The following discussion should be read in conjunction with our consolidated
financial statements and related notes beginning on page F-1 of this report.
Certain totals may not sum due to rounding.
Executive Summary
Introduction
Biogen Idec is a global biotechnology company focused on discovering,
developing, manufacturing and marketing therapies for the treatment of multiple
sclerosis and other autoimmune disorders, neurodegenerative diseases and
hemophilia. We also collaborate on the development and commercialization of
RITUXAN and anti-CD20 product candidates for the treatment of non-Hodgkin's
lymphoma and other conditions.
In the near term, our current and future revenues are dependent upon continued
sales of our three principal products, AVONEX, TYSABRI, and RITUXAN as well as
the potential approval of TECFIDERA, Factor VIII and Factor IX. In the longer
term, our revenue growth will be dependent upon the successful clinical
development, regulatory approval and launch of new commercial products, our
ability to obtain and maintain patents and other rights related to our marketed
products and assets originating from our research and development efforts, and
successful execution of external business development opportunities. As part of
our on-going research and development efforts, we have devoted significant
resources to conducting clinical studies to advance the development of new
pharmaceutical products and to explore the utility of our existing products in
treating disorders beyond those currently approved in their labels.
Financial Highlights
The following table is a summary of financial results achieved:
% Change
For the Years Ended
December 31, 2012
(In millions, except per share amounts and 2012 2011 compared to
percentages) (4) (5) (1) (2) (3) 2011
Total revenues $ 5,516.5 $ 5,048.6 9.3 %
Income from operations $ 1,855.8 $ 1,724.7 7.6 %
Net income attributable to Biogen Idec Inc. $ 1,380.0 $ 1,234.4 11.8 %
Diluted earnings per share attributable to
Biogen Idec Inc. $ 5.76 $
5.04 14.3 %
(1) Income from operations, as well as net income attributable to Biogen Idec
Inc. for 2011, was reduced by a charge of $36.8 million to research and
development expense incurred in connection with the collaboration and license
agreement entered into with Portola Pharmaceuticals, Inc. in October 2011.
(2) In the second quarter of 2011 our share of RITUXAN revenues from
unconsolidated joint business was reduced by approximately $50.0 million to
reflect our share of the approximately $125.0 million compensatory damages
and interest that Genentech estimated might be awarded to Hoechst GmbH
(Hoechst), in relation to Genentech's ongoing arbitration with Hoechst.
(3) Income from operations, as well as net income attributable to Biogen Idec
Inc., for 2011 was reduced by $19.0 million resulting from charges associated
with our restructuring initiative announced in November 2010.
(4) Income from operations, as well as net income attributable to Biogen Idec
Inc. for 2012, was reduced by charges totaling $71.0 million to research and
development expense incurred in connection with our collaboration agreements
entered into with Isis Pharmaceuticals, Inc. in January, June and December
2012.
(5) Income from operations, as well as net income attributable to Biogen Idec
Inc. for 2012, includes $46.8 million from the sale of all of our rights,
including rights to royalties, related to BENLYSTA.
As described below under "Results of Operations," our operating results for the
year ended December 31, 2012, reflect the following:
• Worldwide AVONEX revenues totaled $2,913.1 million for 2012, representing an
increase of 8.4% over 2011.
• Our share of TYSABRI revenues totaled $1,135.9 million for 2012, representing
an increase of 5.2% over 2011.
35--------------------------------------------------------------------------------
Table of Contents
• Our share of RITUXAN revenues totaled $1,137.9 million for 2012, representing
an increase of 14.2% from 2011.
• Total cost and expenses increased 11.5% for 2012 compared to 2011. This
increase was primarily the result of a 16.9% increase in cost of sales, a
9.5% increase in research and development expense, and a 21.0% increase in selling, general and administrative costs over the same period in 2011. These
increases reflect an increase in manufacturing costs driven by higher sales,
spending associated with licensing and development of our early stage product
candidates and preparing for the potential launches of TECFIDERA, Factor VIII
and Factor IX.
We generated $1,879.9 million of net cash flows from operations for 2012, which
were primarily driven by earnings. Cash, cash equivalents and marketable
securities totaled approximately $3,742.4 million as of December 31, 2012.
Business Environment
We conduct our business within the biotechnology and pharmaceutical industries,
which are highly competitive. Many of our competitors are working to develop or
have commercialized products similar to those we market or are developing,
including oral and other alternative formulations that may compete with AVONEX,
TYSABRI or other products we are developing. In addition, the commercialization
of certain of our own pipeline product candidates, such as TECFIDERA, may
negatively impact future sales of AVONEX, TYSABRI or both. We may also face
increased competitive pressures from the emergence of biosimilars. In the U.S.,
AVONEX, TYSABRI, and RITUXAN are licensed under the Public Health Service Act
(PHSA) as biological products. In March 2010, U.S. healthcare reform legislation
amended the PHSA to authorize the U.S. Food and Drug Administration (FDA) to
approve biological products, known as biosimilars, that are similar to or
interchangeable with previously approved biological products based upon
potentially abbreviated data packages.
Global economic conditions continue to present challenges for our industry.
Governments in many international markets where we operate have announced or
implemented austerity measures to constrain the overall level of government
expenditures. These measures, which include efforts aimed at reforming health
care coverage and reducing health care costs, particularly in certain countries
in Europe, continue to exert pressure on product pricing, have delayed
reimbursement for our products, and have negatively impacted our revenues and
results of operations. For additional information about certain risks that could
negatively impact our financial position or future results of operations, please
read the "Risk Factors" section of this report.
The Affordable Care Act
On June 28, 2012, the United States Supreme Court upheld the constitutionality
of the 2010 Patient Protection and Affordable Care Act's mandate to purchase
health insurance but rejected specific funding provisions that incentivized
states to expand their current Medicaid programs. As a result of this ruling, we
currently expect implementation of most of the major provisions of the Act to
continue. Changes to the Affordable Care Act, or other federal legislation
regarding health care access, financing, or delivery and other actions taken by
individual states concerning the possible expansion of Medicaid could impact our
financial position or results of operations.
The American Taxpayer Relief Act of 2012
The American Taxpayer Relief Act of 2012 (the "TRA") was passed by the House of
Representatives and the Senate on January 1, 2013, and was signed into law by
the President on January 2, 2013. The TRA, among other things, extends through
2013 an array of temporary business and individual tax provisions and
temporarily delayed the implementation of certain spending reductions (known as
"sequestration"). We do not expect that the TRA will have a material impact on
our financial position or results of operation.
During 2013 we expect Congress to again consider sequestration and other means
of reducing government expenditures, as well as an increase to the government's
borrowing authority. Proposals that have been raised to address government
finances include changes to the Medicare program, including increases to Part D
rebates or co-payments or reductions in premium subsidies, increases to the
pharmaceutical fee, changes to the coverage gap and reductions in physician
payments for Part B drugs. If enacted, these changes to current policy could
have a material impact on our financial position or results of operations.
36
--------------------------------------------------------------------------------
Table of Contents
Key Pipeline Developments
Peginterferon beta-1a
In January 2013, we released the primary efficacy analysis and safety data from
our Phase 3 study, ADVANCE. Results support Peginterferon as a potential
treatment dosed every two weeks or every four weeks for relapsing-remitting MS.
The primary endpoint of ADVANCE, annualized relapse rate at one year, was met
for both the two-week and four-week dosing regimens. Results showed that
Peginterferon also met the secondary endpoints of risk of 12-week confirmed
disability progression, proportion of patients who relapsed and magnetic
resonance imaging assessments for both dose regimens. We plan to submit
marketing applications for Peginterferon in the U.S. and E.U. by mid - 2013.
Dexpramipexole
At the end of December 2012, we learned that a Phase 3 trial investigating
dexpramipexole in people with amyotrophic lateral sclerosis (ALS) did not meet
its primary endpoint, a joint rank analysis of function and survival, and no
efficacy was seen in the individual components of function or survival. The
trial also failed to show efficacy in its key secondary endpoints. Based on
these results, we have discontinued development of dexpramipexole in ALS.
Long-Lasting Recombinant Factors VIII and IX
In October 2012, we announced positive top-line results from the Phase 3 study,
known as A-LONG, investigating our long-lasting recombinant Factor VIII-Fc
fusion protein in hemophilia A, a rare inherited disorder which inhibits blood
coagulation. We plan to submit a Biologics License Application to the FDA for
Factor VIII in the first half of 2013.
We submitted a Biologics License Application to the FDA for marketing approval
of our long-lasting recombinant Factor IX-Fc fusion protein in hemophilia B, a
rare inherited disorder which inhibits blood coagulation, during the fourth
quarter of 2012. The regulatory submission was based on the positive top-line
results from the Phase 3 study known as B-LONG.
Pediatric data will be required as part of the Marketing Authorization
Applications for Factor VIII and Factor IX that we plan to submit to the EMA,
and we have initiated two global pediatric studies of Factor VIII and Factor IX.
We collaborate with Swedish Orphan Biovitrum AB on the commercialization of
Factor VIII and Factor IX. For information about this collaboration, please read
Note 21, Collaborative and Other Relationships to our consolidated financial
statements included in this report.
TECFIDERA
In February 2012, we submitted a New Drug Application to the FDA for marketing
approval of TECFIDERA, our oral small molecule candidate for the treatment of
MS. The regulatory submission was based on TECFIDERA's comprehensive development
program, in which TECFIDERA demonstrated significant reductions in MS disease
activity coupled with favorable safety and tolerability in the Phase 3 DEFINE
and CONFIRM studies. The FDA accepted our application for TECFIDERA and granted
us a standard review timeline. In October 2012, we announced that the FDA
extended the initial PDUFA date for its review of our application by three
months, which is a standard extension period. The extended PDUFA target date is
in late March 2013. The FDA has indicated that the extension of the PDUFA date
is needed to allow additional time for review of our application. The agency has
not asked for additional studies.
In March 2012, we submitted a Marketing Authorisation Application for TECFIDERA
to the European Medicines Agency (EMA). The EMA has validated our application
for review of TECFIDERA in the E.U. We have submitted additional regulatory
applications for TECFIDERA in Australia, Canada and Switzerland.
We acquired TECFIDERA as part of our acquisition of Fumapharm AG in 2006. For
more information about this acquisition and associated milestone obligations,
please read the subsection entitled "Contractual Obligations and Off-Balance
Sheet Arrangements - Contingent Consideration" subsection of this "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
AVONEX PEN and Dose Titration
In February 2012, the FDA approved two separate dosing innovations designed to
improve the treatment experience for patients receiving once-a-week AVONEX for
relapsing forms of MS: AVONEX PEN and a new dose titration regimen. AVONEX PEN
is the first intramuscular autoinjector approved for MS and is designed to
enhance the self-injection process for patients receiving AVONEX therapy. A new
dose titration regimen, facilitated by the AVOSTARTGRIP titration devices,
provides patients with the option to gradually increase the dose of AVONEX at
treatment initiation to reduce the incidence and severity of flu-like symptoms
that patients may experience with therapy. These AVONEX dosing innovations are
commercially available in the E.U., U.S. and other countries.
37
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
Revenues
Revenues are summarized as follows:
For the Years Ended % Change
December 31,
(In millions, except 2012 compared to 2011 compared to
percentages) 2012 2011 2010 2011 2010
Product Revenues:
United States $ 2,176.8 $ 1,954.8 $ 1,744.4 11.4 % 12.1 %
Rest of world 1,989.3 1,881.3 1,725.7 5.7 % 9.0 %Total product revenues 4,166.1 3,836.1 3,470.1
8.6 % 10.5 %
Unconsolidated joint
business revenues 1,137.9 996.6 1,077.2 14.2 % (7.5 )%
Other revenues 212.5 215.9 169.1 (1.6 )% 27.7 %
Total revenues $ 5,516.5 $ 5,048.6 $ 4,716.4 9.3 % 7.0 %
Product Revenues
Product revenues are summarized as follows:
For the Years Ended % Change
December 31, 2012 compared 2011 compared
(In millions, except percentages) 2012 2011 2010 to 2011 to 2010
AVONEX $ 2,913.1 $ 2,686.6 $ 2,518.4 8.4 % 6.7 %
TYSABRI 1,135.9 1,079.5 900.2 5.2 % 19.9 %
Other product revenues 117.1 70.0 51.5 67.3 % 35.9 %
Total product revenues $ 4,166.1 $ 3,836.1 $ 3,470.1 8.6 % 10.5 %
AVONEXRevenues from AVONEX are summarized as follows:
For the Years Ended % Change
December 31, 2012 compared 2011 compared
(In millions, except percentages) 2012 2011 2010 to 2011 to 2010
United States $ 1,793.7 $ 1,628.3 $ 1,491.6 10.2 % 9.2 %
Rest of world 1,119.4 1,058.3 1,026.8 5.8 % 3.1 %
Total AVONEX revenues $ 2,913.1 $ 2,686.6 $ 2,518.4 8.4 % 6.7 %
For 2012 compared to 2011, as well as for 2011 compared to 2010, the increase in
U.S. AVONEX revenues was due to price increases offset by decreased unit sales
volume. U.S. AVONEX unit sales volume decreased approximately 2% and 3% for 2012
and 2011, respectively, over the prior year comparative periods.
For 2012 compared to 2011, as well as for 2011 compared to 2010, the increase in
rest of world AVONEX revenues was due to increased demand primarily in Europe
driven by customer penetration attributable to the AVONEX PEN launch, offset by
pricing reductions resulting from austerity measures enacted in some countries.
Rest of world AVONEX unit volume primarily in Europe increased 8% and 6% for
2012 and 2011, respectively, over the prior year comparative periods. The
increase in rest of world AVONEX revenues for 2012 compared to 2011 also
reflects gains recognized in relation to the settlement of certain cash flow
hedge instruments under our foreign currency hedging program, which partially
offset negative impacts of foreign currency as those gains were less than the
impacts of foreign currency exchange rates on sales. The increase in rest of
world AVONEX revenues for 2011 compared to 2010 also reflects the favorable
impact of foreign currency exchange rates offset by losses recognized in
relation to the settlement of certain cash flow hedge instruments under our
foreign currency hedging program.
38--------------------------------------------------------------------------------
Table of Contents
Gains recognized in relation to the settlement of certain cash flow hedge
instruments under our foreign currency hedging program totaled $25.4 million in
2012, compared to losses recognized of $30.6 million for 2011 and gains
recognized of $35.0 million in 2010.
We expect AVONEX to continue facing increased competition in the MS marketplace
in both the U.S. and rest of world. We and a number of other companies are
working to develop or have commercialized additional treatments for MS,
including oral and other alternative formulations that may compete with AVONEX.
In addition, the continued growth of TYSABRI and the commercialization of
certain of our own pipeline product candidates, such as TECFIDERA, may
negatively impact future sales of AVONEX. Increased competition also may lead to
reduced unit sales of AVONEX, as well as increasing price pressures particularly
in geographic markets outside the U.S.
TYSABRI
We collaborate with Elan Pharma International, Ltd (Elan) an affiliate of Elan
Corporation, plc, on the development and commercialization of TYSABRI. For
additional information about this collaboration, please read Note 21,
Collaborative and Other Relationships to our consolidated financial statements
included in this report.
Revenues from TYSABRI are summarized as follows:
For the Years Ended % Change
December 31, 2012 compared to 2011 compared
(In millions, except percentages) 2012 2011 2010 2011 to 2010
United States $ 383.1 $ 326.5 $ 252.8 17.3 % 29.2 %
Rest of world 752.8 753.0 647.4 - % 16.3 %
Total TYSABRI revenues $ 1,135.9 $ 1,079.5 $ 900.2 5.2 % 19.9 %
For 2012 compared to 2011, as well as for 2011 compared to 2010, the increase in
U.S. TYSABRI revenues was due to increased unit sales volume and price
increases. U.S. TYSABRI unit sales volume increased approximately 11% and 12%
for 2012 and 2011, respectively, over the prior year comparative periods. Net
sales of TYSABRI from our collaboration partner, Elan, to third-party customers
in the U.S. for 2012, 2011, and 2010 totaled $886.0 million, $746.5 million, and
$593.1 million, respectively.
For 2012 compared to 2011, the change in rest of world TYSABRI revenues reflects
the deferral of a portion of our revenues recognized on sales of TYSABRI in
Italy (as described below) and pricing reductions from austerity measures
enacted in some countries offset by an increase in demand. Increased demand
resulted in increases of approximately 14% and 19% in rest of world TYSABRI unit
sales volume for 2012 and 2011, respectively, over the prior year comparative
periods. For 2011 compared to 2010, the increase in rest of world TYSABRI
revenues reflects an increase in demand offset by a deferral of a portion of our
revenues recognized on sales of TYSABRI in Italy (as described below) and
pricing reductions from austerity measures enacted in some countries. The
decrease in rest of world TYSABRI revenues for 2012 compared to 2011 also
reflects gains recognized in relation to the settlement of certain cash flow
hedge instruments under our foreign currency hedging program, which only
partially offset negative impacts of foreign currency on sales. The increase in
rest of world TYSABRI revenues for 2011 compared to 2010 reflects the favorable
impact of foreign currency exchange rates offset by losses recognized in
relation to the settlement of certain cash flow hedge instruments under our
foreign currency hedging program.
Gains recognized in relation to the settlement of certain cash flow hedge
instruments under our foreign currency hedging program totaled $9.7 million in
2012, compared to losses recognized of $6.3 million for 2011 and gains
recognized of $10.7 million in 2010.
In the fourth quarter of 2011, Biogen Idec SRL received a notice from the
Italian National Medicines Agency (AIFA) stating that sales of TYSABRI for the
period from February 2009 through February 2011 exceeded by EUR30.7 million a
reimbursement limit established pursuant to a Price Determination Resolution
(Price Resolution) granted by AIFA in February 2007. In December 2011, we filed
an appeal against AIFA in administrative court seeking a ruling that the
reimbursement limit does not apply and that the position of AIFA is
unenforceable. As a result of being notified that AIFA believes a reimbursement
limit is in effect, we have deferred $62.7 million and $13.8 million of revenue
of TYSABRI in Italy for 2012 and 2011, respectively. We expect to continue to
defer a portion of our revenues on future sales of TYSABRI in Italy until this
matter is resolved. For additional information, please read Note 22, Litigation
to our consolidated financial statements included within this report.
39
--------------------------------------------------------------------------------
Table of Contents
We expect TYSABRI to continue facing increased competition in the MS marketplace
in both the U.S. and rest of world. We and a number of other companies are
working to develop or have commercialized additional treatments for MS,
including oral and other alternative formulations that may compete with TYSABRI.
The commercialization of certain of our own pipeline product candidates, such as
TECFIDERA, also may negatively impact future sales of TYSABRI. Increased
competition may also lead to reduced unit sales of TYSABRI, as well as
increasing price pressure. In addition, safety warnings included in the TYSABRI
label, such as the risk of progressive multifocal leukoencephalopathy (PML), and
any future safety-related label changes, may limit the growth of TYSABRI unit
sales. We continue to research and develop protocols and therapies that may
reduce risk and improve outcomes of PML in patients. Our efforts to stratify
patients into lower or higher risk for developing PML, including through the JCV
antibody assay, and other on-going or future clinical trials involving TYSABRI
may have a negative impact on prescribing behavior, which may result in
decreased product revenues from sales of TYSABRI.
Other Product Revenues
Other product revenues are summarized as follows:
For the Years Ended % Change
December 31, 2012 compared 2011 compared
(In millions, except percentages) 2012 2011 2010 to 2011 to 2010
FUMADERM $ 59.7 $ 54.7 $ 51.2 9.1 % 6.8 %
FAMPYRA 57.4 13.6 - ** **
Other - 1.7 0.3 (100.0 )% **Total other product revenues $ 117.1$ 70.0$ 51.5
67.3 % 35.9 %
We have a license from Acorda Therapeutics, Inc. (Acorda) to develop and
commercialize FAMPYRA in all markets outside the U.S. The European Commission
previously granted a conditional marketing authorization for FAMPYRA in the E.U.
in July 2011. A conditional marketing authorization is renewable annually and is
granted to a medicinal product with a positive benefit-risk assessment that
fulfills an unmet medical need when the benefit to public health of immediate
availability outweighs the risk inherent in the fact that additional data are
still required. To meet the conditions of this marketing authorization, we will
provide additional data from on-going clinical studies regarding FAMPYRA's
benefits and safety in the long term. This marketing authorization was renewed
as of July 2012. FAMPYRA is the first treatment that addresses the unmet medical
need of walking improvement in adult patients with MS who have walking
disability. FAMPYRA is commercially available throughout the European Union and
in Canada, Australia, New Zealand, Israel and South Korea, and we anticipate
making FAMPYRA commercially available in additional markets in 2013.
In 2011, the German government implemented new legislation to manage pricing
related to new drug products introduced within the German market through a
review of each product's comparative efficacy. We launched FAMPYRA in Germany in
August 2011. During the second quarter of 2012, the government agency completed
its comparative efficacy assessment of FAMPYRA indicating a range of pricing
below our initial launch price, which was unregulated for the first 12 months
after launch consistent with German law. As of the third quarter of 2012, we
have had pricing negotiations with the German authorities which were resolved in
2013. We recognized revenue during the fourth quarter of 2012 based on the
lowest point of the initially indicated German pricing authority range. We will
recognize revenue at the negotiated fixed price effective upon the signing of
the new agreement in 2013.
For information about our relationship with Acorda, please read Note 21,
Collaborative and Other Relationships to our consolidated financial statements
included in this report.
40
--------------------------------------------------------------------------------
Table of Contents
Unconsolidated Joint Business Revenues
We collaborate with Genentech on the development and commercialization of
RITUXAN. For additional information related to this collaboration including
information regarding the pre-tax co-promotion profit sharing formula for
RITUXAN and its impact on future unconsolidated joint business revenues, please
read Note 21, Collaborative and Other Relationships to our consolidated
financial statements included in this report.
Revenues from unconsolidated joint business are summarized as follows:
For the Years Ended
% Change
December 31,
(In millions, except 2012 compared 2011 compared
percentages) 2012 2011 2010 to 2011 to 2010
Biogen Idec's share of
pre-tax co-promotion profits
in the U.S. $ 1,031.7 $ 872.7 $ 848.0 18.2 % 2.9 %
Reimbursement of our selling
and development expenses in
the U.S. 1.6 6.1 58.3 (73.8 )% (89.5 )%
Revenue on sales of RITUXAN
in the rest of world 104.6 117.8 170.9 (11.2 )% (31.1 )%
Total unconsolidated joint
business revenues $ 1,137.9 $ 996.6 $ 1,077.2 14.2 % (7.5 )%
Biogen Idec's Share of Pre-tax Co-Promotion Profits in the U.S.
The following table provides a summary of amounts comprising our share of
pre-tax co-promotion profits in the U.S.:
For the Years Ended % Change
December 31,
(In millions, except 2012 compared 2011 compared
percentages) 2012 2011 2010 to 2011 to 2010
Product revenues, net $ 3,131.8 $ 2,924.5 $ 2,759.2 7.1 % 6.0 %
Cost and expenses 543.7 730.8 626.8 (25.6 )% 16.6 %
Pre-tax co-promotion profits
in the U.S. $ 2,588.1 $ 2,193.7 $ 2,132.4 18.0 % 2.9 %
Biogen Idec's share of
pre-tax co-promotion profits
in the U.S. $ 1,031.7 $ 872.7 $ 848.0 18.2 % 2.9 %
For 2012 compared to 2011, as well as for 2011 compared to 2010, the increase in
U.S. RITUXAN product revenues was primarily due to price increases and an
increase in commercial demand. Increased commercial demand was approximately 3%
and 4% in U.S. RITUXAN unit sales volume for 2012 and 2011, respectively, over
the prior year comparative periods. The increase in demand was driven by
numerous factors including a continued uptake in the rheumatoid arthritis and
vasculitis indications.
Collaboration costs and expenses for 2012 compared to 2011 decreased primarily
due to a decrease in sales and marketing expenses incurred by the collaboration
and a decline in expenditures for the development of RITUXAN for use in other
indications. For 2012 and 2011, we have increased our share of co-promotion
profits in the U.S. by approximately $14.3 million and $12.0 million,
respectively, to reflect our interpretation of a proposed rule within the 2010
healthcare reform legislation related to changes in the exclusion of orphan
drugs under Section 340B of the Public Health Services Act. The cumulative
amount of these adjustments is $26.3 million, which is reflected as an amount
due from Genentech in our consolidated balance sheets and may be subject to
adjustment when a final rule on the provisions of 340B is issued.
Collaboration cost and expenses for 2011 compared to 2010 were favorably
impacted by Genentech assuming responsibility for the U.S. sales and marketing
efforts for RITUXAN in the fourth quarter of 2010. The savings realized from the
consolidation of the sales force in 2011 were offset by a charge of
approximately $125.0 million recorded to the collaboration, representing
Genentech's estimate of compensatory damages and interest that might be awarded
to Hoechst GmbH (Hoechst), in relation to an intermediate decision by the
arbitrator in Genentech's ongoing arbitration with Hoechst. As a result of this
charge to the collaboration, our share of RITUXAN revenues from unconsolidated
joint business was reduced by approximately $50.0 million in the second quarter
of 2011. This $50.0 million amount reflects our share of the estimate of the
loss that we may incur in the event of a final arbitration award unfavorable to
Genentech. The actual amount of our share of any damages may vary from this
estimate depending on the nature or amount of any damages awarded to Hoechst.
For additional information related to this matter, please read Note 22,
Litigation to our consolidated financial statements included within this report.
41--------------------------------------------------------------------------------
Table of Contents
In addition, total collaboration cost and expenses for 2011 was further
negatively impacted by a fee which became payable in 2011 by all branded
prescription drug manufacturers and importers. This fee is calculated based upon
each organization's percentage share of total branded prescription drug sales to
qualifying U.S. government programs (such as Medicare, Medicaid and Veterans
Administration (VA) and Public Health Service (PHS) discount programs). We have
reduced our share of pre-tax co-promotion profits in the U.S. by approximately
$15.0 million in 2012 and 2011 based upon Genentech's estimate of the fee that
will be assessed to Genentech on qualifying sales of RITUXAN.
Under our collaboration agreement, our current pre-tax co-promotion
profit-sharing formula, which resets annually, provides for a 40% share of
pre-tax co-promotion profits if co-promotion operating profits exceed $50.0
million. For 2012, 2011, and 2010, the 40% threshold was met during the first
quarter.
Reimbursement of Selling and Development Expense in the U.S.
In the fourth quarter of 2010, we and Genentech made an operational decision
under which we eliminated our RITUXAN oncology and rheumatology sales force,
with Genentech assuming responsibility for the U.S. sales and marketing efforts
related to RITUXAN. As a result of this change, selling and development expense
incurred by us in the U.S. and reimbursed by Genentech decreased for 2011 in
comparison to 2010. As discussed in Note 21, Collaborative and Other
Relationships to our consolidated financial statements included in this report,
Genentech incurs the majority of continuing development costs for RITUXAN.
Expenses incurred by Genentech in the development of RITUXAN are not recorded as
research and development expense, but rather reduce our share of pre-tax
co-promotion profits recorded as a component of unconsolidated joint business
revenues.
For 2012 and 2011, amounts received in reimbursement of selling and development
expenses in the U.S. were insignificant.
Revenue on Sales of RITUXAN in the Rest of World
Revenue on sales of RITUXAN in the rest of world consists of our share of
pre-tax co-promotion profits in Canada and royalty revenue on sales of RITUXAN
outside the U.S. and Canada. For 2012 compared to 2011, revenue on sales of
RITUXAN in the rest of world decreased due to the expirations of royalties on a
country-by-country basis offset by a portion of the 2011 Hoechst charge, noted
above, which was recorded as of June 30, 2011. For 2011 compared to 2010,
revenue on sales of RITUXAN in the rest of world decreased due to the
expirations of royalties on a country-by-country basis. In addition, revenue on
sales of RITUXAN in the rest of world for 2010 were favorably impacted by
receipt of $21.3 million representing the cumulative underpayment of past
royalties owed to us on sales of RITUXAN in the rest of world.
The royalty period for sales in the rest of world with respect to all products
is 11 years from the first commercial sale of such product on a
country-by-country basis. The royalty periods for substantially all of the
remaining royalty-bearing sales of RITUXAN in the rest of world markets expired
during 2012. After 2012, we expect revenue on sales of RITUXAN in the rest of
world will primarily be limited to our share of pre-tax co-promotion profits in
Canada.
Other Revenues
Other revenues are summarized as follows:
For the Years Ended % Change
December 31, 2012 compared 2011 compared
(In millions, except percentages) 2012 2011 2010 to 2011 to 2010
Royalty revenues $ 168.7 $ 158.5 $ 137.4 6.4 % 15.4 %
Corporate partner revenues 43.8 57.4 31.7 (23.7 )% 81.1 %
Total other revenues $ 212.5 $ 215.9 $ 169.1 (1.6 )% 27.7 %
Royalty Revenues
We receive royalties from net sales on products related to patents that we
licensed. Our most significant source of royalty revenue is derived from net
worldwide sales of ANGIOMAX, which is licensed to The Medicines Company (TMC).
Royalty revenues from the net worldwide sales of ANGIOMAX are recognized in an
amount equal to the level of net sales achieved during a calendar year
multiplied by the royalty rate in effect for that tier under our agreement with
TMC. The royalty rate increases based upon which tier of total net sales are
earned in any calendar year. For 2012 compared to 2011, as well as for 2011
compared to 2010, the increase in royalty revenues reflects an increase in the
net worldwide sales of ANGIOMAX. The increase in royalty revenues related to the
sale of ANGIOMAX for 2011 compared to 2010 also reflects a $14.7 million
adjustment recorded in the fourth quarter of 2011, as net sales levels for 2011
achieved a new royalty tier.
42
--------------------------------------------------------------------------------
Table of Contents
In March 2012, the U.S. Patent and Trademark Office granted the extension of the
term of the principal U.S. patent that covers ANGIOMAX to December 15, 2014.
Under the terms of our royalty arrangement for ANGIOMAX, TMC is obligated to pay
us royalties earned, on a country-by-country basis, until the later of
(1) twelve years from the date of the first commercial sale of ANGIOMAX in such
country or (2) the date upon which the product is no longer covered by a
licensed patent in such country. The annual royalty rate is reduced by a
specified percentage in any country where the product is no longer covered by a
licensed patent and where sales have been reduced to a certain volume-based
market share. TMC began selling ANGIOMAX in the U.S. in January 2001.
Corporate Partner Revenues
Our corporate partner revenues include amounts earned upon delivery of product
under contract manufacturing agreements, revenues related to our arrangement
with Samsung BioLogics Co. Ltd. (Samsung Biologics) to develop, manufacture and
market biosimilar pharmaceuticals and supply agreement revenues covering
products previously included within our product line that we have sold or
exclusively licensed to third parties.
The decrease in corporate partner revenues for 2012 compared to 2011, as well as
the increase for 2011 compared to 2010, is primarily related to a one-time cash
payment of approximately $11.0 million received in exchange for entering into an
asset transfer agreement in March 2011.
Reserves for Discounts and Allowances
Revenues from product sales are recorded net of applicable allowances for trade
term discounts, wholesaler incentives, Medicaid rebates, VA and PHS discounts,
managed care rebates, product returns, and other governmental rebates or
applicable allowances including those associated with the implementation of
pricing actions in certain international markets where we operate.
Reserves established for these discounts and allowances are classified as
reductions of accounts receivable (if the amount is payable to our direct
customer) or a liability (if the amount is payable to a party other than our
customer). These reserves are based on estimates of the amounts earned or to be
claimed on the related sales. Our estimates take into consideration our
historical experience, current contractual and statutory requirements, specific
known market events and trends, and forecasted customer buying and payment
patterns. Actual amounts may ultimately differ from our estimates. If actual
results vary, we adjust these estimates, which could have an effect on earnings
in the period of adjustment. The estimates we make with respect to these
allowances represent the most significant judgments with regard to revenue
recognition.
Reserves for discounts, contractual adjustments and returns that reduced gross
product revenues are summarized as follows:
For the Years Ended % Change
December 31, 2012 compared 2011 compared
(In millions, except percentages) 2012 2011 2010 to 2011 to 2010
Discounts $ 113.5 $ 96.0 $ 77.9 18.2 % 23.2 %
Contractual adjustments 512.2 346.4 282.6 47.9 % 22.6 %
Returns 21.9 14.8 14.3 48.0 % 3.5 %
Total allowances $ 647.6 $ 457.2 $ 374.8 41.6 % 22.0 %
Gross product revenues $ 4,813.7 $ 4,293.3 $ 3,844.9 12.1 % 11.7 %
Percent of gross product revenues 13.5 % 10.6 % 9.7 %
Discount reserves include trade term discounts and wholesaler incentives. For
2012 compared to 2011, the increase in discounts was primarily driven by
wholesaler incentives as a result of price increases. For 2011 compared to 2010,
the increase in discounts was primarily driven by increases in trade term and
volume discounts and wholesaler incentives as a result of price increases.
Contractual adjustment reserves relate to Medicaid and managed care rebates, VA,
PHS discounts and other government rebates or applicable allowances. For 2012
compared to 2011, as well as for 2011 compared to 2010, the increase in
contractual adjustments was due to higher reserves for managed care and Medicaid
and VA programs principally associated with higher rebates resulting from price
increases as well as an increase in governmental rebates and allowances in
certain of the international markets in which we operate. The amount of
contractual adjustments as of December 31, 2012 includes our price adjustments
related to sales of FAMPYRA described above under the heading "Other Product
Revenues".
43
--------------------------------------------------------------------------------
Table of Contents
Product return reserves are established for returns made by wholesalers. In
accordance with contractual terms, wholesalers are permitted to return product
for reasons such as damaged or expired product. The majority of wholesaler
returns are due to product expiration. Reserves for product returns are recorded
in the period the related revenue is recognized, resulting in a reduction to
product sales. For 2012 compared to 2011, return reserves increased primarily
due to returns associated with a voluntary withdrawal of a limited amount of
AVONEX product in the first quarter of 2012 that demonstrated a trend in
oxidation that may have led to expiry earlier than stated on its label as well
as price increases. For 2011 compared to 2010, return reserves remained
relatively unchanged.
Cost and Expenses
A summary of total cost and expenses is as follows:
For the Years Ended % Change
December 31,
(In millions, except 2012 compared 2011 compared
percentages) 2012 2011 2010 to 2011 to 2010
Cost of sales, excluding
amortization of acquired
intangible assets $ 545.5 $ 466.8 $ 400.3 16.9 % 16.6 %
Research and development 1,334.9 1,219.6 1,248.6
9.5 % (2.3 )%
Selling, general and
administrative 1,277.5 1,056.1 1,031.5 21.0 % 2.4 %
Collaboration profit sharing 317.9 317.8 258.1
- % 23.1 %
Amortization of acquired
intangible assets 202.2 208.6 208.9 (3.1 )% (0.2 )%
Fair value adjustment of
contingent consideration 27.2 36.1 - (24.7 )% **
Restructuring charge 2.2 19.0 75.2 (88.4 )% (74.7 )%
Acquired in-process research
and development - - 245.0 - % (100.0 )%
Total cost and expenses $ 3,707.4 $ 3,323.9 $ 3,467.5 11.5 % (4.1 )%
Cost of Sales, Excluding Amortization of Acquired Intangible Assets (Cost of
Sales)
For the Years Ended % Change
December 31,
(In millions, except 2012 compared 2011 compared
percentages) 2012 2011 2010 to 2011 to 2010
Cost of sales, excluding
amortization of acquired
intangible assets $ 545.5 $ 466.8 $ 400.3 16.9 % 16.6 %
For 2012 compared to 2011, the increase in cost of sales was primarily driven by
higher revenue from our core products, higher costs of the AVONEX PEN and
increased funding related to the JCV antibody assay, nurse training fees, and
our arrangement with Samsung Biologics.
For 2011 compared to 2010, the increase in cost of sales was driven by higher
unit sales volumes, increased contract manufacturing and production costs, and
an increase in amounts written down related to excess, obsolete, unmarketable,
or other inventory. These increases were partially offset by the sale of
inventory produced under our high-titer production process. Cost of sales for
2011 also includes increased costs associated with AVONEX PEN, the JCV antibody
assay, and sales of FAMPYRA, while cost of sales for 2010 included $6.7 million
of period expense related to the shutdown for capital upgrades of our
manufacturing facility in Research Triangle Park, North Carolina (RTP).
Our products are subject to strict quality control and monitoring which we
perform throughout the manufacturing process. Periodically, certain batches or
units of product may no longer meet quality specifications or may expire. The
expiry associated with our inventory is generally between 6 months and 5 years,
depending on the product. Obsolescence due to expiration has historically been
insignificant.
Inventory amounts written down related to excess, obsolete, unmarketable, or
other are charged to cost of sales, and totaled $24.8 million, $25.4 million,
and $11.8 million for the years ended December 31, 2012, 2011, and 2010,
respectively.
44--------------------------------------------------------------------------------
Table of Contents
Research and Development
For the Years Ended % Change
December 31,
(In millions, except 2012 compared to 2011 compared
percentages) 2012 2011 2010 2011 to 2010
Marketed products $ 128.2 $ 111.0 $ 109.0 15.5 % 1.8 %
Late stage programs 467.0 428.1 379.8 9.1 % 12.7 %
Early stage programs 90.7 72.5 98.5 25.1 % (26.4 )%
Research and discovery 94.6 97.3 134.0 (2.8 )% (27.4 )%
Other research and
development costs 479.0 465.6 458.4 2.9 % 1.6 %
Milestone and upfront
payments 75.4 45.1 68.9 67.2 % (34.5 )%
Total research and
development $ 1,334.9 $ 1,219.6 $ 1,248.6 9.5 % (2.3 )%
Research and development expense incurred in support of our marketed products
includes costs associated with product lifecycle management activities and, if
applicable, costs associated with the development of new indications for
existing products. Late stage programs are programs in Phase 3 development or in
registration stage. Early stage programs are programs in Phase 1 or Phase 2
development. Research and discovery represents costs incurred to support our
discovery research and translational science efforts. Other research and
development costs consist of indirect costs incurred in support of overall
research and development activities and non-specific programs, including
activities that benefit multiple programs, such as management costs as well as
depreciation and other facility-based expenses.
For 2012 compared to 2011, the increase in research and development expense
includes costs incurred in connection with our late and early stage programs,
additional investments in our marketed products, an increase in upfront and
milestone payments, and costs related to reorganizing a group in our research
and development function. The increase in spending associated with our late
stage product candidates was driven by increased clinical trial activity
associated with our Factor VIII, dexpramipexole, and daclizumab product
candidates as well as costs incurred in support of commercial preparatory
capabilities related to Factor VIII.
At the end of December 2012, we learned that a Phase 3 trial investigating
dexpramipexole in people with amyotrophic lateral sclerosis (ALS) did not meet
its primary endpoint and failed to show efficacy in its key secondary endpoints.
Based on these results, we have discontinued development of dexpramipexole in
ALS. Prior to our decision to discontinue dexpramipexole, we had started the R&D
extension program, ENVISION, and had entered into arrangements with certain
suppliers for the purchase of raw materials and the supply of drug product.
These arrangements have been canceled. We have accrued approximately $12.3
million of research and development expense, as of December 31, 2012, related to
those firm commitments to purchase R&D services and inventory or to pay
cancellation charges.
Research and development expense related to our early stage programs increased
over the prior year comparative period primarily due to costs incurred in the
advancement of our Anti-TWEAK program in lupus nephritis, our BIIB037 program
for Alzheimer's disease, our Neublastin program for neuropathic pain, an
increase in spending incurred in connection with our collaboration and license
agreement with Portola Pharmaceuticals, Inc. for the development of the Syk
inhibitor molecule and development of STX-100 for the treatment of idiopathic
pulmonary fibrosis following our recent acquisition of Stromedix, Inc.
Research and development expense for 2011 compared to 2010, reflects our efforts
to allocate resources within our research and development organization
consistent with our restructuring initiative, which is described under the
heading Restructuring Charge, and resulted in a reduction in spending related to
certain programs which were terminated or are in the process of being
discontinued. These decreases were offset by research and development costs
associated with initiatives to grow our business, which included increased
clinical trial activity for certain of our late stage product candidates, such
as dexpramipexole, Factor VIII, Factor IX, and Peginterferon. Research and
development expense for 2011 compared to 2010, also reflects a reduction in
milestone and upfront payments recognized within research and development
expense.
We intend to continue committing significant resources to targeted research and
development opportunities where there is a significant unmet need and where the
drug candidate has the potential to be highly differentiated. Specifically, we
intend to continue to invest in bringing forward our MS pipeline and in pursuing
additional therapies for autoimmune disorders, neurodegenerative diseases and
hemophilia as well as make investments to enhance our early-stage pipeline.
45
--------------------------------------------------------------------------------
Table of Contents
Milestone and Upfront Payments included in Research and Development Expense
Included in total research and development expense in 2012 are charges totaling
$71.0 million related to upfront payments made to Isis Pharmaceuticals, Inc.
(Isis) in January, June and December 2012 upon entering into three separate
agreements for the development of Isis' antisense investigational drug
ISIS-SMNRx for the treatment of spinal muscular atrophy (SMA), product
candidates related to the treatment of mytonic dystrophy (DM1), and antisense
therapeutics for up to three gene targets, respectively. Research and
development expense in 2011 included a charge of $36.8 million related to an
upfront payment made in connection with our collaboration and license agreement
entered into with Portola Pharmaceuticals, Inc. Research and development expense
for 2010 included the $26.4 million upfront payment made to Knopp Neurosciences,
Inc. (Knopp), which became payable to Knopp upon our entering a license
agreement for dexpramipexole as well as a $30.0 million milestone paid to AbbVie
Biotherapeutics, Inc. upon initiation of patient enrollment in a Phase 3 trial
of daclizumab in relapsing MS.
Selling, General and Administrative
For the Years Ended
% Change
December 31,
(In millions, except 2012 compared 2011 compared
percentages) 2012 2011 2010 to 2011 to 2010
Selling, general and
administrative $ 1,277.5 $ 1,056.1 $ 1,031.5 21.0 % 2.4 %
For 2012 compared to 2011, the increase in selling, general and administrative
expense was primarily driven by costs associated with developing commercial
capabilities in preparation for the potential product launches of TECFIDERA,
Factor VIII and Factor IX, an increase in costs associated with the development
of our sales force and promotional spending in support of FAMPYRA, an increase
in sales and marketing activities in support of AVONEX and TYSABRI, and an
increase in grant and sponsorship activity. The successful commercialization of
FAMPYRA and potential new products require significant investments. The increase
in selling, general and administrative expense was offset by the positive impact
of foreign currency exchange rates.
For 2011 compared to 2010, the increase in selling, general and administrative
expenses was primarily due to initiatives to grow our business, the negative
impact of foreign currency exchange rates and increased sales and marketing
activities in support of AVONEX and TYSABRI, as well as costs incurred in
support of the potential launch of TECFIDERA, offset by a decrease in grant and
sponsorship activity and savings realized through our restructuring initiatives,
which are described under the heading Restructuring Charge. Selling, general and
administrative expenses for 2010 also included incremental charges totaling
$18.6 million, which were recognized in relation to the modification of the
equity based compensation of our former Chief Executive Officer.
We remain focused on preparing for multiple potential product launches in the
coming years. As discussed above, we continue to invest in the development of
commercial capabilities in support of our TECFIDERA program with the expectation
of a U.S. launch in the second quarter of 2013. We also have begun to make
investments in the development of commercial capabilities for our hemophilia
franchise.
Collaboration Profit Sharing
For the Years Ended % Change
December 31, 2012 compared to 2011 compared
(In millions, except percentages) 2012 2011 2010 2011 to 2010
Collaboration profit sharing $ 317.9$ 317.8$ 258.1
- % 23.1 %
Collaboration profit sharing includes the portion of rest of world net operating
profits to be shared with Elan under the terms of our collaboration agreement
for the development, manufacture and commercialization of TYSABRI. The amount
also includes the reimbursement for our portion of third-party royalties paid by
Elan on behalf of the collaboration relating to rest of world sales. For 2012
compared to 2011, collaboration profit sharing expense was consistent as a
portion of our revenues recognized on sales of TYSABRI in Italy were deferred,
as discussed under the heading Product Revenues - TYSABRI, resulting in rest of
world net operating profits being lower, offset by unit volume revenue growth.
For 2011 compared to 2010, the increase in collaboration profit sharing expense
was due to an increase in TYSABRI rest of world sales resulting in higher rest
of world net operating profits to be shared with Elan and resulting in growth in
the third-party royalties Elan paid on behalf of the collaboration. For 2012,
2011, and 2010, our collaboration profit sharing expense included $53.2 million,
$55.5 million and $45.5 million related to the reimbursement of third-party
royalty payments made by Elan, which start to expire in 2013. For additional
information about this collaboration, please read Note 21, Collaborative and
Other Relationships to our consolidated financial statements included in this
report.
46
--------------------------------------------------------------------------------
Table of Contents
Amortization of Acquired Intangible Assets
For the Years Ended % Change
December 31,
(In millions, except 2012 compared to 2011 compared to
percentages) 2012 2011 2010 2011 2010
Amortization of acquired
intangible assets $ 202.2 $ 208.6 $ 208.9 (3.1 )% (0.2 )%
For 2012 compared to 2011, as well as for 2011 compared to 2010, the change in
amortization of acquired intangible assets is primarily driven by the amount of
amortization recorded in relation to our AVONEX core technology asset.
AVONEX Core Technology Asset
Our most significant intangible asset is the core technology related to our
AVONEX product. Our amortization policy reflects our belief that the economic
benefit of our core technology is consumed as revenue is generated from our
AVONEX product. We refer to this amortization methodology as the economic
consumption model. An analysis of the anticipated lifetime revenues of AVONEX is
performed annually during our long range planning cycle which is completed in
the third quarter of each year, and this analysis serves as the basis for the
calculation of our economic consumption model.
Amortization recorded for the first and second quarters of 2010 was recorded
based upon the results of the 2009 analysis. Amortization recorded in the third
and fourth quarters of 2010 and the first two quarters of 2011 was recorded
based upon the results of our 2010 analysis, which did not result in a
significant change in the expected lifetime revenues of AVONEX from the 2009
analysis.
The results of our 2011 analysis reflected an increase in the expected lifetime
revenue of AVONEX. This increase in the expected lifetime revenues of AVONEX was
primarily attributable to changes in expected impact of competitor products. As
a result, amortization recorded for the third and fourth quarters of 2011 and
the first two quarters of 2012 decreased from those amounts recorded in the
previous four quarters.
Our most recent long range planning cycle was completed in the third quarter of
2012, which reflected a small decrease in the expected lifetime revenue of
AVONEX. Based upon this analysis, amortization recorded in relation to our core
intangible asset for the third and fourth quarters of 2012 increased in
comparison to amounts recorded in the first half of 2012.
The estimated future amortization of our core intangible asset related to AVONEX
is expected to be as follows:
(In millions) As of December 31, 2012
2013 $ 162.7
2014 141.4
2015 123.7
2016 103.8
2017 87.2
Total $ 618.8
We monitor events and expectations regarding product performance. If there are
any indications that the assumptions underlying our most recent analysis would
be different than those utilized within our current estimates, our analysis
would be updated and may result in a significant change in the anticipated
lifetime revenue of AVONEX determined during our most recent annual review.
47--------------------------------------------------------------------------------
Table of Contents
Fair Value Adjustment of Contingent Consideration
% Change
For the Years Ended
December 31, 2011
(In millions, except 2012 compared compared
percentages) 2012 2011 2010 to 2011 to 2010
Fair value adjustment of
contingent consideration $ 27.2 $ 36.1 $ - (24.7 )% **
The consideration for certain of our acquisitions includes future payments that
are contingent upon the occurrence of a particular factor or factors. For
acquisitions completed after January 1, 2009, we record a contingent
consideration obligation for such contingent consideration payments at its fair
value on the acquisition date. We revalue our acquisition-related contingent
consideration obligations each reporting period. Changes in the fair value of
our contingent consideration obligations, other than changes due to payments,
are recognized as a fair value adjustment of contingent consideration within our
consolidated statements of income.
In connection with our acquisition of Stromedix, Inc. in March 2012, we recorded
a contingent consideration obligation of $122.2 million. The fair value of this
contingent consideration obligation as of December 31, 2012 was $135.3 million.
The increase in the fair value of this obligation of $13.1 million since the
acquisition date was primarily due to changes in the discount rate and in the
probability and expected timing related to the achievement of certain
developmental milestones.
Upon completion of our purchase of the noncontrolling interest in our joint
venture investments in Biogen Dompé SRL and Biogen Dompé Switzerland GmbH in
September 2011, we recorded a contingent consideration obligation of $38.8
million. The fair value of this contingent consideration obligation as of
December 31, 2012 and 2011 was $29.8 million and $31.9 million, respectively.
The decrease in the fair value of this obligation of $9.0 million since the
acquisition date was primarily due to changes in the probability and expected
timing related to the achievement of certain cumulative sales-based and
developmental milestones and in the discount rate as well as the payment of a
$4.0 million developmental milestone.
In connection with our acquisition of Biogen Idec International Neuroscience
GmbH (BIN), formerly Panima Pharmaceuticals AG (Panima), in December 2010, we
recorded a contingent consideration obligation of $81.2 million. The fair value
of this contingent consideration obligation as of December 31, 2012 and 2011 was
$128.8 million and $119.1 million, respectively. The increase in the fair value
of this obligation of $47.6 million since the acquisition date was primarily due
to changes in the discount rate and in the probability and expected timing
related to the achievement of certain remaining developmental milestones, offset
by payments of $7.5 million in developmental milestones.
Restructuring Charge
For the Years Ended % Change
December 31, 2012 compared 2011 compared
(In millions, except percentages) 2012 2011 2010 to 2011 to 2010
Restructuring charge $ 2.2 $ 19.0 $ 75.2 (88.4 )% (74.7 )%
In November 2010, we announced a number of strategic, operational, and
organizational initiatives designed to provide a framework for the future growth
of our business and realign our overall structure to become a more efficient and
cost effective organization. As part of this initiative:
• We out-licensed or terminated certain research and development programs,
including those in oncology and cardiovascular medicine, that are no longer a
strategic fit for us.
• We completed a 13% reduction in workforce spanning our sales, research and
development, and administrative functions.
• We vacated and recognized the sale of the San Diego, California facility as
well as consolidated certain of our Massachusetts facilities.
As a result of these initiatives, we realized annual operating expense savings
of which the substantial majority have been realized within research and
development and selling, general and administrative expense. These savings were
offset by costs associated with initiatives to grow our business. We have also
increased our workforce to support our growth initiatives, including efforts to
bring forward our late stage pipeline.
48--------------------------------------------------------------------------------
Table of Contents
Costs associated with our workforce reduction primarily related to employee
severance and benefits. Facility consolidation costs are primarily comprised of
charges associated with closing these facilities, related lease obligations and
additional depreciation recognized when the expected useful lives of certain
assets have been shortened due to the consolidation and closing of related
facilities and the discontinuation of certain research and development programs.
As of December 31, 2012, substantially all restructuring charges have been
incurred and paid.
The following table summarizes the activity of our restructuring liability:
(In millions) Workforce Reduction Facility Consolidation Total
Restructuring reserve as of December
31, 2010 $ 60.6 $ 5.8 $ 66.4
Expense 15.8 2.4 18.2
Payments (81.8 ) (3.9 ) (85.7 )
Adjustments to previous estimates, net (2.9 ) - (2.9 )
Other adjustments 8.6 (3.2 ) 5.4
Restructuring reserve as of December
31, 2011 $ 0.3 $ 1.1 $ 1.4
Payments (0.3 ) (1.1 ) (1.4 )
Restructuring reserve as of December
31, 2012 $ - $ - $ -
Acquired In-process Research and Development (IPR&D)
For the Years Ended % Change
December 31,
(In millions, except 2012 compared to 2011 compared
percentages) 2012 2011 2010 2011 to 2010
Acquired in-process research
and development $ - $ - $ 245.0 - % (100.0 )%
In August 2010, we entered into a license agreement with Knopp for the
development, manufacture and commercialization of dexpramipexole. We have since
discontinued development of dexpramipexole. As we determined that we were the
primary beneficiary of this relationship, we consolidated the results of Knopp
and recorded an IPR&D charge of approximately $205.0 million upon initial
consolidation within our consolidated statements of income for 2010. We
attributed approximately $145.0 million of the total IPR&D charge to the
noncontrolling interest, representing the noncontrolling interest's ownership
interest in the equity of Knopp. For additional information related to this
transaction, please read Note 20, Investments in Variable Interest Entities to
our consolidated financial statements included in this report.
In connection with our acquisition of Biogen Idec Hemophilia Inc., formerly
Syntonix Pharmaceuticals, Inc. (Syntonix), in January 2007, we agreed to make
additional payments based upon the achievement of certain milestone events. One
of these milestones was achieved when, in January 2010, we initiated patient
enrollment in a registrational trial of Factor IX in hemophilia B. As a result
of the achievement of this milestone we paid approximately $40.0 million to the
former shareholders of Syntonix, which was reflected as a charge to acquired
IPR&D within our consolidated statement of income for 2010.
Gain on Sale of Rights
% Change
For the Years Ended
December 31, 2012
compared 2011 compared to
(In millions, except percentages) 2012 2011 2010 to 2011 2010
Gain on sale of rights $ 46.8 $ - $ - ** - %
During the third quarter of 2012, we sold all of our rights, including rights to
royalties, related to BENLYSTA (belimumab) to a DRI Capital managed fund (DRI).
We were entitled to these rights pursuant to a license agreement with Human
Genome Sciences, Inc. and GlaxoSmithKline plc. For additional information
related to this transaction, please read Note 4, Gain on Sale of Rights to our
consolidated financial statements included in this report.
49
--------------------------------------------------------------------------------
Table of Contents
Other Income (Expense), Net
For the Years Ended % Change
December 31, 2012 compared 2011 compared
(In millions, except percentages) 2012 2011 2010 to 2011 to 2010
Other income (expense), net $ (0.7 ) $ (13.5 ) $ (19.0 ) (94.8 )% (28.9 )%
For 2012 compared to 2011, the change in other income (expense), net was
primarily due to an increase in interest income due to acceleration of interest
imputed on originally discounted accounts receivables during the second quarter
of 2012, which were collected in Spain in advance of original estimates, offset
by an increase in interest expense due to a decrease in the amount of
capitalized interest. Other income (expense), net in 2012 includes a gain of
$9.0 million recognized upon our acquisition of Stromedix in March 2012, which
was based on the value derived from the purchase price of our equity interest
held in Stromedix prior to the acquisition. The amount in 2011 includes a gain
of $13.8 million on the sale of stock from our strategic investments portfolio
that was deemed no longer strategic.
For 2011 compared to 2010, the change in other income (expense), net was
primarily due to a decrease in interest expense driven by an increase in the
amount of capitalized interest and a decrease in losses recognized in our
strategic investment portfolio offset by a decrease in interest income due to
lower interest yields on cash, cash equivalents, and marketable securities
offset by an increase in average cash balances.
For additional information related to our strategic investments, please read
Note 10, Financial Instruments to our consolidated financial statements included
in this report.
Income Tax Provision
For the Years Ended % Change
December 31,
(In millions, except 2012 compared to 2011 compared to
percentages) 2012 2011 2010 2011 2010
Effective tax rate on
pre-tax income 25.4 % 26.0 % 26.9 % (2.3 )% (3.3 )%
Income tax expense $ 470.6 $ 444.5 $ 331.3 5.9 % 34.2 %
Our effective tax rate fluctuates from year to year due to the global nature of
our operations. The factors that most significantly impact our effective tax
rate include variability in the allocation of our taxable earnings among
multiple jurisdictions, changes in tax laws, the amount and characterization of
our research and development expenses, acquisitions, and licensing transactions.
Our effective tax rate for 2012 compared to 2011 decreased primarily as a result
of higher orphan drug credits for our Factor VIII, STX-100, dexpramipexole and
other orphan credit eligible clinical trials, the cessation of certain
intercompany royalties owed by a foreign wholly owned subsidiary to a U.S.
wholly owned subsidiary on the international sales of one of our products and
higher deductions related to our manufacturing activities. These decreases were
partially offset by the correction of an error which had accumulated over
several years in our deferred tax accounting for capitalized interest which
resulted in an expense of $29.0 million.
Our effective tax rate for 2011 compared to 2010 decreased primarily due to our
2010 license and collaboration agreement with Knopp, which negatively impacted
our 2010 effective tax rate due to the attribution to noncontrolling interest of
$145.0 million of the associated IPR&D charge. Because the attributed amount was
not an expense for tax purposes, our tax rate was unfavorably impacted by 2.8
percentage points. In addition, during 2011, we experienced an increase in
research and development expenditures eligible for the orphan drug credit, a
lower effective state tax rate resulting from a change in state law and the
settlement of outstanding matters related to state and federal audits. These
favorable items were offset by a higher percentage of our 2011 profits being
earned in higher tax rate jurisdictions, principally the U.S., and a
non-deductible charge for contingent consideration associated with the
acquisition of Panima.
For additional information related to income taxes for 2012, 2011 and 2010,
please read Note 18, Income Taxes to our consolidated financial statements
included in this report.
50
--------------------------------------------------------------------------------
Table of Contents
Equity in Loss of Investee, Net of Tax
% Change
For the Years Ended
December 31, 2012
(In millions, except compared 2011 compared to
percentages) 2012 2011 2010 to 2011 2010
Equity in loss of investee,
net of tax $ 4.5 $ - $ - ** - %
In February 2012, we finalized an agreement with Samsung BioLogics that
established an entity, Samsung Bioepis, to develop, manufacture and market
biosimilar pharmaceuticals. We account for this investment under the equity
method of accounting. We recognize our share of the results of operations
related to our investment in Samsung Bioepis one quarter in arrears. For
additional information related to this transaction, please read Note 21,
Collaborative and Other Relationships to our consolidated financial statements
included in this report.
Noncontrolling Interest
For the Years Ended % Change
December 31,
(In millions, except 2012 compared 2011 compared
percentages) 2012 2011 2010 to 2011 to 2010
Net income (loss)
attributable to
noncontrolling interests,
net of tax $ - $ 32.3 $ (106.7 ) (100.0 )% (130.3 )%
For 2012 compared to 2011, the change in net income attributable to
noncontrolling interests, net of tax, reflects a reduction in earnings from our
foreign joint ventures due to our purchase of the noncontrolling interest in our
joint venture investments described below. Amounts recognized during 2011 also
reflect the attribution of a $10.0 million milestone payment to Knopp upon
dosing the first patient in a registrational study for dexpramipexole as well as
the attribution of a $15.0 million milestone payment to Neurimmune upon our
submission of an IND application for BIIB037. For 2011 compared to 2010, the
change in net income attributable to noncontrolling interests, net of tax,
primarily resulted from the impact of our Knopp transaction recorded in 2010,
offset by a $25.0 million payment made to Cardiokine for termination of our
lixivaptan collaboration agreement.
On September 6, 2011, we completed the purchase of the noncontrolling interest
in our joint venture investments in Biogen Dompé SRL and Biogen Dompé
Switzerland GmbH, our respective sales affiliates in Italy and Switzerland.
Prior to this transaction, our consolidated financial statements reflected 100%
of the operations of these joint venture investments and we recorded net income
(loss) attributable to noncontrolling interests in our consolidated statements
of income based on the percentage of ownership interest retained by our joint
venture partners. We have continued to consolidate the operations of these
entities following our purchase of the noncontrolling interest; however, as of
September 6, 2011, we no longer allocate 50% of the earnings of these ventures
to net income (loss) attributable to noncontrolling interests as Biogen Dompé
SRL and Biogen Dompé Switzerland GmbH became wholly-owned subsidiaries of ours.
Cambridge Leases
In July 2011, we executed leases for two office buildings currently under
construction in Cambridge, Massachusetts with a planned occupancy during the
second half of 2013. Construction of these facilities began in late 2011. These
buildings will serve as the future location of our corporate headquarters and
will provide additional general and administrative and research and development
office space.
As a result of our decision to relocate our corporate headquarters to Cambridge,
Massachusetts, we expect to vacate part of our Weston, Massachusetts facility in
the second half of 2013 upon completion of the new buildings and incur a charge
between $15.0 million to $30.0 million. This estimate represents our remaining
lease obligation for the vacated portion of our Weston facility, net of sublease
income expected to be received. In addition, this decision has shortened the
expected useful lives of certain leasehold improvements and other assets at our
Weston facility and will result in approximately $15.0 million to $20.0 million
of additional depreciation. As of December 31, 2012 and 2011, approximately
$11.4 million and $4.7 million of this additional depreciation has been
recognized.
51
--------------------------------------------------------------------------------
Table of Contents
Research Triangle Park Lease
In December 2012, we entered into an arrangement with Eisai, Inc. to lease a
portion of their facility in RTP to manufacture our and Eisai's oral solid dose
products and for Eisai to provide us with vial-filling services for biologic
therapies and packaging services for oral solid dose products. The 10 year lease
agreement, which is cancellable after 5 years and will become effective in
February 2013, gives us the option to purchase the facility.
Market Risk
We conduct business globally. As a result, our international operations are
subject to certain opportunities and risks which may affect our results of
operations, including volatility in foreign currency exchange rates or weak
economic conditions in the foreign markets in which we operate.
Foreign Currency Exchange Risk
Our results of operations are subject to foreign currency exchange rate
fluctuations due to the global nature of our operations. While the financial
results of our global activities are reported in U.S. dollars, the functional
currency for most of our foreign subsidiaries is their respective local
currency. Fluctuations in the foreign currency exchange rates of the countries
in which we do business will affect our operating results, often in ways that
are difficult to predict.
Our net income may also fluctuate due to the impact of our foreign currency
hedging program, which is designed to mitigate, over time, a portion of the
impact resulting from volatility in exchange rate changes on revenues. We use
foreign currency forward contracts to manage foreign currency risk with the
majority of our forward contracts used to hedge certain forecasted revenue
transactions denominated in foreign currencies in the next 12 months. For a more
detailed disclosure of our hedges outstanding, please read Note 11, Derivative
Instruments to our consolidated financial statements included in this report.
Our ability to mitigate the impact of exchange rate changes on revenues and net
income diminishes as significant exchange rate fluctuations are sustained over
extended periods of time. Other foreign currency gains or losses arising from
our operations are recognized in the period in which we incur those gains or
losses.
Pricing Pressure
Global economic conditions continue to present challenges for our industry. The
global economic downturn and the deterioration of credit and economic conditions
continue to impact our results of operations, particularly in countries where
government-sponsored healthcare systems are the primary payers for healthcare.
Global economic conditions may be further impacted by additional negative
economic developments in countries such as Italy, Portugal and Spain, whose
sovereign debt credit ratings have been downgraded. As a result, many countries
worldwide, particularly those within the European Union, are reducing their
public expenditures in an effort to achieve cost savings.
Governments in a number of international markets in which we operate, including
Germany, France, Italy, the United Kingdom, Portugal and Spain have announced or
implemented measures aimed at reducing healthcare costs to constrain the overall
level of government expenditures. The implementation of measures varies by
country and include, among other things, mandatory rebates and discounts, price
reductions and suspensions on pricing increases on pharmaceuticals. Certain
implemented measures negatively impacted our revenues in 2011 and 2012. We
expect to see continued efforts to achieve additional reductions in public
expenditures and consequently expect that our revenues and results of operations
will be further negatively impacted if these, similar or more extensive measures
are, or continue to be, implemented in these and other countries in which we
operate. Based upon our most recent estimates, we expect that such measures will
reduce our revenues in 2013 by approximately $45.0 to $60.0 million.
In addition, certain countries set prices by reference to the prices in other
countries where our products are marketed. Thus, our inability to secure
adequate prices in a particular country may impair our ability to obtain
acceptable prices in existing and potential new markets and limit market growth.
The continued implementation of pricing actions throughout Europe may also lead
to higher levels of parallel trade.
Generally, in the United States there are fewer government-imposed constraints
on the pricing of pharmaceuticals. However, given current trends in health care
costs, we expect increased focus on overall health care expenditures in 2013 and
beyond that may result in, among other things, constraints on pharmaceutical
pricing, changes in level of rebates and other reimbursement mechanisms, the
permissibility of cross-border trade, and the use of comparative effectiveness
research.
52
--------------------------------------------------------------------------------
Table of Contents
Credit Risk
We are subject to credit risk from our accounts receivable related to our
product sales. The majority of our accounts receivable arise from product sales
in the U.S. and Europe with concentrations of credit risk limited due to the
wide variety of customers and markets using our products, as well as their
dispersion across many different geographic areas. Our accounts receivable are
primarily due from wholesale distributors, public hospitals and other government
entities. We monitor the financial performance and credit worthiness of our
large customers so that we can properly assess and respond to changes in their
credit profile. We operate in certain countries where weakness in economic
conditions has resulted in extended collection periods. We continue to monitor
these conditions, including the volatility associated with international
economies and the relevant financial markets, and assess their possible impact
on our business. Our historical write-offs of accounts receivable have not been
significant.
Although our contractual payment terms have not changed, over the past year we
noted greater volatility in the amount and timing of collections of accounts
receivable balances in certain countries. In countries where we have experienced
a pattern of extended payments and we expect to collect receivables greater than
one year from the time of sale, we have discounted our receivables and reduced
related revenues over the period of time that we estimate those amounts will be
paid using the country's market-based borrowing rate for such period. The
related receivables are classified at the time of sale as long-term assets.
Within the European Union, our accounts receivable in Spain, Italy and Portugal
continue to be subject to significant payment delays due to government funding
and reimbursement practices. Deteriorating credit and economic conditions have
generally led to an increase in the average length of time that it takes to
collect our accounts receivable in these countries, although these countries
have introduced programs to pay down significantly overdue payables.
Specifically during the third quarter of 2012, as part of a new program to
resolve outstanding amounts long overdue, the Portuguese government paid us
approximately $21.2 million, contributing to a decrease in our accounts
receivable in Portugal. Also during this period, Portugal enacted legislation to
limit their total expenditure on total pharmaceutical products. In recognizing
revenue in Portugal, we have estimated the effect of these caps in determining
our price. Similarly, in June 2012, the Spanish government paid us approximately
$112.0 million, contributing to a significant decrease in our accounts
receivables in Spain. Our net accounts receivable balances from product sales in
Italy, Portugal and Spain totaled $207.5 million and $235.0 million as of
December 31, 2012 and 2011, respectively, of which $17.6 million and $126.5
million were classified as non-current and included within investments and other
assets within our consolidated balance sheets as of those dates. Approximately
$11.8 million and $56.0 million of the aggregated balances for these four
countries were overdue more than one year as of December 31, 2012 and 2011,
respectively.
Our balance sheet exposure to Greece has been limited as we maintain no
investment holdings backed by the Greek government and our only receivables in
this market are due from our distributor, which totaled approximately $0.6
million and $4.0 million as of December 31, 2012 and 2011, respectively. These
receivables remain current and in compliance with their contractual due dates.
However, due to the current uncertainty, we recognize sales in Greece on a cash
collection basis.
We believe that our allowance for doubtful accounts was adequate as of
December 31, 2012 and 2011, respectively. However, if significant changes occur
in the availability of government funding or the reimbursement practices of
these or other governments, we may not be able to collect on amounts due to us
from customers in such countries and our results of operations could be
adversely affected.
53
--------------------------------------------------------------------------------
Table of Contents
Financial Condition and Liquidity
Our financial condition is summarized as follows:
As of December 31, % Change
2012 compared
(In millions, except percentages) 2012 2011 to 2011
Financial assets:
Cash and cash equivalents $ 570.7 $ 514.5 10.9 %
Marketable securities - current 1,135.0 1,176.1 (3.5 )%
Marketable securities - non-current 2,036.7 1,416.7 43.8 %
Total cash, cash equivalents and marketable
securities $ 3,742.4 $ 3,107.3 20.4 %
Borrowings:
Current portion of notes payable and line of
credit $ 453.4 $ 3.3 **
Notes payable, line of credit, and other
financing arrangements 687.4 1,060.8 (35.2 )%
Total borrowings $ 1,140.8 $ 1,064.1 7.2 %
Working Capital:
Current assets $ 3,244.3 $ 2,975.4 9.0 %
Current liabilities (1,657.4 ) (912.9 ) 81.6 %
Total working capital $ 1,586.9 $ 2,062.5 (23.1 )%
For the year ended December 31, 2012, certain significant cash flows were as
follows:
• $133.2 million in cash collections on accounts receivable balances in Spain
and Portugal as part of new programs to resolve outstanding amounts long
overdue;
• $67.5 million in proceeds from the issuance of stock for share-based
compensation arrangements;
• $46.8 million in proceeds from the sale of our royalty and other rights to
BENLYSTA;
• $984.7 million used for share repurchases;
• $526.6 million in total payments for income taxes;
• $254.5 million used for purchases of property, plant and equipment;
• $72.4 million of net cash paid for the acquisition of Stromedix, Inc.;
• $71.0 million in upfront payments made to Isis, recognized as research and
development expense, pursuant to our collaboration agreements dated January,
June, and December 2012; and
• $32.1 million in contributions made to Samsung Bioepis.
For the year ended December 31, 2011, certain significant cash flows were as
follows:
• $314.7 million in proceeds from the issuance of stock for share-based
compensation arrangements;
• $104.6 million in proceeds received from Dompé Farmaceutici SpA for the
purchase of Biogen Dompé SRL's outstanding receivables;
• $43.5 million in proceeds received from the sale of strategic investments and
long-lived assets;
• $498.0 million used for share repurchases;
• $332.7 million in total payments for income taxes;
• $208.0 million used for purchases of property, plant and equipment;
54
--------------------------------------------------------------------------------
Table of Contents
• $148.3 million of payments made for the purchase of the noncontrolling
interest in our joint venture investments in Biogen Dompé SRL and Biogen
Dompé Switzerland GmbH;
• $36.8 million in upfront payment to Portola under our October 2011 license
agreement and a $8.2 million investment in the equity of Portola;
• $25.0 million milestone payment made to Acorda capitalized as an intangible
asset.
We have historically financed our operating and capital expenditures primarily
through cash flows earned through our operations. We expect to continue funding
our current and planned operating requirements principally through our cash
flows from operations, as well as our existing cash resources. We believe that
existing funds, when combined with cash generated from operations and our access
to additional financing resources, if needed, are sufficient to satisfy our
operating, working capital, strategic alliance, milestone payment, capital
expenditure and debt service requirements for the foreseeable future. In
addition, we may choose to opportunistically return cash to shareholders and
pursue other business initiatives, including acquisition and licensing
activities. We may, from time to time, also seek additional funding through a
combination of new collaborative agreements, strategic alliances and additional
equity and debt financings or from other sources should we identify a
significant new opportunity.
We consider the unrepatriated cumulative earnings of certain of our foreign
subsidiaries to be invested indefinitely outside the U.S. Of the total cash,
cash equivalents and marketable securities at December 31, 2012, approximately
$1.4 billion was generated from operations in foreign jurisdictions and is
intended for use in our foreign operations or in connection with business
development transactions outside of the U.S. In managing our day-to-day
liquidity in the U.S., we do not rely on the unrepatriated earnings as a source
of funds and we have not provided for U.S. federal or state income taxes on
these undistributed foreign earnings.
For additional information related to certain risks that could negatively impact
our financial position or future results of operations, please read the "Risk
Factors" and "Quantitative and Qualitative Disclosures About Market Risk"
sections of this report.
Share Repurchase Programs
In February 2011, our Board of Directors authorized the repurchase of up to 20.0
million shares of common stock. This authorization does not have an expiration
date. In 2012, approximately 7.8 million shares were repurchased at a cost of
$984.7 million.
We repurchased approximately 6.0 million shares at a cost of approximately
$498.0 million under the 2011 authorization in 2011.
Approximately 6.2 million shares of our common stock remain available for
repurchase under the 2011 authorization.
Cash, Cash Equivalents and Marketable Securities
Until required for another use in our business, we invest our cash reserves in
bank deposits, certificates of deposit, commercial paper, corporate notes,
U.S. and foreign government instruments and other interest bearing marketable
debt instruments in accordance with our investment policy. We mitigate credit
risk in our cash reserves and marketable securities by maintaining a
well-diversified portfolio that limits the amount of exposure as to institution,
maturity, and investment type. We also limit our exposure to European sovereign
debt securities and maintain no holdings with respect to certain euro-zone
states, such as Portugal, Italy, Greece, and Spain. The value of our
investments, however, may be adversely affected by increases in interest rates,
downgrades in the credit rating of the corporate bonds included in our
portfolio, instability in the global financial markets that reduces the
liquidity of securities included in our portfolio, and by other factors which
may result in declines in the value of the investments. Each of these events may
cause us to record charges to reduce the carrying value of our investment
portfolio if the declines are other-than-temporary or sell investments for less
than our acquisition cost which could adversely impact our financial position
and our overall liquidity. For a summary of the fair value and valuation methods
of our marketable securities please read Note 9, Fair Value Measurements to our
consolidated financial statements included in this report.
The increase in cash, cash equivalents and marketable securities from
December 31, 2011 is primarily due to net cash flows provided by operating
activities and proceeds from the issuance of stock for share-based compensation
arrangements offset by share repurchases, costs associated with a business
acquisition and new license agreements and purchases of property, plant and
equipment.
55
--------------------------------------------------------------------------------
Table of Contents
Borrowings
In June 2012 our $360.0 million senior unsecured revolving credit facility
expired and was not renewed.
We have $450.0 million aggregate principal amount of 6.0% Senior Notes due
March 1, 2013 and $550.0 million aggregate principal amount of 6.875% Senior
Notes due March 1, 2018.
In connection with our 2006 distribution agreement with Fumedica, we issued
notes totaling 61.4 million Swiss Francs which were payable to Fumedica in
varying amounts from June 2008 through June 2018. Our remaining note payable to
Fumedica had a present value of 16.4 million Swiss Francs ($17.9 million) and
18.6 million Swiss Franc ($19.7 million) as of December 31, 2012 and 2011,
respectively.
For a summary of the fair and carrying values of our outstanding borrowings as
of December 31, 2012 and 2011, please read Note 9, Fair Value Measurements to
our consolidated financial statements included in this report.
Working Capital
We define working capital as current assets less current liabilities. The
decrease in working capital from December 31, 2011 reflects an increase in total
current assets of $268.9 million offset by a greater increase in total current
liabilities of $744.5 million. The increase in total current liabilities
primarily resulted from the inclusion of our 6.0% Senior Notes, which are due
March 1, 2013, as a component of total current liabilities. The increase in
total current assets was primarily driven by an increase in inventory and
accounts receivables offset by a decrease in our total financial assets
classified as current.
Cash Flows
Our net cash flows are summarized as follows:
For the Years Ended
% Change
December 31,
(In millions, except 2012 compared 2011 compared
percentages) 2012 2011 2010 to 2011 to 2010
Net cash flows provided by
operating activities $ 1,879.9 $ 1,727.7 $ 1,624.7 8.8 % 6.3 %
Net cash flows (used in)
provided by investing
activities $ (950.3 ) $ (1,650.3 ) $ 345.3 (42.4 )% **
Net cash flows used in
financing activities $ (877.5 ) $ (319.9 ) $ (1,784.9 ) ** (82.1 )%
Operating Activities
Cash flows from operating activities represent the cash receipts and
disbursements related to all of our activities other than investing and
financing activities. We expect cash provided from operating activities will
continue to be our primary source of funds to finance operating needs and
capital expenditures for the foreseeable future.
Operating cash flow is derived by adjusting our net income for:
• Non-cash operating items such as depreciation and amortization, impairment
charges and share-based compensation charges;
• Changes in operating assets and liabilities which reflect timing differences
between the receipt and payment of cash associated with transactions and when
they are recognized in results of operations; and
• Changes associated with the fair value of contingent milestones associated
with our acquisitions of businesses and payments related to collaborations.
For 2012 compared to 2011, the increase in cash provided by operating activities
was driven by an increase in net income, primarily resulting from increased
product revenue, and higher accrued balances offset by an increase in deferred
income taxes and inventory balances.
For 2011 compared to 2010, the increase in cash provided by operating activities
was driven by an increase in net income primarily resulting from increased
product revenues and $104.6 million in proceeds from Dompé Farmaceutici SpA for
the purchase of Biogen Dompé SRL's outstanding receivables, offset by increased
inventory balances and lower liabilities.
56
--------------------------------------------------------------------------------
Table of Contents
Investing Activities
For 2012 compared to 2011, the increase in net cash flows provided by investing
activities is primarily due to a decrease in the net purchases of marketable
securities offset by the net cash paid for the acquisition of Stromedix. Net
purchases of marketable securities totaled $584.8 million in 2012, compared to
$1,420.3 million in 2011.
For 2011 compared to 2010, the decrease in net cash flows provided by investing
activities is primarily due to an increase in the net purchases of marketable
securities. Net purchases of marketable securities totaled $1,420.3 million in
2011, compared to net proceeds received from sales and maturities of marketable
securities totaling $680.3 million in 2010. Net cash flows used in investing
activities for 2010 also reflect $85.0 million in net payments made to Knopp
under our 2010 license and stock purchase agreements.
Financing Activities
For 2012 compared to 2011, the increase in net cash flows used in financing
activities is due primarily to an increase in the amounts of our common stock we
repurchased as well as a decrease in proceeds from the issuance of stock for
share-based compensation arrangements. We received $67.5 million in 2012,
compared to $314.7 million in 2011, related to stock option exercises and stock
issuances under our employee stock purchase plan.
For 2011 compared to 2010, the decrease in net cash flows used in financing
activities is due primarily to a decrease in the amounts of our common stock we
repurchased and higher proceeds from the issuance of stock for share-based
compensation arrangements in 2011, offset by the $148.3 million of payments made
in 2011 for the purchase of the noncontrolling interest in our joint venture
investments in Biogen Dompé SRL and Biogen Dompé Switzerland GmbH. In addition,
we received $314.7 million in 2011 compared to $183.5 million in 2010, related
to stock option exercises and stock issuances under our employee stock purchase
plan. Cash used in financing activities during 2011, also includes the repayment
of amounts outstanding under Biogen Dompé SRL's line of credit in connection
with our recent purchase of the noncontrolling interest in our joint venture
investment in Biogen Dompé SRL.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following table summarizes our contractual obligations as of December 31,
2012, excluding amounts related to uncertain tax positions, amounts payable to
tax authorities, funding commitments, contingent milestone payments, contingent
consideration and our financing arrangements, as described below.
Payments Due by Period
Less than 1 to 3 3 to 5 After
(In millions) Total 1 Year Years Years 5 Years
Non-cancellable operating
leases (1), (2) $ 654.8 $ 45.6 $ 112.2 $ 98.8 $ 398.2
Notes payable (3) 1,218.0 495.8 81.9 81.2 559.1
Purchase and other
obligations (4) 97.5 92.1 4.4 0.7 0.3
Defined benefit obligation 36.4 - - - 36.4
Total contractual
obligations $ 2,006.7 $ 633.5 $ 198.5 $ 180.7 $ 994.0
(1) We lease properties and equipment for use in our operations. In addition to
rent, the leases may require us to pay additional amounts for taxes,
insurance, maintenance and other operating expenses. Amounts reflected within
the table, detail future minimum rental commitments under non-cancelable
operating leases as of December 31 for each of the periods presented.
(2) Includes future minimum rental commitments related to leases executed for two
buildings currently under construction in Cambridge, Massachusetts, with a
planned occupancy during the second half of 2013. For additional information
related to our leases in Cambridge, Massachusetts, please read Note 12,
Property, Plant and Equipment to our consolidated financial statements
included in this report.
Includes future minimum rental commitments of $9.3 million related to our lease
arrangement with Eisai. The 10 year lease agreement, which is cancellable after
5 years and will become effective in February 2013, gives us the option to
purchase the facility.
(3) Notes payable includes principal and interest payments.
57
--------------------------------------------------------------------------------
Table of Contents
(4) Purchase and other obligations include our obligations of approximately $14.4
million related to the fair value of net liabilities on derivative contracts
due in less than one year, approximately $5.4 million related to fixed
obligations for the purchase of natural gas and approximately $4.0 million
related to obligations for communication services.
Tax Related Obligations
We exclude liabilities pertaining to uncertain tax positions from our summary of
contractual obligations as we cannot make a reliable estimate of the period of
cash settlement with the respective taxing authorities. As of December 31, 2012,
we have approximately $71.7 million of liabilities associated with uncertain tax
positions.
Other Funding Commitments
As of December 31, 2012, our cash contributions to Samsung Bioepis totaled 36.0
billion South Korean won (approximately $32.1 million). We are obligated to fund
an additional 13.5 billion South Korean won (approximately
$12.5 million), which is due within the next year. For additional information
related to our relationship with Samsung Bioepis, please read Note 21,
Collaborative and Other Relationships to our consolidated financial statements
included in this report.
As of December 31, 2012, we have funding commitments of up to approximately
$11.6 million as part of our investment in biotechnology oriented venture
capital funds.
As of December 31, 2012, we have several on-going clinical studies in various
clinical trial stages. Our most significant clinical trial expenditures are to
clinical research organizations (CROs). The contracts with CROs are generally
cancellable, with notice, at our option. We have recorded accrued expenses of
approximately $26.5 million on our consolidated balance sheet for expenditures
incurred by CROs as of December 31, 2012. We have approximately $440.0 million
in cancellable future commitments based on existing CRO contracts as of
December 31, 2012.
Contingent Milestone Payments
Based on our development plans as of December 31, 2012, we have committed to
make potential future milestone payments to third parties of up to approximately
$1.5 billion as part of our various collaborations, including licensing and
development programs. Payments under these agreements generally become due and
payable only upon achievement of certain development, regulatory or commercial
milestones. Because the achievement of these milestones had not occurred as of
December 31, 2012, such contingencies have not been recorded in our financial
statements.
We anticipate that we may pay approximately $14.5 million of milestone payments
in 2013, provided various development, regulatory or commercial milestones are
achieved. Amounts related to contingent milestone payments are not considered
contractual obligations as they are contingent on the successful achievement of
certain development, regulatory approval and commercial milestones. These
milestones may not be achieved.
Contingent Consideration
In connection with our purchase of the noncontrolling interests in our joint
venture investments in Biogen Dompé SRL and Biogen Dompé Switzerland GmbH and
our acquisitions of Stromedix, Biogen Idec International Neuroscience GmbH,
Biogen Idec Hemophilia Inc., and Fumapharm AG, we agreed to make additional
payments of up to approximately $1.0 billion based upon the achievement of
certain milestone events. These milestones may not be achieved.
As the acquisitions of the noncontrolling interests in our joint venture
investments and our acquisitions of Stromedix and Biogen Idec International
Neuroscience GmbH occurred after January 1, 2009, we record contingent
consideration liabilities at their fair value on the acquisition date and
revalue these obligations each reporting period. For additional information
related to these transactions please read Note 2, Acquisitions, to these
consolidated financial statements.
In connection with our acquisition of Biogen Idec Hemophilia Inc. (BIH),
formerly Syntonix in January 2007, we agreed to pay up to an additional $80.0
million if certain milestone events associated with the development of BIH's
lead product, long-lasting recombinant Factor IX are achieved. The first $40.0
million contingent payment was achieved in the first quarter of 2010. An
additional $20.0 million contingent payment will occur if prior to the tenth
anniversary of the closing date, the FDA grants approval of a Biologic License
Application for Factor IX. A second $20.0 million contingent payment will occur
if prior to the tenth anniversary of the closing date, a marketing authorization
is granted by the EMA for Factor IX. For additional information related to our
acquisition of BIH, please read Note 2, Acquisitions to our consolidated
financial statements included in this report.
58
--------------------------------------------------------------------------------
Table of Contents
In 2006, we acquired Fumapharm AG. As part of this acquisition we acquired
FUMADERM and TECFIDERA (together, Fumapharm Products). We paid $220.0 million
upon closing of the transaction and will pay an additional $15.0 million if a
Fumapharm Product is approved for MS in the U.S. or E.U. We would also be
required to make the following additional milestone payments to Fumapharm AG
based on the attainment of certain sales levels of Fumapharm Products, less
certain costs as defined in the acquisition agreement:
Cumulative Sales Level
Each additional
$1.0B
Prior 12 Month Sales $500M $1.0B $2.0B $3.0B up to $20.0B
Payment Amount (In millions)
< $500 million $ - $ - $ - $ - $ -
$500 million - $1.0 billion 22.0 25.0 50.0 50.0 50.0
$1.0 billion - $1.5 billion - 50.0 100.0 100.0 100.0
$1.5 billion - $2.0 billion - - 150.0 150.0 150.0
$2.0 billion - $2.5 billion - - 200.0 200.0 200.0
$2.5 billion - $3.0 billion - - - 250.0 250.0
> $3.0 billion - - - - 300.0
These payments will be accounted for as an increase to goodwill as incurred, in
accordance with the accounting standard applicable to business combinations when
we acquired Fumapharm. Payments are due within 30 days following the end of the
quarter in which the applicable sales level has been reached and are based upon
the total sales of Fumapharm Products in the prior twelve month period.
Financing Arrangement
In July 2011, we executed leases for two office buildings currently under
construction in Cambridge, Massachusetts with a planned occupancy during the
second half of 2013. Construction of these facilities began in late 2011. In
accordance with accounting guidance applicable to entities involved with the
construction of an asset that will be leased when the construction is completed,
we are considered the owner of these properties during the construction period.
Accordingly, we record an asset along with a corresponding financing obligation
on our consolidated balance sheet for the amount of total project costs incurred
related to the construction in progress for these buildings through completion
of the construction period. Upon completion of the buildings, we will assess and
determine if the assets and corresponding liabilities should be derecognized. As
of December 31, 2012 and 2011, cost incurred by the developer in relation to the
construction of these buildings totaled approximately $86.5 million and $2.2
million, respectively.
Other Off-Balance Sheet Arrangements
We do not have any relationships with entities often referred to as structured
finance or special purpose entities that were established for the purpose of
facilitating off-balance sheet arrangements. As such, we are not exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in such relationships. We consolidate variable interest entities if we are the
primary beneficiary.
Legal Matters
For a discussion of legal matters as of December 31, 2012, please read Note 22,
Litigation to our consolidated financial statements included in this report.
Critical Accounting Estimates
The preparation of our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
U.S. (U.S. GAAP), requires us to make estimates, judgments and assumptions that
may affect the reported amounts of assets, liabilities, equity, revenues and
expenses, and related disclosure of contingent assets and liabilities. We base
our estimates on historical experience and on various other assumptions that we
believe are reasonable, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. We evaluate our estimates,
judgments and assumptions on an ongoing basis. Actual results may differ from
these estimates under different assumptions or conditions.
59
--------------------------------------------------------------------------------
Table of Contents
Revenue Recognition and Related Allowances
We recognize revenue when all of the following criteria are met: persuasive
evidence of an arrangement exists; delivery has occurred or services have been
rendered; our price to the customer is fixed or determinable; and collectability
is reasonably assured.
Product Revenues
Revenues from product sales are recognized when title and risk of loss have
passed to the customer, which is typically upon delivery. However, sales of
TYSABRI in the U.S. are recognized on the "sell-through" model, that is, upon
shipment of the product by Elan to its third party distributor rather than upon
shipment to Elan. The timing of distributor orders and shipments can cause
variability in earnings.
Revenues from Unconsolidated Joint Business
We collaborate with Genentech on the development and commercialization of
RITUXAN. Revenues from unconsolidated joint business consist of (1) our share of
pre-tax co-promotion profits in the U.S.; (2) reimbursement of our selling and
development expense in the U.S.; and (3) revenue on sales of RITUXAN in the rest
of world, which consists of our share of pre-tax co-promotion profits in Canada
and royalty revenue on sales of RITUXAN outside the U.S. and Canada by F.
Hoffmann-La Roche Ltd. (Roche) and its sublicensees. Pre-tax co-promotion
profits are calculated and paid to us by Genentech in the U.S. and by Roche in
Canada. Pre-tax co-promotion profits consist of U.S. and Canadian sales of
RITUXAN to third-party customers net of discounts and allowances less the cost
to manufacture RITUXAN, third-party royalty expenses, and distribution, selling
and marketing, and joint development expenses incurred by Genentech, Roche and
us. We record our share of the pre-tax co-promotion profits in Canada and
royalty revenues on sales of RITUXAN outside the U.S. on a cash basis.
Additionally, our share of the pre-tax co-promotion profits in the U.S. includes
estimates made by Genentech and us and those estimates are subject to change.
Actual results may ultimately differ from our estimates.
Reserves for Discounts and Allowances
We establish reserves for trade term discounts, wholesaler incentives, Medicaid
and managed care rebates, VA and PHS discounts, product returns and other
governmental discounts or applicable allowances associated with the
implementation of pricing actions in certain of international markets in which
we operate. These reserves are based on estimates of the amounts earned or to be
claimed on the related sales. Our estimates take into consideration our
historical experience, current contractual and statutory requirements, specific
known market events and trends and forecasted customer buying patterns. If
actual results vary, we may need to adjust these estimates, which could have an
effect on earnings in the period of the adjustment. The estimates we make with
respect to these allowances represent the most significant judgments with regard
to revenue recognition.
In addition to the discounts and rebates described above and classified as a
reduction of revenue, we also maintain certain customer service contracts with
distributors and other customers in the distribution channel that provide us
with inventory management and distribution services.
Bad Debt Reserves
Bad debt reserves are based on our estimated uncollectible accounts receivable.
Given our historical experience with bad debts, combined with our credit
management policies and practices, we do not presently maintain significant bad
debt reserves. However certain of our customers are based in countries where the
economic conditions continue to present challenges. We continue to monitor these
conditions and associated impacts on the financial performance and credit
worthiness of our large customers so that we can properly assess and respond to
changes in their credit profile. Our historical write-offs of accounts
receivable have not exceeded management's estimates.
Concentrations of Credit Risk
The majority of our receivables arise from product sales in the United States
and Europe and are primarily due from wholesale distributors, public hospitals
and other government entities. We monitor the financial performance and credit
worthiness of our large customers so that we can properly assess and respond to
changes in their credit profile. We continue to monitor economic conditions,
including the volatility associated with international economies, and associated
impacts on the relevant financial markets and our business, especially in light
of the global economic downturn. The credit and economic conditions within many
of the international markets in which we operate, particularly in certain
countries throughout Europe, such as Italy, Spain and Portugal, have continued
to deteriorate throughout 2012. These conditions have resulted in, and may
continue to result in, an increase in the average length of time that it takes
to collect on our accounts receivable outstanding in these countries.
60
--------------------------------------------------------------------------------
Table of Contents
In countries where we have experienced a pattern of extended payments and we
expect to collect receivables greater than one year from the time of sale, we
have discounted our receivables and reduced related revenues over the period of
time that we estimate those amounts will be paid using the country's
market-based borrowing rate for such period. The related receivables are
classified at the time of sale as long-term assets.
To date, we have not experienced any significant losses with respect to the
collection of our accounts receivable. If economic conditions worsen and/or the
financial condition of our customers were to further deteriorate, our risk of
collectability may increase, which may result in additional allowances and/or
significant bad debts.
For additional information related to our concentration of credit risk
associated with our accounts receivable balances, please read the subsection
above entitled "Credit Risk" in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Royalty Revenues
We receive royalty revenues under license agreements with a number of third
parties that sell products based on technology we have developed or to which we
own rights. The license agreements provide for the payment of royalties to us
based on sales of these licensed products. There are no future performance
obligations on our part under these license agreements. We record these revenues
based on estimates of the sales that occurred during the relevant period. The
relevant period estimates of sales are based on interim data provided by
licensees and analysis of historical royalties that have been paid to us,
adjusted for any changes in facts and circumstances, as appropriate. We maintain
regular communication with our licensees in order to assess the reasonableness
of our estimates. Differences between actual royalty revenues and estimated
royalty revenues are adjusted for in the period in which they become known,
typically the following quarter. Historically, adjustments have not been
material when compared to actual amounts paid by licensees. To the extent we do
not have sufficient ability to accurately estimate revenues, we record such
revenues on a cash basis.
Clinical Trial Expenses
Clinical trial expenses include expenses associated with CROs. The invoicing
from CROs for services rendered can lag several months. We accrue the cost of
services rendered in connection with CRO activities based on our estimate of
site management, monitoring costs, and project management costs. We maintain
regular communication with our CROs to gauge the reasonableness of our
estimates. Differences between actual clinical trial expenses and estimated
clinical trial expenses recorded have not been material and are adjusted for in
the period in which they become known. We also accrue the costs of ongoing
clinical trials associated with programs that have been terminated or
discontinued for which there is no future economic benefit at the time the
decision is made to terminate or discontinue the program.
Consolidation of Variable Interest Entities
We consolidate variable interest entities in which we are the primary
beneficiary. For such consolidated entities where we own or are exposed to less
than 100% of the economics, we record noncontrolling interest in our statement
of income for the current results allocated to the third party equity interests.
In determining whether we are the primary beneficiary of a variable interest
entity, we consider a number of factors, including our ability to direct the
activities that most significantly affect the entity's economic success, our
contractual rights and responsibilities under the arrangement and the
significance of the arrangement to each party. These considerations impact the
way we account for our existing collaborative and joint venture relationships
and may result in the future consolidation of companies or entities with which
we have collaborative or other arrangements.
Inventory
Inventories are stated at the lower of cost or market with cost determined in a
manner that approximates the first-in, first-out (FIFO) method. Included in
inventory are raw materials used in the production of multiple pre-clinical and
clinical products, which are expensed as research and development costs when
consumed.
Capitalization of Inventory Costs
Our policy is to capitalize inventory costs associated with our products prior
to regulatory approval, when, based on management's judgment, future
commercialization is considered probable and the future economic benefit is
expected to be realized. We consider numerous attributes in evaluating whether
the costs to manufacture a particular product should be capitalized as an asset.
We assess the regulatory approval process and where the particular product
stands in relation to that approval process, including any known safety or
efficacy concerns, potential labeling restrictions and other impediments to
approval. We evaluate our anticipated research and development initiatives and
constraints relating to the product and the indication in which it will be used.
We consider our manufacturing environment including our supply chain in
determining logistical constraints that could hamper approval or
commercialization. We consider the shelf life of the product in relation to
61--------------------------------------------------------------------------------
Table of Contents
the expected timeline for approval and we consider patent related or contract
issues that may prevent or delay commercialization. We also base our judgment on
the viability of commercialization, trends in the marketplace and market
acceptance criteria. Finally, we consider the reimbursement strategies that may
prevail with respect to the product and assess the economic benefit that we are
likely to realize.
We expense previously capitalized costs related to pre-approval inventory upon a
change in such judgment, due to, among other potential factors, a denial or
significant delay of approval by necessary regulatory bodies. As of December 31,
2012, $38.3 million of our inventory, including costs associated with our
TECFIDERA, Serum-Free AVONEX, Factor VIII and Factor IX programs, have been
capitalized in advance of regulatory approval. As of December 31, 2011, the
carrying value of our inventory did not include any costs associated with
products that had not yet received regulatory approval.
There is a risk inherent in these judgments and any changes we make in these
judgments may have a material impact on our results in future periods.
Obsolescence and Unmarketable Inventory
We periodically review our inventories for excess or obsolete inventory and
write-down obsolete or otherwise unmarketable inventory to its estimated net
realizable value. If the actual net realizable value is less than that estimated
by us, or if it is determined that inventory utilization will further diminish
based on estimates of demand, additional inventory write-downs may be required.
Additionally, our products are subject to strict quality control and monitoring
which we perform throughout the manufacturing process. In the event that certain
batches or units of product no longer meet quality specifications or become
obsolete due to expiration, we will record a charge to cost of sales to
write-down any obsolete or otherwise unmarketable inventory to its estimated net
realizable value. In all cases, product inventory is carried at the lower of
cost or its estimated net realizable value.
Acquired Intangible Assets, including In-process Research and Development
We have acquired, and expect to continue to acquire, intangible assets through
the acquisition of biotechnology companies or through the consolidation of
variable interest entities. These intangible assets primarily consist of
technology associated with human therapeutic products and in-process research
and development product candidates. When significant identifiable intangible
assets are acquired, we generally engage an independent third-party valuation
firm to assist in determining the fair values of these assets as of the
acquisition date. Management will determine the fair value of less significant
identifiable intangible assets acquired. Discounted cash flow models are
typically used in these valuations, and these models require the use of
significant estimates and assumptions including but not limited to:
• estimating the timing of and expected costs to complete the in-process
projects;
• projecting regulatory approvals;
• estimating future cash flows from product sales resulting from completed
products and in process projects; and
• developing appropriate discount rates and probability rates by project.
We believe the fair values assigned to the intangible assets acquired are based
upon reasonable estimates and assumptions given available facts and
circumstances as of the acquisition dates.
If these projects are not successfully developed, the sales and profitability of
the company may be adversely affected in future periods. Additionally, the value
of the acquired intangible assets may become impaired. We believe that the
foregoing assumptions used in the IPR&D analysis were reasonable at the time of
the respective acquisition. No assurance can be given, however, that the
underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated.
Effective January 1, 2009, if we are purchasing a business, the acquired IPR&D
is measured at fair value, capitalized as an intangible asset and tested for
impairment at least annually until commercialization, after which time the IPR&D
is amortized over its estimated useful life. If we acquire an asset or group of
assets, that do not meet the definition of a business under applicable
accounting standards; the acquired IPR&D is expensed on its acquisition date.
Future costs to develop these assets are recorded to expense as they are
incurred if the technology lacks alternative future uses.
62
--------------------------------------------------------------------------------
Table of Contents
Impairment and Amortization of Long-lived Assets and Accounting for Goodwill
Long-lived Assets Other than Goodwill
Long-lived assets to be held and used, including property plant and equipment as
well as intangible assets, including IPR&D and trademarks, totaled approximately
$3,373.8 million as of December 31, 2012 and are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. We review our intangible assets with
indefinite lives for impairment annually, as of October 31, and whenever events
or changes in circumstances indicate that the carrying value of an asset may not
be recoverable.
When performing our impairment assessment, we first assess qualitative factors
to determine whether it is necessary to recalculate the fair value of our
intangible assets with indefinite lives. If we believe, as a result of the
qualitative assessment, that it is more-likely-than-not that the fair value of
our intangible assets with indefinite lives is less than its carrying amount, we
calculate the fair value using the same methodology as described above. If the
carrying value of our intangible assets with indefinite lives exceeds its fair
value, then the intangible asset is written-down to their fair values.
Our most significant intangible asset is the core technology related to our
AVONEX product. We believe the economic benefit of our core technology is
consumed as revenue is generated from our AVONEX product, which we refer to as
the economic consumption amortization model. This amortization methodology
involves calculating a ratio of actual current period sales to total anticipated
sales for the life of the product and applying this ratio to the carrying amount
of the intangible asset. An analysis of the anticipated product sales of AVONEX
is performed at least annually during our long range planning cycle, and this
analysis serves as the basis for the calculation of our economic consumption
amortization model. This analysis is based upon certain assumptions that we
evaluate on a periodic basis, such as the anticipated product sales of AVONEX
and AVONEX related products and expected impact of competitor products and our
own pipeline product candidates, as well as the issuance of new patents or the
extension of existing patents. We completed our most recent long range planning
cycle in the third quarter of 2012.
We monitor events and expectations regarding product performance. If there are
any indications that the assumptions underlying our most recent analysis would
be different than those utilized within our current estimates, our analysis
would be updated and may result in a significant change in the anticipated
lifetime revenue of AVONEX determined during our most recent annual review.
We did not recognize an impairment charge related to our long-lived assets
during 2012, 2011 and 2010.
Goodwill
Goodwill totaled approximately $1,201.3 million as of December 31, 2012, and
relates largely to amounts that arose in connection with the merger of Biogen,
Inc. and IDEC Pharmaceuticals Corporation. Our goodwill balances represent the
difference between the purchase price and the fair value of the identifiable
tangible and intangible net assets when accounted for using the purchase method
of accounting.
We assess our goodwill balance within our single reporting unit annually, as of
October 31, and whenever events or changes in circumstances indicate the
carrying value of goodwill may not be recoverable to determine whether any
impairment in this asset may exist and, if so, the extent of such impairment. We
first assess qualitative factors to determine whether it is necessary to perform
the current two-step impairment test. If we believe, as a result of the
qualitative assessment, that it is more-likely-than-not that the fair value of
our reporting unit is less than its carrying amount, the quantitative two-step
impairment test is required; otherwise, no further testing is required. In the
first step, we compare the fair value of our reporting unit to its carrying
value. If the carrying value of the net assets assigned to the reporting unit
exceeds the fair value of our reporting unit, then the second step of the
impairment test is performed in order to determine the implied fair value of our
reporting unit's goodwill. If the carrying value of our reporting unit's
goodwill exceeds its implied fair value, then the company records an impairment
loss equal to the difference.
We completed our required annual impairment test in the fourth quarter of 2012,
2011 and 2010 and determined in each of those periods that the carrying value of
goodwill was not impaired. In each year, the fair value of our reporting unit,
which includes goodwill, was significantly in excess of the carry value of our
reporting unit.
63
--------------------------------------------------------------------------------
Table of Contents
Investments, including Fair Value Measures and Impairments
We invest in various types of securities, including short-term and long-term
marketable securities, principally corporate notes, government securities
including government sponsored enterprise mortgage-backed securities and credit
card and auto loan asset-backed securities, in which our excess cash balances
are invested.
In accordance with the accounting standard for fair value measurements we have
classified our financial assets as Level 1, 2 or 3 within the fair value
hierarchy. Fair values determined by Level 1 inputs utilize quoted prices
(unadjusted) in active markets for identical assets that we have the ability to
access. Fair values determined by Level 2 inputs utilize data points that are
observable such as quoted prices, interest rates and yield curves. Fair values
determined by Level 3 inputs utilize unobservable data points for the asset.
As noted in Note 9, Fair Value Measurements to our consolidated financial
statements, a majority of our financial assets have been classified as Level 2.
These assets have been initially valued at the transaction price and
subsequently valued utilizing third party pricing services. The pricing services
use many observable market inputs to determine value, including reportable
trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers,
current spot rates and other industry and economic events. We validate the
prices provided by our third party pricing services by understanding the models
used, obtaining market values from other pricing sources and analyzing pricing
data in certain instances.
We also have some investments classified as Level 3 whose fair value is
initially measured at transaction prices and subsequently valued using the
pricing of recent financing or by reviewing the underlying economic fundamentals
and liquidation value of the companies. We apply judgments and estimates when we
validate the prices provided by third parties. While we believe the valuation
methodologies are appropriate, the use of valuation methodologies is highly
judgmental and changes in methodologies can have a material impact on our
results of operations.
Impairment
We conduct periodic reviews to identify and evaluate each investment that has an
unrealized loss, in accordance with the meaning of other-than-temporary
impairment and its application to certain investments. An unrealized loss exists
when the current fair value of an individual security is less than its amortized
cost basis. Unrealized losses on available-for-sale debt securities that are
determined to be temporary, and not related to credit loss, are recorded, net of
tax, in accumulated other comprehensive income.
For available-for-sale debt securities with unrealized losses, management
performs an analysis to assess whether we intend to sell or whether we would
more likely than not be required to sell the security before the expected
recovery of the amortized cost basis. Where we intend to sell a security, or may
be required to do so, the security's decline in fair value is deemed to be
other-than-temporary and the full amount of the unrealized loss is reflected
within earnings as an impairment loss.
Regardless of our intent to sell a security, we perform additional analysis on
all securities with unrealized losses to evaluate losses associated with the
creditworthiness of the security. Credit losses are identified where we do not
expect to receive cash flows sufficient to recover the amortized cost basis of a
security and are reflected within earnings as an impairment loss.
Share-Based Compensation
We make certain assumptions in order to value and record expense associated with
awards made under our share-based compensation arrangements. Changes in these
assumptions may lead to variability with respect to the amount of expense we
recognize in connection with share-based payments.
Determining the appropriate valuation model and related assumptions requires
judgment, and includes estimating the expected market price of our stock on
vesting date and stock price volatility as well as the term of the expected
awards. Determining the appropriate amount to expense based on the anticipated
achievement of performance targets requires judgment, including forecasting the
achievement of future financial targets. The estimate of expense is revised
periodically based on the probability of achieving the required performance
targets and adjustments are made throughout the performance as appropriate. The
cumulative impact of any revision is reflected in the period of change.
We also estimate forfeitures over the requisite service period when recognizing
share-based compensation expense based on historical rates and forward-looking
factors; these estimates are adjusted to the extent that actual forfeitures
differ, or are expected to materially differ, from our estimates.
64--------------------------------------------------------------------------------
Table of Contents
Contingent Consideration
For acquisitions completed after January 1, 2009, we record contingent
consideration resulting from a business combination at its fair value on the
acquisition date. Each reporting period thereafter, we revalue these obligations
and record increases or decreases in their fair value as an adjustment to
contingent consideration expense within the consolidated statement of income.
Changes in the fair value of the contingent consideration obligations can result
from adjustments to the discount rates and periods, updates in the assumed
achievement or timing of any development milestones, or changes in the
probability of certain clinical events and changes in the assumed probability
associated with regulatory approval. These fair value measurements represent
Level 3 measurements as they are based on significant inputs not observable in
the market.
Significant judgment is employed in determining the appropriateness of these
assumptions as of the acquisition date and for each subsequent period.
Accordingly, changes in assumptions described above, could have a material
impact on the amount of contingent consideration expense we record in any given
period.
Income Taxes
We prepare and file income tax returns based on our interpretation of each
jurisdiction's tax laws and regulations. In preparing our consolidated financial
statements, we estimate our income tax liability in each of the jurisdictions in
which we operate by estimating our actual current tax expense together with
assessing temporary differences resulting from differing treatment of items for
tax and financial reporting purposes. These differences result in deferred tax
assets and liabilities, which are included in our consolidated balance sheets.
Significant management judgment is required in assessing the realizability of
our deferred tax assets. In performing this assessment, we consider whether it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which those
temporary differences become deductible. In making this determination, under the
applicable financial accounting standards, we are allowed to consider the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and the effects of tax planning strategies. Our estimates of future taxable
income include, among other items, our estimates of future income tax deductions
related to the exercise of stock options. In the event that actual results
differ from our estimates, we adjust our estimates in future periods and we may
need to establish a valuation allowance, which could materially impact our
financial position and results of operations.
We account for uncertain tax positions using a "more-likely-than-not" threshold
for recognizing and resolving uncertain tax positions. We evaluate uncertain tax
positions on a quarterly basis and consider various factors, that include, but
are not limited to, changes in tax law, the measurement of tax positions taken
or expected to be taken in tax returns, the effective settlement of matters
subject to audit, new audit activity and changes in facts or circumstances
related to a tax position. We adjust the level of the liability to reflect any
subsequent changes in the relevant facts surrounding the uncertain positions.
Our liabilities for uncertain tax positions can be relieved only if the
contingency becomes legally extinguished through either payment to the taxing
authority or the expiration of the statute of limitations, the recognition of
the benefits associated with the position meet the "more-likely-than-not"
threshold or the liability becomes effectively settled through the examination
process. We consider matters to be effectively settled once the taxing authority
has completed all of its required or expected examination procedures, including
all appeals and administrative reviews; we have no plans to appeal or litigate
any aspect of the tax position; and we believe that it is highly unlikely that
the taxing authority would examine or re-examine the related tax position. We
also accrue for potential interest and penalties, related to unrecognized tax
benefits in income tax expense.
As of December 31, 2012, our non-U.S. subsidiaries' undistributed foreign
earnings included in consolidated retained earnings and other basis differences
aggregated approximately $3.3 billion. We intend to reinvest these earnings
indefinitely in operations outside the U.S.; however, if we decide to repatriate
funds in the future to execute our growth initiatives or to fund any other
liquidity needs, the resultant tax consequences would negatively impact our
results of operations. The residual U.S. tax liability, if such amounts were
remitted, would be between $800 million to $900 million as of December 31, 2012.
Contingencies
We are currently involved in various claims and legal proceedings. On a
quarterly basis, we review the status of each significant matter and assess its
potential financial exposure. If the potential loss from any claim, asserted or
unasserted, or legal proceeding is considered probable and the amount can be
reasonably estimated, we accrue a liability for the estimated loss. Significant
judgment is required in both the determination of probability and the
determination as to whether an exposure is reasonably estimable. Because of
uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to pending claims and litigation and
may revise our estimates. These revisions in the estimates of the potential
liabilities could have a material impact on our consolidated results of
operations and financial position.
65
--------------------------------------------------------------------------------
Table of Contents
New Accounting Standards
For a discussion of new accounting standards please read Note 1, Summary of
Significant Accounting Principles to our consolidated financial statements
included in this report.
