Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-19311

BIOGEN IDEC INC.

(Exact name of registrant as specified in its charter)

 

Delaware   33-0112644

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

133 Boston Post Road, Weston, MA 02493

(781) 464-2000

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer þ       Accelerated filer  ¨   
Non-accelerated filer ¨       Smaller reporting company  ¨   
(Do not check if a smaller reporting company)      

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  þ

The number of shares of the issuer’s Common Stock, $0.0005 par value, outstanding as of July 18, 2012, was 236,346,955 shares.

 

 

 


Table of Contents

BIOGEN IDEC INC.

FORM 10-Q — Quarterly Report

For the Quarterly Period Ended June 30, 2012

TABLE OF CONTENTS

 

          Page  
PART I — FINANCIAL INFORMATION   

Item 1.

  

Financial Statements (unaudited)

  
   Condensed Consolidated Statements of Income — For the Three and Six Months Ended June 30, 2012 and 2011      5   
   Condensed Consolidated Statements of Comprehensive Income — For the Three and Six Months Ended June 30, 2012 and 2011      6   
   Condensed Consolidated Balance Sheets — As of June 30, 2012 and December 31, 2011      7   
   Condensed Consolidated Statements of Cash Flows — For the Six Months Ended June 30, 2012 and 2011      8   
  

Notes to Condensed Consolidated Financial Statements

     9   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     58   

Item 4.

  

Controls and Procedures

     58   
PART II — OTHER INFORMATION   

Item 1.

  

Legal Proceedings

     60   

Item 1A.

  

Risk Factors

     60   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     71   

Item 6.

  

Exhibits

     71   

Signatures

     72   

 

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements that are based on our current beliefs and expectations. These forward-looking statements may be accompanied by such words as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “target,” “will” and other words and terms of similar meaning. Reference is made in particular to forward-looking statements regarding:

 

   

the anticipated amount, timing and accounting of product revenues, joint business revenues, deferred revenues, milestone and other payments under licensing, collaboration or acquisition agreements, tax positions and contingencies, doubtful accounts, cost of sales, research and development costs and other expenses, amortization of intangible assets, and foreign currency forward contracts;

 

   

our plans to develop further risk stratification protocols for TYSABRI and the impact of such protocols;

 

   

the expected lifetime revenue of AVONEX and amortization recorded in relation to its core technology;

 

   

the anticipated launch of BG-12;

 

   

additional planned regulatory filings for and launches of FAMPYRA and the timing of pricing negotiations regarding FAMPYRA;

 

   

the timing, outcome and impact of proceedings related to: patents and other intellectual property rights; tax audits, assessments and settlements; and other legal proceedings;

 

   

the costs and timing of the development and commercialization of our pipeline products and services;

 

   

the timing and impact of measures worldwide designed to reduce healthcare costs;

 

   

the impact of the deterioration of the credit and economic conditions in certain countries in Europe;

 

   

our ability to finance our operations and business initiatives and obtain funding for such activities;

 

   

contract manufacturing activity;

 

   

share repurchase activity;

 

   

the timing and expected financial impact of vacating our facility in Weston, Massachusetts;

 

   

the plans for and financial impact of our manufacturing facility in Hillerød, Denmark, corporate headquarters and other properties; and

 

   

the drivers for growing our business, including our plans to pursue business development and research opportunities, and competitive conditions.

These forward-looking statements involve risks and uncertainties, including those that are described in the “Risk Factors” section of this report and elsewhere within this report that could cause actual results to differ materially from those reflected in such statements. You should not place undue reliance on these statements. Forward-looking statements speak only as of the date of this report. We do not undertake any obligation to publicly update any forward-looking statements.

NOTE REGARDING COMPANY AND PRODUCT REFERENCES

Throughout this report, “Biogen Idec,” the “Company,” “we,” “us” and “our” refer to Biogen Idec Inc. and its consolidated subsidiaries. References to “RITUXAN” refer to both RITUXAN (the trade name for rituximab in the U.S., Canada and Japan) and MabThera (the trade name for rituximab outside the U.S., Canada and Japan), and “ANGIOMAX” refers to both ANGIOMAX (the trade name for bivalirudin in the U.S., Canada and Latin America) and ANGIOX (the trade name for bivalirudin in Europe).

 

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NOTE REGARDING TRADEMARKS

AVONEX®, AVONEX PEN® and RITUXAN® are registered trademarks of Biogen Idec. FUMADERM™ is a trademark of Biogen Idec. TYSABRI® is a registered trademark of Elan Pharmaceuticals, Inc. The following are trademarks of the respective companies listed: ANGIOMAX® and ANGIOX® — The Medicines Company; ARZERRA® — Glaxo Group Limited; BETASERON® — Bayer Schering Pharma AG; EXTAVIA® — Novartis AG; FAMPYRA® — Acorda Therapeutics, Inc.; and REBIF® — Ares Trading S.A.

 

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PART I FINANCIAL INFORMATION

BIOGEN IDEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in thousands, except per share amounts)

 

    For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
    2012     2011     2012     2011  

Revenues:

       

Product

  $ 1,076,800      $ 956,703      $ 2,052,288      $ 1,863,805   

Unconsolidated joint business

    284,630        216,458        569,183        472,583   

Other

    59,521        35,486        91,495        75,602   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    1,420,951        1,208,647        2,712,966        2,411,990   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost and expenses:

       

Cost of sales, excluding amortization of acquired intangible assets

    139,112        100,503        272,308        203,616   

Research and development

    329,559        285,644        685,521        579,277   

Selling, general and administrative

    301,767        266,301        601,856        510,819   

Collaboration profit sharing

    78,511        88,050        164,406        162,844   

Amortization of acquired intangible assets

    52,282        55,136        98,243        108,352   

Fair value adjustment of contingent consideration

    12,858        2,200        14,117        3,400   

Restructuring charge

    1,139               1,422        16,587   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

    915,228        797,834        1,837,873        1,584,895   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    505,723        410,813        875,093        827,095   

Other income (expense), net

    2,950        (11,728     18,094        (1,777
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense and equity in loss of investee, net of tax

    508,673        399,085        893,187        825,318   

Income tax expense

    121,021        95,036        203,169        212,504   

Equity in loss of investee, net of tax

    511               511          
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    387,141        304,049        689,507        612,814   

Net income attributable to noncontrolling interests, net of tax

    295        16,015               30,450   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Biogen Idec Inc.

  $ 386,846      $ 288,034      $ 689,507      $ 582,364   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

       

Basic earnings per share attributable to Biogen Idec Inc.

  $ 1.62      $ 1.19      $ 2.88      $ 2.40   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share attributable to Biogen Idec Inc.

  $ 1.61      $ 1.18      $ 2.86      $ 2.38   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares used in calculating:

       

Basic earnings per share attributable to Biogen Idec Inc.

    238,988        242,375        239,389        241,932   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share attributable to Biogen Idec Inc.

    240,622        244,966        241,245        244,899   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited, in thousands)

 

    For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
    2012     2011     2012     2011  

Net income

  $ 387,141      $ 304,049      $ 689,507      $ 612,814   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

       

Unrealized gains (losses) on securities available for sale, net of tax of $47 and $621 for the three months ended June 30, 2012 and 2011, respectively; and $1,075 and $6,307 for the six months ended June 30, 2012 and 2011, respectively

    (83     1,057        1,828        (10,739

Unrealized gains (losses) on foreign currency forward contracts, net of tax of $2,164 and $822 for the three months ended June 30, 2012 and 2011, respectively; and $22 and $1,213 for the six months ended June 30, 2012 and 2011, respectively

    18,260        6,327        (103     (11,050

Unrealized gains (losses) on pension benefit obligation

    202        4        391        16   

Currency translation adjustment

    (51,226     22,235        (26,073     74,784   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

    (32,847     29,623        (23,957     53,011   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    354,294        333,672        665,550        665,825   

Comprehensive income attributable to noncontrolling interests, net of tax

    295        18,933        65        36,137   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Biogen Idec Inc.

  $ 353,999      $ 314,739      $ 665,485      $ 629,688   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except per share amounts)

 

     As of June 30,
2012
    As of December 31,
2011
 
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 456,811      $ 514,542   

Marketable securities

     949,239        1,176,115   

Accounts receivable, net

     683,841        584,603   

Due from unconsolidated joint business

     266,841        228,724   

Inventory

     362,940        326,843   

Other current assets

     149,247        144,600   
  

 

 

   

 

 

 

Total current assets

     2,868,919        2,975,427   

Marketable securities

     1,467,909        1,416,737   

Property, plant and equipment, net

     1,622,812        1,571,387   

Intangible assets, net

     1,732,972        1,608,191   

Goodwill

     1,197,904        1,146,314   

Investments and other assets

     271,864        331,548   
  

 

 

   

 

 

 

Total assets

   $ 9,162,380      $  9,049,604   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

    

Current portion of notes payable and line of credit

   $ 453,045      $ 3,292   

Taxes payable

     58,315        45,939   

Accounts payable

     159,152        186,448   

Accrued expenses and other

     762,353        677,210   
  

 

 

   

 

 

 

Total current liabilities

     1,432,865        912,889   

Notes payable, line of credit and other financing arrangements

     641,568        1,060,808   

Long-term deferred tax liability

     282,904        248,644   

Other long-term liabilities

     534,358        400,276   
  

 

 

   

 

 

 

Total liabilities

     2,891,695        2,622,617   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Biogen Idec Inc. shareholders’ equity

    

Preferred stock, par value $0.001 per share

              

Common stock, par value $0.0005 per share

     127        128   

Additional paid-in capital

     3,825,647        4,185,048   

Accumulated other comprehensive income (loss)

     (50,557     (26,535

Retained earnings

     3,796,154        3,106,761   

Treasury stock, at cost

     (1,303,074     (839,903
  

 

 

   

 

 

 

Total Biogen Idec Inc. shareholders’ equity

     6,268,297        6,425,499   

Noncontrolling interests

     2,388        1,488   
  

 

 

   

 

 

 

Total equity

     6,270,685        6,426,987   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 9,162,380      $ 9,049,604   
  

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

     For the Six Months
Ended June 30,
 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 689,507      $ 612,814   

Adjustments to reconcile net income to net cash flows from operating activities:

    

Depreciation and amortization

     174,569        182,845   

Share-based compensation

     60,467        57,399   

Deferred income taxes

     (43,831     48,626   

Other

     (21,070     (26,785

Changes in operating assets and liabilities, net:

    

Accounts receivable

     (10,758     (54,909

Accrued expenses and other current liabilities

     51,973        (67,488

Other changes in operating assets and liabilities, net

     (70,651     (69,258
  

 

 

   

 

 

 

Net cash flows provided by operating activities

     830,206        683,244   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales and maturities of marketable securities

     1,423,931        1,169,836   

Purchases of marketable securities

     (1,253,934     (1,778,568

Acquisitions of business, net of cash acquired

     (72,401       

Purchases of property, plant and equipment

     (127,447     (86,229

Other

     (22,647     21,376   
  

 

 

   

 

 

 

Net cash flows used in investing activities

     (52,498     (673,585
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Purchase of treasury stock

     (909,951     (386,575

Proceeds from issuance of stock for share-based compensation arrangements

     43,081        285,883   

Other

     33,166        22,767   
  

 

 

   

 

 

 

Net cash flows used in financing activities

     (833,704     (77,925
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (55,996     (68,266

Effect of exchange rate changes on cash and cash equivalents

     (1,735     6,194   

Cash and cash equivalents, beginning of the period

     514,542        759,598   
  

 

 

   

 

 

 

Cash and cash equivalents, end of the period

   $ 456,811      $ 697,526   
  

 

 

   

 

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Business

Overview

Biogen Idec is a global biotechnology company that discovers, develops, manufactures and markets therapies for the treatment of neurodegenerative diseases, hemophilia and autoimmune disorders. Patients worldwide benefit from our multiple sclerosis therapies.

Basis of Presentation

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The information included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2011 Form 10-K and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period. Certain prior-year amounts may be reclassified to conform to the current year’s presentation.

Consolidation

Our condensed consolidated financial statements reflect our financial statements, those of our wholly-owned subsidiaries and those of certain variable interest entities where we are the primary beneficiary. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interests in our condensed consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. All material intercompany balances and transactions are eliminated in consolidation.

In determining whether we are the primary beneficiary of an entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way we account for our existing collaborative relationships and other arrangements. We continuously assess whether we are the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in us consolidating or deconsolidating our partner(s) to collaborations and other arrangements.

Equity Method of Accounting

In circumstances where we have the ability to exercise significant influence over the operating and financial policies of a company in which we have an investment, we utilize the equity method of accounting for recording investment activity. In assessing whether we exercise significant influence, we consider the nature and magnitude of our investment, the voting and protective rights we hold, any participation in the governance of the other company, and other relevant factors such as the presence of a collaboration or other business relationship. Under the equity method of accounting, we will record within our results of operations our share of income or loss of the other company.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Use of Estimates

The preparation of our condensed consolidated financial statements requires us to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates and judgments and methodologies, including those related to revenue recognition and related allowances, our collaborative relationships, clinical trial expenses, the consolidation of variable interest entities, the collectability of our accounts receivable, the valuation of contingent consideration, the valuation of acquired intangible assets including in-process research and development, inventory, impairment and amortization of long-lived assets including intangible assets and acquired in-process research and development (IPR&D), impairments of goodwill, share-based compensation, income taxes including the valuation allowance for deferred tax assets, the valuation of investments, derivatives and hedging activities, contingencies, litigation, and restructuring charges. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

 

2. Acquisitions

Stromedix, Inc.

On March 8, 2012, we completed our acquisition of all the outstanding stock of Stromedix, Inc. (Stromedix), a privately held company located in Cambridge, Massachusetts. Stromedix is a business involved in the discovery of antibodies designed to treat fibrosis disorders. Stromedix’ lead candidate, STX-100, is in phase 2a of development in patients with idiopathic pulmonary fibrosis (IPF). The purchase price included a $75.0 million cash payment and up to a maximum of $487.5 million in contingent consideration in the form of development and approval milestones, of which $275.0 million relates directly to the development and approval of STX-100 for the treatment of IPF. The acquisition was funded from our existing cash on hand and has been accounted for as the acquisition of a business. In addition to acquiring the outstanding stock of the entity and obtaining the rights to STX-100, we obtained the services of key employees and the rights to a second antibody and an antibody conjugate, which are both in preclinical development.

Upon acquisition, we recorded a liability of $122.2 million representing the fair value of the contingent consideration. This amount was estimated through a valuation model that incorporates industry based probability adjusted assumptions relating to the achievement of these milestones and thus the likelihood of us making payments. This fair value measurement is based upon significant inputs not observable in the market and therefore represents a Level 3 measurement. Subsequent changes in the fair value of this obligation will be recognized as adjustments to contingent consideration and reflected within our condensed consolidated statements of income. For additional information related to our fair value of this obligation, please read Note 7, Fair Value Measurements to these condensed consolidated financial statements.

 

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

The purchase price consists of the following:

 

(In millions)

      

Cash portion of consideration

   $ 75.0   

Fair value of pre-existing equity ownership

     10.2   

Contingent consideration

     122.2   
  

 

 

 

Total purchase price

   $ 207.4   
  

 

 

 

The following table summarizes the estimated fair values of the separately identifiable assets acquired and liabilities assumed as of March 8, 2012:

 

(In millions)

      

In-process research and development

   $ 219.2   

Goodwill

     51.6   

Deferred tax assets

     14.4   

Deferred tax liability

     (77.9

Other, net

     0.1   
  

 

 

 

Total purchase price

   $ 207.4   
  

 

 

 

Our estimate of the fair value of the specifically identifiable assets acquired and liabilities assumed as of the date of acquisition is subject to the finalization of management’s analysis related to tax matters, such as filing Stromedix’ final tax return and completing the evaluation of whether we will be able utilize Stromedix’ net operating losses. The final determination of these fair values will be completed as soon as possible as additional information becomes available but no later than one year from the acquisition date. Although the final determination may result in differences from our estimates, we do not expect those differences to be material to our financial condition or results of operations.

Our estimate of the fair value of the IPR&D programs acquired was determined through a probability adjusted cash flow analysis utilizing a discount rate of 20%. This valuation was primarily driven by the value associated with the primary indication of the lead candidate, STX-100, which is expected to be completed no earlier than fiscal 2020 at a remaining cost as of the acquisition date of approximately $290.0 million. The fair value associated with STX-100 for the treatment of IPF was $202.6 million. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 fair value measurements.

The goodwill recognized is largely related to establishing a deferred tax liability for the IPR&D intangible assets which have no tax basis and, therefore, are not tax deductible.

Pro forma results of operations would not be materially different as a result of the acquisition of Stromedix and therefore are not presented. After the acquisition date, our results of operations include the results of Stromedix.

Prior to the acquisition of Stromedix, we had an equity interest equal to approximately 5% of the company’s total capital stock (on an “as converted” basis) pursuant to a license agreement we entered into with Stromedix in 2007 for the development of the STX-100 product candidate. Based on the fair market value of this equity interest derived from the purchase price, we recognized a gain of approximately $9.0 million in the first quarter of 2012, which was recorded as a component of other income (expense), net within our condensed consolidated statement of income.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

3. Accounts Receivable

Our accounts receivable primarily arise from product sales in the U.S. and Europe and mainly represent amounts due from our wholesale distributors, public hospitals and other government entities. Concentrations of credit risk with respect to our accounts receivable, which are typically unsecured, are limited due to the wide variety of customers and markets using our products, as well as their dispersion across many different geographic areas. The majority of our accounts receivable have standard payment terms which are generally between 30 and 90 days. 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 economic conditions and assess the impacts of such changes in the relevant financial markets on our business, especially in light of sovereign credit developments. We provide reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve. To date, our historical write-offs of accounts receivable have not been significant.

The credit and economic conditions within Italy, Spain, Portugal and Greece, among other members of the European Union, remain uncertain. Over the past year, the average length of time that it takes to collect our accounts receivable in some of these countries has increased and may increase further in the future. In some regions in these countries where our collections have slowed and a significant portion of these receivables are now routinely being collected over periods in excess of one year, 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. We accrete interest income on these receivables, which is recognized as a component of other income (expense), net within our condensed consolidated statements of income.

Our net accounts receivable balances from product sales in selected European countries are summarized as follows:

 

     As of June 30, 2012  

(In millions)

   Current
Balance Included
within Accounts
Receivable, net
     Non-Current
Balance Included
within Investments
and Other Assets
     Total  

Spain

   $ 58.9       $       $ 58.9   

Italy

   $ 90.7       $ 8.9       $ 99.6   

Portugal

   $ 26.0       $ 13.1       $ 39.1   

Greece

   $ 2.7       $       $ 2.7   

 

     As of December 31, 2011  

(In millions)

   Current
Balance Included
within Accounts
Receivable, net
     Non-Current
Balance Included
within Investments
and Other Assets
     Total  

Spain

   $ 68.5       $ 65.5       $ 134.0   

Italy

   $ 19.4       $ 48.7       $ 68.1   

Portugal

   $ 20.6       $ 12.3       $ 32.9   

Greece

   $ 4.0       $       $ 4.0   

Approximately $15.2 million and $56.0 million of the aggregated balances for these countries were overdue more than one year as of June 30, 2012 and December 31, 2011, respectively.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

In June 2012, as part of a new program to resolve long outstanding amounts due, the Spanish government paid us approximately $112.0 million, contributing to a significant decrease in our accounts receivable in Spain. At June 30, 2012, our receivables in Spain are paid through November 2011.

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 Euro 30.7 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 seeking a ruling that the reimbursement limit does not apply and that the position of AIFA is unenforceable. Since being notified that AIFA believes a reimbursement limit is in effect, we have deferred $32.5 million and $13.8 million of revenue in Italy during the first half of 2012 and fourth quarter of 2011, respectively. We expect that we will 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 19, Litigation to our condensed consolidated financial statements included within this report.

 

4. Reserves for Discounts and Allowances

An analysis of the amount of, and change in, reserves is summarized as follows:

 

           Contractual              

(In millions)

   Discounts     Adjustments     Returns     Total  

Balance, as of December 31, 2011

   $ 12.6      $ 119.3      $  23.7      $ 155.6   

Current provisions relating to sales in current year

     55.7        220.0        11.9        287.6   

Adjustments relating to prior years

     (0.2     (5.7            (5.9

Payments/returns relating to sales in current year

     (39.4     (114.8     (3.2     (157.4

Payments/returns relating to sales in prior years

     (11.2     (83.5     (6.0     (100.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, as of June 30, 2012

   $ 17.5      $ 135.3      $ 26.4      $ 179.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

The total reserves above, included in our condensed consolidated balance sheets, are summarized as follows:

 

     As of      As of  
     June 30,      December 31,  

(In millions)

   2012      2011  

Reduction of accounts receivable

   $ 46.3       $ 40.6   

Component of accrued expenses and other

     132.9         115.0   
  

 

 

    

 

 

 

Total reserves

   $ 179.2       $ 155.6   
  

 

 

    

 

 

 

 

5. Inventory

The components of inventory are summarized as follows:

 

     As of      As of  
     June 30,      December 31,  

(In millions)

   2012      2011  

Raw materials

   $ 92.9       $ 83.8   

Work in process

     166.8         169.4   

Finished goods

     103.2         73.6   
  

 

 

    

 

 

 

Total inventory

   $ 362.9       $ 326.8   
  

 

 

    

 

 

 

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

6. Intangible Assets and Goodwill

In connection with our acquisition of Stromedix, we acquired IPR&D programs with an estimated fair value of $219.2 million and recorded $51.6 million of goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. For a more detailed description of this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements.

Intangible Assets

Intangible assets, net of accumulated amortization, impairment charges and adjustments, are summarized as follows:

 

          As of June 30, 2012     As of December 31, 2011  
    Estimated           Accumulated                 Accumulated        

(In millions)

  Life     Cost     Amortization     Net     Cost     Amortization     Net  

Out-licensed patents

    13-23 years      $ 578.0      $ (406.2   $ 171.8      $ 578.0      $ (391.3   $ 186.7   

Core developed technology

    15-23 years        3,005.3        (1,880.6     1,124.7        3,005.3        (1,801.1     1,204.2   

In-process research and development

   
 
Up to 15 years upon
commercialization
  
  
    330.1               330.1        110.9               110.9   

Trademarks and tradenames

    Indefinite        64.0               64.0        64.0               64.0   

In-licensed rights and patents

    6-16 years        51.1        (8.7     42.4        47.2        (4.8     42.4   

Assembled workforce

    4 years        2.1        (2.1            2.1        (2.1       
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets

    $ 4,030.6      $ (2,297.6   $ 1,733.0      $ 3,807.5      $ (2,199.3   $ 1,608.2   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For the three and six months ended June 30, 2012, amortization of acquired intangible assets totaled $52.3 million and $98.3 million, respectively, as compared to $55.1 million and $108.4 million, respectively, in the prior year comparative periods. Amortization of acquired intangible assets is expected to be in the range of approximately $130.0 million to $200.0 million annually through 2016.

In-licensed Rights and Patents

We licensed rights for the diagnostic and therapeutic application of recombinant virus-like particles, known as VP1 proteins, to detect antibodies of the JC virus (JCV) in serum or blood. Under the terms of this license, we expect to make payments totaling approximately $57.5 million through 2016. These payments include upfront and milestone payments as well as the greater of an annual maintenance fee or usage-based royalty payment. As of June 30, 2012 and December 31, 2011, we have recognized an intangible asset totaling $23.1 million and $19.2 million, respectively, reflecting the total amount of upfront payments made and other time-based milestone payments. We will capitalize any additional payments due under this arrangement as an intangible asset when they become due. Amortization expense is recorded using an economic consumption model based on the number of JCV antibody assay tests performed each period compared to an estimate of the total tests we expect to perform multiplied by payments made to date and the probable payments we expect to make through 2016.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Goodwill

The following table provides a roll forward of the changes in our goodwill balance:

 

     As of      As of  

(In millions)

   June 30,
2012
     December 31,
2011
 

Goodwill, beginning of period

   $ 1,146.3       $ 1,146.3   

Goodwill acquired during the period

     51.6           
  

 

 

    

 

 

 

Goodwill, end of period

   $ 1,197.9       $ 1,146.3   
  

 

 

    

 

 

 

As of June 30, 2012, we had no accumulated impairment losses related to goodwill.

 

7. Fair Value Measurements

The tables below present information about our assets and liabilities that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine each fair value:

 

(In millions)

   As of
June 30,
2012
     Quoted Prices
in Active
Markets
(Level 1)
     Significant Other

Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Cash equivalents

   $ 222.9       $       $ 222.9       $   

Marketable debt securities:

           

Corporate debt securities

     781.5                 781.5           

Government securities

     1,267.0                 1,267.0           

Mortgage and other asset backed securities

     368.6                 368.6           

Marketable equity securities

     0.1         0.1                   

Venture capital investments

     25.4                         25.4   

Derivative contracts

     36.5                 36.5           

Plan assets for deferred compensation

     16.1                 16.1           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,718.1       $ 0.1       $ 2,692.6       $ 25.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative contracts

   $ 0.3       $       $ 0.3       $   

Contingent consideration obligations

     280.9                         280.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 281.2       $       $ 0.3       $ 280.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

(In millions)

   As of
December 31,
2011
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Cash equivalents

   $ 399.8       $       $ 399.8       $   

Marketable debt securities:

           

Corporate debt securities

     602.6                 602.6           

Government securities

     1,716.5                 1,716.5           

Mortgage and other asset backed securities

     273.8                 273.8           

Marketable equity securities

     0.1         0.1                   

Venture capital investments

     23.5                         23.5   

Derivative contracts

     39.5                 39.5           

Plan assets for deferred compensation

     11.6                 11.6           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,067.4       $ 0.1       $ 3,043.8       $ 23.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivative contracts

   $ 0.5       $       $ 0.5       $   

Contingent consideration obligations

     151.0                         151.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 151.5       $       $ 0.5       $  151.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of Level 2 instruments classified as cash equivalents and marketable debt securities were determined through financial models of third party pricing services. For a description of our validation procedures related to prices provided by third party pricing services, refer to Note 1, Summary of Significant Accounting Policies: Fair Value Measurements, to our consolidated financial statements included within our 2011 Form 10-K.

Our marketable equity securities represent investments in publicly traded equity securities. Our venture capital investments include investments in certain venture capital funds, accounted for at fair value, which primarily invest in small privately-owned, venture-backed biotechnology companies. These venture capital investments represented approximately 0.3% of total assets as of June 30, 2012 and December 31, 2011, respectively.

The following table provides a roll forward of the fair value of our venture capital investments, which are all Level 3 assets:

 

     For the Three Months
Ended June 30,
       For the Six Months  
Ended June 30,
 

(In millions)

   2012     2011      2012      2011  

Fair value, beginning of period

   $ 22.1      $ 20.5       $ 23.5       $ 20.8   

Unrealized gains included in earnings

     3.1        0.1         3.5         0.7   

Unrealized losses included in earnings

     (0.2     (0.3      (2.0      (1.3

Purchases

     0.4        0.3         0.4         0.4   
  

 

 

   

 

 

    

 

 

    

 

 

 

Fair value, end of period

   $ 25.4      $ 20.6       $ 25.4       $ 20.6   
  

 

 

   

 

 

    

 

 

    

 

 

 

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

The fair and carrying values of our debt instruments, which are all Level 2 liabilities, are summarized as follows:

 

     As of June 30, 2012        As of December 31, 2011    

(In millions)

   Fair
Value
     Carrying
Value
     Fair
Value
     Carrying
Value
 

Notes payable to Fumedica

   $ 18.2       $ 16.5       $ 22.4       $ 19.7   

6.0% Senior Notes due March 1, 2013

     464.1         449.9         474.1         449.9   

6.875% Senior Notes due March 1, 2018

     667.0         589.4         663.9         592.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,149.3       $ 1,055.8       $ 1,160.4       $ 1,061.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

We utilized Level 2 inputs to determine the fair value of our notes payable to Fumedica and our Senior Notes. The fair value of our note payable to Fumedica was estimated using market observable inputs, including current interest and foreign currency exchange rates. The fair value of our Senior Notes was determined through market, observable, and corroborated sources.

The following table provides a roll forward of the fair values of our contingent consideration obligations, which are all Level 3 liabilities:

 

     For the Three Months
Ended June 30,
     For the Six Months
Ended June 30,
 

(In millions)

       2012             2011              2012             2011      

Fair value, beginning of period

   $ 269.9      $ 82.4       $ 151.0      $ 81.2   

Additions

     4.6                122.2          

Changes in fair value

     12.9        2.2         14.2        3.4   

Payments

     (6.5             (6.5       
  

 

 

   

 

 

    

 

 

   

 

 

 

Fair value, end of period

   $ 280.9      $ 84.6       $ 280.9      $ 84.6   
  

 

 

   

 

 

    

 

 

   

 

 

 

As of June 30, 2012 and December 31, 2011, approximately $263.9 million and $140.3 million, respectively, of the fair value of our total contingent consideration obligations were reflected as components of other long-term liabilities within our condensed consolidated balance sheets with the remaining balances reflected as a component of accrued expenses and other.

In connection with our acquisition of Stromedix in March 2012, we recorded a liability of $122.2 million representing the fair value of the contingent consideration. This valuation was based on probability weighted net cash outflow projections of $487.5 million, discounted using a rate of 4.4%, which is a measure of the credit risk associated with settling the liability.

The consideration for our acquisitions often includes future payments that are contingent upon the occurrence of a particular event. For acquisitions completed after January 1, 2009, we record a contingent consideration obligation for such contingent payments at fair value on the acquisition date. We estimate the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and thus likelihood of making related payments. We revalue these contingent consideration obligations each reporting period. Changes in the fair value of our contingent consideration obligations are recognized within our condensed consolidated statements of income. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

inputs, including adjustments to the discount rates and periods utilized, changes in estimated cash flows projected if the product candidate is successfully commercialized, changes in the assumed achievement or timing of any development milestones, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. Our contingent consideration obligation related to our 2011 purchase of the noncontrolling interest in the Dompé joint ventures also includes an estimate of the timing and amount of cumulative sales of product(s) over a specified performance period.

Discount rates in our valuation models represent a measure of the credit risk associated with settling the liability. The value of our contingent obligations as of June 30, 2012 was based upon discount rates ranging from 3.3% to 4.2%. The period over which we discount our contingent obligations is based on the current development stage of the product candidates, our specific development plan for that product candidate adjusted for the probability of completing the development step, and when the contingent payments would be triggered. In determining the probability of success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. 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 could have a material impact on the amount of contingent consideration expense we record in any given period.

In connection with our acquisition of Stromedix, we allocated $219.2 million of the total purchase price to acquired IPR&D, which was capitalized as an intangible asset. The amount allocated to acquired IPR&D was based on significant inputs not observable in the market and thus represented a Level 3 fair value measurement. These assets are tested for impairment annually until commercialization, after which time the IPR&D is amortized over its estimated useful life. For a more detailed description of this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements.

There has been no impairment of our assets measured at fair value during the three and six months ended June 30, 2012. In addition, there were no changes in valuation techniques or inputs utilized or transfers between fair value measurement levels during the three and six months ended June 30, 2012. For additional information related to the valuation techniques and inputs utilized in valuation of our financial assets and liabilities, please read Note 1, Summary of Significant Accounting Policies to our consolidated financial statements included within our 2011 Form 10-K.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

8. Financial Instruments

Marketable Securities

The following tables summarize our marketable debt and equity securities:

 

As of June 30, 2012 (In millions):

   Fair
Value
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Amortized
Cost
 

Available-for-sale:

          

Corporate debt securities

          

Current

   $ 281.7       $ 0.3       $      $ 281.4   

Non-current

     499.8         2.3         (0.3     497.8   

Government securities

          

Current

     666.1         0.3         (0.1     665.9   

Non-current

     600.9         0.7         (0.2     600.4   

Mortgage and other asset backed securities

          

Current

     1.4                        1.4   

Non-current

     367.2         1.1         (1.2     367.3   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable debt securities

   $ 2,417.1       $ 4.7       $ (1.8   $ 2,414.2   
  

 

 

    

 

 

    

 

 

   

 

 

 

Marketable equity securities, non-current

   $ 0.1       $       $      $ 0.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

            Gross      Gross        
     Fair      Unrealized      Unrealized     Amortized  

As of December 31, 2011 (In millions):

   Value      Gains      Losses     Cost  

Available-for-sale:

          

Corporate debt securities

          

Current

   $ 155.0       $ 0.2       $ (0.1   $ 154.9   

Non-current

     447.6         1.2         (1.5     447.9   

Government securities

          

Current

     1,021.0         0.4                1,020.6   

Non-current

     695.5         0.9         (0.2     694.8   

Mortgage and other asset backed securities

          

Current

     0.1                        0.1   

Non-current

     273.7         0.5         (1.3     274.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total marketable debt securities

   $ 2,592.9       $ 3.2       $ (3.1   $ 2,592.8   
  

 

 

    

 

 

    

 

 

   

 

 

 

Marketable equity securities, non-current

   $ 0.1       $       $ (0.1   $ 0.2   
  

 

 

    

 

 

    

 

 

   

 

 

 

In the tables above, as of June 30, 2012 and December 31, 2011, government securities included $88.9 million and $214.0 million, respectively, of Federal Deposit Insurance Corporation (FDIC) guaranteed senior notes issued by financial institutions under the Temporary Liquidity Guarantee Programs, which will all mature prior to December 31, 2012.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

The following table summarizes our financial assets with original maturities of less than 90 days included within cash and cash equivalents on the accompanying condensed consolidated balance sheet:

 

     As of      As of  
     June 30,      December 31,  

(In millions)

       2012              2011      

Commercial paper

   $ 10.0       $   

Repurchase agreements

     84.0         8.8   

Short-term debt securities

     128.9         391.0   
  

 

 

    

 

 

 

Total

   $ 222.9       $ 399.8   
  

 

 

    

 

 

 

The carrying values of our commercial paper, including accrued interest, repurchase agreements and short-term debt securities approximate fair value.

Summary of Contractual Maturities: Available-for-Sale Securities

The estimated fair value and amortized cost of our marketable debt securities available-for-sale by contractual maturity are summarized as follows:

 

     As of June 30, 2012      As of December 31, 2011  
     Estimated      Amortized      Estimated      Amortized  

(In millions)

   Fair Value      Cost      Fair Value      Cost  

Due in one year or less

   $ 949.2       $ 948.7       $ 1,176.1       $ 1,175.6   

Due after one year through five years

     1,260.0         1,257.4         1,251.6         1,251.4   

Due after five years

     207.9         208.1         165.2         165.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

   $ 2,417.1       $ 2,414.2       $ 2,592.9       $ 2,592.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

The average maturity of our marketable securities as of June 30, 2012 and December 31, 2011 was 13 months and 14 months, respectively.

Proceeds from Marketable Debt Securities

The proceeds from maturities and sales of marketable debt securities and resulting realized gains and losses are summarized as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions)

       2012             2011             2012               2011        

Proceeds from maturities and sales

   $ 599.6      $ 381.8      $ 1,423.9      $ 1,169.8   

Realized gains

   $ 0.6      $ 0.7      $ 1.3      $ 3.1   

Realized losses

   $ (1.3   $ (0.5   $ (2.0   $ (1.3

Proceeds were generally reinvested. Realized losses for the three and six months ended June 30, 2012 and 2011 primarily relate to sales of agency mortgage-backed securities.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Strategic Investments

As of June 30, 2012 and December 31, 2011, our strategic investment portfolio was comprised of investments totaling $63.2 million and $62.8 million, respectively, which are included in investments and other assets in our accompanying condensed consolidated balance sheets. Our strategic investment portfolio includes investments in equity securities of certain biotechnology companies and our investments in venture capital funds accounted for at fair value which totaled $25.5 million and $23.6 million as of June 30, 2012 and December 31, 2011, respectively. Our strategic investment portfolio also includes other equity investments in privately-held companies and additional investments in venture capital funds accounted for under the cost method. The carrying value of these investments totaled $37.7 million and $39.2 million, as of June 30, 2012 and December 31, 2011, respectively.

During the three and six months ended June 30, 2012, we realized net gains, impairments and changes to fair value recorded through income of $2.2 million and $13.5 million, respectively, on our strategic investment portfolio as compared to a net loss of $5.5 million and a net gain of $7.6 million, respectively, in the prior year comparative periods. The gains recognized during the six months ended June 30, 2012, include a gain of $9.0 million recognized upon our acquisition of Stromedix as we previously held an equity interest. For a more detailed description of this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements. The gains recognized during the six months ended June 30, 2011 include a gain of $13.8 million on the sale of one of our marketable equity investments.

Impairments

For the three and six months ended June 30, 2012, we recognized $0.8 million and $1.3 million, respectively, as impairment charges of our publicly-held strategic investments, investments in venture capital funds accounted for under the cost method and investments in privately-held companies.

For the three and six months ended June 30, 2011, we recognized $5.2 million and $5.5 million, respectively, as impairment charges of our investments in privately-held companies and our investments in venture capital funds accounted for under the cost method. No impairments were recognized in relation to our publicly-held strategic investments.

 

9. Derivative Instruments

Foreign Currency Forward Contracts

Due to the global nature of our operations, portions of our revenues are earned in currencies other than the U.S. dollar. The value of revenues measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. In order to mitigate these changes we use foreign currency forward contracts to lock in exchange rates associated with a portion of our forecasted international revenues.

Foreign currency forward contracts in effect as of June 30, 2012 and December 31, 2011 had durations of 1 to 12 months. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in accumulated other comprehensive income (loss). Realized gains and losses for the effective portion of such contracts are recognized in revenue when the sale of product in the currency being hedged is recognized. To the extent ineffective, hedge transaction gains and losses are reported in other income (expense), net.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

The notional value of foreign currency forward contracts that were entered into to hedge forecasted revenues is summarized as follows:

 

     Notional Amount  
     As of
June 30, 2012
     As of
December 31, 2011
 

Foreign Currency: (in millions)

     

Euro

   $ 523.1       $ 496.4   

Canadian dollar

     12.8         22.9   

Swedish krona

     6.7         13.0   
  

 

 

    

 

 

 

Total foreign currency forward contracts

   $ 542.6       $ 532.3   
  

 

 

    

 

 

 

The portion of the fair value of these foreign currency forward contracts that was included in accumulated other comprehensive income (loss) within total equity reflected gains of $36.4 million and $36.5 million as of June 30, 2012 and December 31, 2011, respectively. We expect all contracts to be settled over the next 12 months and any amounts in accumulated other comprehensive income (loss) to be reported as an adjustment to revenue. We consider the impact of our and our counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract. As of June 30, 2012 and December 31, 2011, respectively, credit risk did not materially change the fair value of our foreign currency forward contracts.

In relation to our foreign currency forward contracts, we recognized in other income (expense) net gains of $1.3 million and $3.2 million due to hedge ineffectiveness for the three and six months ended June 30, 2012, respectively, as compared to net losses of $1.2 million and $0.5 million, respectively, in the prior year comparative periods.

In addition, we recognized in product revenue net gains of $13.6 million and $19.0 million for the settlement of certain effective cash flow hedge instruments for the three and six months ended June 30, 2012, respectively, as compared to net losses of $18.5 million and $26.8 million, respectively, in the prior year comparative periods. These settlements were recorded in the same period as the related forecasted revenues.

Summary of Derivatives Designated as Hedging Instruments

The following table summarizes the fair value and presentation in our condensed consolidated balance sheets for derivatives designated as hedging instruments:

 

(In millions)

  

Balance Sheet Location

   Fair Value
As of June 30,
2012
 

Foreign Currency Contracts:

     

Asset derivatives

  

Other current assets

   $ 35.7   

Liability derivatives

  

Accrued expenses and other

   $   

(In millions)

  

Balance Sheet Location

   Fair Value
As of December 31,
2011
 

Foreign Currency Contracts:

     

Asset derivatives

  

Other current assets

   $ 32.6   

Liability derivatives

  

Accrued expenses and other

   $   

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

The following table summarizes the effect of derivatives designated as hedging instruments on our condensed consolidated statements of income:

 

(In millions)

  Amount
Recognized in
Accumulated
Other
Comprehensive
Income (Loss)
on Derivative

Gain/(Loss)
(Effective Portion)
   

Income
Statement
Location
(Effective Portion)

  Amount
Reclassified from
Accumulated
Other
Comprehensive
Income (Loss)
into Income

Gain/(Loss)
(Effective Portion)
    Income
Statement Location
(Ineffective Portion)
  Amount of
Gain/(Loss)
Recorded
(Ineffective Portion)
 
         

For the Three Months Ended

         

June 30, 2012:

        Other income  

Foreign currency contracts

  $ 36.4     

Revenue

  $ 13.6      (expense)   $ 1.3   

June 30, 2011:

        Other income  

Foreign currency contracts

  $ (23.3  

Revenue

  $ (18.5   (expense)   $ (1.2

For the Six Months Ended

         

June 30, 2012:

        Other income  

Foreign currency contracts

  $ 36.4     

Revenue

  $ 19.0      (expense)   $ 3.2   

June 30, 2011:

        Other income  

Foreign currency contracts

  $ (23.3  

Revenue

  $ (26.8   (expense)   $ (0.5

Other Derivatives

We also enter into other foreign currency forward contracts, usually with one month durations, to mitigate the foreign currency risk related to certain balance sheet positions. We have not elected hedge accounting for these transactions.

The aggregate notional amount of these other outstanding foreign currency contracts was $344.1 million as of June 30, 2012. The fair value of these contracts was a net asset of $0.5 million. Net gains of $15.9 million and $11.4 million related to these contracts were recognized as a component of other income (expense), net, for the three and six months ended June 30, 2012, respectively, as compared to a net gain of $0.6 million and a net loss of $4.3 million in the prior year comparative periods.

 

10. Property, Plant and Equipment

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Accumulated depreciation on property, plant and equipment was $854.7 million and $782.1 million as of June 30, 2012 and December 31, 2011, respectively.

For the three and six months ended June 30, 2012, we capitalized interest costs related to construction in progress totaling approximately $8.6 million and $16.8 million, respectively, as compared to $8.3 million and $15.9 million, respectively, in the prior year comparative periods. Capitalized interest costs are primarily related to the development of our large-scale biologic manufacturing facility in Hillerød, Denmark.

Hillerød, Denmark Facility

As of June 30, 2012 and December 31, 2011, the construction in progress balance related to the construction of our large-scale biologics manufacturing facility in Hillerød, Denmark totaled $487.4 million and $474.0 million, respectively. Based on our current manufacturing strategy, we expect that this facility will be ready for

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

its intended use in the second half of 2012, at which time we plan to cease capitalizing interest expense in relation to this project and begin recording depreciation on the facility.

Cambridge Leases

In July 2011, we executed leases for two office buildings to be built 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 commercial operations as well as provide additional general and administrative and research and development office space. 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, for accounting purposes, of these properties during the construction period. Accordingly, we record an asset along with a corresponding financing obligation on our condensed consolidated balance sheet for the amount of total project costs incurred related to the construction in progress for these buildings. Upon completion of the buildings, we will assess and determine if the assets and corresponding liabilities should be derecognized. As of June 30, 2012 and December 31, 2011, cost incurred by the developer in relation to the construction of these buildings totaled approximately $38.8 million and $2.2 million, respectively.

As a result of our decision to relocate our corporate headquarters and centralize our campus in Cambridge, Massachusetts, we expect to vacate our Weston, Massachusetts facility in the second half of 2013 upon completion of the new buildings. Based upon our most recent estimates, we expect to incur a charge of approximately $35.0 million upon vacating the Weston facility. This amount represents our estimate of our remaining Weston lease obligation, net of sublease income expected to be received.

 

11. Indebtedness

Revolving Credit Facility

In June 2012 our $360.0 million senior unsecured revolving credit facility expired and was not renewed. No borrowings were made under this credit facility.

 

12. Equity

Total equity as of June 30, 2012 decreased $156.3 million compared to December 31, 2011. This decrease was primarily driven by repurchases of our common stock totaling $909.9 million offset by net income attributable to Biogen Idec Inc. of $689.5 million and the increase in additional paid-in capital resulting from our share based compensation arrangements totaling $87.4 million.

Share Repurchases

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. During the six months ended June 30, 2012, 7.3 million shares were repurchased at a cost of $909.9 million. Of those shares, 3.3 million were repurchased and retired during the three months ended June 30, 2012 at a cost of $446.8 million. The remaining shares purchased were recorded as treasury stock.

After June 30, 2012, we repurchased and retired an additional 0.4 million shares at a cost of $53.2 million. Approximately 6.3 million shares of our common stock remain available for repurchase under the 2011 authorization.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

We repurchased approximately 5.0 million shares at a cost of approximately $386.6 million under the 2011 authorization during the six months ended June 30, 2011.

Noncontrolling Interest

The following table reconciles equity attributable to noncontrolling interests:

 

    For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions)

      2012             2011             2012             2011      

Noncontrolling interests, beginning of period

  $ 2.6      $ 70.1      $ 1.5      $ 52.9   

Net income (loss) attributable to noncontrolling interests, net of tax

    0.3        16.0               30.4   

Currency translation adjustment

           2.9        0.1        5.7   

Deconsolidation of noncontrolling interest

    (0.5            (0.5       

Distributions to noncontrolling interests

           (9.9     1.3        (9.9
 

 

 

   

 

 

   

 

 

   

 

 

 

Noncontrolling interests, end of period

  $ 2.4      $ 79.1      $ 2.4      $ 79.1   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

13. Earnings per Share

Basic and diluted earnings per share are calculated as follows:

 

    For the Three Months     For the Six Months  
    Ended June 30,     Ended June 30,  

(In millions)

      2012             2011             2012             2011      

Numerator:

       

Net income attributable to Biogen Idec Inc.

  $ 386.8      $ 288.0      $ 689.5      $ 582.4   

Adjustment for net income allocable to preferred stock

                         (0.5
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income used in calculating basic and diluted earnings per share

  $ 386.8      $ 288.0      $ 689.5      $ 581.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Weighted average number of common shares outstanding

    239.0        242.4        239.4        241.9   

Effect of dilutive securities:

       

Stock options and employee stock purchase plan

    0.6        1.0        0.6        1.3   

Time-vested restricted stock units

    0.8        1.4        1.0        1.5   

Market stock units

    0.2        0.2        0.2        0.2   

Performance-vested restricted stock units settled in shares

                           
 

 

 

   

 

 

   

 

 

   

 

 

 

Dilutive potential common shares

    1.6        2.6        1.8        3.0   
 

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in calculating diluted earnings per share

    240.6        245.0        241.2        244.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Amounts excluded from the calculation of net income per diluted share because their effects were anti-dilutive were insignificant.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

14. Share-based Payments

Share-based Compensation Expense

The following table summarizes share-based compensation expense included within our condensed consolidated statements of income:

 

     For the Three Months      For the Six Months  
     Ended June 30,      Ended June 30,  

(In millions)

       2012             2011              2012             2011      

Research and development .

   $ 18.1      $ 13.9       $ 37.8      $ 32.2   

Selling, general and administrative

     25.0        22.2         53.8        42.8   

Restructuring charges

                           (0.6
  

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal

     43.1        36.1         91.6        74.4   

Capitalized share-based compensation costs .

     (1.3     (1.0      (2.5     (2.0
  

 

 

   

 

 

    

 

 

   

 

 

 

Share-based compensation expense included in total cost and expenses

     41.8        35.1         89.1        72.4   

Income tax effect

     (12.7     (10.9      (27.1     (23.0
  

 

 

   

 

 

    

 

 

   

 

 

 

Share-based compensation expense included in net income attributable to Biogen Idec Inc.

         
   $ 29.1      $ 24.2       $ 62.0      $ 49.4   
  

 

 

   

 

 

    

 

 

   

 

 

 

The following table summarizes share-based compensation expense associated with each of our share-based compensation programs:

 

     For the Three Months      For the Six Months  
     Ended June 30,      Ended June 30,  

(In millions)

       2012             2011              2012             2011      

Stock options

   $ 0.8      $ 1.6       $ 0.9      $ 2.7   

Market stock units

     5.6        4.3         11.6        7.7   

Time-vested restricted stock units

     22.2        19.1         48.1        46.2   

Performance-vested restricted stock units settled in shares

            0.3         0.1        0.7   

Cash settled performance shares

     13.9        10.7         28.7        15.5   

Employee stock purchase plan

     0.6        0.1         2.2        1.6   
  

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal

     43.1        36.1         91.6        74.4   

Capitalized share-based compensation costs

     (1.3     (1.0      (2.5     (2.0
  

 

 

   

 

 

    

 

 

   

 

 

 

Share-based compensation expense included in total cost and expenses

   $ 41.8      $ 35.1       $ 89.1      $ 72.4   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Grants Under Share-based Compensation Plans

The following table summarizes our equity grants to employees, officers and directors under our current stock plans:

 

     For the Six Months  
     Ended June 30,  
     2012      2011  

Market stock units(a)

     302,000         373,000   

Cash settled performance shares(b)

     327,000         483,000   

Time-vested restricted stock units(c)

     865,000         1,303,000   

Performance-vested restricted stock units(d)

             1,000   

 

(a) Market stock units (MSUs) granted for the six months ended June 30, 2012, include approximately 217,000 MSUs granted in connection with our annual awards made in February 2012, representing the target number of shares eligible to be earned at the time of grant. The remaining MSUs issued in the six months ended June 30, 2012 were based upon the attainment of performance criteria set for 2011 and 2010 in relation to shares granted in those years and shares granted to newly-hired employees.

MSUs granted for the six months ended June 30, 2011, include approximately 347,000 MSUs granted in connection with our annual awards made in February 2011, representing the target number of shares eligible to be earned at the time of grant. The remaining MSUs issued in the six months ended June 30, 2011 were based upon the attainment of performance criteria set for 2010 in relation to shares granted in 2010 and shares granted to newly-hired employees.

 

(b) Cash settled performance shares (CSPSs) granted for the six months ended June 30, 2012, include approximately 245,000 CSPSs granted in connection with our annual awards made in February 2012, representing the target number of shares eligible to be earned at the time of grant. The remaining CSPSs issued in the six months ended June 30, 2012 were based upon the attainment of performance criteria set for 2011 in relation to shares granted in 2011 and shares granted to newly-hired employees.

CSPSs granted for the six months ended June 30, 2011, include approximately 379,000 CSPSs granted in connection with our annual awards made in February 2011, representing the target number of shares eligible to be earned at the time of grant. The remaining CSPSs issued in the six months ended June 30, 2011 were based upon the attainment of performance criteria set for 2010 in relation to shares granted in 2010 and shares granted to newly-hired employees.

 

(c) Time-vested restricted stock units (RSUs) granted for the six months ended June 30, 2012, include approximately 771,000 RSUs granted in connection with our annual awards made in February 2012. The remaining RSUs issued in the six months ended June 30, 2012 were based upon shares issued to newly-hired employees and our Board of Directors.

RSUs granted for the six months ended June 30, 2011, include approximately 1.2 million RSUs granted in connection with our annual awards made in February 2011. The remaining RSUs issued in the six months ended June 30, 2011 were based upon shares issued to newly-hired employees and our Board of Directors.

 

(d) Performance-vested restricted stock units (PVRSUs) granted for the six months ended June 30, 2011, represent additional shares earned for performance criteria set for 2010 in relation to shares granted in 2010. No PVRSUs were granted during the six months ended June 30, 2012.

No stock options were granted during the six months ended June 30, 2012 and 2011. In addition, for the six months ended June 30, 2012, approximately 168,000 shares were issued under the ESPP compared to approximately 316,000 shares issued in the prior year comparative period.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

15. Income Taxes

For the three and six months ended June 30, 2012, our effective tax rate was 23.8% and 22.7%, respectively, compared to 23.8% and 25.7%, respectively, in the prior year comparative period.

Reconciliation between the U.S. federal statutory tax rate and our effective tax rate is summarized as follows:

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  
     2012     2011     2012     2011  

Statutory rate

     35.0     35.0     35.0     35.0

State taxes

     0.8        0.4        0.8        1.4   

Taxes on foreign earnings

     (7.6     (7.3     (7.9     (6.3

Credits and net operating loss utilization

     (3.9     (4.1     (3.8     (3.1

Purchased intangible assets

     1.1        1.4        1.1        1.4   

Permanent items

     (2.4     (1.1     (3.1     (1.2

Contingent consideration

     0.6               0.4          

Other

     0.2        (0.5     0.2        (1.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective tax rate

     23.8     23.8     22.7     25.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Our tax rate for the three months ended June 30, 2012, was substantially the same as the rate for the same period in 2011 due to a favorable state audit adjustment in the three months ended June 30, 2011, which was specific to that quarter, being offset by higher orphan drug credits in 2012.

For the six months ended June 30, 2012, the reduction in our income tax rate compared to the same period in 2011 was primarily a result of a benefit from higher orphan drug credits as a result of the Factor VIII, Factor IX and dexpramipexole clinical trials, the cessation of certain intercompany royalties owed by a foreign affiliate of ours to a U.S. affiliate on the international sales of one of our products, and for the three months ended March 31, 2012, a favorable determination by the IRS with regard to the deductibility of certain 2011 expenses reimbursed through our unconsolidated joint business.

Accounting for Uncertainty in Income Taxes

We and our subsidiaries are routinely examined by various taxing authorities. We file income tax returns in the U.S. federal jurisdiction, various U.S. states, and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal tax examination for years before 2010 or state, local, or non-U.S. income tax examinations for years before 2004. During the three and six months ended June 30, 2012, we adjusted our unrecognized tax benefits to reflect new information arising during our on-going federal and state audit examinations including the filing of amended federal income tax returns to claim certain deductions. These amended returns had the effect of increasing our unrecognized tax benefit by approximately $37.0 million.

In October 2011, in conjunction with our examination, the IRS proposed a disallowance of approximately $130 million in deductions for tax years 2007, 2008 and 2009 related to payments for services from our Danish contract manufacturing affiliate. We believe that these items represent valid deductible business expenses and will vigorously defend our position.

We do not anticipate any significant changes in our positions in the next twelve months other than expected settlements, which have been classified as current liabilities within the accompanying balance sheet.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Contingencies

On June 8, 2010, we received Notices of Assessment from the Massachusetts Department of Revenue (DOR) against Biogen Idec MA Inc. (BIMA), one of our wholly-owned subsidiaries, for $103.5 million of corporate excise tax, including associated interest and penalties, related to our 2004, 2005 and 2006 tax filings. We filed an abatement application with the DOR, which was denied, and we filed a petition appealing the denial with the Massachusetts Appellate Tax Board (Massachusetts ATB) on February 3, 2011, and a hearing has been scheduled for April 2013. For all periods under dispute, we believe that positions taken in our tax filings are valid and we are contesting the assessments vigorously.

The audits of our tax filings for 2007 and 2008 are not completed. As these filings were prepared in a manner consistent with prior filings, we may receive an assessment for those years as well. Due to tax law changes effective January 1, 2009, the computation and deductions at issue in previous tax filings are not part of our subsequent tax filings in Massachusetts.

We believe that these assessments do not impact the amount of liabilities for income tax contingencies. However, there is a possibility that we may not prevail in defending all of our assertions with the DOR. If these matters are resolved unfavorably in the future, the resolution could have a material adverse impact on our effective tax rate and our results of operations.

 

16. Other Consolidated Financial Statement Detail

Other Income (Expense), Net

Components of other income (expense), net, are summarized as follows:

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  

(In millions)

       2012             2011             2012             2011      

Interest income

   $ 10.2      $ 4.3      $ 16.7      $ 8.0   

Interest expense

     (7.0     (8.4     (14.4     (17.6

Impairments of investments

     (0.8     (5.2     (1.3     (5.5

Gain (loss) on investments, net

     2.5        (0.1     14.3        14.8   

Foreign exchange gains (losses), net

     (1.3     (0.6     0.1        (1.0

Other, net

     (0.6     (1.7     2.7        (0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ 3.0      $ (11.7   $ 18.1      $ (1.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued Expenses and Other

Accrued expenses and other consists of the following:

 

(In millions)

   As of
June 30,
2012
     As of
December 31,
2011
 

Employee compensation and benefits

   $ 156.7       $ 176.3   

Revenue-related rebates

     132.9         115.0   

Deferred revenue

     110.3         69.6   

Collaboration expenses

     56.0         44.2   

Clinical development expenses

     50.1         40.8   

Royalties and licensing fees

     48.9         47.4   

Current portion of contingent consideration obligations

     16.9         10.8   

Other

     190.6         173.1   
  

 

 

    

 

 

 

Total accrued expenses and other

   $ 762.4       $ 677.2   
  

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

17. Investments in Variable Interest Entities

Consolidated Variable Interest Entities

Our condensed consolidated financial statements include the financial results of variable interest entities in which we are the primary beneficiary.

Knopp

In 2010, we purchased 30.0% of the Class B common shares of Knopp Neurosciences, Inc. (Knopp), a subsidiary of Knopp Holdings, LLC, and entered into a license agreement with Knopp for the development, manufacture and commercialization of dexpramipexole, an orally administered small molecule in clinical development for the treatment of amyotrophic lateral sclerosis (ALS). We are responsible for all development activities and, if successful, we will also be responsible for the manufacture and global commercialization of dexpramipexole. Based on our current development plans, we may pay Knopp up to an additional $255.0 million in remaining development and sales-based milestone payments, as well as royalties on future commercial sales. We determined that we are the primary beneficiary of Knopp because we have the power through the license agreement to direct the activities that most significantly impact Knopp’s economic performance and are required to fund 100% of the research and development costs incurred in support of the collaboration agreement. As such, we consolidate the results of Knopp.

We are responsible for the development of dexpramipexole and reimburse certain Knopp expenses directly attributable to the license agreement. Amounts incurred by Knopp that we reimburse are reflected as research and development expenses in our condensed consolidated statements of income. Future development and sales-based milestone payments also will be reflected within our condensed consolidated statements of income as a charge to noncontrolling interests, net of tax, when such milestones are achieved.

For the three and six months ended June 30, 2012, the collaboration incurred development expense totaling $20.4 million and $43.1 million, respectively, which is reflected as research and development expense within our condensed consolidated statements of income, compared to $9.0 million and $14.7 million, respectively, in the prior year comparative periods. During the first quarter of 2011, we dosed the first patient in a registrational study for dexpramipexole. The achievement of this milestone resulted in a $10.0 million milestone due to Knopp, which was reflected as a charge to noncontrolling interests.

The assets and liabilities of Knopp are not significant to our financial position or results of operations. We have provided no financing to Knopp other than contractually required amounts disclosed above.

Neurimmune SubOne AG

In 2007, we entered into a collaboration agreement with Neurimmune SubOne AG (Neurimmune), a subsidiary of Neurimmune AG, for the development and commercialization of antibodies for the treatment of Alzheimer’s disease. Neurimmune conducts research to identify potential therapeutic antibodies and we are responsible for the development, manufacturing and commercialization of all products. Based upon our current development plans, we may pay Neurimmune up to $345.0 million in remaining milestone payments, as well as royalties on sales of any resulting commercial products. We determined that we are the primary beneficiary of Neurimmune because we have the power through the collaboration agreement to direct the activities that most significantly impact the entity’s economic performance and are required to fund 100% of the research and development costs incurred in support of the collaboration agreement. As such, we consolidate the results of Neurimmune.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Research and development expenses incurred by Neurimmune in support of the collaboration that we reimburse are reflected in research and development expense in our condensed consolidated statements of income. Future milestone payments will be reflected within our condensed consolidated statements of income as a charge to the noncontrolling interest, net of tax, when such milestones are achieved.

For the three and six months ended June 30, 2012, the collaboration incurred development expense totaling $2.6 million and $5.1 million, respectively, which is reflected as research and development expense within our condensed consolidated statements of income, compared to $3.0 million and $4.8 million, respectively, in the prior year comparative periods. In April 2011, we submitted an Investigational New Drug (IND) application for BIIB037 (human anti-Amyloid B mAb), a beta-amyloid removal therapy. The achievement of this milestone resulted in a $15.0 million milestone due to Neurimmune, which was reflected as a charge to noncontrolling interests in the prior year second quarter. The assets and liabilities of Neurimmune are not significant to our financial position or results of operations as it is a research and development organization. We have provided no financing to Neurimmune other than previously contractually required amounts disclosed above.

Unconsolidated Variable Interest Entities

We have relationships with other variable interest entities which we do not consolidate as we lack the power to direct the activities that significantly impact the economic success of these entities. These relationships include investments in certain biotechnology companies and research collaboration agreements. For additional information related to our significant collaboration arrangements with unconsolidated variable interest entities, please read Note 20, Collaborations to our consolidated financial statements included within our 2011 Form 10-K.

As of June 30, 2012 and December 31, 2011, the total carrying value of our investments in biotechnology companies that we have determined to be variable interest entities, but do not consolidate as we do not have the power to direct their activities, totaled $12.8 million and $14.6 million, respectively. Our maximum exposure to loss related to these variable interest entities is limited to the carrying value of our investments.

We have entered into research collaborations with certain variable interest entities where we are required to share or fund certain development activities. These development activities are included in research and development expense within our condensed consolidated statements of income, as they are incurred. Depending on the collaborative arrangement, we may record funding receivables or payable balances with our partners, based on the nature of the cost-sharing mechanism and activity within the collaboration. As of June 30, 2012 and December 31, 2011, we had no significant receivables or payables related to cost sharing arrangements with unconsolidated variable interest entities.

We have provided no financing to these variable interest entities other than previously contractually required amounts.

For additional information related to our Investments in Variable Interest Entities, please read Note 19, Investments in Variable Interest Entities to our consolidated financial statements included within our 2011 Form 10-K.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

18. Collaborative and Other Relationships

Samsung Biosimilar Agreement

In February 2012, we finalized an agreement with Samsung BioLogics Co. Ltd. (Samsung Biologics) that established an entity, Samsung Bioepis, to develop, manufacture and market biosimilar pharmaceuticals. Under the terms of the agreement, Samsung Biologics will contribute 280.5 billion South Korean won (approximately $250.0 million) for an 85 percent stake in Samsung Bioepis and Biogen Idec will contribute approximately 49.5 billion South Korean won (approximately $45.0 million) for the remaining 15 percent ownership interest. Our investment will be limited to this contribution as we have no obligation to provide any additional funding; however, we maintain an option to purchase additional stock in Samsung Bioepis in order to increase our ownership percentage up to 49.9 percent. The exercise of this option is within our control.

Samsung Biologics has the power to direct the activities of Samsung Bioepis which will most significantly and directly impact its economic performance. We account for this investment under the equity method of accounting as we maintain the ability to exercise significant influence over Samsung Bioepis through a presence on the entity’s Board of Directors and our contractual relationship. Under the equity method, we record our original investment at cost and subsequently adjust the carrying value of our investments for our share of equity in the entity’s income or losses according to our percentage of ownership. If losses accumulate, we will record our share of losses until our investment has been fully depleted. Once our investment has been fully depleted, we will recognize additional losses only if we provide or are required to provide additional funding. As of June 30, 2012, our investment in Samsung Bioepis totaled 24.7 billion South Korean won (approximately $21.2 million), which is classified as a component of investments and other assets within our condensed consolidated balance sheets. We are obligated to fund an additional 24.8 billion South Korean won (approximately $21.4 million) of which 18.4 billion South Korean won (approximately $15.9 million) is due within the next year. We recognize our share of the results of operations related to our investment in Samsung Bioepis one quarter in arrears when the results of the entity become available, which will be reflected as equity in earnings (loss) of investee, net of tax within our condensed consolidated statements of income. During the three months ended June 30, 2012, we recognized a loss of $0.5 million.

Simultaneous with formation of Samsung Bioepis, we entered into a license agreement and technical development and manufacturing services agreements with Samsung Bioepis. Under the terms of the license agreement, we granted Samsung Bioepis an exclusive license to use, develop, manufacture, and commercialize products created by Samsung Bioepis using Biogen Idec product-specific technology. In exchange, we will receive royalties on all products developed and commercialized by Samsung Bioepis. Under the terms of the technical development agreement, we will provide Samsung Bioepis technical development services and technology transfer services, which include, but are not limited to, cell culture development, purification process development, formulation development, and analytical development. For the three and six months ended June 30, 2012, we recognized $4.6 million and $5.6 million, respectively, in revenues in relation to these services, which is reflected as a component of other revenues within our condensed consolidated statement of income. Under the terms of our manufacturing agreement we will manufacture certain clinical drug substance, clinical drug product, commercial drug substance and commercial drug product pursuant to contractual terms. No amounts have been earned to date by us under the manufacturing agreement.

Isis Pharmaceuticals, Inc. (Myotonic Dystrophy-1 and Spinal Muscular Atrophy)

In June and January 2012, we entered into exclusive, worldwide option and collaboration agreements with Isis Pharmaceuticals, Inc. (Isis) under which both companies will develop and commercialize Isis’ product candidates for the treatment of myotonic dystrophy type 1 (DM1) and the treatment of spinal muscular atrophy (SMA), respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Under the terms of the June agreement for the DM1 candidate, we provided Isis with an upfront payment of $12.0 million and will make potential additional payments, prior to licensing, of up to $59.0 million based on the development of the selected product candidate. Isis will be responsible for global development of any product candidate through the completion of a Phase 2 trial and we will provide advice on the clinical trial design and regulatory strategy. We then have an option to license the product candidate until completion of the Phase 2 trial. If we exercise our option, we will pay Isis up to a $70.0 million license fee and assume global development, regulatory and commercialization responsibilities. Isis could receive up to another $130.0 million in milestone payments upon the achievement of certain regulatory milestones as well as royalties on future sales if we successfully develop the product candidate after option exercise.

Under the terms of the January agreement for the antisense investigation drug, ISIS-SMNRx, we paid Isis $29.0 million as an upfront payment and agreed to pay up to $45.0 million in milestones related to the clinical development of ISIS-SMNRx of which $18.0 million will become payable upon initiation of the first Phase 2/3 study of ISIS-SMNRx. Isis will be responsible for global development of ISIS-SMNRx through the completion of Phase 2/3 trials and we will provide advice on the clinical trial design and regulatory strategy. We also have an option to license ISIS-SMNRx until completion of the first successful Phase 2/3 trial. If we exercise our option, we will pay Isis a $75.0 million license fee and assume global development, regulatory and commercialization responsibilities. Isis could receive up to another $150.0 million in milestone payments upon the achievement of certain regulatory milestones as well as royalties on future sales of ISIS-SMNRx if we successfully develop ISIS-SMNRx after option exercise.

Under these agreements we recognized $12.0 million and $41.0 million as research and development expenses within our condensed consolidated statement of income for the three and six months ended June 30, 2012, respectively.

For additional information related to our other significant collaboration arrangements, please read Note 20, Collaborations to our consolidated financial statements included within our 2011 Form 10-K.

 

19. Litigation

Massachusetts Department of Revenue

On June 8, 2010, we received Notices of Assessment from the Massachusetts DOR against BIMA for $103.5 million of corporate excise tax, including associated interest and penalties, related to our 2004, 2005 and 2006 tax filings. We filed an abatement application with the DOR, which was denied, and we filed a petition appealing the denial with the Massachusetts ATB on February 3, 2011, and a hearing has been scheduled for April 2013. For all periods under dispute, we believe that positions taken in our tax filings are valid and we are contesting the assessments vigorously.

Hoechst — Genentech Arbitration

On October 24, 2008, Hoechst GmbH (Hoechst), affiliate of Sanofi-Aventis Deutschland GmbH (Sanofi), filed with the ICC International Court of Arbitration (Paris) a request for arbitration against Genentech, claiming a breach of a license agreement (the Hoechst License) between Hoechst’s predecessor and Genentech that was entered as of January 1, 1991 and terminated by Genentech effective October 27, 2008. The Hoechst License granted Genentech certain rights with respect to later-issued U.S. Patents 5,849,522 (’522 patent) and 6,218,140 (’140 patent) and related patents outside the U.S. The Hoechst License provided for potential royalty payments of 0.5% on net sales of certain products defined by the agreement. In that proceeding, Genentech maintains that no royalties are due because it does not infringe any of the relevant patents. Although we are not a party to the arbitration, we expect that any damages that may be awarded to Hoechst may be a cost charged to our collaboration with Genentech.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

In June 2011, the arbitrator issued an intermediate decision suggesting that RITUXAN may be covered by the Hoechst License, and in the second quarter of 2011 we reduced our share of RITUXAN revenues from unconsolidated joint business 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. 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, or if any final decision awarding damages is successfully challenged by Genentech. Hoechst has since claimed it is due damages of approximately EUR153.0 million (approximately $192.4 million) for the period from December 15, 1998 to September 30, 2008 as well as additional royalties for later periods in an amount to be determined at a future hearing.

In August 2011, the arbitrator informed the parties that the underlying issue of liability with respect to RITUXAN under the Hoechst License has not yet been decided. A further hearing on liability took place in June 2012, but no decision was issued. Hearings on damages, if any, are scheduled for November 2012.

Sanofi ’522 and ’140 Patent Litigation

On October 27, 2008, Sanofi filed suit against Genentech and Biogen Idec in federal court in Texas (E.D. Tex.) (Texas Action) claiming that RITUXAN and certain other Genentech products infringe the ’522 patent and the ’140 patent, and on the same day Genentech and Biogen Idec filed a complaint against Sanofi in federal court in California (N.D. Cal.) (California Action) seeking declaratory judgments that RITUXAN and the other Genentech products do not infringe the ‘522 patent or the ’140 patent and that those patents are invalid and unenforceable. The Texas Action was ordered transferred to the federal court in the Northern District of California and consolidated with the California Action.

On April 21, 2011, the district court entered a separate and final judgment that the manufacture and sale of RITUXAN do not infringe the ’522 patent or the ’140 patent. The district court stayed further proceedings relating to Biogen Idec’s and Genentech’s claims seeking a declaration that the asserted patent claims are invalid and unenforceable. On March 22, 2012, the U.S. Court of Appeals for the Federal Circuit affirmed the judgment of non-infringement. No trial date has yet been set on the stayed claims. On May 1, 2012, Genentech filed a motion to enjoin Sanofi and those acting in concert with it, including Hoechst, from continuing the arbitration described above, but the motion was denied on May 25, 2012. On June 6, 2012, Genentech appealed the denial to the U.S. Court of Appeals for the Federal Circuit and the appeal is pending.

’755 Patent Litigation

On September 15, 2009, we were issued U.S. Patent No. 7,588,755 (’755 Patent), which claims the use of interferon beta for immunomodulation or treating a viral condition, viral disease, cancers or tumors. This patent, which expires in September 2026, covers, among other things, the treatment of MS with our product AVONEX. On May 27, 2010, Bayer Healthcare Pharmaceuticals Inc. (Bayer) filed a lawsuit against us in the U.S. District Court for the District of New Jersey seeking a declaratory judgment of patent invalidity and non-infringement and seeking monetary relief in the form of attorneys’ fees, costs and expenses. On May 28, 2010, BIMA filed a lawsuit in the U.S. District Court for the District of New Jersey alleging infringement of the ’755 Patent by EMD Serono, Inc. (manufacturer, marketer and seller of REBIF), Pfizer, Inc. (co-marketer of REBIF), Bayer (manufacturer, marketer and seller of BETASERON and manufacturer of EXTAVIA), and Novartis Pharmaceuticals Corp. (marketer and seller of EXTAVIA) and seeking monetary damages, including lost profits and royalties. The court has consolidated the two lawsuits, and we refer to the two actions as the “Consolidated ’755 Patent Actions”.

Bayer, Pfizer, Novartis and EMD Serono have all filed counterclaims in the Consolidated ‘755 Patent Actions seeking declaratory judgments of patent invalidity and noninfringement, and seeking monetary relief in

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

the form of costs and attorneys’ fees, and EMD Serono and Bayer have each filed a counterclaim seeking a declaratory judgment that the ‘755 Patent is unenforceable based on alleged inequitable conduct. Bayer has also amended its complaint to seek such a declaration. No trial date has yet been ordered, but we expect that the trial of the Consolidated ‘755 Patent Actions will take place in 2013.

GSK ’612 Patent Litigation

On March 23, 2010, we and Genentech were issued U.S. Patent No. 7,682,612 (’612 Patent) relating to a method of treating CLL using an anti-CD20 antibody. The patent which expires in November 2019 covers, among other things, the treatment of CLL with RITUXAN. On March 23, 2010, we and Genentech filed a lawsuit in federal court in the Southern District of California against Glaxo Group Limited and GlaxoSmithKline LLC (collectively, GSK) alleging infringement of that patent based upon GSK’s manufacture, marketing and sale, offer to sell, and importation of ARZERRA. We seek damages, including a royalty and lost profits, and injunctive relief. GSK has filed a counterclaim seeking a declaratory judgment of patent invalidity, noninfringement, unenforceability, and inequitable conduct, and seeking monetary relief in the form of costs and attorneys’ fees.

On November 15, 2011, the district court entered a separate and final judgment in favor of GSK on Biogen Idec’s and Genentech’s claims, and in favor of GSK on GSK’s counterclaim for non-infringement, and stayed all further proceedings pending the outcome on appeal. Biogen Idec and Genentech filed a notice of appeal in the United States Court of Appeals for the Federal Circuit on December 5, 2011, and the appeal is pending.

Novartis V&D ’688 Patent Litigation

On January 26, 2011, Novartis Vaccines and Diagnostics, Inc. (Novartis V&D) filed suit against us in federal district court in Delaware, alleging that TYSABRI infringes U.S. Patent No. 5,688,688 “Vector for Expression of a Polypeptide in a Mammalian Cell” (’688 Patent), which was granted in November 1997 and expires in November 2014. Novartis V&D seeks a declaration of infringement, a finding of willful infringement, compensatory damages, treble damages, interest, costs and attorneys’ fees. We have not formed an opinion that an unfavorable outcome is either “probable” or “remote”, and are unable to estimate the magnitude or range of any potential loss. We believe that we have good and valid defenses to the complaint and will vigorously defend against it. A trial has been set for January 2014.

Italian National Medicines Agency

In the fourth quarter of 2011, Biogen Idec SRL received a notice from the Italian National Medicines Agency (Agenzia Italiana del Farmaco or AIFA) stating that sales of TYSABRI for the period from February 2009 through February 2011 exceeded by Euro 30.7 million a reimbursement limit established pursuant to a Price Determination Resolution (Price Resolution) granted by AIFA in February 2007. The Price Resolution set the initial price for the sale of TYSABRI in Italy and limited the amount of government reimbursement “for the first 24 months” of TYSABRI sales. As the basis for the claim, the AIFA notice referred to a 2001 Decree that provides for an automatic 24-month renewal of the terms of all Price Resolutions that are not renegotiated prior to the expiration of their term.

On November 17, 2011, Biogen Idec SRL responded to AIFA that the reimbursement limit in the Price Resolution by its terms relates only to the first 24 months of TYSABRI sales, which began in February 2007. On December 23, 2011, we filed an appeal in the Regional Administrative Tribunal of Lazio (Ecc.mo Tribunale Amministrativo Regionale per il Lazio) in Rome against AIFA, seeking a ruling that our interpretation of the Price Resolution is valid and that the position of the AIFA is unenforceable. We have not formed an opinion that an unfavorable outcome is either “probable” or “remote”. We believe that we have good and valid grounds for our appeal and will vigorously pursue it.

 

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BIOGEN IDEC INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Average Manufacturer Price Litigation

On September 6, 2011, we and several other pharmaceutical companies were served with a complaint originally filed under seal on October 28, 2008 in the United States District Court for the Eastern District of Pennsylvania by Ronald Streck (the relator) on behalf of himself and the United States, and the states of New Jersey, California, Rhode Island, Michigan, Montana, Wisconsin, Massachusetts, Tennessee, Oklahoma, Texas, Indiana, New Hampshire, North Carolina, Florida, Georgia, New Mexico, Illinois, New York, Virginia, Delaware, Hawaii, Louisiana, Connecticut, and Nevada, (collectively States), and the District of Columbia, alleging violations of the False Claims Act, 31 U.S.C. § 3729 et seq. and state and District of Columbia statutory counterparts. The United States and the States have declined to intervene, and the District of Columbia has not intervened. The complaint was subsequently unsealed and served, and then amended. The amended complaint alleges that Biogen Idec and other defendants underreport Average Manufacturer Price (AMP) information to the Centers for Medicare and Medicaid Services, thereby causing Biogen Idec and other defendants to underpay rebates under the Medicaid Drug Rebate Program. The relator alleges that the underreporting has occurred because Biogen Idec and other defendants improperly consider various payments that they make to drug wholesalers to be discounts under applicable federal law. We and the other defendants filed a motion to dismiss the complaint, which was granted in part and denied in part on July 3, 2012. As to AMP submissions before January 1, 2007, the court dismissed all state and federal claims against us. As to AMP submissions after January 1, 2007, the court denied our motion to dismiss federal law claims. Plaintiff’s remaining state-law claims were dismissed in whole as to claims under New Mexico law and in part as to claims under the laws of Delaware, New Hampshire, Texas, Connecticut, Georgia, Indiana, Montana, New York, Oklahoma, and Rhode Island. The court has set a scheduling conference for August 23, 2012. We have not formed an opinion that an unfavorable outcome under the remaining claims is either “probable” or “remote,” and are unable at this stage of the litigation to form an opinion as to the magnitude or range of any potential loss. We believe that we have good and valid defenses and intend vigorously to defend against the allegations.

Government Review of Sales and Promotional Practices

We have learned that state and federal governmental authorities are investigating our sales and promotional practices. We are cooperating with the government.

Canada Lease Dispute

On April 18, 2008, First Real Properties Limited filed suit against Biogen Idec Canada Inc. (BI Canada) in the Superior Court of Justice in London, Ontario alleging breach of an offer for lease of property signed by BI Canada in 2007 and an unsigned proposed lease for the same property. The plaintiff’s complaint seeks $7.0 million in damages, but the plaintiff submitted an expert report estimating the plaintiff’s damages to be $2.5 million after mitigation. The plaintiff also seeks costs of approximately $0.4 million and interest. The plaintiff has recently signed an offer to lease the property to another company, and has informed us that its expert will revise his damages estimate in light of this development. The trial has been rescheduled for January 2013. We have not formed an opinion that an unfavorable outcome is either “probable” or “remote.”

Product Liability and Other Legal Proceedings

We are also involved in product liability claims and other legal proceedings generally incidental to our normal business activities. While the outcome of any of these proceedings cannot be accurately predicted, we do not believe the ultimate resolution of any of these existing matters would have a material adverse effect on our business or financial condition.

 

20. Segment Information

We operate as one business segment, which is the business of discovering, developing, manufacturing and marketing therapies for the treatment of neurodegenerative diseases, hemophilia and autoimmune disorders and therefore, our chief operating decision-maker manages the operations of our Company as a single operating segment.

 

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our condensed consolidated financial statements and accompanying notes beginning on page 5 of this quarterly report on Form 10-Q and our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011 (2011 Form 10-K). Certain totals may not sum due to rounding.

Executive Summary

Introduction

Biogen Idec is a global biotechnology company that discovers, develops, manufactures and markets therapies for the treatment of neurodegenerative diseases, hemophilia and autoimmune disorders. Patients worldwide benefit from our multiple sclerosis therapies.

In the near term, our current and future revenues are dependent upon continued sales of our three principal products, AVONEX, TYSABRI, and RITUXAN. 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:

 

     For the Three Months
Ended June 30,
 

(In millions, except per share amounts and percentages)

   2012      2011 (1)      Change %  

Total revenues

   $ 1,421.0       $ 1,208.6         17.6

Income from operations

   $ 505.7       $ 410.8         23.1

Net income attributable to Biogen Idec Inc.

   $ 386.8       $ 288.0         34.3

Diluted earnings per share attributable to Biogen Idec Inc.

   $ 1.61       $ 1.18         36.4

 

(1) 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 would be awarded to Hoechst GmbH (Hoechst), in relation to Genentech’s ongoing arbitration with Hoechst. For additional information related to this arbitration, please read Note 19, Litigation to our condensed consolidated financial statements included within this report.

As described below under “Results of Operations,” our operating results for the three months ended June 30, 2012 reflect the following:

 

   

Worldwide AVONEX revenues totaled $762.1 million in the second quarter of 2012, representing an increase of 15.6% over the same period in 2011.

 

   

Our share of TYSABRI revenues totaled $280.4 million in the second quarter of 2012, representing a decrease of 0.4% over the same period in 2011.

 

   

Our share of RITUXAN revenues totaled $284.6 million in the second quarter of 2012, representing an increase of 31.5% over the same period in 2011.

 

   

Total cost and expenses increased 14.7% in the second quarter of 2012, compared to the same period in 2011. This increase was primarily the result of a 38.4% increase in cost of sales, a 15.4% increase in research and development expense, and a 13.3% 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 the development of our late stage product candidates and preparing for the potential launch of BG-12 in 2013.

 

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We generated $830.2 million of net cash flows from operations for the six months ended June 30, 2012, which were primarily driven by earnings. Cash, cash equivalents and marketable securities totaled approximately $2,873.9 million as of June 30, 2012.

Business Environment

We conduct our business primarily 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 both. In addition, the commercialization of certain of our own pipeline product candidates, such as BG-12, 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 Affordable Care Act’s mandate to purchase health insurance but struck down 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 Act, or other federal legislature 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.

Key Pipeline and Product Development

BG-12

The U.S. Food and Drug Administration (FDA) has accepted our New Drug Application (NDA) for marketing approval of BG-12 in the United States and granted us a standard review timeline. The European Medicines Agency (EMA) also has validated our Marketing Authorisation Application (MAA) for review of BG-12 in the European Union. We have submitted additional regulatory applications for BG-12 in Australia, Canada and Switzerland.

AVONEX PEN

On February 28, 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, the first intramuscular autoinjector approved for MS, incorporates a smaller needle and easier administration to help reduce patients’ anxiety about AVONEX self-injection. Our new dose titration regimen gradually escalates the dose of AVONEX at treatment initiation and reduces the incidence and severity of flu-like symptoms that can occur at the beginning of therapy with any interferon. AVONEX PEN was approved in the E.U. and Canada in the first half of 2011.

Other

Over the next nine months, we expect to have clinical trial data readouts for our late-stage long-lasting factor IX and factor VIII programs, dexpramiperole program in ALS, and our PEGylated interferon program.

 

 

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Results of Operations

Revenues

Revenues are summarized as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012     2011     2012     2011  

Product revenues

                    

United States

   $ 557.5         39.2   $ 490.6         40.6   $ 1,045.4         38.5   $ 951.0         39.4

Rest of world

     519.3         36.6     466.1         38.6     1,006.9         37.1     912.8         37.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total product revenues

     1,076.8         75.8     956.7         79.2     2,052.3         75.6     1,863.8         77.3

Unconsolidated joint business

     284.6         20.0     216.5         17.9     569.2         21.0     472.6         19.6

Other

     59.6         4.2     35.5         2.9     91.5         3.4     75.6         3.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

   $ 1,421.0         100.0   $ 1,208.6         100.0   $ 2,713.0         100.0   $ 2,412.0         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Product Revenues

Product revenues are summarized as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012     2011     2012     2011  

AVONEX

   $ 762.1         70.8   $ 659.2         68.9   $ 1,423.7         69.4   $ 1,301.7         69.8

TYSABRI

     280.4         26.0     281.4         29.4     566.0         27.6     532.8         28.6

Other

     34.3         3.2     16.1         1.7     62.6         3.1     29.3         1.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total product revenues

   $ 1,076.8         100.0   $   956.7         100.0   $ 2,052.3         100.0   $ 1,863.8         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

AVONEX

Revenues from AVONEX are summarized as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

United States

   $ 464.3       $ 409.4         13.4   $ 864.8       $ 796.7         8.5

Rest of world

     297.8         249.8         19.2     558.9         505.0         10.7
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total AVONEX revenues

   $ 762.1       $ 659.2         15.6   $ 1,423.7       $ 1,301.7         9.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in U.S. AVONEX revenues was due to price increases offset by a 2% and 5% decrease, respectively, in U.S. AVONEX unit sales volume.

For the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in rest of world AVONEX revenues was due to increased demand driven by customer penetration attributable to the AVONEX PEN launch and gains recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program. These increases were partially offset by the negative impact of foreign currency exchange rates and pricing reductions resulting from austerity measures enacted in some countries. Rest of world AVONEX unit volume increased 19% and 9%, respectively, for the three and six months ended June 30, 2012, over the prior year comparative periods. Gains recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program totaled

 

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$10.0 million and $13.9 million, respectively, for the three and six months ended June 30, 2012, compared to losses recognized of $15.1 million and $22.2 million, respectively, in the prior year comparative periods.

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 BG-12, may negatively impact future sales of AVONEX. Increased competition also may lead to reduced unit sales of AVONEX, as well as increasing price pressure.

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 related to this collaboration, please read Note 20, Collaborations to our consolidated financial statements included within our 2011 Form 10-K.

Revenues from TYSABRI are summarized as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

United States

   $ 93.2       $ 81.2         14.8   $ 180.6       $ 154.3         17.0

Rest of world

     187.2         200.2         (6.5 )%      385.4         378.4         1.8
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total TYSABRI revenues

   $ 280.4       $ 281.4         (0.4 )%    $ 566.0       $ 532.8         6.2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the three and six months ended June 30, 2012, compared to the same period in 2011, the increase in U.S. TYSABRI revenues was due to increased demand and price increases. Increased demand resulted in an increase of approximately 9% in U.S. TYSABRI unit sales volume for the three and six months ended June 30, 2012, over the prior year comparative periods. Net sales of TYSABRI from our collaboration partner, Elan, to third-party customers in the U.S. for the three and six months ended June 30, 2012 totaled $211.5 million and $412.5 million, respectively, compared to $183.0 million and $353.0 million, respectively, in the prior year comparative periods.

For the three months ended June 30, 2012, compared to the same period in 2011, the decrease 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), the negative impact of foreign currency exchange rates, and pricing reductions from austerity measures enacted in some countries offset by an increase in demand. Increased demand resulted in an increase of approximately 11% in rest of world TYSABRI unit sales volume for the three months ended June 30, 2012. For the six months ended June 30, 2012, compared to the same period in 2011, the increase in rest of world TYSABRI revenues reflects an increase in demand offset by the deferral of a portion of our revenues recognized on sales of TYSABRI in Italy (as described below), the negative impact of foreign currency exchange rates, and pricing reductions resulting from austerity measures enacted in some countries. Increased demand resulted in an increase of approximately 18% in rest of world TYSABRI unit sales volume for the six months ended June 30, 2012. The change in rest of world TYSABRI revenues for the three and six months ended June 30, 2012, compared to the same periods in 2011, also reflects gains 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 $3.6 million and $5.1 million, respectively, for the three and six months ended June 30, 2012, compared to losses recognized of $3.4 million and $4.6 million, respectively, for the three and six months ended June 30, 2011.

 

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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 Euro 30.7 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 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 $32.5 million and $13.8 million of revenue of TYSABRI made in Italy during the first half of 2012 and fourth quarter of 2011, respectively. We expect that we will 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 19, Litigation to our condensed consolidated financial statements included within this report.

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 BG-12, 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 Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

FAMPYRA

   $ 19.7       $         *   $ 34.7       $         *

FUMADERM

     14.6         15.1         (3.3 )%      27.9         27.6         1.1

Other

             1.0         (100.0 )%              1.7         (100.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total other product revenues

   $ 34.3       $ 16.1         *   $ 62.6       $ 29.3         *
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

We have a license from Acorda Therapeutics, Inc. (Acorda) to develop and commercialize FAMPYRA in all markets outside the U.S. In July 2011, the European Commission granted a conditional marketing authorization, renewable annually, for FAMPYRA in the E.U. 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. FAMPYRA is the first treatment that addresses the unmet medical need of walking improvement in adult patients with MS who have walking disability. We have launched FAMPYRA in Australia, Canada and a number of European countries and expect to launch the product in additional countries throughout the remainder of 2012.

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 and we expect to enter into pricing negotiations during the second half of 2012. It is likely that the negotiated price will be less than our initial launch price, which has been used to record sales in the six month period.

For information about our relationship with Acorda, please read Note 20, Collaborations to our consolidated financial statements included within our 2011 Form 10-K.

 

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Unconsolidated Joint Business Revenues

We collaborate with Genentech on the development and commercialization of RITUXAN. For information about our relationship with Genentech, 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 20, Collaborations to our consolidated financial statements included within our 2011 Form 10-K.

Revenues from unconsolidated joint business are summarized as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Biogen Idec’s share of co-promotion profits in the U.S.

   $ 259.0       $ 189.6         36.6   $ 516.8       $ 411.5         25.6

Reimbursement of selling and development expenses in the U.S.

     0.3         1.8         (83.3 )%      0.6         4.5         (86.7 )% 

Revenue on sales of RITUXAN in the rest of world

     25.3         25.1         0.8     51.8         56.6         (8.5 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total unconsolidated joint business revenues

   $ 284.6       $ 216.5         31.5   $ 569.2       $ 472.6         20.4
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Biogen Idec’s Share of Co-Promotion Profits in the U.S.

The following table provides a summary of amounts comprising our share of co-promotion profits in the U.S.:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Product revenues, net

   $ 784.1       $ 748.8         4.7   $ 1,576.3       $ 1,470.7         7.2

Costs and expenses

     139.1         275.5         (49.5 )%      275.6         430.2         (35.9 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Co-promotion profits in the U.S.

   $ 645.0       $ 473.3         36.3   $ 1,300.7       $ 1,040.5         25.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Biogen Idec’s share of co-promotion profits in the U.S.

   $ 259.0       $ 189.6         36.6   $ 516.8       $ 411.5         25.6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

For the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in U.S. RITUXAN product revenues was primarily due to increased commercial demand and price increases. The increase in demand was driven by numerous factors including an increase in the maintenance setting in non-Hodgkin lymphoma, continued uptake in rheumatoid arthritis and vasculitis indications. The decrease in collaboration cost and expenses for the three and six months ended June 30, 2012, compared to the same periods in 2011, was primarily due to a decrease in general and administrative expenses incurred by the collaboration and a decline in expenditures for the development of RITUXAN for use in other indications. In addition, for the three and six months ended June 30, 2011, collaboration cost and expenses included a charge of $125.0 million recorded by the collaboration, representing an estimate of compensatory damages and interest that would 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, a portion of which was recorded as a reduction in revenue on sales of RITUXAN in the rest of the world. This $50.0 million amount reflects 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 of amount of any damages awarded to Hoechst, or if the arbitrator’s decision is successfully challenged by Genentech. For additional information related to this matter, please read Note 19, Litigation to our condensed consolidated financial statements included within this report.

 

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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 the six months ended June 30, 2012 and 2011, respectively, the 40% threshold was met during the first quarter.

Revenue on Sales of RITUXAN in the Rest of the 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 the three months ended June 30, 2012 compared to the same period in 2011, revenue on sales of RITUXAN in the rest of world increased because a portion of the 2011 Hoechst charge, noted above, was recorded as of June 30, 2011 offset by a decrease in royalties as our right to receive royalties is expiring. For the six months ended June 30, 2012 compared to the same period in 2011, revenue on sales of RITUXAN in rest of world decreased due to the expirations of royalties on a country-by-country basis.

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 will expire 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 Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Royalty revenues

   $ 37.1       $ 28.6         29.7   $ 65.9       $ 54.2         21.6

Corporate partner revenues

     22.5         6.9         *     25.6         21.4         19.6
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total other revenues

   $ 59.6       $ 35.5         67.9   $ 91.5       $ 75.6         21.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Royalty Revenues

For the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in royalty revenues were primarily due to an increase in the 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. The increased royalty rate is applied retroactively to the first dollar of net sales achieved during the year. This formula has the effect of increasing the amount of royalty revenue to be recognized in later quarters and, as a result, an adjustment is recorded in the periods in which an increase in royalty rate has been achieved. The increase in royalty revenues related to the sale of ANGIOMAX for the three and six month comparative periods reflects an overall increase in net sales of ANGIOMAX as well as the achievement of a royalty tier in the second quarter of 2012 that was not achieved until the third quarter of 2011, resulting in an additional $7.5 million of royalty revenue over the prior year comparative periods.

Under the terms of our agreement, 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

 

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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. The principal U.S. patent that covers ANGIOMAX (‘404 Patent) was due to expire in March 2010 and TMC applied for an extension of the term of this patent. On March 5, 2012, the PTO granted the extension of the patent term of ANGIOMAX to December 15, 2014, and there is no pending challenge to that extension.

Corporate Partner Revenues

For the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in corporate partner revenues was primarily due to higher contract manufacturing revenues and increased biosimilar revenue related to our agreement with Samsung offset by a one-time cash payment of approximately $11.0 million received in exchange for entering into an asset transfer agreement in March 2011 related to two research and development programs that were discontinued in connection with our November 2010 restructuring initiative.

Reserves for Discounts and Allowances

Revenues from product sales are recorded net of applicable allowances for trade term discounts, wholesaler incentives, Medicaid rebates, Veterans Administration (VA) and Public Health Service (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 patterns. Actual amounts may ultimately differ from our estimates. If actual results vary, we will need to 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 Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012     2011     Change %     2012     2011     Change %  

Discounts

   $ 29.8      $ 23.4        27.4   $ 55.5      $ 47.2        17.6

Contractual adjustments

     108.1        80.0        35.1     214.3        166.2        29.0

Returns

     0.8        4.0        (80.0 )%      11.9        6.8        75.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total allowances

   $ 138.7      $ 107.4        29.1   $ 281.7      $ 220.2        27.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross product revenues

   $ 1,215.5      $ 1,064.1        14.2   $ 2,334.0      $ 2,084.0        12.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of gross product revenues

     11.4     10.1     12.9     12.1     10.6     14.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Discount reserves include trade term discounts and wholesaler incentives. For the three and six months ended June 30, 2012 compared to the same periods in 2011, 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 the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in contractual adjustments was due to higher reserves for managed care and

 

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Medicaid and VA programs principally associated with price increases and increased unit sales volumes in the U.S. as well as an increase due to sales of FAMPYRA and governmental rebates and allowances in certain of the international markets in which we operate.

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 the six months ended June 30, 2012 compared to the same period in 2011, return reserves increased primarily due to expected returns associated with a voluntary withdrawal of a limited amount of AVONEX product that demonstrated a trend in oxidation that may have led to expiry earlier than stated on its label. For the three months ended June 30, 2012 compared to the same period in 2011, return reserves decreased due to the completion of the AVONEX voluntary withdrawal and adjustments to prior quarters’ estimates.

Cost and Expenses

A summary of total cost and expenses is as follows:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Cost of sales, excluding amortization of acquired intangible assets

   $ 139.1       $ 100.5         38.4   $ 272.3       $ 203.6         33.7

Research and development

     329.6         285.6         15.4     685.5         579.3         18.3

Selling, general and administrative

     301.8         266.3         13.3     601.9         510.8         17.8

Collaboration profit sharing

     78.5         88.1         (10.9 )%      164.4         162.8         1.0

Amortization of acquired intangible assets

     52.3         55.1         (5.1 )%      98.2         108.4         (9.4 )% 

Fair value adjustment of contingent consideration

     12.9         2.2         *     14.1         3.4         *

Restructuring charge

     1.1                 *     1.4         16.6         (91.6 )% 
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total cost and expenses

   $ 915.2       $ 797.8         14.7   $ 1,837.9       $ 1,584.9         16.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Cost of Sales, Excluding Amortization of Acquired Intangible Assets (Cost of Sales)

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Cost of sales

   $ 139.1       $ 100.5         38.4   $ 272.3       $ 203.6         33.7

For the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in cost of sales was primarily driven by higher unit sales volumes including contract manufacturing, an increase in manufacturing costs related to the AVONEX PEN and JCV antibody assay costs.

Amounts written down related to excess, obsolete or unmarketable inventory totaled $1.2 million and $10.6 million, respectively, for the three and six months ended June 30, 2012, as compared to $6.1 million and $7.3 million, respectively, in the prior year comparative periods. The increase over the six month comparative period was primarily the result of a $5.4 million charge recognized in the first quarter of 2012 related to a limited amount of unsold AVONEX product that we determined would not be sold as it demonstrated a trend in oxidation that may have lead to expiry earlier than stated on its label.

 

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Research and Development

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Marketed products

   $ 32.0       $ 29.0         10.3   $ 62.7       $ 54.9         14.2

Late stage programs

     118.8         100.4         18.3     245.3         198.3         23.7

Early stage programs

     22.5         20.6         9.2     42.4         36.1         17.5

Research and discovery

     24.7         20.4         21.1     48.6         47.4         2.5

Other research and development costs

     118.0         109.7         7.5     243.6         235.8         3.3

Milestone and upfront payments

     13.6         5.5         *     43.0         6.8         *
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total research and development

   $ 329.6       $ 285.6         15.4   $ 685.6       $ 579.3         18.3
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Research and discovery represents costs incurred to support our discovery research and translational science efforts. Early stage programs are programs in Phase 1 or Phase 2 development. Late stage programs are programs in Phase 3 development or in registration stage. 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. General 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 the three and six months ended June 30, 2012, compared to the same periods in 2011, the increase in research and development expense was primarily the result of an increase in costs incurred in connection with our late and early stage programs as well as an increase in upfront and milestone payments. The increase in spending associated with our late stage product candidates was driven by increased clinical trial activity associated with our Factor VIII, dexpramipexole, daclizumab, and PEGylated interferon beta-1a product candidates as well as cost incurred in support of commercial preparatory capabilities related to Factor VIII and dexpramipexole. Research and development expense related to our early stage programs increased over the prior year comparative periods primarily due to costs incurred in the advancement of our Anti-TWEAK program in lupus nephritis and the advancement of our BIIB037 program for Alzheimer’s disease as well as an increase in spending incurred in connection with our recent collaboration and license agreement with Portola Pharmaceuticals, Inc. for the development of the Syk inhibitor molecule. In addition, research and development expense for the first six months of 2012 includes the $29.0 million and $12.0 million upfront payments made to Isis Pharmaceuticals, Inc. (Isis) in January and June 2012 upon entering into an agreement for the development of Isis’ antisense investigational drug ISIS-SMNRx for the treatment of spinal muscular atrophy (SMA) and product candidates related to the treatment of mytonic dystrophy (DM1), respectively.

We expect future research and development spend will be driven by strong patient enrollment trends in several of our late-stage clinical trials, the most costly stage of testing, which will likely be at or near their maximum enrollment points during 2012. We also 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 therapies for other neurodegenerative diseases as well as make investments to enhance our early-stage pipeline.

In July 2012, we initiated a reorganization of our research organization that will enable us to increase our emphasis on early discovery research. Our current estimate of costs associated with this program is approximately $9.0 million, which will be recorded in the third quarter.

 

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Selling, General and Administrative

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Selling, general and administrative

   $ 301.8       $ 266.3         13.3   $ 601.9       $ 510.8         17.8

For the three and six months ended June 30, 2012, compared to the same periods in 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 launch of BG-12, 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 other potential new products require significant pre-launch investments.

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 BG-12 program with the expectation of a first half 2013 launch. We have also begun to make investments in the development of commercial capabilities for our hemophilia franchise, which will continue to increase as we get closer to a potential 2013 launch. In addition, we continue to plan additional launches of FAMPYRA in various countries.

Collaboration Profit Sharing

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Collaboration profit sharing

   $ 78.5       $ 88.1         (10.9 )%    $ 164.4       $ 162.8         1.0

Collaboration profit sharing includes the portion of rest of world operating profits of TYSABRI to be shared with Elan. The amount shared includes third-party royalties paid by Elan on behalf of the collaboration. For the three months ended June 30, 2012, compared to the same period in 2011, the collaboration profit sharing expense was lower because a portion of our revenues recognized on sales of TYSABRI in Italy were deferred, as discussed above under the heading “Product Revenues”, thus operating profit was lower. For the six months ended June 30, 2012, compared to the same period in 2011, the collaboration profit sharing costs were generally flat as the amount of Italian revenue deferred was offset by unit volume revenue growth. For the three and six months ended June 30, 2012, our collaboration profit sharing expense included $13.4 million and $27.8 million, respectively, related to the reimbursement of third-party royalty payments made by Elan as compared to $15.2 million and $28.2 million, respectively, in the prior year comparative periods. For additional information about this collaboration, please read Note 20, Collaborations to our consolidated financial statements included within our 2011 Form 10-K.

Amortization of Acquired Intangible Assets

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Amortization of acquired intangible assets

   $ 52.3       $ 55.1         (5.1 )%    $ 98.2       $ 108.4         (9.4 )% 

For the three and six months ended June 30, 2012, compared to the same periods in 2011, 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.

 

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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, which 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 lifetime revenues of AVONEX is performed annually during our long range planning cycle, and this analysis serves as the basis for the calculation of our economic consumption model. We believe this process has allowed us to reliably determine the best estimate of the pattern in which we will consume the economic benefits of our core technology intangible asset.

Our most recent long range planning cycle was completed in the third quarter of 2011, which reflected a further increase in the expected lifetime revenue of AVONEX. As a result, amortization recorded for the first six months of 2012 decreased from the amount recorded in the first six months of 2011.

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. For example, the occurrence of an adverse event, such as the invalidation of our AVONEX ’755 Patent, could substantially increase the amount of amortization expense associated with our acquired intangible assets as compared to previous periods or our current expectations, which may result in a significant negative impact on our future results of operations.

Fair Value Adjustment of Contingent Consideration

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Fair value adjustment of contingent consideration

   $ 12.9       $ 2.2         *   $ 14.1       $ 3.4         *

We revalue the contingent consideration obligations for acquisitions completed after January 1, 2009 each reporting period. Changes in the fair value of our contingent consideration obligations are recognized as a fair value adjustment of contingent consideration within our condensed consolidated statements of income. The increase in the fair value of this obligation was primarily due to changes in the discount rate, which is based on interest rates, and the expected timing of payments.

Restructuring Charge

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Restructuring charge

   $ 1.1       $         *   $ 1.4       $ 16.6         (91.6 )% 

As of June 30, 2012, substantially all related restructuring charges from our 2010 initiative have been incurred and paid. We longer have a restructuring liability associated with these initiatives.

Other Income (Expense), Net

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011     Change %     2012      2011     Change %  

Other income (expense), net

   $ 3.0       $ (11.7     *   $ 18.1       $ (1.8     *

 

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Interest Income

For the three and six months ended June 30, 2012, compared to the same periods in 2011, interest income increased $5.9 million and $8.7 million, respectively, primarily due to the acceleration of imputed interest on originally discounted accounts receivables, which were collected.

Interest Expense

For the three and six months ended June 30, 2012, compared to the same periods in 2011, the decrease of $1.4 million and $3.2 million, respectively, in interest expense was primarily due to lower debt balances.

For the three and six months ended June 30, 2012, we capitalized interest costs related to construction in progress totaling approximately $8.6 million and $16.8 million, respectively, which reduced our interest expense by the same amount. We capitalized $8.3 million and $15.9 million, respectively, in the prior year comparative periods. Capitalized interest costs are primarily related to the construction of our large-scale biologic manufacturing facility in Hillerød, Denmark. Based on our current manufacturing strategy, we expect that this facility will be ready for its intended use in the second half of 2012, at which time we plan to cease capitalizing interest expense in relation to this project and begin recording depreciation on the facility.

Impairment on Investments

For the three and six months ended June 30, 2012, we recognized $0.8 million and $1.3 million, respectively, as impairment charges of our publicly-held strategic investments, investments in venture capital funds accounted for under the cost method and investments in privately-held companies.

For the three and six months ended June 30, 2011, we recognized $5.2 million and $5.5 million, respectively, as impairment charges of our investments in privately-held companies and our investments in venture capital funds accounted for under the cost method. No impairments were recognized in relation to our publicly-held strategic investments.

Gain on Investments, net

For the three and six months ended June 30, 2012, we realized net gains of $2.5 million and $14.3 million, respectively, as compared to a net loss of $0.1 million and a net gain of $14.8 million, respectively, in the prior year comparative periods. Net gains realized during the six months ended June 30, 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. Included within net gains realized during the six months ended June 30, 2011 is a gain of $13.8 million on the sale of stock from our strategic investments portfolio that was deemed to be no longer strategic.

Income Tax Provision

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012     2011     Change %     2012     2011     Change %  

Effective tax rate on pre-tax income

     23.8     23.8         22.7     25.7     (11.7 )% 

Income tax expense

   $ 121.0      $ 95.0        27.4   $ 203.2      $ 212.5        (4.4 )% 

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 between multiple jurisdictions, changes in tax laws, the amount and characterization of our research and development expenses, acquisitions, and licensing transactions.

 

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Our tax rate for the three months ended June 30, 2012, was substantially the same as the rate for the same period in 2011 due to a favorable state audit adjustment in the three months ended June 30, 2011, which was specific to that quarter, being offset by higher orphan drug credits in 2012.

For the six months ended June 30, 2012, the reduction in our income tax rate compared to the same period in 2011 was primarily a result of a benefit from higher orphan drug credits as a result of the Factor VIII, Factor IX and dexpramipexole trials, the cessation of certain intercompany royalties owed by a foreign affiliate of ours to a U.S. affiliate on the international sales of one of our products and the three months ended March 31, 2012 favorable determination by the IRS with regard to the deductibility of certain 2011 expenses reimbursed through our unconsolidated joint business.

For a detailed income tax rate reconciliation for the three and six months ended June 30, 2012 and 2011, please read Note 15, Income Taxes to our condensed consolidated financial statements included within this report.

Equity in Loss of Investee, Net of Tax

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, except percentages)

   2012      2011      Change %     2012      2011      Change %  

Equity in loss of investee, net of tax

   $ 0.5       $         *   $ 0.5       $         *

In February 2012, we finalized an agreement with Samsung BioLogics Co. Ltd. that established an entity, Samsung Bioepis, to develop, manufacture and market biosimilar pharmaceuticals. We account for this investment under the equity method of accounting. Under the equity method, we record our original investment at cost and subsequently adjust the carrying value of our investments for our share of equity in the entity’s income or losses according to our percentage of ownership. We recognize our share of the results of operations related to our investment in Samsung Bioepis one quarter in arrears.

Noncontrolling Interests

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 

(In millions, expect percentages)

   2012      2011      Change %     2012      2011      Change %  

Net income attributable to noncontrolling interests, net of tax

   $ 0.3       $ 16.0         (98.2 )%    $       $ 30.5         (100.0 )% 

For the three months ended June 30, 2012, compared to the same period in 2011, the change in net income attributable to noncontrolling interests, net of tax primarily resulted from the attribution of a $15.0 million milestone payment due Neurimmune in 2011.

For the six months ended June 30, 2012 compared to the same period in 2011, the change in net income attributable to noncontrolling interests, net of tax, reflects a reduction in earnings from our foreign joint venture investments due to our purchase of the noncontrolling interest in these ventures in September 2011 and therefore we no longer allocate 50% of the earnings of these affiliates to net income (loss) attributable to noncontrolling interests. Amounts recognized during the six months ended June 30, 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 and the $15.0 million milestone payment due to Neurimmune in 2011.

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.

 

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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. For example, when the U.S. dollar strengthens against foreign currencies, the relative value of sales made in the respective foreign currencies decreases, conversely, when the U.S. dollar weakens against foreign currencies, the relative amount of such sales in U.S. dollars increases.

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 9, Derivative Instruments to our condensed consolidated financial statements included within 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 France, Greece, 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 and Spain have announced or implemented austerity 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 have continued to do so during the three and six months ended June 30, 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 continue to expect that such measures will reduce our revenues in 2012 by approximately $40.0 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 2012 and beyond that may result in, among other things, constraints on pharmaceutical pricing, the permissibility of cross-border trade, and the use of comparative effectiveness research.

 

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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 have noted a lengthening in the time period required to collect 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 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. In June 2012, as part of a new program to resolve long outstanding amounts due, the Spanish government paid us approximately $112.0 million, contributing to a significant decrease in our accounts receivables in Spain. At June 30, 2012 our receivables in Spain are paid through November 2011. Our net accounts receivable balances from product sales in these countries totaled $200.3 million and $239.0 million as of June 30, 2012 and December 31, 2011, respectively, of which $22.0 million and $126.5 million were classified as non-current and included within investments and other assets within our condensed consolidated balance sheets as of those dates. Approximately $15.2 million and $56.0 million of the aggregate balances for these countries were overdue more than one year as of June 30, 2012 and December 31, 2011, respectively.

In March 2012, the government of Greece invoked a collective action clause that resulted in the mandatory conversion of Greek government debt issued under Greek law. Under the debt restructuring, creditors collectively exchanged Greek debt for new Greek bonds with lower coupons and longer maturities. The overall loss to bondholders is expected to exceed 70% of their original investment. To date 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 $2.7 million and $4.0 million as of June 30, 2012 and December 31, 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.

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