filings.toolsItem 16. Form 10-K Summary
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Item 16. Form 10-K Summary
Not applicable.
EXHIBIT INDEX
| ^ | References to “our” filings mean filings made by Biogen Inc. and filings made by IDEC Pharmaceuticals Corporation prior to the merger with Biogen, Inc. Unless otherwise indicated exhibits were previously filed with the SEC under Commission File Number 0-19311 and are incorporated herein by reference. |
| * | Management contract or compensatory plan or arrangement. |
| † | Confidential treatment has been granted or requested with respect to portions of this exhibit. |
| + | Filed herewith. |
| + | + | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BIOGEN INC. | |
| By: | /S/ MICHEL VOUNATSOS |
| Michel Vounatsos | |
| Chief Executive Officer |
Date: February 6, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Capacity | Date | ||
| /S/ MICHEL VOUNATSOS | Director and Chief Executive Officer (principal executive officer) | February 6, 2019 | ||
| Michel Vounatsos | ||||
| /S/ JEFFREY D. CAPELLO | Executive Vice President and Chief Financial Officer (principal financial officer) | February 6, 2019 | ||
| Jeffrey D. Capello | ||||
| /S/ ROBIN C. KRAMER | Vice President, Chief Accounting Officer (principal accounting officer) | February 6, 2019 | ||
| Robin C. Kramer | ||||
| /S/ STELIOS PAPADOPOULOS | Director and Chairman of the Board of Directors | February 6, 2019 | ||
| Stelios Papadopoulos | ||||
| /S/ ALEXANDER J. DENNER | Director | February 6, 2019 | ||
| Alexander J. Denner | ||||
| /S/ CAROLINE D. DORSA | Director | February 6, 2019 | ||
| Caroline D. Dorsa | ||||
| /S/ NANCY L. LEAMING | Director | February 6, 2019 | ||
| Nancy L. Leaming | ||||
| /S/ RICHARD C. MULLIGAN | Director | February 6, 2019 | ||
| Richard C. Mulligan | ||||
| /S/ ROBERT W. PANGIA | Director | February 6, 2019 | ||
| Robert W. Pangia | ||||
| /S/ BRIAN S. POSNER | Director | February 6, 2019 | ||
| Brian S. Posner | ||||
| /S/ ERIC K. ROWINSKY | Director | February 6, 2019 | ||
| Eric K. Rowinsky | ||||
| /S/ LYNN SCHENK | Director | February 6, 2019 | ||
| Lynn Schenk | ||||
| /S/ STEPHEN A. SHERWIN | Director | February 6, 2019 | ||
| Stephen A. Sherwin |
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
| Page Number | ||
| Consolidated Statements of Income | F-2 | |
| Consolidated Statements of Comprehensive Income | F-3 | |
| Consolidated Balance Sheets | F-4 | |
| Consolidated Statements of Cash Flows | F-5 | |
| Consolidated Statements of Equity | F-6 | |
| Notes to Consolidated Financial Statements | F-9 | |
| Report of Independent Registered Public Accounting Firm | F-83 |
F- 1
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
| For the Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Revenues: | |||||||||||
| Product, net | $ | 10,886.8 | $ | 10,354.7 | $ | 9,817.9 | |||||
| Revenues from anti-CD20 therapeutic programs | 1,980.2 | 1,559.2 | 1,314.5 | ||||||||
| Other | 585.9 | 360.0 | 316.4 | ||||||||
| Total revenues | 13,452.9 | 12,273.9 | 11,448.8 | ||||||||
| Cost and expenses: | |||||||||||
| Cost of sales, excluding amortization and impairment of acquired intangible assets | 1,816.3 | 1,630.0 | 1,478.7 | ||||||||
| Research and development | 2,597.2 | 2,253.6 | 1,973.3 | ||||||||
| Selling, general and administrative | 2,106.3 | 1,933.9 | 1,946.6 | ||||||||
| Amortization and impairment of acquired intangible assets | 747.3 | 814.7 | 385.6 | ||||||||
| Collaboration profit (loss) sharing | 185.0 | 112.3 | 10.2 | ||||||||
| Acquired in-process research and development | 112.5 | 120.0 | — | ||||||||
| Restructuring charges | 12.0 | 0.9 | 33.1 | ||||||||
| (Gain) loss on fair value remeasurement of contingent consideration | (12.3 | ) | 62.7 | 14.8 | |||||||
| TECFIDERA litigation settlement charge | — | — | 454.8 | ||||||||
| Total cost and expenses | 7,564.3 | 6,928.1 | 6,297.1 | ||||||||
| Income from operations | 5,888.6 | 5,345.8 | 5,151.7 | ||||||||
| Other income (expense), net | 11.0 | (217.0 | ) | (218.7 | ) | ||||||
| Income before income tax expense and equity in loss of investee, net of tax | 5,899.6 | 5,128.8 | 4,933.0 | ||||||||
| Income tax expense | 1,425.6 | 2,458.7 | 1,237.3 | ||||||||
| Equity in loss of investee, net of tax | — | — | — | ||||||||
| Net income | 4,474.0 | 2,670.1 | 3,695.7 | ||||||||
| Net income (loss) attributable to noncontrolling interests, net of tax | 43.3 | 131.0 | (7.1 | ) | |||||||
| Net income attributable to Biogen Inc. | $ | 4,430.7 | $ | 2,539.1 | $ | 3,702.8 | |||||
| Net income per share: | |||||||||||
| Basic earnings per share attributable to Biogen Inc. | $ | 21.63 | $ | 11.94 | $ | 16.96 | |||||
| Diluted earnings per share attributable to Biogen Inc. | $ | 21.58 | $ | 11.92 | $ | 16.93 | |||||
| Weighted-average shares used in calculating: | |||||||||||
| Basic earnings per share attributable to Biogen Inc. | 204.9 | 212.6 | 218.4 | ||||||||
| Diluted earnings per share attributable to Biogen Inc. | 205.3 | 213.0 | 218.8 |
See accompanying notes to these consolidated financial statements.
F- 2
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| For the Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Net income attributable to Biogen Inc. | $ | 4,430.7 | $ | 2,539.1 | $ | 3,702.8 | |||||
| Other comprehensive income: | |||||||||||
| Unrealized gains (losses) on securities available for sale: | |||||||||||
| Unrealized gains (losses) recognized during the period, net of tax | (10.6 | ) | (3.5 | ) | (10.6 | ) | |||||
| Less: reclassification adjustment for (gains) losses included in net income, net of tax | 6.7 | 12.7 | 0.6 | ||||||||
| Unrealized gains (losses) on securities available for sale, net of tax | (3.9 | ) | 9.2 | (10.0 | ) | ||||||
| Unrealized gains (losses) on cash flow hedges: | |||||||||||
| Unrealized gains (losses) recognized during the period, net of tax | 97.4 | (193.8 | ) | 51.6 | |||||||
| Less: reclassification adjustment for (gains) losses included in net income, net of tax | 41.8 | 31.5 | (4.0 | ) | |||||||
| Unrealized gains (losses) on cash flow hedges, net of tax | 139.2 | (162.3 | ) | 47.6 | |||||||
| Gains (losses) on net investment hedges: | |||||||||||
| Gains (losses) recognized during the period, net of tax | 5.0 | — | — | ||||||||
| Less: reclassification adjustment for (gains) losses included in net income, net of tax | (1.5 | ) | — | — | |||||||
| Gains (losses) on net investment hedges, net of tax | 3.5 | — | — | ||||||||
| Unrealized gains (losses) on pension benefit obligation, net of tax | 5.5 | (4.1 | ) | 5.1 | |||||||
| Currency translation adjustment | (67.8 | ) | 158.7 | (138.6 | ) | ||||||
| Total other comprehensive income (loss), net of tax | 76.5 | 1.5 | (95.9 | ) | |||||||
| Comprehensive income attributable to Biogen Inc. | 4,507.2 | 2,540.6 | 3,606.9 | ||||||||
| Comprehensive income (loss) attributable to noncontrolling interests, net of tax | 42.9 | 131.0 | (7.1 | ) | |||||||
| Comprehensive income | $ | 4,550.1 | $ | 2,671.6 | $ | 3,599.8 |
See accompanying notes to these consolidated financial statements.
F- 3
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| As of December 31, | |||||||
| 2018 | 2017 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 1,224.6 | $ | 1,573.8 | |||
| Marketable securities | 2,313.4 | 2,115.2 | |||||
| Accounts receivable, net | 1,958.5 | 1,787.0 | |||||
| Due from anti-CD20 therapeutic programs | 526.9 | 532.6 | |||||
| Inventory | 929.9 | 902.7 | |||||
| Other current assets | 687.6 | 962.0 | |||||
| Total current assets | 7,640.9 | 7,873.3 | |||||
| Marketable securities | 1,375.9 | 3,057.3 | |||||
| Property, plant and equipment, net | 3,601.2 | 3,182.4 | |||||
| Intangible assets, net | 3,120.0 | 3,879.6 | |||||
| Goodwill | 5,706.4 | 4,632.5 | |||||
| Deferred tax asset | 2,153.9 | 595.9 | |||||
| Investments and other assets | 1,690.6 | 431.6 | |||||
| Total assets | $ | 25,288.9 | $ | 23,652.6 | |||
| LIABILITIES AND EQUITY | |||||||
| Current liabilities: | |||||||
| Current portion of notes payable | $ | — | $ | 3.2 | |||
| Taxes payable | 63.5 | 68.2 | |||||
| Accounts payable | 370.5 | 395.5 | |||||
| Accrued expenses and other | 2,861.2 | 2,901.3 | |||||
| Total current liabilities | 3,295.2 | 3,368.2 | |||||
| Notes payable | 5,936.5 | 5,935.0 | |||||
| Deferred tax liability | 1,636.2 | 122.6 | |||||
| Other long-term liabilities | 1,389.4 | 1,628.7 | |||||
| Total liabilities | 12,257.3 | 11,054.5 | |||||
| Commitments and contingencies | |||||||
| Equity: | |||||||
| Biogen Inc. shareholders’ equity | |||||||
| Preferred stock, par value $0.001 per share | — | — | |||||
| Common stock, par value $0.0005 per share | 0.1 | 0.1 | |||||
| Additional paid-in capital | — | 97.8 | |||||
| Accumulated other comprehensive loss | (240.4 | ) | (318.4 | ) | |||
| Retained earnings | 16,257.0 | 15,810.4 | |||||
| Treasury stock, at cost; 23.8 million and 23.8 million shares, respectively | (2,977.1 | ) | (2,977.1 | ) | |||
| Total Biogen Inc. shareholders’ equity | 13,039.6 | 12,612.8 | |||||
| Noncontrolling interests | (8.0 | ) | (14.7 | ) | |||
| Total equity | 13,031.6 | 12,598.1 | |||||
| Total liabilities and equity | $ | 25,288.9 | $ | 23,652.6 |
See accompanying notes to these consolidated financial statements.
F- 4
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| For the Years Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 4,474.0 | $ | 2,670.1 | $ | 3,695.7 | |||||
| Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||
| Depreciation, amortization and impairments | 1,016.6 | 1,081.0 | 682.7 | ||||||||
| Acquired in-process research and development | 112.5 | 120.0 | — | ||||||||
| Share-based compensation | 157.5 | 128.0 | 154.8 | ||||||||
| Deferred income taxes | 108.3 | 91.7 | (175.0 | ) | |||||||
| Contingent consideration | (12.3 | ) | 62.7 | 14.8 | |||||||
| Other | (69.1 | ) | 162.1 | 89.0 | |||||||
| Changes in operating assets and liabilities, net: | |||||||||||
| Accounts receivable | (205.2 | ) | (435.6 | ) | (241.4 | ) | |||||
| Due from anti-CD20 therapeutic programs | 5.7 | (232.0 | ) | 13.9 | |||||||
| Inventory | (52.1 | ) | (94.5 | ) | (165.6 | ) | |||||
| Other assets | (119.1 | ) | (76.6 | ) | 59.1 | ||||||
| Accrued expenses and other current liabilities | 465.5 | (227.4 | ) | 622.3 | |||||||
| Income tax assets and liabilities | 321.7 | 1,303.9 | (232.6 | ) | |||||||
| Other liabilities | (16.3 | ) | (2.4 | ) | 69.5 | ||||||
| Net cash flows provided by operating activities | 6,187.7 | 4,551.0 | 4,587.2 | ||||||||
| Cash flows from investing activities: | |||||||||||
| Proceeds from sales and maturities of marketable securities | 9,173.7 | 5,565.9 | 7,378.9 | ||||||||
| Purchases of marketable securities | (7,694.8 | ) | (5,355.2 | ) | (7,913.2 | ) | |||||
| Contingent consideration related to Fumapharm AG acquisition | (1,500.0 | ) | (1,200.0 | ) | (1,200.0 | ) | |||||
| Acquired in-process research and development | (112.5 | ) | (120.0 | ) | — | ||||||
| Purchases of property, plant and equipment | (770.6 | ) | (867.4 | ) | (616.1 | ) | |||||
| Acquisitions of intangible assets | (3.0 | ) | (975.4 | ) | (111.6 | ) | |||||
| Purchase of Ionis Pharmaceuticals, Inc. stock | (462.9 | ) | — | — | |||||||
| Investment in Samsung Bioepis | (676.6 | ) | — | — | |||||||
| Other | 0.4 | (11.0 | ) | (22.8 | ) | ||||||
| Net cash flows used in investing activities | (2,046.3 | ) | (2,963.1 | ) | (2,484.8 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Purchases of treasury stock | (4,352.6 | ) | (1,365.4 | ) | (1,000.0 | ) | |||||
| Payments related to issuance of stock for share-based compensation arrangements, net | (2.1 | ) | (5.3 | ) | (8.5 | ) | |||||
| Net distribution to noncontrolling interest | (36.4 | ) | (134.1 | ) | — | ||||||
| Repayments of borrowings | (3.2 | ) | (560.9 | ) | (2.7 | ) | |||||
| Net cash contribution to Bioverativ, Inc. | — | (302.7 | ) | — | |||||||
| Contingent consideration payments | (58.2 | ) | (3.0 | ) | (38.6 | ) | |||||
| Other | (19.5 | ) | (8.6 | ) | (2.8 | ) | |||||
| Net cash flows used in financing activities | (4,472.0 | ) | (2,380.0 | ) | (1,052.6 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | (330.6 | ) | (792.1 | ) | 1,049.8 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (18.6 | ) | 39.4 | (31.3 | ) | ||||||
| Cash and cash equivalents, beginning of the year | 1,573.8 | 2,326.5 | 1,308.0 | ||||||||
| Cash and cash equivalents, end of the year | $ | 1,224.6 | $ | 1,573.8 | $ | 2,326.5 |
See accompanying notes to these consolidated financial statements.
F- 5
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Treasury stock | Total Biogen Inc. shareholders’ equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | — | $ | — | 235.3 | $ | 0.1 | $ | 97.8 | $ | (318.4 | ) | $ | 15,810.4 | (23.8 | ) | $ | (2,977.1 | ) | $ | 12,612.8 | $ | (14.7 | ) | $ | 12,598.1 | |||||||||||||||||||
| Net income | 4,430.7 | 4,430.7 | 43.3 | 4,474.0 | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 76.5 | 76.5 | (0.4 | ) | 76.1 | |||||||||||||||||||||||||||||||||||||||
| Capital contribution by noncontrolling interest | — | 13.8 | 13.8 | |||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | (50.0 | ) | (50.0 | ) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2018 Share Repurchase Program, at cost | (4.3 | ) | (1,352.6 | ) | (1,352.6 | ) | (1,352.6 | ) | ||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2018 Share Repurchase Program, at cost | (4.3 | ) | — | (92.8 | ) | (1,259.8 | ) | 4.3 | 1,352.6 | — | — | |||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2016 Share Repurchase Program, at cost | (10.5 | ) | (3,000.0 | ) | (3,000.0 | ) | (3,000.0 | ) | ||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2016 Share Repurchase Program, at cost | (10.5 | ) | — | (171.1 | ) | (2,828.9 | ) | 10.5 | 3,000.0 | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock under stock option and stock purchase plans | 0.2 | — | 41.2 | 41.2 | 41.2 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock award plan | 0.3 | — | (43.8 | ) | (43.8 | ) | (43.8 | ) | ||||||||||||||||||||||||||||||||||||
| Compensation related to share-based payments | 168.7 | 168.7 | 168.7 | |||||||||||||||||||||||||||||||||||||||||
| Adoption of new accounting guidance | 1.5 | 104.6 | 106.1 | 106.1 | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | — | $ | — | 221.0 | $ | 0.1 | $ | — | $ | (240.4 | ) | $ | 16,257.0 | (23.8 | ) | $ | (2,977.1 | ) | $ | 13,039.6 | $ | (8.0 | ) | $ | 13,031.6 |
See accompanying notes to these consolidated financial statements.
F- 6
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY - (Continued)
(In millions)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Treasury stock | Total Biogen Inc. shareholders’ equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | — | $ | — | 238.5 | $ | 0.1 | $ | — | $ | (319.9 | ) | $ | 15,071.6 | (22.6 | ) | $ | (2,611.7 | ) | $ | 12,140.1 | $ | (11.5 | ) | $ | 12,128.6 | |||||||||||||||||||
| Net income | 2,539.1 | 2,539.1 | 131.0 | 2,670.1 | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | 1.5 | 1.5 | — | 1.5 | ||||||||||||||||||||||||||||||||||||||||
| Capital contribution by noncontrolling interest | — | 15.8 | 15.8 | |||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | (150.0 | ) | (150.0 | ) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2016 Share Repurchase Program, at cost | (3.7 | ) | (1,000.0 | ) | (1,000.0 | ) | (1,000.0 | ) | ||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2016 Share Repurchase Program, at cost | (3.7 | ) | — | (36.0 | ) | (964.0 | ) | 3.7 | 1,000.0 | — | — | |||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2011 Share Repurchase Program, at cost | (1.2 | ) | (365.4 | ) | (365.4 | ) | (365.4 | ) | ||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock option and stock purchase plans | 0.2 | — | 40.5 | 40.5 | 40.5 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock award plan | 0.3 | — | (44.8 | ) | (1.0 | ) | (45.8 | ) | (45.8 | ) | ||||||||||||||||||||||||||||||||||
| Compensation related to share-based payments | 138.1 | 138.1 | 138.1 | |||||||||||||||||||||||||||||||||||||||||
| Hemophilia spin-off adjustment | (852.8 | ) | (852.8 | ) | (852.8 | ) | ||||||||||||||||||||||||||||||||||||||
| Tax benefit | 17.5 | 17.5 | 17.5 | |||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | — | $ | — | 235.3 | $ | 0.1 | $ | 97.8 | $ | (318.4 | ) | $ | 15,810.4 | (23.8 | ) | $ | (2,977.1 | ) | $ | 12,612.8 | $ | (14.7 | ) | $ | 12,598.1 |
See accompanying notes to these consolidated financial statements.
F- 7
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY - (Continued)
(In millions)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Treasury stock | Total Biogen Inc. shareholders’ equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2015 | — | $ | — | 241.2 | $ | 0.1 | $ | — | $ | (224.0 | ) | $ | 12,208.4 | (22.6 | ) | $ | (2,611.7 | ) | $ | 9,372.8 | $ | 2.1 | $ | 9,374.9 | ||||||||||||||||||||
| Net income | 3,702.8 | 3,702.8 | (7.1 | ) | 3,695.7 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | (95.9 | ) | (95.9 | ) | 0.1 | (95.8 | ) | |||||||||||||||||||||||||||||||||||||
| Acquisition of noncontrolling interest | — | (0.6 | ) | (0.6 | ) | |||||||||||||||||||||||||||||||||||||||
| Capital contribution by noncontrolling interest | — | 1.5 | 1.5 | |||||||||||||||||||||||||||||||||||||||||
| Deconsolidation of noncontrolling interest | — | (7.5 | ) | (7.5 | ) | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2016 Share Repurchase Program, at cost | (3.3 | ) | (1,000.0 | ) | (1,000.0 | ) | (1,000.0 | ) | ||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2016 Share Repurchase Program, at cost | (3.3 | ) | — | (164.9 | ) | (835.1 | ) | 3.3 | 1,000.0 | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock under stock option and stock purchase plans | 0.2 | — | 43.7 | 43.7 | 43.7 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock award plan | 0.4 | — | (47.6 | ) | (4.5 | ) | (52.1 | ) | (52.1 | ) | ||||||||||||||||||||||||||||||||||
| Compensation related to share-based payments | 169.4 | 169.4 | 169.4 | |||||||||||||||||||||||||||||||||||||||||
| Tax benefit from share-based payments | (0.6 | ) | (0.6 | ) | (0.6 | ) | ||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2016 | — | $ | — | 238.5 | $ | 0.1 | $ | — | $ | (319.9 | ) | $ | 15,071.6 | (22.6 | ) | $ | (2,611.7 | ) | $ | 12,140.1 | $ | (11.5 | ) | $ | 12,128.6 |
See accompanying notes to these consolidated financial statements.
F- 8
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- Summary of Significant Accounting Policies
References in these notes to "Biogen," the "company," "we," "us" and "our" refer to Biogen Inc. and its consolidated subsidiaries.
Business Overview
Biogen is a global biopharmaceutical company focused on discovering, developing and delivering worldwide innovative therapies for people living with serious neurological and neurodegenerative diseases, including in our core growth areas of multiple sclerosis (MS) and neuroimmunology, Alzheimer’s disease (AD) and dementia, movement disorders, including Parkinson's disease, and neuromuscular disorders, including spinal muscular atrophy (SMA) and amyotrophic lateral sclerosis (ALS). We are also focused on discovering, developing and delivering worldwide innovative therapies in our emerging growth areas of acute neurology, neurocognitive disorders, pain and ophthalmology. In addition, we are employing innovative technologies to discover potential treatments for rare and genetic disorders, including new ways of treating diseases through gene therapy in our core and emerging growth areas. We also manufacture and commercialize biosimilars of advanced biologics.
Our marketed products include TECFIDERA, AVONEX, PLEGRIDY, TYSABRI and FAMPYRA for the treatment of MS, SPINRAZA for the treatment of SMA and FUMADERM for the treatment of severe plaque psoriasis. We also have certain business and financial rights with respect to RITUXAN for the treatment of non-Hodgkin's lymphoma, chronic lymphocytic leukemia (CLL) and other conditions, RITUXAN HYCELA for the treatment of non-Hodgkin's lymphoma and CLL, GAZYVA for the treatment of CLL and follicular lymphoma, OCREVUS for the treatment of primary progressive MS (PPMS) and relapsing MS (RMS) and other potential anti-CD20 therapies pursuant to our collaboration arrangements with Genentech, Inc. (Genentech), a wholly-owned member of the Roche Group. For additional information on our collaboration arrangements with Genentech, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
We support our drug discovery and development efforts through the commitment of significant resources to discovery, research and development programs and business development opportunities. For over two decades we have led in the research and development of new therapies to treat MS, resulting in our leading portfolio of MS treatments. Now our research is focused on additional improvements in the treatment of MS, such as the development of next generation therapies for MS, with a goal to reverse or possibly repair damage caused by the disease. We are also applying our scientific expertise to solve some of the most challenging and complex diseases, including AD, progressive supranuclear palsy (PSP), Parkinson's disease, ALS, stroke, epilepsy, cognitive impairment associated with schizophrenia (CIAS) and pain.
Our innovative drug development and commercialization activities are complemented by our biosimilar products that expand access to medicines and reduce the cost burden for healthcare systems. We are leveraging our manufacturing capabilities and know-how to develop, manufacture and market biosimilar products through Samsung Bioepis Co., Ltd. (Samsung Bioepis), our joint venture with Samsung BioLogics Co., Ltd. (Samsung BioLogics). Under our commercial agreement, we market and sell BENEPALI, an etanercept biosimilar referencing ENBREL, FLIXABI, an infliximab biosimilar referencing REMICADE, and IMRALDI, an adalimumab biosimilar referencing HUMIRA, in the European Union (E.U.). For additional information on our collaboration arrangement with Samsung Bioepis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Hemophilia Spin-Off
On February 1, 2017, we completed the spin-off of our hemophilia business, Bioverativ Inc. (Bioverativ), as an independent, publicly traded company. Our consolidated results of operations and financial position included in these audited consolidated financial statements reflect the financial results of our hemophilia business for all periods through January 31, 2017.
For additional information on the spin-off of our hemophilia business, please read Note 3, Hemophilia Spin-Off, to these consolidated financial statements.
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Consolidation
Our 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 consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.
In determining whether we are the primary beneficiary of an entity, 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 one or more of our collaborators or partners.
Use of Estimates
The preparation of our consolidated financial statements requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from these estimates.
Revenue Recognition
In May 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services.
The FASB subsequently issued the following amendments to ASU 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. We adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).
The new revenue standards became effective for us on January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018, did not change our revenue recognition as the majority of our revenues continue to be recognized when the customer takes control of our product. As we did not identify any accounting changes that impacted the amount of reported revenues with respect to our product revenues, revenues from anti-CD20 therapeutic programs or other revenues, no adjustment to retained earnings was required upon adoption. However, the adoption of the new revenue standards will result in a change in the timing of revenue recognition related to certain of our contract manufacturing activities based upon the terms of the underlying agreements.
Under the new revenue standards, we recognize revenues when our customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenues following the five-step model prescribed under ASU 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
As a result of the new revenue standards, other corporate revenue was higher by $75.8 million and cost of sales, excluding amortization and impairment of acquired intangible assets was higher by $42.4 million for the year ended December 31, 2018, compared to what would have been reported under the previous revenue guidance,
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primarily due to the earlier recognition of revenue associated with our contract manufacturing agreements. Under the previous revenue guidance, these amounts would have been recognized in future periods upon shipment. The adoption of the new revenue standards did not have a material impact on any other balances within our consolidated financial statements as of and for the year ended December 31, 2018.
Product Revenues
In the United States (U.S.), we sell our products primarily to wholesale distributors and specialty pharmacy providers. In other countries, we sell our products primarily to wholesale distributors, hospitals, pharmacies and other third-party distribution partners. These customers subsequently resell our products to health care providers and patients. In addition, we enter into arrangements with health care providers and payors that provide for government-mandated or privately-negotiated discounts and allowances related to our products.
Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that we would have recognized is one year or less or the amount is immaterial.
Reserves for Discounts and Allowances
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers, health care providers or payors, including those associated with the implementation of pricing actions in certain of the international markets in which we operate. Our process for estimating reserves established for these variable consideration components do not differ materially from our historical practices.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the following categories: discounts, contractual adjustments and returns.
These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer). Our estimates of reserves established for variable consideration are calculated based upon a consistent application of our methodology utilizing the expected value method. These estimates reflect our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.
Discounts include trade term discounts and wholesaler incentives. Trade term discounts and wholesaler incentives primarily relate to estimated obligations for credits to be granted to wholesalers for remitting payment on their purchases within established incentive periods and credits to be granted to wholesalers for compliance with various contractually-defined inventory management practices, respectively. We determine these reserves based on our historical experience, including the timing of customer payments.
Contractual adjustments primarily relate to Medicaid and managed care rebates, co-payment (copay) assistance, Veterans Administration (VA) and Public Health Service (PHS) discounts, specialty pharmacy program fees and other governmental rebates or applicable allowances.
| • | Medicaid rebates relate to our estimated obligations to states under established reimbursement arrangements. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in other current liabilities. Our liability for Medicaid rebates consists of estimates for claims that a state will make for the current quarter, claims for prior quarters that have been estimated for which an invoice has not been received, invoices received for claims from the prior quarters that have not been paid and an estimate of potential claims that will be made for inventory that exists in the distribution channel at period end. |
| • | Governmental rebates or chargebacks, including VA and PHS discounts, represent our estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower |
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than the list prices we charge to wholesalers which provide those products. The wholesaler charges us for the difference between what the wholesaler pays for the products and the ultimate selling price to the qualified healthcare providers. Rebate and chargeback reserves are established in the same period as the related revenue is recognized, resulting in a reduction in product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider from the wholesaler, and we generally issue credits for such amounts within a few weeks of the wholesaler notifying us about the resale. Our reserves for VA, PHS and chargebacks consist of amounts that we expect to issue for inventory that exists at the wholesalers that we expect will be sold to qualified healthcare providers and chargebacks that wholesalers have claimed for which we have not issued a credit.
| • | Managed care rebates represent our estimated obligations to third parties, primarily pharmacy benefit managers. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses and other current liabilities. These rebates result from performance-based goals, formulary position and price increase limit allowances (price protection). The calculation of the accrual for these rebates is based on an estimate of the customer’s buying patterns and the resulting applicable contractual rebate rate(s) to be earned over a contractual period. |
| • | Copay assistance represents financial assistance to qualified patients, assisting them with prescription drug co-payments required by insurance. The calculation of the accrual for copay is based on an estimate of claims and the cost per claim that we expect to receive associated with inventory that exists in the distribution channel at period end. |
| • | Other governmental rebates, non-US pharmaceutical taxes or applicable allowances primarily relate to mandatory rebates and discounts in international markets where government-sponsored healthcare systems are the primary payors for healthcare. |
Product returns are established for returns expected to be made by wholesalers and are recorded in the period the related revenue is recognized, resulting in a reduction to product revenues. 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. Expired product return reserves are estimated through a comparison of historical return data to their related sales on a production lot basis. Historical rates of return are determined for each product and are adjusted for known or expected changes in the marketplace specific to each product.
In addition to discounts, rebates and product returns, we also maintain certain customer service contracts with distributors and other customers in the distribution channel that provide us with inventory management, data and distribution services, which are generally reflected as a reduction of revenues. To the extent we can demonstrate a separable benefit and fair value for these services we classify these payments in selling, general and administrative expenses.
Revenues from Anti-CD20 Therapeutic Programs
Our collaboration with Genentech is within the scope of Accounting Standards Codification (ASC) 808, Collaborative Agreements, which provides guidance on the presentation and disclosure of collaborative arrangements. For purposes of this footnote we refer to RITUXAN and RITUXAN HYCELA collectively as RITUXAN.
Our share of the pre-tax co-promotion profits on RITUXAN and GAZYVA and royalty revenues on the sale of OCREVUS resulted from an exchange of a license. As we do not have future performance obligations under the license or collaboration agreement, revenues are recognized as the underlying sales occur.
Revenues from anti-CD20 therapeutic programs consist of:
| (i) | our share of pre-tax profits and losses in the U.S. for RITUXAN and GAZYVA; and |
| (ii) | other revenues from anti-CD20 therapeutic programs, which primarily consist of our share of pre-tax co-promotion profits on RITUXAN in Canada and royalty revenues on sales of OCREVUS. |
Pre-tax co-promotion profits on RITUXAN and GAZYVA are calculated and paid to us by Genentech in the U.S. Pre-tax co-promotion profits on RITUXAN are calculated and paid to us by the Roche Group in Canada. Pre-tax co-promotion profits consist of U.S. and Canadian net sales to third-party customers less applicable costs to manufacture, third-party royalty expenses, distribution, selling and marketing expenses and joint development
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expenses incurred by Genentech, the Roche Group and us. Our share of the pre-tax profits on RITUXAN and GAZYVA in the U.S. and pre-tax co-promotion profits on RITUXAN in Canada include estimates that are based on information received from Genentech. These estimates are subject to change and actual results may differ.
For additional information on our relationship with Genentech, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Other Revenues
Collaborative and Other Relationships
We have a number of significant collaborative and other third-party relationships for revenues and for the development, regulatory approval, commercialization and marketing of certain of our products and product candidates. Where we are the principal on sales transactions with third parties, we recognize revenues, cost of sales and operating expenses on a gross basis in their respective lines in our consolidated statements of income. Where we are not the principal on sales transactions with third parties, we record our share of the revenues, cost of sales and operating expenses on a net basis in collaborative and other relationships included in other revenues in our consolidated statements of income.
Our development and commercialization arrangements with AbbVie Inc. (AbbVie), Genentech and Samsung Bioepis represent collaborative arrangements as each party is an active participant in one or more joint operating activities and is exposed to significant risks and rewards of these arrangements. These arrangements resulted from an exchange of a license and utilize the sales and usage based royalty exception. Therefore, revenues relating to royalties or profit-sharing amounts received are recognized as the underlying sales occur.
For additional information on our collaboration arrangements with AbbVie, Genentech and Samsung Bioepis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Royalty Revenues
We receive royalty revenues on sales by our licensees of other products covered under patents that we own. We do not have future performance obligations under these license arrangements. We record these revenues based on estimates of the sales that occurred during the relevant period as a component of other revenues. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. Differences between actual and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees.
Other Corporate Revenues
We record other corporate revenues primarily from amounts earned under contract manufacturing agreements. Revenues under contract manufacturing agreements are recognized when the customer obtains control of the product, which may occur at a point in time or over time depending on the terms and conditions of the agreement.
Fair Value Measurements
We have certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.
| • | Level 1 — Fair values are determined utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access; |
| • | Level 2 — Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, foreign currency spot rates and option pricing valuation models; and |
| • | Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable. |
The majority of our financial assets have been classified as Level 2. Our financial assets (which include our cash equivalents, marketable debt securities and certain of our marketable equity securities, derivative contracts and plan assets for deferred compensation) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third-party pricing services or option pricing valuation models.
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The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events.
We validate the prices provided by our third-party pricing services by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances. The option pricing valuation models use assumptions within the model, including the term, stock price volatility, constant maturity risk-free interest rate and dividend yield. After completing our validation procedures, we did not adjust or override any fair value measurements provided by our pricing services as of December 31, 2018 and 2017.
Other Assets and Liabilities
The carrying amounts reflected in our consolidated balance sheets for current accounts receivable, due from anti-CD20 therapeutic programs, other current assets, accounts payable and accrued expenses and other, approximate fair value due to their short-term maturities.
Cash and Cash Equivalents
We consider only those investments that are highly liquid, readily convertible to cash and that mature within three months from date of purchase to be cash equivalents. As of December 31, 2018 and 2017, cash equivalents were comprised of money market funds, commercial paper, overnight reverse repurchase agreements and other debt securities with maturities less than 90 days from the date of purchase.
Accounts Receivable
The majority of our accounts receivable arise from product sales and primarily represent amounts due from our wholesale and other third-party distributors, public hospitals, pharmacies and other government entities and have standard payment terms that generally require payment within 30 to 90 days.
We do not adjust our receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale.
In countries where we have experienced a pattern of payments extending beyond our contractual payment term and we expect to collect receivables greater than one year from the time of sale, we have assessed whether the customer has a significant financing component and 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 non-current assets. We accrete interest income on these receivables, which is recorded as a component of other income (expense), net in our consolidated statements of income.
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.
The adoption of the new revenue standards did not change our historical accounting methods for our accounts receivable.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents, investments, derivatives and accounts receivable. We attempt to minimize the risks related to cash and cash equivalents and investments by investing in a broad and diverse range of financial instruments as previously defined by us. We have established guidelines related to credit ratings and maturities intended to safeguard principal balances and maintain liquidity. Our investment portfolio is maintained in accordance with our investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. We minimize credit risk resulting from derivative instruments by choosing only highly rated financial institutions as counterparties.
Concentrations of credit risk with respect to receivables, which are typically unsecured, are somewhat mitigated due to the wide variety of customers and markets using our products, as well as their dispersion across many different geographic areas. We monitor the financial performance and creditworthiness of our customers so that we
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can properly assess and respond to changes in their credit profile. We continue to monitor these conditions and assess their possible impact on our business.
Marketable Securities and Other Investments
Marketable Debt Securities
Available-for-sale marketable debt securities are recorded at fair market value and unrealized gains and losses are included in accumulated other comprehensive income (loss) in equity, net of related tax effects, unless the security has experienced a credit loss, we have determined that we have the intent to sell the security or we have determined that it is more likely than not that we will have to sell the security before its expected recovery. Realized gains and losses are reported in other income (expense), net, on a specific identification basis.
Marketable Equity Securities and Venture Capital Funds
Our marketable equity securities are recorded at fair market value and, beginning January 1, 2018, unrealized gains and losses are included in other income (expense), net in our consolidated statements of income. Prior to January 1, 2018, unrealized gains and losses were included in accumulated other comprehensive income (loss) in equity, net of related tax effects. Our marketable equity securities represent investments in publicly traded equity securities and are included in investments and other assets in our consolidated balance sheets.
Our investments in venture capital funds are recorded at net asset value, which approximates fair value, and, beginning January 1, 2018, unrealized gains and losses are included in other income (expense), net in our consolidated statements of income. Prior to January 1, 2018, these investments were accounted for under the cost method of accounting. The underlying investments of the venture capital funds in which we invest are in equity securities of certain biotechnology companies and are included in investments and other assets in our consolidated balance sheets.
Non-Marketable Equity Securities
We also invest in equity securities of companies whose securities are not publicly traded and where fair value is not readily available. These investments are recorded using either the equity method of accounting or the cost minus impairment adjusted for changes in observable prices, depending on our ownership percentage and other factors that suggest we have significant influence. We monitor these investments to evaluate whether any increase or decline in their value has occurred, based on the implied value of recent company financings, public market prices of comparable companies and general market conditions. These investments are included in investments and other assets in our consolidated balance sheets.
Evaluating Investments for Other-than-Temporary Impairments
We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale debt securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income.
For available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected in earnings as an impairment loss.
Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.
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
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and other relevant factors such as the presence of a collaborative or other business relationship. Under the equity method of accounting, we record in our results of operations our share of income or loss of the other company. If our share of losses exceeds the carrying value of our investment, we will suspend recognizing additional losses and will continue to do so unless we commit to providing additional funding.
Inventory
Inventories are stated at the lower of cost or net realizable value with cost based on the first-in, first-out method. We classify our inventory costs as long-term when we expect to utilize the inventory beyond our normal operating cycle and include these costs in investments and other assets in our consolidated balance sheets. Inventory that can be used in either the production of clinical or commercial products is expensed as research and development costs when identified for use in a clinical manufacturing campaign.
Capitalization of Inventory Costs
We capitalize inventory costs associated with our products prior to regulatory approval, when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. We consider numerous attributes in evaluating whether the costs to manufacture a particular product should be capitalized as an asset. We assess the regulatory approval process and where the particular product stands in relation to that approval process, including any known safety or efficacy concerns, potential labeling restrictions and other impediments to approval. We evaluate our anticipated research and development initiatives and constraints relating to the product and the indication in which it will be used. We consider our manufacturing environment including our supply chain in determining logistical constraints that could hamper approval or commercialization. We consider the shelf life of the product in relation to the expected timeline for approval and we consider patent related or contract issues that may prevent or delay commercialization. We also base our judgment on the viability of commercialization, trends in the marketplace and market acceptance criteria. Finally, we consider the reimbursement strategies that may prevail with respect to the product and assess the economic benefit that we are likely to realize. We expense previously capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among other potential factors, a denial or significant delay of approval by necessary regulatory bodies.
Obsolescence and Unmarketable Inventory
We periodically review our inventories for excess or obsolescence and write-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated by us, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Additionally, our products are subject to strict quality control and monitoring that we perform throughout the manufacturing process. In the event that certain batches or units of product no longer meet quality specifications, we will record a charge to cost of sales to write-down any unmarketable inventory to its estimated net realizable value. In all cases, product inventory is carried at the lower of cost or its estimated net realizable value. Amounts written-down due to unmarketable inventory are charged to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, subject to review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The cost of normal, recurring, or periodic repairs and maintenance activities related to property, plant and equipment are expensed as incurred. The cost for planned major maintenance activities, including the related acquisition or construction of assets, is capitalized if the repair will result in future economic benefits.
Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset. We also capitalize certain direct and incremental costs associated with the validation effort required for licensing by regulatory agencies of new manufacturing equipment for the production of a commercially approved drug. These costs primarily include direct labor and material and are incurred in preparing the equipment for its intended use. The validation costs are either amortized over the life of the related equipment or expensed as cost of sales when the product produced in the validation process is sold.
In addition, we capitalize certain internal use computer software development costs. If the software is an integral part of production assets, these costs are included in machinery and equipment and are amortized on a
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straight-line basis over the estimated useful lives of the related software, which generally range from three to five years.
We generally depreciate or amortize the cost of our property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets, which are summarized as follows:
| Asset Category | Useful Lives |
| Land | Not depreciated |
| Buildings | 15 to 40 years |
| Leasehold Improvements | Lesser of the useful life or the term of the respective lease |
| Furniture and Fixtures | 5 to 7 years |
| Machinery and Equipment | 5 to 20 years |
| Computer Software and Hardware | 3 to 5 years |
When we dispose of property, plant and equipment, we remove the associated cost and accumulated depreciation from the related accounts in our consolidated balance sheets and include any resulting gain or loss in our consolidated statements of income.
Intangible Assets
Our intangible assets consist of acquired and in-licensed rights and patents, developed technology, out-licensed patents, in-process research and development acquired after January 1, 2009, trademarks and trade names. Our intangible assets are recorded at fair value at the time of their acquisition and are stated in our consolidated balance sheets net of accumulated amortization and impairments, if applicable.
Intangible assets related to acquired and in-licensed rights and patents, developed technology and out-licensed patents are amortized over their estimated useful lives using the economic consumption method if anticipated future revenues can be reasonably estimated. The straight-line method is used when revenues cannot be reasonably estimated. Amortization is recorded within amortization and impairment of acquired intangible assets in our consolidated statements of income.
Acquired and in-licensed rights and patents primarily relate to our acquisition of all remaining rights to TYSABRI from Elan Pharma International, Ltd. (Elan), an affiliate of Elan Corporation, plc. Acquired and in-licensed rights and patents also includes our U.S. and rest of world licenses to Forward Pharma A/S' (Forward Pharma) intellectual property, including Forward Pharma's intellectual property related to TECFIDERA, and other amounts related to our other marketed products and other programs acquired through business combinations. Developed technology primarily relates to our AVONEX product, which was recorded in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in 2003. We amortize the intangible assets related to our TYSABRI, AVONEX, SPINRAZA and TECFIDERA products using the economic consumption method based on revenues generated from the products underlying the related intangible assets. An analysis of the anticipated lifetime revenues of our TYSABRI, AVONEX, SPINRAZA and TECFIDERA products is performed annually during our long-range planning cycle and whenever events or changes in circumstances would significantly affect the anticipated lifetime revenues of our TYSABRI, AVONEX, SPINRAZA and TECFIDERA products.
Intangible assets related to trademarks, trade names and in-process research and development prior to commercialization are not amortized because they have indefinite lives; however, they are subject to review for impairment. We review our intangible assets with indefinite lives for impairment annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Acquired In-process Research and Development (IPR&D)
Acquired IPR&D represents the fair value assigned to research and development assets that have not reached technological feasibility. The value assigned to acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenues from the projects and discounting the net cash flows to present value. The revenues and costs projections used to value acquired IPR&D are, as applicable, reduced based on the probability of success of developing a new drug. Additionally, the projections consider the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by us and our competitors. The rates utilized to discount the net cash flows to their present value are commensurate with the stage of development of the projects and uncertainties in the
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economic estimates used in the projections. Upon the acquisition of IPR&D, we complete an assessment of whether our acquisition constitutes the purchase of a single asset or a group of assets. We consider multiple factors in this assessment, including the nature of the technology acquired, the presence or absence of separate cash flows, the development process and stage of completion, quantitative significance and our rationale for entering into the transaction.
If we acquire a business as defined under applicable accounting standards, then the acquired IPR&D is capitalized as an intangible asset. If we acquire an asset or group of assets that do not meet the definition of a business under applicable accounting standards, then the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense as they are incurred.
When performing our impairment assessment, we calculate the fair value using the same methodology as described above. If the carrying value of our acquired IPR&D exceeds its fair value, then the intangible asset is written-down to its fair value. Changes in estimates and assumptions used in determining the fair value of our acquired IPR&D could result in an impairment. Impairments are recorded within amortization and impairment of acquired intangible assets in our consolidated statements of income. Assets that have been previously impaired, including our vixotrigine (BIIB074) program for the treatment of neuropathic pain, such as trigeminal neuralgia (TGN), could become further impaired in the future.
Goodwill
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but reviewed for impairment. Goodwill is reviewed annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.
We compare the fair value of our reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of our reporting unit, we would record an impairment loss equal to the difference. As described in Note 25, Segment Information, to these consolidated financial statements, we operate in one operating segment, which is our only reporting unit.
Impairment of Long-Lived Assets
Long-lived assets to be held and used, including property, plant and equipment, and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. Long-lived assets to be disposed of are carried at fair value less costs to sell.
Contingent Consideration
The consideration for our acquisitions often includes future payments that are contingent upon the occurrence of a particular event or events. For acquisitions completed before January 1, 2009, we record contingent consideration resulting from a business combination when the contingency is resolved. For acquisitions of a business completed after January 1, 2009, we record an 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 our contingent consideration obligations each reporting period. Changes in the fair value of our contingent consideration obligations are recognized in our consolidated statements of income. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates, changes in the amount or timing of expected expenditures associated with product development, changes in the amount or timing of cash flows and reserves associated with products upon commercialization, changes in the assumed achievement or timing of any cumulative sales-based and development milestones, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval.
Discount rates in our valuation models represent a measure of the credit risk associated with settling the liability. The period over which we discount our contingent obligations is based on the current development stage of
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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 estimating 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 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.
Derivative Instruments and Hedging Activities
Cash Flow and Fair Value Derivative Instruments
We recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance sheets. Changes in the fair value of our derivative instruments are recognized each period in current earnings or accumulated other comprehensive income (loss), depending on whether the derivative instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. We classify the cash flows from these instruments in the same category as the cash flows from the hedged items. We do not hold or issue derivative instruments for trading or speculative purposes.
We assess at inception and on an ongoing basis, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of the hedged items. We exclude the forward points portion of the derivative instruments used in a hedging transaction from the effectiveness test and record the fair value gain or loss related to this portion each period in our consolidated statements of income in the same line as the underlying hedged item. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting for the affected portion of the hedge instrument, and any related unrealized gain or loss on the contract is recognized in current earnings.
Net Investment Derivative Instruments
We are exposed to the impact of foreign exchange fluctuations on our investment in the equity of Samsung Bioepis, which is denominated in a currency other than the U.S. dollar, and could adversely impact the U.S. dollar value of this investment. Using derivative instruments, we have hedged our net investment position to mitigate the effects of foreign exchange fluctuations. We recognize these designated net investment hedges as either assets or liabilities, at fair value, in our consolidated balance sheets. We hedge the changes in the spot exchange rate in accumulated other comprehensive income (loss) and exclude changes to the forward rate and amortize the forward points in other income (expense), net in our consolidated statements of income over the term of the contract. We classify the cash flows from these instruments in the same category as the cash flows from the hedged items.
For additional information on our derivative instruments and hedging activities, please read Note 10, Derivative Instruments, to these consolidated financial statements.
Translation of Foreign Currencies
The functional currency for most of our foreign subsidiaries is their local currency. For our non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive income, a separate component of equity. For subsidiaries where the functional currency of the assets and liabilities differ from the local currency, non-monetary assets and liabilities are translated at the rate of exchange in effect on the date assets were acquired while monetary assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average foreign currency rates for the period. Translation adjustments of these subsidiaries are included in other income (expense), net in our consolidated statements of income.
Royalty Cost of Sales
We make royalty payments to a number of third parties under license or purchase agreements associated with our acquisition of intellectual property. These royalty payments are typically calculated as a percentage (royalty rate) of the sales of our products in a particular year. That royalty rate may remain constant, increase or decrease within each year based on the total amount of sales during the annual period. Each quarterly period, we estimate our total royalty obligation for the full year and recognize the proportional amount as cost of sales based on actual quarterly
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sales as a percentage of full year estimated sales. For example, if the level of net sales in any calendar year increases the royalty rate within the year, we will record our cost of sales at an even rate over the year, based on the estimated blended royalty rate.
Accounting for Share-Based Compensation
Our share-based compensation programs grant awards that have included stock options, restricted stock units that vest based on stock performance known as market stock units (MSUs), performance-vested restricted stock units that settle in cash (CSPUs), time-vested restricted stock units (RSUs), performance-vested restricted stock units that can be settled in cash or shares of our common stock (PUs) at the sole discretion of the Compensation and Management Development Committee of our Board of Directors, performance-vested stock units that settle in stock or cash (PSUs) and shares issued under our employee stock purchase plan (ESPP). We charge the estimated fair value of awards against income over the requisite service period, which is generally the vesting period. Where awards are made with non-substantive vesting periods (for instance, where a portion of the award vests upon retirement eligibility), we estimate and recognize expense based on the period from the grant date to the date the employee becomes retirement eligible.
The fair values of our stock option grants are estimated as of the date of grant using a Black-Scholes option valuation model. The estimated fair values of the stock options are then expensed over the options’ vesting periods.
The fair values of our MSUs are estimated using a lattice model with a Monte Carlo simulation. We apply an accelerated attribution method to recognize share-based compensation expense over the applicable service period, net of estimated forfeitures when accounting for our MSUs. The probability of actual shares expected to be earned is considered in the grant date valuation, therefore the expense is not adjusted to reflect the actual units earned.
The fair values of our RSUs are based on the market value of our stock on the date of grant. Compensation expense, net of forfeitures, for RSUs is recognized straight-line over the applicable service period.
We apply an accelerated attribution method to recognize share-based compensation expense when accounting for our CSPUs, PUs and PSUs that settle in cash, and the fair value of the liability is remeasured at the end of each reporting period through expected settlement. Compensation expense associated with CSPUs, PUs and PSUs that settle in cash are based upon the stock price and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Cumulative adjustments are recorded each quarter to reflect changes in the stock price and estimated outcome of the performance-related conditions until the date results are determined and settled.
The fair values of PSUs that settle in stock are based upon the stock price on the date of grant and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the associated targeted payout level that is forecasted will be achieved, net of estimated forfeitures. Cumulative adjustments are recorded each quarter to reflect the estimated outcome of the performance-related conditions until the date results are determined and settled.
The purchase price of common stock under our ESPP is equal to 85% of the lesser of (i) the fair market value per share of the common stock on the first business day of an offering period and (ii) the fair market value per share of the common stock on the purchase date. The fair value of the discounted purchases made under our ESPP is calculated using the Black-Scholes valuation model. The fair value of the look-back provision plus the 15% discount is recognized as compensation expense over the 90-day purchase period.
Research and Development Expenses
Research and development expenses consist of upfront fees and milestones paid to collaborators and expenses incurred in performing research and development activities, which include compensation and benefits, facilities and overhead expenses, clinical trial expenses and fees paid to contract research organizations (CROs), clinical supply and manufacturing expenses, write-offs of inventory that was previously capitalized in anticipation of product launch and determined to no longer be realizable and other outside expenses. Research and development expenses are expensed as incurred. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our consolidated balance sheets and are expensed as the services are provided. We also accrue the costs of ongoing clinical trials associated with programs that have been
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terminated or discontinued for which there is no future economic benefit at the time the decision is made to terminate or discontinue the program.
From time to time, we enter into development agreements in which we share expenses with a collaborative partner. We record payments received from our collaborative partners for their share of the development costs as a reduction of research and development expense, except as discussed in Note 19, Collaborative and Other Relationships, to these consolidated financial statements. Because an initial indication has been approved for both RITUXAN and GAZYVA, expenses incurred by Genentech in the ongoing development of RITUXAN and GAZYVA are not recorded as research and development expense, but rather reduce our share of profits recorded as a component of revenues from anti-CD20 therapeutic programs.
For collaborations with commercialized products, if we are the principal, we record revenues and the corresponding operating costs in their respective line items in our consolidated statements of income. If we are not the principal, we record operating costs as a reduction of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are primarily comprised of compensation and benefits associated with sales and marketing, finance, human resources, legal, information technology and other administrative personnel, outside marketing, advertising and legal expenses and other general and administrative costs.
Advertising costs are expensed as incurred. For the years ended December 31, 2018, 2017 and 2016, advertising costs totaled $90.2 million, $75.2 million and $106.3 million, respectively.
Income Taxes
The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. In December 2018 we elected to recognize deferred taxes associated with our global intangible low-taxed income (GILTI) tax calculations.
In October 2016 the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory. This standard eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the income tax consequences from the intra-entity transfers of assets other than inventory within our consolidated group, both current and deferred, are recorded as a prepaid tax or deferred charge and recognized through our consolidated statements of income when the asset is transferred.
We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.
Contingencies
We are currently involved in various claims and legal proceedings. Loss contingency provisions are recorded if the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated or a range of loss can be determined. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may change our estimates. These changes in the estimates of the potential liabilities could have a material impact on our consolidated results of operations and financial position.
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Earnings per Share
Basic earnings per share is computed by dividing undistributed net income attributable to Biogen Inc. by the weighted-average number of common shares outstanding during the period.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that we adopt as of the specified effective date. Unless otherwise discussed below, we do not believe that the adoption of recently issued standards have or may have a material impact on our consolidated financial statements or disclosures.
Revenue recognition
In May 2014 the FASB issued ASU 2014-09, which supersedes all existing revenue recognition requirements, including most industry specific guidance. This standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. For additional information on the adoption of the new revenue standards, please read the section titled Revenue Recognition above, and Note 5, Revenues, to these consolidated financial statements.
Financial Instruments
In January 2016 the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This standard amends certain aspects of accounting and disclosure requirements for financial instruments, including the requirement that equity investments with readily determinable fair values are to be measured at fair value with any changes in fair value recognized in a company's results of operations. This standard does not apply to investments accounted for under the equity method of accounting or those investments that result in consolidation of the investee. Equity investments that do not have readily determinable fair values may be measured at fair value or at cost minus impairment adjusted for changes in observable prices. A financial liability that is measured at fair value in accordance with the fair value option is required to be presented separately in other comprehensive income for the portion of the total change in the fair value resulting from change in the instrument-specific credit risk. In addition, a valuation allowance should be evaluated on deferred tax assets related to available-for-sale debt securities in combination with other deferred tax assets.
We adopted this standard on January 1, 2018, using the modified retrospective method, and recognized a $1.3 million net increase to retained earnings as well as a $1.5 million increase to accumulated other comprehensive income reflecting the cumulative impact for the accounting changes made upon adoption. The adoption of this standard resulted in a change in the income statement classification with respect to where we recognize changes in fair value related to certain equity security investments. Prior to the adoption of ASU 2016-01, we recognized changes in fair value in accumulated other comprehensive income (loss), net. Upon the adoption of ASU 2016-01, we recognize changes in fair value in other income (expense), net. During the year ended December 31, 2018, we recognized net gains resulting from changes in fair value related to our equity security investments in other income (expense), net totaling approximately $128.0 million under this standard that would not have been recognized in other income (expense), net under the previous standard.
Leasing
In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842). This standard established a right-of-use model that requires all lessees to recognize right-of-use assets and liabilities on their balance sheet that arise from leases with terms longer than 12 months as well as provide disclosures with respect to certain qualitative and quantitative information related to their leasing arrangements. This standard became effective for us on January 1, 2019.
The FASB has subsequently issued the following amendments to ASU 2016-02, which have the same effective date and transition date of January 1, 2019, and which we collectively refer to as the new leasing standards:
| • | ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which permits an entity to elect an optional transition practical expedient to not evaluate under Topic 842 land easements that exist or expired prior to adoption of Topic 842 and that were not previously accounted for as leases under the prior standard, ASC 840, Leases. |
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| • | ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which amends certain narrow aspects of the guidance issued in ASU 2016-02. |
| • | ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which allows for a transition approach to initially apply ASU 2016-02 at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption as well as an additional practical expedient for lessors to not separate non-lease components from the associated lease component. |
| • | ASU No. 2018-20, Narrow-Scope Improvements for Lessors, which contains certain narrow scope improvements to the guidance issued in ASU 2016-02. |
We adopted the new leasing standards on January 1, 2019, using a modified retrospective transition approach to be applied to leases existing as of, or entered into after, January 1, 2019. We have reviewed our existing lease contracts and the impact of the new leasing standards on our consolidated results of operations, financial position and disclosures. Upon adoption of the new leasing standards, we expect to recognize a lease liability and related right-of-use asset on our consolidated balance sheet of approximately $0.5 billion. The impact of adoption of the new leasing standards will have an immaterial impact to our consolidated statements of income.
Credit Losses
In June 2016 the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This standard requires that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, this standard now requires allowances to be recorded instead of reducing the amortized cost of the investment. This standard will be effective for us on January 1, 2020. We are currently evaluating the potential impact that this standard may have on our consolidated financial position and results of operations.
Income Taxes
In October 2016 the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory. This standard eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the income tax consequences from the intra-entity transfer of an asset other than inventory and associated changes to deferred taxes will be recognized when the transfer occurs.
We adopted this standard on January 1, 2018, using the modified retrospective method, through a cumulative-effect adjustment to retained earnings as of that date. Upon adoption, we recognized additional net deferred tax assets of approximately $0.5 billion, offset by a corresponding net increase to retained earnings of approximately $0.5 billion. In the fourth quarter of 2018, when we elected to begin recognizing deferred taxes on the GILTI tax calculation, we recorded an additional deferred tax liability of $0.4 billion with a corresponding reduction to our retained earnings as these differences are related to inter-entity transactions. We will recognize incremental deferred income tax expense thereafter as these deferred tax assets and liabilities are utilized.
For additional information on our income taxes, please read Note 17, Income Taxes, to these consolidated financial statements.
Net Periodic Pension Cost
In March 2017 the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costs and Net Periodic Postretirement Benefit Cost. This standard requires that an employer disaggregate the service cost component from the other components of net benefit cost. This standard also provides explicit guidance on how to present the service cost component and the other components of net benefit cost in the statements of income and allows only the service cost component of net benefit cost to be eligible for capitalization. The other components of the net periodic benefit cost must be presented separately from the line items that include service cost and outside of any subtotal of operating income on our consolidated statements of income. We adopted this standard on January 1, 2018, using the retrospective method.
As a result of the adoption of this standard, the other components of net periodic benefit cost, which we previously presented as a component of operating income, are now classified in other income (expense), net in our consolidated statements of income. For the years ended December 31, 2017 and 2016, $2.5 million and $3.3
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million, respectively, were reclassified from operating income to other income (expense), net in our consolidated statements of income to conform to our current year presentation.
Debt Securities
In March 2017 the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This standard amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period to the earliest call date. This standard became effective for us on January 1, 2019, and was adopted using a modified retrospective transition approach. Based upon our marketable debt securities as of December 31, 2018, the adoption of this standard did not result in a significant adjustment to our marketable debt securities.
Derivative Instruments and Hedging Activities
In August 2017 the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This standard provides guidance to better align an entity's risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This standard expands and refines hedge accounting for both non-financial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.
We adopted this standard on January 1, 2018, using the modified retrospective method, which did not have an impact on our financial position or results of operations; however, the adoption of this standard resulted in additional disclosures and a change in the income statement classification with respect to where we recognize cash flow hedge ineffective or excluded hedge transaction gains and losses. Prior to the adoption of ASU 2017-12 on January 1, 2018, to the extent ineffective or excluded, cash flow hedge transaction gains and losses were reported in other income (expense), net. Effective January 1, 2018, we recognize all cash flow hedge reclassifications from accumulated other comprehensive income and fair value changes of any cash flow hedge ineffectiveness or excluded portions in the same line item in our consolidated statements of income that has been impacted by the hedged item.
Additionally, in October 2018 the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This standard permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815, Derivatives and Hedging.
For additional information on our derivative instruments and hedging activities, please read Note 10, Derivative Instruments, to these consolidated financial statements.
Fair Value Measurements
In August 2018 the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. This standard will be effective for us on January 1, 2020. We do not expect that the adoption of this standard will have a material impact on our disclosures.
Collaborative Arrangements
In November 2018 the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard makes targeted improvements for collaborative arrangements as follows:
| • | Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606, Revenue from Contracts with Customers, when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation and disclosure requirements; |
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| • | Adds unit-of-account guidance to ASC 808, Collaborative Arrangements, to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606; and |
| • | Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting that transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. |
This standard will be effective for us on January 1, 2020; however, early adoption is permitted. A retrospective transition approach is required for either all contracts or only for contracts that are not completed at the date of initial application of ASC 606, with a cumulative adjustment to opening retained earnings. We are currently evaluating the potential impact that this standard may have on our consolidated financial position and results of operations.
- Acquisitions
BIIB100 Acquisition
In January 2018 we acquired BIIB100 (formerly known as KPT-350) from Karyopharm Therapeutics Inc. (Karyopharm). BIIB100 is a Phase 1 ready investigational oral compound for the treatment of certain neurological and neurodegenerative diseases, primarily in ALS. BIIB100 is a novel therapeutic candidate that works by inhibiting a protein known as XPO1, with the goal of reducing inflammation and neurotoxicity, along with increasing neuroprotective responses.
We accounted for this transaction as an asset acquisition as the value being acquired primarily relates to a single asset. In connection with the closing of this transaction, we made an upfront payment of $10.0 million to Karyopharm, which was recorded as acquired IPR&D in our consolidated statements of income as BIIB100 has not yet reached technological feasibility. We may also pay Karyopharm up to $207.0 million in additional milestone payments as well as tiered royalties on potential net commercial sales in the mid-single digit to low-teen percentages.
BIIB104 Acquisition
In April 2018 we acquired BIIB104 (formerly known as PF-04958242) from Pfizer Inc. (Pfizer). BIIB104 is a first-in-class, Phase 2b ready AMPA receptor potentiator for CIAS, representing our first program in neurocognitive disorders. AMPA receptors mediate fast excitatory synaptic transmission in the central nervous system, a process which can be disrupted in a number of neurological and psychiatric diseases, including schizophrenia.
We accounted for this transaction as an asset acquisition as the value being acquired primarily relates to a single asset. In connection with the closing of this transaction, we made an upfront payment of $75.0 million to Pfizer, which was recorded as acquired IPR&D in our consolidated statements of income as BIIB104 has not yet reached technological feasibility. We may also pay Pfizer up to $515.0 million in additional development and commercialization milestone payments as well as tiered royalties on potential net commercial sales in the low to mid-teen percentages.
During the fourth quarter of 2018 we accrued a $10.0 million milestone payment related to the Phase 2b trial for BIIB104, which is included in research and development expense in our consolidated statements of income.
TMS Co., Ltd.
In June 2018 we entered into an exclusive option agreement with TMS Co., Ltd. (TMS) granting us the option to acquire TMS-007, a plasminogen activator with a novel mechanism of action associated with breaking down blood clots, which is in Phase 2 development in Japan, and backup compounds for the treatment of stroke. In exchange for the purchase option, we made a $4.0 million upfront payment to TMS, which was recorded as research and development expense in our consolidated statements of income as TMS-007 has not yet reached technological feasibility.
If we exercise the purchase option, we will make an additional payment of $18.0 million upon closing of the asset acquisition, which will be recorded as acquired IPR&D expense in our consolidated statements of income as TMS-007 will not have reached technological feasibility at that time. In addition, we may pay TMS up to $335.0 million in additional development and commercialization milestone payments as well as tiered royalties on potential
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net commercial sales in the high-single digit to low-teen percentages. If we exercise the purchase option, consummation of the asset acquisition may be subject to the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 in the U.S.
BIIB110 Acquisition
In July 2018 we acquired BIIB110 (formerly known as ALG-801) (Phase 1a) and ALG-802 (preclinical) from AliveGen Inc. (AliveGen). BIIB110 and ALG-802 represent novel ways of targeting the myostatin pathway. We initially plan to study BIIB110 in multiple neuromuscular indications, including SMA and ALS.
We accounted for this transaction as an asset acquisition as the value being acquired primarily relates to a single asset. In connection with the closing of this transaction, we made an upfront payment of $27.5 million to AliveGen, which was recorded as acquired IPR&D in our consolidated statements of income as BIIB110 has not yet reached technological feasibility. We may also pay AliveGen up to $535.0 million in additional development and commercialization milestones.
BIIB093 Acquisition
In May 2017 we acquired BIIB093 (glibencamide IV) (formerly known as CIRARA) from Remedy Pharmaceuticals Inc. (Remedy). BIIB093 is a Phase 3 ready candidate for large hemispheric infarction (LHI), a severe form of ischemic stroke where brain swelling (cerebral edema) often leads to a disproportionately large share of stroke-related morbidity and mortality. The U.S. Food and Drug Administration (FDA) granted BIIB093 orphan drug designation for severe cerebral edema in patients with acute ischemic stroke. The FDA has also granted BIIB093 Fast Track designation.
We are responsible for the future development and commercialization of BIIB093 and Remedy will share in the cost of development for the target indication for BIIB093 in LHI stroke.
We accounted for this transaction as an asset acquisition as we did not acquire any employees from Remedy nor did we acquire any significant processes required in the development of BIIB093. In connection with the closing of this transaction, we made an upfront payment of $120.0 million to Remedy, which was recorded as acquired IPR&D in our consolidated statements of income as BIIB093 has not yet reached technological feasibility. We may also pay Remedy certain development and sales based milestone payments that are substantially payable upon or after regulatory approval, as well as royalties on potential net commercial sales.
- Hemophilia Spin-Off
On February 1, 2017, we completed the spin-off of our hemophilia business, Bioverativ, as an independent, publicly traded company, which was acquired by Sanofi in March 2018. In connection with the spin-off, each Biogen shareholder received one share of Bioverativ common stock for every two shares of Biogen common stock they owned. The separation and distribution was structured to be tax-free for shareholders for federal income tax purposes. Bioverativ assumed all of our rights and obligations under our collaboration agreement with Swedish Orphan Biovitrum AB (Sobi) and our collaboration and license agreement with Sangamo Biosciences Inc.
Biogen and Bioverativ entered into a separation agreement and various other agreements, including a manufacturing and supply agreement, which govern the separation and distribution and the relationship between the two companies going forward. Under the separation agreement, Bioverativ is obligated to indemnify us for liabilities that may exist relating to its business activities, whether incurred prior to or after the distribution, including any pending or future litigation.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with the distribution we made a net cash contribution to Bioverativ, during the first quarter of 2017, totaling $302.7 million. The following table summarizes the assets and liabilities that were charged against equity as a result of the spin-off of our hemophilia business:
| (In millions) | |||
| Assets | |||
| Cash | $ | 302.7 | |
| Accounts receivable | 144.7 | ||
| Inventory | 116.1 | ||
| Property, plant and equipment, net | 20.2 | ||
| Intangible assets, net | 56.8 | ||
| Goodwill | 314.1 | ||
| Other, net | 53.7 | ||
| Assets transferred, net | $ | 1,008.3 | |
| Liabilities | |||
| Accrued expenses and other current liabilities | $ | 87.8 | |
| Other long-term liabilities | 67.7 | ||
| Liabilities transferred, net | $ | 155.5 |
Pursuant to the terms of our agreements with Bioverativ, upon completion of the spin-off, we distributed ALPROLIX and ELOCTATE on behalf of Bioverativ until Bioverativ obtained appropriate regulatory authorizations in certain countries, including a Biologics License Application transfer in the U.S., which was received in September 2017. Accordingly, commencing October 2017, we ceased distribution of ALPROLIX and ELOCTATE on behalf of Bioverativ under this arrangement.
Under the manufacturing and supply agreement, we manufacture and supply certain products and materials to Bioverativ. The manufacturing and supply agreement has an initial term of five years, with a five-year extension at Bioverativ's sole discretion and a further five-year extension with Bioverativ's and our consent. For the years ended December 31, 2018 and 2017, we recognized $206.7 million and $64.8 million, respectively, in revenues in relation to contract manufacturing services provided to Bioverativ, which is reflected as a component of other royalty and corporate revenues in our consolidated statements of income. We also recorded $180.4 million and $15.1 million as cost of sales in relation to these services during the years ended December 31, 2018 and 2017, respectively. Additionally, pursuant to the terms of the manufacture and supply agreement, we expect to sell substantially all remaining hemophilia related inventory to Bioverativ during the first quarter of 2019, when Bioverativ will assume full control over its manufacturing processes. Hemophilia related inventory on hand as of December 31, 2018, totals approximately $180.0 million.
Amounts earned under the non-manufacturing and supply related transaction service agreements are recorded as a reduction of costs and expenses in their respective expense line items. These amounts, which were primarily reflected as a reduction to selling, general and administrative expenses in our consolidated statements of income, were not significant for the years ended December 31, 2018 and 2017.
Hemophilia related product revenues reflected in our consolidated statements of income for the years ended December 31, 2017 and 2016, totaled $74.4 million and $846.9 million, respectively. Results for the year ended December 31, 2017, only reflect hemophilia-related product revenues through January 31, 2017.
Patents
Prior to the spin-off of our hemophilia business, we were awarded various methods of treatment and composition of matter patents related to ELOCTATE and ALPROLIX. Upon completion of the spin-off, these patents were transferred to the patent portfolio of Bioverativ.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
- Restructuring, Business Transformation and Other Cost Saving Initiatives
2017 Corporate Strategy
In October 2017, in connection with creating a leaner and simpler operating model, we approved a corporate restructuring program intended to streamline our operations and reallocate resources. We expect to make total non-recurring operating and capital expenditures of approximately $135.0 million in connection with this program and our goal is to redirect resources of up to $400.0 million annually by 2020 to prioritized research and development and other value creation opportunities.
For the years ended December 31, 2018 and 2017, we recognized charges of $22.9 million and $19.4 million, respectively, related to this effort, of which $12.0 million and $0.9 million, respectively, are reflected as restructuring charges and $10.9 million and $18.5 million, respectively, are included in selling, general and administrative expenses in our consolidated statements of income. These restructuring charges were primarily related to severance.
Restructuring charges incurred to date under this program have been substantially paid in cash as of December 31, 2018.
2016 Organizational Changes and Cost Saving Initiatives
2016 Restructuring Charges
During the third quarter of 2016 we initiated cost saving measures primarily intended to realign our organizational structure due to the changes in roles and workforce resulting from our decision to spin-off our hemophilia business, and to achieve further targeted cost reductions. For the year ended December 31, 2016, we recognized charges totaling $17.7 million related to this effort. These amounts, which were substantially incurred and paid by the end of 2016, were primarily related to severance and are reflected in restructuring charges in our consolidated statements of income.
Cambridge, MA Manufacturing Facility
In June 2016 following an evaluation of our current and future manufacturing capabilities and capacity needs, we decided to cease manufacturing and vacate our 67,000 square foot small-scale biologics manufacturing facility in Cambridge, MA and close and vacate our 46,000 square foot warehouse space in Somerville, MA.
In December 2016 we subleased our rights to the Cambridge, MA manufacturing facility to Brammer Bio MA, LLC (Brammer). Brammer also purchased from us certain manufacturing equipment, leasehold improvements and other assets in exchange for shares of Brammer common LLC interests and assumed manufacturing operations effective January 1, 2017. In December 2016 we closed and vacated our warehouse space in Somerville, MA.
Our departure from these facilities shortened the expected useful lives of certain leasehold improvements and other assets at these facilities. As a result, we recorded additional depreciation expense to reflect the assets' new shorter useful lives. For the year ended December 31, 2016, we recognized approximately $45.5 million of this additional depreciation, which was recorded as cost of sales in our consolidated statements of income.
In the fourth quarter of 2016 we also recognized charges totaling $7.4 million for severance costs related to certain employees separated from Biogen in connection with our departure from these facilities. These amounts were substantially incurred and paid by the end of first quarter of 2017 and are reflected in restructuring charges in our consolidated statements of income for the year ended December 31, 2016.
2015 Restructuring Charges
Restructuring charges for the year ended December 31, 2016, include $8.0 million of expense related to our 2015 restructuring program.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
- Revenues
Product Revenues
Revenues by product are summarized as follows:
| For the Years Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | |||||||||||||||||||||||||||||||||
| (In millions) | United States | Rest of World | Total | United States | Rest of World | Total | United States | Rest of World | Total | ||||||||||||||||||||||||||
| Multiple Sclerosis (MS): | |||||||||||||||||||||||||||||||||||
| TECFIDERA | $ | 3,253.2 | $ | 1,020.9 | $ | 4,274.1 | $ | 3,294.0 | $ | 920.0 | $ | 4,214.0 | $ | 3,169.4 | $ | 798.7 | $ | 3,968.1 | |||||||||||||||||
| Interferon* | 1,668.3 | 694.7 | 2,363.0 | 1,889.1 | 756.7 | 2,645.8 | 1,980.3 | 814.9 | 2,795.2 | ||||||||||||||||||||||||||
| TYSABRI | 1,025.0 | 839.0 | 1,864.0 | 1,113.8 | 859.3 | 1,973.1 | 1,182.9 | 780.9 | 1,963.8 | ||||||||||||||||||||||||||
| FAMPYRA | — | 92.7 | 92.7 | — | 91.6 | 91.6 | — | 84.9 | 84.9 | ||||||||||||||||||||||||||
| ZINBRYTA | — | 1.4 | 1.4 | — | 52.7 | 52.7 | — | 7.8 | 7.8 | ||||||||||||||||||||||||||
| Subtotal: MS Product Revenues | 5,946.5 | 2,648.7 | 8,595.2 | 6,296.9 | 2,680.3 | 8,977.2 | 6,332.6 | 2,487.2 | 8,819.8 | ||||||||||||||||||||||||||
| Spinal Muscular Atrophy: | |||||||||||||||||||||||||||||||||||
| SPINRAZA | 854.0 | 870.2 | 1,724.2 | 657.0 | 226.7 | 883.7 | 4.6 | — | 4.6 | ||||||||||||||||||||||||||
| Biosimilars: | |||||||||||||||||||||||||||||||||||
| BENEPALI | — | 485.2 | 485.2 | — | 370.8 | 370.8 | — | 100.6 | 100.6 | ||||||||||||||||||||||||||
| FLIXABI | — | 43.2 | 43.2 | — | 9.0 | 9.0 | — | 0.1 | 0.1 | ||||||||||||||||||||||||||
| IMRALDI | — | 16.7 | 16.7 | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Subtotal: Biosimilar product revenues | — | 545.1 | 545.1 | — | 379.8 | 379.8 | — | 100.7 | 100.7 | ||||||||||||||||||||||||||
| Other: | |||||||||||||||||||||||||||||||||||
| FUMADERM | — | 22.3 | 22.3 | — | 39.6 | 39.6 | — | 45.9 | 45.9 | ||||||||||||||||||||||||||
| Hemophilia: | |||||||||||||||||||||||||||||||||||
| ELOCTATE | — | — | — | 42.2 | 6.2 | 48.4 | 445.2 | 68.0 | 513.2 | ||||||||||||||||||||||||||
| ALPROLIX | — | — | — | 21.0 | 5.0 | 26.0 | 268.0 | 65.7 | 333.7 | ||||||||||||||||||||||||||
| Subtotal: Hemophilia product revenues | — | — | — | 63.2 | 11.2 | 74.4 | 713.2 | 133.7 | 846.9 | ||||||||||||||||||||||||||
| Total product revenues | $ | 6,800.5 | $ | 4,086.3 | $ | 10,886.8 | $ | 7,017.1 | $ | 3,337.6 | $ | 10,354.7 | $ | 7,050.4 | $ | 2,767.5 | $ | 9,817.9 |
*Interferon includes AVONEX and PLEGRIDY.
We recognized revenues from two wholesalers accounting for 32% and 18% of gross product revenues in 2018, 34% and 21% of gross product revenues in 2017 and 35% and 22% of gross product revenues in 2016, respectively.
As of December 31, 2018, two wholesale distributors individually accounted for approximately 27.7% and 15.6% of net accounts receivable associated with our product sales, as compared to 26.5% and 19.0% as of December 31, 2017.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
An analysis of the change in reserves for discounts and allowances is summarized as follows:
| (In millions) | Discounts | Contractual Adjustments | Returns | Total | |||||||||||
| 2018 | |||||||||||||||
| Beginning balance | $ | 109.6 | $ | 606.0 | $ | 46.0 | $ | 761.6 | |||||||
| Current provisions relating to sales in current year | 679.3 | 2,686.7 | 23.1 | 3,389.1 | |||||||||||
| Adjustments relating to prior years | (0.3 | ) | (10.0 | ) | (1.8 | ) | (12.1 | ) | |||||||
| Payments/returns relating to sales in current year | (551.7 | ) | (1,887.6 | ) | (1.1 | ) | (2,440.4 | ) | |||||||
| Payments/returns relating to sales in prior years | (109.1 | ) | (506.3 | ) | (31.5 | ) | (646.9 | ) | |||||||
| Ending balance | $ | 127.8 | $ | 888.8 | $ | 34.7 | $ | 1,051.3 |
| (In millions) | Discounts | Contractual Adjustments | Returns | Total | |||||||||||
| 2017 | |||||||||||||||
| Beginning balance | $ | 71.6 | $ | 482.7 | $ | 51.2 | $ | 605.5 | |||||||
| Current provisions relating to sales in current year | 583.0 | 2,307.4 | 26.9 | 2,917.3 | |||||||||||
| Adjustments relating to prior years | (0.1 | ) | 15.0 | (8.9 | ) | 6.0 | |||||||||
| Payments/returns relating to sales in current year | (475.8 | ) | (1,756.9 | ) | (0.1 | ) | (2,232.8 | ) | |||||||
| Payments/returns relating to sales in prior years | (69.1 | ) | (442.2 | ) | (23.1 | ) | (534.4 | ) | |||||||
| Ending balance | $ | 109.6 | $ | 606.0 | $ | 46.0 | $ | 761.6 |
| (In millions) | Discounts | Contractual Adjustments | Returns | Total | |||||||||||
| 2016 | |||||||||||||||
| Beginning balance | $ | 56.1 | $ | 548.7 | $ | 57.9 | $ | 662.7 | |||||||
| Current provisions relating to sales in current year | 592.6 | 2,044.5 | 30.9 | 2,668.0 | |||||||||||
| Adjustments relating to prior years | (1.4 | ) | 1.5 | (16.8 | ) | (16.7 | ) | ||||||||
| Payments/returns relating to sales in current year | (522.5 | ) | (1,576.0 | ) | (1.0 | ) | (2,099.5 | ) | |||||||
| Payments/returns relating to sales in prior years | (53.2 | ) | (536.0 | ) | (19.8 | ) | (609.0 | ) | |||||||
| Ending balance | $ | 71.6 | $ | 482.7 | $ | 51.2 | $ | 605.5 |
The total reserves above, which are included in our consolidated balance sheets, are summarized as follows:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Reduction of accounts receivable | $ | 176.6 | $ | 189.6 | |||
| Component of accrued expenses and other | 874.7 | 572.0 | |||||
| Total revenue-related reserves | $ | 1,051.3 | $ | 761.6 |
Revenues from Anti-CD20 Therapeutic Programs
Revenues from anti-CD20 therapeutic programs are summarized as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Biogen's share of pre-tax profits in the U.S. for RITUXAN and GAZYVA, including the reimbursement of selling and development expenses | $ | 1,431.9 | $ | 1,316.4 | $ | 1,249.5 | |||||
| Other revenues from anti-CD20 therapeutic programs | 548.3 | 242.8 | 65.0 | ||||||||
| Total revenues from anti-CD20 therapeutic programs | $ | 1,980.2 | $ | 1,559.2 | $ | 1,314.5 |
Approximately 15%, 13% and 11% of our total revenues in 2018, 2017 and 2016, respectively, are derived from our collaboration arrangements with Genentech. For additional information on our collaboration arrangements with Genentech, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Revenues
Other revenues are summarized as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Revenues from collaborative and other relationships: | |||||||||||
| (Loss) profit earned under our 50% share of the co-promotion losses on ZINBRYTA in the U.S. with AbbVie | $ | (8.6 | ) | $ | (16.9 | ) | $ | (21.9 | ) | ||
| Revenues earned under our technical development agreement, manufacturing service agreements and royalty revenues on biosimilar products with Samsung Bioepis | 96.4 | 42.7 | 20.2 | ||||||||
| Revenues earned under manufacturing services agreement on shipments of ELOCTA and ALPROLIX to Sobi and royalties from Sobi on sales of ELOCTA and ALPROLIX | — | 10.7 | 41.0 | ||||||||
| Other royalty and corporate revenues: | |||||||||||
| Royalty | 38.7 | 69.8 | 46.5 | ||||||||
| Other corporate | 459.4 | 253.7 | 230.6 | ||||||||
| Total other revenues | $ | 585.9 | $ | 360.0 | $ | 316.4 |
Other corporate revenues primarily reflect amounts earned under contract manufacturing agreements with our strategic partners, including Bioverativ.
For additional information on our collaboration arrangements with AbbVie and Samsung Bioepis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements. For additional information on our contract manufacturing agreements with Bioverativ, please read Note 3, Hemophilia Spin-Off, to these consolidated financial statements.
- Inventory
The components of inventory are summarized as follows:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Raw materials | $ | 196.3 | $ | 162.4 | |||
| Work in process | 606.7 | 605.7 | |||||
| Finished goods | 133.5 | 157.4 | |||||
| Total inventory | $ | 936.5 | $ | 925.5 | |||
| Balance Sheet Classification: | |||||||
| Inventory | $ | 929.9 | $ | 902.7 | |||
| Investments and other assets | 6.6 | 22.8 | |||||
| Total inventory | $ | 936.5 | $ | 925.5 |
Included in the table above is hemophilia related inventory totaling approximately $180.0 million as of December 31, 2018, which is expected to be sold to Bioverativ in the first quarter of 2019.
Long-term inventory, which primarily consists of work in process, is included in investments and other assets in our consolidated balance sheets.
Inventory amounts written down as a result of excess, obsolescence, unmarketability or other reasons are charged to cost of sales, and totaled $41.9 million, $76.9 million and $48.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
- Intangible Assets and Goodwill
Intangible Assets
Intangible assets, net of accumulated amortization, impairment charges and adjustments are summarized as follows:
| As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||||||||||||
| (In millions) | Estimated Life | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||
| Out-licensed patents | 13-23 years | $ | 543.3 | $ | (542.3 | ) | $ | 1.0 | $ | 543.3 | $ | (535.6 | ) | $ | 7.7 | ||||||||||
| Developed technology | 15-23 years | 3,005.3 | (2,734.8 | ) | 270.5 | 3,005.3 | (2,689.0 | ) | 316.3 | ||||||||||||||||
| In-process research and development | Indefinite until commercialization | 476.0 | — | 476.0 | 680.6 | — | 680.6 | ||||||||||||||||||
| Trademarks and trade names | Indefinite | 64.0 | — | 64.0 | 64.0 | — | 64.0 | ||||||||||||||||||
| Acquired and in-licensed rights and patents | 4-18 years | 3,638.7 | (1,330.2 | ) | 2,308.5 | 3,971.4 | (1,160.4 | ) | 2,811.0 | ||||||||||||||||
| Total intangible assets | $ | 7,727.3 | $ | (4,607.3 | ) | $ | 3,120.0 | $ | 8,264.6 | $ | (4,385.0 | ) | $ | 3,879.6 |
Amortization and impairments of acquired intangible assets totaled $747.3 million, $814.7 million and $385.6 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Amortization and impairments of acquired intangible assets for the year ended December 31, 2018, includes the impact of a $176.8 million impairment charge related to our intangible asset associated with our U.S. license to Forward Pharma's intellectual property, including Forward Pharma's intellectual property related to TECFIDERA, as discussed below. Amortization and impairment of acquired intangible assets for 2018 also reflects the impact of impairment charges related to certain IPR&D assets associated with our vixotrigine (BIIB074) program totaling $189.3 million, also discussed below.
Amortization and impairments of acquired intangible assets for the year ended December 31, 2017, includes the impact of a $328.2 million impairment charge related to our intangible assets associated with our U.S. license to Forward Pharma's intellectual property, including Forward Pharma's intellectual property related to TECFIDERA. Amortization and impairment of acquired intangible assets for 2017 also includes a $31.2 million impairment charge related to our acquired and in-licensed rights and patents intangible asset associated with ZINBRYTA after the initiation of an European Medicines Agency (EMA) review (referred to as an Article 20 Procedure) of ZINBRYTA following the report of a case of fatal fulminant liver failure, as well as four cases of serious liver injury.
Amortization and impairments of acquired intangible assets for the year ended December 31, 2016, included impairment charges of $12.2 million related to two of our IPR&D intangible assets resulting from the termination of our collaboration agreements with Rodin Therapeutics, Inc. and Ataxion Inc.
Amortization of acquired intangible assets, excluding impairment charges, totaled $381.2 million, $455.3 million and $373.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Out-licensed Patents
Out-licensed patents to third-parties primarily relate to patents acquired in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in 2003.
Developed Technology
Developed technology primarily relates to our AVONEX product, which was recorded in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in 2003. The net book value of this asset, as of December 31, 2018, was $265.0 million.
IPR&D
IPR&D represents the fair value assigned to research and development assets that we acquired and had not reached technological feasibility at the date of acquisition. Upon commercialization, we will determine the estimated
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
useful life and amortize these amounts based upon an economic consumption method. The carrying value associated with our IPR&D assets as of December 31, 2018 and 2017, relates to the various IPR&D programs we acquired in connection with our acquisitions of Convergence Pharmaceuticals (Convergence), Stromedix Inc. (Stromedix) and Biogen International Neuroscience GmbH (BIN) in 2015, 2012 and 2010, respectively. IPR&D balances include adjustments related to foreign currency exchange rate fluctuations.
An analysis of anticipated lifetime revenues and anticipated development costs is performed annually during our long-range planning cycle, which was most recently updated in the third quarter of 2018. This analysis is based upon certain assumptions that we evaluate on a periodic basis, including anticipated future product sales, the expected impact of changes in the amount of development costs and the probabilities of our programs succeeding, the introduction of new products by our competitors and changes in our commercial and pipeline product candidates.
Vixotrigine
During the third quarter of 2018 we completed a Phase 2b study of vixotrigine for the treatment of painful lumbosacral radiculopathy (PLSR). The study did not meet its primary or secondary efficacy endpoints; therefore, we discontinued development of vixotrigine for the treatment of PLSR and we recognized an impairment charge of approximately $60.0 million during the third quarter of 2018 to reduce the fair value of the related IPR&D intangible asset to zero. In addition, we delayed the initiation of the Phase 3 studies of vixotrigine for the treatment of TGN as we awaited the outcome of ongoing interactions with the FDA regarding the design of the Phase 3 studies, a more detailed review of the data from the Phase 2b study of vixotrigine for the treatment of PLSR and insights from the Phase 2 study of vixotrigine for the treatment of small fiber neuropathy. We reassessed the fair value of our vixotrigine program for the treatment of TGN using reduced expected lifetime revenues, higher expected clinical development costs and lower cumulative probabilities of success, and, as a result of that assessment, we recognized an impairment charge of $129.3 million during the third quarter of 2018 to reduce the fair value of the IPR&D intangible asset associated with our vixotrigine program for the treatment of TGN to $41.8 million.
In late December 2018 we received feedback from the FDA regarding the design of the Phase 3 vixotrigine program for the treatment of TGN. Following this feedback, we are now planning to initiate the Phase 3 vixotrigine program for the treatment of TGN.
The IPR&D impairment charges that resulted from the developments in our vixotrigine program for the treatment of TGN, as discussed above, were included in amortization and impairment of acquired intangible assets. The fair value of the intangible assets were based on a probability-adjusted discounted cash flow calculation using Level 3 fair value measurements and inputs including estimated revenues, costs and probabilities of success.
We may recognize additional impairment charges in the future depending upon our ability to advance vixotrigine for the treatment of TGN or other indications.
Acquired and In-licensed Rights and Patents
Acquired and in-licensed rights and patents primarily relate to our acquisition of all remaining rights to TYSABRI from Elan. Acquired and in-licensed rights and patents also includes our U.S and rest of world licenses to Forward Pharma's intellectual property, including Forward Pharma's intellectual property related to TECFIDERA, as discussed below, and other amounts related to our other marketed products and other programs acquired through business combinations. The net book value of the TYSABRI asset as of December 31, 2018, was $2,027.1 million.
TECFIDERA License Rights
In January 2017 we entered into a settlement and license agreement among Biogen Swiss Manufacturing GmbH, Biogen International Holding Ltd., Forward Pharma and certain related parties, which was effective as of February 1, 2017. Pursuant to this agreement, we obtained U.S. and rest of world licenses to Forward Pharma's intellectual property, including Forward Pharma's intellectual property related to TECFIDERA. In exchange, we paid Forward Pharma $1.25 billion in cash, of which $795.2 million was recorded within intangible assets in the first quarter of 2017.
We have two intellectual property disputes with Forward Pharma, one in the U.S. and one in the E.U., concerning intellectual property related to TECFIDERA.
In March 2017 the U.S. intellectual property dispute was decided in our favor. Forward Pharma appealed to the U.S. Court of Appeals for the Federal Circuit. We evaluated the recoverability of the U.S. asset acquired from Forward Pharma and recorded a $328.2 million impairment charge in the first quarter of 2017 to adjust the carrying value of
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the acquired U.S. asset to fair value reflecting the impact of the developments in the U.S. legal dispute and continued to amortize the remaining net book value of the U.S. intangible asset in our consolidated statements of income utilizing an economic consumption model. The U.S. Court of Appeals for the Federal Circuit upheld the U.S. Patent and Trademark Office’s (USPTO) March 2017 ruling and in January 2019 denied Forward Pharma's petition for rehearing. We evaluated the recoverability of the U.S. asset based upon these most recent developments recorded a $176.8 million impairment charge in the fourth quarter of 2018 to reduce the remaining net book value of the U.S. asset to zero.
In March 2018 the European Patent Office (EPO) revoked Forward Pharma’s European Patent No. 2 801 355. Forward Pharma has filed an appeal to the Technical Board of Appeal of the EPO and the appeal is pending. Based upon our assessment of this ruling, we continue to amortize the remaining net book value of the rest of world intangible asset in our consolidated statements of income utilizing an economic consumption model. The remaining net book value of the TECFIDERA intangible asset as of December 31, 2018, was $71.0 million.
For additional information on these disputes, please read Note 21, Litigation, to these consolidated financial statements.
Estimated Future Amortization of Intangible Assets
Our amortization expense is based on the economic consumption and impairment of intangible assets. Our most significant intangible assets are related to our TYSABRI, AVONEX, SPINRAZA and TECFIDERA products and other programs acquired through business combinations. Annually, during our long-range planning cycle, we perform an analysis of the anticipated lifetime revenues of our TYSABRI, AVONEX, SPINRAZA and TECFIDERA products. This analysis is also updated whenever events or changes in circumstances would significantly affect the anticipated lifetime revenues of any of these products. Impairments are recorded in the period in which they are incurred.
Our most recent long-range planning cycle was completed in the third quarter of 2018. Based upon this most recent analysis, the estimated future amortization of acquired intangible assets for the next five years is expected to be as follows:
| (In millions) | As of December 31, 2018 | ||
| 2019 | $ | 270.0 | |
| 2020 | 290.0 | ||
| 2021 | 250.0 | ||
| 2022 | 250.0 | ||
| 2023 | 230.0 |
Goodwill
The following table provides a roll forward of the changes in our goodwill balance:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Goodwill, beginning of year | $ | 4,632.5 | $ | 3,669.3 | |||
| Elimination of goodwill allocated to our hemophilia business | — | (314.1 | ) | ||||
| Increase to goodwill | 1,080.1 | 1,267.3 | |||||
| Other | (6.2 | ) | 10.0 | ||||
| Goodwill, end of year | $ | 5,706.4 | $ | 4,632.5 |
The elimination of goodwill represents an allocation based upon the relative enterprise fair value of our hemophilia business as of February 1, 2017. For additional information on the spin-off of our hemophilia business, please read Note 3, Hemophilia Spin-Off, to these consolidated financial statements.
The increase to goodwill during 2018 and 2017 was related to $1.2 billion and $1.5 billion in contingent milestones achieved (exclusive of $119.9 million and $232.7 million in tax benefits), respectively, and payable to the former shareholders of Fumapharm AG and holders of their rights. In the fourth quarter of 2018 we achieved the $20.0 billion cumulative sales level threshold and accrued our last $300.0 million contingent payment related to FUMADERM and TECFIDERA (together, the Fumapharm Products), which will be paid in the first quarter of 2019. For
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
additional information on contingent payments to the former shareholders of Fumapharm AG and holders of their rights, please read Note 22, Commitments and Contingencies, to these consolidated financial statements.
Other includes changes related to foreign currency exchange rate fluctuations. As of December 31, 2018, we had no accumulated impairment losses related to goodwill.
- 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 such fair value:
| As of December 31, 2018 (In millions) | Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 705.5 | $ | — | $ | 705.5 | $ | — | |||||||
| Marketable debt securities: | |||||||||||||||
| Corporate debt securities | 2,459.2 | — | 2,459.2 | — | |||||||||||
| Government securities | 969.6 | — | 969.6 | — | |||||||||||
| Mortgage and other asset backed securities | 260.5 | — | 260.5 | — | |||||||||||
| Marketable equity securities | 615.4 | 51.7 | 563.7 | — | |||||||||||
| Derivative contracts | 66.9 | — | 66.9 | — | |||||||||||
| Plan assets for deferred compensation | 25.4 | — | 25.4 | — | |||||||||||
| Total | $ | 5,102.5 | $ | 51.7 | $ | 5,050.8 | $ | — | |||||||
| Liabilities: | |||||||||||||||
| Derivative contracts | $ | 24.6 | $ | — | $ | 24.6 | $ | — | |||||||
| Contingent consideration obligations | 409.8 | — | — | 409.8 | |||||||||||
| Total | $ | 434.4 | $ | — | $ | 24.6 | $ | 409.8 |
| As of December 31, 2017 (In millions) | Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||
| Assets: | |||||||||||||||
| Cash equivalents | $ | 1,229.4 | $ | — | $ | 1,229.4 | $ | — | |||||||
| Marketable debt securities: | |||||||||||||||
| Corporate debt securities | 2,609.8 | — | 2,609.8 | — | |||||||||||
| Government securities | 1,919.3 | — | 1,919.3 | — | |||||||||||
| Mortgage and other asset backed securities | 643.4 | — | 643.4 | — | |||||||||||
| Marketable equity securities | 11.8 | 11.8 | — | — | |||||||||||
| Derivative contracts | 2.7 | — | 2.7 | — | |||||||||||
| Plan assets for deferred compensation | 28.5 | — | 28.5 | — | |||||||||||
| Total | $ | 6,444.9 | $ | 11.8 | $ | 6,433.1 | $ | — | |||||||
| Liabilities: | |||||||||||||||
| Derivative contracts | $ | 111.3 | $ | — | $ | 111.3 | $ | — | |||||||
| Contingent consideration obligations | 523.6 | — | — | 523.6 | |||||||||||
| Total | $ | 634.9 | $ | — | $ | 111.3 | $ | 523.6 |
There have been no changes in valuation techniques or transfers between fair value measurement levels during the years ended December 31, 2018 and 2017. The fair value of Level 2 instruments classified as cash equivalents, marketable debt securities and our marketable equity security investment in Ionis Pharmaceuticals, Inc. (Ionis) were determined through third-party pricing services or an option pricing valuation model. For additional information on our
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
new agreement with Ionis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements. For a description of our validation procedures related to prices provided by third-party pricing services and our option pricing valuation model, please read Note 1, Summary of Significant Accounting Policies - Fair Value Measurements, to these consolidated financial statements.
Debt Instruments
The fair values of our debt instruments, which are Level 2 liabilities, are summarized as follows:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Notes payable to Fumedica AG | $ | — | $ | 3.2 | |||
| 2.900% Senior Notes due September 15, 2020 | 1,489.5 | 1,517.7 | |||||
| 3.625% Senior Notes due September 15, 2022 | 1,000.4 | 1,032.9 | |||||
| 4.050% Senior Notes due September 15, 2025 | 1,745.1 | 1,851.9 | |||||
| 5.200% Senior Notes due September 15, 2045 | 1,802.6 | 2,077.6 | |||||
| Total | $ | 6,037.6 | $ | 6,483.3 |
In connection with our 2006 distribution agreement with Fumedica AG, we issued notes totaling 61.4 million Swiss Francs that were payable to Fumedica AG in varying amounts from June 2008 through June 2018. In June 2018 we redeemed our remaining note payable to Fumedica AG.
The fair value of our notes payable to Fumedica AG, as of December 31, 2017, was estimated using market observable inputs, including current interest and foreign currency exchange rates. The fair value for each series of our Senior Notes was determined through market, observable and corroborated sources. For additional information on our debt instruments, please read Note 12, Indebtedness, to these consolidated financial statements.
Contingent Consideration Obligations
In connection with our acquisitions of Convergence, Stromedix and BIN in 2015, 2012 and 2010, respectively, we agreed to make additional payments based upon the achievement of certain milestone events. The following table provides a roll forward of the fair values of our contingent consideration obligations, which includes Level 3 measurements:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Fair value, beginning of year | $ | 523.6 | $ | 467.6 | |||
| Changes in fair value | (12.3 | ) | 62.7 | ||||
| Payments and other | (101.5 | ) | (6.7 | ) | |||
| Fair value, end of year | $ | 409.8 | $ | 523.6 |
As of December 31, 2018 and 2017, approximately $265.0 million and $279.0 million, respectively, of the fair value of our total contingent consideration obligations was reflected as a component of other long-term liabilities in our consolidated balance sheets with the remaining balance reflected as a component of accrued expenses and other.
For the year ended December 31, 2018, changes in the fair value of our contingent consideration obligations were primarily due to delays in the expected timing of achievement of milestones related to our vixotrigine program for the treatment of TGN and an increase in discount rates used to revalue our contingent consideration liabilities, partially offset by the passage of time. For the year ended December 31, 2018, payments and other reflects a $81.5 million milestone payment made to the former shareholders of Stromedix, as discussed below. For additional information on our IPR&D intangible asset related to our vixotrigine program for the treatment of TGN, please read Note 7, Intangible Assets and Goodwill, to these consolidated financial statements.
For the year ended December 31, 2017, changes in the fair value of our contingent consideration obligations are primarily due to changes in the expected timing and probabilities of success related to the achievement of certain development milestones and changes in the discount rate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair values of the intangible assets and contingent consideration liabilities were based on a probability-adjusted discounted cash flow calculation using Level 3 fair value measurements and inputs including estimated revenues and probabilities of success. For additional information on the valuation techniques and inputs utilized in the valuation of our financial assets and liabilities, please read Note 1, Summary of Significant Accounting Policies, to these consolidated financial statements.
Convergence Pharmaceuticals Ltd.
In connection with our acquisition of Convergence in February 2015 we recorded a contingent consideration obligation of $274.5 million. This valuation was based on probability weighted net cash outflow projections of $450.0 million, discounted using a rate of 2.0%, which was the estimated cost of debt financing for market participants. This liability reflected the revised estimate from the date of acquisition for our initial clinical development plans, resulting probabilities of success and the timing of certain milestone payments.
As of December 31, 2018 and 2017, the fair value of this contingent consideration obligation was $246.6 million and $259.0 million, respectively. Our most recent valuation was determined based upon net cash flow projections of $400.0 million, probability weighted and discounted using a rate of 3.6%, which is a measure of the credit risk associated with settling the liability.
For 2018 compared to 2017, the net decrease in our contingent consideration obligation was primarily due to delays in the expected timing of achievement of milestones related to our vixotrigine program for the treatment of TGN and an increase in discount rates used to revalue our contingent consideration liabilities, partially offset by the passage of time. Accrued expenses and other in our consolidated balance sheets include $144.8 million as we expect to make the payment within one year.
Stromedix Inc.
In connection with our acquisition of Stromedix in March 2012 we recorded a contingent consideration obligation of $122.2 million. As of December 31, 2018 and 2017, the fair value of this contingent consideration obligation was $83.0 million and $162.4 million, respectively. Our most recent valuation was determined based upon net cash outflow projections of $306.5 million, probability weighted and discounted using a rate of 3.6%, which is a measure of the credit risk associated with settling the liability.
For 2018 compared to 2017, the net decrease in our contingent consideration obligation was primarily due to a $81.5 million milestone paid to the former shareholders of Stromedix as we dosed our first patient in the Phase 2b study of BG00011 (STX-100) in idiopathic pulmonary fibrosis in September 2018, changes in the expected timing related to the achievement of certain remaining developmental milestones and an increase in discount rates, partially offset by the passage of time. No amounts are reflected as a current liability in our consolidated balance sheets as we do not expect to make a payment in the next year.
Biogen Idec International Neuroscience GmbH
In connection with our acquisition of BIN in December 2010 we recorded a contingent consideration obligation of $81.2 million. As of December 31, 2018 and 2017, the fair value of this contingent consideration obligation was $80.2 million and $102.2 million, respectively. Our most recent valuation was determined based upon net cash outflow projections of $335.0 million, probability weighted and discounted using a rate of 3.8%, which is a measure of the credit risk associated with settling the liability.
For 2018 compared to 2017, the net decrease in our contingent consideration obligation was primarily due to a $20.0 million development milestone paid in the first quarter of 2018 as we dosed our first patient in our Phase 2 SPARK study of BIIB054 (α-synuclein mAb) in Parkinson's disease in January 2018 and an increase in discount rates, partially offset by the passage of time. No amounts are reflected as a current liability in our consolidated balance sheets as we do not expect to make a payment in the next year.
Acquired IPR&D
In connection with our acquisition of Convergence, we also allocated $424.6 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 will be tested for impairment annually until commercialization, after which time the acquired IPR&D will be amortized over its estimated useful life using the economic consumption method. During the third quarter of 2018 we recognized impairment charges related to certain IPR&D assets associated with our vixotrigine program totaling
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$189.3 million. For additional information on our IPR&D intangible assets related to our vixotrigine program, including a discussion of our most significant assumptions, please read Note 7, Intangible Assets and Goodwill, to these consolidated financial statements.
- Financial Instruments
The following table summarizes our financial assets with maturities of less than 90 days from the date of purchase included in cash and cash equivalents in our consolidated balance sheets:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Commercial paper | $ | 231.2 | $ | 30.5 | |||
| Overnight reverse repurchase agreements | — | 3.6 | |||||
| Money market funds | 279.5 | 948.0 | |||||
| Short-term debt securities | 194.8 | 247.3 | |||||
| Total | $ | 705.5 | $ | 1,229.4 |
The carrying values of our commercial paper, including accrued interest, overnight reverse repurchase agreements, money market funds and our short-term debt securities approximate fair value due to their short-term maturities.
Upon the adoption of ASU 2016-01, our marketable equity securities gains (losses) are recorded in other income (expense), net in our consolidated statements of income. The following tables summarize our marketable debt and equity securities, classified as available for sale:
| As of December 31, 2018 (In millions) | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | |||||||||||
| Corporate debt securities | |||||||||||||||
| Current | $ | 1,607.5 | $ | — | $ | (0.9 | ) | $ | 1,608.4 | ||||||
| Non-current | 851.7 | 0.7 | (3.9 | ) | 854.9 | ||||||||||
| Government securities | |||||||||||||||
| Current | 705.8 | 0.1 | (0.4 | ) | 706.1 | ||||||||||
| Non-current | 263.8 | 0.1 | (0.3 | ) | 264.0 | ||||||||||
| Mortgage and other asset backed securities | |||||||||||||||
| Current | 0.1 | — | — | 0.1 | |||||||||||
| Non-current | 260.4 | 0.4 | (0.5 | ) | 260.5 | ||||||||||
| Total marketable debt securities | $ | 3,689.3 | $ | 1.3 | $ | (6.0 | ) | $ | 3,694.0 | ||||||
| Marketable equity securities, non-current | $ | 615.4 | $ | 127.7 | $ | (8.5 | ) | $ | 496.2 |
| As of December 31, 2017 (In millions) | Fair Value | Gross Unrealized Gains | Gross Unrealized Losses | Amortized Cost | |||||||||||
| Corporate debt securities | |||||||||||||||
| Current | $ | 1,039.3 | $ | — | $ | (0.2 | ) | $ | 1,039.5 | ||||||
| Non-current | 1,570.5 | 0.9 | — | 1,569.6 | |||||||||||
| Government securities | |||||||||||||||
| Current | 1,075.1 | 0.1 | (0.7 | ) | 1,075.7 | ||||||||||
| Non-current | 844.2 | 0.2 | (1.1 | ) | 845.1 | ||||||||||
| Mortgage and other asset backed securities | |||||||||||||||
| Current | 0.8 | — | — | 0.8 | |||||||||||
| Non-current | 642.6 | 1.1 | (0.8 | ) | 642.3 | ||||||||||
| Total marketable debt securities | $ | 5,172.5 | $ | 2.3 | $ | (2.8 | ) | $ | 5,173.0 | ||||||
| Marketable equity securities, non-current | $ | 11.8 | $ | 1.8 | $ | (4.4 | ) | $ | 14.4 |
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 December 31, 2018 | As of December 31, 2017 | ||||||||||||||
| (In millions) | Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | |||||||||||
| Due in one year or less | $ | 2,313.4 | $ | 2,314.6 | $ | 2,115.2 | $ | 2,116.0 | |||||||
| Due after one year through five years | 1,232.7 | 1,235.9 | 2,730.0 | 2,730.0 | |||||||||||
| Due after five years | 143.2 | 143.5 | 327.3 | 327.0 | |||||||||||
| Total available-for-sale securities | $ | 3,689.3 | $ | 3,694.0 | $ | 5,172.5 | $ | 5,173.0 |
The average maturity of our marketable debt securities available-for-sale as of December 31, 2018 and 2017, were 12 months and 17 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 Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Proceeds from maturities and sales | $ | 9,173.7 | $ | 5,565.9 | $ | 7,378.9 | |||||
| Realized gains | $ | 3.2 | $ | 3.0 | $ | 3.3 | |||||
| Realized losses | $ | 11.7 | $ | 22.4 | $ | 4.3 |
Realized losses for the year ended December 31, 2018, primarily relate to sales of corporate bonds, agency mortgage-backed securities and other asset-backed securities. Realized losses for the year ended December 31, 2017, primarily relate to impairments recognized on certain of our available-for-sale marketable debt securities, sales of agency mortgage-backed securities, corporate bonds and government securities. Realized losses for the year ended December 31, 2016, primarily relate to sales of corporate bonds, agency mortgage-backed securities and other asset-backed securities.
Strategic Investments
As of December 31, 2018 and 2017, our strategic investment portfolio was comprised of investments totaling $676.3 million and $85.8 million, respectively, which are included in investments and other assets in our consolidated balance sheets. The increase in our strategic investment portfolio is primarily a result of our investment in Ionis' common stock, as discussed below.
Our strategic investment portfolio includes investments in equity securities of certain biotechnology companies and venture capital funds where the underlying investments are in equity securities of certain biotechnology companies. Our investments in equity securities of certain publicly-traded biotechnology companies are regularly measured and carried at fair value and classified as Level 1 marketable equity securities within our disclosures included in Note 8, Fair Value Measurements, to these consolidated financial statements.
Ionis Pharmaceuticals, Inc.
In June 2018 we closed a new 10-year exclusive agreement with Ionis to develop novel antisense oligonucleotide (ASO) drug candidates for a broad range of neurological diseases (the 2018 Ionis Agreement) for a total payment of $1.0 billion, consisting of an upfront payment of $375.0 million and the purchase of approximately 11.5 million shares of Ionis' common stock at a cost of $625.0 million.
Our investment in Ionis' common stock is remeasured each reporting period and carried at fair value as a Level 2 marketable equity security due to certain holding period restrictions. The effect of these holding period restrictions are estimated using an option pricing valuation model. The most significant assumptions within the model are the term of the restrictions and the stock price volatility, which is based upon historical volatility of similar companies. We also use a constant maturity risk-free interest rate to match the remaining term of the restrictions on our investment in Ionis' common stock and a dividend yield of zero based upon the fact that Ionis and similar companies generally have not historically granted cash dividends.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For additional information on the 2018 Ionis Agreement, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Samsung Bioepis
In June 2018 we exercised our option under our joint venture agreement with Samsung BioLogics to increase our ownership percentage in Samsung Bioepis from approximately 5% to approximately 49.9%. The share purchase transaction was completed in November 2018 and, upon closing, we paid 759.5 billion South Korean won ($676.6 million) to Samsung BioLogics.
As of December 31, 2018, the carrying value of our investment in Samsung Bioepis totaled 759.5 billion South Korean won ($680.6 million), which is classified as a component of investments and other assets within our consolidated balance sheet.
For additional information on our collaboration arrangements with Samsung Bioepis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
- Derivative Instruments
In August 2017 the FASB issued ASU 2017-12. We adopted this standard on January 1, 2018, using the modified retrospective method, which did not have an impact on our financial position or results of operations; however, the adoption of this standard resulted in additional disclosures and a change in the income statement classification with respect to where we recognize cash flow hedge ineffective or excluded hedge transaction gains and losses. For additional information on this standard, please read Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, to these consolidated financial statements.
Foreign Currency Forward Contracts - Hedging Instruments
Due to the global nature of our operations, portions of our revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses 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 and operating expenses.
Foreign currency forward contracts in effect, as of December 31, 2018 and 2017, had durations of 1 to 12 months and 1 to 21 months, respectively. These contracts have been designated as cash flow hedges and unrealized gains or losses on the portion of these foreign currency forward contracts that are included in the effectiveness test are reported in accumulated other comprehensive income (loss) (referred to as AOCI in the tables below). Realized gains and losses of such contracts are recognized in revenues when the sale of product in the currency being hedged is recognized and in operating expenses when the expense in the currency being hedged is recorded. Prior to the adoption of ASU 2017-12 on January 1, 2018, to the extent ineffective or excluded, cash flow hedge transaction gains and losses were reported in other income (expense), net. Effective January 1, 2018, we recognize all cash flow hedge reclassifications from accumulated other comprehensive income and fair value changes of any cash flow hedge ineffectiveness or excluded portions in the same line item in our consolidated statements of income that has been impacted by the hedged item.
The notional value of foreign currency forward contracts that were entered into to hedge forecasted revenues and operating expenses is summarized as follows:
| Notional Amount As of December 31, | |||||||
| Foreign Currency: (In millions) | 2018 | 2017 | |||||
| Euro | $ | 1,701.4 | $ | 1,875.6 | |||
| British pound sterling | 215.3 | 150.9 | |||||
| Swiss francs | 131.4 | 88.7 | |||||
| Japanese yen | 98.8 | — | |||||
| Canadian dollar | 92.2 | 83.5 | |||||
| Total foreign currency forward contracts | $ | 2,239.1 | $ | 2,198.7 |
The pre-tax portion of the fair value of these foreign currency forward contracts that were included in accumulated other comprehensive income (loss) in total equity reflected net gains of $27.3 million as of
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2018, net losses of $113.0 million as of December 31, 2017, and net gains of $49.8 million as of December 31, 2016. We expect the net gains of $27.3 million to be settled over the next 12 months, with any amounts in accumulated other comprehensive income (loss) to be reported as an adjustment to revenues or operating expenses. 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 contractual obligations. As of December 31, 2018 and 2017, credit risk did not change the fair value of our foreign currency forward contracts.
The following tables summarize the effect of foreign currency forward contracts designated as hedging instruments in our consolidated statements of income:
| For the Year Ended December 31, | ||||||||||
| Net Gains/(Losses) Reclassified from AOCI into Operating Income (in millions) | Net Gains/(Losses) Recognized in Operating Income (in millions) | |||||||||
| Location | 2018 | Location | 2018 | |||||||
| Revenues | $ | (42.5 | ) | Revenues | $ | 10.8 | ||||
| Operating expenses | $ | 0.2 | Operating expenses | $ | (0.1 | ) |
| For the Years Ended December 31, | ||||||||||||||||||
| Net Gains/(Losses) Reclassified from AOCI into Operating Income (in millions) | Net Gains/(Losses) Recognized Directly into Net Income (in millions) | |||||||||||||||||
| Location | 2017 | 2016 | Location | 2017 | 2016 | |||||||||||||
| Revenues | $ | (32.5 | ) | $ | 5.3 | Other income (expense) | $ | 8.9 | $ | 2.9 | ||||||||
| Operating expenses | $ | 0.6 | $ | (1.5 | ) | Other income (expense) | $ | (0.2 | ) | $ | 0.1 |
Interest Rate Contracts - Hedging Instruments
We have entered into interest rate lock contracts or interest rate swap contracts on certain borrowing transactions to manage our exposure to interest rate changes and to reduce our overall cost of borrowing.
Interest Rate Swap Contracts
In connection with the issuance of our 2.90% Senior Notes, as described in Note 12, Indebtedness, to these consolidated financial statements, we entered into interest rate swaps with an aggregate notional amount of $675.0 million, which expire on September 15, 2020. The interest rate swap contracts are designated as hedges of the fair value changes in our 2.90% Senior Notes attributable to changes in interest rates. Since the specific terms and notional amount of the swaps match the debt being hedged, it is assumed to be a highly effective hedge and all changes in the fair value of the swaps are recorded as a component of our 2.90% Senior Notes with no net impact recorded in income. Any net interest payments made or received on the interest rate swap contracts are recorded as a component of interest expense in our consolidated statements of income.
Net Investment Hedges - Hedging Instruments
In February 2012 we entered into a joint venture agreement with Samsung BioLogics, establishing an entity, Samsung Bioepis, to develop, manufacture and market biosimilar products. In June 2018 we exercised our option under our joint venture agreement to increase our ownership percentage in Samsung Bioepis from approximately 5% to approximately 49.9%. The share purchase transaction was completed in November 2018 and, upon closing, we paid 759.5 billion South Korean won ($676.6 million) to Samsung BioLogics. Our investment in the equity of Samsung Bioepis is exposed to the currency fluctuations in the South Korean won.
In order to mitigate these currency fluctuations between the U.S. dollar and South Korean won, we have entered into foreign currency forward contracts. Foreign currency forward contracts in effect as of December 31, 2018, had remaining durations of 10 months. These contracts have been designated as net investment hedges. Since the critical terms of the investment and the foreign currency forward contracts match, these contracts are assumed to be highly effective. We recognize changes in the spot exchange rate in accumulated other comprehensive income (loss) (referred to as AOCI in the table below). The pre-tax portion of the fair value of these foreign currency forward contracts that were included in accumulated other comprehensive income (loss) in total equity reflected net losses of $3.8 million as of December 31, 2018. We exclude fair value changes related to the forward rate from our hedging relationship and will amortize the forward points in other income (expense), net in our consolidated statements of income over the term of the contract. The pre-tax portion of the fair value of the forward
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
points that were included in accumulated other comprehensive income (loss) in total equity reflected gains of $7.3 million as of December 31, 2018.
The following table summarizes the effect of our net investment hedge in our consolidated financial statements:
| (In millions) | Location | For the Year Ended December 31, 2018 | ||||
| Net Gains/(Losses) Recognized in AOCI | Gains (Losses) on Net Investment Hedge | $ | (3.8 | ) | ||
| Net Gains/(Losses) Reclassified from AOCI into Net Income | Other income (expense) | $ | 1.5 |
For additional information on our collaboration arrangement with Samsung Bioepis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Foreign Currency Forward Contracts - Other Derivative Instruments
We also enter into other foreign currency forward contracts, usually with durations of one month or less, 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 outstanding foreign currency contracts as of December 31, 2018 and 2017, were $735.1 million and $564.9 million, respectively. Net gains of $2.0 million and $4.5 million and net losses of $29.2 million related to these contracts were recorded as a component of other income (expense), net, for the years ended December 31, 2018, 2017 and 2016, respectively.
Summary of Derivative Instruments
While certain of our derivative instruments are subject to netting arrangements with our counterparties, we do not offset derivative assets and liabilities in our consolidated balance sheets. The amounts in the table below would not be substantially different if the derivative assets and liabilities were offset.
The following table summarizes the fair value and presentation in our consolidated balance sheets of our outstanding derivative instruments, including those designated as hedging instruments:
| (In millions) | Balance Sheet Location | Fair Value As of December 31, 2018 | ||||
| Hedging Instruments: | ||||||
| Asset derivative instruments | Other current assets | $ | 65.8 | |||
| Liability derivative instruments | Accrued expenses and other | $ | 6.9 | |||
| Other long-term liabilities | $ | 14.5 | ||||
| Other Derivative Instruments: | ||||||
| Asset derivative instruments | Other current assets | $ | 1.1 | |||
| Liability derivative instruments | Accrued expenses and other | $ | 3.2 |
| (In millions) | Balance Sheet Location | Fair Value As of December 31, 2017 | ||||
| Hedging Instruments: | ||||||
| Asset derivative instruments | Other current assets | $ | 0.7 | |||
| Investments and other assets | $ | 0.2 | ||||
| Liability derivative instruments | Accrued expenses and other | $ | 84.7 | |||
| Other long-term liabilities | $ | 23.6 | ||||
| Other Derivative Instruments: | ||||||
| Asset derivative instruments | Other current assets | $ | 1.8 | |||
| Liability derivative instruments | Accrued expenses and other | $ | 3.0 |
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
- Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Components of property, plant and equipment, net are summarized as follows:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Land | $ | 144.5 | $ | 141.2 | |||
| Buildings | 1,282.8 | 1,213.6 | |||||
| Leasehold improvements | 94.4 | 80.6 | |||||
| Machinery and equipment | 1,258.1 | 1,207.7 | |||||
| Computer software and hardware | 798.7 | 767.1 | |||||
| Furniture and fixtures | 61.6 | 55.3 | |||||
| Construction in progress | 1,758.5 | 1,276.0 | |||||
| Total cost | 5,398.6 | 4,741.5 | |||||
| Less: accumulated depreciation | (1,797.4 | ) | (1,559.1 | ) | |||
| Total property, plant and equipment, net | $ | 3,601.2 | $ | 3,182.4 |
Depreciation expense totaled $269.4 million, $266.3 million and $309.3 million for 2018, 2017 and 2016, respectively.
For 2018, 2017 and 2016 we capitalized interest costs related to construction in progress totaling approximately $54.0 million, $30.7 million and $12.9 million, respectively. The increase in capitalized interest costs is primarily due to the construction of our large-scale biologics manufacturing facility in Solothurn, Switzerland, as discussed below.
Solothurn, Switzerland Manufacturing Facility
We are building a large-scale biologics manufacturing facility in Solothurn, Switzerland. We expect this facility to be operational by the end of 2020. Upon completion, the facility will include 393,000 square feet related to a large-scale biologics manufacturing facility, 290,000 square feet of warehouse, utilities and support space and 51,000 square feet of administrative space. As of December 31, 2018 and 2017, we had approximately $1.6 billion and $1.2 billion, respectively, capitalized as construction in progress related to this facility.
- Indebtedness
Our indebtedness is summarized as follows:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Current portion: | |||||||
| Notes payable to Fumedica AG | $ | — | $ | 3.2 | |||
| Current portion of notes payable | $ | — | $ | 3.2 | |||
| Non-current portion: | |||||||
| 2.900% Senior Notes due September 15, 2020 | 1,480.8 | 1,482.4 | |||||
| 3.625% Senior Notes due September 15, 2022 | 995.5 | 994.3 | |||||
| 4.050% Senior Notes due September 15, 2025 | 1,737.8 | 1,736.3 | |||||
| 5.200% Senior Notes due September 15, 2045 | 1,722.4 | 1,722.0 | |||||
| Non-current portion of notes payable | $ | 5,936.5 | $ | 5,935.0 |
6.875% Senior Notes due March 1, 2018
On March 4, 2008, we issued $550.0 million aggregate principal amount of 6.875% Senior Notes due March 1, 2018, at 99.184% of par. These notes were senior unsecured obligations. We also entered into interest rate swap contracts where we received a fixed rate and paid a variable rate. These contracts were terminated in December 2008. Upon termination of these interest rate swap contracts, the carrying amount of these Senior Notes increased
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
by $62.8 million, with this amount being amortized using the effective interest rate method over the remaining life of the Senior Notes and recognized as a reduction of interest expense.
In November 2017 we redeemed these Senior Notes prior to their maturity and recognized a net charge of $5.2 million upon the extinguishment of these Senior Notes. This charge, which was recognized in interest expense in other income (expense), net in our consolidated statements of income for the year ended December 31, 2017, reflects the payment of a $7.7 million early call premium and the write-off of remaining unamortized original debt issuance costs and discount balances, partially offset by a $2.9 million gain related to the remaining unamortized balance of the interest rate swap liability discussed above.
Notes payable to Fumedica AG
In connection with our 2006 distribution agreement with Fumedica AG, we issued notes totaling 61.4 million Swiss Francs that were payable to Fumedica AG in varying amounts from June 2008 through June 2018. In June 2018 we redeemed our remaining note payable to Fumedica AG.
2015 Senior Notes
The following is a summary of our principal indebtedness as of December 31, 2018:
| • | $1.5 billion aggregate principal amount of 2.90% Senior Notes due September 15, 2020, valued at 99.792% of par; |
| • | $1.0 billion aggregate principal amount of 3.625% Senior Notes due September 15, 2022, valued at 99.920% of par; |
| • | $1.75 billion aggregate principal amount of 4.05% Senior Notes due September 15, 2025, valued at 99.764% of par; and |
| • | $1.75 billion aggregate principal amount of 5.20% Senior Notes due September 15, 2045, valued at 99.294% of par. |
The costs associated with these offerings of approximately $47.5 million have been recorded as a reduction to the carrying amount of the debt in our consolidated balance sheet. These costs along with the discounts will be amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity.
These notes are senior unsecured obligations. These Senior Notes may be redeemed at our option at any time at 100% of the principal amount plus accrued interest and a specified make-whole amount. These Senior Notes contain a change of control provision that may require us to purchase the notes at a price equal to 101% of the principal amount plus accrued and unpaid interest to the date of purchase under certain circumstances.
In connection with the 2.90% Senior Notes offering due in 2020, we entered into interest rate swap contracts. The carrying value of the 2.90% Senior Notes as of December 31, 2018 and 2017, includes approximately $14.5 million and $10.1 million, respectively, related to changes in the fair value of these contracts. For additional information on our interest rate contracts, please read Note 10, Derivative Instruments, to these consolidated financial statements.
Credit Facility
In August 2015 we entered into a $1.0 billion, five-year senior unsecured revolving credit facility under which we are permitted to draw funds for working capital and general corporate purposes. The terms of the revolving credit facility include a financial covenant that requires us not to exceed a maximum consolidated leverage ratio. As of December 31, 2018, we had no outstanding borrowings and were in compliance with all covenants under this facility.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt Maturity
The total gross payments due under our debt arrangements are as follows:
| (In millions) | As of December 31, 2018 | ||
| 2019 | $ | — | |
| 2020 | 1,500.0 | ||
| 2021 | — | ||
| 2022 | 1,000.0 | ||
| 2023 | — | ||
| 2024 and thereafter | 3,500.0 | ||
| Total | $ | 6,000.0 |
The fair value of our debt is disclosed in Note 8, Fair Value Measurements, to these consolidated financial statements.
- Equity
Preferred Stock
We have 8.0 million shares of Preferred Stock authorized, of which 1.75 million shares are authorized as Series A, 1.0 million shares are authorized as Series X junior participating and 5.25 million shares are undesignated. Shares may be issued without a vote or action of shareholders from time to time in classes or series with the designations, powers, preferences, and the relative, participating, optional or other special rights of the shares of each such class or series and any qualifications, limitations or restrictions thereon as set forth in the instruments governing such shares. Any such Preferred Stock may rank prior to common stock as to dividend rights, liquidation preference or both, and may have full or limited voting rights and may be convertible into shares of common stock. No shares of Preferred Stock were issued and outstanding during 2018, 2017 and 2016.
Common Stock
The following table describes the number of shares authorized, issued and outstanding of our common stock as of December 31, 2018, 2017 and 2016:
| As of December 31, 2018 | As of December 31, 2017 | December 31, 2016 | ||||||||||||||||||||||||
| (In millions) | Authorized | Issued | Outstanding | Authorized | Issued | Outstanding | Authorized | Issued | Outstanding | |||||||||||||||||
| Common stock | 1,000.0 | 221.0 | 197.2 | 1,000.0 | 235.3 | 211.5 | 1,000.0 | 238.5 | 215.9 |
Share Repurchases
In August 2018 our Board of Directors authorized a program to repurchase up to $3.5 billion of our common stock (2018 Share Repurchase Program). Our 2018 Share Repurchase program does not have an expiration date. All share repurchases under our 2018 Share Repurchase Program will be retired. Under our 2018 Share Repurchase Program, we repurchased and retired approximately 4.3 million shares of our common stock at a cost of approximately $1.4 billion during the year ended December 31, 2018.
In July 2016 our Board of Directors authorized a program to repurchase up to $5.0 billion of our common stock (2016 Share Repurchase Program), which was completed as of June 30, 2018. All share repurchases under our 2016 Share Repurchase Program were retired. Under our 2016 Share Repurchase Program, we repurchased and retired approximately 10.5 million, 3.7 million and 3.3 million shares of common stock at a cost of approximately $3.0 billion, $1.0 billion and $1.0 billion during the years ended December 31, 2018, 2017 and 2016, respectively.
In February 2011 our Board of Directors authorized a program to repurchase up to 20.0 million shares of our common stock (2011 Share Repurchase Program), which was completed as of March 31, 2017. Share repurchases under our 2011 Share Repurchase Program were principally used to offset common stock issuances under our share-based compensation programs. Under our 2011 Share Repurchase Program, we repurchased approximately 1.2 million shares of common stock at a cost of $365.4 million during the year ended December 31, 2017. We did not repurchase any shares of common stock under our 2011 Share Repurchase Program during the year ended December 31, 2016.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amounts paid to repurchase shares in excess of their par value are allocated between additional paid-in capital and retained earnings, with payments in excess of our additional paid-in-capital balance recorded as a reduction to retained earnings.
- Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss), net of tax by component:
| (In millions) | Unrealized Gains (Losses) on Securities Available for Sale, net of tax | Unrealized Gains (Losses) on Cash Flow Hedges, net of tax | Gains (Losses) on Net Investment Hedge, Net of Tax | Unfunded Status of Postretirement Benefit Plans, net of tax | Currency Translation Adjustments | Total | |||||||||||||||||
| Balance, December 31, 2017 | $ | (1.6 | ) | $ | (104.5 | ) | $ | — | $ | (36.8 | ) | $ | (175.5 | ) | $ | (318.4 | ) | ||||||
| Amounts reclassified, net of tax, upon adoption of ASU 2016-01 | 1.5 | — | — | — | — | 1.5 | |||||||||||||||||
| Balance, January 1, 2018 | (0.1 | ) | (104.5 | ) | — | (36.8 | ) | (175.5 | ) | (316.9 | ) | ||||||||||||
| Other comprehensive income (loss) before reclassifications | (10.6 | ) | 97.4 | 5.0 | 5.5 | (67.8 | ) | 29.5 | |||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 6.7 | 41.8 | (1.5 | ) | — | — | 47.0 | ||||||||||||||||
| Net current period other comprehensive income (loss) | (3.9 | ) | 139.2 | 3.5 | 5.5 | (67.8 | ) | 76.5 | |||||||||||||||
| Balance, December 31, 2018 | $ | (4.0 | ) | $ | 34.7 | $ | 3.5 | $ | (31.3 | ) | $ | (243.3 | ) | $ | (240.4 | ) |
| (In millions) | Unrealized Gains (Losses) on Securities Available for Sale, net of tax | Unrealized Gains (Losses) on Cash Flow Hedges, net of tax | Gains (Losses) on Net Investment Hedge, Net of Tax | Unfunded Status of Postretirement Benefit Plans, net of tax | Currency Translation Adjustments | Total | |||||||||||||||||
| Balance, December 31, 2016 | $ | (10.8 | ) | $ | 57.8 | $ | — | $ | (32.7 | ) | $ | (334.2 | ) | $ | (319.9 | ) | |||||||
| Other comprehensive income (loss) before reclassifications | (3.5 | ) | (193.8 | ) | — | (4.1 | ) | 158.7 | (42.7 | ) | |||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 12.7 | 31.5 | — | — | — | 44.2 | |||||||||||||||||
| Net current period other comprehensive income (loss) | 9.2 | (162.3 | ) | — | (4.1 | ) | 158.7 | 1.5 | |||||||||||||||
| Balance, December 31, 2017 | $ | (1.6 | ) | $ | (104.5 | ) | $ | — | $ | (36.8 | ) | $ | (175.5 | ) | $ | (318.4 | ) |
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| (In millions) | Unrealized Gains (Losses) on Securities Available for Sale, net of tax | Unrealized Gains (Losses) on Cash Flow Hedges, net of tax | Gains (Losses) on Net Investment Hedge, Net of Tax | Unfunded Status of Postretirement Benefit Plans, net of tax | Currency Translation Adjustments | Total | |||||||||||||||||
| Balance, December 31, 2015 | $ | (0.8 | ) | $ | 10.2 | $ | — | $ | (37.8 | ) | $ | (195.6 | ) | $ | (224.0 | ) | |||||||
| Other comprehensive income (loss) before reclassifications | (10.6 | ) | 51.6 | — | 5.1 | (138.6 | ) | (92.5 | ) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 0.6 | (4.0 | ) | — | — | — | (3.4 | ) | |||||||||||||||
| Net current period other comprehensive income (loss) | (10.0 | ) | 47.6 | — | 5.1 | (138.6 | ) | (95.9 | ) | ||||||||||||||
| Balance, December 31, 2016 | $ | (10.8 | ) | $ | 57.8 | $ | — | $ | (32.7 | ) | $ | (334.2 | ) | $ | (319.9 | ) |
The following table summarizes the amounts reclassified from accumulated other comprehensive income:
| (In millions) | Income Statement Location | Amounts Reclassified from Accumulated Other Comprehensive Income | ||||||||||||
| For the Years Ended December 31, | ||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||
| Gains (losses) on securities available for sale | Other income (expense) | $ | (8.5 | ) | $ | (19.5 | ) | $ | (0.9 | ) | ||||
| Income tax benefit (expense) | 1.8 | 6.8 | 0.3 | |||||||||||
| Gains (losses) on cash flow hedges | Revenues | (42.5 | ) | (32.5 | ) | 5.3 | ||||||||
| Operating expenses | 0.2 | 0.6 | (1.5 | ) | ||||||||||
| Other income (expense) | 0.3 | 0.3 | 0.2 | |||||||||||
| Income tax benefit (expense) | 0.2 | 0.1 | — | |||||||||||
| Gains (losses) on net investment hedge | Other Income (expense) | 1.5 | — | — | ||||||||||
| Income tax benefit (expense) | — | — | — | |||||||||||
| Total reclassifications, net of tax | $ | (47.0 | ) | $ | (44.2 | ) | $ | 3.4 |
- Earnings per Share
Basic and diluted earnings per share are calculated as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Numerator: | |||||||||||
| Net income attributable to Biogen Inc. | $ | 4,430.7 | $ | 2,539.1 | $ | 3,702.8 | |||||
| Denominator: | |||||||||||
| Weighted average number of common shares outstanding | 204.9 | 212.6 | 218.4 | ||||||||
| Effect of dilutive securities: | |||||||||||
| Stock options and employee stock purchase plan | — | 0.1 | 0.1 | ||||||||
| Time-vested restricted stock units | 0.3 | 0.2 | 0.2 | ||||||||
| Market stock units | 0.1 | 0.1 | 0.1 | ||||||||
| Performance stock units settled in stock | — | — | — | ||||||||
| Dilutive potential common shares | 0.4 | 0.4 | 0.4 | ||||||||
| Shares used in calculating diluted earnings per share | 205.3 | 213.0 | 218.8 |
Amounts excluded from the calculation of net income per diluted share because their effects were anti-dilutive were insignificant.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings per share for the years ended December 31, 2018, 2017 and 2016, reflects, on a weighted average basis, the repurchase of approximately 14.8 million shares, 3.7 million shares and 0.7 million shares of our common stock, respectively, under our 2018, 2016 and 2011 Share Repurchase Programs.
The adjustments related to the spin-off of our hemophilia business did not have a material impact on the potentially dilutive securities to be considered in the calculation of diluted earnings per share of common stock.
- Share-Based Payments
Share-Based Compensation Expense
The following table summarizes share-based compensation expense included in our consolidated statements of income:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Research and development | $ | 75.8 | $ | 74.0 | $ | 84.5 | |||||
| Selling, general and administrative | 105.8 | 95.7 | 121.7 | ||||||||
| Restructuring charges | — | — | (1.8 | ) | |||||||
| Subtotal | 181.6 | 169.7 | 204.4 | ||||||||
| Capitalized share-based compensation costs | (11.5 | ) | (9.6 | ) | (14.6 | ) | |||||
| Share-based compensation expense included in total cost and expenses | 170.1 | 160.1 | 189.8 | ||||||||
| Income tax effect | (27.5 | ) | (42.8 | ) | (54.0 | ) | |||||
| Share-based compensation expense included in net income attributable to Biogen Inc. | $ | 142.6 | $ | 117.3 | $ | 135.8 |
The following table summarizes share-based compensation expense associated with each of our share-based compensation programs:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Market stock units | $ | 27.2 | $ | 22.4 | $ | 38.4 | |||||
| Time-vested restricted stock units | 126.6 | 107.3 | 120.0 | ||||||||
| Cash settled performance units | 7.8 | 18.4 | 16.3 | ||||||||
| Performance units | 3.1 | 12.3 | 18.6 | ||||||||
| Performance stock units settled in stock | 4.7 | — | — | ||||||||
| Performance stock units settled in cash | 1.7 | — | — | ||||||||
| Employee stock purchase plan | 10.5 | 9.3 | 11.1 | ||||||||
| Subtotal | 181.6 | 169.7 | 204.4 | ||||||||
| Capitalized share-based compensation costs | (11.5 | ) | (9.6 | ) | (14.6 | ) | |||||
| Share-based compensation expense included in total cost and expenses | $ | 170.1 | $ | 160.1 | $ | 189.8 |
As of December 31, 2018, unrecognized compensation cost related to unvested share-based compensation was approximately $188.5 million, net of estimated forfeitures. We expect to recognize the cost of these unvested awards over a weighted-average period of 1.9 years.
Spin-off Related Equity Adjustments
Pursuant to an employee matters agreement entered into in connection with the spin-off of our hemophilia business and the provisions of our existing share-based compensation arrangements, we made certain adjustments to the number and terms of our outstanding stock options, RSUs, CSPUs and other share-based awards to preserve the intrinsic value of the awards immediately before and after the spin-off. For purposes of the vesting of these equity awards, continued employment or service with Biogen or with Bioverativ was treated as continued employment for purposes of both Biogen's and Bioverativ's equity awards with the outstanding awards continuing to vest over
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
their respective original vesting periods. Outstanding equity awards for employees transferring to Bioverativ were converted to unvested Bioverativ equity awards.
Adjustments to the number of our share-based compensation awards were made using an adjustment ratio based upon the weighted-average closing price of our common stock for the 10 calendar days prior to the effective date of the spin-off and the volume-weighted average prices for the 10 calendar days of our common stock following the effective date of the spin-off. For stock options, the exercise prices of the awards were modified to maintain the pre-spin intrinsic value of the awards in relation to the post-spin stock price of Biogen. The difference between the fair value of the awards based upon the adjustment ratio and the opening price on the distribution date was not material.
Share-Based Compensation Plans
We have three share-based compensation plans pursuant to which awards are currently being made: (i) the Biogen Inc. 2006 Non-Employee Directors Equity Plan (2006 Directors Plan); (ii) the Biogen Inc. 2017 Omnibus Equity Plan (2017 Omnibus Equity Plan); and (iii) the Biogen Inc. 2015 Employee Stock Purchase Plan (2015 ESPP).
Directors Plan
In May 2006 our shareholders approved the 2006 Directors Plan for share-based awards to our directors. Awards granted from the 2006 Directors Plan may include stock options, shares of restricted stock, RSUs, stock appreciation rights and other awards in such amounts and with such terms and conditions as may be determined by a committee of our Board of Directors, subject to the provisions of the plan. We have reserved a total of 1.6 million shares of common stock for issuance under the 2006 Directors Plan. The 2006 Directors Plan provides that awards other than stock options and stock appreciation rights will be counted against the total number of shares reserved under the plan in a 1.5-to-1 ratio. In June 2015 our shareholders approved an amendment to extend the term of the 2006 Directors Plan until June 2025.
Omnibus Plan
In June 2017 our shareholders approved the 2017 Omnibus Equity Plan for share-based awards to our employees. Awards granted from the 2017 Omnibus Equity Plan may include stock options, shares of restricted stock, RSUs, performance shares, stock appreciation rights and other awards in such amounts and with such terms and conditions as may be determined by a committee of our Board of Directors, subject to the provisions of the plan. Shares of common stock available for grant under the 2017 Omnibus Equity Plan consist of 8.0 million shares reserved for this purpose, plus shares of common stock that remained available for grant under our 2008 Omnibus Equity Plan as of June 7, 2017, or that could again become available for grant if outstanding awards under the 2008 Omnibus Equity Plan as of June 7, 2017, are cancelled, surrendered or terminated in whole or in part. The 2017 Omnibus Equity Plan provides that awards other than stock options and stock appreciation rights will be counted against the total number of shares available under the plan in a 1.5-to-1 ratio.
We have not made any awards pursuant to the 2008 Omnibus Equity Plan since our shareholders approved the 2017 Omnibus Equity Plan, and do not intend to make any awards pursuant to the 2008 Omnibus Equity Plan in the future, except that unused shares under the 2008 Omnibus Equity Plan have been carried over for use under the 2017 Omnibus Equity Plan.
Stock Options
We currently do not grant stock options to our employees or directors. Outstanding stock options previously granted to our employees and directors generally have a 10-year term and vest over a period of between one and four years, provided the individual continues to serve at Biogen through the vesting dates. Options granted under all plans are exercisable at a price per share not less than the fair market value of the underlying common stock on the date of grant. The estimated fair value of options, including the effect of estimated forfeitures, is recognized over the options’ vesting periods. The fair value of the stock options granted in 2010 was estimated as of the date of grant using a Black-Scholes option valuation model. There were no grants of stock options made in 2018, 2017 and 2016. As of December 31, 2018, all outstanding options were exercisable.
The expected life of options granted is derived using assumed exercise rates based on historical exercise patterns and represents the period of time that options granted are expected to be outstanding. Expected stock price volatility is based upon implied volatility for our exchange-traded options and other factors, including historical volatility. After assessing all available information on either historical volatility, implied volatility or both, we have
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
concluded that a combination of both historical and implied volatility provides the best estimate of expected volatility. The risk-free interest rate used is determined by the market yield curve based upon risk-free interest rates established by the Federal Reserve, or non-coupon bonds that have maturities equal to the expected term. The dividend yield of zero is based upon the fact that we have not historically granted cash dividends, and do not expect to issue dividends in the foreseeable future. Stock options granted prior to January 1, 2006, were valued based on the grant date fair value of those awards, using the Black-Scholes option pricing model, as previously calculated for pro-forma disclosures.
The following table summarizes our stock option activity:
| Shares | Weighted Average Exercise Price | |||||
| Outstanding at December 31, 2017 | 42,000 | $ | 53.83 | |||
| Granted | — | $ | — | |||
| Exercised | (15,000 | ) | $ | 53.85 | ||
| Cancelled | — | $ | — | |||
| Outstanding at December 31, 2018 | 27,000 | $ | 53.82 |
The total intrinsic values of options exercised in 2018, 2017 and 2016 totaled $4.0 million, $3.4 million and $10.4 million, respectively. The aggregate intrinsic values of options outstanding as of December 31, 2018, totaled $6.7 million. The weighted average remaining contractual term for options outstanding as of December 31, 2018, was 0.7 years.
The following table summarizes the amount of tax benefit realized for stock options and cash received from the exercise of stock options:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Tax benefit realized for stock options | $ | 2.2 | $ | 3.4 | $ | 4.0 | |||||
| Cash received from the exercise of stock options | $ | 0.8 | $ | 0.7 | $ | 2.2 |
Market Stock Units (MSUs)
MSUs awarded to employees prior to 2014 vested in four equal annual increments beginning on the first anniversary of the grant date. Participants may ultimately earn between 0% and 150% of the target number of units granted based on actual stock performance.
MSUs awarded to employees in 2014 and thereafter vest in three equal annual increments beginning on the first anniversary of the grant date, and participants may ultimately earn between 0% and 200% of the target number of units granted based on actual stock performance.
The vesting of these awards is subject to the respective employee’s continued employment. The number of MSUs granted represents the target number of units that are eligible to be earned based on the attainment of certain market-based criteria involving our stock price. The number of MSUs earned is calculated at each annual anniversary from the date of grant over the respective vesting periods, resulting in multiple performance periods. Accordingly, additional MSUs may be issued or currently outstanding MSUs may be cancelled upon final determination of the number of awards earned. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes our MSU activity:
| Shares | Weighted Average Grant Date Fair Value | |||||
| Unvested at December 31, 2017 | 171,000 | $ | 370.83 | |||
| Granted (a) | 129,000 | $ | 378.85 | |||
| Vested | (91,000 | ) | $ | 365.83 | ||
| Forfeited | (29,000 | ) | $ | 376.51 | ||
| Unvested at December 31, 2018 | 180,000 | $ | 371.32 |
| (a) | MSUs granted during 2018 include awards granted in conjunction with our annual awards made in February 2018 and MSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant. MSUs granted in 2018 also reflect an adjustment based upon the final performance multiplier in relation to shares granted in 2017, 2016 and 2015. |
We value grants of MSUs using a lattice model with a Monte Carlo simulation. This valuation methodology utilizes several key assumptions, the 30 calendar day average closing stock price on the date of grant for MSUs, expected volatility of our stock price, risk-free rates of return and expected dividend yield.
The assumptions used in our valuation are summarized as follows:
| For the Years Ended December 31, | |||||
| 2018 | 2017 | 2016 | |||
| Expected dividend yield | —% | —% | —% | ||
| Range of expected stock price volatility | 27.5% - 32.4% | 33.0% - 35.6% | 38.2% - 40.7% | ||
| Range of risk-free interest rates | 1.9% - 2.3% | 0.9% - 1.6% | 0.6% - 0.9% | ||
| 30 calendar day average stock price on grant date | $279.47 - $346.76 | $263.18 - $267.88 | $260.67 - $304.86 | ||
| Weighted-average per share grant date fair value | $378.85 | $382.59 | $328.03 |
The fair values of MSUs vested in 2018, 2017 and 2016 totaled $26.9 million, $31.4 million and $39.3 million, respectively.
Cash Settled Performance Units (CSPUs)
CSPUs awarded to employees vest in three equal annual increments beginning on the first anniversary of the grant date. The vesting of these awards is subject to the respective employee’s continued employment with such awards settled in cash. The number of CSPUs granted represents the target number of units that are eligible to be earned based on the attainment of certain performance measures established at the beginning of the performance period, which ends on December 31 of each year. Participants may ultimately earn between 0% and 200% of the target number of units granted based on the degree of actual performance metric achievement. Accordingly, additional CSPUs may be issued or currently outstanding CSPUs may be cancelled upon final determination of the number of units earned. CSPUs are classified as liability awards and will be settled in cash based on the 30 calendar day average closing stock price through each vesting date, once the actual vested and earned number of units is known. Since no shares are issued, these awards do not dilute equity. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period.
The following table summarizes our CSPU activity:
| Shares | ||
| Unvested at December 31, 2017 | 105,000 | |
| Granted (a) | 12,000 | |
| Vested | (51,000 | ) |
| Forfeited | (16,000 | ) |
| Unvested at December 31, 2018 | 50,000 |
| (a) | These shares reflect the CSPUs issued in 2018 based upon the attainment of performance criteria set for 2017 in relation to CSPUs granted in 2017. |
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The cash paid in settlement of CSPUs vested in 2018, 2017 and 2016 totaled $15.1 million, $16.6 million and $31.9 million, respectively.
Performance-vested Restricted Stock Units (PUs)
PUs are granted to certain employees in the form of RSUs that may be settled in cash or shares of our common stock at the sole discretion of the Compensation and Management Development Committee of our Board of Directors. These awards are structured and accounted for the same way as the CSPUs, and vest in three equal annual increments beginning on the first anniversary of the grant date. The number of PUs granted represents the target number of units that are eligible to be earned based on the attainment of certain performance measures established at the beginning of the performance period, which ends on December 31 of each year. Participants may ultimately earn between 0% and 200% of the target number of units granted based on the degree of actual performance metric achievement. Accordingly, additional PUs may be issued or currently outstanding PUs may be cancelled upon final determination of the number of units earned. PUs settling in cash are based on the 30 calendar day average closing stock price through each vesting date once the actual vested and earned number of units is known. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period.
The following table summarizes our PU activity:
| Shares | ||
| Unvested at December 31, 2017 | 91,000 | |
| Granted (a) | 10,000 | |
| Vested | (52,000 | ) |
| Forfeited | (1,000 | ) |
| Unvested at December 31, 2018 | 48,000 |
| (a) | These shares reflect the PUs issued in 2018 based upon the attainment of performance criteria set for 2017 in relation to PUs granted in 2017. |
All PUs that vested in 2018, 2017 and 2016 were settled in cash totaling $17.0 million, $11.5 million and $8.1 million, respectively.
Performance Stock Units (PSUs)
PSUs Settled in Stock
During the first quarter of 2018 we began granting awards for performance-vested RSUs that will settle in stock. PSUs awarded to employees have a three-year performance period and vest on the third anniversary of the grant date. The vesting of these awards is subject to the respective employee’s continued employment. The number of PSUs granted represents the target number of units that are eligible to be earned based on the achievement of cumulative three-year performance measures established at the beginning of the performance period, which ends on December 31 of the third year of the performance period.
Participants may ultimately earn between 0% and 200% of the target number of PSUs granted based on the degree of achievement of the applicable performance metric. Accordingly, additional PSUs may be issued or currently outstanding PSUs may be cancelled upon final determination of the number of units earned. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes our PSUs that settle in stock activity:
| Shares | Weighted Average Grant Date Fair Value | |||||
| Unvested at December 31, 2017 | — | $ | — | |||
| Granted (a) | 67,000 | $ | 317.09 | |||
| Vested | — | $ | — | |||
| Forfeited | (7,000 | ) | $ | 315.70 | ||
| Unvested at December 31, 2018 | 60,000 | $ | 317.26 |
| (a) | PSUs settled in stock granted in 2018 include awards granted in conjunction with our annual awards made in February 2018 and PSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant. |
PSUs Settled in Cash
During the first quarter of 2018 we began granting awards for performance-vested restricted stock units that will settle in cash. PSUs awarded to employees have three performance periods and vest on the third anniversary of the grant date. The vesting of these awards is subject to the respective employee’s continued employment. The number of PSUs granted represents the target number of units that are eligible to be earned based on the achievement of three annual performance measures established when the performance objectives are defined, which will be at the beginning of each year and will end on December 31 of such year.
Participants may ultimately earn between 0% and 200% of the target number of PSUs granted based on the degree of achievement of the applicable performance metric. Accordingly, additional PSUs may be issued or currently outstanding PSUs may be cancelled upon final determination of the number of units earned. PSUs are classified as liability awards and will be settled in cash based on the 30 calendar day average closing stock price through the vesting date, once the actual vested and earned number of PSUs is determined. Since no shares are issued, these awards do not dilute equity. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period.
The following table summarizes our PSUs that settle in cash activity:
| Shares | ||
| Unvested at December 31, 2017 | — | |
| Granted (a) | 45,000 | |
| Vested | — | |
| Forfeited | (5,000 | ) |
| Unvested at December 31, 2018 | 40,000 |
| (a) | PSUs settled in cash granted in 2018 include awards granted in conjunction with our annual awards made in February 2018 and PSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant. |
Time-Vested Restricted Stock Units (RSUs)
RSUs awarded to employees generally vest no sooner than one-third per year over three years on the anniversary of the date of grant, or upon the third anniversary of the date of the grant, provided the employee remains continuously employed with us, except as otherwise provided in the plan. Shares of our common stock will be delivered to the employee upon vesting, subject to payment of applicable withholding taxes. RSUs awarded to directors for service on our Board of Directors vest on the first anniversary of the date of grant, provided in each case that the director continues to serve on our Board of Directors through the vesting date. Shares of our common stock will be delivered to the director upon vesting and are not subject to any withholding taxes. The fair value of all RSUs is based on the market value of our stock on the date of grant. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes our RSU activity:
| Shares | Weighted Average Grant Date Fair Value | |||||
| Unvested at December 31, 2017 | 832,000 | $ | 291.85 | |||
| Granted (a) | 581,000 | $ | 316.32 | |||
| Vested | (376,000 | ) | $ | 299.94 | ||
| Forfeited | (134,000 | ) | $ | 298.81 | ||
| Unvested at December 31, 2018 | 903,000 | $ | 303.18 |
| (a) | RSUs granted in 2018 primarily represent RSUs granted in conjunction with our annual awards made in February 2018 and awards made in conjunction with the hiring of new employees. RSUs granted in 2018 also include approximately 9,000 RSUs granted to our Board of Directors. |
RSUs granted in 2017 and 2016 had weighted average grant date fair values of $293.41 and $268.52, respectively.
The fair values of RSUs vested in 2018, 2017 and 2016 totaled $111.7 million, $100.0 million and $104.6 million, respectively.
Employee Stock Purchase Plan (ESPP)
In June 2015 our shareholders approved the 2015 ESPP. The 2015 ESPP, which became effective on July 1, 2015, replaced the Biogen Idec Inc. 1995 ESPP, which expired on June 30, 2015. The maximum aggregate number of shares of our common stock that may be purchased under the 2015 ESPP is 6.2 million.
The following table summarizes our ESPP activity:
| For the Years Ended December 31, | |||||||||||
| (In millions, except share amounts) | 2018 | 2017 | 2016 | ||||||||
| Shares issued under the 2015 ESPP | 170,000 | 167,000 | 190,000 | ||||||||
| Cash received under the 2015 ESPP | $ | 40.5 | $ | 39.8 | $ | 41.5 |
- Income Taxes
Income Tax Expense
Income before income tax provision and the income tax expense consist of the following:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Income before income taxes (benefit): | |||||||||||
| Domestic | $ | 3,877.0 | $ | 3,540.4 | $ | 3,655.4 | |||||
| Foreign | 2,022.6 | 1,588.4 | 1,277.6 | ||||||||
| Total | $ | 5,899.6 | $ | 5,128.8 | $ | 4,933.0 | |||||
| Income tax expense (benefit): | |||||||||||
| Current: | |||||||||||
| Federal | $ | 1,131.8 | $ | 2,201.4 | $ | 1,304.3 | |||||
| State | 45.5 | 57.0 | 55.1 | ||||||||
| Foreign | 140.0 | 108.6 | 52.9 | ||||||||
| Total | 1,317.3 | 2,367.0 | 1,412.3 | ||||||||
| Deferred: | |||||||||||
| Federal | $ | (62.0 | ) | $ | 241.0 | $ | (125.6 | ) | |||
| State | (7.4 | ) | 9.9 | (3.8 | ) | ||||||
| Foreign | 177.7 | (159.2 | ) | (45.6 | ) | ||||||
| Total | 108.3 | 91.7 | (175.0 | ) | |||||||
| Total income tax expense | $ | 1,425.6 | $ | 2,458.7 | $ | 1,237.3 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2017 Tax Act
The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35% to 21%, the elimination or reduction of certain domestic deductions and credits and limitations on the deductibility of interest expense and executive compensation. The 2017 Tax Act also transitions international taxation from a worldwide system to a modified territorial system, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation as GILTI, and includes base erosion prevention measures on non-U.S. earnings. These changes became effective in 2018. During the fourth quarter of 2018 we elected to recognize deferred taxes for basis differences expected to reverse as GILTI is incurred and have established initial deferred tax balances, as of the enactment date of the 2017 Tax Act.
During the fourth quarter of 2017 we recognized within our provision for income taxes a $1.2 billion provisional estimate pursuant to the U.S. Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 118. Our provisional estimate included an amount of $989.6 million associated with a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings (the Transition Toll Tax), as discussed below, and $184.0 million related to the impact of remeasuring our deferred tax balances to reflect the new federal statutory rate and other changes to U.S. tax law.
During the year ended December 31, 2018, we recognized a net reduction of $34.6 million in our estimated Transition Toll Tax, an expense of $12.7 million to remeasure our deferred tax balances, an expense of $135.8 million related to establishing deferred taxes for GILTI and an expense of $11.0 million to reflect other aspects of the 2017 Tax Act.
Transition Toll Tax
The 2017 Tax Act eliminated the deferral of U.S. income tax on the historical unrepatriated earnings by imposing the Transition Toll Tax. The Transition Toll Tax was assessed on our share of our foreign corporations' accumulated foreign earnings that were not previously taxed. Earnings in the form of cash and cash equivalents were taxed at a rate of 15.5% and all other earnings were taxed at a rate of 8.0%.
As of December 31, 2018 and 2017, we have accrued income tax liabilities of $697.0 million and $989.6 million, respectively, under the Transition Toll Tax. The decrease in this liability is primarily attributed to our 2018 Transition Toll Tax payment of $85.0 million, the application by the U.S. Internal Revenue Service (IRS) of an approximately $150.0 million overpayment against the accrual and the impact of the $34.6 million net reduction described above. Of the amounts accrued as of December 31, 2018, no amounts are expected to be paid within one year due to the overpayment discussed above. The Transition Toll Tax will be paid in installments over an eight--year period, which started in 2018, and will not accrue interest.
Status of our Assessment
The final determination of the Transition Toll Tax and the remeasurement of our deferred assets and liabilities was completed during the fourth quarter of 2018 under SEC Staff Accounting Bulletin No. 118. Throughout 2018 proposed regulations were issued by the IRS, which are expected to be finalized in 2019 and may have an impact on our income tax provision. We will assess the impact of any additional guidance when it is issued.
Unremitted Earnings
At December 31, 2018, we considered none of our earnings to be permanently reinvested outside the U.S. and therefore recorded deferred tax liabilities associated with an estimate of the total withholding taxes expected as a result of our repatriation of earnings. Other than for earnings, we are permanently reinvested for book/tax basis differences related to foreign subsidiaries. These differences are estimated to total approximately $1.5 billion and primarily arose through the impacts of purchase accounting. These basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of December 31, 2018. The residual U.S. tax liability, if these differences would reverse, would be between $0.3 billion to $0.4 billion as of December 31, 2018.
Article 20 Procedure of ZINBRYTA
As a result of the Article 20 Procedure of ZINBRYTA, for the year ended December 31, 2017, we recognized a net impairment charge on certain tax assets related to ZINBRYTA reflected within income tax expense of $48.8
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
million. This charge reflected the write-off of $142.6 million related to prepaid taxes, which was partially offset by the recognition of an unrecorded deferred tax benefit of $93.8 million. For additional information on our collaboration arrangement with AbbVie, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Deferred Tax Assets and Liabilities
Significant components of our deferred tax assets and liabilities are summarized as follows:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Deferred tax assets: | |||||||
| Tax credits | $ | 102.8 | $ | 60.0 | |||
| Inventory, other reserves and accruals | 163.9 | 147.8 | |||||
| Intangibles, net | 2,298.6 | 378.8 | |||||
| Net operating loss | 213.1 | 209.8 | |||||
| Share-based compensation | 25.8 | 26.9 | |||||
| Other | 38.9 | 25.1 | |||||
| Valuation allowance | (20.0 | ) | (16.6 | ) | |||
| Total deferred tax assets | $ | 2,823.1 | $ | 831.8 | |||
| Deferred tax liabilities: | |||||||
| Purchased intangible assets | $ | (232.8 | ) | $ | (250.7 | ) | |
| GILTI | (544.6 | ) | — | ||||
| Tax credits | (1,425.7 | ) | — | ||||
| Depreciation, amortization and other | (102.3 | ) | (107.9 | ) | |||
| Total deferred tax liabilities | $ | (2,305.4 | ) | $ | (358.6 | ) |
In addition to deferred tax assets and liabilities, we have recorded prepaid tax and deferred charges related to intra-entity transactions. As of December 31, 2018 and 2017, the total deferred charges and prepaid taxes were $239.2 million and $617.7 million, respectively.
In October 2016 the FASB issued ASU 2016-16. This standard eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the income tax consequences from the intra-entity transfer of an asset other than inventory and associated changes to deferred taxes will be recognized when the transfer occurs. We adopted this standard on January 1, 2018, using the modified retrospective method, through a cumulative-effect adjustment to retained earnings as of that date. Upon adoption, we recognized additional deferred tax assets of approximately $2.0 billion offset by a corresponding increase to deferred tax liabilities, related to an expected reduction in future U.S. foreign tax credits of approximately $1.5 billion and an increase to retained earnings of approximately $0.5 billion. In the fourth quarter of 2018, when we elected to begin recognizing deferred taxes on the GILTI tax calculation, we recorded an additional deferred tax liability of $0.4 billion with a corresponding reduction to our retained earnings as these differences are related to inter-entity transactions. We will recognize incremental deferred income tax expense thereafter as these deferred tax assets and liabilities are utilized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Tax Rate
A reconciliation between the U.S. federal statutory tax rate and our effective tax rate is summarized as follows:
| For the Years Ended December 31, | ||||||||
| 2018 | 2017 | 2016 | ||||||
| Statutory rate | 21.0 | % | 35.0 | % | 35.0 | % | ||
| State taxes | 0.6 | 0.8 | 0.9 | |||||
| Taxes on foreign earnings | (1.9 | ) | (11.1 | ) | (9.6 | ) | ||
| Credits and net operating loss utilization | (0.9 | ) | (0.8 | ) | (1.4 | ) | ||
| Purchased intangible assets | 1.2 | 1.4 | 1.2 | |||||
| Manufacturing deduction | — | (1.9 | ) | (1.9 | ) | |||
| Other permanent items | 0.3 | 0.7 | 0.5 | |||||
| 2017 Tax Act | 2.1 | 22.9 | — | |||||
| GILTI | 1.6 | — | — | |||||
| Impairment of ZINBRYTA related tax assets | — | 0.9 | — | |||||
| Other | 0.2 | — | 0.4 | |||||
| Effective tax rate | 24.2 | % | 47.9 | % | 25.1 | % |
Changes in Tax Rate
For the year ended December 31, 2018, as compared to 2017, the decrease in our effective tax rate was primarily due to the enactment of the 2017 Tax Act. The effects of an overall reduction in the federal statutory rate in the U.S. were partially offset by the elimination of the manufacturing deduction, the imposition of the GILTI tax on international earnings, our recording of deferred taxes on GILTI in 2018, limits on the deductibility of certain benefits on executive compensation and a reduction in the tax benefit associated with the Orphan Drug Credit, all resulting from the 2017 Tax Act, and a change in accounting rules related to recording the tax impacts of intra-entity transactions. Included in taxes on foreign earnings in the above rate reconciliation for 2018 was an increase of approximately 350 basis points related to the sale of inventory, the tax effect of which had been included within prepaid taxes at December 31, 2017, at a higher effective tax rate. The effective tax rate for the year ended December 31, 2017, also reflected the impact of a favorable settlement related to a state tax matter in 2017.
For the year ended December 31, 2017, as compared to 2016, the most significant factors contributing to the increase in our effective tax rate was the effect of the enactment of the 2017 Tax Act and the impairment of certain ZINBRYTA related tax assets, both of which are discussed above. Excluding the effect of these items, our income tax rate would have decreased due to a lower percentage of our earnings being recognized in the U.S., a higher tax jurisdiction. The geographic split of our earnings was affected by milestone and upfront payments in the current year and the spin-off of our hemophilia business, partially offset by growth from the U.S. launch of SPINRAZA and increases in our revenues from anti-CD20 therapeutic programs in the U.S. In addition, in 2017 we earned a lower benefit from the Orphan Drug Credit due to the FDA's approval of SPINRAZA.
Tax Attributes
As of December 31, 2018, we had net operating losses and general business credit carry forwards for federal income tax purposes of approximately $1.0 million and $1.3 million, respectively, which begin to expire in 2022. Additionally, for state income tax purposes, we had net operating loss carry forwards of approximately $4.6 million that begin to expire in 2020. For state income tax purposes, we also had research and investment credit carry forwards of approximately $133.1 million that begin to expire in 2019. For foreign income tax purposes, we had $2.2 billion of net operating loss carryforwards that begin to expire in 2024.
In assessing the realizability of our deferred tax assets, we have considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial reporting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Our estimates of future taxable income take into consideration, among other items, our estimates of future income tax deductions related to the exercise of stock options. Based upon the level of historical taxable income and income tax liability and projections for future taxable income over the periods in which the deferred tax
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assets are utilizable, we believe it is more likely than not that we will realize the net benefits of the deferred tax assets of our wholly owned subsidiaries. In the event that actual results differ from our estimates or we adjust our estimates in future periods, we may need to establish a valuation allowance, which could materially impact our consolidated financial position and results of operations.
Accounting for Uncertainty in Income Taxes
A reconciliation of the beginning and ending amount of our unrecognized tax benefits is summarized as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Balance at January 1, | $ | 66.8 | $ | 32.4 | $ | 67.9 | |||||
| Additions based on tax positions related to the current period | 0.5 | 5.7 | 7.2 | ||||||||
| Additions for tax positions of prior periods | 58.7 | 7.3 | 36.3 | ||||||||
| Reductions for tax positions of prior periods | (13.6 | ) | (21.8 | ) | (13.3 | ) | |||||
| Statute expirations | (2.9 | ) | (1.4 | ) | (1.4 | ) | |||||
| Settlement refund (payment) | 4.7 | 44.6 | (64.3 | ) | |||||||
| Balance at December 31, | $ | 114.2 | $ | 66.8 | $ | 32.4 |
Our 2017 activity above reflects a refund received from a state, related to the settlement of an uncertain tax position.
We and our subsidiaries are routinely examined by various taxing authorities. We file income tax returns in various U.S. states and in U.S. federal and other foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal tax examination for years before 2013 or state, local or non-U.S. income tax examinations for years before 2010.
Included in the balance of unrecognized tax benefits as of December 31, 2018, 2017 and 2016, are $109.1 million, $64.3 million and $26.9 million (net of the federal benefit on state issues), respectively, of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods.
We recognize potential interest and penalties accrued related to unrecognized tax benefits in income tax expense. In 2018, 2017 and 2016 we recognized a net interest expense of $2.2 million, $4.8 million and $9.1 million, respectively. We have accrued $13.8 million and $16.1 million for the payment of interest and penalties as of December 31, 2018 and 2017, respectively.
International Uncertain Tax Positions
We have made payments totaling approximately $60.0 million to the Danish Tax Authority (SKAT) for assessments received for 2009, 2011 and 2013 regarding withholding taxes and the treatment of certain intercompany transactions involving a Danish affiliate and another of our affiliates. We continue to dispute the assessments for all of these periods and believe that the positions taken in our historical filings are valid. It is reasonably possible that we will adjust the value of our uncertain tax positions related to Danish withholding taxes based on potential European court decisions expected in 2019 on similar matters.
Federal and State Uncertain Tax Positions
It is reasonably possible that we will adjust the value of our uncertain tax positions related to certain transfer pricing issues as we receive additional information from various taxing authorities, including reaching settlements with such authorities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
- Other Consolidated Financial Statement Detail
Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the years ended December 31, 2018, 2017 and 2016, is as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Cash paid during the year for: | |||||||||||
| Interest | $ | 243.2 | $ | 281.7 | $ | 281.2 | |||||
| Income taxes | $ | 1,007.1 | $ | 1,066.4 | $ | 1,642.2 |
Non-cash Operating, Investing and Financing Activity
In the fourth quarter of 2018 we accrued $300.0 million upon reaching $20.0 billion in total cumulative sales of the Fumapharm Products, which will be paid in the first quarter of 2019. In the fourth quarter of 2017 we accrued $600.0 million upon reaching $15.0 billion and $16.0 billion in total cumulative sales of the Fumapharm Products, which was paid in the first quarter of 2018. These amounts, net of tax benefit, were accounted for as increases to goodwill in accordance with the accounting standard applicable to business combinations when we acquired Fumapharm AG. For additional information on the contingent payments to the former shareholders of Fumapharm AG and holders of their rights, please read Note 22, Commitments and Contingencies, to these consolidated financial statements.
In connection with the construction of our large-scale biologics manufacturing facility in Solothurn, Switzerland, we accrued charges related to processing equipment and engineering services of approximately $100.0 million and $150.0 million in our consolidated balance sheets as of December 31, 2018 and 2017, respectively. For additional information on the construction of our manufacturing facility in Solothurn, Switzerland, please read Note 11, Property, Plant and Equipment, to these consolidated financial statements.
In December 2016 we accrued $454.8 million related to the settlement and license agreement with Forward Pharma. For additional information on the settlement and license agreement with Forward Pharma, please read Note 7, Intangible Assets and Goodwill, to these consolidated financial statements.
Other Income (Expense), Net
Components of other income (expense), net, are summarized as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Interest income | $ | 112.5 | $ | 78.5 | $ | 63.4 | |||||
| Interest expense | (200.6 | ) | (250.8 | ) | (260.0 | ) | |||||
| Gain (loss) on investments, net | 119.5 | (36.3 | ) | 6.0 | |||||||
| Foreign exchange gains (losses), net | (9.9 | ) | 6.3 | (9.8 | ) | ||||||
| Other, net | (10.5 | ) | (14.7 | ) | (18.3 | ) | |||||
| Total other income (expense), net | $ | 11.0 | $ | (217.0 | ) | $ | (218.7 | ) |
For the year ended December 31, 2018, gain (loss) on investments, net, as reflected in the table above, substantially relate to marketable equity securities held at December 31, 2018.
Other Current Assets
Other current assets were $687.6 million and $962.0 million as of December 31, 2018 and 2017, respectively, and include prepaid taxes totaling $271.2 million and $657.6 million, respectively.
Investments and other assets
Investments and other assets were $1,690.6 million as of December 31, 2018, including $680.6 million and $563.8 million related to our investments in Samsung Bioepis and Ionis, respectively. For additional information on
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
our collaboration arrangements with Samsung Bioepis and Ionis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Accrued Expenses and Other
Accrued expenses and other consists of the following:
| As of December 31, | |||||||
| (In millions) | 2018 | 2017 | |||||
| Revenue-related reserves for discounts and allowances | $ | 874.7 | $ | 572.0 | |||
| Current portion of contingent consideration obligations | 444.8 | 844.6 | |||||
| Employee compensation and benefits | 320.9 | 297.7 | |||||
| Royalties and licensing fees | 224.7 | 206.7 | |||||
| Construction in progress | 125.2 | 159.7 | |||||
| Collaboration expenses | 261.6 | 183.7 | |||||
| Other | 609.3 | 636.9 | |||||
| Total accrued expenses and other | $ | 2,861.2 | $ | 2,901.3 |
Other Long-term Liabilities
Other long-term liabilities were $1,389.4 million and $1,628.7 million as of December 31, 2018 and 2017, respectively, and include accrued income taxes totaling $791.4 million and $979.8 million, respectively.
- Collaborative and Other Relationships
In connection with our business strategy, we have entered into various collaboration agreements that provide us with rights to develop, produce and market products using certain know-how, technology and patent rights maintained by our collaborative partners. Terms of the various collaboration agreements may require us to make milestone payments upon the achievement of certain product research and development objectives and pay royalties on future sales, if any, of commercial products resulting from the collaboration.
Depending on the collaborative arrangement, we may record funding receivable or payable balances with our partners, based on the nature of the cost-sharing mechanism and activity within the collaboration. Our significant collaboration arrangements are discussed below.
Genentech, Inc. (Roche Group)
We have certain business and financial rights with respect to RITUXAN for the treatment of non-Hodgkin's lymphoma, CLL and other conditions, RITUXAN HYCELA for the treatment of non-Hodgkin's lymphoma and CLL, GAZYVA for the treatment of CLL and follicular lymphoma, OCREVUS for the treatment of PPMS and RMS and other potential anti-CD20 therapies pursuant to our collaboration arrangements with Genentech, a wholly-owned member of the Roche Group. For purposes of this footnote we refer to RITUXAN and RITUXAN HYCELA collectively as RITUXAN.
Our collaboration arrangements will continue in effect until we mutually agree to terminate the collaboration, except that if we undergo a change in control, as defined in our collaboration agreement, Genentech has the right to present an offer to buy the rights to RITUXAN and we must either accept Genentech’s offer or purchase Genentech’s rights on the same terms as its offer. Genentech will also be deemed concurrently to have purchased our rights to any other anti-CD20 products in development in exchange for a royalty and our rights to GAZYVA in exchange for the compensation described in the table below. Our collaboration with Genentech was created through a contractual arrangement and not through a joint venture or other legal entity.
RITUXAN
Genentech and its affiliates are responsible for the worldwide manufacture of RITUXAN, as well as all development and commercialization activities as follows:
U.S.
We have co-exclusively licensed our rights to develop, commercialize and market RITUXAN in the U.S.
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Canada
We have co-exclusively licensed our rights to develop, commercialize and market RITUXAN in Canada.
GAZYVA
The Roche Group and its sub-licensees maintain sole responsibility for the development, manufacture and commercialization of GAZYVA in the U.S. We recognize our share of the development and commercialization expenses of GAZYVA as a reduction of our share of pre-tax profits in revenues from anti-CD20 therapeutic programs.
Commercialization of GAZYVA impacts our percentage of the co-promotion profits for RITUXAN, as summarized in the table below.
OCREVUS
In March 2017 the FDA approved OCREVUS for the treatment of RMS and PPMS. Pursuant to the terms of our collaboration arrangements with Genentech, we receive a tiered royalty on U.S. net sales from 13.5% and increasing up to 24% if annual net sales exceed $900.0 million. There will be a 50% reduction to these royalties if a biosimilar to OCREVUS is approved in the U.S.
In addition, we receive a gross 3% royalty on net sales of OCREVUS outside the U.S., with the royalty period lasting 11 years from the first commercial sale of OCREVUS on a country-by-country basis. OCREVUS has been approved for the treatment of RMS and PPMS in the E.U. and certain other countries.
The commercialization of OCREVUS does not impact the percentage of the co-promotion profits we receive for RITUXAN or GAZYVA. Genentech is solely responsible for development and commercialization of OCREVUS and funding future costs. Genentech cannot develop OCREVUS in CLL, non-Hodgkin's lymphoma or rheumatoid arthritis. OCREVUS royalty revenues were based on our estimates from third party and market research data of OCREVUS sales occurring during the corresponding period. Differences between actual and estimated royalty revenues will be adjusted for in the period in which they become known, which is expected to be the following quarter.
Profit-sharing Formulas
RITUXAN Profit Share
Our current pretax co-promotion profit-sharing formula for RITUXAN provides for a 30% share on the first $50.0 million of co-promotion operating profits earned each calendar year. Our share of annual co-promotion profits in excess of $50.0 million varies, as summarized in the table below, upon the following events:
| Until GAZYVA First Non-CLL FDA Approval | 40.0 | % |
| After GAZYVA First Non-CLL FDA Approval until First GAZYVA Threshold Date | 39.0 | % |
| After First GAZYVA Threshold Date until Second GAZYVA Threshold Date | 37.5 | % |
| After Second GAZYVA Threshold Date | 35.0 | % |
First Non-CLL GAZYVA FDA Approval means the FDA’s first approval of GAZYVA in an indication other than CLL.
First GAZYVA Threshold Date means the earlier of (i) the date of the First Non-CLL GAZYVA FDA approval if U.S. gross sales of GAZYVA for the preceding consecutive 12-month period were at least $150.0 million or (ii) the first day of the calendar quarter after the date of the First Non-CLL GAZYVA FDA Approval that U.S. gross sales of GAZYVA within any consecutive 12-month period have reached $150.0 million.
Second GAZYVA Threshold Date means the first day of the calendar quarter after U.S. gross sales of GAZYVA within any consecutive 12-month period have reached $500.0 million. The Second GAZYVA Threshold Date can be achieved regardless of whether GAZYVA has been approved in a non-CLL indication.
Our share of RITUXAN pre-tax profits in the U.S. decreased to 39% from 40% in February 2016 when GAZYVA was approved by the FDA as a new treatment for follicular lymphoma and further decreased to 37.5% in the third quarter of 2017 as gross sales of GAZYVA in the U.S. for the preceding 12-month period exceeded $150.0 million.
In addition, should the FDA approve an anti-CD20 product other than OCREVUS or GAZYVA that is acquired or developed by Genentech and subject to the collaboration agreement, our share of the co-promotion operating profits would be between 30% and 37.5% based on certain events.
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GAZYVA Profit Share
Our current pretax profit-sharing formula for GAZYVA provides for a 35% share on the first $50.0 million of operating profits earned each calendar year. Our share of annual profits in excess of $50.0 million varies, as summarized in the table below, upon the following events:
| Until First GAZYVA Threshold Date | 39.0 | % |
| After First GAZYVA Threshold Date until Second GAZYVA Threshold Date | 37.5 | % |
| After Second GAZYVA Threshold Date | 35.0 | % |
In 2018 the 37.5% GAZYVA profit-sharing threshold was met during the third quarter. In 2017 and 2016 our share of operating profits on GAZYVA was 35%.
In November 2017 the FDA approved GAZYVA in combination with chemotherapy, followed by GAZYVA alone, for people with previously untreated advanced follicular lymphoma.
Revenues from Anti-CD20 Therapeutic Programs
Revenues from anti-CD20 therapeutic programs are summarized as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Biogen's share of pre-tax profits in the U.S. for RITUXAN and GAZYVA, including the reimbursement of selling and development expenses | $ | 1,431.9 | $ | 1,316.4 | $ | 1,249.5 | |||||
| Other revenues from anti-CD20 therapeutic programs | 548.3 | 242.8 | 65.0 | ||||||||
| Total revenues from anti-CD20 therapeutic programs | $ | 1,980.2 | $ | 1,559.2 | $ | 1,314.5 |
In 2018 the 37.5% RITUXAN profit-sharing threshold was met during the first quarter. In 2017 the 39% profit-sharing threshold was met during the first quarter and further decreased to 37.5% in the third quarter of 2017 as gross sales of GAZYVA in the U.S. for the preceding 12-month period exceeded $150.0 million. In 2016, the 39% profit-sharing threshold was met during the first quarter.
Prior to regulatory approval, we record our share of the expenses incurred by the collaboration for the development of anti-CD20 products in research and development expense in our consolidated statements of income. After an anti-CD20 product is approved, we record our share of the development expenses related to that product as a reduction of our share of pre-tax profits in revenues from anti-CD20 therapeutic programs.
Ionis Pharmaceuticals, Inc.
Product Collaborations
SPINRAZA
In January 2012 we entered into an exclusive worldwide option and collaboration agreement with Ionis to develop and commercialize SPINRAZA for the treatment of SMA. SPINRAZA was approved for the treatment of SMA in the U.S., E.U. and Japan in December 2016, June 2017 and July 2017, respectively.
For the years ended December 31, 2018, 2017 and 2016, we recognized product revenues of $1,724.2 million, $883.7 million and $4.6 million, respectively, on our sales of SPINRAZA. Under our agreement with Ionis, we make royalty payments to Ionis on annual worldwide net sales of SPINRAZA using a tiered royalty rate between 11% and 15%, which are recognized in cost of sales within our consolidated statements of income. Royalty cost of sales related to sales of SPINRAZA for the years ended December 31, 2018, 2017 and 2016, totaled $238.0 million, $112.4 million and $0.5 million, respectively.
During the third quarter of 2016, upon the exercise of our option to develop and commercialize SPINRAZA, we paid a $75.0 million license fee to Ionis, which was recorded as research and development expense in our consolidated statements of income. In addition, during 2017 we made milestone payments to Ionis totaling $150.0 million related to the marketing approvals discussed above, which were capitalized in intangible assets, net in our consolidated balance sheets.
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During 2018 and 2017 no clinical trial payments were made to Ionis due to the completion of study activities. During 2016 we made clinical trial payments of $35.3 million related to the advancement of the program, which were recorded in investments and other assets in our consolidated balance sheets as they represented prepaid research and development expenditures. As of December 31, 2017, these prepaid research and development amounts were fully expensed as the services were provided.
For the years ending December 31, 2018, 2017 and 2016, $285.0 million, $234.5 million and $257.8 million, respectively, were reflected in total costs and expenses in our consolidated statements of income related to the advancement and commercialization of the program.
Antisense Therapeutics
In December 2012 we entered into an agreement with Ionis for the development and commercialization of up to three therapeutic targets.
Under this agreement, Ionis is 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 have an option to license the product candidate until completion of the Phase 2 trial. If we exercise our option, we will pay a license fee of up to $70.0 million to Ionis and assume global development, regulatory and commercialization responsibilities. Ionis is eligible to 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.
Upon entering into this agreement, we made an upfront payment of $30.0 million to Ionis and agreed to make potential additional payments, prior to licensing, of up to $10.0 million based on the development of the selected product candidate as well as a mark-up of the cost estimate of the Phase 1 and Phase 2 trials. During 2015 we recognized this $10.0 million developmental milestone upon the selection of BIIB080 (also known as IONIS-MAPTRx), which is currently in Phase 1 development for the treatment of AD.
Research Collaborations
2018 Ionis Agreement
In June 2018 we closed the 2018 Ionis Agreement, which is a 10-year exclusive agreement with Ionis to develop novel ASO drug candidates for a broad range of neurological diseases for a total payment of $1.0 billion, consisting of an upfront payment of $375.0 million and the purchase of approximately 11.5 million shares of Ionis' common stock at a cost of $625.0 million.
Upon closing, we recorded $50.9 million of the $375.0 million upfront payment as prepaid services in our consolidated balance sheets and recognized the remaining $324.1 million as research and development expense in our consolidated statements of income. The amount recorded as prepaid services represented the value of the employee resources committed to the arrangement to provide research and discovery services over the term of the agreement.
The 11.5 million shares of Ionis' common stock were purchased at a premium to their fair value at the transaction closing date. The premium consisted of acquiring the shares at a price above the fair value based on the trailing 10-day weighted-average close price prior to entering into the 2018 Ionis Agreement in April 2018 and the effect of certain holding period restrictions. We recorded an asset of $462.9 million in investments and other assets in our consolidated balance sheets reflecting the fair value of the common stock as of the purchase date and a charge of $162.1 million to research and development expense in our consolidated statements of income in the second quarter of 2018 reflecting the premium paid for the common stock.
Our investment in Ionis' common stock is remeasured each reporting period. Changes in the fair value of our investment in Ionis' common stock, including the effect of the holding period restrictions, are reflected in other income (expense), net in our consolidated statements of income. For additional information on the fair value of our investment in Ionis' common stock, please read Note 9, Financial Instruments, to these consolidated financial statements.
We have the option to license therapies arising out of this agreement and will be responsible for the development and commercialization of such therapies. We may pay development milestones to Ionis of up to $125.0
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million or $270.0 million for each program, depending on the indication plus an annual license fee, as well as royalties on potential net commercial sales.
2017 SMA Collaboration Agreement
In December 2017 we entered into a new collaboration agreement with Ionis to identify new ASO drug candidates for the treatment of SMA. Under this agreement, we have the option to license therapies arising out of this collaboration and will be responsible for their development and commercialization of these therapies.
Upon entering into this agreement, we made a $25.0 million upfront payment to Ionis and we may pay Ionis up to $260.0 million in additional development and regulatory milestone payments if new drug candidates advance to marketing approval. Upon commercialization, we may also pay Ionis up to $800.0 million in additional performance-based milestone payments and tiered royalties on potential net sales of such therapies.
2013 Long-term Strategic Research Agreement
In September 2013 we entered into a six-year research collaboration agreement with Ionis under which both companies collaborate to perform discovery level research and subsequent development and commercialization activities of antisense or other therapeutics for the treatment of neurological diseases. Under this agreement, Ionis performs research on a set of neurological targets identified within the agreement.
Ionis is eligible to receive milestone payments, license fees and royalty payments for all product candidates developed through this collaboration, with the specific amount dependent upon the modality of the product candidate advanced by us under the terms of the 2013 agreement.
For non-ALS antisense product candidates, Ionis will be responsible for global development through the completion of a Phase 2 trial and we will provide advice on the clinical trial design and regulatory strategy. For ALS antisense product candidates, we are responsible for global development, clinical trial design and regulatory strategy. We have an option to license a product candidate until completion of the Phase 2 trial. If we exercise our option, we will pay Ionis up to a $70.0 million license fee and assume global development, regulatory and commercialization responsibilities. Ionis could receive additional milestone payments upon the achievement of certain regulatory milestones of up to $130.0 million, plus additional amounts related to the cost of clinical trials conducted by Ionis under the collaboration, and royalties on future sales if we successfully develop the product candidate after option exercise.
In December 2018 we exercised our option with Ionis and obtained a worldwide, exclusive, royalty-bearing license to develop and commercialize BIIB067 (IONIS-SOD1Rx), an investigational treatment for ALS with superoxide dismutase 1 (SOD1) mutations. In connection with the option exercise, we made an upfront payment of $35.0 million to Ionis. Future payments may include potential post-licensing milestone payments of up to $55.0 million and royalties in the low to mid-teen percentages on potential annual worldwide net sales. We are solely responsible for the costs and expenses related to the development, manufacturing and commercialization of BIIB067 following the option exercise. During the years ending December 31, 2018, 2017 and 2016, we incurred milestones of $53.0 million, $12.0 million and $5.5 million, respectively, related to the advancement of BIIB067 and other neurological targets identified.
Eisai Co., Ltd.
BAN2401 and Elenbecestat Collaboration
We have a collaboration agreement with Eisai Co., Ltd. (Eisai) to jointly develop and commercialize BAN2401, a monoclonal antibody that targets amyloid beta aggregates, and elenbecestat, the oral BACE (base amyloid cleaving enzyme) inhibitor, two Eisai product candidates for the treatment of AD (the BAN2401 and Elenbecestat Collaboration). Eisai serves as the global operational and regulatory lead for BAN2401 and elenbecestat and all costs, including research, development, sales and marketing expenses, are shared equally between us and Eisai; and, if applicable, upon marketing approval in major markets, such as the U.S., the E.U. and Japan, we and Eisai will co-promote BAN2401 and elenbecestat and share profits equally. In smaller markets, Eisai will distribute these products and pay us a royalty. In addition, the BAN2401 and Elenbecestat Collaboration provides both parties with certain rights and obligations in the event of a change in control of either party.
The BAN2401 and Elenbecestat Collaboration also provided Eisai with an option to jointly develop and commercialize aducanumab, our anti-amyloid beta antibody candidate for the treatment of AD (Aducanumab Option),
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and an option to jointly develop and commercialize one of our anti-tau monoclonal antibodies (Anti-Tau Option). Upon exercise of each of the Aducanumab Option and the Anti-Tau Option, a separate collaboration agreement would be entered into with Eisai on terms and conditions that mirror the BAN2401 and Elenbecestat Collaboration agreement. Eisai has not yet exercised its Anti-Tau Option.
In October 2017 Eisai exercised its Aducanumab Option and we entered into a new collaboration agreement for the joint development and commercialization of aducanumab (Aducanumab Collaboration Agreement).
Under the Aducanumab Collaboration Agreement, the two companies will continue to jointly develop BAN2401 and elenbecestat in accordance with the BAN2401 and Elenbecestat Collaboration; however, we are no longer required to pay Eisai any milestone payments for products containing BAN2401 and we are no longer entitled to any potential development and commercial milestone payments from Eisai in relation to aducanumab. The two companies will co-promote aducanumab with a region-based profit split and we will continue to lead the ongoing Phase 3 development of aducanumab.
For the years ended December 31, 2018, 2017 and 2016, sales and marketing expenses related to the BAN2401 and Elenbecestat Collaboration were immaterial.
A summary of development expenses related to the BAN2401 and Elenbecestat Collaboration is as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Total development expense incurred by the collaboration related to the advancement of BAN2401 and Elenbecestat | $ | 232.0 | $ | 146.2 | $ | 95.1 | |||||
| Biogen's share of BAN2401 and Elenbecestat development expense reflected in research and development expense in our consolidated statements of income | $ | 116.0 | $ | 74.3 | $ | 50.5 |
In addition, during the fourth quarter of 2016 we recognized a $50.0 million milestone payment related to the initiation of a Phase 3 trial for elenbecestat, which is included in research and development expense in our consolidated statements of income. We could pay Eisai up to an additional $625.0 million under the BAN2401 and Elenbecestat Collaboration based on the future achievement of certain development, regulatory and commercial milestones.
Aducanumab Collaboration Agreement
For the period through March 31, 2018, we were responsible for 100% of development costs incurred by the collaboration for the advancement of aducanumab (aducanumab development expense). For the period April 1, 2018 through December 31, 2018, Eisai reimbursed us for 15% of aducanumab development expense incurred and beginning January 1, 2019, is reimbursing us for 45% of aducanumab development expense incurred.
Upon commercialization, both companies will co-promote aducanumab with a region-based profit split. We will receive a 55% share of the potential profits (losses) in the U.S., a 68.5% share of the potential profits (losses) in the E.U. and a 20% share of the potential profits (losses) in Japan and Asia, excluding China and South Korea. The two companies will continue to share equally in the potential profits (losses) in rest of world markets. Sales and marketing expense incurred before commercialization are shared in proportion to the same region-based profit split that will be utilized to co-promote aducanumab.
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A summary of development and sales and marketing expenses related to the Aducanumab Collaboration Agreement is as follows:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Total aducanumab development expense | $ | 264.8 | $ | 268.7 | $ | 209.5 | |||||
| Biogen's share of aducanumab development expense reflected in research and development expense in our consolidated statements of income | $ | 234.6 | $ | 268.7 | $ | 209.5 | |||||
| Total aducanumab sales and marketing expense incurred by the collaboration | $ | 50.6 | $ | 23.6 | $ | 18.3 | |||||
| Biogen's share of aducanumab sales and marketing expense reflected in selling, general and administrative expense in our consolidated statements of income | $ | 27.3 | $ | 23.6 | $ | 18.3 |
We and Eisai co-promote AVONEX, TYSABRI and TECFIDERA in Japan in certain settings and Eisai distributes AVONEX, TYSABRI, TECFIDERA and PLEGRIDY in India and other Asia-Pacific markets, excluding China.
Anti-Tau Option
Eisai may exercise the Anti-Tau Option after completion of the Phase 1 clinical trial of such anti-tau monoclonal antibody. If Eisai exercises its Anti-Tau Option, we will receive an upfront payment from Eisai and will be entitled to additional development and commercial milestone payments.
Alkermes
In November 2017 we entered into an exclusive license and collaboration agreement with Alkermes Pharma Ireland Limited, a subsidiary of Alkermes plc (Alkermes), for diroximel fumarate (BIIB098), a novel fumarate in Phase 3 development for the treatment of RMS. In December 2018 Alkermes submitted a New Drug Application (NDA) to the FDA for diroximel fumarate. Alkermes is seeking approval of diroximel fumarate under the 505(b)(2) regulatory pathway. If approved, we intend to market diroximel fumarate under the brand name VUMERITY. This name has been conditionally accepted by the FDA and will be confirmed upon approval.
Under this agreement, we received an exclusive, worldwide license to develop and commercialize diroximel fumarate and will pay Alkermes a mid-teens percentage royalty on potential worldwide net commercial sales of diroximel fumarate. Royalties payable on net commercial sales of diroximel fumarate are subject, under certain circumstances, to tiered minimum payment requirements for a period of five years following FDA approval. Alkermes is eligible to receive royalties in the high-single digits to sub-teen double digits of annual net commercial sales upon successful development and commercialization of new product candidates other than diroximel fumarate, developed under the exclusive license from Alkermes. Alkermes will maintain responsibility for regulatory interactions with the FDA through the potential approval of the NDA for diroximel fumarate.
Upon entering into this agreement, we made a $28.0 million upfront payment to Alkermes representing our share of diroximel fumarate development costs already incurred in 2017. Beginning in 2018 we became responsible for all development expenses related to diroximel fumarate. In December 2017 we also recognized a $50.0 million expense, which was paid to Alkermes in 2018, enabling the continuation of the agreement to develop diroximel fumarate. Both the $28.0 million upfront payment and $50.0 million continuation payment were recorded as research and development expense in our consolidated financial statements.
We may also pay Alkermes an additional $150.0 million milestone payment upon a regulatory achievement related to diroximel fumarate under this agreement. For the years ended December 31, 2018 and 2017, we recorded $68.7 million and $80.3 million, respectively, in research and development expense in our consolidated statements of income related to this collaboration.
In connection with the license and collaboration agreement, we may also enter into a supply agreement with Alkermes for the commercial supply of diroximel fumarate and other products developed under the license and collaboration agreement.
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Bristol-Myers Squibb Company
In June 2017 we completed an exclusive license agreement with Bristol-Myers Squibb Company (BMS) for the development and potential commercialization of BIIB092, a Phase 2 investigational therapy with potential in AD and PSP. BIIB092 is an antibody targeting tau, the protein that forms the deposits, or tangles, in the brain associated with AD and other neurodegenerative tauopathies such as PSP.
Under this agreement, we received worldwide rights to BIIB092 and are responsible for the full development and potential commercialization of BIIB092 in AD and PSP.
Upon entering into this agreement, we made an upfront payment of $300.0 million to BMS and we may pay BMS up to $410.0 million in additional milestone payments, and potential royalties. We also assumed all remaining obligations to the former shareholders of iPierian, Inc. (iPierian) related to BMS’s acquisition of iPierian in 2014. In June 2017 we recognized a $60.0 million developmental milestone payable to the former shareholders of iPierian upon dosing of the first patient in the Phase 2 study of BIIB092 for PSP and we may pay the former shareholders of iPierian up to $490.0 million in remaining milestone payments as well as potential royalties on net commercial sales. Both the $300.0 million upfront payment and the $60.0 million developmental milestone payment were recorded as research and development expense in our consolidated statements of income.
For the year ended December 31, 2018, we recorded $97.0 million in research and development expense in our consolidated statements of income related to this collaboration.
Acorda Therapeutics, Inc.
In June 2009 we entered into a collaboration and license agreement with Acorda Therapeutics, Inc. (Acorda) to develop and commercialize products containing fampridine, such as FAMPYRA, in markets outside the U.S. We are responsible for all regulatory activities and the future clinical development of related products in those markets.
Under this agreement, we pay tiered royalties based on the level of ex-U.S. net sales and we may pay potential milestone payments based on the successful achievement of certain regulatory and commercial milestones, which would be capitalized as intangible assets upon achievement of the milestones and amortized utilizing an economic consumption model. The next expected milestone would be $15.0 million, due if ex-U.S. net sales reach $100.0 million over a period of four consecutive quarters. Royalty payments are recognized in cost of sales within our consolidated statements of income.
In connection with the collaboration and license agreement, we also entered into a supply agreement with Acorda for the commercial supply of FAMPYRA. This agreement is a sublicense arrangement of an existing agreement between Acorda and Alkermes, who acquired Elan Drug Technologies, the original party to the license with Acorda.
For the years ending December 31, 2018, 2017 and 2016, total cost of sales related to royalties and commercial supply of FAMPYRA reflected in our consolidated statements of income were $36.5 million, $34.0 million and $31.5 million, respectively.
AbbVie Inc.
We have a collaboration agreement with AbbVie for the development and commercialization of ZINBRYTA, which was approved for the treatment of RMS in the U.S. in May 2016 and in the E.U. in July 2016. In March 2018 we and AbbVie announced the voluntary worldwide withdrawal of ZINBRYTA for RMS.
Under this agreement, we and AbbVie conducted ZINBRYTA co-promotion activities in the U.S., E.U. and Canadian territories (Collaboration Territory), where development and commercialization costs and profits were shared equally. Outside of the Collaboration Territory, we were solely responsible for development and commercialization of ZINBRYTA and paid a tiered royalty to AbbVie as a percentage of net sales in the low to high teens.
We were responsible for manufacturing and research and development activities in both the Collaboration Territory and outside the Collaboration Territory and recorded these activities within their respective lines in our consolidated statements of income, net of any reimbursement of research and development expenditures received from AbbVie. For the years ended December 31, 2018, 2017 and 2016, the collaboration incurred $32.4 million,
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$39.9 million and $48.6 million for research and development activities, respectively, for which we recognized $16.2 million, $19.9 million and $24.3 million, respectively, in our consolidated statements of income.
Research and development expense recognized in our consolidated statements of income for the year ended December 31, 2018, includes a $12.8 million charge recognized in the first quarter of 2018 related to the termination of research and development contracts and clinical trials as a result of the voluntary worldwide withdrawal of ZINBRYTA.
Prior to regulatory approval, we also recognized $22.0 million of pre-commercialization expenses within our selling, general and administrative expense, which represented 50% of the collaboration's pre-commercialization costs for 2016. After ZINBRYTA was approved by the FDA and the EMA in 2016, we began to recognize our share of the collaboration activities within the Collaboration Territories as described below under Co-promotion Profits and Losses.
Co-promotion Profits and Losses
In the U.S., AbbVie recognized revenues on sales to third parties and we recognized our 50% share of the co-promotion profits or losses as a component of total revenues in our consolidated statements of income.
The collaboration began selling ZINBRYTA in the U.S. in the third quarter of 2016 and ceased selling ZINBRYTA in the U.S. in March 2018 in connection with the voluntary worldwide withdrawal of ZINBRYTA for RMS. For the years ended December 31, 2018, 2017 and 2016, we recognized a net reduction in revenues from collaborative and other relationships, a component of other revenues, of $8.6 million, $16.9 million and $21.9 million, respectively, to reflect our share of the overall net losses within the collaboration for each of those years.
The following table provides a summary of the U.S. collaboration and our share of the co-promotion losses on ZINBRYTA in the U.S.:
| For the Year Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Product revenues, net | $ | 7.5 | $ | 53.1 | $ | 6.1 | |||||
| Costs and expenses | 25.3 | 92.6 | 50.0 | ||||||||
| Co-promotion losses in the U.S. | $ | 17.8 | $ | 39.5 | $ | 43.9 | |||||
| Biogen's share of co-promotion losses in the U.S. | $ | 8.6 | $ | 16.9 | $ | 21.9 |
In the E.U. and Canada, we recognized revenues on sales to third parties in product revenues, net in our consolidated statements of income. We began to recognize net product revenues on sales of ZINBRYTA in the E.U. and Canada in the third quarter of 2016 and first quarter of 2017, respectively, and ceased selling ZINBRYTA in the E.U. and Canada in March 2018 in connection with the voluntary worldwide withdrawal of ZINBRYTA for RMS. For the years ended December 31, 2018, 2017 and 2016, we recognized net product revenues on the sales of ZINBRYTA in the E.U. and Canada of $1.4 million, $52.7 million and $7.8 million, respectively. We also recorded the related cost of revenues and sales and marketing expenses to their respective line items in our consolidated statements of income as these costs were incurred.
We reimbursed AbbVie for their 50% share of the co-promotion profits or losses in the E.U. and Canada. This reimbursement was recognized in collaboration profit (loss) sharing in our consolidated statements of income. For the year ended December 31, 2018, we recognized net profit-sharing income of $2.4 million to reflect AbbVie's 50% sharing of the net collaboration losses in the E.U. and Canada, as compared to net profit-sharing expense of $1.3 million for the year ended December 31, 2017, and net profit-sharing income of $4.9 million for the year ended December 31, 2016.
Other Research and Discovery Arrangements
These arrangements may include the potential for future milestone payments based on the achievement of certain clinical and commercial development payable over a period of several years.
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C4 Therapeutics
In December 2018 we entered into a collaborative research and license agreement with C4 Therapeutics (C4T) to investigate the use of C4T’s novel protein degradation platform to discover and develop potential new treatments for neurological diseases, such as AD and Parkinson’s disease.
Under the agreement, C4T will provide expertise and research services in targeted protein degradation and we will provide neuroscience expertise and drug development capabilities. We will be responsible for the development and potential commercialization of any therapies resulting from this collaboration.
In connection with this agreement we made an upfront payment of $45.0 million to C4T, of which $17.0 million was recorded as research and development expense in our consolidated statements of income and $28.0 million was recorded as prepaid research and development expenditures within investments and other assets in our consolidated balance sheets. We may also pay C4T up to a total of $370.0 million in additional milestone payments as well as potential royalties on net commercial sales.
University of Pennsylvania
We have a collaboration and alliance with the University of Pennsylvania (UPenn) to advance gene therapy and gene editing technologies. In December 2018 we notified UPenn that we will be terminating certain programs under our collaboration and alliance with UPenn, including the development of therapeutic approaches that target the eye, skeletal muscle and central nervous system and research and validation of next generation gene transfer technology using adeno-associated virus (AAV) gene delivery vectors and exploring the expanded use of genome editing technology as a potential therapeutic platform. The termination of these programs will be effective in May 2019. This termination did not impact our collaboration with UPenn for the development of BIIB089 for the treatment of SMA.
Upon entering into this agreement we made an upfront payment of $20.0 million to UPenn, which was recorded as research and development expense in our consolidated statements of income, and made prepaid research and development expenditures of $15.0 million, which was recorded in investments and other assets in our consolidated balance sheets. During 2017 we made additional prepaid research and development expenditures to UPenn of $29.1 million related to the advancement of the programs under this agreement. These prepaid research and development amounts were expensed as the services were provided, of which no amounts remain as a prepaid asset as of December 31, 2018.
We may be required to make future payments of over $137.0 million in research funding, options and milestone payments in relation to the BIIB089 program if we are successful and exercise our related options under this agreement. UPenn is also eligible to receive royalties in the mid-single digit percentages of annual net commercial sales upon successful development and commercialization of BIIB089. UPenn is no longer entitled to any potential future research funding, options and milestone payments from us in relation to the development of programs other than BIIB089.
For the years ended December 31, 2018, 2017 and 2016, we recorded $64.0 million, $33.0 million and $27.8 million, respectively, in research and development expense in our consolidated statements of income related to this collaboration.
Applied Genetic Technologies Corporation
We have a collaboration and license agreement to develop gene-based therapies for multiple ophthalmic diseases with Applied Genetic Technologies Corporation (AGTC). This collaboration focused on the development of BIIB087, an investigational AAV-based gene therapy for the treatment of X-linked Retinoschisis (XLRS), and BIIB088, an investigational AAV-based gene therapy for the treatment of X-Linked Retinitis Pigmentosa (XLRP). This collaboration also provided us with options to early stage discovery programs in two ophthalmic diseases and one non-ophthalmic condition.
In December 2018 we notified AGTC of the termination of our collaboration agreement with AGTC. The termination of this collaboration agreement will be effective in March 2019 and we will have no further involvement in the development of any of the programs under this collaboration. Accordingly, AGTC is no longer entitled to any potential development, regulatory and commercial milestone payments from us in relation to the development of these programs.
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In connection with the collaboration and license agreement, we also received a manufacturing license under which we received an exclusive license to use AGTC’s proprietary technology platform to make AAV vectors for up to six genes, three of which are in AGTC’s discretion, in exchange for payment of milestones and royalties. Our termination of the collaboration agreement does not impact our rights under the manufacturing license.
Upon entering into the collaboration agreement we made an upfront payment of $124.0 million to AGTC. The $124.0 million upfront payment reflected a $30.0 million equity investment in AGTC, including a $7.5 million premium on our equity investment, prepaid research and development expenditures of $58.4 million and total licensing and other fees of $35.6 million. The $35.6 million in total licensing and other fees and the $7.5 million premium on our equity investment were recorded as a charge to research and development expense in our consolidated statements of income. The remaining $22.5 million equity investment and the $58.4 million of prepaid research and development expenditures were recorded in investments and other assets in our consolidated balance sheets. These prepaid research and development amounts were expensed as the services were provided. No amounts remain as a prepaid asset as of December 31, 2018.
For the years ended December 31, 2018, 2017 and 2016, we recorded $39.5 million, $27.5 million and $26.5 million, respectively, which were reflected in research and development expense in our consolidated statements of income related to this collaboration.
Other
For the years ended December 31, 2018, 2017 and 2016, we entered into several research, discovery and other related arrangements that resulted in $5.0 million, $10.0 million and $10.3 million, respectively, recorded as research and development expense in our consolidated statements of income.
Samsung Bioepis Co., Ltd.
Joint Venture Agreement
In February 2012 we entered into a joint venture agreement with Samsung BioLogics, establishing an entity, Samsung Bioepis, to develop, manufacture and market biosimilar products. Samsung BioLogics contributed 280.5 billion South Korean won (approximately $250.0 million) for an 85% stake in Samsung Bioepis and we contributed 49.5 billion South Korean won (approximately $45.0 million) for the remaining 15% ownership interest. In June 2018 we exercised our option under our joint venture agreement to increase our ownership percentage in Samsung Bioepis from approximately 5%, which reflected the effect of previous equity financings in which we did not participate, to approximately 49.9%. The share purchase transaction was completed in November 2018 and, upon closing, we paid 759.5 billion South Korean won ($676.6 million) to Samsung BioLogics. As of December 31, 2018, our ownership percentage remains approximately 49.9%.
We recognize our share of the results of operations related to our investment in Samsung Bioepis under the equity method of accounting one quarter in arrears when the results of the entity become available, which is reflected as equity in income (loss) of investee, net of tax in our consolidated statements of income. During 2015, as our share of losses exceeded the carrying value of our initial investment, we suspended recognizing additional losses. In the first quarter of 2019, depending on the results of Samsung Bioepis, we expect to restart recognizing our share of Samsung Bioepis' income (losses) and we will begin recognizing the amortization of certain basis differences resulting from our November 2018 investment.
As of December 31, 2018, the carrying value of our investment in Samsung Bioepis totaled 759.5 billion South Korean won ($680.6 million), which is classified as a component of investments and other assets within our consolidated balance sheet.
Commercial Agreement
In December 2013 pursuant to our rights under the joint venture agreement with Samsung BioLogics, we entered into an agreement with Samsung Bioepis to commercialize, over a 10-year term, 3 anti-tumor necrosis factor (TNF) biosimilar product candidates in Europe and in the case of BENEPALI, Japan. Under this agreement, we have made upfront and clinical development milestone payments totaling $46.0 million, which were recorded as research and development expense in our consolidated statements of income as the programs they relate to had not achieved regulatory approval. We also agreed to make additional milestone payments of $25.0 million upon regulatory approval in the E.U. for each of the three anti-TNF biosimilar product candidates. IMRALDI, an adalimumab biosimilar referencing HUMIRA, FLIXABI, an infliximab biosimilar referencing REMICADE, and BENEPALI, an etanercept
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biosimilar referencing ENBREL, received regulatory approval in the E.U. in August 2017, May 2016 and January 2016, respectively, and we capitalized the related milestone payments totaling $75.0 million as intangible assets, net in our consolidated balance sheets.
In April 2018 we and Samsung Bioepis announced an agreement with AbbVie related to the commercialization of IMRALDI. Under the terms of the agreement, AbbVie granted us and Samsung Bioepis patent licenses for the use and sale of IMRALDI in Europe, on a country-by-country basis, and we make royalty payments to AbbVie on behalf of Samsung Bioepis. We began to recognize revenues on sales of IMRALDI to third parties in the E.U. in the fourth quarter of 2018.
We reflect revenues on sales of IMRALDI, FLIXABI and BENEPALI to third parties in product revenues, net in our consolidated statements of income and record the related cost of revenues and sales and marketing expenses in our consolidated statements of income to their respective line items when these costs are incurred. Royalty payments to AbbVie on sales of IMRALDI are recognized in cost of sales within our consolidated statements of income.
We share 50% of the profit or loss related to our commercial agreement with Samsung Bioepis, which is recognized in collaboration profit (loss) sharing in our consolidated statements of income. For the years ended December 31, 2018, 2017 and 2016, we recognized a net profit-sharing expense of $187.4 million, $111.0 million and $15.1 million, respectively, to reflect Samsung Bioepis' 50% sharing of the net collaboration profits.
Other Services
Simultaneous with the formation of Samsung Bioepis, we also entered into a license agreement, a technical development services agreement and a manufacturing agreement with Samsung Bioepis.
Under the license agreement, we granted Samsung Bioepis an exclusive license to use, develop, manufacture and commercialize biosimilar products created by Samsung Bioepis using Biogen product-specific technology. In exchange, we will receive single digit royalties on all biosimilar products developed and commercialized by Samsung Bioepis.
Under the technical development services agreement, we provide Samsung Bioepis technical development and technology transfer services, which include, but are not limited to, cell culture development, purification process development, formulation development and analytical development.
Under our manufacturing agreement, we manufacture clinical and commercial quantities of bulk drug substance of biosimilar products for Samsung Bioepis pursuant to contractual terms. Under limited circumstances, we may also supply Samsung Bioepis with quantities of drug product of biosimilar products for use in clinical trials through arrangements with third-party contract manufacturers.
For the years ended December 31, 2018, 2017 and 2016, we recognized $96.4 million, $42.7 million and $20.2 million, respectively, in revenues under our license, technical development services and manufacturing agreements, which is reflected in revenues from collaborative and other relationships, as a component of other revenues in our consolidated statements of income.
- Investments in Variable Interest Entities
Consolidated Variable Interest Entities
Our consolidated financial statements include the financial results of variable interest entities in which we are the primary beneficiary. The following are our significant variable interest entities.
Neurimmune SubOne AG
In November 2007 we entered into a collaboration and license agreement with Neurimmune SubOne AG (Neurimmune) for the development and commercialization of antibodies for the treatment of AD, including aducanumab, our anti-amyloid beta antibody candidate for the treatment of AD. We are responsible for the development, manufacturing and commercialization of all collaboration products. This agreement is effective for the longer of the duration of certain patents relating to a licensed product or 12 years from the first commercial sale of any product using such a licensed compound.
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We consolidate the results of Neurimmune as we determined that we are the primary beneficiary of Neurimmune because we have the power through the collaboration to direct the activities that most significantly impact the entity’s economic performance and we are required to fund 100% of the research and development costs incurred in support of the collaboration. Under this agreement, we are also required to pay royalties on net sales of any resulting commercial products and make payments upon the achievement of certain milestone events.
In October 2017 we amended the terms of our collaboration and license agreement with Neurimmune (as amended, the Neurimmune Agreement). Under the Neurimmune Agreement, we made a $150.0 million payment to Neurimmune in exchange for a 15% reduction in the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab. In May 2018 we made an additional $50.0 million payment to Neurimmune to further reduce the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab, by an additional 5%. Our royalty rates payable on products developed under the Neurimmune Agreement, including royalty rates payable on potential commercial sales of aducanumab, will now range from the high single digits to sub-teens. As we consolidate the results of Neurimmune, we treated these payments as distributions and recognized them as charges to noncontrolling interest in the fourth quarter of 2017 and the second quarter of 2018, as applicable.
Research and development costs for which we reimburse Neurimmune are reflected in research and development expense in our consolidated statements of income. During the years ending December 31, 2018, 2017 and 2016, amounts reimbursed were immaterial.
The assets and liabilities of Neurimmune are not significant to our consolidated 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.
Under the terms of our Aducanumab Collaboration Agreement, Eisai had an option to share in the benefit and cost associated with the royalty reductions discussed above; however, Eisai did not elect to share in the benefit and cost with respect to either the October 2017 or May 2018 royalty reductions, which will impact the amount of profits (losses) on potential commercial sales of aducanumab to be shared with Eisai. For additional information on our collaboration arrangements with Eisai, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Unconsolidated Variable Interest Entities
We have relationships with variable interest entities that 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.
As of December 31, 2018 and 2017, the carrying value of our investments in certain biotechnology companies representing potential unconsolidated variable interest entities totaled $28.7 million and $48.3 million, respectively. Our maximum exposure to loss related to these variable interest entities is limited to the carrying value of our investments.
We have also entered into research collaboration agreements with certain variable interest entities where we are required to fund certain development activities. These development activities are included in research and development expense in our consolidated statements of income as they are incurred. We have provided no financing to these variable interest entities other than previously contractually required amounts.
- Litigation
We are currently involved in various claims and legal proceedings, including the matters described below. For information as to our accounting policies relating to claims and legal proceedings, including use of estimates and contingencies, please read Note 1, Summary of Significant Accounting Policies, to these consolidated financial statements.
With respect to some loss contingencies, an estimate of the possible loss or range of loss cannot be made until management has further information, including, for example, (i) which claims, if any, will survive dispositive motion practice; (ii) information to be obtained through discovery; (iii) information as to the parties' damages claims and supporting evidence; (iv) the parties’ legal theories; and (v) the parties' settlement positions.
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The claims and legal proceedings in which we are involved also include challenges to the scope, validity or enforceability of the patents relating to our products, pipeline or processes, and challenges to the scope, validity or enforceability of the patents held by others. These include claims by third parties that we infringe their patents. An adverse outcome in any of these proceedings could result in one or more of the following and have a material impact on our business or consolidated results of operations and financial position: (i) loss of patent protection; (ii) inability to continue to engage in certain activities; and (iii) payment of significant damages, royalties, penalties and/or license fees to third parties.
Loss Contingencies
IMRALDI Patent Matters
In September 2018 Fresenius Kabi Deutschland GmbH (Fresenius Kabi) commenced proceedings for damages and injunctive relief against Biogen France SAS in the Tribunal de Grande Instance de Paris, alleging that IMRALDI, the adalimumab biosimilar product of Samsung Bioepis UK Limited that Biogen has commercialized in Europe, infringes the French counterpart of European Patent No. 3 148 510 (the '510 Patent), which was issued in June 2018 and expires in March 2035. In October 2018 Fresenius Kabi commenced preliminary injunction proceedings against Biogen (Denmark) Manufacturing ApS and Biogen Denmark A/S in Denmark's Maritime and Commercial High Court alleging infringement of Danish Utility Models. In November 2018 Fresenius Kabi commenced infringement proceedings for damages and injunctive relief against Biogen Italia S.R.L. in the District Court of Milan relating to the Italian counterpart of the ‘510 Patent, and against Biogen GmbH in the Dusseldorf Regional Court relating to the German counterpart of the ‘510 Patent. No hearing has yet been set in these proceedings.
In August 2018 Biogen Idec Ltd. (Biogen UK) and Samsung Bioepis UK Limited filed an action in the United Kingdom Patents Court to revoke the United Kingdom counterpart of the '510 Patent. Fresenius Kabi has filed a counterclaim asserting infringement of the '510 Patent and seeking damages and an injunction to restrain infringement if the patent is found valid and infringed. A trial has been set for July 2019. In December 2018 Biogen B.V. and Samsung Bioepis UK Limited filed an action in the District Court of the Hague, Netherlands to revoke the Dutch counterpart of the ‘510 Patent. A trial has been set for October 2019. An estimate of the possible loss or range of loss in the above matters cannot be made at this time.
In October 2018 Gedeon Richter PLC asserted to Biogen and Samsung Bioepis UK Limited that IMRALDI infringes European Patent No. 3 212 667, which was issued in September 2018 and expires in October 2035. We dispute the assertion. An estimate of the possible loss or range of loss cannot be made at this time.
Qui Tam Litigation
In July 2015 a qui tam action filed by Michael Bawduniak on behalf of the U.S. and certain states was unsealed by the U.S. District Court for the District of Massachusetts. The action alleges sales and promotional activities in violation of the federal False Claims Act and state law counterparts and seeks single and treble damages, civil penalties, interest, attorneys’ fees and costs. Our motion to dismiss was denied in part. No trial date has been set. The U.S. has not made an intervention decision. An estimate of the possible loss or range of loss cannot be made at this time.
In May 2018 we were served with a qui tam action filed by SMSF, LLC on behalf of the U.S. and certain states in the U.S. District Court for the District of Massachusetts alleging activities by nurse-educators in violation of the federal False Claims Act and state law counterparts. The government declined to intervene, and we, other defendants and the U.S. moved to dismiss. In December 2018 the court dismissed the case with prejudice against the relator and without prejudice as to the U.S. and states. The period for an appeal has lapsed and we consider the matter closed.
In July 2018 we and certain other drug manufacturers and pharmacy benefit managers were served with a qui tam action filed by John Borzilleri on behalf of the U.S. and certain states in the U.S. District Court for the District of Rhode Island. The case alleges agreements with pharmacy benefit managers in violation of the Federal False Claims Act and state law counterparts and seeks single and treble damages, civil penalties, interest, attorneys' fees and costs. We, the other defendants and the U.S. have moved to dismiss the case and the motions are pending. No trial date has been set. An estimate of the possible loss or range of loss cannot be made at this time.
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Securities Litigation
We and certain current and former officers are defendants in an action filed by a shareholder in October 2016 in the U.S. District Court for the District of Massachusetts alleging violations of federal securities laws under 15 U.S.C §78j(b) and §78t(a) and 17 C.F.R. §240.10b-5 and seeking a declaration of the action as a class action and an award of damages, interest and attorneys' fees. In March 2018 the court dismissed the complaint with prejudice. The plaintiff's appeal is pending. An estimate of the possible loss or range of loss cannot be made at this time.
Other Matters
Hatch-Waxman Act Litigation relating to TECFIDERA Orange-Book Listed Patents
In June and July 2017, January, March, April, August and December 2018 and January 2019 we initiated patent infringement proceedings against multiple parties pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, in the U.S. District Courts.
Patent infringement proceedings pursuant to the Hatch-Waxman Act are pending against Accord Healthcare Inc., Alkem Laboratories Ltd., Amneal Pharmaceuticals LLC, Aurobindo Pharma U.S.A., Inc., Banner Life Sciences LLC, Caribe Holdings (Cayman) Co. Ltd. DBA Puracap Caribe, Cipla Limited, Glenmark Pharmaceuticals Ltd., Graviti Pharmaceuticals Pvt. Ltd., Hetero USA, Inc., Lupin Atlantis Holdings SA, Macleods Pharmaceuticals, Ltd., MSN Laboratories Pvt. Ltd., Pharmathen S.A., Prinston Pharmaceutical Inc., Sandoz Inc., Sawai USA, Inc., Shipla Medicare Limited, Slayback Pharma LLC, Sun Pharma Global FZE, Torrent Pharmaceuticals Ltd., TWi Pharmaceuticals, Inc., Windlas Healthcare Pvt. Ltd. and Zydus Pharmaceuticals (USA) Inc. in the U.S. District Court for the District of Delaware and against Mylan Pharmaceuticals Inc. in the U.S. District Court for the Northern District of West Virginia.
A trial has been set for December 2019 in the Delaware actions, and a trial date has been set for February 2020 in the West Virginia action. A trial date has not been set in the case against Banner Life Sciences LLC or the case against Hetero USA Inc. that was filed in January 2019.
Petition for Inter Partes Review filed by Mylan Pharmaceuticals, Inc.
In July 2018 Mylan Pharmaceuticals, Inc. filed a petition with the U.S. Patent Trial and Appeal Board seeking inter partes review of our U.S. Patent No. 8,399,514 (the '514 Patent). The '514 Patent includes claims covering the treatment of MS with 480 mg of dimethyl fumarate per day as provided for in our TECFIDERA label. On February 6, 2019, the U.S. Patent Trial and Appeal Board instituted inter partes review of the '514 Patent.
Interference Proceeding with Forward Pharma
In April 2015 the USPTO declared an interference between Forward Pharma’s U.S. Patent Application No. 11,576,871 and the '514 Patent. The U.S. Court of Appeals for the Federal Circuit affirmed the March 2017 ruling of the USPTO in favor of Biogen and in January 2019 denied Forward Pharma's petition for rehearing. For additional information regarding this matter, please read Note 7, Intangible Assets and Goodwill, to these consolidated financial statements.
European Patent Office Oppositions
In 2016 the EPO revoked our European patent number 2 137 537 (the '537 Patent). We have appealed to the Technical Boards of Appeal of the EPO and the appeal is pending. The '537 Patent includes claims covering the treatment of MS with 480 mg of dimethyl fumarate as provided for in our TECFIDERA label.
In March 2018 the EPO revoked Forward Pharma’s European Patent No. 2 801 355, which was issued in May 2015 and expires in October 2025. Forward Pharma has filed an appeal to the Technical Boards of Appeal of the EPO and the appeal is pending. The settlement and license agreement that we entered into with Forward Pharma in January 2017 did not resolve the issues pending in this proceeding and we and Forward Pharma intend to permit the Technical Boards of Appeal and the Enlarged Board of Appeal, if applicable, to make a final determination. For additional information regarding this matter, please read Note 7, Intangible Assets and Goodwill, to these consolidated financial statements.
TYSABRI Patent Revocation Matters
In November 2017 Bioeq GMBH, affiliated with the Polpharma Group, brought an action to the Polish Patent Office seeking to revoke Polish Patent Number 215263 (the Polish '263 Patent), the Polish patent corresponding to our European Patent Number 1 485 127 (the EU '127 Patent) ("Administration of agents to treat inflammation"). The
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Polish '263 Patent concerns administration of natalizumab (TYSABRI) to treat MS. The Polish '263 Patent was issued in 2013 and expires in February 2023. Swiss Pharma International AG, also affiliated with the Polpharma Group, filed actions in the District Court of The Hague (January 2016), the German Patents Court (March 2016) and the Commercial Court of Rome (November 2017) seeking to invalidate the Dutch, German and Italian counterparts of the EU '127 Patent, which was issued in 2011 and also concerns administration of natalizumab (TYSABRI) to treat MS. The EU '127 Patent expires in February 2023. The Dutch and German counterparts were ruled invalid and we have appealed. No date for a hearing on the merits has been set in the Polish and Italian actions.
'755 Patent Litigation
In May 2010 Biogen MA Inc. (formerly Biogen Idec MA Inc.) filed a complaint in the U.S. District Court for the District of New Jersey alleging infringement by Bayer Healthcare Pharmaceuticals Inc. (Bayer) (manufacturer, marketer and seller of BETASERON and manufacturer of EXTAVIA), EMD Serono, Inc. (EMD Serono) (manufacturer, marketer and seller of REBIF), Pfizer (co-marketer of REBIF) and Novartis Pharmaceuticals Corp. (Novartis) (marketer and seller of EXTAVIA) of our 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. The complaint seeks monetary damages, including lost profits and royalties. Bayer had previously filed a complaint against us in the same court, on May 27, 2010, seeking a declaratory judgment that it does not infringe the '755 Patent and that the '755 Patent is invalid, and seeking monetary relief in the form of attorneys' fees, costs and expenses.
Bayer, Pfizer, Novartis and EMD Serono all filed counterclaims seeking declaratory judgments of patent invalidity and non-infringement, and seeking monetary relief in the form of costs and attorneys' fees.
In September 2018, following a trial against EMD Serono and Pfizer, the court granted Biogen's motion for judgment as a matter of law that the '755 Patent is infringed and valid and ordered a new trial on all damages issues. The court has not yet scheduled the trial on damages or a trial against Bayer and Novartis. In October 2018 EMD Serono and Pfizer filed an appeal from the judgment in the U.S. Court of Appeals for the Federal Circuit, which is pending.
Government Matters
We have learned that state and federal governmental authorities are investigating our sales and promotional practices and have received related subpoenas. We are cooperating with the government.
We have received subpoenas and other requests from the federal government for documents and information relating to our relationship with non-profit organizations that assist patients taking drugs sold by Biogen and Biogen's co-pay assistance programs. We are cooperating with the government.
In July 2016 we received civil investigative demands from the federal government for documents and information relating to our treatment of certain service agreements with wholesalers when calculating and reporting Average Manufacturer Prices in connection with the Medicaid Drug Rebate Program. We are cooperating with the government.
In July 2017 we learned that the Prosecution Office of Milan is investigating our interactions with certain healthcare providers in Italy. We are cooperating with the government.
Tax Matter
In the second quarter of 2018 the State Treasury of Goias, Brazil issued tax assessments for the period 2013 through February 2018 relating to tax on the circulation of goods and totaling approximately $70.0 million including interest and penalties. We dispute the assessments and have filed defenses with the Administrative Court of Appeals for the State of Goias, which are pending. We have not formed an opinion that an unfavorable outcome of the dispute 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.
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- Commitments and Contingencies
Contingent Payments
TYSABRI
In 2013 we acquired from Elan full ownership of all remaining rights to TYSABRI that we did not already own or control. Under the acquisition agreement, we are obligated to make contingent payments to Elan of 18% on annual worldwide net sales up to $2.0 billion and 25% on annual worldwide net sales that exceed $2.0 billion. Royalty payments to Elan and other third parties are recorded as cost of sales in our consolidated statements of income. Elan was acquired by Perrigo Company plc (Perrigo) in December 2013, and Perrigo subsequently sold its rights to these payments to a third-party effective January 2017.
SPINRAZA
In the third quarter of 2016 we exercised our option to develop and commercialize SPINRAZA from Ionis. Under our agreement with Ionis, we make royalty payment to Ionis on annual worldwide net sales of SPINRAZA using a tiered royalty rate between 11% and 15%, which are recorded as cost of sales in our consolidated statements of income. For additional information on our collaboration arrangements with Ionis, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements.
Contingent Consideration related to Business Combinations
In connection with our acquisitions of Convergence, Stromedix and BIN, we agreed to make additional payments based upon the achievement of certain milestone events.
As the acquisitions of Convergence, Stromedix and BIN occurred after January 1, 2009, we recognized the contingent consideration liabilities associated with these transactions at their fair value on the acquisition date and revalue these obligations each reporting period. We may pay up to approximately $1.0 billion in remaining milestones related to these acquisitions.
Fumapharm AG
In 2006 we acquired Fumapharm AG. As part of this acquisition we acquired the Fumapharm Products. We paid $220.0 million upon closing of the transaction and agreed to pay an additional $15.0 million if a Fumapharm Product was approved for MS in the U.S. or E.U. In the second quarter of 2013 TECFIDERA was approved in the U.S. for MS by the FDA and we made the $15.0 million contingent payment. We are also required to make additional contingent payments to former shareholders of Fumapharm AG and holders of their rights based on the attainment of certain cumulative sales levels of Fumapharm Products and the level of total net sales of Fumapharm Products in the prior 12-month period, as defined in the acquisition agreement, until such time as the cumulative sales level reached $20.0 billion, at which time no further contingent payments are due. These payments are accounted for as an increase to goodwill as incurred, in accordance with the accounting standard applicable to business combinations when we acquired Fumapharm AG. Any portion of the payment that is tax deductible was recorded as a reduction to goodwill. Payments are due within 60 days following the end of the quarter in which the applicable cumulative sales level was reached.
During 2018 we paid $1.5 billion in contingent payments as we reached the $15.0 billion and $16.0 billion cumulative sales levels related to the Fumapharm Products in the fourth quarter of 2017 and the $17.0 billion, $18.0 billion and $19.0 billion cumulative sales levels related to the Fumapharm Products in the first, second and third quarters of 2018, respectively. In the fourth quarter of 2018 we achieved the $20.0 billion cumulative sales level threshold and accrued our last $300.0 million contingent payment related to the Fumapharm Products, which will be paid in the first quarter of 2019.
Contingent Development, Regulatory and Commercial Milestone Payments
Based on our development plans as of December 31, 2018, we could make potential future milestone payments to third parties of up to approximately $5.0 billion, including approximately $0.7 billion in development milestones, approximately $1.8 billion in regulatory milestones and approximately $2.5 billion in commercial milestones, as part of our various collaborations, including licensing and development programs. Payments under these agreements generally become due and payable upon achievement of certain development, regulatory or commercial milestones. Because the achievement of these milestones was not considered probable as of December 31, 2018, such contingencies have not been recorded in our financial statements. Amounts related to
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval or commercial milestones.
Other Funding Commitments
As of December 31, 2018, we have several ongoing clinical studies in various clinical trial stages. Our most significant clinical trial expenditures are to CROs. The contracts with CROs are generally cancellable, with notice, at our option. We recorded accrued expenses of approximately $27.0 million in our consolidated balance sheet for expenditures incurred by CROs as of December 31, 2018. We have approximately $655.0 million in cancellable future commitments based on existing CRO contracts as of December 31, 2018.
Tax Related Obligations
We exclude liabilities pertaining to uncertain tax positions from our summary of contractual obligations as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 31, 2018, we have $117.7 million of liabilities associated with uncertain tax positions.
As of December 31, 2018 and 2017, we have accrued income tax liabilities of $697.0 million and $989.6 million, respectively, under the Transition Toll Tax. Of the amounts accrued as of December 31, 2018, no amounts are expected to be paid within one year due to a $150.0 million overpayment of taxes in the current year. The Transition Toll Tax will be paid over an eight-year period, which started in 2018, and will not accrue interest. For additional information on the Transition Toll Tax, please read Note 17, Income Taxes, to these consolidated financial statements.
Solothurn, Switzerland Manufacturing Facility
We are building a large-scale biologics manufacturing facility in Solothurn, Switzerland. We expect this facility to be operational by the end of 2020. As of December 31, 2018, we had contractual commitments of $111.0 million related to the construction of this facility.
Leases
We rent laboratory and office space and certain equipment under non-cancelable operating leases. These lease agreements contain various clauses for renewal at our option and, in certain cases, escalation clauses typically linked to rates of inflation. Rental expense, net of sublease income under these leases, which terminate at various dates through 2028, amounted to $64.5 million, $65.3 million and $68.7 million in 2018, 2017 and 2016, respectively. In addition to rent, the leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses.
As of December 31, 2018, minimum rental commitments under non-cancelable leases, net of income from subleases, for each of the next five years and total thereafter were as follows:
| (In millions) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | ||||||||||||||||||||
| Minimum lease payments | $ | 87.0 | $ | 80.7 | $ | 75.9 | $ | 71.7 | $ | 71.0 | $ | 215.3 | $ | 601.6 | |||||||||||||
| Less: income from subleases (1) | (26.8 | ) | (25.6 | ) | (23.7 | ) | (24.0 | ) | (24.3 | ) | (58.4 | ) | (182.8 | ) | |||||||||||||
| Net minimum lease payments | $ | 60.2 | $ | 55.1 | $ | 52.2 | $ | 47.7 | $ | 46.7 | $ | 156.9 | $ | 418.8 |
| (1) | Represents sublease income expected to be received for the vacated manufacturing facility in Cambridge, MA, the vacated portion of our Weston, MA facility and other facilities throughout the world. |
Under certain of our lease agreements, we are contractually obligated to return leased space to its original condition upon termination of the lease agreement. At the inception of a lease with such conditions, we record an asset retirement obligation liability and a corresponding capital asset in an amount equal to the estimated fair value of the obligation. In subsequent periods, for each such lease, we record interest expense to accrete the asset retirement obligation liability to full value and depreciate each capitalized asset retirement obligation asset, both over the term of the associated lease agreement. Our asset retirement obligations were not significant as of December 31, 2018 or 2017.
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- Guarantees
As of December 31, 2018 and 2017, we did not have significant liabilities recorded for guarantees.
We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, clinical sites and customers. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. However, to date we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2018 and 2017.
- Employee Benefit Plans
We sponsor various retirement and pension plans. Our estimates of liabilities and expenses for these plans incorporate a number of assumptions, including expected rates of return on plan assets and interest rates used to discount future benefits.
401(k) Savings Plan
We maintain a 401(k) Savings Plan, which is available to substantially all regular employees in the U.S. over the age of 21. Participants may make voluntary contributions. We make matching contributions according to the 401(k) Savings Plan’s matching formula. All matching contributions and participant contributions vest immediately. The 401(k) Savings Plan also holds certain transition contributions on behalf of participants who previously participated in the Biogen, Inc. Retirement Plan. The expense related to our 401(k) Savings Plan primarily consists of our matching contributions.
Expense related to our 401(k) Savings Plan totaled $42.2 million, $42.6 million and $45.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Deferred Compensation Plan
We maintain a non-qualified deferred compensation plan, known as the Supplemental Savings Plan (SSP), which allows a select group of management employees in the U.S. to defer a portion of their compensation. The SSP also provides certain credits to highly compensated U.S. employees that are paid by the company. These credits are known as the Restoration Match. The deferred compensation amounts are accrued when earned. Such deferred compensation is distributable in cash in accordance with the rules of the SSP. Deferred compensation amounts under such plan as of December 31, 2018 and 2017, totaled approximately $109.3 million and $109.8 million, respectively, and are included in other long-term liabilities in our consolidated balance sheets. The SSP also holds certain transition contributions on behalf of participants who previously participated in the Biogen, Inc. Retirement Plan. The Restoration Match and participant contributions vest immediately. Distributions to participants can be either in one lump sum payment or annual installments as elected by the participants.
Pension Plans
Our retiree benefit plans include defined benefit plans for employees in our affiliates in Switzerland and Germany as well as other insignificant defined benefit plans in certain other countries where we maintain an operating presence.
Our Swiss plan is a government-mandated retirement fund that provides employees with a minimum investment return. The minimum investment return is determined annually by the Swiss government and was 1.00% in 2018 and 2017 and 1.25% in 2016. Under the Swiss plan, both we and certain of our employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. Employer contributions must be in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender. As of December 31, 2018 and 2017, the Swiss plan had an unfunded net pension obligation of $48.6 million and $48.3 million, respectively, and plan assets that totaled $93.1 million and $83.7 million, respectively. In 2018, 2017 and 2016, we recognized expense totaling $14.8 million, $12.3 million and $15.3 million, respectively, related to our Swiss plan, of which $1.3 million, $1.1 million and $2.2 million, respectively, was included in other income (expense), net.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The obligations under the German plans are unfunded and totaled $45.3 million and $43.5 million as of December 31, 2018 and 2017, respectively. Net periodic pension cost related to the German plans totaled $5.3 million, $5.2 million and $4.2 million for the years ended December 31, 2018, 2017 and 2016, respectively, of which $1.5 million, $1.4 million and $1.1 million, respectively, was included in other income (expense), net.
- Segment Information
We operate as one operating segment, focused on discovering, developing and delivering worldwide innovative therapies for people living with serious neurological and neurodegenerative diseases. Our Chief Executive Officer (CEO), as the chief operating decision-maker, manages and allocates resources to the operations of our company on a total company basis. Our research and development organization is responsible for the research and discovery of new product candidates and supports development and registration efforts for potential future products. Our pharmaceutical, operations and technology organization manages the development of the manufacturing processes, clinical trial supply, commercial product supply, distribution, buildings and facilities. Our commercial organization is responsible for U.S. and international development of our commercial products. The company is also supported by corporate staff functions. Managing and allocating resources on a total company basis enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions, therapeutic areas and research and development projects that are in line with our long-term company-wide strategic goals. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets.
Enterprise-wide disclosures about product revenues, other revenues and long-lived assets by geographic area are presented below. Revenues are primarily attributed to individual countries based on location of the customer or licensee.
Geographic Information
The following tables contain certain financial information by geographic area:
| December 31, 2018 (In millions) | U.S. | Europe | Asia | Other | Total | ||||||||||||||
| Product revenues from external customers | $ | 6,800.5 | $ | 3,370.3 | $ | 281.2 | $ | 434.8 | $ | 10,886.8 | |||||||||
| Revenues from anti-CD20 therapeutic programs | $ | 1,903.4 | $ | 0.2 | $ | — | $ | 76.6 | $ | 1,980.2 | |||||||||
| Other revenues from external customers | $ | 457.0 | $ | 32.7 | $ | 96.2 | $ | — | $ | 585.9 | |||||||||
| Long-lived assets | $ | 1,152.7 | $ | 2,442.8 | $ | 3.9 | $ | 1.8 | $ | 3,601.2 | |||||||||
| December 31, 2017 (In millions) | U.S. | Europe | Asia | Other | Total | ||||||||||||||
| Product revenues from external customers | $ | 7,017.1 | $ | 2,844.8 | $ | 160.1 | $ | 332.7 | $ | 10,354.7 | |||||||||
| Revenues from anti-CD20 therapeutic programs | $ | 1,475.6 | $ | 0.6 | $ | — | $ | 83.0 | $ | 1,559.2 | |||||||||
| Other revenues from external customers | $ | 249.5 | $ | 67.8 | $ | 42.7 | $ | — | $ | 360.0 | |||||||||
| Long-lived assets | $ | 1,226.9 | $ | 1,948.2 | $ | 5.2 | $ | 2.1 | $ | 3,182.4 | |||||||||
| December 31, 2016 (In millions) | U.S. | Europe | Asia | Other | Total | ||||||||||||||
| Product revenues from external customers | $ | 7,050.4 | $ | 2,237.2 | $ | 217.3 | $ | 313.0 | $ | 9,817.9 | |||||||||
| Revenues from anti-CD20 therapeutic programs | $ | 1,249.5 | $ | 1.9 | $ | — | $ | 63.1 | $ | 1,314.5 | |||||||||
| Other revenues from external customers | $ | 224.7 | $ | 71.5 | $ | 20.2 | $ | — | $ | 316.4 | |||||||||
| Long-lived assets | $ | 1,272.3 | $ | 1,221.1 | $ | 7.0 | $ | 1.4 | $ | 2,501.8 |
Other
As of December 31, 2018, 2017 and 2016, approximately $1,748.5 million, $1,215.7 million and $545.5 million, respectively, of our long-lived assets were related to the construction of our large-scale biologics manufacturing facility in Solothurn, Switzerland.
As of December 31, 2018, 2017 and 2016, approximately $646.5 million, $707.1 million and $643.6 million, respectively, of our long-lived assets were related to our manufacturing facilities in Denmark.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For additional information on our large-scale biologics manufacturing facility in Solothurn, Switzerland, please read Note 11, Property, Plant and Equipment, to these consolidated financial statements.
- Quarterly Financial Data (Unaudited)
| (In millions, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | ||||||||||||||
| 2018 | (a) (b) | (a) (b) (c) (d) | (a) (b) (e) | (a) (f) (g) (h) (i) | |||||||||||||||
| Product revenues, net | $ | 2,523.5 | $ | 2,757.5 | $ | 2,780.1 | $ | 2,825.7 | $ | 10,886.8 | |||||||||
| Revenues from anti-CD20 therapeutic programs | $ | 443.2 | $ | 490.4 | $ | 511.7 | $ | 534.9 | $ | 1,980.2 | |||||||||
| Other revenues | $ | 164.4 | $ | 108.6 | $ | 147.2 | $ | 165.7 | $ | 585.9 | |||||||||
| Total revenues | $ | 3,131.1 | $ | 3,356.5 | $ | 3,439.0 | $ | 3,526.3 | $ | 13,452.9 | |||||||||
| Gross profit (1) | $ | 2,685.1 | $ | 2,935.5 | $ | 2,978.2 | $ | 3,037.8 | $ | 11,636.6 | |||||||||
| Net income | $ | 1,171.2 | $ | 915.0 | $ | 1,442.9 | $ | 944.9 | $ | 4,474.0 | |||||||||
| Net income attributable to Biogen Inc. | $ | 1,172.9 | $ | 866.6 | $ | 1,444.4 | $ | 946.8 | $ | 4,430.7 | |||||||||
| Net income per share: | |||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | $ | 5.55 | $ | 4.18 | $ | 7.17 | $ | 4.74 | $ | 21.63 | |||||||||
| Diluted earnings per share attributable to Biogen Inc. | $ | 5.54 | $ | 4.18 | $ | 7.15 | $ | 4.73 | $ | 21.58 | |||||||||
| Weighted-average shares used in calculating: | |||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | 211.4 | 207.1 | 201.4 | 199.8 | 204.9 | ||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | 211.7 | 207.3 | 201.9 | 200.3 | 205.3 |
| (In millions, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | ||||||||||||||
| 2017 | (g) | (j) (k) (l) | (m) (n) (o) (p) | ||||||||||||||||
| Product revenues, net | $ | 2,380.1 | $ | 2,639.7 | $ | 2,622.5 | $ | 2,712.4 | $ | 10,354.7 | |||||||||
| Revenues from anti-CD20 therapeutic programs | $ | 340.6 | $ | 397.1 | $ | 406.5 | $ | 415.0 | $ | 1,559.2 | |||||||||
| Other revenues | $ | 90.0 | $ | 41.6 | $ | 48.8 | $ | 179.6 | $ | 360.0 | |||||||||
| Total revenues | $ | 2,810.7 | $ | 3,078.4 | $ | 3,077.8 | $ | 3,307.0 | $ | 12,273.9 | |||||||||
| Gross profit (1) | $ | 2,426.1 | $ | 2,712.2 | $ | 2,707.8 | $ | 2,797.8 | $ | 10,643.9 | |||||||||
| Net income | $ | 747.5 | $ | 862.8 | $ | 1,226.1 | $ | (166.3 | ) | $ | 2,670.1 | ||||||||
| Net income attributable to Biogen Inc. | $ | 747.6 | $ | 862.8 | $ | 1,226.1 | $ | (297.4 | ) | $ | 2,539.1 | ||||||||
| Net income per share: | |||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | $ | 3.47 | $ | 4.07 | $ | 5.80 | $ | (1.41 | ) | $ | 11.94 | ||||||||
| Diluted earnings per share attributable to Biogen Inc. | $ | 3.46 | $ | 4.07 | $ | 5.79 | $ | (1.40 | ) | $ | 11.92 | ||||||||
| Weighted-average shares used in calculating: | |||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | 215.6 | 211.9 | 211.4 | 211.5 | 212.6 | ||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | 215.9 | 212.2 | 211.8 | 212.0 | 213.0 |
(1) Gross profit is calculated as total revenues less cost of sales, excluding amortization and impairment of acquired intangible assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| (a) | Net income and net income attributable to Biogen Inc. for the first, second, third and fourth quarters of 2018 includes pre-tax charges related to (losses) gains recorded in relation to changes in the fair value of our strategic investments of $(6.4) million, $5.4 million, $141.2 million and $(12.2) million, respectively. |
| (b) | Net income and net income attributable to Biogen Inc. for the first, second and third quarters of 2018 include pre-tax charges to acquired IPR&D of $10.0 million, $75.0 million and $27.5 million, respectively, for upfront payments to Karyopharm, Pfizer and AliveGen, respectively, upon closing of the asset purchase transactions for BIIB100, BIIB104 and BIIB110, respectively, as the underlying assets had not yet reached technological feasibility. |
| (c) | Net income and net income attributable to Biogen Inc. for the second quarter of 2018 includes pre-tax charges to research and development expense of $486.2 million upon the closing of the 2018 Ionis Agreement. Included in this amount was a charge of $162.1 million reflecting the premium paid above fair value for the purchase of approximately 11.5 million shares of Ionis' common stock upon the closing of the 2018 Ionis Agreement. |
| (d) | Net income attributable to Biogen Inc. for the second quarter of 2018 includes a pre-tax charge to noncontrolling interest of $50.0 million for a payment to Neurimmune in exchange for a 5% reduction in the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab. |
| (e) | Net income and net income attributable to Biogen Inc. for the third quarter of 2018 includes the impact of impairment charges totaling $189.3 million related to certain IPR&D assets associated with our vixotrigine program and an adjustment to the value of our contingent consideration obligations related to our vixotrigine program for the treatment of TGN to reflect the lower cumulative probabilities of success, which resulted in a gain of $89.6 million in the third quarter of 2018. |
| (f) | In late December 2018 we received feedback from the FDA regarding the design of the Phase 3 vixotrigine program for the treatment of TGN. Following this feedback, we are now planning to initiate the Phase 3 vixotrigine program for the treatment of TGN and, as a result, we adjusted the fair value of our contingent consideration obligations related to our vixotrigine program for the treatment of TGN to reflect the increased probabilities of success and recognized a loss of $80.6 million in the fourth quarter of 2018. |
| (g) | Net income and net income attributable to Biogen Inc. for the fourth quarter of 2018 and the first quarter of 2017 includes $176.8 million and $328.2 million, respectively, of impairment charges related to our intangible asset associated with our U.S. license to Forward Pharma's intellectual property, including Forward Pharma's intellectual property related to TECFIDERA. |
| (h) | Net income and net income attributable to Biogen Inc. for the fourth quarter of 2018 includes a net increase to income tax expense of $135.8 million reflecting the impact of electing to record deferred taxes on GILTI. |
| (i) | Net income and net income attributable to Biogen Inc. for the fourth quarter of 2018 includes an upfront payment of $35.0 million to Ionis, as we exercised our option to obtain a worldwide, exclusive, royalty-bearing license from Ionis to develop and commercialize BIIB067. |
| (j) | Net income and net income attributable to Biogen Inc. for the second quarter of 2017 includes a pre-tax charge to research and development expense of $300.0 million for an upfront payment made to BMS upon entering into our agreement to exclusively license BIIB092. |
| (k) | Net income and net income attributable to Biogen Inc. for the second quarter of 2017 includes a pre-tax charge to acquired IPR&D of $120.0 million for an upfront payment to Remedy upon closing of the asset purchase transaction for BIIB093. |
| (l) | Net income and net income attributable to Biogen Inc. for the second quarter of 2017 includes a pre-tax charge to research and development expense of $60.0 million for a developmental milestone that became payable to the former shareholders of iPierian upon dosing of the first patient in the Phase 2 study of BIIB092 for PSP. |
| (m) | Net income attributable to Biogen Inc. for the fourth quarter of 2017 includes a pre-tax charge to noncontrolling interest of $150.0 million for a payment made to Neurimmune in exchange for a 15% reduction in the |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab.
| (n) | Net income and net income attributable to Biogen Inc. for the fourth quarter of 2017 includes pre-tax charges to research and development expense of $28.0 million and $50.0 million for an upfront payment and a continuation payment, respectively, to Alkermes. |
| (o) | Net income and net income attributable to Biogen Inc. for the fourth quarter of 2017 includes a pre-tax charge to research and development expense of $25.0 million for an upfront payment to Ionis upon entering into a new collaboration agreement to identify new ASO drug candidates for the treatment of SMA. |
| (p) | Net income and net income attributable to Biogen Inc. for the fourth quarter of 2017 includes $1,173.6 million related to the provisions of the 2017 Tax Act, including a $989.6 million expense under the Transition Toll Tax. |
For additional information on our acquisitions of BIIB100, BIIB104, BIIB110 and BIIB093, please read Note 2, Acquisitions, to these consolidated financial statements. For additional information on our collaboration arrangements with Ionis, BMS and Alkermes, please read Note 19, Collaborative and Other Relationships, to these consolidated financial statements. For additional information on our collaboration arrangement with Neurimmune, please read Note 20, Investments in Variable Interest Entities, to these consolidated financial statements. For additional information on the amortization and impairment of acquired intangible assets, including our IPR&D intangible asset related to our vixotrigine program for the treatment of TGN and our TECFIDERA settlement and license agreement, please read Note 7, Intangible Assets and Goodwill, to these consolidated financial statements. For additional information on the 2017 Tax Act, please read Note 17, Income Taxes, to these consolidated financial statements.
- Subsequent Events
Skyhawk Therapeutics, Inc.
In January 2019 we entered into a collaboration and research and development services agreement with Skyhawk Therapeutics, Inc. (Skyhawk) pursuant to which the companies will leverage Skyhawk’s SkySTAR technology platform with the goal of discovering innovative small molecule treatments for patients with neurological diseases, including MS and SMA. We will be responsible for the development and potential commercialization of any therapies resulting from this collaboration.
In connection with this agreement, we made an upfront payment of $74.0 million to Skyhawk. We may also pay Skyhawk up to a total of approximately $2.0 billion in additional milestone payments as well as potential royalties on net commercial sales. We expect to record research and development expense of approximately $35.0 million in the first quarter of 2019 related to this collaboration.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Biogen Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Biogen Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for income taxes for intra-entity transfers of assets other than inventory in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting
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includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 6, 2019
We have served as the Company's auditor since 2003.
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Previous: Item 15. Exhibits and Financial Statement Schedules