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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the accompanying notes beginning on page F-1 of this report.
Executive Summary
Introduction
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 MS and neuroimmunology, AD and dementia, movement disorders, including Parkinson's disease, and neuromuscular disorders, including SMA and 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, 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. For additional information on our collaboration arrangements with Genentech, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Our revenues depend upon continued sales of our principal products, as well as the financial rights we have in our anti-CD20 therapeutic programs, and, unless we develop, acquire rights to and/or commercialize new products and technologies, we will be substantially dependent on sales from our principal products and our financial rights in our anti-CD20 therapeutic programs for many years.
In the longer term, our revenue growth will depend upon the successful clinical development, regulatory approval and launch of new commercial products as well as additional indications for our existing products, our ability to obtain and maintain patents and other rights related to our marketed products, assets originating from our research and development efforts and/or successful execution of external business development opportunities.
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, our joint venture with 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 E.U. For additional information on our collaboration arrangement with Samsung Bioepis, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Hemophilia Spin-Off
On February 1, 2017, we completed the spin-off of our hemophilia business, Bioverativ, as an independent publicly traded company. Our consolidated results of operations and financial position included in our 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 our consolidated financial statements included in this report.
Business Environment
The biopharmaceutical industry and the markets in which we operate are intensely competitive. Many of our competitors are working to develop or have commercialized products similar to those we market or are developing and have considerable experience in undertaking clinical trials and in obtaining regulatory approval to market pharmaceutical products. In addition, the commercialization of certain of our own approved MS products, products of our collaborators and pipeline product candidates may negatively impact future sales of our existing MS products. Our products may also face increased competitive pressures from the introduction of generic versions, prodrugs of existing therapies, biosimilars of existing products, other products approved under alternative regulatory pathways and other technologies.
Sales of our products depend, to a significant extent, on the availability and extent of adequate coverage, pricing and reimbursement from government health administration authorities, private health insurers and other organizations. When a new pharmaceutical product is approved, the availability of government and private reimbursement for that product may be uncertain, as is the pricing and amount for which that product will be reimbursed.
Drug prices are under significant scrutiny in the markets in which our products are prescribed. We expect drug pricing and other health care costs to continue to be subject to intense political and societal pressures on a global basis.
Our failure to obtain or maintain adequate coverage, pricing or reimbursement for our products could have an adverse effect on our business, reputation, revenues and results of operations, could curtail or eliminate our ability to adequately fund research and development programs for the discovery and commercialization of new products or could cause a decline or volatility in our stock price.
In addition to the impact of competition, pricing actions and other measures being taken worldwide designed to reduce healthcare costs and limit the overall level of government expenditures, our sales and operations could also be affected by other risks of doing business internationally, including the impact of foreign currency exchange fluctuations, changes in intellectual property legal protections and changes in trade regulations and procedures as well as the impact of the continued uncertainty of the credit and economic conditions in certain countries in Europe.
For additional information on our competition and pricing risks that could negatively impact our product sales, please read Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in this report.
Brexit
In June 2016 the U.K. electorate voted in a referendum to voluntarily depart from the E.U., known as Brexit. In March 2017 the U.K. government formally notified the European Council of its intention to leave the E.U. and began to negotiate the terms of the future relationship between the U.K. and the E.U. upon exit, which is expected to occur in March 2019.
The potential impact on our results of operations and liquidity resulting from Brexit remains unclear. The actual effects of Brexit will depend upon many factors and significant uncertainty remains with respect to the ultimate resolution of the Brexit negotiations. The final outcome of these negotiations may impact certain of our research, commercial and general business operations in the U.K. and the E.U., including the approval and supply of our products.
Compliance with any resulting regulatory mandates may prove challenging and the macroeconomic impact on our sales and consolidated results of operations from these developments remains unknown. We do not, however, expect Brexit to have a material impact on our consolidated results of operations as approximately 2% of our total product revenues in each of 2018 and 2017 were derived from U.K. sales.
While we are in the process of implementing measures to meet E.U. legal requirements and to modify our business operations after the U.K. separates from the E.U., we cannot predict the direction Brexit-related developments will take nor the impact of those developments on our European operations and the economies of the markets where we operate. We will continue to monitor for developments and will assess the resulting potential impact on our business and results of operations.
Financial Highlights
Diluted earnings per share attributable to Biogen Inc. were $21.58 for 2018, representing an increase of 81.0% over $11.92 in the same period in 2017.
As described below under Results of Operations, our net income and diluted earnings per share attributable to Biogen Inc. for the year ended December 31, 2018, compared to the year ended December 31, 2017, reflects the following:
| • | Total revenues were $13,452.9 million for 2018, representing an increase of 9.6% over $12,273.9 million in 2017. |
| • | Product revenues, net totaled $10,886.8 million for 2018, representing an increase of 5.1% over $10,354.7 million in 2017. This increase was primarily due to higher revenues from SPINRAZA and our biosimilar products, partially offset by a 4.3% net decrease in our MS product revenues, primarily resulting from a decrease in our Interferon product revenues. Product revenues, net, compared to the same period in 2017, further reflects the favorable impact of foreign currency exchange of $88.7 million. Net losses recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program for 2018 and 2017 were similar. |
For 2018 compared to 2017, product revenues, net, were also negatively impacted by the elimination of worldwide ELOCTATE and ALPROLIX revenues resulting from the spin-off of our hemophilia business on February 1, 2017, as well as a decrease in ZINBRYTA revenues due to the voluntary worldwide withdrawal of ZINBRYTA, which was announced in the first quarter of 2018. Compared to 2017, these events negatively impacted revenues by $125.7 million.
| • | Revenues from anti-CD20 therapeutic programs totaled $1,980.2 million for 2018, representing an increase of 27.0% over $1,559.2 million in 2017. This increase was due to higher royalty revenues on sales of OCREVUS as well as an increase on our share of pre-tax profits in the U.S. for RITUXAN and GAZYVA. |
| • | Other revenues totaled $585.9 million for 2018, representing an increase of 62.8% over $360.0 million in 2017. This increase was primarily due to higher contract manufacturing revenues. |
| • | Total cost and expenses totaled $7,564.3 million for 2018, representing an increase of 9.2% over $6,928.1 million in 2017. This increase was primarily due to a 15.2% increase in research and development, a 11.4% increase |
in cost of sales and an 8.9% increase in selling, general and administrative expenses. These increases were partially offset by the net change in (gain) loss recognized on the fair value remeasurement of our contingent consideration obligations as well as a decrease in amortization and impairment of acquired intangible assets.
| ◦ | The increase in research and development was primarily due to the $482.6 million net charge recognized upon the closing of the 2018 Ionis Agreement, partially offset by charges recognized in the prior year period totaling $360.0 million related to our exclusive license agreement with BMS as well as increased spending related to our early and late stage pipeline candidates. |
| ◦ | The increase in cost of sales was primarily due to higher contract manufacturing shipments of drug product and drug substance production provided to our strategic partners, an increase in biosimilar sales volumes and increased royalties payable to Ionis on higher sales of SPINRAZA, partially offset by lower sales and costs associated with our MS products. |
| ◦ | The increase in selling, general and administrative expenses was primarily due to increases in operational spending on sales and marketing activities in support of our marketed products, primarily related to SPINRAZA as we continue to expand into new international markets and increased costs incurred in support of our business development transactions completed in the current period. |
| • | Net income attributable to Biogen Inc. was favorably impacted by a decrease in our effective tax rate to 24.2% for the year ended December 31, 2018, from 47.9% for 2017. The reduction in tax rate was primarily due to the favorable impacts of the 2017 Tax Act on our 2018 tax rate and the Transition Toll Tax expense recognized on enactment in December 2017. |
As described below under Financial Condition, Liquidity and Capital Resources:
| • | We generated $6,187.7 million of net cash flows from operations for 2018, which were primarily driven by earnings. |
| • | Cash, cash equivalents and marketable securities totaled approximately $4,913.9 million as of December 31, 2018. |
| • | We repurchased and retired approximately 14.8 million shares of our common stock at a cost of approximately $4.4 billion during 2018 under our 2018 and 2016 Share Repurchase Programs. |
Acquisitions, Collaborative and Other Relationships
BIIB100 Acquisition
In January 2018 we acquired BIIB100 from 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 XP01, with the goal of reducing inflammation and neurotoxicity, along with increasing neuroprotective responses. In connection with the closing of this transaction, we made an upfront payment of $10.0 million to Karyopharm.
BIIB104 Acquisition
In April 2018 we acquired BIIB104 from 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. In connection with the closing of this transaction, we made an upfront payment of $75.0 million to Pfizer.
Neurimmune SubOne AG
In May 2018 we made a $50.0 million payment to Neurimmune under the terms of the Neurimmune Agreement to reduce the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab, by 5%. Our royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab, will now range from the high single digits to sub-teens.
Ionis Pharmaceuticals, Inc.
In June 2018 we closed the 2018 Ionis Agreement, which is a new 10-year exclusive agreement with Ionis to develop novel ASO drug candidates for a broad range of neurological diseases, and made a total payment of $1.0 billion to Ionis. We have the option to license therapies arising out of the 2018 Ionis Agreement and will be responsible for the development and potential commercialization of such therapies.
TMS Co., Ltd.
In June 2018 we entered into an exclusive option agreement with TMS granting us the option to acquire TMS-007, a plasminogen activator with a novel MOA 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.
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.
BIIB110 Acquisition
In July 2018 we acquired BIIB110 and ALG-802 from 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. In connection with the closing of this transaction, we made an upfront payment of $27.5 million to AliveGen.
BIIB067 Option Exercise
In December 2018 we exercised our option with Ionis and obtained a worldwide, exclusive, royalty-bearing license to develop and commercialize BIIB067, an investigational treatment for ALS with SOD1 mutations. In connection with the option exercise, we made an upfront payment of $35.0 million to Ionis.
C4 Therapeutics
In December 2018 we entered into a collaborative research and license agreement with 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. 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.
Skyhawk Therapeutics, Inc.
In January 2019 we entered into a collaboration and research and development services agreement with 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.
For additional information on our acquisitions of BIIB100, BIIB104 and BIIB110 and our exclusive option agreement with TMS, please read Note 2, Acquisitions, to our consolidated financial statements included in this report. For additional information on our collaboration arrangements with Ionis, Samsung Bioepis and C4T, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report. For additional information on our collaboration arrangement with Skyhawk, please read Note 27, Subsequent Events, to our consolidated financial statements included in this report.
Other Key Developments
ZINBRYTA Withdrawal
In March 2018 we and AbbVie announced the voluntary worldwide withdrawal of ZINBRYTA for RMS.
For additional information on our collaboration arrangement with AbbVie, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
IMRALDI
In October 2018 we began to recognize revenues on sales of IMRALDI, an adalimumab biosimilar referencing HUMIRA, to third parties in the E.U. We and Samsung Bioepis previously entered into an agreement with AbbVie for 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.
2018 Share Repurchase Program
In August 2018 our Board of Directors authorized our 2018 Share Repurchase Program, which is a program to repurchase up to $3.5 billion of our common stock. 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.
Results of Operations
Revenues
Revenues are summarized as follows:
| For the Years Ended December 31, | % Change | ||||||||||||||||
| 2018 compared to 2017 | 2017 compared to 2016 | ||||||||||||||||
| (In millions, except percentages) | 2018 | 2017 | 2016 | ||||||||||||||
| Product revenues, net: | |||||||||||||||||
| United States | $ | 6,800.5 | $ | 7,017.1 | $ | 7,050.4 | (3.1 | )% | (0.5 | )% | |||||||
| Rest of world | 4,086.3 | 3,337.6 | 2,767.5 | 22.4 | % | 20.6 | % | ||||||||||
| Total product revenues, net | 10,886.8 | 10,354.7 | 9,817.9 | 5.1 | % | 5.5 | % | ||||||||||
| Revenues from anti-CD20 therapeutic programs | 1,980.2 | 1,559.2 | 1,314.5 | 27.0 | % | 18.6 | % | ||||||||||
| Other revenues | 585.9 | 360.0 | 316.4 | 62.8 | % | 13.8 | % | ||||||||||
| Total revenues | $ | 13,452.9 | $ | 12,273.9 | $ | 11,448.8 | 9.6 | % | 7.2 | % |
Product Revenues
Product revenues are summarized as follows:
| For the Years Ended December 31, | % Change | ||||||||||||||||
| 2018 compared to 2017 | 2017 compared to 2016 | ||||||||||||||||
| (In millions, except percentages) | 2018 | 2017 | 2016 | ||||||||||||||
| Multiple Sclerosis (MS): | |||||||||||||||||
| TECFIDERA | $ | 4,274.1 | $ | 4,214.0 | $ | 3,968.1 | 1.4 | % | 6.2 | % | |||||||
| Interferon* | 2,363.0 | 2,645.8 | 2,795.2 | (10.7 | )% | (5.3 | )% | ||||||||||
| TYSABRI | 1,864.0 | 1,973.1 | 1,963.8 | (5.5 | )% | 0.5 | % | ||||||||||
| FAMPYRA | 92.7 | 91.6 | 84.9 | 1.2 | % | 7.9 | % | ||||||||||
| ZINBRYTA | 1.4 | 52.7 | 7.8 | (97.3 | )% | 575.6 | % | ||||||||||
| Subtotal: MS product revenues | 8,595.2 | 8,977.2 | 8,819.8 | (4.3 | )% | 1.8 | % | ||||||||||
| Spinal Muscular Atrophy: | |||||||||||||||||
| SPINRAZA | 1,724.2 | 883.7 | 4.6 | 95.1 | % | 19,110.9 | % | ||||||||||
| Biosimilars: | |||||||||||||||||
| BENEPALI | 485.2 | 370.8 | 100.6 | 30.9 | % | 268.6 | % | ||||||||||
| FLIXABI | 43.2 | 9.0 | 0.1 | 380.0 | % | 8,900.0 | % | ||||||||||
| IMRALDI | 16.7 | — | — | ** | ** | ||||||||||||
| Subtotal: Biosimilar product revenues | 545.1 | 379.8 | 100.7 | 43.5 | % | 277.2 | % | ||||||||||
| Other: | |||||||||||||||||
| FUMADERM | 22.3 | 39.6 | 45.9 | (43.7 | )% | (13.7 | )% | ||||||||||
| Hemophilia: | |||||||||||||||||
| ELOCTATE | — | 48.4 | 513.2 | ** | (90.6 | )% | |||||||||||
| ALPROLIX | — | 26.0 | 333.7 | ** | (92.2 | )% | |||||||||||
| Subtotal: Hemophilia product revenues | — | 74.4 | 846.9 | ** | (92.2 | )% | |||||||||||
| Total product revenues, net | $ | 10,886.8 | $ | 10,354.7 | $ | 9,817.9 | 5.1 | % | 5.5 | % |
- Interferon includes AVONEX and PLEGRIDY.
** Percentage not meaningful.
Multiple Sclerosis (MS)
TECFIDERA
For 2018 compared to 2017, the decrease in U.S. TECFIDERA revenues was primarily due to a decrease in unit sales volume of 5% and higher discounts and allowances, partially offset by price increases.
For 2017 compared to 2016, the increase in U.S. TECFIDERA revenues was primarily due to price increases, partially offset by higher discounts and allowances and a decrease in unit sales volume of 3%.
For 2018 compared to 2017, the increase in rest of world TECFIDERA revenues was primarily due to increases in unit sales volume of 16% and the favorable impact of foreign currency exchange of $30.8 million. These increases were partially offset by higher discounts and allowances and pricing reductions in certain European countries. TECFIDERA rest of world revenues for 2018 also include net losses recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program totaling $11.8 million, compared to net losses recognized of $12.4 million for 2017.
For 2017 compared to 2016, the increase in rest of world TECFIDERA revenues was primarily due to increases in unit sales volume of 19% primarily in the E.U., partially offset by pricing reductions in certain European countries.
We anticipate continued increase in TECFIDERA demand on a global basis in 2019, compared to 2018, with increasing competition from additional treatments for MS. We expect sales volumes in the U.S. to stabilize in future periods. We also expect
moderate volume growth in our international markets with price reductions in certain European countries.
Interferon
AVONEX and PLEGRIDY
For 2018 compared to 2017, the decrease in U.S. Interferon revenues was primarily due to a decrease in Interferon unit sales volumes of 15%, which was primarily attributable to patients transitioning to other MS therapies, partially offset by price increases.
For 2017 compared to 2016, the decrease in U.S. Interferon revenues was primarily due to an overall decrease in Interferon unit sales volumes of 12%, which was primarily attributable to patients transitioning to other MS therapies, partially offset by price increases.
For 2018 compared to 2017, the decrease in rest of world Interferon revenues was primarily due to a decrease in Interferon unit sales volume of 6%, as patients transition to other MS therapies in the E.U., and pricing reductions in certain European countries. These decreases were partially offset by the favorable impact of foreign currency exchange of $21.9 million. Net losses recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program, and included in Interferon rest of world revenues, totaled $8.7 million for both 2018 and 2017.
For 2017 compared to 2016, the decrease in rest of world Interferon revenues was primarily due to an overall decrease in AVONEX unit sales volume of 14% primarily due to patients transitioning to other MS therapies in the E.U.
We expect that Interferon revenues will continue to decline in both the U.S. and international markets
in 2019, compared to 2018, as a result of increasing competition from our other MS products as well as other treatments for MS, including biosimilars.
AVONEX
For 2018, 2017 and 2016 U.S. AVONEX revenues totaled $1,420.2 million, $1,593.6 million and $1,675.3 million, respectively.
For 2018, 2017 and 2016 rest of world AVONEX revenues totaled $495.3 million, $557.9 million and $638.2 million, respectively.
PLEGRIDY
For 2018, 2017 and 2016 U.S. PLEGRIDY revenues totaled $248.1 million, $295.5 million and $305.0 million, respectively.
For 2018, 2017 and 2016 rest of world PLEGRIDY revenues totaled $199.4 million, $198.8 million and $176.7 million, respectively.
TYSABRI
For 2018 compared to 2017, the decrease in U.S. TYSABRI revenues was primarily due to a decrease in unit sales volume of 9%, partially offset by price increases and lower discounts and allowances.
For 2017 compared to 2016, the decrease in U.S. TYSABRI revenues was primarily due to higher discounts and allowances and a decrease in unit sales volume of 4%, partially offset by price increases.
For 2018 compared to 2017, the decrease in rest of world TYSABRI revenues was primarily due to the recognition in the prior year period of approximately $45.0 million of previously deferred
revenues in Italy relating to the pricing agreement with the Italian National Medicines Agency (Agenzia Italiana de Farmaco or AIFA), as discussed below, and pricing reductions in certain European countries. These decreases were partially offset by an increase in unit sales volumes of 1% and the favorable impact of foreign currency exchange of $27.8 million.
TYSABRI rest of world revenues for 2018 also include net losses recognized in relation to the settlement of certain cash flow hedge instruments under our foreign currency hedging program totaling $10.5 million, compared to net losses recognized of $10.7 million for 2017.
For 2017 compared to 2016, the increase in rest of world TYSABRI revenues was primarily due to the recognition of approximately $45.0 million of previously deferred revenues in Italy relating to the pricing agreement with AIFA, as discussed below, and a 12% increase in unit sales volume primarily in our international partner markets, partially offset by a prior year favorable adjustment of approximately $20.0 million to previous reserves estimates related to a government price reimbursement program included in our discounts and allowances.
In the fourth quarter of 2011 Biogen Italia SRL, our Italian subsidiary, received notice from AIFA that sales of TYSABRI after mid-February 2009 through mid-February 2011 exceeded a reimbursement limit pursuant to a Price Determination Resolution granted by AIFA in December 2006. Since being notified in the fourth quarter of 2011 that AIFA believed a reimbursement limit was still in effect, we deferred revenue on sales of TYSABRI as if the reimbursement limit were in effect for each biannual period beginning in mid-February 2009. In June 2014 AIFA approved a resolution affirming that there is no reimbursement limit from and after February 2013. In the first quarter of 2017 we reached an agreement with AIFA's Price and Reimbursement Committee resolving all of AIFA's claims relating to sales of TYSABRI in excess of the reimbursement limit for prior periods.
We anticipate a slight decline in TYSABRI demand on a global basis in 2019, compared to 2018, with expected volume declines in the U.S. due to increasing competition from additional treatments for MS, including OCREVUS, exceeding volume growth in our international markets.
ZINBRYTA
Under our collaboration agreement with AbbVie, we began to recognize revenues on sales of ZINBRYTA to third parties in the E.U. in the third quarter of 2016.
For 2018 compared to 2017, the decrease in ZINBRYTA revenues was primarily due to the voluntary worldwide withdrawal of ZINBRYTA for RMS, which we and AbbVie announced in March 2018.
For 2017 compared to 2016, the increase in ZINBRYTA revenues was primarily due to an increase in unit sales volume.
For additional information on our collaboration arrangement with AbbVie, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Spinal Muscular Atrophy
SPINRAZA
We began to recognize revenues on sales of SPINRAZA in the U.S. in the fourth quarter of 2016 and in our rest of world markets beginning in the first quarter of 2017.
For 2018 compared to 2017, the increase in U.S. SPINRAZA revenues was primarily due to increases in unit sales volume of 32%, partially offset by higher discounts and allowances.
For 2018 compared to 2017, the increase in rest of world SPINRAZA revenues was primarily due to increases in unit sales volumes as the product continued to be launched in new markets around the world, partially offset by the unfavorable impact of foreign currency exchange of $10.0 million.
For 2017 compared to 2016, the increase in U.S. and rest of world SPINRAZA revenues was primarily due to an increase in unit sales volume in new and existing markets.
We expect that the rate at which SPINRAZA revenues will grow will moderate in 2019, compared to 2018, primarily due to a lower rate of new patient starts combined with the impact of loading dose dynamics as patients transition to dosing once every four months.
In addition, we are aware of other products in development that, if successfully developed and approved, may compete with SPINRAZA in the SMA market, including a potential gene therapy product for the treatment of SMA Type 1, which could come to market in the U.S. in 2019. Future sales of SPINRAZA may be adversely affected by the commercialization of competing products.
For additional information on our collaboration arrangements with Ionis, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Biosimilars
BENEPALI, FLIXABI and IMRALDI
Under our commercial agreement with Samsung Bioepis, we began to recognize revenues on sales of BENEPALI and FLIXABI to third parties in the E.U. in the first and third quarters of 2016, respectively, and began to recognize revenues on sales of IMRALDI to third parties in the E.U. in the fourth quarter of 2018.
For 2018 compared to 2017, the increase in biosimilar revenues was primarily due to an increase in BENEPALI unit sales volume of 45% and the launch of IMRALDI in the fourth quarter of 2018. These increases were partially offset by pricing reductions in certain European countries.
For 2017 compared to 2016, the increase in biosimilar revenues was primarily due to an increase in BENEPALI unit sales volume in new and existing markets.
In 2019 we expect strong revenue growth for our biosimilars business, primarily driven by the continued launch of IMRALDI.
For additional information on our collaboration arrangement with Samsung Bioepis, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Revenues from Anti-CD20 Therapeutic Programs
Genentech Inc. (Roche Group)
Our share of RITUXAN, including RITUXAN HYCELA, and GAZYVA collaboration operating profits in the U.S. and other revenues from anti-CD20 therapeutic programs are summarized as follows:
Biogen’s Share of Pre-tax Profits in the U.S. for RITUXAN and GAZYVA
The following table provides a summary of amounts comprising our share of pre-tax profits in the U.S. for RITUXAN, including RITUXAN HYCELA, and GAZYVA:
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||||
| Product revenues, net | $ | 4,484.3 | $ | 4,206.9 | $ | 3,941.8 | |||||
| Cost and expenses | 669.6 | 755.2 | 744.5 | ||||||||
| Pre-tax profits in the U.S. | $ | 3,814.7 | $ | 3,451.7 | $ | 3,197.3 | |||||
| Biogen's share of pre-tax profits | $ | 1,431.9 | $ | 1,316.4 | $ | 1,249.5 |
Our share of RITUXAN, including RITUXAN HYCELA, annual pre-tax co-promotion profits in the U.S. in excess of $50.0 million 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.
For 2018 compared to 2017, the increase in U.S. product revenues, net was primarily due to an increase in net sales of RITUXAN, including RITUXAN HYCELA, in the U.S. of 6%. This increase reflects selling price increases and an increase in unit sales volume of 1%, partially offset by higher discounts and allowances.
The increase in U.S. product revenues, net over 2017 also reflects an increase in GAZYVA unit sales volume of 22%, partially offset by higher discounts and allowances.
For 2017 compared to 2016, the increase in U.S. product revenues, net was primarily due to selling price increases and an increase in RITUXAN, including RITUXAN HYCELA, and GAZYVA unit sales volume of 2% and 6%, respectively, partially offset by higher discounts and allowances.
For 2018 compared to 2017, the decrease in collaboration costs and expenses was primarily due to lower Branded Pharmaceutical Drug fee expenses and decreases in GAZYVA and RITUXAN research and development costs.
For 2017 compared to 2016, the increase in collaboration costs and expenses was primarily due to higher Branded Pharmaceutical Drug Fee expenses and an increase in RITUXAN selling and marketing costs, partially offset by a decrease in GAZYVA research and development costs.
We are aware of anti-CD20 molecules, including biosimilars, in development that if successfully developed and approved, may compete with RITUXAN in the oncology market. In 2018 the FDA approved a rituximab biosimilar in the U.S. A biosimilar of RITUXAN could come to market in the U.S. in 2019, which may adversely affect the pre-tax profits of our collaboration arrangements with Genentech, which would, in turn, adversely affect our co-promotion profits in the U.S. in future years.
Other Revenues from Anti-CD20 Therapeutic Programs
Other revenues from anti-CD20 therapeutic programs consist of royalty revenues on sales of OCREVUS and our share of pre-tax co-promotion profits from RITUXAN in Canada.
For 2018 compared to 2017, the increase in other revenues from anti-CD20 therapeutic programs was primarily due to the launch of OCREVUS in the second quarter of 2017 and subsequent sales growth. Royalty revenues recognized on sales of OCREVUS for the years ended December 31, 2018 and 2017, totaled $478.3 million and $159.3 million, respectively.
For 2017 compared to 2016, other revenues from anti-CD20 therapeutic programs increased primarily due to the launch of OCREVUS in the second quarter of 2017.
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 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.
For additional information on our relationship with Genentech, including information regarding the pre-tax profit-sharing formula and its impact on future revenues from anti-CD20 therapeutic programs, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Other Revenues
Other revenues are summarized as follows:
| For The Years Ended December 31, | % Change | ||||||||||||||||
| 2018 compared to 2017 | 2017 compared to 2016 | ||||||||||||||||
| (In millions, except percentages) | 2018 | 2017 | 2016 | ||||||||||||||
| Revenues from collaborative and other relationships | $ | 87.8 | $ | 36.5 | $ | 39.3 | 140.5 | % | (7.1 | )% | |||||||
| Other royalty and corporate revenues | 498.1 | 323.5 | 277.1 | 54.0 | % | 16.7 | % | ||||||||||
| Total other revenues | $ | 585.9 | $ | 360.0 | $ | 316.4 | 62.8 | % | 13.8 | % |
Revenues from Collaborative and Other Relationships
Revenues from collaborative and other relationships include revenues from our technical development services and manufacturing agreements with Samsung Bioepis and royalty revenues on biosimilar products from Samsung Bioepis. Revenues from collaborative and other relationships also include our 50% share of the co-promotion losses on sales of ZINBRYTA in the U.S. with AbbVie.
Prior to the spin-off of our hemophilia business, other revenues from collaborative and other relationships also included revenues earned under our manufacturing services agreement with Swedish Orphan Biovitrum AB (Sobi) on shipments of ELOCTA and ALPROLIX to Sobi and royalties from Sobi on sales of ELOCTA and ALPROLIX in their territory, which included substantially all of Europe, Russia and certain markets in Northern Africa and the Middle East. Bioverativ assumed all of our rights and obligations under our agreement with Sobi on February 1, 2017.
For 2018 compared to 2017, the increase in revenues from collaborative and other relationships was primarily due to higher revenues earned under our manufacturing agreement with Samsung Bioepis.
For 2017 compared to 2016, the decrease in other revenues from collaborative and other relationships was primarily due to the impact of the spin-off of our hemophilia business on February 1, 2017, partially offset by higher revenues earned under our manufacturing agreement with Samsung Bioepis.
For additional information on our collaborative and other relationships, including revenues recognized under our technical development services and manufacturing agreements with Samsung Bioepis and our share of co-promotion losses in the U.S. on the sale of ZINBRYTA, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
For additional information on the spin-off of our hemophilia business, please read Note 3, Hemophilia Spin-Off, to our consolidated financial statements included in this report.
Other Royalty and Corporate Revenues
We receive royalties from net sales on products related to patents that we have out-licensed and we record other corporate revenues primarily from amounts earned under contract manufacturing agreements.
For 2018 compared to 2017, the increase in royalty and other corporate revenues was primarily due to higher contract manufacturing revenues resulting from increased shipments of drug product and drug substance production provided to our strategic partners, partially offset by a reduction in royalty revenues due to the expiration of certain of our patents.
As a result of the adoption of the new revenue standards as of January 1, 2018, other corporate revenue and cost of sales, excluding amortization and impairment of acquired intangible assets were $75.8 million and $42.4 million, respectively, higher in the year ended December 31, 2018, compared to what
would have been reported under the previous revenue guidance, 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.
For 2017 compared to 2016, the increase in royalty and other corporate revenues was primarily due to an increase in sales of the underlying products from which we receive royalties and higher contract manufacturing revenues related to the volume of shipments of drug substance production provided to our strategic partners, including Bioverativ.
Pursuant to the terms of the manufacture and supply agreement with Bioverativ entered into in connection with the spin-off of our hemophilia business, we expect to sell substantially all remaining hemophilia related inventory to Bioverativ during the first quarter of 2019, with a cost basis totaling approximately $180.0 million as of December 31, 2018.
Reserves for Discounts and Allowances
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances, including those associated with the implementation of pricing actions in certain international markets where we operate.
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). 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. 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.
Reserves for discounts, contractual adjustments and returns that reduced gross product revenues are summarized as follows:
For the years ended December 31, 2018, 2017 and 2016, reserves for discounts and allowances as a percentage of gross product revenues were 23.7%, 22.0% and 21.3%, respectively.
Discounts
Discounts include trade term discounts and wholesaler incentives.
For 2018 compared to 2017, the increase in discounts was primarily due to increases in rest of world product revenues, due in part to increases in SPINRAZA and biosimilar revenues, partially offset by the impact resulting from the spin-off of our hemophilia business on February 1, 2017.
For 2017 compared to 2016, the decrease in discounts was primarily driven by the impact from the spin-off of our hemophilia business on February 1, 2017, partially offset by an increase in rest of world product revenues, due in part to an increase in biosimilar revenues, as well as an increase in gross selling prices.
Contractual Adjustments
Contractual adjustments primarily relate to Medicaid and managed care rebates, co-payment assistance (copay), VA and PHS discounts, specialty pharmacy program fees and other government rebates or applicable allowances.
For 2018 compared to 2017, the increase in contractual adjustments was primarily due to higher managed care rebates in the U.S. as well as other governmental rebates and allowances in the U.S. and
rest of world, due in part to an increase in SPINRAZA sales volumes worldwide and an increase in gross selling prices in the U.S. These increases were partially offset by the impact from the spin-off of our hemophilia business on February 1, 2017.
For 2017 compared to 2016, the increase in contractual adjustments was primarily due to higher managed care rebates and Medicaid and other governmental rebates and allowances in the U.S., due in part to an increase in gross selling prices and the launch of SPINRAZA in the U.S. in the fourth quarter of 2016, partially offset by the impact from the spin-off of our hemophilia business on February 1, 2017.
Returns
Product return reserves are established for returns made by wholesalers. In accordance with contractual terms, wholesalers are permitted to return
product for reasons such as damaged or expired product. The majority of wholesaler returns are due to product expiration. Provisions for product returns are recognized in the period the related revenue is recognized, resulting in a reduction to product sales.
For 2018 compared to 2017, the increase in return reserves was primarily due to the voluntary worldwide withdrawal of ZINBRYTA for RMS, which we and AbbVie announced in March 2018.
For 2017 compared to 2016, return provisions were relatively consistent.
For additional information on our revenue reserves, please read Note 5, Revenues, to our consolidated financial statements included in this report.
Cost and Expenses
A summary of total cost and expenses is as follows:
| For the Years Ended December 31, | % Change | ||||||||||||||||
| 2018 compared to 2017 | 2017 compared to 2016 | ||||||||||||||||
| (In millions, except percentages) | 2018 | 2017 | 2016 | ||||||||||||||
| Cost of sales, excluding amortization and impairment of acquired intangible assets | $ | 1,816.3 | $ | 1,630.0 | $ | 1,478.7 | 11.4 | % | 10.2 | % | |||||||
| Research and development | 2,597.2 | 2,253.6 | 1,973.3 | 15.2 | % | 14.2 | % | ||||||||||
| Selling, general and administrative | 2,106.3 | 1,933.9 | 1,946.6 | 8.9 | % | (0.7 | )% | ||||||||||
| Amortization and impairment of acquired intangible assets | 747.3 | 814.7 | 385.6 | (8.3 | )% | 111.3 | % | ||||||||||
| Collaboration profit (loss) sharing | 185.0 | 112.3 | 10.2 | 64.7 | % | ** | |||||||||||
| Acquired in-process research and development | 112.5 | 120.0 | — | (6.3 | )% | ** | |||||||||||
| Restructuring charges | 12.0 | 0.9 | 33.1 | ** | (97.3 | )% | |||||||||||
| (Gain) loss on fair value remeasurement of contingent consideration | (12.3 | ) | 62.7 | 14.8 | (119.6 | )% | 323.6 | % | |||||||||
| TECFIDERA litigation settlement charge | — | — | 454.8 | ** | (100.0 | )% | |||||||||||
| Total cost and expenses | $ | 7,564.3 | $ | 6,928.1 | $ | 6,297.1 | 9.2 | % | 10.0 | % |
** Percentage not meaningful.
Cost of Sales, Excluding Amortization and Impairment of Acquired Intangible Assets (Cost of Sales)
Product Cost of Sales
For 2018 compared to 2017, the increase in product cost of sales was primarily due to higher contract manufacturing shipments of drug product and drug substance production provided to our strategic partners and an increase in biosimilar sales volumes. These increases were partially offset by lower costs associated with our MS products and a decrease in inventory amounts written down as a result of excess, obsolescence, unmarketability or other reasons.
For 2017 compared to 2016, the increase in product cost of sales was primarily driven by higher unit sales volume related to our biosimilar product shipments, higher contract manufacturing shipments of drug substance production provided to our strategic partners, including Bioverativ, and an increase in inventory amounts written down as a result of excess, obsolescence, unmarketability or other reasons. These increases were partially offset by the impact from the spin-off of our hemophilia business on February 1, 2017, and the accelerated depreciation recorded in the second, third and fourth quarters of 2016 as a result of our decision to cease manufacturing in Cambridge, MA.
Product cost of sales for 2016 reflects the recognition of $45.5 million of accelerated depreciation as a result of our decision to cease manufacturing in Cambridge, MA and vacate our small-scale biologics manufacturing facility in Cambridge, MA and warehouse space in Somerville, MA.
Inventory amounts written down as a result of excess, obsolescence, unmarketability or other
reasons totaled $41.9 million, $76.9 million and $48.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Royalty Cost of Sales
For 2018 compared to 2017, the increase in royalty cost of sales was primarily due to increased royalties payable to Ionis on higher sales of SPINRAZA, partially offset by the expiration of certain third-party royalties payable on sales of TYSABRI and decreases in royalties payable due to lower sales of TYSABRI.
For 2017 compared to 2016, the increase in royalty cost of sales was primarily driven by the recognition of royalties payable to Ionis on sales of SPINRAZA and higher royalties on sales of AVONEX and PLEGRIDY in the U.S., as described below. These increases were partially offset by the elimination of royalties payable on sales of hemophilia products resulting from the spin-off of our hemophilia business on February 1, 2017, and lower royalties on sales of TYSABRI resulting from the expiration of certain third-party royalties.
On June 28, 2016, the USPTO issued to the Japanese Foundation for Cancer Research (JFCR) a patent related to recombinant interferon-beta protein. This patent, U.S. Patent No. 9,376,478, expires in June 2033. This patent was issued following an interference proceeding between JFCR and us. This patent is relevant to AVONEX and PLEGRIDY, and we will pay royalties in the mid-single digits in relation to this patent during the life of the patent.
Research and Development
We support our drug discovery and development efforts through the commitment of significant resources to discovery, research and development programs and business development opportunities.
A significant amount of our research and development costs consist of indirect costs incurred in support of overall research and development activities and non-specific programs, including activities that benefit multiple programs, such as management costs, as well as depreciation,
information technology and facility-based expenses. These costs are considered other research and development costs in the table above and are not allocated to a specific program or stage.
Research and development expense incurred in support of our marketed products includes costs associated with product lifecycle management activities including, if applicable, costs associated with the development of new indications for existing products. Late stage programs are programs in Phase 3 development or in registration stage. Early stage programs are programs in Phase 1 or Phase 2 development. Research and discovery represents costs incurred to support our discovery research and translational science efforts. Costs are reflected in the development stage based upon the program status when incurred. Therefore, the same program could be reflected in different development stages in the same year. For several of our programs, the research and development activities are part of our collaborative and other relationships. Our costs reflect our share of the total costs incurred.
For 2018 compared to 2017, the increase in research and development expense was primarily due to increases in milestone and upfront expenses, costs incurred in connection with our early and late stage programs and increased costs incurred in connection with research and discovery. These increases were partially offset by decreased costs incurred with our marketed products.
For 2017 compared to 2016, the increase in research and development expense was primarily related to milestone and upfront expenses and costs incurred in connection with our early stage and late stage programs, partially offset by decreased costs incurred in connection with our marketed products.
We intend to continue committing significant resources to targeted research and development opportunities where there is a significant unmet need and where a drug candidate has the potential to be highly differentiated.
Milestone and Upfront Expenses
Research and development expense for 2018 includes:
| • | $486.2 million net charge to research and development expense upon the closing of the 2018 Ionis Agreement; |
| • | $35.0 million charge to research and development expense upon the exercise of our option to obtain a worldwide, exclusive, royalty-bearing license from Ionis to develop and commercialize BIIB067; and |
| • | $17.0 million upfront charge recognized upon entering into a collaboration and research and development services agreement with C4T to investigate the use of C4T’s novel protein degradation platform to discover and develop potential new treatments for neurological diseases. |
Research and development expense for 2017 includes:
| • | $300.0 million upfront payment made to BMS upon entering into our agreement to exclusively license BIIB092; |
| • | $60.0 million developmental milestone payment due to the former shareholders of iPierian, which became payable upon dosing of the first patient in the Phase 2 study of BIIB092 for PSP; |
| • | $28.0 million upfront payment made to Alkermes upon entering into our agreement to exclusively license diroximel fumarate, representing our share of diroximel fumarate development costs already incurred in 2017; |
| • | $50.0 million accrual based upon the expected continuation of our agreement with Alkermes to develop and commercialize diroximel fumarate; and |
| • | $25.0 million upfront payment recognized upon entering into a new collaboration agreement with Ionis to identify new ASO drug candidates for the treatment of SMA. |
Research and development expense for 2016 includes:
| • | $75.0 million license fee paid to Ionis as we exercised our option to develop and commercialize SPINRAZA from Ionis; |
| • | $50.0 million milestone payment to Eisai related to the initiation of a Phase 3 study for elenbecestat; and |
| • | $20.0 million upfront payment recognized upon entering into a collaboration and alliance agreement with UPenn. |
These payments are classified as research and development expense as the programs they relate to had not achieved regulatory approval as of the payment date.
For additional information about these collaboration arrangements, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Early Stage Programs
For 2018 compared to 2017, the increase in spending associated with our early stage programs was primarily due to the development of BIIB092 in AD and PSP pursuant to our license agreement with BMS, the development of BIIB054 in Parkinson's disease, the development of BIIB080 (IONIS-MAPTRx) in AD, the development of opicinumab in MS and the development of BIIB093 in LHI, which we advanced to a late stage program in the third quarter of 2018.
For 2017 compared to 2016, the increase in spending associated with our early stage programs was primarily related to the development of BIIB092 in AD and PSP pursuant to our license agreement with BMS, vixotrigine for the treatment of trigeminal neuralgia (TGN) and BIIB076 (anti-tau mAb) in AD. These increases were partially offset by a reduction in costs resulting from our discontinuance of development of amiselimod in the third quarter of 2016.
Late Stage Programs
For 2018 compared to 2017, the increase in spending associated with our late stage programs was primarily due to the development of diroximel fumarate in MS pursuant to our license and collaboration agreement with Alkermes, the development of elenbecestat in AD pursuant to our collaboration agreement with Eisai and the development of BIIB093 in LHI, which we advanced to a late stage program in the third quarter of 2018. These increases were partially offset by a decrease in costs related to aducanumab reflecting Eisai's 15% reimbursement of aducanumab development expenses beginning April 1, 2018.
Beginning January 1, 2019, Eisai began to reimburse us for 45% of aducanumab development expense incurred.
For 2017 compared to 2016, the increase in spending associated with our late stage programs was primarily related to the increased costs associated with the development of aducanumab in AD and costs incurred associated with the development of elenbecestat that was advanced to a late stage program in the fourth quarter of 2016. These increases were partially offset by advancement of SPINRAZA to marketed products following its approval in the U.S. in the fourth quarter of 2016.
Marketed Products
For 2018 compared to 2017, the decrease in spending associated with our marketed products was primarily due to decreases in costs associated with our MS related projects.
For 2017 compared to 2016, the decrease in spending associated with our marketed products was primarily due to a reduction in spending resulting from the spin-off of our hemophilia business on February 1, 2017, and a reduction in spending related to TECFIDERA. These decreases were partially offset by increased spending related to SPINRAZA following its approval in the U.S. in the fourth quarter of 2016.
Selling, General and Administrative
For 2018 compared to 2017, the increase in selling, general and administrative expenses was primarily due to increases in operational spending on sales and marketing activities in support of our marketed products, primarily related to increased commercialization costs of SPINRAZA as we continue to expand into new international markets and increased costs incurred in support of our business development activities completed during the current period. These increases were partially offset by the timing of certain spend, a decrease in operational spend on ZINBRYTA subsequent to the voluntary worldwide withdrawal of ZINBRYTA for RMS, which we and AbbVie announced in March 2018, and a reduction in the Branded Pharmaceutical Drug fee expense.
For 2017 compared to 2016, the decrease in selling, general and administrative expenses was primarily due to a reduction in operational spending resulting from the spin-off of our hemophilia business on February 1, 2017, the execution of targeted cost reduction initiatives and a reduction in costs resulting from the discontinuance of our TECFIDERA television advertising campaign in the second quarter of 2016. These decreases were offset by an increase in SPINRAZA commercialization costs and an increase in corporate giving.
Amortization and Impairment of Acquired 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.
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.
For 2018 compared to 2017, the decrease in amortization and impairment of acquired intangible assets reflects an overall net decrease in amortization and impairment charges related to our intangible assets associated with our U.S. and rest of world licenses for Forward Pharma's intellectual property, including Forward Pharma's intellectual property related to TECFIDERA, as discussed below, and the impact of higher expected lifetime revenues of TYSABRI. These decreases were partially offset by the impact of impairment charges related to certain IPR&D assets associated with our vixotrigine program totaling $189.3 million, also discussed below.
For 2017 compared to 2016, the increase in amortization and impairment of acquired intangible assets was primarily due to $444.2 million of amortization and impairment charges related to our intangible asset associated with our U.S. and rest of world licenses for Forward Pharma's intellectual property, including Forward Pharma's intellectual property related to TECFIDERA. Amortization and impairment of acquired intangible asset for 2017 also includes a $31.2 million impairment related to our acquired and in-licensed rights and patents intangible asset associated with ZINBRYTA after the initiation of an 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.
For additional information on our collaboration arrangement with AbbVie, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
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 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 USPTO's 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 rest of world intangible asset as of December 31, 2018, was $71.0 million.
For additional information on these disputes, please read Note 21, Litigation, to our consolidated financial statements included in this report.
IPR&D related to Business Combinations
IPR&D represents the fair value assigned to research and development assets that we acquired and had not yet reached technological feasibility at the date of acquisition. We review amounts capitalized as acquired IPR&D for impairment at least annually, as of October 31, and whenever events or changes in circumstances indicate to us that the carrying value of the assets might not be recoverable.
During the third quarter of 2018 we completed a Phase 2b study of vixotrigine for the treatment of 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 SFN. 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.
We may recognize additional impairment charges in the future depending upon our ability to advance vixotrigine for the treatment of TGN or other indications.
Overall, the value of our acquired IPR&D assets is dependent upon several variables, including estimates of future revenues and the effects of competition, our ability to secure sufficient pricing in a competitive market, our ability to confirm safety and efficacy based on data from clinical trials and regulatory feedback, the level of anticipated development costs and the probability and timing of
successfully advancing a particular research program from one clinical trial phase to the next. We are continually reevaluating our estimates concerning these and other variables, including our life cycle management strategies and changes in program economics and related impact of foreign currency exchange rates, and evaluating industry data regarding the productivity of clinical research and the development process. Changes in our estimates of these items may result in a significant change to our valuation of our IPR&D assets.
For additional information on the amortization and impairment of acquired intangible assets, including our TECFIDERA settlement and license agreement and our IPR&D intangible asset related to our vixotrigine program for the treatment of TGN, please read Note 7, Intangible Assets and Goodwill, to our consolidated financial statements included in this report.
Estimated Future Amortization of Intangible Assets
Annually, during our long-range planning cycle, we perform an analysis of 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. The results of our TYSABRI, AVONEX and TECFIDERA analyses were impacted by changes in the estimated timing and impact of other alternative MS formulations, including OCREVUS. The outcome of this most recent analysis resulted in a net overall decrease in our expected rate of amortization for acquired intangible assets, which was primarily related to higher expected lifetime revenues of TYSABRI.
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 |
The amounts in the table above are lower than the total amount of amortization recognized for the years ended December 31, 2018, 2017 and 2016, as
a result of the impact of the impairment charges discussed above.
We monitor events and expectations regarding product performance. If new information indicates that the assumptions underlying our most recent analysis are substantially different than those utilized in our current estimates, our analysis would be updated and may result in a significant change in the anticipated lifetime revenues of the relevant products. The occurrence of an adverse event could substantially increase the amount of amortization expense related to our acquired intangible assets as compared to previous periods or our current expectations, which may result in a significant negative impact on our future results of operations.
Collaboration Profit (Loss) Sharing
Collaboration profit (loss) sharing includes our partner’s 50% share of the profit or loss related to our biosimilars commercial agreement with Samsung Bioepis and our partner’s 50% share of the co-promotion profits or losses in the E.U. and Canada related to our collaboration agreement with AbbVie on the commercialization of ZINBRYTA.
For 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. The increase in profit-sharing expense for the comparative periods were primarily due to increased collaboration profits resulting from increased biosimilar sales.
For 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, compared to net profit-sharing expense of $1.3 million in 2017 to reflect AbbVie’s 50% sharing of the net collaboration profits in the E.U. and Canada, and net profit-sharing income of $4.9 million in 2016 to reflect AbbVie’s 50% sharing of the net collaboration losses in the E.U. and Canada.
For additional information on our collaboration arrangements with Samsung Bioepis and AbbVie, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Acquired In-Process Research and Development
BIIB110 Acquisition
In July 2018 we acquired BIIB110 and ALG-802 from AliveGen. BIIB110 and ALG-802 represent novel ways of targeting the myostatin pathway. 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.
BIIB104 Acquisition
In April 2018 we acquired BIIB104 from Pfizer. BIIB104 is a first-in-class, Phase 2b ready AMPA receptor potentiator for CIAS. 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.
BIIB100 Acquisition
In January 2018 we acquired BIIB100 from Kayropharm. BIIB100 is a Phase 1 ready investigational oral compound for the treatment of certain neurological and neurodegenerative diseases, primarily in ALS. 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.
BIIB093 Acquisition
In May 2017 we acquired BIIB093 from Remedy. 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 had not yet reached technological feasibility.
For additional information on our acquisitions of BIIB110, BIIB104, BIIB100 and BIIB093, please read Note 2, Acquisitions, to our consolidated financial statements included in this report.
Restructuring Charges
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.
Throughout 2018 we reallocated resources within our research and development organization to maximize our investment in what we believe are our highest-potential programs. As a result, we have terminated certain research and development programs and redesigned clinical trial protocols with the goal of driving efficiencies and savings to be reinvested in such efforts. Additionally, we have focused efforts on implementing improvements to our core business processes as well as refining our facility footprint, which allowed for the further reallocation of resources towards prioritized research and investment in our sales and marketing organizations to fortify our core business in MS and SMA and to prepare for the potential launch of future products.
For the years ended December 31, 2018 and 2017, we recognized charges of $22.9 million and $19.4 million related to this effort, respectively, 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 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.
(Gain) Loss on Fair Value Remeasurement of Contingent Consideration
Consideration payable for certain of our business combinations includes future payments that are contingent upon the occurrence of a particular event or events. We record an obligation for such contingent consideration payments at fair value on the acquisition date. We then revalue our contingent consideration obligations each reporting period. Changes in the fair value of our contingent consideration obligations, other than changes due to payments, are recognized as a (gain) loss on fair value remeasurement of contingent consideration in our consolidated statements of income.
The gain on fair value remeasurement of contingent consideration for 2018 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. 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 our consolidated financial statements included in this report.
The loss on fair value remeasurement of contingent consideration for 2017 was primarily due to the increase in the probability of achieving certain
developmental milestones based upon the progression of the underlying clinical programs.
The loss on fair value remeasurement of contingent consideration for 2016 was primarily due to changes in the probability of achieving certain developmental milestones based upon the progression of the underlying clinical programs and changes in the discount rate.
TECFIDERA Litigation Settlement Charge
As described above under Amortization and Impairment of Acquired Intangible Assets - TECFIDERA License Rights, in January 2017 we entered into a settlement and license agreement with Forward Pharma pursuant to which 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. During the fourth quarter of 2016, we recognized a pre-tax charge of $454.8 million and, in the first quarter of 2017, we recognized an intangible asset of $795.2 million related to this agreement. The pre-tax charge recognized in the fourth quarter of 2016 represented the fair value of our licenses to Forward Pharma’s intellectual property for the period April 2014, when we started selling TECFIDERA, through December 31, 2016.
For additional information on our TECFIDERA settlement and license agreement, please read Note 7, Intangible Assets and Goodwill, to our consolidated financial statements included in this report.
Other Income (Expense), Net
Effective January 1, 2018, other income (expense), net for the year ended December 31, 2018, reflects the recognition of net gains (losses) recorded in relation to changes in the fair value of our strategic investments following our adoption of Accounting Standards Update (ASU) No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Changes in the fair value of our strategic investments could have a significant impact on our results of operations in any given period. For 2018 net gains (losses) recognized in relation to the changes in fair value of our strategic investments totaled $128.0 million, which are reflected in the net gains discussed below. Prior to the adoption of this standard, we recognized changes in fair value of our strategic investment in accumulated other comprehensive income (loss), net.
For 2018 compared to 2017, the change in other income (expense), net was primarily due to the recognition of net gains totaling $119.5 million recorded in 2018 in relation to our investment portfolio as compared to net losses totaling $36.3 million in 2017. The change in other income (expense), net for 2018, compared to 2017, was also due to a decrease in interest expense due to the redemption in November 2017 of our 6.875% Senior Notes due March 1, 2018, and an increase in capitalized interest costs, which was primarily related to the ongoing construction of our manufacturing facility in Solothurn, Switzerland as well as an increase in interest income primarily due to higher interest rates. These comparative net increases were partially offset by foreign exchange losses recognized in 2018 compared to gains recognized in 2017.
For 2017 compared to 2016, the change in other income (expense), net was primarily due to an increase in foreign currency exchange gains, an increase in interest income, primarily due to higher interest rates, and a decrease in interest expense
due to the redemption in November 2017 of our 6.875% Senior Notes due March 1, 2018. These comparative net increases were partially offset by other than temporary impairments recognized on strategic investments and marketable debt securities during 2017.
Income Tax Provision
Our effective tax rate fluctuates from year to year due to the global nature of our operations. The factors that most significantly impact our effective tax rate include changes in tax laws, variability in the allocation of our taxable earnings among multiple jurisdictions, the amount and characterization of our research and development expenses, the levels of certain deductions and credits, acquisitions and licensing transactions.
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 our effective tax rate 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 2017 compared to 2016, the increase in our effective tax rate was primarily due to the effect of the 2017 Tax Act and the impairment of prepaid tax assets related to our ZINBRYTA program.
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.
2017 Tax Act
The 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, resulting in our recording of a $135.8 million income tax expense during the year ended December 31, 2018.
During the fourth quarter of 2017 we recognized within our provision for income taxes a $1.2 billion provisional estimate pursuant to SEC Staff Accounting Bulletin No. 118. Our provisional estimate included an amount of $989.6 million associated with the Transition Toll Tax, which is a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries’ previously untaxed foreign earnings, 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.
The final determination of the Transition Toll Tax and remeasurement of our deferred assets and liabilities was completed in the fourth quarter of 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 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 our consolidated financial statements included in this report.
For 2017 compared to 2016, excluding the effect of the 2017 Tax Act and the ZINBRTYA impairment, 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.
Accounting for Uncertainty in Income Taxes
For additional information on our uncertain tax positions and income tax rate reconciliation for 2018, 2017 and 2016, please read Note 17, Income Taxes,
to our consolidated financial statements included in this report.
Noncontrolling Interest
For 2018 net income attributable to noncontrolling interests, net of tax, was primarily related to a $50.0 million pre-tax payment made to Neurimmune to reduce the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab, by 5%.
For 2017 net income attributable to noncontrolling interests, net of tax, was primarily related to a $150.0 million pre-tax payment made to Neurimmune to reduce the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab, by 15%.
For additional information on our collaboration arrangement with Neurimmune, please read Note 20, Investments in Variable Interest Entities, to our consolidated financial statements included in this report.
Financial Condition, Liquidity and Capital Resources
Our financial condition is summarized as follows:
| As of December 31, | % Change | |||||||||
| (In millions, except percentages) | 2018 | 2017 | 2018 compared to 2017 | |||||||
| Financial assets: | ||||||||||
| Cash and cash equivalents | $ | 1,224.6 | $ | 1,573.8 | (22.2 | )% | ||||
| Marketable securities — current | 2,313.4 | 2,115.2 | 9.4 | % | ||||||
| Marketable securities — non-current | 1,375.9 | 3,057.3 | (55.0 | )% | ||||||
| Total cash, cash equivalents and marketable securities | $ | 4,913.9 | $ | 6,746.3 | (27.2 | )% | ||||
| Borrowings: | ||||||||||
| Current portion of notes payable and other financing arrangements | $ | — | $ | 3.2 | (100.0 | )% | ||||
| Notes payable and other financing arrangements | 5,936.5 | 5,935.0 | — | % | ||||||
| Total borrowings | $ | 5,936.5 | $ | 5,938.2 | — | % | ||||
| Working Capital: | ||||||||||
| Current assets | $ | 7,640.9 | $ | 7,873.3 | (3.0 | )% | ||||
| Current liabilities | (3,295.2 | ) | (3,368.2 | ) | (2.2 | )% | ||||
| Total working capital | $ | 4,345.7 | $ | 4,505.1 | (3.5 | )% |
For the year ended December 31, 2018, certain significant cash flows were as follows:
| • | $6.2 billion in net cash flows provided by operating activities, net of: |
| ◦ | $1.0 billion in total net payments for income taxes; |
| ◦ | $375.0 million in an upfront payment made to Ionis upon the closing of the 2018 Ionis Agreement and a $162.1 million expense reflecting the premium paid for the purchase of Ionis’ common stock; |
| • | $4.4 billion used for share repurchases; |
| • | $1.5 billion in contingent payments made to former shareholders of Fumapharm AG and holders of their rights; |
| • | $770.6 million used for purchases of property, plant and equipment; |
| • | $676.6 million payment made to Samsung BioLogics upon the closing of the share purchase transaction increasing our ownership percentage in Samsung Bioepis to approximately 49.9%; |
| • | $462.9 million payment made to Ionis reflecting the fair value of the common stock purchased upon the closing the 2018 Ionis Agreement; and |
| • | $112.5 million in payments made for the acquisitions of BIIB100, BIIB104 and BIIB110. |
For the year ended December 31, 2017, certain significant cash flows were as follows:
| • | $4.6 billion in net cash flows provided by operating activities, net of: |
| ◦ | $1.1 billion in total net payments for income taxes; |
| ◦ | $463.0 million in upfront and milestone payments made to BMS, iPierian, Eisai, Alkermes and Ionis; and |
| ◦ | $454.8 million payment made to Forward Pharma for the litigation settlement charge that was accrued as of December 31, 2016; |
| • | $1.4 billion used for share repurchases; |
| • | $1.2 billion in contingent payments made to former shareholders of Fumapharm AG and holders of their rights; |
| • | $867.4 million used for purchases of property, plant and equipment; |
| • | $795.2 million payment made to Forward Pharma to license Forward Pharma’s intellectual property, including Forward Pharma’s intellectual property related to TECFIDERA; |
| • | $557.7 million payment made for the redemption of our 6.875% Senior Notes due March 1, 2018, prior to their maturity; |
| • | $302.7 million net cash contribution made in connection with the spin-off of our hemophilia business; |
| • | $295.0 million in upfront and milestone payments made to Remedy, Ionis and Samsung Bioepis; and |
| • | $132.4 million payment, net of tax, made 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. |
Overview
We have historically financed our operating and capital expenditures primarily through cash flows earned through our operations. We expect to continue funding our current and planned operating requirements principally through our cash flows from operations, as well as our existing cash resources. We believe that our existing funds, when combined with cash generated from operations and our access to additional financing resources, if needed, are sufficient to satisfy our operating, working capital, strategic alliance, milestone payment, capital expenditure and debt service requirements for the foreseeable future. In addition, we may choose to opportunistically return cash to shareholders and pursue other business initiatives, including acquisition and licensing activities. We may, from time to time, also seek additional funding through a combination of new collaborative agreements, strategic alliances and additional equity and debt financings or from other sources should we identify a significant new opportunity.
Tax Reform
The 2017 Tax Act resulted in significant changes to the U.S. corporate income tax system.
The 2017 Tax Act eliminated the deferral of U.S. income tax on the historical unrepatriated earnings by imposing the Transition Toll Tax, which is a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries’ previously untaxed foreign earnings. The Transition Toll Tax was assessed on our share of our foreign corporations’ accumulated foreign earnings that have not previously been taxed.
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.
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 IRS of an approximately $150.0 million overpayment against the accrual and the net reduction of approximately $34.6 million in our estimated Transition Toll Tax. 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. For additional information on the 2017 Tax Act, please read Note 17, Income Taxes, to our consolidated financial statements included in this report.
After repatriating approximately $3.5 billion during the first quarter of 2018 as a result of the 2017 Tax Act, approximately 51% of our total cash, cash equivalents and marketable securities at the end of the year were held in the U.S.
For additional information on certain risks that could negatively impact our financial position or future results of operations, please read Item 1A. Risk Factors and Item 7A. Quantitative and Qualitative Disclosures About Market Risk included in this report.
Share Repurchase Programs
In August 2018 our Board of Directors authorized our 2018 Share Repurchase Program, which is a program to repurchase up to $3.5 billion of our common stock. 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 our 2016 Share Repurchase Program, which is a program to repurchase up to $5.0 billion of our common stock. Our 2016 Share Repurchase Program 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 our 2011 Share Repurchase Program, which is a program to repurchase up to 20.0 million shares of our common stock. Our 2011 Share Repurchase Program 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.
Cash, Cash Equivalents and Marketable Securities
Until required for another use in our business, we typically invest our cash reserves in bank deposits, certificates of deposit, commercial paper, corporate notes, U.S. and foreign government instruments and other interest-bearing marketable debt instruments in accordance with our investment policy. It is our policy to mitigate credit risk in our cash reserves and marketable securities by maintaining a well-diversified portfolio that limits the amount of exposure as to institution, maturity and investment type.
As of December 31, 2018, we had cash, cash equivalents and marketable securities totaling approximately $4.9 billion compared to approximately $6.7 billion as of December 31, 2017. The net decrease in cash, cash equivalents and marketable securities at December 31, 2018, from December 31, 2017, was primarily due to cash used for share repurchases, contingent payments made to former shareholders of Fumapharm AG and holders of their rights, the payment made to Ionis upon the closing of the 2018 Ionis Agreement, net purchases of property, plant and equipment, payment made to Samsung BioLogics upon the closing of the share purchase transaction increasing our ownership percentage in Samsung Bioepis to approximately 49.9%, the upfront payments made to Karyopharm, Pfizer and AliveGen upon the acquisitions of BIIB100, BIIB104 and BIIB110, respectively, and the payment made to Ionis for the option exercise for BIIB067. These decreases were partially offset by cash flows from operations.
In addition, investments and other assets in our consolidated balance sheet as of December 31, 2018, includes the carrying value of our investment in Samsung Bioepis of $680.6 million. As Samsung Bioepis is a privately-held entity, our ability to liquidate our investment in Samsung Bioepis, may be limited and we may realize significantly less than the value of
such investment. Investments in other assets, as of December 31, 2018, also includes an asset of $563.8 million reflecting the fair value of our investment in Ionis’ common stock, which is subject to certain holding period restrictions.
For additional information on our acquisitions of BIIB100, BIIB104 and BIIB110, please read Note 2, Acquisitions, to our consolidated financial statements included in this report. For additional information on the 2018 Ionis Agreement, the additional investment in Samsung Bioepis and the option exercise for BIIB067, please read Note 19, Collaborative and Other Relationships, to our consolidated financial statements included in this report.
Borrowings
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. |
These Senior Notes were issued at discount and are amortized as additional interest expense over the period from issuance through maturity.
During the third quarter of 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.
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, which had a carrying value of 3.1 million Swiss Francs ($3.2 million) as of December 31, 2017.
For a summary of the fair values of our outstanding borrowings as of December 31, 2018 and 2017, please read Note 8, Fair Value Measurements, to our consolidated financial statements included in this report.
Working Capital
Working capital is defined as current assets less current liabilities. The change in working capital at December 31, 2018, from December 31, 2017, reflects a decrease in total current assets of $232.4 million and a decrease in total current liabilities of $73.0 million.
The net decrease in total current assets was primarily due to a decrease in prepaid taxes related to intra-entity inventory transactions, partially offset by an increase in accounts receivable, net related to our ongoing operations.
The net decrease in total current liabilities was primarily due to a reduction in accrued expenses and other and a decrease in accounts payable. The net decrease in accrued expenses and other was due to a decrease in the accrual of contingent payments related to FUMADERM and TECFIDERA (together, the Fumapharm Products), a decrease in accrued contingent consideration due to the milestone payment made to the former shareholders of Stromedix Inc. (Stromedix) and a decrease in our derivative liabilities. These decreases were partially offset by an increase in our accrued revenue related rebates due primarily to an increase in SPINRAZA and biosimilars revenues and an increase in accrued collaboration expenses due to an increase in expenses related to our collaboration with Samsung Bioepis.
Cash Flows
The following table summarizes our cash flow activity:
| For the Years Ended December 31, | % Change | ||||||||||||||||
| 2018 compared to 2017 | 2017 compared to 2016 | ||||||||||||||||
| (In millions, except percentages) | 2018 | 2017 | 2016 | ||||||||||||||
| Net cash flows provided by operating activities | $ | 6,187.7 | $ | 4,551.0 | $ | 4,587.2 | 36.0 | % | (0.8 | )% | |||||||
| Net cash flows used in investing activities | $ | (2,046.3 | ) | $ | (2,963.1 | ) | $ | (2,484.8 | ) | (30.9 | )% | 19.2 | % | ||||
| Net cash flows used in financing activities | $ | (4,472.0 | ) | $ | (2,380.0 | ) | $ | (1,052.6 | ) | 87.9 | % | 126.1 | % |
Operating Activities
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. We expect cash provided from operating activities will continue to be our primary source of funds to finance operating needs and capital expenditures for the foreseeable future.
Operating cash flow is derived by adjusting our net income for:
| • | non-cash operating items such as depreciation and amortization, impairment charges, acquired IPR&D and share-based compensation; |
| • | changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations; and |
| • | changes in the fair value of contingent payments associated with our acquisitions of businesses and payments related to collaborations. |
For 2018 compared to 2017, the increase in net cash flows provided by operating activities was primarily due to an increase in net income, improved collections from customers and collaborators, higher relative accruals for revenue-related reserves and lower overall cash income taxes paid. These factors were partially offset by higher spending related to business development activities discussed below.
The net cash flows provided by operating activities for the year ended December 31, 2018, were reduced by the $375.0 million upfront payment made to Ionis upon the closing of the 2018 Ionis Agreement and the $162.1 million charge reflecting the premium paid for the purchase of Ionis’ common stock compared to payments totaling $463.0 million in 2017 to BMS, iPierian, Eisai, Alkermes and Ionis.
The net cash flows provided by operating activities for the year ended December 31, 2017, were reduced by the $454.8 million payment made to Forward Pharma for the litigation settlement charge in the first quarter of 2017 that was accrued as of December 31, 2016.
For 2017 compared to 2016, net cash flows provided by operations were relatively consistent. Higher sales and lower income tax payments were offset by the $454.8 million payment related to our settlement and license agreement with Forward Pharma, which had been accrued as of December 31, 2016, and the timing of customer payments, including amounts due in connection with anti-CD20 therapeutic programs.
For 2017 compared to 2016, net income was lower primarily due to the Transition Toll Tax under the 2017 Tax Act and higher depreciation and amortization.
Investing Activities
For 2018 compared to 2017, the decrease in net cash flows used in investing activities was primarily due to:
| • | higher net proceeds of marketable securities; |
| • | the 2017 $795.2 million payment made to Forward Pharma to license Forward Pharma’s intellectual property, including Forward Pharma’s intellectual property related to TECFIDERA; and |
| • | a decrease in purchases of property, plant and equipment. |
These changes were partially offset by the following increases to investing activity:
| • | the $676.6 million payment made to Samsung BioLogics upon the closing of the share purchase transaction increasing our ownership percentage in Samsung Bioepis to approximately 49.9%; |
| • | the $462.9 million payment made to Ionis reflecting the fair value of the common stock purchased upon the closing of the 2018 Ionis Agreement; and |
| • | an increase in contingent payments made to former shareholders of Fumapharm AG and holders of their rights. |
For 2017 compared to 2016, the increase in net cash flows used in investing activities was primarily due to:
| • | the $795.2 million payment made to Forward Pharma to license Forward Pharma’s intellectual property, including Forward Pharma’s intellectual property related to TECFIDERA; |
| • | an increase in purchases of property, plant and equipment primarily related to the construction of our Solothurn, Switzerland facility; |
| • | $175.0 million in milestone payments made to Ionis and Samsung Bioepis; and |
| • | the $120.0 million payment made to Remedy for the acquisition of BIIB093. |
These increases were partially offset by an increase in net proceeds of marketable securities.
Financing Activities
For 2018 compared to 2017, the increase in net cash flows used in financing activities was primarily due to an increase in cash used for share repurchases. The effect of the increase in share repurchases was partially offset by lower repayment of outstanding debt, the contribution made in connection with the spin-off of our hemophilia business in the first quarter of 2017 and lower net distributions to noncontrolling interest reflecting the payments made to Neurimmune in October 2017 and May 2018.
For 2017 compared to 2016, the increase in net cash flows used in financing activities was primarily due to an increase in cash used for share repurchases, the payment made for the redemption of our 6.875% Senior Notes due March 1, 2018, prior to their maturity, the net cash contribution made in connection with the spin-off of our hemophilia business on February 1, 2017, and the net distributions to noncontrolling interest, including the payment made to Neurimmune in exchange for a reduction of 15% in the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab.
Contractual Obligations and Off-Balance Sheet Arrangements
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2018, excluding amounts related to uncertain tax positions, funding commitments, contingent development, regulatory and commercial milestone payments, contingent payments and contingent consideration related to our business combinations, as described below.
| Payments Due by Period | |||||||||||||||||||
| (In millions) | Total | Less than 1 Year | 1 to 3 Years | 3 to 5 Years | After 5 Years | ||||||||||||||
| Non-cancellable operating leases (1), (2) | $ | 418.8 | $ | 60.2 | $ | 107.3 | $ | 94.4 | $ | 156.9 | |||||||||
| Long-term debt obligations (3) | 9,185.2 | 241.6 | 1,939.8 | 1,360.0 | 5,643.8 | ||||||||||||||
| Purchase and other obligations (4) | 1,114.7 | 327.0 | 132.2 | 234.6 | 420.9 | ||||||||||||||
| Defined benefit obligation | 93.8 | — | — | — | 93.8 | ||||||||||||||
| Total contractual obligations | $ | 10,812.5 | $ | 628.8 | $ | 2,179.3 | $ | 1,689.0 | $ | 6,315.4 |
| (1) | We lease properties and equipment for use in our operations. Amounts reflected within the table above detail future minimum rental commitments under non-cancelable operating leases as of December 31 for each of the periods presented. In addition to the minimum rental commitments, these leases may require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses. |
| (2) | Obligations are presented net of sublease income expected to be received for the vacated small-scale biologics manufacturing facility in Cambridge, MA, the vacated portion of our Weston, MA facility and other facilities throughout the world. |
| (3) | Long-term debt obligations are primarily related to our Senior Notes, including principal and interest payments. |
| (4) | Purchase and other obligations primarily include our obligations to purchase direct materials, $697.0 million related to the remaining payments on the Transition Toll Tax, $111.0 million in contractual commitments for the construction of our large-scale biologics manufacturing facility in Solothurn, Switzerland and $24.6 million related to the fair value of net liabilities on derivative contracts. |
Contingent Payments
TYSABRI
In 2013 we acquired from Elan Pharma International Ltd. (Elan), an affiliate of Elan Corporation plc, 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 recognized 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 our consolidated financial statements included in this report.
Contingent Consideration related to Business Combinations
In connection with our acquisitions of Convergence Pharmaceuticals Ltd. (Convergence), Stromedix and Biogen International Neuroscience GmbH (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 FUMADERM and TECFIDERA (together, 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 contingent milestone payments are not considered contractual obligations as they are contingent on the successful achievement of certain development, regulatory approval or commercial milestones.
Provided various development, regulatory or commercial milestones are achieved, we anticipate that we may pay approximately $250.0 million of milestone payments in 2019.
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 contract research organizations (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 net 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 in installments over an eight-year period, which started in 2018, and will not accrue interest.
Other Off-Balance Sheet Arrangements
We do not have any relationships with entities often referred to as structured finance or special purpose entities that were established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We consolidate variable interest entities if we are the primary beneficiary.
Legal Matters
For a discussion of legal matters as of December 31, 2018, please read Note 21, Litigation, to our consolidated financial statements included in this report.
Critical Accounting Estimates
The preparation of our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP), requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. 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. Other significant accounting policies are outlined in Note 1, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.
Revenue Recognition
In May 2014 the Financial Accounting Standards Board (FASB) issued 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 Contract 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
result in a significant change to 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.
Product Revenues
In the 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 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.
In addition to the 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.
For additional information on our revenues, please read Note 5, Revenues, to our consolidated financial statements included in this report.
Acquired Intangible Assets, including IPR&D
When we purchase a business, the acquired IPR&D is measured at fair value, capitalized as an intangible asset and tested for impairment at least annually, as of October 31, until commercialization, after which time the IPR&D is amortized over its estimated useful life. If we acquire an asset or group of assets that do not meet the definition of a business under applicable accounting standards, the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to
research and development expense as they are incurred.
We have acquired, and expect to continue to acquire, intangible assets through the acquisition of biotechnology companies or through the consolidation of variable interest entities. These intangible assets primarily consist of technology associated with human therapeutic products and IPR&D product candidates. When significant identifiable intangible assets are acquired, we generally engage an independent third-party valuation firm to assist in determining the fair values of these assets as of the acquisition date. Management will determine the fair value of less significant identifiable intangible assets acquired. Discounted cash flow models are typically used in these valuations, and these models require the use of significant estimates and assumptions including but not limited to:
| • | estimating the timing of and expected costs to complete the in-process projects; |
| • | projecting regulatory approvals; |
| • | estimating future cash flows from product sales resulting from completed products and in process projects; and |
| • | developing appropriate discount rates and probability rates by project. |
We believe the fair values assigned to the intangible assets acquired are based upon reasonable estimates and assumptions given available facts and circumstances as of the acquisition dates.
If these projects are not successfully developed, the sales and profitability of the company may be adversely affected in future periods. Additionally, the value of the acquired intangible assets may become impaired. We believe that the foregoing assumptions used in the IPR&D analysis were reasonable. No assurance can be given that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated.
Impairment and Amortization of Long-lived Assets and Accounting for Goodwill
Long-lived Assets Other than Goodwill
Long-lived assets to be held and used include property, plant and equipment as well as intangible assets, including IPR&D and trademarks. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We review our intangible assets
with indefinite lives for impairment annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
When performing our impairment assessment, we calculate the fair value using the same methodology as described above under Acquired Intangible Assets, including IPR&D. 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 the 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 previously been impaired, including our vixotrigine program for the treatment of neuropathic pain, such as TGN, could become further impaired in the future.
Our most significant intangible assets are our acquired and in-licensed rights and patents and developed technology. Acquired and in-licensed rights and patents primarily relate to our acquisition of all remaining rights to TYSABRI from Elan and obtaining the fair value of the U.S. and rest of world licenses to Forward Pharma’s intellectual property, including Forward Pharma’s intellectual property related to TECFIDERA. 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 TYSABRI, AVONEX, SPINRAZA and TECFIDERA 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 or TECFIDERA products.
For additional information on the impairment charges related to our long-lived assets during 2018, 2017 and 2016, please read Note 7, Intangible Assets and Goodwill, to our consolidated financial statements included in this report.
Goodwill
Goodwill relates largely to amounts that arose in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in 2003 and amounts that are being paid in connection with the acquisition of Fumapharm AG. Our goodwill balances represent the difference between the purchase price and the fair value of the identifiable tangible and intangible net
assets when accounted for using the purchase method of accounting.
We assess our goodwill balance within our single reporting unit annually, as of October 31, and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable to determine whether any impairment in this asset may exist and, if so, the extent of such impairment. We 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.
We completed our required annual impairment test in the fourth quarters of 2018, 2017 and 2016 and determined in each of those periods that the carrying value of goodwill was not impaired. In each year, the fair value of our reporting unit, which includes goodwill, was significantly in excess of the carrying value of our reporting unit.
Investments, including Fair Value Measurements and Impairment
We invest in various types of securities, including short-term and long-term marketable securities, principally corporate notes, government securities including government sponsored enterprise mortgage-backed securities and credit card and auto loan asset-backed securities, in which our excess cash balances are invested. We also invest in equity securities of certain biotechnology companies and venture capital funds where the underlying investments are in equity securities of certain biotechnology companies.
In accordance with the accounting standard for fair value measurements, we have classified our financial assets as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates, yield curves, foreign currency spot rates and option pricing valuation models. Fair values determined by Level 3 inputs utilize unobservable data points for the asset.
As discussed in Note 8, Fair Value Measurements, to our consolidated financial statements included in this report, a majority of our financial assets have been classified as Level 2. These assets have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third-party pricing services or option pricing valuation models. The pricing services use many observable market inputs to determine value, including reportable trades,
benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. We validate the prices provided by our third-party pricing services by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances. 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.
Changes in our fair value measurements could have a significant impact on our results of operations in any given period.
Impairment
We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale debt securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income.
For available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected within earnings as an impairment loss.
Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security and are reflected within earnings as an impairment loss.
Share-Based Compensation
We make certain assumptions in order to value and record expense associated with awards made under our share-based compensation arrangements. Changes in these assumptions may lead to variability with respect to the amount of expense we recognize in connection with share-based payments.
Determining the appropriate valuation model and related assumptions requires judgment, and includes estimating the expected market price of our stock on vesting date and stock price volatility as well as the
term of the expected awards. Determining the appropriate amount to expense based on the anticipated achievement of performance targets requires judgment, including forecasting the achievement of future financial targets. The estimate of expense is revised periodically based on the probability of achieving the required performance targets and adjustments are made throughout the term as appropriate. The cumulative impact of any revision is reflected in the period of change.
We also estimate forfeitures over the requisite service period when recognizing share-based compensation expense based on historical rates and forward-looking factors. These estimates are adjusted to the extent that actual forfeitures differ, or are expected to materially differ, from our estimates.
Contingent Consideration
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 contingent consideration resulting from a business combination at its fair value on the acquisition date. Each reporting period thereafter, we revalue these obligations and record increases or decreases in their fair value as an adjustment to contingent consideration expense in our consolidated statements of income. Changes in the fair value of our contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates and achievement and timing of any cumulative sales-based and development milestones or changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market.
Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions described above, could have a material impact on the amount of contingent consideration expense we record in any given period.
Income Taxes
We prepare and file income tax returns based on our interpretation of each jurisdiction’s tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial
reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Upon our election in the fourth quarter of 2018 to record deferred taxes for GILTI, we have included amounts related to U.S. GILTI taxes within temporary difference. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income and the effects of tax planning strategies. Our estimates of future taxable income include, among other items, our estimates of future income tax deductions related to the exercise of stock options. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our consolidated financial position and results of operations.
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 deferred tax assets of approximately $2.0 billion, offset by a corresponding increase to deferred tax liabilities 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.
For additional information on ASU 2016-16, please read Note 17, Income Taxes, to our
consolidated financial statements included in this report.
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 adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished, through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the “more-likely-than-not” threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews, we have no plans to appeal or litigate any aspect of the tax position and we believe that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.
We earn a significant amount of our operating income outside the U.S. As a result, a portion of our cash, cash equivalents and marketable securities are held by foreign subsidiaries.
The 2017 Tax Act resulted in significant changes to the U.S. corporate income tax system.
The 2017 Tax Act eliminated the deferral of U.S. income tax on the historical unrepatriated earnings by imposing the Transition Toll Tax, which is a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries’ previously untaxed foreign earnings. The Transition Toll Tax was assessed on our share of our foreign corporations’ accumulated foreign earnings that were not previously taxed.
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 in installments over an eight-year period, which started in 2018, and will not accrue interest.
New Accounting Standards
For a discussion of new accounting standards and their expected impact on our consolidated financial statements or disclosures, please read Note 1, Summary of Significant Accounting Policies, to our consolidated financial statements included in this report.
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