination of the 1989 Agreement to be invalid. On or about May
14, 1998, ASTA filed a complaint against Biogen in the United
States District Court for the District of Massachuetts seeking
enforcement of the arbitration decision, injunctive relief,
damages, relief pursuant to the Massachusetts Consumer Protection
Act (Mass. Gen L. ch. 93A) and other relief arising out of additional
tort and contract claims. ASTA alleges that Biogen's termination of the
1989 Agreement based on ASTA's conduct is invalid and that ASTA is
Biogen's exclusive licensee of recombinant beta interferon in the
territories specified in the 1989 Agreement. Biogen intends to
vigorously defend the lawsuit. The Company believes that it has
meritorious defenses to ASTA's claim, and given these defenses,
the Company does not believe the ultimate outcome of this proceeding
will have a material adverse effect on the financial position or
results of operations of the Company.
On or about July 17, 1998, Biogen received a letter demanding relief
pursuant to the Massachusetts Consumer Protection Act (Mass. Gen. L.
ch. 93A) on behalf of an alleged class of persons who have filled
prescriptions at pharmacies owned and/or operated by CVS Pharmacy, Inc.
The demand purports to be made in connection with litigation filed
against CVS and others in the Massachusetts Superior Court styled Weld
v. CVS Pharmacy, Inc., et al. Civil Action No. 98-0897-F. On or about
July 15, 1998, the Weld plaintiffs filed an amended complaint naming
Biogen (and other major pharmaceutical manufacturers) as additional
defendants in the lawsuit. The plaintiffs seek unspecified monetary
and equitable relief from Biogen on account of Biogen's alleged
participation in a direct mailing program to CVS customers using a
third party company, Elensys Care Services, Inc. Plaintiffs claim
that this alleged program violates the CVS customers' statutory and
common law rights to privacy as well as Chapter 93A. Biogen
disputes the claims raised by the plaintiffs and intends to vigorously
defend the lawsuit. The Company believes that it has meritorious
defenses to this claim. The Company does not believe the ultimate
outcome of this proceeding will have a material effect on the financial
position or results of operations of the Company.
5. Income tax expense as a percent of pre-tax income for the quarters
ended September 30, 1998 and 1997 was 32.9% and 39.9%, respectively.
The effective tax rate varied from U.S. statutory rates in the current
quarter primarily due to an increase in European sales and to the
utilization of research and development credits. The effective tax rate
varied from U.S. statutory rates in the comparable period of 1997
primarily due to the benefit of research and development and investment
tax credits partially offset by foreign losses for which the Company
received no tax benefit. The Company's effective tax rate for the nine
months ended September 30, 1998 was 34.0%, and is expected to continue
at or near this level for the remainder of 1998.
Page 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 AVONEX(R) (Interferon beta-la) for the treatment of relapsing forms of
multiple sclerosis ("MS") and from royalties on worldwide sales by the Company's
licensees of a number of products covered under patents controlled by the
Company, including alpha interferon and hepatitis B vaccines and diagnostic
products.
Results of Operations
For the quarter ended September 30, 1998, the Company reported net income of
$37.6 million or $0.49 per diluted share as compared to $20.5 million or $0.27
per diluted share for the comparable period of 1997. For the nine months ended
September 30, 1998, the Company recorded net income of $96.8 million or $1.26
per diluted share as compared to $57.4 million or $0.75 per diluted share for
the comparable period of 1997.
Total revenues for the current quarter were $152.9 million, as compared to
$106.2 million in the quarter ended September 30, 1997, an increase of $46.7
million or 44.0%. The increase in total revenues was due to increased sales of
the Company's product AVONEX(R). Product sales for the current quarter were
$107.5 million compared to $60.4 million for the comparable period in 1997, an
increase of $47.1 million or 78.0%. The growth in 1998 was primarily due to an
increase in the sales volume of AVONEX(R) in the United States and in the
European Union ("EU"). The increase in the EU included an expansion into several
new countries. The Company received regulatory approval to market AVONEX(R) in
the fifteen member countries of the EU in March 1997. By the end of 1997,
AVONEX(R) had received reimbursement approval and was on the market in all of
the EU countries. In addition, in April 1998, the Company received approval to
market AVONEX(R) in Canada. AVONEX(R) sales outside of the United States were
approximately $24.5 million in the current quarter as compared to approximately
$4.0 million in the comparable period of 1997. Revenues from royalties for the
current quarter were $38.4 million as compared to $40.2 million for the
comparable period of 1997, a decrease of $1.8 million or 4.5%, primarily as a
result of a decrease in royalties on sales of Hepatitis B vaccines.
Page 11
Total revenues for the nine months ended September 30, 1998 were $410.2 million
as compared to $303.6 million in the comparable period of 1997, an increase of
$106.6 million or 35.1% primarily due to the increased sales of AVONEX(R).
Revenues from product sales for the nine-month period ended September 30, 1998
increased $101.2 million or 59.7% to $270.7 million, or 66.0% of total revenues,
compared to $169.5 million, or 55.8% of total revenues, in the comparable period
of 1997. Royalties for the nine months ended September 30, 1998 remained
relatively flat at $118.5 million. In May 1998, the Company and Schering
Corporation, a subsidiary of Schering-Plough, amended the terms of the license
agreement under which Schering-Plough pays the Company royalties on worldwide
sales of Schering-Plough's alpha interferon product, Intron(R) A. Under the
terms of the amendment, Schering-Plough acquired the Biogen alpha interferon
patent application, which was the subject of a lawsuit filed by the Company
against F.Hoffman-LaRoche, Inc. and Genentech Inc. related to an interference
involving the Biogen patent application and a patent application jointly-owned
by the two defendants. The lawsuit has since been settled. As consideration for
acquisition of the Biogen patent application, Schering Plough agreed to pay
certain sums on U.S. sales of Intron(R) A from July 2002 until expiration of the
alpha interferon patent expected to be issued to F. Hoffman-LaRoche, Inc. and
Genentech Inc. as a result of the settlement.
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, and expects sales from AVONEX(R) in Europe to continue to increase as
a percentage of total product sales. 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 term, the Company
expects overall sales of licensee products and royalty revenues to
fluctuate depending on changes in sales volumes for specific products, patent
expirations, new licensing arrangements, if any, or other developments. Licensee
sales levels may also fluctuate from quarter to quarter due to the timing and
extent of major events such as new indication approvals or government sponsored
vaccination programs.
Interest income for the current quarter was $7.0 million, an increase of $1.4
million or 25.0% as compared to $5.6 million in the comparable period of 1997.
For the nine months ended September 30, 1998, interest income was $21.0
million compared to $15.7 million in the comparable period of 1997, an increase
of $5.3 million or 33.8%. The increase in interest income is primarily a
result of increased funds invested.
Total expenses for the current quarter were $97.0 million as compared to $72.1
million in the quarter ended September 30, 1997, an increase of $24.9 million or
34.5%. Cost of sales in the current quarter totaled $19.5 million, an increase
of $7.0 million from the quarter ended September 30, 1997. Cost of sales in the
current quarter includes product costs relating to sales of AVONEX(R) of $16.3
million compared to $9.4 million in the quarter ended September 30, 1997. Gross
margins for product sales increased slightly to 84.8% for the three months ended
September 30, 1998 as compared to 84.4% for the comparable period of 1997. Cost
of sales relating to royalty revenue for the current quarter increased slightly
to $3.2 million as compared to $3.1 million in the comparable period of 1997.
Gross margins on royalty revenue declined slightly to 91.7% for the
current quarter as compared to 92.3% for the comparable period of 1997.
Page 12
The Company expects that gross margins on royalty revenue will fluctuate
in the future based on the impact of one-time royalty and milestone
payments. Research and development expenses for the current quarter were
$49.1 million, an increase of $12.1 million or 32.7% as compared to the
quarter ended September 30, 1997. This increase was primarily due to an
increase in clinical trial costs and an increase in the Company's
development efforts relating to research and development programs in its
product pipeline. The Company expects that, in the long-term, research and
development expenses will increase as the Company continues to expand its
development efforts with respect to new products and as it conducts clinical
trials of these products. Selling, general and administrative expenses
for the current quarter were $27.0 million, an increase of $4.4 million or 19.5%
as compared to the quarter ended September 30, 1997. This increase was
primarily due to higher selling and marketing expenses related to sales of
AVONEX(R), principally in support of the ongoing European launch and higher
legal costs. The Company expects that selling, general and administrative
expenses will increase in the near and long-term as the Company continues to put
in place the commercial infrastructure and sales and marketing organizations
necessary to sell AVONEX(R) worldwide.
Total expenses for the nine-month period ended September 30, 1998 were $263.5
million as compared to $207.5 million in the comparable period of 1997, an
increase of $56.0 million or 27.0%. Cost of sales for the nine months ended
September 30, 1998 were $51.6 million as compared to $35.7 million in the
comparable period of 1997, an increase of $15.9 million or 44.5%. Cost of sales
for the nine months ended September 30, 1998 and 1997 included $42.3 million and
$25.9 million, respectively, of product costs related to the sales of AVONEX(R).
Gross margins for product sales decreased slightly to 84.4% for the nine months
ended September 30, 1998 as compared to 84.7% for the comparable period of 1997.
Cost of sales relating to royalty revenue decreased slightly to $9.3 million for
the nine months ended September 30, 1998 as compared to $9.8 million for the
comparable period of 1997. Gross margins on royalty revenue increased slightly
to 92.2% for the nine months ended September 30, 1998 as compared to 91.8% for
the comparable period of 1997.
Research and development expenses for the current nine-month period were $128.3
million as compared to $107.0 million in the comparable period of 1997. Included
in research and development expenses for the nine-months ended September 30,
1997 was a one-time license fee of $5 million to CV Therapeutics, Inc. Excluding
the one-time license fee, research and development expenses for the nine months
ended September 30, 1998, increased $26.3 million or 25.8% from the comparable
period of 1997. This increase was primarily due to an increase in clinical trial
costs and an increase in the Company's development efforts relating to research
and development programs in its product pipeline. Selling, general and
administrative expenses for the nine-month period ended September 30, 1998 were
$81.5 million as compared to $64.8 million in the comparable period of 1997, an
increase of $16.7 million or 25.8%. This increase was primarily due to the
higher selling and marketing expenses related to sales of AVONEX(R), primarily
in Europe, and higher legal fees.
Income tax expense as a percent of pre-tax income for the quarters ended
September 30, 1998 and 1997 was 32.9% and 39.9%, respectively.
Page 13
The effective tax rate varied from U.S. statutory rates in the current
quarter primarily due to an increase in European sales and to the
utilization of research and development credits. The effective tax rate in
the comparable period of 1997 varied from U.S. statutory rates primarily due
to the benefit of research and development and investment tax credits offset by
foreign losses for which the Company received no tax benefit. The Company's
effective tax rate for the nine months ended September 30, 1998 was 34.0%, and
is expected to continue at or near this level for the remainder of 1998.
Financial Condition
At September 30, 1998, cash, cash equivalents and short-term marketable
securities were $504.8 million compared with $440.1 million at December 31,
1997, an increase of $64.7 million. Working capital increased $67.6 million to
$539.8 million from December 31, 1997 to September 30, 1998. Net cash provided
from operating activities for the nine-month period ended September 30, 1998 was
$125.8 million, compared with $67.6 million in the comparable period of 1997.
Cash outflows for the nine-months ended September 30, 1998, included investments
in property and equipment and patents of $23.3 million and $5.0 million related
to research collaboration agreements. Cash outflows from financing activities
included note payable and loan repayments of $9.3 million and repurchases of the
Company's common stock at a total cost of $50.9 million. Cash inflows from
financing activities included $27.2 million from common stock option and
purchase plan activity, including tax benefits related to stock options.
Several legal proceedings were pending during the current quarter which involve
the Company. See Note 4 of the Notes to the Condensed Consolidated Financial
Statements and Part II, Item 1 - Legal Proceedings. 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, 1997 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 seek to raise additional
capital to take advantage of favorable conditions in the market or in connection
with the Company's development activities.
Year 2000 Issues
Year 2000 is the problem resulting from the use of a two-digit date field to
identify the year in computer software. Consequently, computer programs may not
accurately reflect the appropriate date, confusing "00" as the year 1900 rather
than the year 2000. Year 2000 is a pervasive problem affecting many information
technology systems and embedded technologies (e.g. microprocessors in
communications systems) in all companies, in all industries. Failure by the
Company or failure by third parties upon which the Company relies to effectively
address Year 2000 issues could have a material adverse impact on the Company's
financial position or results of operations.
The Company has developed a plan to address the Year 2000 issues. The plan is
segregated into four phases:
Page 14
1. Information Collection - Identify all Year 2000 risk areas and assign
accountability.
2. Assess Risk - Assign each item a category of risk:
Commercial Risk - Has a significant impact on sale, delivery and support of
AVONEX(R) or significant impact on royalty revenues.
Operational Risk - Has a significant impact on productivity but does not
materially impact the Company's results of operations.
Convenience Risk - Has a minor impact on productivity.
3. Remediate - Fix or replace, test and implement changes required for Year 2000
compliance.
4. Contingency Plan - Define procedures to be implemented should a disruption
due to Year 2000 occur.
The Company has completed the first two phases of the project and has completed
the testing and upgrading of all individual software applications that fall
within the Commercial Risk category. All of the Company's major software
applications are purchased from major software vendors and the Company
performs only minor customizations to those applications. The Company's major
software providers have attested to Year 2000 compliance. The Company has
reviewed its operations equipment for embedded technologies which may be Year
2000 susceptible and does not believe necessary modifications to be material.
The Company is communicating with its significant vendors and customers to
determine the progress that those vendors and customers are making in
remediating their own Year 2000 issues. The Company is requiring that
significant vendors and customers certify those products and services to be Year
2000 compliant.
To date, Year 2000 costs have been minimal and the Company believes that future
costs will be immaterial. The Company expects the remainder of the Year 2000
compliance program to be substantially complete by July 1999.
The most reasonably likely worst case scenario, if significant Year 2000 issues
arise, is that the Company would be hampered in its efforts to produce, package,
and deliver AVONEX(R), the Company's only revenue generating product, and that
third parties from whom the Company receives royalty revenue would encounter
similar difficulties in their efforts to produce and sell products which
generate royalty revenue for the Company. To mitigate the risks of such events,
the Company is developing contingency plans, which include maintaining a
sufficient level of inventory of AVONEX(R) in both bulk and packaged format,
developing secondary sources of packaging and delivery, providing for manual
backup processes, and working with third parties on Year 2000 certification. To
the extent that Year 2000 certification is unsatisfactory, contingency plans
will be developed or modified accordingly. In the event that significant vendors
do not achieve Year 2000 compliance in a timely manner, and the Company is
unable to replace them, the operations of the Company could be materially
adversely affected.
Page 15
Outlook
Safe Harbor Statement under Private Securities Litigation Reform Act of 1995
In addition to historical information, this quarterly report on Form 10-Q
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 royalty revenues, product
sales, expenses and profits, predictions as to the anticipated outcome of
pending litigation and opposition proceedings and statements regarding the
expected outcome of planned measures to deal with Year 2000 issues. 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 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 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; market acceptance of
AVONEX(R) outside the United States; successful resolution of the lawsuit with
Berlex related to the "McCormick" patents, which if 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
Company's ability to sustain market share of AVONEX(R) in light of the
introduction of competitive products for the treatment of multiple sclerosis;
the success of ongoing development work related to AVONEX(R) in expanded
multiple sclerosis indications and the continued accessibility of third parties
to vial, label, and distribute AVONEX(R) on acceptable terms. The Company also
receives royalty revenues which contribute significantly to its overall
profitability. The Company's ability to maintain the level of its royalty
revenues will depend on a number of factors, including: sustaining the scope and
validity of existing patents; the efforts of licensees in the clinical testing
Page 16
and marketing of products from which the Company derives revenue; and the
timing and extent of royalties from additional licensing opportunities.
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. 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 the Berlex lawsuit on the
"McCormick" patent, competition in the multiple sclerosis market and regulatory
matters, see the Company's Annual Report on Form 10-K for the period ended
December 31, 1997 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."
New Products
AVONEX(R) is currently the only product sold by the Company. The Company's
long-term viability and growth will depend on the successful development and
commercialization of other products from its research activities and
collaborations. The Company is continuing 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. Many important factors affect the
Company's ability to successfully develop and commercialize drugs, including the
ability to obtain and maintain necessary patents and licenses, to demonstrate
safety and efficacy of drug candidates at each stage of the clinical trial
process, to meet applicable regulatory standards and to receive required
regulatory approvals, to be capable of producing drug candidates in commercial
quantities at reasonable costs, to compete successfully against other products
and to market products successfully. There can be no assurance that the Company
will be successful in its efforts to develop and commercialize new products.
Page 17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On July 3, 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen
in the United States District Court for the District of New Jersey alleging
infringement by Biogen of Berlex's "McCormick" patent in the United States in
the production of Biogen's AVONEX(R) (Interferon beta-la). In November 1996,
Berlex's New Jersey action was transferred to the U.S. District Court in
Massachusetts and consolidated for pre-trial purposes with a related declaratory
judgement action previously filed by Biogen. On August 18, 1998, Berlex filed a
second suit against Biogen alleging infringement by Biogen of a patent which
issued to Berlex in August 1998 and which is related to the McCormick patent. On
September 23, 1998, the cases were consolidated for pre-trial and trial
purposes. Berlex seeks a judgement granting it damages, a trebling of any
damages awarded and a permanent injunction restraining Biogen from the alleged
infringement. An unfavorable ruling in the Berlex suit could have a material
adverse effect on the Company's results of operations and financial position.
The Company believes that it has meritorious defenses to Berlex claims; however,
the ultimate outcome is not determinable at this time. A trial is not expected
before late 1999.
On October 14, 1998, the Company filed an opposition with the Opposition
Division of the European Patent Office to oppose a European patent (the
"Rentschler patent") issued to Dr. Rentschler Biotechnologie GmbH ("Rentschler")
with certain claims regarding compositions of matter of beta interferon with
specific regard to the structure of the glycosolated molecule. While Biogen
believes that the patent will be revoked, if the patent were to be upheld and if
Rentschler were to obtain, through legal proceedings, a determination that the
Company's sale of AVONEX(R) in Europe infringes a valid Rentschler patent, such
result could have a material adverse effect on the Company's results of
operation and financial position.
In June 1996, ASTA Medica Aktiengesellschaft ("ASTA") filed for arbitration
against Biogen with the International Chamber of Commerce ("ICC") in connection
with a dispute with Biogen regarding a License, Development and Supply
Agreement, dated May 30, 1989 (the "1989 Agreement"), among Biogen, ASTA and
Bioferon Biochemische Substanzen GmbH & Co ("Bioferon"). Bioferon was a joint
venture between Biogen and Rentschler Arzneimittel GmbH & Co. of Laupheim,
Germany, which entered bankruptcy in 1993. In the proceeding, ASTA had asked for
a determination that Biogen could not terminate the 1989 Agreement as to ASTA
solely as a result of Bioferon's bankruptcy and a further determination that
Biogen was required to supply ASTA with recombinant beta interferon. On March
13, 1998, the ICC arbitration panel ruled that, as between Biogen and ASTA, the
1989 Agreement was not terminated as a result of the bankruptcy of Bioferon, but
that Biogen was not required to perform Bioferon's obligations under the 1989
Agreement and, as a result, had no obligation to supply recombinant beta
interferon to ASTA. Under the 1989 Agreement, ASTA was granted an exclusive
license for a number of European countries to certain intellectual property
relating to recombinant beta interferon, including Biogen's European Fiers
patent which has since been revoked by the European Patent Office. In light of
the panel's decision, Biogen notified ASTA that it was terminating the
Page 18
1989 Agreement based on ASTA's conduct and failure to perform. On March 19,
1998, ASTA notified Biogen that it deemed Biogen's termination of the 1989
Agreement to be invalid. On or about May 14, 1998, ASTA filed a complaint
against Biogen in the United States District Court for the District of
Massachuetts seeking enforcement of the arbitration decision, injunctive relief,
damages, relief pursuant to the Massachusetts Consumer Protection Act (Mass. Gen
L. ch. 93A) and other relief arising out of additional tort and contract claims.
ASTA alleges that Biogen's termination of the 1989 Agreement based on ASTA's
conduct is invalid and that ASTA is Biogen's exclusive licensee of recombinant
beta interferon in the territories specified in the 1989 Agreement. Biogen
intends to vigorously defend the lawsuit. The Company believes that it has
meritorious defenses to ASTA's claim, and given these defenses, the Company does
not believe the ultimate outcome of this proceeding will have a material adverse
effect on the financial position or results of operations of the Company.
On or about July 17, 1998, Biogen received a letter demanding relief pursuant to
the Massachusetts Consumer Protection Act (Mass. Gen. L. ch. 93A) on behalf of
an alleged class of persons who have filled prescriptions at pharmacies owned
and/or operated by CVS Pharmacy, Inc. The demand purports to be made in
connection with litigation filed against CVS and others in the Massachusetts
Superior Court styled Weld v. CVS Pharmacy, Inc., et al. Civil Action No.
98-0897-F. On or about July 15, 1998, the Weld plaintiffs filed an amended
complaint naming Biogen (and other major pharmaceutical manufacturers) as
additional defendants in the lawsuit. The plaintiffs seek unspecified
monetary and equitable relief from Biogen on account of Biogen's alleged
participation in a direct mailing program to CVS customers using a third party
company, Elensys Care Services, Inc. Plaintiffs claim that this alleged program
violates the CVS customers' statutory and common law rights to privacy as well
as Chapter 93A. Biogen disputes the claims raised by the plaintiffs and
intends to vigorously defend the lawsuit. The Company believes that it has
meritorious defenses to this claim. The Company does not believe the ultimate
outcome of this proceeding will have a material effect on the financial
position or results of operations of the Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
No. 27 Financial Data Schedule (for EDGAR filing purposes only).
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 4, 1998 /s/Timothy M. Kish
---------------------------------------------
Timothy M. Kish
Vice President-Finance and
Chief Financial Officer
Page 19
EXHIBITS
Index to Exhibit.
No. 27 Financial Data Schedule (for EDGAR filing purposes only).
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 94,158
<SECURITIES> 410,602
<RECEIVABLES> 91,817
<ALLOWANCES> 1,642
<INVENTORY> 33,548
<CURRENT-ASSETS> 671,409
<PP&E> 259,938
<DEPRECIATION> 81,260
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0
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<COMMON> 741
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<TOTAL-LIABILITY-AND-EQUITY> 888,551
<SALES> 270,665
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