filings.toolsItem 16. Form 10-K Summary
398K characters. Original on sec.gov · Markdown
Item 16. Form 10-K Summary
Not applicable.
EXHIBIT INDEX
| * | Management contract or compensatory plan or arrangement. |
| † | Confidential treatment has been granted or requested with respect to portions of this exhibit. |
| + | Filed herewith. |
| ++ | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| BIOGEN INC. | |||||
| By: | /S/ MICHEL VOUNATSOS | ||||
| Michel Vounatsos | |||||
| Chief Executive Officer |
Date: February 3, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Name | Capacity | Date | ||||||||||||
| /S/ MICHEL VOUNATSOS | Director and Chief Executive Officer (principal executive officer) | February 3, 2021 | ||||||||||||
| Michel Vounatsos | ||||||||||||||
| /S/ MICHAEL R. MCDONNELL | Executive Vice President and Chief Financial Officer (principal financial officer) | February 3, 2021 | ||||||||||||
| Michael R. McDonnell | ||||||||||||||
| /S/ ROBIN C. KRAMER | Senior Vice President, Chief Accounting Officer (principal accounting officer) | February 3, 2021 | ||||||||||||
| Robin C. Kramer | ||||||||||||||
| /S/ STELIOS PAPADOPOULOS | Director and Chairman of the Board of Directors | February 3, 2021 | ||||||||||||
| Stelios Papadopoulos | ||||||||||||||
| /S/ ALEXANDER J. DENNER | Director | February 3, 2021 | ||||||||||||
| Alexander J. Denner | ||||||||||||||
| /S/ CAROLINE D. DORSA | Director | February 3, 2021 | ||||||||||||
| Caroline D. Dorsa | ||||||||||||||
| /S/ WILLIAM A. HAWKINS | Director | February 3, 2021 | ||||||||||||
| William A. Hawkins | ||||||||||||||
| /S/ NANCY L. LEAMING | Director | February 3, 2021 | ||||||||||||
| Nancy L. Leaming | ||||||||||||||
| /S/ JESUS B. MANTAS | Director | February 3, 2021 | ||||||||||||
| Jesus B. Mantas | ||||||||||||||
| /S/ RICHARD C. MULLIGAN | Director | February 3, 2021 | ||||||||||||
| Richard C. Mulligan | ||||||||||||||
| /S/ ROBERT W. PANGIA | Director | February 3, 2021 | ||||||||||||
| Robert W. Pangia | ||||||||||||||
| /S/ BRIAN S. POSNER | Director | February 3, 2021 | ||||||||||||
| Brian S. Posner | ||||||||||||||
| /S/ ERIC K. ROWINSKY | Director | February 3, 2021 | ||||||||||||
| Eric K. Rowinsky | ||||||||||||||
| /S/ STEPHEN A. SHERWIN | Director | February 3, 2021 | ||||||||||||
| Stephen A. Sherwin |
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
| Page Number | ||||||||
| Consolidated Statements of Income | F-2 | |||||||
| Consolidated Statements of Comprehensive Income | F-3 | |||||||
| Consolidated Balance Sheets | F-4 | |||||||
| Consolidated Statements of Cash Flows | F-5 | |||||||
| Consolidated Statements of Equity | F-6 | |||||||
| Notes to Consolidated Financial Statements | F-9 | |||||||
| Report of Independent Registered Public Accounting Firm | F-80 |
F-1
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Product, net | $ | 10,692.2 | $ | 11,379.8 | $ | 10,886.8 | ||||||||||||||
| Revenues from anti-CD20 therapeutic programs | 1,977.8 | 2,290.4 | 1,980.2 | |||||||||||||||||
| Other | 774.6 | 707.7 | 585.9 | |||||||||||||||||
| Total revenues | 13,444.6 | 14,377.9 | 13,452.9 | |||||||||||||||||
| Cost and expenses: | ||||||||||||||||||||
| Cost of sales, excluding amortization and impairment of acquired intangible assets | 1,805.2 | 1,955.4 | 1,816.3 | |||||||||||||||||
| Research and development | 3,990.9 | 2,280.6 | 2,597.2 | |||||||||||||||||
| Selling, general and administrative | 2,504.5 | 2,374.7 | 2,106.3 | |||||||||||||||||
| Amortization and impairment of acquired intangible assets | 464.8 | 489.9 | 747.3 | |||||||||||||||||
| Collaboration profit (loss) sharing | 232.9 | 241.6 | 185.0 | |||||||||||||||||
| (Gain) loss on divestiture of Hillerød, Denmark manufacturing operations | (92.5) | 55.3 | — | |||||||||||||||||
| (Gain) loss on fair value remeasurement of contingent consideration | (86.3) | (63.7) | (12.3) | |||||||||||||||||
| Acquired in-process research and development | 75.0 | — | 112.5 | |||||||||||||||||
| Restructuring charges | — | 1.5 | 12.0 | |||||||||||||||||
| Total cost and expenses | 8,894.5 | 7,335.3 | 7,564.3 | |||||||||||||||||
| Income from operations | 4,550.1 | 7,042.6 | 5,888.6 | |||||||||||||||||
| Other income (expense), net | 497.4 | 83.3 | 11.0 | |||||||||||||||||
| Income before income tax expense and equity in loss of investee, net of tax | 5,047.5 | 7,125.9 | 5,899.6 | |||||||||||||||||
| Income tax expense | 992.3 | 1,158.0 | 1,425.6 | |||||||||||||||||
| Equity in (income) loss of investee, net of tax | (5.3) | 79.4 | — | |||||||||||||||||
| Net income | 4,060.5 | 5,888.5 | 4,474.0 | |||||||||||||||||
| Net income (loss) attributable to noncontrolling interests, net of tax | 59.9 | — | 43.3 | |||||||||||||||||
| Net income attributable to Biogen Inc. | $ | 4,000.6 | $ | 5,888.5 | $ | 4,430.7 | ||||||||||||||
| Net income per share: | ||||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | $ | 24.86 | $ | 31.47 | $ | 21.63 | ||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | $ | 24.80 | $ | 31.42 | $ | 21.58 | ||||||||||||||
| Weighted-average shares used in calculating: | ||||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | 160.9 | 187.1 | 204.9 | |||||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | 161.3 | 187.4 | 205.3 |
See accompanying notes to these consolidated financial statements.
F-2
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| For the Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Net income attributable to Biogen Inc. | $ | 4,000.6 | $ | 5,888.5 | $ | 4,430.7 | ||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||
| Unrealized gains (losses) on securities available for sale, net of tax | (2.8) | 8.2 | (3.9) | |||||||||||||||||
| Unrealized gains (losses) on cash flow hedges, net of tax | (186.8) | (26.9) | 139.2 | |||||||||||||||||
| Gains (losses) on net investment hedges, net of tax | (33.6) | 21.6 | 3.5 | |||||||||||||||||
| Unrealized gains (losses) on pension benefit obligation, net of tax | (33.5) | (1.5) | 5.5 | |||||||||||||||||
| Currency translation adjustment | 92.9 | 103.8 | (67.8) | |||||||||||||||||
| Total other comprehensive income (loss), net of tax | (163.8) | 105.2 | 76.5 | |||||||||||||||||
| Comprehensive income attributable to Biogen Inc. | 3,836.8 | 5,993.7 | 4,507.2 | |||||||||||||||||
| Comprehensive income (loss) attributable to noncontrolling interests, net of tax | 60.9 | (0.4) | 42.9 | |||||||||||||||||
| Comprehensive income | $ | 3,897.7 | $ | 5,993.3 | $ | 4,550.1 |
See accompanying notes to these consolidated financial statements.
F-3
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
| As of December 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 1,331.2 | $ | 2,913.7 | |||||||
| Marketable securities | 1,278.9 | 1,562.2 | |||||||||
| Accounts receivable, net | 1,913.8 | 1,880.5 | |||||||||
| Due from anti-CD20 therapeutic programs | 413.5 | 590.2 | |||||||||
| Inventory | 1,068.6 | 804.2 | |||||||||
| Other current assets | 881.1 | 631.0 | |||||||||
| Total current assets | 6,887.1 | 8,381.8 | |||||||||
| Marketable securities | 772.1 | 1,408.1 | |||||||||
| Property, plant and equipment, net | 3,411.5 | 3,247.3 | |||||||||
| Operating lease assets | 433.3 | 427.0 | |||||||||
| Intangible assets, net | 3,084.3 | 3,527.4 | |||||||||
| Goodwill | 5,762.1 | 5,757.8 | |||||||||
| Deferred tax asset | 1,369.5 | 3,232.1 | |||||||||
| Investments and other assets | 2,899.0 | 1,252.8 | |||||||||
| Total assets | $ | 24,618.9 | $ | 27,234.3 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of notes payable | $ | — | $ | 1,495.8 | |||||||
| Taxes payable | 142.0 | 71.4 | |||||||||
| Accounts payable | 454.9 | 530.8 | |||||||||
| Accrued expenses and other | 3,145.3 | 2,765.8 | |||||||||
| Total current liabilities | 3,742.2 | 4,863.8 | |||||||||
| Notes payable | 7,426.2 | 4,459.0 | |||||||||
| Deferred tax liability | 1,032.8 | 2,810.8 | |||||||||
| Long-term operating lease liabilities | 402.0 | 412.7 | |||||||||
| Other long-term liabilities | 1,329.6 | 1,348.9 | |||||||||
| Total liabilities | 13,932.8 | 13,895.2 | |||||||||
| Commitments, contingencies and guarantees (Notes 21 and 22) | |||||||||||
| Equity: | |||||||||||
| Biogen Inc. shareholders’ equity | |||||||||||
| Preferred stock, par value $0.001 per share | — | — | |||||||||
| Common stock, par value $0.0005 per share | 0.1 | 0.1 | |||||||||
| Additional paid-in capital | — | — | |||||||||
| Accumulated other comprehensive loss | (299.0) | (135.2) | |||||||||
| Retained earnings | 13,976.3 | 16,455.4 | |||||||||
| Treasury stock, at cost; 23.8 million and 23.8 million shares, respectively | (2,977.1) | (2,977.1) | |||||||||
| Total Biogen Inc. shareholders’ equity | 10,700.3 | 13,343.2 | |||||||||
| Noncontrolling interests | (14.2) | (4.1) | |||||||||
| Total equity | 10,686.1 | 13,339.1 | |||||||||
| Total liabilities and equity | $ | 24,618.9 | $ | 27,234.3 |
See accompanying notes to these consolidated financial statements.
F-4
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| For the Years Ended December 31, | |||||||||||||||||
| 2020 | 2019 | 2018 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net income | $ | 4,060.5 | $ | 5,888.5 | $ | 4,474.0 | |||||||||||
| Adjustments to reconcile net income to net cash flows from operating activities: | |||||||||||||||||
| Depreciation and amortization | 457.2 | 464.7 | 650.5 | ||||||||||||||
| Impairment of intangible assets | 209.7 | 215.9 | 366.1 | ||||||||||||||
| Acquired in-process research and development | 75.0 | — | 112.5 | ||||||||||||||
| Share-based compensation | 198.3 | 182.3 | 157.5 | ||||||||||||||
| Contingent consideration | (86.3) | (63.7) | (12.3) | ||||||||||||||
| (Gain)/loss on divestiture of Hillerod, Denmark manufactuing operations | (92.5) | 55.3 | — | ||||||||||||||
| Deferred income taxes | 149.0 | 67.1 | 108.3 | ||||||||||||||
| Unrealized (gain) loss on strategic investments | (681.8) | (147.3) | (124.8) | ||||||||||||||
| Loss on equity method investment | (3.3) | 77.4 | — | ||||||||||||||
| Other | 131.2 | 139.1 | 55.7 | ||||||||||||||
| Changes in operating assets and liabilities, net: | |||||||||||||||||
| Accounts receivable | 2.8 | 68.8 | (205.2) | ||||||||||||||
| Due from anti-CD20 therapeutic programs | 176.7 | (63.3) | 5.7 | ||||||||||||||
| Inventory | (316.3) | (19.2) | (52.1) | ||||||||||||||
| Accrued expenses and other current liabilities | 154.2 | 240.2 | 465.5 | ||||||||||||||
| Income tax assets and liabilities | (67.5) | 16.1 | 321.7 | ||||||||||||||
| Other changes in operating assets and liabilities, net | (137.1) | (43.3) | (135.4) | ||||||||||||||
| Net cash flows provided by operating activities | 4,229.8 | 7,078.6 | 6,187.7 | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Proceeds from sales and maturities of marketable securities | 7,299.4 | 6,007.0 | 9,173.7 | ||||||||||||||
| Purchases of marketable securities | (6,397.7) | (5,252.6) | (7,694.8) | ||||||||||||||
| Contingent consideration paid related to Fumapharm AG acquisition | — | (300.0) | (1,500.0) | ||||||||||||||
| Acquisition of Nightstar Therapeutics plc, net of cash acquired | — | (744.4) | — | ||||||||||||||
| Purchase of Ionis Pharmaceuticals, Inc. stock | — | — | (462.9) | ||||||||||||||
| Purchase of Sangamo Therapeutics, Inc. stock | (141.8) | — | — | ||||||||||||||
| Purchase of Denali Therapeutics Inc. stock | (423.7) | — | — | ||||||||||||||
| Purchase of Sage Therapeutics, Inc. stock | (441.0) | — | — | ||||||||||||||
| Proceeds from divesiture of Hillerod, Denmark manufacturing operations | — | 923.7 | — | ||||||||||||||
| Purchases of property, plant and equipment | (424.8) | (514.5) | (770.6) | ||||||||||||||
| Acquired in-process research and development | (75.0) | — | (112.5) | ||||||||||||||
| Acquisitions of intangible assets | (52.0) | (155.0) | (3.0) | ||||||||||||||
| Investment in Samsung Bioepis | — | — | (676.6) | ||||||||||||||
| Proceeds from sales of strategic investments | 74.9 | 479.3 | — | ||||||||||||||
| Other | (26.9) | 27.0 | 0.4 | ||||||||||||||
| Net cash flows provided by (used in) investing activities | (608.6) | 470.5 | (2,046.3) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Purchase of treasury stock | (6,679.1) | (5,868.3) | (4,352.6) | ||||||||||||||
| Payments related to issuance of stock for share-based compensation arrangements, net | (4.6) | — | — | ||||||||||||||
| Proceeds from borrowings | 2,967.4 | — | — | ||||||||||||||
| Repayments of borrowings | (1,500.0) | — | (3.2) | ||||||||||||||
| Net contribution (distribution) to noncontrolling interest | (71.0) | 4.3 | (36.4) | ||||||||||||||
| Contingent consideration payments | — | — | (58.2) | ||||||||||||||
| Other | 14.6 | 3.6 | (21.6) | ||||||||||||||
| Net cash flows (used in) financing activities | (5,272.7) | (5,860.4) | (4,472.0) | ||||||||||||||
| Net increase (decrease) in cash and cash equivalents | (1,651.5) | 1,688.7 | (330.6) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 69.0 | 0.4 | (18.6) | ||||||||||||||
| Cash and cash equivalents, beginning of the year | 2,913.7 | 1,224.6 | 1,573.8 | ||||||||||||||
| Cash and cash equivalents, end of the year | $ | 1,331.2 | $ | 2,913.7 | $ | 1,224.6 |
See accompanying notes to these consolidated financial statements.
F-5
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Treasury stock | Total Biogen Inc. shareholders’ equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | $ | — | 198.0 | $ | 0.1 | $ | — | $ | (135.2) | $ | 16,455.4 | (23.8) | $ | (2,977.1) | $ | 13,343.2 | $ | (4.1) | $ | 13,339.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 4,000.6 | — | — | 4,000.6 | 59.9 | 4,060.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | (163.8) | — | — | — | (163.8) | 1.0 | (162.8) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interest | — | — | — | — | — | — | — | — | — | — | (75.0) | (75.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling interest | — | — | — | — | — | — | — | — | — | — | 4.0 | 4.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2020 Share Repurchase Program, at cost | — | — | — | — | — | — | — | (1.6) | (400.0) | (400.0) | — | (400.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2020 Share Repurchase Program, at cost | — | — | (1.6) | — | (60.8) | — | (339.2) | 1.6 | 400.0 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the December 2019 Share Repurchase Program, at cost | — | — | — | — | — | — | — | (16.7) | (5,000.0) | (5,000.0) | — | (5,000.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the December 2019 Share Repurchase Program, at cost | — | — | (16.7) | — | (121.3) | — | (4,878.7) | 16.7 | 5,000.0 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the March 2019 Share Repurchase Program, at cost | — | — | — | — | — | — | — | (4.1) | (1,279.1) | (1,279.1) | — | (1,279.1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the March 2019 Share Repurchase Program, at cost | — | — | (4.1) | — | (71.0) | — | (1,208.1) | 4.1 | 1,279.1 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock option and stock purchase plans | — | — | 0.2 | — | 49.3 | — | — | — | — | 49.3 | — | 49.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock award plan | — | — | 0.4 | — | — | — | (53.7) | — | — | (53.7) | — | (53.7) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation expense related to share-based payments | — | — | — | — | 204.5 | — | — | — | — | 204.5 | — | 204.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | (0.7) | — | — | — | — | (0.7) | — | (0.7) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | — | $ | — | 176.2 | $ | 0.1 | $ | — | $ | (299.0) | $ | 13,976.3 | (23.8) | $ | (2,977.1) | $ | 10,700.3 | $ | (14.2) | $ | 10,686.1 |
See accompanying notes to these consolidated financial statements.
F-6
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY - (Continued)
(In millions)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Treasury stock | Total Biogen Inc. shareholders’ equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | — | $ | — | 221.0 | $ | 0.1 | $ | — | $ | (240.4) | $ | 16,257.0 | (23.8) | $ | (2,977.1) | $ | 13,039.6 | $ | (8.0) | $ | 13,031.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 5,888.5 | — | — | 5,888.5 | — | 5,888.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | 105.2 | — | — | — | 105.2 | (0.4) | 104.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling interest | — | — | — | — | — | — | — | — | — | — | 4.3 | 4.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the March 2019 Share Repurchase Program, at cost | — | — | — | — | — | — | — | (14.7) | (3,720.9) | (3,720.9) | — | (3,720.9) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the March 2019 Share Repurchase Program, at cost | — | — | (14.7) | — | (121.5) | — | (3,599.4) | 14.7 | 3,720.9 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2018 Share Repurchase Program, at cost | — | — | — | — | — | — | — | (8.9) | (2,147.4) | (2,147.4) | — | (2,147.4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2018 Share Repurchase Program, at cost | — | — | (8.9) | — | (110.5) | — | (2,036.9) | 8.9 | 2,147.4 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock option and stock purchase plans | — | — | 0.2 | — | 40.8 | — | — | — | — | 40.8 | — | 40.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock award plan | — | — | 0.4 | — | — | — | (53.8) | — | — | (53.8) | — | (53.8) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation related to share-based payments | — | — | — | — | 191.2 | — | — | — | — | 191.2 | — | 191.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | — | $ | — | 198.0 | $ | 0.1 | $ | — | $ | (135.2) | $ | 16,455.4 | (23.8) | $ | (2,977.1) | $ | 13,343.2 | $ | (4.1) | $ | 13,339.1 |
See accompanying notes to these consolidated financial statements.
F-7
BIOGEN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY - (Continued)
(In millions)
| Preferred stock | Common stock | Additional paid-in capital | Accumulated other comprehensive loss | Retained earnings | Treasury stock | Total Biogen Inc. shareholders’ equity | Noncontrolling interests | Total equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | — | $ | — | 235.3 | $ | 0.1 | $ | 97.8 | $ | (318.4) | $ | 15,810.4 | (23.8) | $ | (2,977.1) | $ | 12,612.8 | $ | (14.7) | $ | 12,598.1 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | 4,430.7 | — | — | 4,430.7 | 43.3 | 4,474.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | — | 76.5 | — | — | — | 76.5 | (0.4) | 76.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Capital contribution from noncontrolling interests | — | — | — | — | — | — | — | — | — | — | 13.8 | 13.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to noncontrolling interests | — | — | — | — | — | — | — | — | — | — | (50.0) | (50.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2018 Share Repurchase Program, at cost | — | — | — | — | — | — | — | (4.3) | (1,352.6) | (1,352.6) | — | (1,352.6) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2018 Share Repurchase Program, at cost | — | — | (4.3) | — | (92.8) | — | (1,259.8) | 4.3 | 1,352.6 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock pursuant to the 2016 Share Repurchase Program, at cost | — | — | — | — | — | — | — | (10.5) | (3,000.0) | (3,000.0) | — | (3,000.0) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock pursuant to the 2016 Share Repurchase Program, at cost | — | — | (10.5) | — | (171.1) | — | (2,828.9) | 10.5 | 3,000.0 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock option and stock purchase plans | — | — | 0.2 | — | 41.2 | — | — | — | — | 41.2 | — | 41.2 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under stock award plan | — | — | 0.3 | — | (43.8) | — | — | — | — | (43.8) | — | (43.8) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Compensation expense related to share-based payments | — | — | — | — | 168.7 | — | — | — | — | 168.7 | — | 168.7 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adoption of new accounting guidance | — | — | — | — | — | 1.5 | 104.6 | — | — | 106.1 | — | 106.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | — | $ | — | 221.0 | $ | 0.1 | $ | — | $ | (240.4) | $ | 16,257.0 | (23.8) | $ | (2,977.1) | $ | 13,039.6 | $ | (8.0) | $ | 13,031.6 |
See accompanying notes to these consolidated financial statements.
F-8
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
References in these notes to "Biogen," the "company," "we," "us" and "our" refer to Biogen Inc. and its consolidated subsidiaries.
Business Overview
Biogen is a global biopharmaceutical company focused on discovering, developing and delivering worldwide innovative therapies for people living with serious neurological and neurodegenerative diseases as well as related therapeutic adjacencies. Our core growth areas include multiple sclerosis (MS) and neuroimmunology; Alzheimer’s disease and dementia; neuromuscular disorders, including spinal muscular atrophy (SMA) and amyotrophic lateral sclerosis (ALS); movement disorders, including Parkinson's disease; ophthalmology; and neuropsychiatry. We are also focused on discovering, developing and delivering worldwide innovative therapies in our emerging growth areas of immunology; acute neurology; and neuropathic pain. In addition, we commercialize biosimilars of advanced biologics. We support our drug discovery and development efforts through the commitment of significant resources to discovery, research and development programs and business development opportunities.
Our marketed products include TECFIDERA, VUMERITY, 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 have certain business and financial rights with respect to RITUXAN for the treatment of non-Hodgkin's lymphoma, chronic lymphocytic leukemia (CLL) and other conditions; RITUXAN HYCELA for the treatment of non-Hodgkin's lymphoma and CLL; GAZYVA for the treatment of CLL and follicular lymphoma; OCREVUS for the treatment of primary progressive MS (PPMS) and relapsing MS (RMS); and other potential anti-CD20 therapies pursuant to our collaboration arrangements with Genentech, Inc. (Genentech), a wholly-owned member of the Roche Group. For additional information on our collaboration arrangements with Genentech, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Our innovative drug development and commercialization activities are complemented by our biosimilar business that expands access to medicines and reduces the cost burden for healthcare systems. Through our agreements with Samsung Bioepis Co., Ltd. (Samsung Bioepis), our joint venture with Samsung BioLogics Co., Ltd. (Samsung BioLogics), we market and sell BENEPALI, an etanercept biosimilar referencing ENBREL, IMRALDI, an adalimumab biosimilar referencing HUMIRA, and FLIXABI, an infliximab biosimilar referencing REMICADE, in certain countries in Europe and have an option to acquire exclusive rights to commercialize these products in China. Additionally, we have exclusive rights to commercialize two potential ophthalmology biosimilar products, SB11, a proposed ranibizumab biosimilar referencing LUCENTIS, and SB15, a proposed aflibercept biosimilar referencing EYLEA, in major markets worldwide, including the United States (U.S.), Canada, Europe, Japan and Australia. For additional information on our collaboration arrangements with Samsung Bioepis, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Consolidation
Our consolidated financial statements reflect our financial statements, those of our wholly-owned subsidiaries and those of certain variable interest entities where we are the primary beneficiary. For consolidated entities where we own or are exposed to less than 100.0% of the economics, we record net income (loss) attributable to noncontrolling interests in our consolidated statements of income equal to the percentage of the economic or ownership interest retained in such entities by the respective noncontrolling parties. Intercompany balances and transactions are eliminated in consolidation.
In determining whether we are the primary beneficiary of a variable interest entity, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way we account for our existing collaborative relationships and other arrangements. We continuously assess whether we are the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in us consolidating or deconsolidating one or more of our collaborators or partners.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Use of Estimates
The preparation of our consolidated financial statements requires us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets, liabilities and equity and the amount of revenues and expenses. Actual results may differ from these estimates.
The length of time and full extent to which the COVID-19 pandemic directly or indirectly impacts our business, results of operations and financial condition, including sales, expenses, reserves and allowances, manufacturing, clinical trials, research and development costs and employee-related amounts, depends on future developments that are highly uncertain, subject to change and are difficult to predict, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19 as well as the economic impact on local, regional, national and international customers and markets. We have made estimates of the impact of COVID-19 within our condensed consolidated financial statements and there may be changes to those estimates in future periods.
Revenue Recognition
In May 2014 the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. This standard became effective for us on January 1, 2018, and was adopted using the modified retrospective method. The adoption of this standard as of January 1, 2018, did not change our revenue recognition.
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 the FASB Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers: (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.
Product revenues 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
Product revenues 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
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
is payable to a party other than our customer). Our estimates of reserves established for variable consideration are calculated based upon a consistent application of our methodology utilizing the expected value method. These estimates reflect our historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns. The transaction price, which includes variable consideration reflecting the impact of discounts and allowances, may be subject to constraint and is included in the net sales price only to the extent that it is probable that a significant reversal of the amount of the cumulative revenues recognized will not occur in a future period. Actual amounts may ultimately differ from our estimates. If actual results vary, we adjust these estimates, which could have an effect on earnings in the period of adjustment.
Discounts include trade term discounts and wholesaler incentives. Trade term discounts and wholesaler incentives primarily relate to estimated obligations for credits to be granted to wholesalers for remitting payment on their purchases within established incentive periods and credits to be granted to wholesalers for compliance with various contractually-defined inventory management practices, respectively. We determine these reserves based on our historical experience, including the timing of customer payments.
Contractual adjustments primarily relate to Medicaid and managed care rebates, pharmacy rebates, co-payment (copay) assistance, Veterans Administration (VA) and Public Health Service (PHS) discounts, specialty pharmacy program fees and other governmental rebates or applicable allowances.
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Medicaid rebates relate to our estimated obligations to states under established reimbursement arrangements. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in other current liabilities. Our liability for Medicaid rebates consists of estimates for claims that a state will make for the current quarter, claims for prior quarters that have been estimated for which an invoice has not been received, invoices received for claims from the prior quarters that have not been paid and an estimate of potential claims that will be made for inventory that exists in the distribution channel at period end.
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Governmental rebates or chargebacks, including VA and PHS discounts, represent our estimated obligations resulting from contractual commitments to sell products to qualified healthcare providers at prices lower than the list prices we charge to wholesalers which provide those products. The wholesaler charges us for the difference between what the wholesaler pays for the products and the ultimate selling price to the qualified healthcare providers. Rebate and chargeback reserves are established in the same period as the related revenue is recognized, resulting in a reduction in product revenue and accounts receivable. Chargeback amounts are generally determined at the time of resale to the qualified healthcare provider from the wholesaler, and we generally issue credits for such amounts within a few weeks of the wholesaler notifying us about the resale. Our reserves for VA, PHS and chargebacks consist of amounts that we expect to issue for inventory that exists at the wholesalers that we expect will be sold to qualified healthcare providers and chargebacks that wholesalers have claimed for which we have not issued a credit.
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Managed care rebates represent our estimated obligations to third parties, primarily pharmacy benefit managers. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses and other current liabilities. These rebates result from performance-based goals, formulary position and price increase limit allowances (price protection). The calculation of the accrual for these rebates is based on an estimate of the coverage patterns and the resulting applicable contractual rebate rate(s) to be earned over a contractual period.
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Copay assistance represents financial assistance to qualified patients, assisting them with prescription drug co-payments required by insurance. The calculation of the accrual for copay is based on an estimate of claims and the cost per claim that we expect to receive associated with inventory that exists in the distribution channel at period end.
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Pharmacy rebates represent our estimated obligations resulting from contractual commitments to sell products to specific pharmacies. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses and other current liabilities. These rebates result from contracted discounts on product purchased or product dispensed. The calculation of the accrual for these rebates is based on an
F-11
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimate of the pharmacy’s buying or dispensing patterns and the resulting applicable contractual rebate rate(s) to be earned over the contractual period.
- Other governmental rebates, non-U.S. pharmaceutical taxes or applicable allowances primarily relate to mandatory rebates and discounts in international markets where government-sponsored healthcare systems are the primary payors for healthcare.
Product return reserves are established for returns expected to be made by wholesalers and are recorded in the period the related revenue is recognized, resulting in a reduction to product revenues. In accordance with contractual terms, wholesalers are permitted to return product for reasons such as damaged or expired product. The majority of wholesaler returns are due to product expiration. Expired product return reserves are estimated through a comparison of historical return data to their related sales on a production lot basis. Historical rates of return are determined for each product and are adjusted for known or expected changes in the marketplace specific to each product.
In addition to discounts, rebates and product returns, we also maintain certain customer service contracts with distributors and other customers in the distribution channel that provide us with inventory management, data and distribution services, which are generally reflected as a reduction of revenues. To the extent we can demonstrate a separable benefit and fair value for these services we classify these payments in selling, general and administrative expenses.
Revenues from Anti-CD20 Therapeutic Programs
Our collaboration with Genentech is within the scope of ASC 808, Collaborative Agreements, which provides guidance on the presentation and disclosure of collaborative arrangements. For purposes of this footnote, we refer to RITUXAN and RITUXAN HYCELA collectively as RITUXAN.
Our share of the pre-tax co-promotion profits on RITUXAN and GAZYVA and royalty revenues on the sale of OCREVUS resulted from an exchange of a license. As we do not have future performance obligations under the license or collaboration agreement, revenues are recognized as the underlying sales occur.
Revenues from anti-CD20 therapeutic programs consist of:
(i) our share of pre-tax profits and losses in the U.S. for RITUXAN and GAZYVA; and
(ii) other revenues from anti-CD20 therapeutic programs, which primarily consist of our share of pre-tax co-promotion profits on RITUXAN in Canada and royalty revenues on sales of OCREVUS.
Pre-tax co-promotion profits on RITUXAN and GAZYVA are calculated and paid to us by Genentech and the Roche Group. Pre-tax co-promotion profits consist of net sales to third-party customers less applicable costs to manufacture, third-party royalty expenses, distribution, selling and marketing expenses and joint development expenses incurred by Genentech and the Roche Group. Our share of the pre-tax profits on RITUXAN and GAZYVA include estimates that are based on information received from Genentech and the Roche Group. These estimates are subject to change and actual results may differ.
We recognize royalty revenues on sales of OCREVUS 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 generally expected to be the following quarter.
For additional information on our relationship with Genentech, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Other Revenues
Royalty Revenues
We recognize royalty revenues related to sales by our licensees of products covered under patents that we own.
Collaborative and Other Relationships
We have a number of significant collaborative and other third-party relationships for revenues and for the development, regulatory approval, commercialization and marketing of certain of our products and product candidates. Where we are the principal on sales transactions with third parties, we recognize revenues, cost of sales
F-12
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and operating expenses on a gross basis in their respective lines in our consolidated statements of income. Where we are not the principal on sales transactions with third parties, we record our share of the revenues, cost of sales and operating expenses on a net basis in collaborative and other relationships included in other revenues in our consolidated statements of income.
Our development and commercialization arrangements with Genentech and Samsung Bioepis represent collaborative arrangements as each party is an active participant in one or more joint operating activities and is exposed to significant risks and rewards of these arrangements. These arrangements resulted from an exchange of a license and utilize the sales and usage based royalty exception. Therefore, revenues relating to royalties or profit-sharing amounts received are recognized as the underlying sales occur.
For additional information on our collaboration arrangements with Genentech and Samsung Bioepis, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Other Corporate Revenues
We record other corporate revenues primarily from amounts earned under contract manufacturing agreements. Revenues under contract manufacturing agreements are recognized when the customer obtains control of the product, which may occur at a point in time or over time depending on the terms and conditions of the agreement.
Fair Value Measurements
We have certain financial assets and liabilities recorded at fair value which have been classified as Level 1, 2 or 3 within the fair value hierarchy as described in the accounting standards for fair value measurements.
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Level 1 — Fair values are determined utilizing quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access;
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Level 2 — Fair values are determined by utilizing quoted prices for identical or similar assets and liabilities in active markets or other market observable inputs such as interest rates, yield curves, foreign currency spot rates and option pricing valuation models; and
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Level 3 — Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
The majority of our financial assets have been classified as Level 2. Our financial assets (which include our cash equivalents, marketable debt securities and certain of our marketable equity securities, derivative contracts and plan assets for deferred compensation) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, utilizing third-party pricing services or option pricing valuation models. The pricing services utilize industry standard valuation models, including both income and market-based approaches and observable market inputs to determine value. These observable market inputs include reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events.
We validate the prices provided by our third-party pricing services by understanding the models used, obtaining market values from other pricing sources and analyzing pricing data in certain instances. The option pricing valuation models use assumptions within the model, including the term, stock price volatility, constant maturity risk-free interest rate and dividend yield. After completing our validation procedures, we did not adjust or override any fair value measurements provided by our pricing services as of December 31, 2020 and 2019.
Other Assets and Liabilities
The carrying amounts reflected in our consolidated balance sheets for current accounts receivable, due from anti-CD20 therapeutic programs, other current assets, accounts payable and accrued expenses and other, approximate fair value due to their short-term maturities.
Cash and Cash Equivalents
We consider only those investments that are highly liquid, readily convertible to cash and that mature within three months from date of purchase to be cash equivalents. As of December 31, 2020 and 2019, cash equivalents were comprised of money market funds, commercial paper, overnight reverse repurchase agreements and other debt securities with maturities less than 90 days from the date of purchase.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Receivable
The majority of our accounts receivable arise from product sales and primarily represent amounts due from our wholesale and other third-party distributors, public hospitals, pharmacies and other government entities and have standard payment terms that generally require payment within 30 to 90 days.
We do not adjust our receivables for the effects of a significant financing component at contract inception if we expect to collect the receivables in one year or less from the time of sale.
In countries where we have experienced a pattern of payments extending beyond our contractual payment term and we expect to collect receivables greater than one year from the time of sale, we have assessed whether the customer has a significant financing component and discounted our receivables and reduced related revenues over the period of time that we estimate those amounts will be paid using the country’s market-based borrowing rate for such period. The related receivables are classified at the time of sale as non-current assets. We accrete interest income on these receivables, which is recorded as a component of other income (expense), net in our consolidated statements of income.
We provide reserves against accounts receivable for estimated losses that may result from a customer's inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk include cash and cash equivalents, investments, derivatives and accounts receivable. We attempt to minimize the risks related to cash and cash equivalents and investments by investing in a broad and diverse range of financial instruments as previously defined by us. We have established guidelines related to credit ratings and maturities intended to safeguard principal balances and maintain liquidity. Our investment portfolio is maintained in accordance with our investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. We minimize credit risk resulting from derivative instruments by choosing only highly rated financial institutions as counterparties.
Concentrations of credit risk with respect to receivables, which are typically unsecured, are somewhat mitigated due to the wide variety of customers and markets using our products, as well as their dispersion across many different geographic areas. We monitor the financial performance and creditworthiness of our customers so that we can properly assess and respond to changes in their credit profile. We continue to monitor these conditions and assess their possible impact on our business.
Marketable Securities and Other Investments
Marketable Debt Securities
Available-for-sale marketable debt securities are recorded at fair market value and unrealized gains and losses are included in accumulated other comprehensive income (loss) in equity, net of related tax effects, unless the security has experienced a credit loss, we have determined that we have the intent to sell the security or we have determined that it is more likely than not that we will have to sell the security before its expected recovery. Realized gains and losses are reported in other income (expense), net on a specific identification basis.
Marketable Equity Securities and Venture Capital Funds
Our marketable equity securities are recorded at fair market value and, beginning January 1, 2018, unrealized gains and losses are included in other income (expense), net in our consolidated statements of income. Prior to January 1, 2018, unrealized gains and losses were included in accumulated other comprehensive income (loss) in equity, net of related tax effects. Our marketable equity securities represent investments in publicly traded equity securities and are included in investments and other assets in our consolidated balance sheets.
Our investments in venture capital funds are recorded at net asset value, which approximates fair value, and, beginning January 1, 2018, unrealized gains and losses are included in other income (expense), net in our consolidated statements of income. Prior to January 1, 2018, these investments were accounted for under the cost method of accounting. The underlying investments of the venture capital funds in which we invest are in equity securities of certain biotechnology companies and are included in investments and other assets in our consolidated balance sheets.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Non-Marketable Equity Securities
We also invest in equity securities of companies whose securities are not publicly traded and where fair value is not readily available. These investments are recorded using either the equity method of accounting or the cost minus impairment adjusted for changes in observable prices, depending on our ownership percentage and other factors that suggest we have significant influence. We monitor these investments to evaluate whether any increase or decline in their value has occurred, based on the implied value of recent company financings, public market prices of comparable companies and general market conditions. These investments are included in investments and other assets in our consolidated balance sheets.
Evaluating Marketable Debt Securities for Other-than-Temporary Impairments
We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale debt securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income.
For available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the security’s decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is reflected in earnings as an impairment loss.
Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.
Equity Method of Accounting
In circumstances where we have the ability to exercise significant influence over the operating and financial policies of a company in which we have an investment, we utilize the equity method of accounting for recording investment activity. In assessing whether we exercise significant influence, we consider the nature and magnitude of our investment, the voting and protective rights we hold, any participation in the governance of the other company and other relevant factors such as the presence of a collaborative or other business relationship. Under the equity method of accounting, we record in our consolidated statements of income our share of income or loss of the other company. If our share of losses exceeds the carrying value of our investment, we will suspend recognizing additional losses and will continue to do so unless we commit to providing additional funding.
Inventory
Inventories are stated at the lower of cost or net realizable value with cost based on the first-in, first-out method. We classify our inventory costs as long-term when we expect to utilize the inventory beyond our normal operating cycle and include these costs in investments and other assets in our consolidated balance sheets. Inventory that can be used in either the production of clinical or commercial products is expensed as research and development costs when identified for use in a clinical manufacturing campaign.
Capitalization of Inventory Costs
We capitalize inventory costs associated with our products prior to regulatory approval, when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. We consider numerous attributes in evaluating whether the costs to manufacture a particular product should be capitalized as an asset. We assess the regulatory approval process and where the particular product stands in relation to that approval process, including any known safety or efficacy concerns, potential labeling restrictions and other impediments to approval. We evaluate our anticipated research and development initiatives and constraints relating to the product and the indication in which it will be used. We consider our manufacturing environment including our supply chain in determining logistical constraints that could hamper approval or commercialization. We consider the shelf life of the product in relation to the expected timeline for approval and we consider patent related or contract issues that may prevent or delay commercialization. We also base our judgment on the viability of commercialization, trends in the marketplace and market acceptance criteria. Finally, we consider the reimbursement strategies that may prevail with respect to the product and assess the economic benefit that we are likely to realize. We expense previously capitalized costs related to pre-approval
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
inventory upon a change in such judgment, due to, among other potential factors, a denial or significant delay of approval by necessary regulatory bodies.
At December 31, 2020, we capitalized approximately $93.8 million of pre-launch inventory for aducanumab, an anti-amyloid beta antibody candidate for the potential treatment of Alzheimer's disease that we are developing in collaboration with Eisai Co., Ltd. (Eisai). If aducanumab does not receive regulatory approval in the U.S., we would expense this inventory as research and development expense and, under the terms of our collaboration agreement with Eisai to jointly develop and commercialize aducanumab, Eisai would reimburse us for 45.0% of the costs.
Obsolescence and Unmarketable Inventory
At each reporting period we review our inventories for excess or obsolescence and write-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated by us, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Additionally, our products are subject to strict quality control and monitoring that we perform throughout the manufacturing process. In the event that certain batches or units of product no longer meet quality specifications, we will record a charge to cost of sales to write-down any unmarketable inventory to its estimated net realizable value. In all cases, product inventory is carried at the lower of cost or its estimated net realizable value. Amounts written-down due to unmarketable inventory are charged to cost of sales.
Property, Plant and Equipment
Property, plant and equipment are carried at cost, subject to reviews for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The cost of normal, recurring or periodic repairs and maintenance activities related to property, plant and equipment are expensed as incurred. The cost for planned major maintenance activities, including the related acquisition or construction of assets, is capitalized if the repair will result in future economic benefits.
Interest costs incurred during the construction of major capital projects are capitalized until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset. We also capitalize certain direct and incremental costs associated with the validation effort required for licensing by regulatory agencies of new manufacturing equipment for the production of a commercially approved drug. These costs primarily include direct labor and material and are incurred in preparing the equipment for its intended use. The validation costs are either amortized over the life of the related equipment or expensed as cost of sales when the product produced in the validation process is sold.
In addition, we capitalize certain internal use computer software development costs. If the software is an integral part of production assets, these costs are included in machinery and equipment and are amortized on a straight-line basis over the estimated useful lives of the related software, which generally range from three to five years.
We generally depreciate or amortize the cost of our property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets, which are summarized as follows:
| Asset Category | Useful Lives | ||||
| Land | Not depreciated | ||||
| Buildings | 15 to 40 years | ||||
| Leasehold Improvements | Lesser of the useful life or the term of the respective lease | ||||
| Furniture and Fixtures | 5 to 7 years | ||||
| Machinery and Equipment | 5 to 20 years | ||||
| Computer Software and Hardware | 3 to 5 years |
When we dispose of property, plant and equipment, we remove the associated cost and accumulated depreciation from the related accounts in our consolidated balance sheets and include any resulting gain or loss in our consolidated statements of income.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842), a new standard issued to increase transparency and comparability among organizations related to their leasing activities. This standard established a right-of-use model that requires all lessees to recognize right-of-use assets and lease liabilities on their balance sheet that arise from leases as well as provide disclosures with respect to certain qualitative and quantitative information related to a company's leasing arrangements to meet the objective of allowing users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.
The FASB subsequently issued the following amendments to ASU 2016-02 that have the same effective date and transition date: ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvement for Lessors, and ASU No. 2019-01, Leases (Topic 842): Codification Improvements. We adopted these amendments with ASU 2016-02 (collectively, the new leasing standards) effective January 1, 2019.
We adopted the new leasing standards using the modified retrospective transition approach, as of January 1, 2019, with no restatement of prior periods or cumulative adjustment to retained earnings. Upon adoption, we elected the package of transition practical expedients, which allowed us to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases and initial direct costs for existing leases. We also elected the practical expedient to not reassess certain land easements and made an accounting policy election to not recognize leases with an initial term of 12 months or less within our consolidated balance sheets and to recognize those lease payments on a straight-line basis in our consolidated statements of income over the lease term. Upon adoption of the new leasing standards we recognized an operating lease asset of approximately $463.0 million and a corresponding operating lease liability of approximately $526.0 million, which are included in our consolidated balance sheets. The adoption of the new leasing standards did not have an impact on our consolidated statements of income.
We determine if an arrangement is a lease at contract inception. Operating lease assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining the lease term, we include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
We use the implicit rate when readily determinable and use our incremental borrowing rate when the implicit rate is not readily determinable based upon the information available at the commencement date in determining the present value of the lease payments. Our incremental borrowing rate is determined using a secured borrowing rate for the same currency and term as the associated lease.
The lease payments used to determine our operating lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable and are recognized in our operating lease assets in our consolidated balance sheets. Our lease agreements may include both lease and non-lease components, which we account for as a single lease component when the payments are fixed. Variable payments included in the lease agreement are expensed as incurred. For certain equipment leases, such as vehicles, we apply a portfolio approach to effectively account for the operating lease assets and liabilities.
Our operating leases are reflected in operating lease assets, accrued expenses and other and in long-term operating lease liabilities in our consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
We also have real estate lease agreements which are subleased to third parties. Operating leases for which we are the sublessor are included in accrued expenses and other and other long-term liabilities in our consolidated balance sheets. We recognize sublease income on a straight-line basis over the lease term in our consolidated statements of income.
For additional information on the adoption of the new leasing standards, please read Note 11, Leases, to these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangible Assets
Our intangible assets consist of completed technology (comprised of acquired and in-licensed rights and patents, developed technology, out-licensed patents), in-process research and development (IPR&D) acquired after January 1, 2009, trademarks and trade names. Our intangible assets are recorded at fair value at the time of their acquisition and are stated in our consolidated balance sheets net of accumulated amortization and impairments, if applicable.
Intangible assets related to acquired and in-licensed rights and patents, developed technology and out-licensed patents are amortized over their estimated useful lives using the economic consumption method if anticipated future revenues can be reasonably estimated. The straight-line method is used when revenues cannot be reasonably estimated. Amortization is recorded within amortization and impairment of acquired intangible assets in our consolidated statements of income.
Acquired and in-licensed rights and patents primarily relate to our acquisition of all remaining rights to TYSABRI from Elan Pharma International Ltd. (Elan), an affiliate of Elan Corporation, plc. Acquired and in-licensed rights and patents also include other amounts related to our other marketed products and programs acquired through business combinations. Developed technology primarily relates to our AVONEX product, which was recorded in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in 2003. We amortize the intangible assets related to our TYSABRI, AVONEX, SPINRAZA, VUMERITY and TECFIDERA (rest of world) products using the economic consumption method based on revenues generated from the products underlying the related intangible assets. An analysis of the anticipated lifetime revenues of our TYSABRI, AVONEX, SPINRAZA, VUMERITY and TECFIDERA (rest of world) products is performed annually during our long-range planning cycle and whenever events or changes in circumstances would significantly affect the anticipated lifetime revenues of our TYSABRI, AVONEX, SPINRAZA, VUMERITY and TECFIDERA (rest of world) products.
Intangible assets related to trademarks, trade names and IPR&D prior to commercialization are not amortized because they have indefinite lives; however, they are subject to review for impairment. We review our intangible assets with indefinite lives for impairment annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Acquired In-process Research and Development (IPR&D)
Acquired IPR&D represents the fair value assigned to research and development assets that have not reached technological feasibility. The value assigned to acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting revenues from the projects and discounting the net cash flows to present value. The revenues and costs projections used to value acquired IPR&D are, as applicable, reduced based on the probability of success of developing a new drug. Additionally, the projections consider the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by us and our competitors. The rates utilized to discount the net cash flows to their present value are commensurate with the stage of development of the projects and uncertainties in the economic estimates used in the projections. Upon the acquisition of IPR&D, we complete an assessment of whether our acquisition constitutes the purchase of a single asset or a group of assets. We consider multiple factors in this assessment, including the nature of the technology acquired, the presence or absence of separate cash flows, the development process and stage of completion, quantitative significance and our rationale for entering into the transaction.
If we acquire a business as defined under applicable accounting standards, then the acquired IPR&D is capitalized as an intangible asset. If we acquire an asset or group of assets that do not meet the definition of a business under applicable accounting standards, then the acquired IPR&D is expensed on its acquisition date. Future costs to develop these assets are recorded to research and development expense as they are incurred.
When performing our impairment assessment, we calculate the fair value using the same methodology as described above. If the carrying value of our acquired IPR&D exceeds its fair value, then the intangible asset is written down to its fair value. Changes in estimates and assumptions used in determining the fair value of our acquired IPR&D could result in an impairment. Impairments are recorded within amortization and impairment of acquired intangible assets in our consolidated statements of income. Assets that have been previously impaired, including our vixotrigine (BIIB074) program for the potential treatment of neuropathic pain, such as trigeminal neuralgia (TGN), could become further impaired in the future.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill
Goodwill represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for using the purchase method of accounting. Goodwill is not amortized, but is reviewed for impairment. Goodwill is reviewed for impairment annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable.
We compare the fair value of our reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of our reporting unit, we would record an impairment loss equal to the difference. As described in Note 24, Segment Information, to these consolidated financial statements, we operate in one operating segment, which is our only reporting unit.
Impairment of Long-Lived Assets
Long-lived assets to be held and used, including property, plant and equipment, and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets or asset group may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their fair values. Long-lived assets to be disposed of are carried at fair value less costs to sell.
Contingent Consideration
The consideration for our acquisitions often includes future payments that are contingent upon the occurrence of a particular event or events. We record an obligation for such contingent payments at fair value on the acquisition date. We estimate the fair value of contingent consideration obligations through valuation models that incorporate probability-adjusted assumptions related to the achievement of the milestones and thus likelihood of making related payments. We revalue our contingent consideration obligations each reporting period. Changes in the fair value of our contingent consideration obligations are recognized in our consolidated statements of income. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates, changes in the amount or timing of expected expenditures associated with product development, changes in the amount or timing of cash flows and reserves associated with products upon commercialization, changes in the assumed achievement or timing of any cumulative sales-based and development milestones, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval.
Discount rates in our valuation models represent a measure of the credit risk associated with settling the liability. The period over which we discount our contingent obligations is based on the current development stage of the product candidates, our specific development plan for that product candidate adjusted for the probability of completing the development step and when the contingent payments would be triggered. In estimating the probability of success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. These fair value measurements are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.
Derivative Instruments and Hedging Activities
Cash Flow and Fair Value Derivative Instruments
We recognize all derivative instruments as either assets or liabilities at fair value in our consolidated balance sheets. Changes in the fair value of our derivative instruments are recognized each period in current earnings or accumulated other comprehensive income (loss), depending on whether the derivative instrument is designated as part of a hedge transaction and, if so, the type of hedge transaction. We classify the cash flows from these instruments in the same category as the cash flows from the hedged items. We do not hold or issue derivative instruments for trading or speculative purposes.
We assess at inception and on an ongoing basis, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting the changes in cash flows or fair values of the hedged items. We exclude the forward points portion of the derivative instruments used in a hedging transaction from the effectiveness
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
test and record the fair value gain or loss related to this portion each period in our consolidated statements of income in the same line as the underlying hedged item. If we determine that a forecasted transaction is no longer probable of occurring, we discontinue hedge accounting for the affected portion of the hedge instrument, and any related unrealized gain or loss on the contract is recognized in current earnings.
Net Investment Derivative Instruments
We are exposed to the impact of foreign exchange fluctuations on our investment in the equity of Samsung Bioepis, which is denominated in a currency other than the U.S. dollar, and could adversely impact the U.S. dollar value of this investment. Using derivative instruments, we have hedged our net investment position to mitigate the effects of foreign exchange fluctuations. We recognize these designated net investment hedges as either assets or liabilities, at fair value, in our consolidated balance sheets. We hedge the changes in the spot exchange rate in accumulated other comprehensive income (loss) and exclude changes to the forward rate and amortize the forward points in other income (expense), net in our consolidated statements of income over the term of the contract. We classify the cash flows from these instruments in the same category as the cash flows from the hedged items.
For additional information on our derivative instruments and hedging activities, please read Note 9, Derivative Instruments, to these consolidated financial statements.
Translation of Foreign Currencies
The functional currency for most of our foreign subsidiaries is their local currency. For our non-U.S. subsidiaries that transact in a functional currency other than the U.S. dollar, assets and liabilities are translated at current rates of exchange at the balance sheet date. Income and expense items are translated at the average foreign currency exchange rates for the period. Adjustments resulting from the translation of the financial statements of our foreign operations into U.S. dollars are excluded from the determination of net income and are recorded in accumulated other comprehensive income, a separate component of equity. For subsidiaries where the functional currency of the assets and liabilities differ from the local currency, non-monetary assets and liabilities are translated at the rate of exchange in effect on the date assets were acquired while monetary assets and liabilities are translated at current rates of exchange as of the balance sheet date. Income and expense items are translated at the average foreign currency rates for the period. Translation adjustments of these subsidiaries are included in other income (expense), net in our consolidated statements of income.
Royalty Cost of Sales
We make royalty payments to a number of third parties under license or purchase agreements associated with our acquisition of intellectual property. These royalty payments are typically calculated as a percentage (royalty rate) of the sales of our products in a particular year. That royalty rate may remain constant, increase or decrease within each year based on the total amount of sales during the annual period. Each quarterly period, we estimate our total royalty obligation for the full year and recognize the proportional amount as cost of sales based on actual quarterly sales as a percentage of full year estimated sales. For example, if the level of net sales in any calendar year increases the royalty rate within the year, we will record our cost of sales at an even rate over the year, based on the estimated blended royalty rate.
Accounting for Share-Based Compensation
Our share-based compensation programs grant awards that have included stock options, restricted stock units that vest based on stock performance known as market stock units (MSUs), performance-vested restricted stock units that settle in cash (CSPUs), time-vested restricted stock units (RSUs), performance-vested restricted stock units that can be settled in cash or shares of our common stock (PUs) at the sole discretion of the Compensation and Management Development Committee of our Board of Directors, performance-vested stock units that settle in stock or cash (PSUs) and shares issued under our employee stock purchase plan (ESPP). Compensation expense is recognized based on the estimated fair value of the awards at grant date. We recognize compensation expense for the number of awards expected to vest after taking into consideration an estimate of award forfeitures over the requisite service period, which is generally the vesting period. Where awards are made with non-substantive vesting periods (for instance, where a portion of the award vests upon retirement eligibility), we estimate and recognize expense based on the period from the grant date to the date the employee becomes retirement eligible.
The fair values of our MSUs are estimated using a lattice model with a Monte Carlo simulation. We apply an accelerated attribution method to recognize share-based compensation expense over the applicable service period
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
for our MSUs. The probability of actual shares expected to be earned is considered in the grant date valuation, therefore the expense is not adjusted to reflect the actual units earned.
The fair values of our RSUs are based on the market value of our stock on the date of grant. Compensation expense for RSUs is recognized straight-line over the applicable service period.
We apply an accelerated attribution method to recognize share-based compensation expense when accounting for our CSPUs, PUs and PSUs that settle in cash, and the fair value of the liability is remeasured at the end of each reporting period through expected settlement. Compensation expense associated with CSPUs, PUs and PSUs that settle in cash are based upon the stock price and the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the targeted payout level associated with the performance criteria expected to be achieved. Cumulative adjustments are recorded each quarter to reflect changes in the stock price and estimated outcome of the performance-related conditions until the date results are determined and settled. If performance criteria are not met or not expected to be met, any compensation expense previously recognized to date associated with the awards will be reversed.
The fair values of PSUs that settle in stock are based upon the stock price on the date of grant. Compensation expense is recognized for the number of units expected to be earned after assessing the probability that certain performance criteria will be met and the targeted payout level associated with the performance criteria expected to be achieved. Cumulative adjustments are recorded each quarter to reflect the estimated outcome of the performance-related conditions until the date results are determined and settled. If performance criteria are not met or not expected to be met, any compensation expense previously recognized to date associated with the awards will be reversed.
Research and Development Expenses
Research and development expenses consist of expenses incurred in performing research and development activities, which include compensation and benefits, facilities and overhead expenses, clinical trial expenses and fees paid to contract research organizations (CROs), clinical supply and manufacturing expenses, write-offs of inventory that was previously capitalized in anticipation of product launch and determined to no longer be realizable and other outside expenses and upfront fees and milestones paid to third-party collaborators. Research and development expenses are expensed as incurred. Upfront and milestone payments made to third-party collaborators are expensed as incurred up to the point of regulatory approval. Milestone payments made upon regulatory approval are capitalized and amortized over the remaining useful life of the related product. Payments we make for research and development services prior to the services being rendered are recorded as prepaid assets in our consolidated balance sheets and are expensed as the services are provided. We also accrue the costs of ongoing clinical trials associated with programs that have been terminated or discontinued for which there is no future economic benefit at the time the decision is made to terminate or discontinue the program.
From time to time, we enter into development agreements in which we share expenses with a collaborative partner. We record payments received from our collaborative partners for their share of the development costs as a reduction of research and development expense, except as discussed in Note 18, Collaborative and Other Relationships, to these consolidated financial statements. Because an initial indication has been approved for both RITUXAN and GAZYVA, expenses incurred by Genentech in the ongoing development of RITUXAN and GAZYVA are not recorded as research and development expense, but rather reduce our share of profits recorded as a component of revenues from anti-CD20 therapeutic programs.
For collaborations with commercialized products, if we are the principal, we record revenues and the corresponding operating costs in their respective line items in our consolidated statements of income. If we are not the principal, we record operating costs as a reduction of revenue.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are primarily comprised of compensation and benefits associated with sales and marketing, finance, human resources, legal, information technology and other administrative personnel, outside marketing, advertising and legal expenses and other general and administrative costs.
Advertising costs are expensed as incurred. For the years ended December 31, 2020, 2019 and 2018, advertising costs totaled $111.8 million, $79.2 million and $90.2 million, respectively.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Taxes
The provision for income taxes includes federal, state, local and foreign taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences of temporary differences between the financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which the temporary differences are expected to be recovered or settled. We evaluate the realizability of our deferred tax assets and establish a valuation allowance when it is more likely than not that all or a portion of deferred tax assets will not be realized. We recognize deferred taxes associated with our global intangible low-taxed income (GILTI) tax calculations.
The income tax consequences from the intra-entity transfers of inventory within our consolidated group, both current and deferred, are recorded as a prepaid tax or deferred charge and recognized through our consolidated statements of income when the inventory is sold to a third party.
In October 2016 the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other Than Inventory. This standard eliminates the deferral of the tax effects of intra-entity asset transfers other than inventory. As a result, the income tax consequences from the intra-entity transfer of an asset other than inventory and associated changes to deferred taxes will be recognized when the transfer occurs.
We adopted this standard on January 1, 2018, using the modified retrospective method, through a cumulative-effect adjustment to retained earnings as of that date. Upon adoption, we recognized additional net deferred tax assets of approximately $0.5 billion, offset by a corresponding net increase to retained earnings of approximately $0.5 billion. In the fourth quarter of 2018, when we elected to begin recognizing deferred taxes on the GILTI tax calculation, we recorded an additional deferred tax liability of $0.4 billion with a corresponding reduction to our retained earnings as these differences are related to intra-entity transactions. We will recognize incremental deferred income tax expense thereafter as these deferred tax assets and liabilities are utilized.
We account for uncertain tax positions using a “more likely than not” threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We also accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense.
Contingencies
We are currently involved in various claims and legal proceedings. Loss contingency provisions are recorded if the potential loss from any claim, asserted or unasserted, or legal proceeding is considered probable and the amount can be reasonably estimated or a range of loss can be determined. These accruals represent management’s best estimate of probable loss. Disclosure also is provided when it is reasonably possible that a loss will be incurred or when it is reasonably possible that the amount of a loss will exceed the recorded provision. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. Significant judgment is required in both the determination of probability and as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may change our estimates. Legal costs associated with legal proceedings are expensed when incurred.
Earnings per Share
Basic earnings per share is computed by dividing undistributed net income attributable to Biogen Inc. by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed based on the treasury method by dividing net income by the weighted-average number of common shares outstanding during the period plus potentially dilutive common equivalent shares outstanding.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that we adopt as of the specified effective date. Unless otherwise discussed below, we do not believe that the adoption of recently issued standards have or may have a material impact on our consolidated financial statements or disclosures.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Leases
In February 2016 the FASB issued the new leasing standards to increase transparency and comparability among organizations related to their leasing activities. For additional information on the adoption of the new leasing standards, please read the section titled Lease above, and Note 11, Leases, to these consolidated financial statements.
Credit Losses
In June 2016 the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The FASB subsequently issued amendments to ASU 2016-13, which have the same effective date and transition date of January 1, 2020. These standards require that credit losses be reported using an expected losses model rather than the incurred losses model that is currently used, and establishes additional disclosures related to credit risks. For available-for-sale debt securities with unrealized losses, these standards now require allowances to be recorded instead of reducing the amortized cost of the investment. These standards limit the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases.
Based on the composition of our investment portfolio, accounts receivable and other financial assets, current market conditions and historical credit loss activity, the adoption of these standards did not have a material impact on our consolidated financial position and results of operations and related disclosures.
Debt Securities
In March 2017 the FASB issued ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. This standard amends the amortization period for certain purchased callable debt securities held at a premium by shortening the amortization period to the earliest call date. This standard became effective for us on January 1, 2019, and was adopted using a modified retrospective transition approach. The adoption of this standard did not result in a significant adjustment to our marketable debt securities.
Fair Value Measurements
In August 2018 the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This standard modifies certain disclosure requirements on fair value measurements. This standard became effective for us on January 1, 2020. The adoption of this standard did not have a material impact on our disclosures.
Derivative Instruments and Hedging Activities
In October 2018 the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This standard permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes under ASC 815, Derivatives and Hedging. This standard became effective for us on January 1, 2019, and did not have an impact on our consolidated results of operations or financial position.
Collaborative Arrangements
In November 2018 the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. This standard makes targeted improvements for collaborative arrangements as follows:
-
Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606, Revenue from Contracts with Customers, when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in ASC 606 should be applied, including recognition, measurement, presentation and disclosure requirements;
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Adds unit-of-account guidance to ASC 808, Collaborative Arrangements, to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606; and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
- Precludes a company from presenting transactions with collaborative arrangement participants that are not directly related to sales to third parties with revenue recognized under ASC 606 if the collaborative arrangement participant is not a customer.
This standard became effective for us on January 1, 2020. A retrospective transition approach is required for either all contracts or only for contracts that are not completed at the date of initial application of ASC 606, with a cumulative adjustment to opening retained earnings, as of January 1, 2018. The adoption of this standard did not have a material impact on our consolidated financial position, results of operations and related disclosures.
2. Acquisitions
BIIB118 Acquisition
In March 2020 we acquired BIIB118 (CK1 inhibitor), a novel CNS-penetrant small molecule inhibitor of casein kinase 1, for the potential treatment of patients with behavioral and neurological symptoms across various psychiatric and neurological diseases from Pfizer Inc. (Pfizer). We are developing BIIB118 for the potential treatment of irregular sleep wake rhythm disorder in Parkinson’s disease and plan to develop BIIB118 for the potential treatment of sundowning in Alzheimer's disease.
In connection with this acquisition, we made an upfront payment of $75.0 million to Pfizer, which was accounted for as an asset acquisition and recorded as acquired IPR&D in our consolidated statements of income as BIIB118 has not yet reached technological feasibility. We may also pay Pfizer up to $635.0 million in potential additional development and commercialization milestone payments as well as tiered royalties in the high single digits to sub-teens.
Acquisition of Nightstar Therapeutics plc
In June 2019 we completed our acquisition of all of the outstanding shares of Nightstar Therapeutics plc (NST), a clinical-stage gene therapy company focused on adeno-associated virus treatments for inherited retinal disorders. As a result of this acquisition, we added two mid- to late-stage clinical assets, as well as preclinical programs, in ophthalmology. These assets include BIIB111 (timrepigene emparvovec), which is in Phase 3 development for the potential treatment of choroideremia, a rare, degenerative, X-linked inherited retinal disorder that leads to blindness and currently has no approved treatments, and BIIB112 (RPGR gene therapy), which is in Phase 2/3 development for the potential treatment of X-linked retinitis pigmentosa, which is a rare inherited retinal disease with no currently approved treatments.
Under the terms of the acquisition, we paid NST shareholders $25.50 in cash for each issued and outstanding NST share, which totaled $847.6 million. In addition, we paid $4.6 million in cash for equity compensation, which is attributable to pre-combination services and is reflected as a component of the total purchase price paid. The fair value of equity compensation attributable to the post-combination service period was $26.2 million, of which $18.4 million was recognized as a charge to selling, general and administrative expense with the remaining $7.8 million as a charge to research and development expense in our consolidated statements of income. These amounts were associated with the accelerated vesting of stock options previously granted to NST employees and were fully paid in cash as of June 30, 2019. We funded this acquisition through available cash and accounted for it as an acquisition of a business. We finalized purchase accounting for this acquisition in the fourth quarter of 2019.
The fair value of the IPR&D programs acquired was determined through a probability adjusted discounted cash flow analysis utilizing a discount rate of 12.5%. We recorded IPR&D assets for BIIB111 and BIIB112 at their initial fair values of $480.0 million and $220.0 million, respectively. Some of the more significant assumptions utilized in our asset valuations included the estimated net cash flows for each year for each asset or product, including net revenues, cost of sales, research and development and other operating expenses, the potential regulatory and commercial success risks, competitive trends impacting the asset and each cash flow stream as well as other factors. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 fair value measurements.
We recognized goodwill in relation to the fair value associated with NST workforce's expertise and early research in retinal disorders. We also recognized goodwill in relation to the establishment of a deferred tax liability for the acquired IPR&D intangible assets, which have no tax basis. This deferred tax liability is net of the related impacts on the deferred taxes for GILTI. Goodwill that is tax deductible for GILTI purposes is approximately $60.9 million as of December 31, 2020.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pro forma results of operations as a result of this acquisition have not been presented as this acquisition is not material to our consolidated statements of income. Subsequent to June 7, 2019, the acquisition date, our results of operations include the results of operations of NST.
BIIB100 Acquisition
In January 2018 we acquired BIIB100 (XP01 inhibitor) from Karyopharm Therapeutics Inc. (Karyopharm). BIIB100 is a Phase 1 investigational oral compound for the potential treatment of certain neurological and neurodegenerative diseases, primarily in ALS. BIIB100 is a novel therapeutic candidate that works by inhibiting a protein known as XPO1, with the goal of reducing inflammation and neurotoxicity, along with increasing neuroprotective responses.
We accounted for this transaction as an asset acquisition as the value being acquired primarily relates to a single asset. In connection with the closing of this transaction, we made an upfront payment of $10.0 million to Karyopharm, which was recorded as acquired IPR&D in our consolidated statements of income as BIIB100 had not yet reached technological feasibility. We may also pay Karyopharm up to $207.0 million in additional milestone payments as well as tiered royalties on potential net commercial sales in the mid-single digit to low-teen percentages.
BIIB104 Acquisition
In April 2018 we acquired BIIB104 (AMPA) from Pfizer. BIIB104 is a first-in-class, Phase 2b ready AMPA receptor potentiator for cognitive impairment associated with schizophrenia. AMPA receptors mediate fast excitatory synaptic transmission in the central nervous system, a process which can be disrupted in a number of neurological and psychiatric diseases, including schizophrenia.
We accounted for this transaction as an asset acquisition as the value being acquired primarily relates to a single asset. In connection with the closing of this transaction, we made an upfront payment of $75.0 million to Pfizer, which was recorded as acquired IPR&D in our consolidated statements of income as BIIB104 had not yet reached technological feasibility. We may also pay Pfizer up to $515.0 million in total development and commercialization milestone payments as well as tiered royalties on potential net commercial sales in the low to mid-teen percentages.
BIIB110 Acquisition
In July 2018 we acquired BIIB110 (ActRIIA/B ligand trap) and ALG-802 from AliveGen Inc. (AliveGen). BIIB110 and ALG-802 represent novel ways of targeting the myostatin pathway. We initially plan to study BIIB110 in multiple neuromuscular indications, including SMA and ALS.
We accounted for this transaction as an asset acquisition as the value being acquired primarily relates to a single asset. In connection with the closing of this transaction, we made an upfront payment of $27.5 million to AliveGen, which was recorded as acquired IPR&D in our consolidated statements of income as BIIB110 had not yet reached technological feasibility. We may also pay AliveGen up to $535.0 million in additional development and commercialization milestones.
3. Divestitures
Divestiture of Hillerød, Denmark Manufacturing Operations
In August 2019 we completed the sale of all of the outstanding shares of our subsidiary that owned our biologics manufacturing operations in Hillerød, Denmark to FUJIFILM Corporation (FUJIFILM). Upon the closing of this transaction, we received approximately $881.9 million in cash, which may be adjusted based on other contractual terms, which are discussed below. We determined that the operations disposed of in this transaction did not meet the criteria to be classified as discontinued operations under the applicable guidance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As part of this transaction, we provided FUJIFILM with certain minimum batch production commitment guarantees. There is a risk that the minimum contractual batch production commitments will not be met. Based upon current estimates we do not expect to incur an adverse commitment obligation associated with such guarantees. We may further adjust this estimate based upon changes in business conditions, which may result in the increase or reduction of this adverse commitment obligation in subsequent periods. We also may be obligated to indemnify FUJIFILM for liabilities that existed relating to certain business activities incurred prior to the closing of this transaction.
In addition, we may earn certain contingent payments based on future manufacturing activities at the Hillerød facility. For the disposition of a business, our policy is to recognize contingent consideration when the consideration is realizable. We currently believe the probability of earning these payments is remote and therefore we did not include these contingent payments in our calculation of the fair value of the operations.
As part of this transaction, we entered into certain manufacturing services agreements with FUJIFILM pursuant to which FUJIFILM will use the Hillerød facility to produce commercial products for us, such as TYSABRI, as well as other third-party products.
For the year ended December 31, 2019, we recognized a total net loss of approximately $124.2 million related to the transaction in our consolidated statements of income. This loss included a pre-tax loss of $55.3 million, which was recorded in loss on divestiture of Hillerød, Denmark manufacturing operations. The loss recognized was based on exchange rates and business conditions on the closing date of this transaction, and included costs to sell our Hillerød, Denmark manufacturing operations of approximately $11.2 million and our estimate of the fair value of adverse commitments of approximately $74.0 million, primarily associated with the guarantee of future minimum batch production at the Hillerød facility. We also recorded a tax expense of $68.9 million related to this transaction.
In addition, upon the closing of this transaction, we sold to FUJIFILM $41.8 million of raw materials that were remaining at the Hillerød facility on the closing date of this transaction. These materials were sold at cost, which approximates fair value.
During the year ended December 31, 2020, we reduced our estimate of the fair value of the adverse commitment associated with the guarantee of future batch production by approximately $62.0 million based on our current manufacturing forecasts. Additionally, we recorded a reduction to our pre-tax loss of approximately $30.5 million due to a refund of interest paid associated with a tax matter.
Our estimate of the fair value of the adverse commitments is a Level 3 measurement and is based on forecasted batch production at the Hillerød facility.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Revenues
Product Revenues
Revenues by product are summarized as follows:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | United States | Rest of World | Total | United States | Rest of World | Total | United States | Rest of World | Total | |||||||||||||||||||||||||||||||||||||||||||||||
| Multiple Sclerosis (MS): | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fumarate* | $ | 2,742.0 | $ | 1,163.4 | $ | 3,905.4 | $ | 3,312.0 | $ | 1,126.2 | $ | 4,438.2 | $ | 3,253.2 | $ | 1,020.9 | $ | 4,274.1 | ||||||||||||||||||||||||||||||||||||||
| Interferon** | 1,273.5 | 604.0 | 1,877.5 | 1,426.6 | 675.2 | 2,101.8 | 1,668.3 | 694.7 | 2,363.0 | |||||||||||||||||||||||||||||||||||||||||||||||
| TYSABRI | 1,096.8 | 849.3 | 1,946.1 | 1,041.8 | 850.4 | 1,892.2 | 1,025.0 | 839.0 | 1,864.0 | |||||||||||||||||||||||||||||||||||||||||||||||
| FAMPYRA | — | 103.1 | 103.1 | — | 97.1 | 97.1 | — | 92.7 | 92.7 | |||||||||||||||||||||||||||||||||||||||||||||||
| ZINBRYTA | — | — | — | — | — | — | — | 1.4 | 1.4 | |||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal: MS | 5,112.3 | 2,719.8 | 7,832.1 | 5,780.4 | 2,748.9 | 8,529.3 | 5,946.5 | 2,648.7 | 8,595.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Spinal Muscular Atrophy: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SPINRAZA | 787.8 | 1,264.3 | 2,052.1 | 933.4 | 1,163.6 | 2,097.0 | 854.0 | 870.2 | 1,724.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Biosimilars: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| BENEPALI | — | 481.6 | 481.6 | — | 486.2 | 486.2 | — | 485.2 | 485.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| IMRALDI | — | 216.3 | 216.3 | — | 184.0 | 184.0 | — | 16.7 | 16.7 | |||||||||||||||||||||||||||||||||||||||||||||||
| FLIXABI | — | 97.9 | 97.9 | — | 68.1 | 68.1 | — | 43.2 | 43.2 | |||||||||||||||||||||||||||||||||||||||||||||||
| Subtotal: Biosimilars | — | 795.8 | 795.8 | — | 738.3 | 738.3 | — | 545.1 | 545.1 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| FUMADERM | — | 12.2 | 12.2 | — | 15.2 | 15.2 | — | 22.3 | 22.3 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total product revenues | $ | 5,900.1 | $ | 4,792.1 | $ | 10,692.2 | $ | 6,713.8 | $ | 4,666.0 | $ | 11,379.8 | $ | 6,800.5 | $ | 4,086.3 | $ | 10,886.8 |
*Fumarate includes TECFIDERA and VUMERITY. VUMERITY became commercially available in the U.S. in November 2019.
**Interferon includes AVONEX and PLEGRIDY.
We recognized revenues from two wholesalers accounting for 30.5% and 15.3% of gross product revenues in 2020, 30.0% and 17.2% of gross product revenues in 2019 and 32.0% and 18.4% of gross product revenues in 2018, respectively.
As of December 31, 2020, two wholesale distributors individually accounted for approximately 21.1% and 8.5% of net accounts receivable associated with our product sales, as compared to 24.1% and 13.9% as of December 31, 2019, respectively.
An analysis of the change in reserves for discounts and allowances is summarized as follows:
| December 31, 2020 | ||||||||||||||||||||||||||
| (In millions) | Discounts | Contractual Adjustments | Returns | Total | ||||||||||||||||||||||
| Beginning balance | $ | 131.1 | $ | 1,027.3 | $ | 40.5 | $ | 1,198.9 | ||||||||||||||||||
| Current provisions relating to sales in current year | 774.7 | 3,308.8 | 19.0 | 4,102.5 | ||||||||||||||||||||||
| Adjustments relating to prior years | (1.0) | (54.0) | 1.3 | (53.7) | ||||||||||||||||||||||
| Payments/returns relating to sales in current year | (635.1) | (2,426.1) | — | (3,061.2) | ||||||||||||||||||||||
| Payments/returns relating to sales in prior years | (128.3) | (763.0) | (19.2) | (910.5) | ||||||||||||||||||||||
| Ending balance | $ | 141.4 | $ | 1,093.0 | $ | 41.6 | $ | 1,276.0 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| December 31, 2019 | ||||||||||||||||||||||||||
| (In millions) | Discounts | Contractual Adjustments | Returns | Total | ||||||||||||||||||||||
| Beginning balance | $ | 127.8 | $ | 888.8 | $ | 34.7 | $ | 1,051.3 | ||||||||||||||||||
| Current provisions relating to sales in current year | 666.2 | 3,011.5 | 20.9 | 3,698.6 | ||||||||||||||||||||||
| Adjustments relating to prior years | 0.3 | (54.1) | 5.5 | (48.3) | ||||||||||||||||||||||
| Payments/returns relating to sales in current year | (535.5) | (2,242.9) | (0.2) | (2,778.6) | ||||||||||||||||||||||
| Payments/returns relating to sales in prior years | (127.7) | (576.0) | (20.4) | (724.1) | ||||||||||||||||||||||
| Ending balance | $ | 131.1 | $ | 1,027.3 | $ | 40.5 | $ | 1,198.9 |
| December 31, 2018 | ||||||||||||||||||||||||||
| (In millions) | Discounts | Contractual Adjustments | Returns | Total | ||||||||||||||||||||||
| Beginning balance | $ | 109.6 | $ | 606.0 | $ | 46.0 | $ | 761.6 | ||||||||||||||||||
| Current provisions relating to sales in current year | 679.3 | 2,686.7 | 23.1 | 3,389.1 | ||||||||||||||||||||||
| Adjustments relating to prior years | (0.3) | (10.0) | (1.8) | (12.1) | ||||||||||||||||||||||
| Payments/returns relating to sales in current year | (551.7) | (1,887.6) | (1.1) | (2,440.4) | ||||||||||||||||||||||
| Payments/returns relating to sales in prior years | (109.1) | (506.3) | (31.5) | (646.9) | ||||||||||||||||||||||
| Ending balance | $ | 127.8 | $ | 888.8 | $ | 34.7 | $ | 1,051.3 |
The total reserves above, which are included in our consolidated balance sheets, are summarized as follows:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Reduction of accounts receivable | $ | 195.4 | $ | 197.8 | ||||||||||
| Component of accrued expenses and other | 1,080.6 | 1,001.1 | ||||||||||||
| Total revenue-related reserves | $ | 1,276.0 | $ | 1,198.9 |
Revenues from Anti-CD20 Therapeutic Programs
Revenues from anti-CD20 therapeutic programs are summarized in the table below. For purposes of this footnote, we refer to RITUXAN and RITUXAN HYCELA collectively as RITUXAN.
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Biogen's share of pre-tax profits in the U.S. for RITUXAN and GAZYVA | $ | 1,080.2 | $ | 1,542.4 | $ | 1,431.9 | ||||||||||||||
| Other revenues from anti-CD20 therapeutic programs | 897.6 | 748.0 | 548.3 | |||||||||||||||||
| Total revenues from anti-CD20 therapeutic programs | $ | 1,977.8 | $ | 2,290.4 | $ | 1,980.2 |
Approximately 14.7%, 15.9% and 14.7% of our total revenues in 2020, 2019 and 2018, respectively, were derived from our collaboration arrangements with Genentech. For additional information on our collaboration arrangements with Genentech, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Revenues
Other revenues are summarized as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Revenues from collaborative and other relationships: | ||||||||||||||||||||
| Revenues earned under our technical development agreement, manufacturing service agreements and royalty revenues on biosimilar products with Samsung Bioepis | $ | 20.9 | $ | 106.2 | $ | 96.4 | ||||||||||||||
| Other revenues from collaborative and other relationships | 0.7 | — | (8.6) | |||||||||||||||||
| Other royalty and corporate revenues: | ||||||||||||||||||||
| Royalty | 33.9 | 17.0 | 38.7 | |||||||||||||||||
| Other corporate | 719.1 | 584.5 | 459.4 | |||||||||||||||||
| Total other revenues | $ | 774.6 | $ | 707.7 | $ | 585.9 |
Other corporate revenues primarily reflect amounts earned under contract manufacturing agreements with our strategic customers, including Bioverativ Inc. (Bioverativ). During the years ended December 31, 2020, 2019 and 2018, we recognized $48.6 million, $383.2 million and $206.7 million, respectively, in revenues under the manufacturing and supply agreement with Bioverativ entered into in connection with the spin-off of our hemophilia business.
During the third quarter of 2019, we amended our agreement with a contract manufacturing customer pursuant to which we licensed certain of our manufacturing-related intellectual property to the customer. In the second quarter of 2020, the customer received regulatory approval for its product that is being manufactured using certain of our manufacturing-related intellectual property. As a result we are entitled to $500.0 million in a series of three payments. The first payment became due upon a regulatory approval of such product and was received during the second quarter of 2020. Subsequent payments are due on the first and second anniversaries of the regulatory approval.
Other corporate revenues for the year ended December 31, 2020, reflect $346.2 million related to the delivery of the license for certain of our manufacturing-related intellectual property under the amended agreement discussed above and the performance of manufacturing product supply services for such customer. We have allocated the remaining $153.8 million of the $500.0 million transaction price to the performance of manufacturing product supply services for the customer, which we expect to perform through 2026. The value allocated to the manufacturing services was based on expected demand for supply and the fair value of comparable manufacturing and development services.
For additional information on our collaboration arrangements with Samsung Bioepis, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
5. Inventory
The components of inventory are summarized as follows:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Raw materials | $ | 314.9 | $ | 169.7 | ||||||||||
| Work in process | 544.5 | 460.0 | ||||||||||||
| Finished goods | 209.2 | 174.5 | ||||||||||||
| Total inventory | $ | 1,068.6 | $ | 804.2 | ||||||||||
Inventory amounts written down as a result of excess, obsolescence, unmarketability or other reasons are charged to cost of sales, and totaled $26.6 million, $52.2 million and $41.9 million for the years ended December 31, 2020, 2019 and 2018, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Divestiture of Hillerød, Denmark Manufacturing Operations
In August 2019 we completed the sale of all of the outstanding shares of our subsidiary that owned our biologics manufacturing operations in Hillerød, Denmark to FUJIFILM. This transaction included the sale of $14.0 million of work in process inventory.
In addition, we sold to FUJIFILM approximately $41.8 million of raw materials that were remaining at the Hillerød facility on the closing date of this transaction. These materials were sold at cost, which approximates fair value.
For additional information on the divestiture of our Hillerød, Denmark manufacturing operations, please read Note 3, Divestitures, to these consolidated financial statements.
6. Intangible Assets and Goodwill
Intangible Assets
Intangible assets, net of accumulated amortization, impairment charges and adjustments are summarized as follows:
| As of December 31, 2020 | As of December 31, 2019 | ||||||||||||||||||||||||||||||||||||||||
| (In millions) | Estimated Life | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||||
| Completed technology | 4-28 years | $ | 7,394.3 | $ | (5,136.5) | $ | 2,257.8 | $ | 7,379.3 | $ | (4,881.4) | $ | 2,497.9 | ||||||||||||||||||||||||||||
| In-process research and development | Indefinite until commercialization | 762.5 | — | 762.5 | 965.5 | — | 965.5 | ||||||||||||||||||||||||||||||||||
| Trademarks and trade names | Indefinite | 64.0 | — | 64.0 | 64.0 | — | 64.0 | ||||||||||||||||||||||||||||||||||
| Total intangible assets | $ | 8,220.8 | $ | (5,136.5) | $ | 3,084.3 | $ | 8,408.8 | $ | (4,881.4) | $ | 3,527.4 |
Amortization and Impairments
Amortization and impairments of acquired intangible assets totaled $464.8 million, $489.9 million and $747.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Amortization of acquired intangible assets, excluding impairment charges, totaled $255.1 million, $274.0 million and $381.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. The decrease in amortization of acquired intangible assets, excluding impairment charges, over the three years was primarily due to a lower rate of amortization for acquired intangible assets.
For the year ended December 31, 2020, amortization and impairment of acquired intangible assets reflects the impact of a $115.0 million impairment charge related to BIIB111, which was obtained as part of our acquisition of NST, a $75.4 million impairment charge related to BIIB054 (cinpanemab) and a $19.3 million impairment charge related to one of our other IPR&D intangible assets.
For the year ended December 31, 2019, amortization and impairments of acquired intangible assets reflects the impact of a $215.9 million impairment charge related to certain IPR&D assets associated with the Phase 2b study of BG00011 (STX-100) for the potential treatment of idiopathic pulmonary fibrosis (IPF), which was discontinued in the third quarter of 2019.
For the year ended December 31, 2018, amortization and impairments of acquired intangible assets reflects the impact of a $189.3 million impairment charge related to certain IPR&D assets associated with our vixotrigine program, as discussed below, and a $176.8 million impairment charge related to our U.S. license to Forward Pharma A/S' (Forward Pharma) intellectual property, including Forward Pharma's intellectual property related to TECFIDERA.
Completed Technology
Completed technology primarily relates to our acquisition of all remaining rights to TYSABRI from Elan as well as other amounts related to our other marketed products and programs acquired through business combinations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
IPR&D Related to Business Combinations
IPR&D represents the fair value assigned to research and development assets that we acquired as part of a business combination and had not yet reached technological feasibility at the date of acquisition. Included in IPR&D balances are adjustments related to foreign currency exchange rate fluctuations. We review amounts capitalized as acquired IPR&D for impairment 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. The carrying value associated with our IPR&D assets as of December 31, 2020 and 2019, relates to the various IPR&D programs we acquired in connection with our acquisitions of NST and Convergence Pharmaceuticals Holdings Ltd. (Convergence). The majority of the balance relates to our acquisition of NST in June 2019 whereby we acquired IPR&D programs with an estimated fair value of approximately $585.0 million as of December 31, 2020. For additional information on our acquisition of NST, please read Note 2, Acquisitions, to these consolidated financial statements.
BIIB111
During the fourth quarter of 2020 we began experiencing third-party manufacturing delays that may impact our timeline for a potential filing of a Biologics License Application (BLA) for BIIB111 for regulatory approval by up to one year. In addition, we determined that forecasted costs associated with advancing the BIIB111 program through Phase 3 development and potential commercialization will exceed our original estimates. We reassessed the fair value of the program based on these changes in assumptions and determined that the program was partially impaired. We recognized an impairment charge of $115.0 million during the fourth quarter of 2020, which resulted in a reduction of the IPR&D asset from $480.0 million to $365.0 million.
BIIB054
In February 2021 we announced that we discontinued development of BIIB054 as a potential treatment of Parkinson's disease as our Phase 2 SPARK study did not meet its primary or secondary endpoints. Although we made this determination in February 2021, it was based on conditions that existed as of December 31, 2020. As a result, we recognized an impairment charge of approximately $75.4 million during the fourth quarter of 2020 to reduce the fair value of the related IPR&D intangible asset to zero.
The IPR&D impairment charges were included in amortization and impairment of acquired intangible assets and the gain resulting from the remeasurement of our contingent consideration obligation was recorded in (gain) loss on fair value remeasurement of contingent consideration in our consolidated statements of income. The fair value of the intangible assets and contingent consideration obligations were based on a probability-adjusted discounted cash flow calculation using Level 3 fair value measurements and inputs including estimated revenues, costs and probabilities of success.
Vixotrigine
In the periods since we acquired vixotrigine, there have been numerous delays in the initiation of Phase 3 studies for the potential treatment of TGN as we engaged with the U.S. Food and Drug Administration (FDA) regarding the design of the Phase 3 studies and awaited data and insights from mid-stage clinical trials of vixotrigine in other indications that have since been completed. The fair value of the TGN asset is not significantly in excess of carrying value. As of December 31, 2020, the carrying value associated with our vixotrigine IPR&D assets was $177.5 million.
Estimated Future Amortization of Intangible Assets
The estimated future amortization of finite-lived intangible assets for the next five years is expected to be as follows:
| (In millions) | As of December 31, 2020 | |||||||
| 2021 | $ | 205.0 | ||||||
| 2022 | 215.0 | |||||||
| 2023 | 215.0 | |||||||
| 2024 | 225.0 | |||||||
| 2025 | 220.0 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill
The following table provides a roll forward of the changes in our goodwill balance:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Goodwill, beginning of year | $ | 5,757.8 | $ | 5,706.4 | ||||||||||
| Increase to goodwill | — | 117.5 | ||||||||||||
| Elimination of goodwill allocated to Hillerød, Denmark manufacturing operations | — | (69.5) | ||||||||||||
| Other | 4.3 | 3.4 | ||||||||||||
| Goodwill, end of year | $ | 5,762.1 | $ | 5,757.8 |
As of December 31, 2020, we had no accumulated impairment losses related to goodwill. Other includes adjustments related to foreign currency exchange rate fluctuations.
7. Fair Value Measurements
The tables below present information about our assets and liabilities that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine such fair value:
| As of December 31, 2020 | ||||||||||||||||||||||||||
| (In millions) | Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash equivalents | $ | 626.9 | $ | — | $ | 626.9 | $ | — | ||||||||||||||||||
| Marketable debt securities: | ||||||||||||||||||||||||||
| Corporate debt securities | 1,301.5 | — | 1,301.5 | — | ||||||||||||||||||||||
| Government securities | 627.1 | — | 627.1 | — | ||||||||||||||||||||||
| Mortgage and other asset backed securities | 122.4 | — | 122.4 | — | ||||||||||||||||||||||
| Marketable equity securities | 1,974.3 | 271.1 | 1,703.2 | — | ||||||||||||||||||||||
| Derivative contracts | 20.5 | — | 20.5 | — | ||||||||||||||||||||||
| Plan assets for deferred compensation | 28.2 | — | 28.2 | — | ||||||||||||||||||||||
| Total | $ | 4,700.9 | $ | 271.1 | $ | 4,429.8 | $ | — | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivative contracts | $ | 217.2 | $ | — | $ | 217.2 | $ | — | ||||||||||||||||||
| Contingent consideration obligations | 259.8 | — | — | 259.8 | ||||||||||||||||||||||
| Total | $ | 477.0 | $ | — | $ | 217.2 | $ | 259.8 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| As of December 31, 2019 | ||||||||||||||||||||||||||
| (In millions) | Total | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Cash equivalents | $ | 2,541.1 | $ | — | $ | 2,541.1 | $ | — | ||||||||||||||||||
| Marketable debt securities: | ||||||||||||||||||||||||||
| Corporate debt securities | 1,695.1 | — | 1,695.1 | — | ||||||||||||||||||||||
| Government securities | 1,013.9 | — | 1,013.9 | — | ||||||||||||||||||||||
| Mortgage and other asset backed securities | 261.3 | — | 261.3 | — | ||||||||||||||||||||||
| Marketable equity securities | 337.5 | 7.9 | 329.6 | — | ||||||||||||||||||||||
| Derivative contracts | 43.8 | — | 43.8 | — | ||||||||||||||||||||||
| Plan assets for deferred compensation | 27.7 | — | 27.7 | — | ||||||||||||||||||||||
| Total | $ | 5,920.4 | $ | 7.9 | $ | 5,912.5 | $ | — | ||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivative contracts | $ | 8.3 | $ | — | $ | 8.3 | $ | — | ||||||||||||||||||
| Contingent consideration obligations | 346.1 | — | — | 346.1 | ||||||||||||||||||||||
| Total | $ | 354.4 | $ | — | $ | 8.3 | $ | 346.1 |
There have been no material impairments of our assets measured and carried at fair value during the years ended December 31, 2020 and 2019. In addition, there have been no changes in valuation techniques during the years ended December 31, 2020 and 2019. The fair value of Level 2 instruments classified as cash equivalents and marketable debt securities was determined through third-party pricing services. The fair value of Level 2 instruments classified as marketable equity securities represents our investments in Sangamo Therapeutics, Inc. (Sangamo) common stock, Denali Therapeutics Inc. (Denali) common stock and Sage Therapeutics, Inc. (Sage) common stock and are valued using an option pricing valuation model as the investments are each subject to certain holding period restrictions. For additional information on our investments in Sangamo, Denali and Sage common stock, please read Note 8, Financial Instruments, to these consolidated financial statements.
Our investments in marketable equity securities also include shares of Ionis Pharmaceuticals, Inc. (Ionis) common stock acquired in June 2018. Our shares of Ionis common stock were initially subject to certain holding period restrictions that have since expired. The fair value of this investment was a Level 1 measurement as of December 31, 2020. For additional information on our collaboration arrangements with Ionis, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
For a description of our validation procedures related to prices provided by third-party pricing services and our option pricing valuation model, please read Note 1, Summary of Significant Accounting Policies - Fair Value Measurements, to these consolidated financial statements.
The following table summarizes the significant unobservable inputs in the fair value measurement of our contingent consideration obligations as of December 31, 2020:
| As of December 31, 2020 | ||||||||||||||||||||||||||||||||
| (In millions) | Fair Value | Valuation Technique | Unobservable Input | Range | Weighted Average | |||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||||||||
| Contingent consideration obligation | $259.8 | Discounted cash flow | Discount rate | 0.60% | 0.60% | |||||||||||||||||||||||||||
| Expected timing of achievement of development milestones | 2021 to 2025 | — |
The weighted average discount rate was calculated based on the relative fair value of our contingent consideration obligations. In addition, we apply various probabilities of technological and regulatory success, ranging from 39.9% to certain probability, to the valuation models to estimate the fair values of our contingent consideration obligations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Nonrecurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, we record assets and liabilities at fair value on a nonrecurring basis as required by accounting principles generally accepted in the U.S. (U.S. GAAP). Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges.
The gains or losses on assets measured at fair value on a nonrecurring basis, are summarized as follows:
| As of December 31, 2020 | ||||||||||||||||||||
| (In millions) | Beginning Book Value | Impairment | Ending Book Value | |||||||||||||||||
| BIIB111 intangible asset | $ | 480.0 | $ | (115.0) | $ | 365.0 |
For the year ended December 31, 2020, we recorded a partial impairment charge of $115.0 million related to BIIB111. For additional information, please read Note 6, Intangible Assets and Goodwill, to these consolidated financial statements.
Debt Instruments
The fair values of our debt instruments, which are Level 2 liabilities, are summarized as follows:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| 2.900% Senior Notes due September 15, 2020(1) | $ | — | $ | 1,509.6 | ||||||||||
| 3.625% Senior Notes due September 15, 2022 | 1,054.1 | 1,038.9 | ||||||||||||
| 4.050% Senior Notes due September 15, 2025 | 2,003.1 | 1,897.2 | ||||||||||||
| 2.250% Senior Notes due May 1, 2030 | 1,557.2 | — | ||||||||||||
| 5.200% Senior Notes due September 15, 2045 | 2,365.1 | 2,107.9 | ||||||||||||
| 3.150% Senior Notes due May 1, 2050 | 1,536.4 | — | ||||||||||||
| Total | $ | 8,515.9 | $ | 6,553.6 |
(1) Our 2.900% Senior Notes due September 15, 2020, were redeemed in full in May 2020 using the net proceeds from the issuance on April 30, 2020, of our senior unsecured notes for an aggregate principal amount of $3.0 billion. For additional information, please read Note 12, Indebtedness, to these consolidated financial statements.
The fair values of each of our series of Senior Notes were determined through market, observable and corroborated sources. For additional information related to our Senior Notes, please read Note 12, Indebtedness, to these consolidated financial statements.
Contingent Consideration Obligations
In connection with our acquisitions of Convergence and Biogen International Neuroscience GmbH (BIN), we agreed to make additional payments based upon the achievement of certain milestone events. The following table provides a roll forward of the fair values of our contingent consideration obligations, which includes Level 3 measurements:
| As of December 31, | |||||||||||||||||
| (In millions) | 2020 | 2019 | |||||||||||||||
| Fair value, beginning of year | $ | 346.1 | $ | 409.8 | |||||||||||||
| Changes in fair value | (86.3) | (63.7) | |||||||||||||||
| Payments and other | — | — | |||||||||||||||
| Fair value, end of year | $ | 259.8 | $ | 346.1 |
As of December 31, 2020 and 2019, approximately $110.3 million and $197.7 million, respectively, of the fair value of our total contingent consideration obligations was reflected as a component of other long-term liabilities in our consolidated balance sheets with the remaining balance reflected as a component of accrued expenses and other.
For the year ended December 31, 2020, changes in the fair value of our contingent consideration obligations were primarily due to our discontinuing development of BIIB054 for the potential treatment of Parkinson's disease, resulting in a reduction of our contingent consideration obligations of $51.0 million as well as other changes in the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
probability and the expected timing of the achievement of certain remaining developmental milestones, changes in the interest rates used to revalue our contingent consideration liabilities and the passage of time.
For the year ended December 31, 2019, changes in the fair value of our contingent consideration obligations were primarily due to the discontinuation of the Phase 2b study of BG00011 for the potential treatment of IPF resulting in a reduction of our contingent consideration obligations of $61.2 million as well as other changes in the probability and expected timing of achievement of certain developmental milestones, a decrease in interest rates used to revalue our contingent consideration liabilities and the passage of time.
The fair values of the contingent consideration liabilities were based on a probability-adjusted discounted cash flow calculation using Level 3 fair value measurements and inputs. For additional information on the valuation techniques and inputs utilized in the valuation of our financial assets and liabilities, please read Note 1, Summary of Significant Accounting Policies, to these consolidated financial statements.
Convergence Pharmaceuticals Holdings Limited
In connection with our acquisition of Convergence in February 2015 we recorded a contingent consideration obligation of $274.5 million. As of December 31, 2020 and 2019, the fair value of this contingent consideration obligation was $259.8 million and $244.6 million, respectively. Our most recent valuation was determined based upon net cash flow projections of $400.0 million, probability weighted and discounted using a rate of 0.6%, which is a measure of the credit risk associated with settling the liability.
Biogen International Neuroscience GmbH
In connection with our acquisition of BIN in December 2010 we recorded a contingent consideration obligation of $81.2 million. We discontinued further development of BIIB054 for the potential treatment of Parkinson's disease based on the results of a Phase 2 study of BIIB054. Additionally, during the third and fourth quarters of 2020 we discontinued other programs related to our acquisition of BIN for which we had immaterial contingent consideration obligations. As a result, the fair value of the contingent consideration obligations related to our acquisition of BIN has been adjusted to zero, resulting in a gain of $101.5 million for the year ended December 31, 2020.
Acquired IPR&D
The fair values of the acquired IPR&D assets were based on a probability-adjusted discounted cash flow calculation using Level 3 fair value measurements and inputs including estimated revenues and probabilities of success. These assets are tested for impairment annually until commercialization, after which time the acquired IPR&D will be amortized over its estimated useful life using the economic consumption method. In connection with our acquisition of BIN, we recognized a $110.9 million acquired IPR&D intangible asset. We discontinued further development of BIIB054 for the potential treatment of Parkinson's disease and recognized an impairment charge of $75.4 million during the fourth quarter of 2020 to reduce the fair value of the IPR&D intangible asset to zero. In connection with our acquisition of Stromedix Inc., we recognized a $219.2 million acquired IPR&D intangible asset. During the third quarter of 2019 we discontinued the Phase 2b study of BG00011 for the potential treatment of IPF and recognized an impairment charge of $215.9 million to reduce the fair value of the IPR&D intangible asset to zero. In connection with our acquisition of Convergence, we recognized a $424.6 million acquired IPR&D intangible asset. During the third quarter of 2018 we recognized impairment charges related to certain IPR&D assets associated with our vixotrigine program totaling $189.3 million. For additional information on our IPR&D intangible assets, including a discussion of our most significant assumptions, please read Note 6, Intangible Assets and Goodwill, to these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Financial Instruments
The following table summarizes our financial assets with maturities of less than 90 days from the date of purchase included in cash and cash equivalents in our consolidated balance sheets:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Commercial paper | $ | 61.1 | $ | 384.4 | ||||||||||
| Overnight reverse repurchase agreements | 37.4 | 368.8 | ||||||||||||
| Money market funds | 505.1 | 1,628.5 | ||||||||||||
| Short-term debt securities | 23.3 | 159.4 | ||||||||||||
| Total | $ | 626.9 | $ | 2,541.1 |
The carrying values of our commercial paper, including accrued interest, overnight reverse repurchase agreements, money market funds and our short-term debt securities approximate fair value due to their short-term maturities.
Our marketable equity securities gains (losses) are recorded in other income (expense), net in our consolidated statements of income. The following tables summarize our marketable debt and equity securities, classified as available for sale:
| As of December 31, 2020 | ||||||||||||||||||||||||||
| (In millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
| Current | $ | 897.8 | $ | 0.4 | $ | (0.2) | $ | 898.0 | ||||||||||||||||||
| Non-current | 402.5 | 1.1 | (0.1) | 403.5 | ||||||||||||||||||||||
| Government securities | ||||||||||||||||||||||||||
| Current | 380.6 | 0.1 | — | 380.7 | ||||||||||||||||||||||
| Non-current | 245.9 | 0.5 | — | 246.4 | ||||||||||||||||||||||
| Mortgage and other asset backed securities | ||||||||||||||||||||||||||
| Current | 0.2 | — | — | 0.2 | ||||||||||||||||||||||
| Non-current | 122.1 | 0.2 | (0.1) | 122.2 | ||||||||||||||||||||||
| Total marketable debt securities | $ | 2,049.1 | $ | 2.3 | $ | (0.4) | $ | 2,051.0 | ||||||||||||||||||
| Marketable equity securities, current | $ | 70.6 | $ | 15.9 | $ | — | $ | 86.5 | ||||||||||||||||||
| Marketable equity securities, non-current | $ | 1,168.9 | $ | 733.8 | $ | (14.9) | $ | 1,887.8 |
| As of December 31, 2019 | ||||||||||||||||||||||||||
| (In millions) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
| Corporate debt securities | ||||||||||||||||||||||||||
| Current | $ | 1,057.2 | $ | 1.0 | $ | — | $ | 1,058.2 | ||||||||||||||||||
| Non-current | 633.9 | 3.0 | — | 636.9 | ||||||||||||||||||||||
| Government securities | ||||||||||||||||||||||||||
| Current | 502.9 | 0.4 | — | 503.3 | ||||||||||||||||||||||
| Non-current | 510.1 | 0.8 | (0.3) | 510.6 | ||||||||||||||||||||||
| Mortgage and other asset backed securities | ||||||||||||||||||||||||||
| Current | 0.7 | — | — | 0.7 | ||||||||||||||||||||||
| Non-current | 260.2 | 0.8 | (0.4) | 260.6 | ||||||||||||||||||||||
| Total marketable debt securities | $ | 2,965.0 | $ | 6.0 | $ | (0.7) | $ | 2,970.3 | ||||||||||||||||||
| Marketable equity securities, non-current | $ | 218.4 | $ | 132.1 | $ | (13.0) | $ | 337.5 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summary of Contractual Maturities: Available-for-Sale Debt Securities
The estimated fair value and amortized cost of our marketable debt securities available-for-sale by contractual maturity are summarized as follows:
| As of December 31, 2020 | As of December 31, 2019 | |||||||||||||||||||||||||
| (In millions) | Estimated Fair Value | Amortized Cost | Estimated Fair Value | Amortized Cost | ||||||||||||||||||||||
| Due in one year or less | $ | 1,278.9 | $ | 1,278.6 | $ | 1,562.2 | $ | 1,560.8 | ||||||||||||||||||
| Due after one year through five years | 722.6 | 721.3 | 1,234.5 | 1,230.4 | ||||||||||||||||||||||
| Due after five years | 49.5 | 49.2 | 173.6 | 173.8 | ||||||||||||||||||||||
| Total marketable debt securities | $ | 2,051.0 | $ | 2,049.1 | $ | 2,970.3 | $ | 2,965.0 |
The average maturity of our marketable debt securities available-for-sale as of December 31, 2020 and 2019, was approximately 11 months and 14 months, respectively.
Proceeds from Marketable Debt Securities
The proceeds from maturities and sales of marketable debt securities and resulting realized gains and losses are summarized as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Proceeds from maturities and sales | $ | 7,299.4 | $ | 6,007.0 | $ | 9,173.7 | ||||||||||||||
| Realized gains | 17.7 | 6.0 | 3.2 | |||||||||||||||||
| Realized losses | 26.0 | 1.5 | 11.7 |
Realized losses for the year ended December 31, 2020, 2019 and 2018, primarily relate to sales of corporate bonds, agency mortgage-backed securities and other asset-backed securities.
Strategic Investments
As of December 31, 2020 and 2019, our strategic investment portfolio was comprised of investments totaling $2,024.6 million and $393.9 million, respectively, which are included in investments and other assets in our consolidated balance sheets.
Our strategic investment portfolio includes investments in equity securities of certain biotechnology companies, which are reflected within our disclosures included in Note 7, Fair Value Measurements, to these consolidated financial statements, venture capital funds where the underlying investments are in equity securities of certain biotechnology companies and non-marketable equity securities.
The increase in our strategic investment portfolio for the year ended December 31, 2020, was primarily due to our purchases of Sage, Denali and Sangamo common stock, as discussed below. These purchases were reflected as net cash flows used in investing activities within the consolidated statement of cash flows.
Sage Therapeutics, Inc.
In November 2020 we entered into a global collaboration and license agreement with Sage. In connection with the closing of this collaboration in December 2020 we purchased approximately 6.2 million shares of Sage common stock. This investment is classified as a Level 2 marketable equity security due to certain holding period restrictions and is remeasured each reporting period and carried at fair value. The effects of certain holding period restrictions on the investment are estimated using an option pricing valuation model. The most significant assumptions within the model are the term of the restrictions and the stock price volatility, which is based upon historical volatility of similar companies. We also use a constant maturity risk free-interest rate to match the remaining term of the restrictions on our investment in Sage common stock and a dividend yield of zero based upon the fact that Sage and similar companies generally have not historically granted cash dividends.
For additional information on our collaboration agreement with Sage, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Denali Therapeutics Inc.
In August 2020 we entered into a collaboration and license agreement with Denali. As part of this collaboration we purchased approximately 13 million shares of Denali common stock in September 2020. This investment is classified as a Level 2 marketable equity security due to certain holding period restrictions and is remeasured each reporting period and carried at fair value. The effects of certain holding period restrictions on the investment are estimated using an option pricing valuation model. The most significant assumptions within the model are the term of the restrictions and the stock price volatility, which is based upon historical volatility of similar companies. We also use a constant maturity risk free-interest rate to match the remaining term of the restrictions on our investment in Denali common stock and a dividend yield of zero based upon the fact that Denali and similar companies generally have not historically granted cash dividends.
For additional information on our collaboration agreement with Denali, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Sangamo Therapeutics, Inc.
In February 2020 we entered into a collaboration and license agreement with Sangamo. In connection with the closing of this transaction in April 2020 we purchased approximately 24 million shares of Sangamo common stock. This equity method investment will be remeasured each reporting period and carried at fair value due to our election of the fair value option. The effects of certain holding period restrictions on the investment are estimated using an option pricing valuation model. The most significant assumptions within the model are the term of the restrictions and the stock price volatility, which is based upon historical volatility of similar companies. We also use a constant maturity risk free-interest rate to match the remaining term of the restrictions on our investment in Sangamo common stock and a dividend yield of zero based upon the fact that Sangamo and similar companies generally have not historically granted cash dividends.
For additional information on our collaboration agreement with Sangamo, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Samsung Bioepis
In June 2018 we exercised our option under our joint venture agreement with Samsung BioLogics to increase our ownership percentage in Samsung Bioepis from approximately 5.0% to approximately 49.9%. The share purchase transaction was completed in November 2018 and, upon closing, we paid 759.5 billion South Korean won ($676.6 million) to Samsung BioLogics.
As of December 31, 2020 and 2019, the carrying value of our investment in Samsung Bioepis totaled 673.8 billion South Korean won ($620.2 million) and 670.8 billion South Korean won ($580.2 million), respectively, which is classified as a component of investments and other assets within our consolidated balance sheets.
For additional information on our collaboration arrangements with Samsung Bioepis, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
9. Derivative Instruments
Foreign Currency Forward Contracts - Hedging Instruments
Due to the global nature of our operations, portions of our revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. In order to mitigate these changes, we use foreign currency forward contracts to lock in exchange rates associated with a portion of our forecasted international revenues and operating expenses.
Foreign currency forward contracts in effect as of December 31, 2020 and 2019, had durations of 1 to 24 months and 1 to 15 months, respectively. These contracts have been designated as cash flow hedges and unrealized gains or losses on the portion of these foreign currency forward contracts that are included in the effectiveness test are reported in accumulated other comprehensive income (loss) (referred to as AOCI in the table below). Realized gains and losses of such contracts are recognized in revenues when the sale of product in the currency being hedged is recognized and in operating expenses when the expense in the currency being hedged is recorded. We recognize all cash flow hedge reclassifications from accumulated other comprehensive income (loss)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and fair value changes of excluded portions in the same line item in our consolidated statements of income that has been impacted by the hedged item.
The notional value of foreign currency forward contracts that were entered into to hedge forecasted revenues and operating expenses is summarized as follows:
| Notional Amount As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Euro | $ | 2,979.1 | $ | 1,892.4 | ||||||||||
| British pound | 250.6 | — | ||||||||||||
| Total foreign currency forward contracts | $ | 3,229.7 | $ | 1,892.4 |
The pre-tax portion of the fair value of these foreign currency forward contracts that were included in accumulated other comprehensive income (loss) in total equity reflected net losses of $212.5 million as of December 31, 2020, net gains of $0.5 million as of December 31, 2019, and net gains of $27.3 million as of December 31, 2018. We expect the net losses of $212.5 million to be settled over the next 24 months, of which $175.2 million of these losses are expected to be settled over the next 12 months, with any amounts in accumulated other comprehensive income (loss) to be reported as an adjustment to revenues or operating expenses. We consider the impact of our and our counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its contractual obligations. As of December 31, 2020 and 2019, credit risk did not materially change the fair value of our foreign currency forward contracts.
The following table summarizes the effect of foreign currency forward contracts designated as hedging instruments in our consolidated statements of income:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||
| Net Gains/(Losses) Reclassified from AOCI into Operating Income (in millions) | Net Gains/(Losses) Recognized in Operating Income (in millions) | |||||||||||||||||||||||||||||||||||||||||||
| Location | 2020 | 2019 | 2018 | Location | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||
| Revenues | $ | 18.3 | $ | 118.6 | $ | (42.5) | Revenues | $ | (9.9) | $ | 2.9 | $ | 10.8 | |||||||||||||||||||||||||||||||
| Operating expenses | 3.3 | (3.3) | 0.2 | Operating expenses | — | 0.2 | (0.1) |
Interest Rate Contracts - Hedging Instruments
We have entered into interest rate lock contracts or interest rate swap contracts on certain borrowing transactions to manage our exposure to interest rate changes and to reduce our overall cost of borrowing.
Interest Rate Swap Contracts
In connection with the issuance of our 2.90% Senior Notes due September 15, 2020, we entered into interest rate swaps with an aggregate notional amount of $675.0 million, which were set to expire on September 15, 2020. The interest rate swap contracts were designated as hedges of the fair value changes in our 2.90% Senior Notes attributable to changes in interest rates. The carrying value of our 2.90% Senior Notes as of December 31, 2019, included approximately $2.3 million related to changes in the fair value of these interest rate swap contracts. In May 2020 we settled our interest rate swap contracts, in conjunction with our early redemption of our 2.90% Senior Notes, resulting in a gain of approximately $3.3 million for the year ended December 31, 2020, which was recorded as a component of interest expense in our consolidated statements of income.
Net Investment Hedges - Hedging Instruments
In February 2012 we entered into a joint venture agreement with Samsung BioLogics establishing an entity, Samsung Bioepis, to develop, manufacture and market biosimilar products. In June 2018 we exercised our option under our joint venture agreement to increase our ownership percentage in Samsung Bioepis from approximately 5.0% to approximately 49.9%. The share purchase transaction was completed in November 2018 and, upon closing, we paid 759.5 billion South Korean won ($676.6 million) to Samsung BioLogics. Our investment in the equity of Samsung Bioepis is exposed to the currency fluctuations in the South Korean won.
In order to mitigate these currency fluctuations between the U.S. dollar and South Korean won, we have entered into foreign currency forward contracts. Foreign currency forward contracts in effect as of December 31, 2020, had remaining durations of 10 months. These contracts have been designated as net investment hedges. We recognize changes in the spot exchange rate in accumulated other comprehensive income (loss). The pre-tax portion
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of the fair value of these foreign currency forward contracts that were included in accumulated other comprehensive income (loss) in total equity reflected net losses of $21.2 million and $1.5 million as of December 31, 2020 and 2019, respectively. We exclude fair value changes related to the forward rate from our hedging relationship and will amortize the forward points in other income (expense), net in our consolidated statements of income over the term of the contract. The pre-tax portion of the fair value of the forward points that were included in accumulated other comprehensive income (loss) in total equity reflected gains of $0.2 million and $2.9 million as of December 31, 2020 and 2019, respectively.
The following table summarizes the effect of our net investment hedges in our consolidated financial statements:
| For the Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net Gains/(Losses) Recognized in Other Comprehensive Income (Effective Portion) (in millions) | Net Gains/(Losses) Recognized in Other Comprehensive Income (Amounts Excluded from Effectiveness Testing) (in millions) | Net Gains/(Losses) Recognized in Net Income (Amounts Excluded from Effectiveness Testing) (in millions) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Location | 2020 | 2019 | 2018 | Location | 2020 | 2019 | 2018 | Location | 2020 | 2019 | 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gains (losses) on net investment hedge | $ | (35.1) | $ | 25.3 | $ | (3.8) | Gains (losses) on net investment hedge | $ | 4.5 | $ | 3.3 | $ | — | Other income (expense) | $ | 2.9 | $ | 7.0 | $ | 1.5 |
For additional information on our collaboration arrangements with Samsung Bioepis, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Foreign Currency Forward Contracts - Other Derivative Instruments
We also enter into other foreign currency forward contracts, usually with durations of one month or less, to mitigate the foreign currency risk related to certain balance sheet positions. We have not elected hedge accounting for these transactions.
The aggregate notional amount of these outstanding foreign currency contracts was $1,158.0 million and $793.8 million as of December 31, 2020 and 2019, respectively. Net gains of $30.1 million, net losses of $5.9 million and net gains of $2.0 million related to these contracts were recorded as a component of other income (expense), net for the years ended December 31, 2020, 2019 and 2018, respectively.
Summary of Derivative Instruments
While certain of our derivative instruments are subject to netting arrangements with our counterparties, we do not offset derivative assets and liabilities in our consolidated balance sheets. The amounts in the table below would not be substantially different if the derivative assets and liabilities were offset.
The following table summarizes the fair value and presentation in our consolidated balance sheets of our outstanding derivative instruments, including those designated as hedging instruments:
| As of December 31, | ||||||||||||||||||||
| (In millions) | Balance Sheet Location | 2020 | 2019 | |||||||||||||||||
| Cash Flow Hedging Instruments: | ||||||||||||||||||||
| Asset derivative instruments | Other current assets | $ | — | $ | 33.8 | |||||||||||||||
| Liability derivative instruments | Accrued expenses and other | 157.1 | 2.0 | |||||||||||||||||
| Other long-term liabilities | 35.7 | 1.7 | ||||||||||||||||||
| Net Investment Hedging Instruments: | ||||||||||||||||||||
| Asset derivative instruments | Other current assets | — | 2.0 | |||||||||||||||||
| Liability derivative instruments | Accrued expenses and other | 19.7 | — | |||||||||||||||||
| Fair Value Hedging Instruments | ||||||||||||||||||||
| Liability derivative instruments | Accrued expenses and other | — | 2.3 | |||||||||||||||||
| Other Derivative Instruments: | ||||||||||||||||||||
| Asset derivative instruments | Other current assets | 20.5 | 8.0 | |||||||||||||||||
| Liability derivative instruments | Accrued expenses and other | 4.7 | 2.4 |
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Components of property, plant and equipment, net are summarized as follows:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Land | $ | 119.8 | $ | 118.1 | ||||||||||
| Buildings | 1,025.3 | 835.0 | ||||||||||||
| Leasehold improvements | 104.6 | 99.5 | ||||||||||||
| Machinery and equipment | 1,027.8 | 844.5 | ||||||||||||
| Computer software and hardware | 903.0 | 798.4 | ||||||||||||
| Furniture and fixtures | 62.5 | 58.3 | ||||||||||||
| Construction in progress | 1,950.8 | 2,084.4 | ||||||||||||
| Total cost | 5,193.8 | 4,838.2 | ||||||||||||
| Less: accumulated depreciation | (1,782.3) | (1,590.9) | ||||||||||||
| Total property, plant and equipment, net | $ | 3,411.5 | $ | 3,247.3 |
Depreciation expense totaled $201.9 million, $190.6 million and $269.4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
For the years ended December 31, 2020, 2019 and 2018, we capitalized interest costs related to construction in progress totaling approximately $65.2 million, $68.8 million and $54.0 million, respectively.
Solothurn, Switzerland Manufacturing Facility
In order to support our future growth and drug development pipeline, we are building a large-scale biologics manufacturing facility in Solothurn, Switzerland. We expect this facility to be partially operational during the first half of 2021. Upon completion, this facility will include 393,000 square feet related to a large-scale biologics manufacturing facility, 290,000 square feet of warehouse, utilities and support space and 51,000 square feet of administrative space. As of December 31, 2020 and 2019, we had approximately $1.8 billion and $1.9 billion, respectively, capitalized as construction in progress related to this facility. For the year ended December 31, 2020, we placed approximately $256.8 million of fixed assets in service related to this facility.
Divestiture of Hillerød, Denmark Manufacturing Operations
In August 2019 we completed the sale of all of the outstanding shares of our subsidiary that owned our biologics manufacturing operations in Hillerød, Denmark to FUJIFILM. This transaction included $631.5 million of property, plant and equipment, which was primarily comprised of $312.5 million for buildings and $287.3 million for machinery and equipment. For additional information on the divestiture of our Hillerød, Denmark manufacturing operations, please read Note 3, Divestitures, to these consolidated financial statements.
11. Leases
We lease real estate, including laboratory and office space, and certain equipment.
Our leases have remaining lease terms ranging from less than one year to ten years. Certain leases include one or more options to renew, exercised at our sole discretion, with renewal terms that can extend the lease term from one year to six years.
In addition, we sublease certain real estate to third parties. Our sublease portfolio consists of operating leases, with remaining lease terms ranging from four years to eight years. Our subleases do not include an option to renew as they are coterminous with our operating leases.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
All of our leases qualify as operating leases. The following table summarizes the presentation in our consolidated balance sheets of our operating leases:
| As of December 31, | |||||||||||||||||
| (In millions) | Balance sheet location | 2020 | 2019 | ||||||||||||||
| Assets: | |||||||||||||||||
| Operating lease assets | Operating lease assets | $ | 433.3 | $ | 427.0 | ||||||||||||
| Liabilities | |||||||||||||||||
| Current operating lease liabilities | Accrued expenses and other | $ | 83.2 | $ | 73.6 | ||||||||||||
| Non-current operating lease liabilities | Long-term operating lease liabilities | 402.0 | 412.7 | ||||||||||||||
| Total operating lease liabilities | $ | 485.2 | $ | 486.3 |
The following table summarizes the effect of lease costs in our consolidated statements of income:
| For the Years Ended December 31, | |||||||||||||||||
| (In millions) | Income Statement Location | 2020 | 2019 | ||||||||||||||
| Operating lease cost | Research and development | $ | 5.2 | $ | 6.7 | ||||||||||||
| Selling, general and administrative | 93.1 | 84.6 | |||||||||||||||
| Variable lease cost | Research and development | 1.1 | 1.2 | ||||||||||||||
| Selling, general and administrative | 21.1 | 23.7 | |||||||||||||||
| Sublease income | Selling, general and administrative | (24.2) | (25.6) | ||||||||||||||
| Other (income) expense, net | (3.9) | (3.9) | |||||||||||||||
| Net lease cost | $ | 92.4 | $ | 86.7 |
Variable lease cost primarily related to operating expenses, taxes and insurance associated with our operating leases. As these costs are generally variable in nature, they are not included in the measurement of the operating lease asset and related lease liability.
The minimum lease payments for the next five years and thereafter is expected to be as follows:
| (In millions) | As of December 31, 2020 | |||||||
| 2021 | $ | 95.8 | ||||||
| 2022 | 93.5 | |||||||
| 2023 | 82.0 | |||||||
| 2024 | 75.0 | |||||||
| 2025 | 56.9 | |||||||
| Thereafter | 129.8 | |||||||
| Total lease payments | $ | 533.0 | ||||||
| Less: interest | 47.8 | |||||||
| Present value of operating lease liabilities | $ | 485.2 |
The weighted average remaining lease term and weighted average discount rate of our operating leases are as follows:
| As of December 31, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Weighted average remaining lease term in years | 6.30 | 7.07 | ||||||||||||
| Weighted average discount rate | 2.9 | % | 3.2 | % |
F-42
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Supplemental disclosure of cash flow information related to our operating leases included in cash flows provided by operating activities in our consolidated statements of cash flows is as follows:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 100.2 | $ | 93.8 | ||||||||||
| Operating lease assets obtained in exchange for lease obligations | 59.0 | 35.9 |
12. Indebtedness
Our indebtedness is summarized as follows:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Current portion: | ||||||||||||||
| 2.900% Senior Notes due September 15, 2020(1) | $ | — | $ | 1,495.8 | ||||||||||
| Current portion of notes payable | $ | — | $ | 1,495.8 | ||||||||||
| Non-current portion: | ||||||||||||||
| 3.625% Senior Notes due September 15, 2022 | $ | 997.9 | $ | 996.6 | ||||||||||
| 4.050% Senior Notes due September 15, 2025 | 1,741.2 | 1,739.5 | ||||||||||||
| 2.250% Senior Notes due May 1, 2030 | 1,491.1 | — | ||||||||||||
| 5.200% Senior Notes due September 15, 2045 | 1,723.4 | 1,722.9 | ||||||||||||
| 3.150% Senior Notes due May 1, 2050 | 1,472.6 | — | ||||||||||||
| Non-current portion of notes payable | $ | 7,426.2 | $ | 4,459.0 |
(1) Our 2.900% Senior Notes due September 15, 2020, were redeemed in full in May 2020 using the net proceeds from the issuance on April 30, 2020, of our senior unsecured notes for an aggregate principal amount of $3.0 billion, as discussed below.
2020 Senior Notes
On April 30, 2020, we issued senior unsecured notes for an aggregate principal amount of $3.0 billion (2020 Senior Notes) as of December 31, 2020, consisting of the following:
-
$1.5 billion aggregate principal amount of 2.25% Senior Notes due May 1, 2030, valued at 99.973% of par; and
-
$1.5 billion aggregate principal amount of 3.15% Senior Notes due May 1, 2050, valued at 99.174% of par.
Our 2020 Senior Notes are senior unsecured obligations and may be redeemed at our option at any time at 100.0% of the principal amount plus accrued interest and, until a specified period before maturity, a specified make-whole amount. Our 2020 Senior Notes contain a change-of-control provision that, under certain circumstances, may require us to purchase our 2020 Senior Notes at a price equal to 101.0% of the principal amount plus accrued and unpaid interest to the date of repurchase.
We incurred approximately $24.4 million of costs associated with this offering which have been recorded as a reduction to the carrying amount of the debt on our consolidated balance sheet. These costs will be amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity. The discounts will be amortized as additional interest expense over the period from issuance through maturity using the effective interest rate method. Interest on our 2020 Senior Notes is payable May 1 and November 1 of each year, commencing November 1, 2020.
2015 Senior Notes
The following is a summary of our currently outstanding senior secured notes issued in 2015 (the 2015 Senior Notes) as of December 31, 2020:
- $1.0 billion aggregate principal amount of 3.625% Senior Notes due September 15, 2022, valued at 99.920% of par;
F-43
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
-
$1.75 billion aggregate principal amount of 4.05% Senior Notes due September 15, 2025, valued at 99.764% of par; and
-
$1.75 billion aggregate principal amount of 5.20% Senior Notes due September 15, 2045, valued at 99.294% of par.
The original costs associated with this offering of approximately $47.5 million have been recorded as a reduction to the carrying amount of the debt in our consolidated balance sheets. These costs along with the discounts will be amortized as additional interest expense using the effective interest rate method over the period from issuance through maturity.
Our 2015 Senior Notes are senior unsecured obligations and may be redeemed at our option at any time at 100.0% of the principal amount plus accrued interest and a specified make-whole amount. Our 2015 Senior Notes contain a change of control provision that may require us to purchase the notes at a price equal to 101.0% of the principal amount plus accrued and unpaid interest to the date of purchase under certain circumstances.
On September 15, 2015, we issued $1.5 billion aggregate principal amount of 2.90% Senior Notes due September 15, 2020, at 99.792% of par. Our 2.90% Senior Notes were senior unsecured obligations. In connection with the 2.90% Senior Notes, we entered into interest rate swap contracts where we received a fixed rate and paid a variable rate. In May 2020 we used the net proceeds from the sale of our 2020 Senior Notes to redeem our 2.90% Senior Notes prior to their maturity and recognized a net pre-tax charge of $9.4 million upon the extinguishment of these notes. This charge, which was recognized in interest expense in other income (expense), net in our consolidated statements of income for the year ended December 31, 2020, reflects the payment of a $12.7 million early call premium and the write off of remaining unamortized original debt issuance costs and discount balances, partially offset by a $3.3 million gain related to the settlement of the associated interest rate swap contracts. For additional information on our interest rate contracts, please read Note 9, Derivative Instruments, to these consolidated financial statements.
2020 Credit Facility
In January 2020 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. This revolving credit facility replaced the revolving credit facility that we entered into in August 2015. As of December 31, 2020, we had no outstanding borrowings and were in compliance with all covenants under this facility.
Debt Maturity
The total gross payments due under our debt arrangements are as follows:
| (In millions) | As of December 31, 2020 | |||||||
| 2021 | $ | — | ||||||
| 2022 | 1,000.0 | |||||||
| 2023 | — | |||||||
| 2024 | — | |||||||
| 2025 | 1,750.0 | |||||||
| 2026 and thereafter | 4,750.0 | |||||||
| Total | $ | 7,500.0 |
The fair value of our debt is disclosed in Note 7, Fair Value Measurements, to these consolidated financial statements.
13. Equity
Preferred Stock
We have 8.0 million shares of Preferred Stock authorized, of which 1.75 million shares are authorized as Series A, 1.0 million shares are authorized as Series X junior participating and 5.25 million shares are undesignated. Shares may be issued without a vote or action of shareholders from time to time in classes or series with the designations, powers, preferences and the relative, participating, optional or other special rights of the shares of
F-44
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
each such class or series and any qualifications, limitations or restrictions thereon as set forth in the instruments governing such shares. Any such Preferred Stock may rank prior to common stock as to dividend rights, liquidation preference or both, and may have full or limited voting rights and may be convertible into shares of common stock. No shares of Preferred Stock were issued and outstanding during 2020, 2019 and 2018.
Common Stock
The following table describes the number of shares authorized, issued and outstanding of our common stock as of December 31, 2020, 2019 and 2018:
| As of December 31, 2020 | As of December 31, 2019 | As of December 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Authorized | Issued | Outstanding | Authorized | Issued | Outstanding | Authorized | Issued | Outstanding | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock | 1,000.0 | 176.2 | 152.4 | 1,000.0 | 198.0 | 174.2 | 1,000.0 | 221.0 | 197.2 |
Share Repurchases
In October 2020 our Board of Directors authorized a program to repurchase up to $5.0 billion of our common stock (2020 Share Repurchase Program). Our 2020 Share Repurchase Program does not have an expiration date. All share repurchases under our 2020 Share Repurchase Program will be retired. Under our 2020 Share Repurchase Program, we repurchased and retired approximately 1.6 million shares of our common stock at a cost of approximately $400.0 million during the year ended December 31, 2020.
In December 2019 our Board of Directors authorized a program to repurchase up to $5.0 billion of our common stock (December 2019 Share Repurchase Program), which was completed as of September 30, 2020. All shares repurchased under our December 2019 Share Repurchase Program were retired. Under our December 2019 Share Repurchase Program, we repurchased and retired approximately 16.7 million shares of our common stock at a cost of approximately $5.0 billion during the year ended December 31, 2020.
In March 2019 our Board of Directors authorized a program to repurchase up to $5.0 billion of our common stock (March 2019 Share Repurchase Program), which was completed as of March 31, 2020. All shares repurchased under our March 2019 Share Repurchase Program were retired. Under our March 2019 Share Repurchase Program, we repurchased and retired approximately 4.1 million and 14.7 million shares of our common stock at a cost of approximately $1.3 billion and $3.7 billion during the years ended December 31, 2020 and 2019, respectively.
In August 2018 our Board of Directors authorized a program to repurchase up to $3.5 billion of our common stock (2018 Share Repurchase Program), which was completed as of June 30, 2019. All share repurchases under our 2018 Share Repurchase Program were retired. Under our 2018 Share Repurchase Program, we repurchased and retired approximately 8.9 million and 4.3 million shares of our common stock at a cost of approximately $2.1 billion and $1.4 billion during the years ended December 31, 2019 and 2018, respectively.
In July 2016 our Board of Directors authorized a program to repurchase up to $5.0 billion of our common stock (2016 Share Repurchase Program), which was completed as of June 30, 2018. All share repurchases under our 2016 Share Repurchase Program were retired. Under our 2016 Share Repurchase Program, we repurchased and retired approximately 10.5 million shares of common stock at a cost of approximately $3.0 billion during the year ended December 31, 2018.
Amounts paid to repurchase shares in excess of their par value are allocated between additional paid-in capital and retained earnings, with payments in excess of our additional paid-in-capital balance recorded as a reduction to retained earnings.
F-45
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Income (Loss)
The following tables summarize the changes in accumulated other comprehensive income (loss), net of tax by component:
| December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Unrealized Gains (Losses) on Securities Available for Sale, net of tax | Unrealized Gains (Losses) on Cash Flow Hedges, net of tax | Gains (Losses) on Net Investment Hedge, Net of Tax | Unfunded Status of Postretirement Benefit Plans, net of tax | Currency Translation Adjustments | Total | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 4.2 | $ | 7.8 | $ | 25.1 | $ | (32.8) | $ | (139.5) | $ | (135.2) | ||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (9.3) | (165.0) | (30.7) | (33.5) | 92.9 | (145.6) | ||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 6.5 | (21.8) | (2.9) | — | — | (18.2) | ||||||||||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | (2.8) | (186.8) | (33.6) | (33.5) | 92.9 | (163.8) | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 1.4 | $ | (179.0) | $ | (8.5) | $ | (66.3) | $ | (46.6) | $ | (299.0) |
| December 31, 2019 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Unrealized Gains (Losses) on Securities Available for Sale, net of tax | Unrealized Gains (Losses) on Cash Flow Hedges, net of tax | Gains (Losses) on Net Investment Hedge, Net of Tax | Unfunded Status of Postretirement Benefit Plans, net of tax | Currency Translation Adjustments | Total | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | (4.0) | $ | 34.7 | $ | 3.5 | $ | (31.3) | $ | (243.3) | $ | (240.4) | ||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | 11.8 | 88.1 | 28.6 | (1.5) | 103.8 | 230.8 | ||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | (3.6) | (115.0) | (7.0) | — | — | (125.6) | ||||||||||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | 8.2 | (26.9) | 21.6 | (1.5) | 103.8 | 105.2 | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 4.2 | $ | 7.8 | $ | 25.1 | $ | (32.8) | $ | (139.5) | $ | (135.2) |
| December 31, 2018 | ||||||||||||||||||||||||||||||||||||||
| (In millions) | Unrealized Gains (Losses) on Securities Available for Sale, net of tax | Unrealized Gains (Losses) on Cash Flow Hedges, net of tax | Gains (Losses) on Net Investment Hedge, Net of Tax | Unfunded Status of Postretirement Benefit Plans, net of tax | Currency Translation Adjustments | Total | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2017 | $ | (1.6) | $ | (104.5) | $ | — | $ | (36.8) | $ | (175.5) | $ | (318.4) | ||||||||||||||||||||||||||
| Amount reclassified, net of tax, upon adoption of ASU 2016-01 | 1.5 | — | — | — | — | 1.5 | ||||||||||||||||||||||||||||||||
| Balance, January 1, 2018 | (0.1) | (104.5) | — | (36.8) | (175.5) | (316.9) | ||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) before reclassifications | (10.6) | 97.4 | 5.0 | 5.5 | (67.8) | 29.5 | ||||||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 6.7 | 41.8 | (1.5) | — | — | 47.0 | ||||||||||||||||||||||||||||||||
| Net current period other comprehensive income (loss) | (3.9) | 139.2 | 3.5 | 5.5 | (67.8) | 76.5 | ||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | (4.0) | $ | 34.7 | $ | 3.5 | $ | (31.3) | $ | (243.3) | $ | (240.4) |
F-46
BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the amounts reclassified from accumulated other comprehensive income:
| (In millions) | Income Statement Location | Amounts Reclassified from Accumulated Other Comprehensive Income | ||||||||||||||||||||||||
| For the Years Ended December 31, | ||||||||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Gains (losses) on securities available for sale | Other income (expense) | $ | (8.2) | $ | 4.5 | $ | (8.5) | |||||||||||||||||||
| Income tax benefit (expense) | 1.7 | (0.9) | 1.8 | |||||||||||||||||||||||
| Gains (losses) on cash flow hedges | Revenues | 18.3 | 118.6 | (42.5) | ||||||||||||||||||||||
| Operating expenses | 3.3 | (3.3) | 0.2 | |||||||||||||||||||||||
| Other income (expense) | 0.3 | 0.3 | 0.3 | |||||||||||||||||||||||
| Income tax benefit (expense) | (0.1) | (0.6) | 0.2 | |||||||||||||||||||||||
| Gains (losses) on net investment hedge | Other Income (expense) | 2.9 | 7.0 | 1.5 | ||||||||||||||||||||||
| Total reclassifications, net of tax | $ | 18.2 | $ | 125.6 | $ | (47.0) |
14. Earnings per Share
Basic and diluted earnings per share are calculated as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Numerator: | ||||||||||||||||||||
| Net income attributable to Biogen Inc. | $ | 4,000.6 | $ | 5,888.5 | $ | 4,430.7 | ||||||||||||||
| Denominator: | ||||||||||||||||||||
| Weighted average number of common shares outstanding | 160.9 | 187.1 | 204.9 | |||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||
| Time-vested restricted stock units | 0.2 | 0.2 | 0.3 | |||||||||||||||||
| Market stock units | 0.1 | 0.1 | 0.1 | |||||||||||||||||
| Performance stock units settled in stock | 0.1 | — | — | |||||||||||||||||
| Dilutive potential common shares | 0.4 | 0.3 | 0.4 | |||||||||||||||||
| Shares used in calculating diluted earnings per share | 161.3 | 187.4 | 205.3 |
Amounts excluded from the calculation of net income per diluted share because their effects were anti-dilutive were insignificant.
Earnings per share for the years ended December 31, 2020, 2019 and 2018, reflects the repurchase of approximately 22.4 million shares, 23.6 million shares and 14.8 million shares of our common stock, respectively, under our share repurchase programs. For additional information on our share repurchase programs, please read Note 13, Equity, to these consolidated financial statements.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Share-Based Payments
Share-Based Compensation Expense
The following table summarizes share-based compensation expense included in our consolidated statements of income:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Research and development | $ | 80.0 | $ | 77.1 | $ | 75.8 | ||||||||||||||
| Selling, general and administrative | 131.3 | 148.3 | 105.8 | |||||||||||||||||
| Subtotal | 211.3 | 225.4 | 181.6 | |||||||||||||||||
| Capitalized share-based compensation costs | (6.2) | (8.9) | (11.5) | |||||||||||||||||
| Share-based compensation expense included in total cost and expenses | 205.1 | 216.5 | 170.1 | |||||||||||||||||
| Income tax effect | (33.5) | (35.7) | (27.5) | |||||||||||||||||
| Share-based compensation expense included in net income attributable to Biogen Inc. | $ | 171.6 | $ | 180.8 | $ | 142.6 |
The following table summarizes share-based compensation expense associated with each of our share-based compensation programs:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Market stock units | $ | 40.5 | $ | 30.4 | $ | 27.2 | ||||||||||||||
| Time-vested restricted stock units | 142.6 | 134.0 | 126.6 | |||||||||||||||||
| Cash settled performance units | (1.7) | 0.7 | 7.8 | |||||||||||||||||
| Performance units | (0.1) | 1.6 | 3.1 | |||||||||||||||||
| Performance stock units settled in stock | 7.9 | 15.5 | 4.7 | |||||||||||||||||
| Performance stock units settled in cash | 8.6 | 5.5 | 1.7 | |||||||||||||||||
| Employee stock purchase plan | 13.5 | 11.5 | 10.5 | |||||||||||||||||
| NST stock options | — | 26.2 | — | |||||||||||||||||
| Subtotal | 211.3 | 225.4 | 181.6 | |||||||||||||||||
| Capitalized share-based compensation costs | (6.2) | (8.9) | (11.5) | |||||||||||||||||
| Share-based compensation expense included in total cost and expenses | $ | 205.1 | $ | 216.5 | $ | 170.1 |
As of December 31, 2020, unrecognized compensation cost related to unvested share-based compensation was approximately $207.6 million, net of estimated forfeitures. We expect to recognize the cost of these unvested awards over a weighted-average period of 1.9 years.
Share-Based Compensation Plans
We have three share-based compensation plans pursuant to which awards are currently being made: (i) the Biogen Inc. 2006 Non-Employee Directors Equity Plan (2006 Directors Plan); (ii) the Biogen Inc. 2017 Omnibus Equity Plan (2017 Omnibus Equity Plan); and (iii) the Biogen Inc. 2015 Employee Stock Purchase Plan (2015 ESPP).
Directors Plan
In May 2006 our shareholders approved the 2006 Directors Plan for share-based awards to our directors. Awards granted from the 2006 Directors Plan may include stock options, shares of restricted stock, RSUs, stock appreciation rights and other awards in such amounts and with such terms and conditions as may be determined by a committee of our Board of Directors, subject to the provisions of the 2006 Directors Plan. We have reserved a total of 1.6 million shares of common stock for issuance under the 2006 Directors Plan. The 2006 Directors Plan provides that awards other than stock options and stock appreciation rights will be counted against the total number of shares reserved under the plan in a 1.5-to-1 ratio. In June 2015 our shareholders approved an amendment to extend the term of the 2006 Directors Plan until June 2025.
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Omnibus Plan
In June 2017 our shareholders approved the 2017 Omnibus Equity Plan for share-based awards to our employees. Awards granted from the 2017 Omnibus Equity Plan may include stock options, shares of restricted stock, RSUs, performance shares, stock appreciation rights and other awards in such amounts and with such terms and conditions as may be determined by a committee of our Board of Directors, subject to the provisions of the 2017 Omnibus Equity Plan. Shares of common stock available for grant under the 2017 Omnibus Equity Plan consist of 8.0 million shares reserved for this purpose, plus shares of common stock that remained available for grant under the Biogen Idec Inc. 2008 Omnibus Equity Plan (2008 Omnibus Equity Plan) as of June 7, 2017, or that could again become available for grant if outstanding awards under the 2008 Omnibus Equity Plan as of June 7, 2017, are cancelled, surrendered or terminated in whole or in part. The 2017 Omnibus Equity Plan provides that awards other than stock options and stock appreciation rights will be counted against the total number of shares available under the plan in a 1.5-to-1 ratio.
We have not made any awards pursuant to the 2008 Omnibus Equity Plan since our shareholders approved the 2017 Omnibus Equity Plan, and do not intend to make any awards pursuant to the 2008 Omnibus Equity Plan in the future, except that unused shares under the 2008 Omnibus Equity Plan have been carried over for use under the 2017 Omnibus Equity Plan.
Stock Options
We currently do not grant stock options to our employees or directors. Outstanding stock options previously granted to our employees and directors generally have a 10-year term and vest over a period of between one and four years, provided the individual continues to serve at Biogen through the vesting dates. Options granted under all plans are exercisable at a price per share not less than the fair market value of the underlying common stock on the date of grant. As of December 31, 2020, all outstanding options were exercisable.
The following table summarizes our stock option activity:
| Shares | Weighted Average Exercise Price | ||||||||||
| Outstanding at December 31, 2019 | 12,000 | $ | 58.46 | ||||||||
| Granted | — | — | |||||||||
| Exercised | (12,000) | 58.46 | |||||||||
| Cancelled | — | — | |||||||||
| Outstanding at December 31, 2020 | — | $ | — |
The total intrinsic values of options exercised in 2020, 2019 and 2018 totaled $2.9 million, $4.2 million and $4.0 million, respectively.
The following table summarizes the amount of tax benefit realized for stock options and cash received from the exercise of stock options:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Tax benefit realized for stock options | $ | 2.9 | $ | 2.5 | $ | 2.2 | ||||||||||||||
| Cash received from the exercise of stock options | 0.7 | 0.4 | 0.8 |
Market Stock Units (MSUs)
MSUs awarded to employees prior to 2014 vested in four equal annual increments beginning on the first anniversary of the grant date. Participants may ultimately earn between zero and 150.0% of the target number of units granted based on actual stock performance.
MSUs awarded to employees in 2014 and thereafter vest in three equal annual increments beginning on the first anniversary of the grant date, and participants may ultimately earn between zero and 200.0% of the target number of units granted based on actual stock performance.
The vesting of these awards is subject to the respective employee’s continued employment. The number of MSUs granted represents the target number of units that are eligible to be earned based on the attainment of certain market-based criteria involving our stock price. The number of MSUs earned is calculated at each annual
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anniversary from the date of grant over the respective vesting periods, resulting in multiple performance periods. Accordingly, additional MSUs may be issued or currently outstanding MSUs may be cancelled upon final determination of the number of awards earned.
The following table summarizes our MSU activity:
| December 31, 2020 | ||||||||||||||
| Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Unvested at December 31, 2019 | 183,000 | $ | 378.09 | |||||||||||
| Granted (1) | 133,000 | 398.61 | ||||||||||||
| Vested | (82,000) | 375.42 | ||||||||||||
| Forfeited | (33,000) | 402.62 | ||||||||||||
| Unvested at December 31, 2020 | 201,000 | $ | 388.98 |
(1) MSUs granted during 2020 include awards granted in conjunction with our annual awards made in February 2020 and MSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant. MSUs granted in 2020 also reflect an adjustment based upon the final performance multiplier in relation to shares granted in 2019, 2018 and 2017.
We value grants of MSUs using a lattice model with a Monte Carlo simulation. This valuation methodology utilizes several key assumptions, the 30 calendar day average closing stock price on the date of grant for MSUs, expected volatility of our stock price, risk-free rates of return and expected dividend yield.
The assumptions used in our valuation are summarized as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Expected dividend yield | —% | —% | —% | |||||||||||||||||
| Range of expected stock price volatility | 37.8% - 44.1% | 31.2% - 33.6% | 27.5% - 32.4% | |||||||||||||||||
| Range of risk-free interest rates | 1.41% - 1.48% | 2.46% - 2.53% | 1.9% - 2.3% | |||||||||||||||||
| 30 calendar day average stock price on grant date | $257.83 - $325.40 | $228.59 - $331.18 | $279.47 - $346.76 | |||||||||||||||||
| Weighted-average per share grant date fair value | $398.61 | $378.08 | $378.85 |
The fair values of MSUs vested in 2020, 2019 and 2018 totaled $26.9 million, $32.5 million and $26.9 million, respectively.
Cash Settled Performance Units (CSPUs)
CSPUs awarded to employees vest in three equal annual increments beginning on the first anniversary of the grant date. The vesting of these awards is subject to the respective employee’s continued employment with such awards settled in cash. The number of CSPUs granted represents the target number of units that are eligible to be earned based on the attainment of certain performance measures established at the beginning of the performance period, which ends on December 31 of each year. Participants may ultimately earn between zero and 200.0% of the target number of units granted based on the degree of actual performance metric achievement. Accordingly, additional CSPUs may be issued or currently outstanding CSPUs may be cancelled upon final determination of the number of units earned. CSPUs are classified as liability awards and will be settled in cash based on the 30 calendar day average closing stock price through each vesting date, once the actual vested and earned number of units is known. Since no shares are issued, these awards do not dilute equity.
The following table summarizes our CSPU activity:
| Shares | |||||
| Unvested at December 31, 2019 | 13,000 | ||||
| Granted | — | ||||
| Vested | (13,000) | ||||
| Forfeited | — | ||||
| Unvested at December 31, 2020 | — |
The cash paid in settlement of CSPUs vested in 2020, 2019 and 2018 totaled $3.8 million, $10.6 million and $15.1 million, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Performance-vested Restricted Stock Units (PUs)
PUs are granted to certain employees in the form of RSUs that may be settled in cash or shares of our common stock at the sole discretion of the Compensation and Management Development Committee of our Board of Directors. These awards are structured and accounted for the same way as the CSPUs, and vest in three equal annual increments beginning on the first anniversary of the grant date. The number of PUs granted represents the target number of units that are eligible to be earned based on the attainment of certain performance measures established at the beginning of the performance period, which ends on December 31 of each year. Participants may ultimately earn between zero and 200.0% of the target number of units granted based on the degree of actual performance metric achievement. Accordingly, additional PUs may be issued or currently outstanding PUs may be cancelled upon final determination of the number of units earned. PUs settling in cash are based on the 30 calendar day average closing stock price through each vesting date once the actual vested and earned number of units is known.
The following table summarizes our PU activity:
| Shares | |||||
| Unvested at December 31, 2019 | 11,000 | ||||
| Granted | — | ||||
| Vested | (11,000) | ||||
| Forfeited | — | ||||
| Unvested at December 31, 2020 | — |
All PUs that vested in 2020, 2019 and 2018 were settled in cash totaling $3.4 million, $10.4 million and $17.0 million, respectively.
Performance Stock Units (PSUs)
PSUs Settled in Stock
During the first quarter of 2018 we began granting awards for performance-vested RSUs that will settle in stock. PSUs awarded to employees have a three-year performance period and vest on the third anniversary of the grant date. The vesting of these awards is subject to the respective employee’s continued employment. The number of PSUs granted represents the target number of units that are eligible to be earned based on the achievement of cumulative three-year performance measures established at the beginning of the performance period, which ends on December 31 of the third year of the performance period.
Participants may ultimately earn between zero and 200.0% of the target number of PSUs granted based on the degree of achievement of the applicable performance metric. Accordingly, additional PSUs may be issued or currently outstanding PSUs may be cancelled upon final determination of the number of units earned.
The following table summarizes our PSUs that settle in stock activity:
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested at December 31, 2019 | 111,000 | $ | 316.39 | ||||||||
| Granted (1) | 73,000 | 293.35 | |||||||||
| Vested | — | — | |||||||||
| Forfeited | (29,000) | 323.42 | |||||||||
| Unvested at December 31, 2020 | 155,000 | $ | 304.19 |
(1) PSUs settled in stock granted in 2020 include awards granted in conjunction with our annual awards made in February 2020 and PSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant.
PSUs Settled in Cash
During the first quarter of 2018 we began granting awards for performance-vested restricted stock units that will settle in cash. PSUs awarded to employees have three performance periods and vest on the third anniversary of the grant date. The vesting of these awards is subject to the respective employee’s continued employment. The number of PSUs granted represents the target number of units that are eligible to be earned based on the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
achievement of three annual performance measures established when the performance objectives are defined, which will be at the beginning of each year and will end on December 31 of such year.
Participants may ultimately earn between zero and 200.0% of the target number of PSUs granted based on the degree of achievement of the applicable performance metric. Accordingly, additional PSUs may be issued or currently outstanding PSUs may be cancelled upon final determination of the number of units earned. PSUs are classified as liability awards and will be settled in cash based on the 30 calendar day average closing stock price through the vesting date, once the actual vested and earned number of PSUs is determined. Since no shares are issued, these awards do not dilute equity.
The following table summarizes our PSUs that settle in cash activity:
| Shares | |||||
| Unvested at December 31, 2019 | 82,000 | ||||
| Granted (1) | 63,000 | ||||
| Vested | (2,000) | ||||
| Forfeited | (23,000) | ||||
| Unvested at December 31, 2020 | 120,000 |
(1) PSUs settled in cash granted in 2020 include awards granted in conjunction with our annual awards made in February 2020 and PSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant.
Time-Vested Restricted Stock Units (RSUs)
RSUs awarded to employees generally vest no sooner than one-third per year over three years on the anniversary of the date of grant, or upon the third anniversary of the date of the grant, provided the employee remains continuously employed with us, except as otherwise provided in the plan. Shares of our common stock will be delivered to the employee upon vesting, subject to payment of applicable withholding taxes. RSUs awarded to directors for service on our Board of Directors vest on the first anniversary of the date of grant, provided in each case that the director continues to serve on our Board of Directors through the vesting date. Shares of our common stock will be delivered to the director upon vesting and are not subject to any withholding taxes.
The following table summarizes our RSU activity:
| Shares | Weighted Average Grant Date Fair Value | ||||||||||
| Unvested at December 31, 2019 | 938,000 | $ | 306.55 | ||||||||
| Granted (1) | 620,000 | 318.87 | |||||||||
| Vested | (440,000) | 304.45 | |||||||||
| Forfeited | (100,000) | 314.46 | |||||||||
| Unvested at December 31, 2020 | 1,018,000 | $ | 314.46 |
(1) RSUs granted in 2020 primarily represent RSUs granted in conjunction with our annual awards made in February 2020 and awards made in conjunction with the hiring of new employees. RSUs granted in 2020 also include approximately 10,000 RSUs granted to our Board of Directors.
RSUs granted in 2019 and 2018 had weighted average grant date fair values of $304.44 and $316.32, respectively.
The fair values of RSUs vested in 2020, 2019 and 2018 totaled $140.5 million, $131.5 million and $111.7 million, respectively.
Employee Stock Purchase Plan (ESPP)
In June 2015 our shareholders approved the 2015 ESPP. The maximum aggregate number of shares of our common stock that may be purchased under the 2015 ESPP is 6.2 million.
The following table summarizes our ESPP activity:
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| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions, except share amounts) | 2020 | 2019 | 2018 | |||||||||||||||||
| Shares issued under the 2015 ESPP | 212,000 | 204,000 | 170,000 | |||||||||||||||||
| Cash received under the 2015 ESPP | $ | 48.6 | $ | 40.4 | $ | 40.5 |
16. Income Taxes
Income Tax Expense
Income before income tax expense and the income tax expense consist of the following:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Income before income taxes (benefit): | ||||||||||||||||||||
| Domestic | $ | 3,290.0 | $ | 4,725.3 | $ | 3,877.0 | ||||||||||||||
| Foreign | 1,757.5 | 2,400.6 | 2,022.6 | |||||||||||||||||
| Total | $ | 5,047.5 | $ | 7,125.9 | $ | 5,899.6 | ||||||||||||||
| Income tax expense (benefit): | ||||||||||||||||||||
| Current: | ||||||||||||||||||||
| Federal | $ | 647.0 | $ | 947.4 | $ | 1,131.8 | ||||||||||||||
| State | 41.2 | 59.1 | 45.5 | |||||||||||||||||
| Foreign | 155.1 | 84.4 | 140.0 | |||||||||||||||||
| Total | 843.3 | 1,090.9 | 1,317.3 | |||||||||||||||||
| Deferred: | ||||||||||||||||||||
| Federal | $ | (1,749.9) | $ | 1,143.9 | $ | (62.0) | ||||||||||||||
| State | (6.8) | (2.3) | (7.4) | |||||||||||||||||
| Foreign | 1,905.7 | (1,074.5) | 177.7 | |||||||||||||||||
| Total | 149.0 | 67.1 | 108.3 | |||||||||||||||||
| Total income tax expense | $ | 992.3 | $ | 1,158.0 | $ | 1,425.6 |
2017 Tax Act
The Tax Cuts and Jobs Act of 2017 (2017 Tax Act) resulted in significant changes to the U.S. corporate income tax system. These changes include a federal statutory rate reduction from 35.0% to 21.0%, 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 and collaborations to immediate U.S. taxation as GILTI or Subpart F income, includes a one-time mandatory deemed repatriation tax on accumulated foreign subsidiaries' previously untaxed foreign earnings (the Transition Toll Tax) and base erosion prevention measures on U.S. earnings and reduces the effective tax rate on income that comes from U.S. exports, called Foreign Derived Intangible Income. These changes became effective in 2018.
During the year ended December 31, 2018, we recognized a net reduction of $34.6 million in our estimated Transition Toll Tax, an expense of $12.7 million to remeasure our deferred tax balances, an expense of $135.8 million related to establishing deferred taxes for GILTI and an expense of $11.0 million to reflect other aspects of the 2017 Tax Act.
Transition Toll Tax
The 2017 Tax Act eliminated the deferral of U.S. income tax on the historical unrepatriated earnings by imposing the Transition Toll Tax. The Transition Toll Tax was assessed on our share of our foreign corporations' accumulated foreign earnings that were not previously taxed. Earnings in the form of cash and cash equivalents were taxed at a rate of 15.5% and all other earnings were taxed at a rate of 8.0%.
As of December 31, 2020 and 2019, we have accrued income tax liabilities of $697.0 million under the Transition Toll Tax. Of the amounts accrued as of December 31, 2020, $62.0 million is expected to be paid within one year. The Transition Toll Tax will be paid over an eight--year period, which started in 2018, and does not accrue
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
interest.
Unremitted Earnings
At December 31, 2020, we considered our earnings not 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 of approximately $1.5 billion as of December 31, 2020, primarily arising through the impacts of purchase accounting. These permanently reinvested basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which were considered probable as of December 31, 2020. The residual U.S. tax liability, if these differences reverse, would be between $300.0 million and $400.0 million as of December 31, 2020.
Coronavirus Aid, Relief and Economic Security Act
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in the U.S. in March 2020. The CARES Act adjusted a number of provisions of the tax code, including the calculation and eligibility of certain deductions and the treatment of net operating losses and tax credits. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the year ended December 31, 2020, or to our net deferred tax assets as of December 31, 2020.
TECFIDERA
In June 2020 and September 2020 judgments were entered in favor of the defendants in the patent infringement proceedings relating to TECFIDERA Orange-Book listed patents pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act, in West Virginia and Delaware. We have appealed the judgments in both actions. For additional information, please read Note 20, Litigation, to these consolidated financial statements.
Multiple TECFIDERA generic entrants are now in the U.S. market and have deeply discounted prices compared to TECFIDERA. The generic competition for TECFIDERA significantly reduced our TECFIDERA revenues during the year ended December 31, 2020, and is expected to have a substantial negative impact on our TECFIDERA revenues for as long as there is generic competition.
As of December 31, 2020, we have assessed the realizability of our deferred tax assets that are dependent on future expected sales of TECFIDERA in the U.S. and reduced the net value of certain deferred tax assets by approximately $1.7 billion and reduced the net value of deferred tax liabilities associated with GILTI and tax credits by approximately $1.6 billion. For the year ended December 31, 2020, the income tax expense associated with these reductions was approximately $90.3 million.
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Deferred Tax Assets and Liabilities
Significant components of our deferred tax assets and liabilities are summarized as follows:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Deferred tax assets: | ||||||||||||||
| Tax credits | $ | 113.4 | $ | 106.6 | ||||||||||
| Inventory, other reserves and accruals | 165.9 | 162.0 | ||||||||||||
| Intangibles, net | 1,546.0 | 3,380.0 | ||||||||||||
| Net operating loss | 2,080.3 | 130.4 | ||||||||||||
| Share-based compensation | 23.3 | 23.8 | ||||||||||||
| Other | 103.1 | 103.7 | ||||||||||||
| Valuation allowance | (1,753.9) | (1.1) | ||||||||||||
| Total deferred tax assets | $ | 2,278.1 | $ | 3,905.4 | ||||||||||
| Deferred tax liabilities: | ||||||||||||||
| Purchased intangible assets | $ | (396.2) | $ | (350.3) | ||||||||||
| GILTI | (1,143.7) | (1,381.6) | ||||||||||||
| Tax credits | (174.6) | (1,617.2) | ||||||||||||
| Depreciation, amortization and other | (227.0) | (135.0) | ||||||||||||
| Total deferred tax liabilities | $ | (1,941.5) | $ | (3,484.1) |
The change in the valuation allowance between December 31, 2020 and 2019, was primarily related to the establishment of a valuation allowance against certain deferred tax assets, the realization of which is dependent on future sales of TECFIDERA in the U.S., as discussed above.
In addition to deferred tax assets and liabilities, we have recorded deferred charges related to intra-entity sales of inventory. As of December 31, 2020 and 2019, the total deferred charges were $142.2 million and $243.8 million, respectively.
Tax Rate
A reconciliation between the U.S. federal statutory tax rate and our effective tax rate is summarized as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2020 | 2019 | 2018 | ||||||||||||||||||
| Statutory rate | 21.0 | % | 21.0 | % | 21.0 | % | ||||||||||||||
| State taxes | 0.7 | 0.8 | 0.6 | |||||||||||||||||
| Taxes on foreign earnings | (3.3) | (4.5) | (1.9) | |||||||||||||||||
| Credits and net operating loss utilization | (1.2) | (1.1) | (0.9) | |||||||||||||||||
| Purchased intangible assets | 0.7 | 0.4 | 1.2 | |||||||||||||||||
| Divestiture of Denmark manufacturing operations | (0.4) | 1.0 | — | |||||||||||||||||
| Internal reorganization of certain intellectual property rights | — | (2.1) | — | |||||||||||||||||
| TECFIDERA impairment | 1.8 | — | — | |||||||||||||||||
| GILTI | 1.3 | 1.5 | 1.6 | |||||||||||||||||
| U.S. tax reform | — | — | 2.1 | |||||||||||||||||
| Swiss tax reform | — | (0.8) | — | |||||||||||||||||
| Other | (0.9) | 0.1 | 0.5 | |||||||||||||||||
| Effective tax rate | 19.7 | % | 16.3 | % | 24.2 | % |
Changes in Tax Rate
For the year ended December 31, 2020, our effective tax rate was primarily increased by the income tax expense related to the establishment of a valuation allowance against certain deferred tax assets, the realization of which is dependent on future sales of TECFIDERA in the U.S., as discussed above, and partially offset by the benefit recognized on the effective settlement of certain tax matters. Additionally, our 2019 effective tax rate benefited from
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an internal reorganization of certain intellectual property rights and the enactment of a new taxing regime in the country and certain cantons of Switzerland, which we refer to as Swiss Tax Reform, partially offset by tax expense related to the divestiture of our Hillerød, Denmark manufacturing operations. Although we recognized a loss on the divestiture of our Hillerød, Denmark manufacturing operations, the divestiture required us to write-off certain deferred tax assets and resulted in a taxable gain in certain jurisdictions. For additional information on the divestiture of our Hillerød, Denmark manufacturing operations, please read Note 3, Divestitures, to these consolidated financial statements.
As a result of the 2019 internal reorganization of certain intellectual property rights, we recorded a deferred tax asset of $754.1 million and a deferred tax liability of $603.3 million as of December 31, 2019.
For the year ended December 31, 2019, as compared to 2018, the decrease in our effective tax rate was primarily due to the combination of the internal reorganization of certain intellectual property rights and the impact of the Swiss Tax Reform. This decrease was partially offset by a $68.9 million tax expense related to the divestiture of our subsidiary that owned our Hillerød, Denmark manufacturing operations. We also had a higher effective tax rate in 2018 resulting from the unfavorable effects of the 2017 Tax Act and our sale of inventory, the tax effect of which had been included within prepaid taxes at January 1, 2018, at a higher effective tax rate than the 2018 statutory tax rate.
Tax Attributes
As of December 31, 2020, we had net operating losses and general business credit carry forwards for U.S. federal income tax purposes of approximately $0.6 million and $1.3 million, respectively, which begin to expire in 2026. For U.S. state income tax purposes, we had research and investment credit carry forwards of approximately $142.4 million that begin to expire in 2022. For foreign income tax purposes, we had $18.0 billion of Swiss federal net operating loss carryforwards that begin to expire in 2025 and $16.8 billion of Swiss cantonal net operating loss carryforwards that begin to expire in 2025.
In assessing the realizability of our deferred tax assets, we have considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial reporting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Based upon the level of historical taxable income and income tax liability and projections for future taxable income over the periods in which the deferred tax assets are utilizable, we believe it is more likely than not that we will realize the net benefits of the deferred tax assets of our wholly owned subsidiaries, net of the recorded valuation allowance. In the event that actual results differ from our estimates or we adjust our estimates in future periods, we may need to adjust or establish a valuation allowance, which could materially impact our consolidated financial position and results of operations.
Accounting for Uncertainty in Income Taxes
A reconciliation of the beginning and ending amount of our unrecognized tax benefits is summarized as follows:
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Beginning balance at January 1, | $ | 129.9 | $ | 114.2 | $ | 66.8 | ||||||||||||||
| Additions based on tax positions related to the current period | 1.5 | 5.3 | 0.5 | |||||||||||||||||
| Additions for tax positions of prior periods | 51.7 | 17.2 | 58.7 | |||||||||||||||||
| Reductions for tax positions of prior periods | (63.6) | (10.3) | (13.6) | |||||||||||||||||
| Statute expirations | (7.9) | (0.1) | (2.9) | |||||||||||||||||
| Settlement refund (payment) | (35.9) | 3.6 | 4.7 | |||||||||||||||||
| Ending balance ar December 31, | $ | 75.7 | $ | 129.9 | $ | 114.2 |
Our 2020 activity reflects the impact of the effective settlement of certain tax matters. We and our subsidiaries are routinely examined by various taxing authorities. We file income tax returns in various U.S. states and in U.S. federal and other foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal tax examination for years before 2017 or state, local or non-U.S. income tax examinations for years before 2012.
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The U.S. Internal Revenue Service and other national tax authorities routinely examine our intercompany transfer pricing with respect to intellectual property related transactions and it is possible that they may disagree with one or more positions we have taken with respect to such valuations.
Included in the balance of unrecognized tax benefits as of December 31, 2020, 2019 and 2018, are $68.8 million, $122.7 million and $109.1 million (net of the federal benefit on state issues), respectively, of unrecognized tax benefits that, if recognized, would affect the effective income tax rate in future periods.
We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense. In 2020, 2019 and 2018 we recognized a net interest and penalty expense of $1.0 million, $4.7 million and $2.2 million, respectively. We have accrued $21.2 million and $20.0 million for the payment of interest and penalties as of December 31, 2020 and 2019, respectively.
Federal and State Uncertain Tax Positions
It is reasonably possible that we will adjust the value of our uncertain tax positions related to certain transfer pricing, collaboration matters and other issues as we receive additional information from various taxing authorities, including reaching settlements with such authorities.
We estimate that it is reasonably possible that our gross unrecognized tax benefits, exclusive of interest, could decrease by up to approximately $25.0 million in the next 12 months as a result of various audit closures, settlements and expiration of the statute of limitations.
Accounting for Bioverativ Spin-off
On February 1, 2017, in connection with the spin-off of our hemophilia business, we distributed all of the then outstanding shares of Bioverativ common stock to Biogen shareholders pursuant to a separation agreement. In March 2018 Bioverativ was acquired by Sanofi S.A. (Sanofi) and is now an indirect wholly-owned subsidiary of Sanofi. The spin-off of our hemophilia business was intended to qualify for tax-free treatment to Biogen and its shareholders under the Internal Revenue Code. Our 2017 tax return position remains open to audit. Bioverativ and Sanofi agreed to indemnify us for certain potential liabilities that may arise.
17. Other Consolidated Financial Statement Detail
Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the years ended December 31, 2020, 2019 and 2018, is as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||||||
| Interest | $ | 272.7 | $ | 244.2 | $ | 243.2 | ||||||||||||||
| Income taxes | 906.7 | 1,064.5 | 1,007.1 |
Non-cash Operating, Investing and Financing Activity
In the fourth quarter of 2018 we accrued $300.0 million upon reaching $20.0 billion in total cumulative sales of FUMADERM and TECFIDERA (together, the Fumapharm Products), which was paid in the first quarter of 2019. These amounts, net of tax benefit, were accounted for as increases to goodwill in accordance with the accounting standard applicable to business combinations when we acquired Fumapharm AG.
In connection with the construction of our large-scale biologics manufacturing facility in Solothurn, Switzerland, we accrued charges related to processing equipment and engineering services of approximately $12.4 million and $50.0 million in our consolidated balance sheets as of December 31, 2020 and 2019, respectively. For additional information on the construction of our manufacturing facility in Solothurn, Switzerland, please read Note 10, Property, Plant and Equipment, to these consolidated financial statements.
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Other Income (Expense), Net
Components of other income (expense), net, are summarized as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Interest income | $ | 42.0 | $ | 120.0 | $ | 112.5 | ||||||||||||||
| Interest expense | (222.5) | (187.4) | (200.6) | |||||||||||||||||
| Gain (loss) on investments, net | 685.7 | 204.7 | 119.5 | |||||||||||||||||
| Foreign exchange gains (losses), net | (10.7) | (7.0) | (9.9) | |||||||||||||||||
| Other, net | 2.9 | (47.0) | (10.5) | |||||||||||||||||
| Total other income (expense), net | $ | 497.4 | $ | 83.3 | $ | 11.0 |
Gain (loss) on investments, net, as reflected in the table above, relate to debt securities, equity securities of certain biotechnology companies, venture capital funds where the underlying investments are in equity securities of certain biotechnology companies and non-marketable equity securities.
For the year ended December 31, 2020, net unrealized and realized gains on our holdings in equity securities were approximately $681.8 million and $12.1 million, respectively, compared to net unrealized and realized gains of $150.1 million and $50.0 million in 2019. The net unrealized gains recognized during the year ended December 31, 2020, primarily reflects an increase in the fair value of Denali and Sangamo common stock of approximately $703.9 million.
The following table summarizes our gain (loss) on investments, net that relates to our equity securities held as of December 31, 2020, 2019 and 2018:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Net gains (losses) recognized during the period on equity securities | $ | 693.9 | $ | 200.1 | $ | 127.9 | ||||||||||||||
| Less: Net gains (losses) recognized on equity securities sold during the period and on capital distributions | 12.1 | 50.0 | (0.6) | |||||||||||||||||
| Unrealized gains (losses) recognized during the period on equity securities | $ | 681.8 | $ | 150.1 | $ | 128.5 |
Accrued Expenses and Other
Accrued expenses and other consists of the following:
| As of December 31, | ||||||||||||||
| (In millions) | 2020 | 2019 | ||||||||||||
| Revenue-related reserves for discounts and allowances | $ | 1,080.6 | $ | 1,001.1 | ||||||||||
| Collaboration expenses | 389.9 | 281.6 | ||||||||||||
| Employee compensation and benefits | 333.8 | 309.1 | ||||||||||||
| Royalties and licensing fees | 218.5 | 220.9 | ||||||||||||
| Derivative liabilities | 181.5 | 6.7 | ||||||||||||
| Current portion of contingent consideration obligations | 149.6 | 148.4 | ||||||||||||
| Other | 791.4 | 798.0 | ||||||||||||
| Total accrued expenses and other | $ | 3,145.3 | $ | 2,765.8 |
Other Long-term Liabilities
Other long-term liabilities were $1,329.6 million and $1,348.9 million as of December 31, 2020 and 2019, respectively, and include accrued income taxes totaling $709.9 million and $803.3 million, respectively.
18. Collaborative and Other Relationships
In connection with our business strategy, we have entered into various collaboration agreements that provide us with rights to develop, produce and market products using certain know-how, technology and patent rights maintained by our collaborative partners. Terms of the various collaboration agreements may require us to make milestone payments upon the achievement of certain product research and development objectives and pay royalties on future sales, if any, of commercial products resulting from the collaboration.
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Depending on the collaborative arrangement, we may record funding receivable or payable balances with our collaboration partners, based on the nature of the cost-sharing mechanism and activity within the collaboration. Our significant collaborative arrangements are discussed below.
Genentech, Inc. (Roche Group)
We have certain business and financial rights with respect to RITUXAN for the treatment of non-Hodgkin's lymphoma, CLL and other conditions; RITUXAN HYCELA for the treatment of non-Hodgkin's lymphoma and CLL; GAZYVA for the treatment of CLL and follicular lymphoma; OCREVUS for the treatment of PPMS and RMS; and other potential anti-CD20 therapies pursuant to our collaboration arrangements with Genentech, a wholly-owned member of the Roche Group. For purposes of this footnote, we refer to RITUXAN and RITUXAN HYCELA collectively as RITUXAN.
Our collaboration arrangements will continue in effect until we mutually agree to terminate the collaboration, except that if we undergo a change in control, as defined in our collaboration agreement, Genentech has the right to present an offer to buy the rights to RITUXAN and we must either accept Genentech’s offer or purchase Genentech’s rights on the same terms as its offer. Genentech will also be deemed concurrently to have purchased our rights to OCREVUS and any other collaboration anti-CD20 products in development in exchange for a royalty as well as our rights to GAZYVA in exchange for the compensation described in the collaboration arrangement. Our collaboration with Genentech was created through a contractual arrangement and not through a joint venture or other legal entity.
RITUXAN
Genentech and its affiliates are responsible for the worldwide manufacture of RITUXAN as well as all development and commercialization activities as follows:
U.S.
We have co-exclusively licensed our rights to develop, commercialize and market RITUXAN in the U.S.
Canada
We have co-exclusively licensed our rights to develop, commercialize and market RITUXAN in Canada.
GAZYVA
The Roche Group and its sub-licensees maintain sole responsibility for the development, manufacture and commercialization of GAZYVA in the U.S. We recognize our share of the development and commercialization expenses of GAZYVA as a reduction of our share of pre-tax profits in revenues from anti-CD20 therapeutic programs.
Commercialization of GAZYVA impacts our percentage of the co-promotion profits for RITUXAN, as summarized in the table below.
OCREVUS
In March 2017 the FDA approved OCREVUS for the treatment of RMS and PPMS. Pursuant to the terms of our collaboration arrangements with Genentech, we receive a tiered royalty on U.S. net sales from 13.5% and increasing up to 24.0% if annual net sales exceed $900.0 million. There will be a 50.0% reduction to these royalties if a biosimilar to OCREVUS is approved in the U.S.
In addition, we receive a gross 3.0% royalty on net sales of OCREVUS outside the U.S., with the royalty period lasting 11 years from the first commercial sale of OCREVUS on a country-by-country basis. OCREVUS has been approved for the treatment of RMS and PPMS in the E.U. and certain other countries.
The commercialization of OCREVUS does not impact the percentage of the co-promotion profits we receive for RITUXAN or GAZYVA. Genentech is solely responsible for development and commercialization of OCREVUS and funding future costs. Genentech cannot develop OCREVUS in CLL, non-Hodgkin's lymphoma or rheumatoid arthritis. OCREVUS royalty revenues were based on our estimates from third party and market research data of OCREVUS sales occurring during the corresponding period. Differences between actual and estimated royalty revenues will be adjusted for in the period in which they become known, which is generally expected to be the following quarter.
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Profit-sharing Formulas
RITUXAN Profit Share
Our current pretax co-promotion profit-sharing formula for RITUXAN provides for a 30.0% share on the first $50.0 million of co-promotion operating profits earned each calendar year. Our share of annual co-promotion profits in excess of $50.0 million varies, as summarized in the table below, upon the following events:
| Until GAZYVA First Non-CLL FDA Approval | 40.0 | % | |||
| After GAZYVA First Non-CLL FDA Approval until First GAZYVA Threshold Date | 39.0 | % | |||
| After First GAZYVA Threshold Date until Second GAZYVA Threshold Date | 37.5 | % | |||
| After Second GAZYVA Threshold Date | 35.0 | % |
First Non-CLL GAZYVA FDA Approval means the FDA’s first approval of GAZYVA in an indication other than CLL.
First GAZYVA Threshold Date means the earlier of (i) the date of the First Non-CLL GAZYVA FDA approval if U.S. gross sales of GAZYVA for the preceding consecutive 12-month period were at least $150.0 million or (ii) the first day of the calendar quarter after the date of the First Non-CLL GAZYVA FDA Approval that U.S. gross sales of GAZYVA within any consecutive 12-month period have reached $150.0 million.
Second GAZYVA Threshold Date means the first day of the calendar quarter after U.S. gross sales of GAZYVA within any consecutive 12-month period have reached $500.0 million. The Second GAZYVA Threshold Date can be achieved regardless of whether GAZYVA has been approved in a non-CLL indication.
Our share of RITUXAN pre-tax profits in the U.S. in excess of $50.0 million for the years ended December 31, 2020, 2019 and 2018, was 37.5%.
In addition, should the FDA approve an anti-CD20 product other than OCREVUS or GAZYVA that is acquired or developed by Genentech and subject to the collaboration agreement, our share of the co-promotion operating profits would be between 30.0% and 37.5% based on certain events.
GAZYVA Profit Share
Our current pretax profit-sharing formula for GAZYVA provides for a 35.0% share on the first $50.0 million of operating profits earned each calendar year. Our share of annual profits in excess of $50.0 million varies, as summarized in the table below, upon the following events:
| Until First GAZYVA Threshold Date | 39.0 | % | |||
| After First GAZYVA Threshold Date until Second GAZYVA Threshold Date | 37.5 | % | |||
| After Second GAZYVA Threshold Date | 35.0 | % |
Our share of GAZYVA pre-tax profits in excess of $50.0 million for the years ended December 31, 2020, 2019 and 2018, was 37.5%.
In November 2017 the FDA approved GAZYVA in combination with chemotherapy, followed by GAZYVA alone, for people with previously untreated advanced follicular lymphoma.
Revenues from Anti-CD20 Therapeutic Programs
Revenues from anti-CD20 therapeutic programs are summarized as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Biogen's share of pre-tax profits in the U.S. for RITUXAN and GAZYVA, including the reimbursement of selling and development expenses | $ | 1,080.2 | $ | 1,542.4 | $ | 1,431.9 | ||||||||||||||
| Other revenues from anti-CD20 therapeutic programs | 897.6 | 748.0 | 548.3 | |||||||||||||||||
| Total revenues from anti-CD20 therapeutic programs | $ | 1,977.8 | $ | 2,290.4 | $ | 1,980.2 |
Prior to regulatory approval, we record our share of the expenses incurred by the collaboration for the development of anti-CD20 products in research and development expense in our consolidated statements of income.
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After an anti-CD20 product is approved, we record our share of the development expenses related to that product as a reduction of our share of pre-tax profits in revenues from anti-CD20 therapeutic programs.
Ionis Pharmaceuticals, Inc.
SPINRAZA
In January 2012 we entered into a collaboration and license agreement with Ionis pursuant to which we have an exclusive, worldwide license to develop and commercialize SPINRAZA for the treatment of SMA.
Under our agreement with Ionis, we make royalty payments to Ionis on annual worldwide net sales of SPINRAZA using a tiered royalty rate between 11.0% and 15.0%, which are recognized in cost of sales within our consolidated statements of income. Royalty cost of sales related to sales of SPINRAZA for the years ended December 31, 2020, 2019 and 2018, totaled $286.6 million, $293.0 million and $238.0 million, respectively.
2012 Ionis Agreement
In December 2012 we entered into an agreement with Ionis for the development and commercialization of up to three gene targets.
Under this agreement, Ionis is responsible for global development of any product candidate through the completion of a Phase 2 trial and we will provide advice on the clinical trial design and regulatory strategy. We have an option to license the product candidate until completion of the Phase 2 trial. If we exercise our option, we will pay a license fee of up to $70.0 million to Ionis and assume global development, regulatory and commercialization responsibilities. Ionis is eligible to receive up to $130.0 million in additional milestone payments upon the achievement of certain regulatory milestones as well as royalties on future sales if we successfully develop the product candidate after option exercise.
Upon entering into this agreement, we made an upfront payment of $30.0 million to Ionis and agreed to make potential additional payments, prior to licensing, of up to $10.0 million based on the development of the selected product candidate as well as a mark-up of the cost estimate of the Phase 1 and Phase 2 trials. During 2015 we recognized this $10.0 million developmental milestone upon the selection of BIIB080 (tau ASO), which is currently in Phase 1 development for the potential treatment of Alzheimer's disease.
In December 2019 we exercised our option with Ionis and obtained a worldwide, exclusive, royalty-bearing license to develop and commercialize BIIB080. In connection with the option exercise, we made a payment of $45.0 million to Ionis, which was recorded as research and development expense in our consolidated statements of income. Future payments may include additional milestone payments of up to $155.0 million and royalties on future sales in the low- to mid-teens if we successfully develop the product candidate after option exercise.
2018 Ionis Agreement
In June 2018 we closed a 10-year exclusive collaboration agreement with Ionis to develop novel antisense oligonucleotide (ASO) drug candidates for a broad range of neurological diseases (2018 Ionis Agreement) for a total payment of $1.0 billion, consisting of an upfront payment of $375.0 million and the purchase of approximately 11.5 million shares of Ionis common stock at a cost of $625.0 million.
Upon closing, we recorded $50.9 million of the $375.0 million upfront payment as prepaid services in our consolidated balance sheets and recognized the remaining $324.1 million as research and development expense in our consolidated statements of income. The amount recorded as prepaid services represented the value of the employee resources committed to the arrangement to provide research and discovery services over the term of the agreement.
The 11.5 million shares of Ionis common stock were purchased at a premium to their fair value at the transaction closing date. The premium consisted of acquiring the shares at a price above the fair value based on the trailing 10-day weighted-average close price prior to entering into the 2018 Ionis Agreement in April 2018 and the effect of certain holding period restrictions. We recorded an asset of $462.9 million in investments and other assets in our consolidated balance sheets reflecting the fair value of the Ionis common stock as of the purchase date and a charge of $162.1 million to research and development expense in our consolidated statements of income in the second quarter of 2018 reflecting the premium paid for the Ionis common stock.
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Our investment in Ionis common stock is remeasured each reporting period. Changes in the fair value of our investment in Ionis common stock, including the effect of the holding period restrictions, are reflected in other income (expense), net in our consolidated statements of income. For additional information on the fair value of our investment in Ionis common stock, please read Note 7, Fair Value Measurements, to these consolidated financial statements.
We have the option to license therapies arising out of the 2018 Ionis Agreement and will be responsible for the development and commercialization of such therapies. We may pay development milestones to Ionis of up to $125.0 million or $270.0 million for each program, depending on the indication plus an annual license fee, as well as royalties on potential net commercial sales.
During the years ended December 31, 2020 and 2019, we incurred milestones of $11.3 million and $30.0 million, respectively, related to the advancement of neurological targets identified under the 2018 Ionis Agreement.
2017 SMA Collaboration Agreement
In December 2017 we entered into a collaboration agreement with Ionis to identify new ASO drug candidates for the potential treatment of SMA. Under this agreement, we have the option to license therapies arising out of this collaboration and will be responsible for their development and commercialization of such therapies.
Upon entering into this agreement, we made a $25.0 million upfront payment to Ionis and we may pay Ionis up to $260.0 million in additional development and regulatory milestone payments if new drug candidates advance to marketing approval. Upon commercialization, we may also pay Ionis up to $800.0 million in additional performance-based milestone payments and tiered royalties on potential net sales of such therapies.
2013 Long-term Strategic Research Agreement
In September 2013 we entered into a six-year research collaboration agreement with Ionis under which both companies collaborate to perform discovery level research and subsequent development and commercialization activities of antisense or other therapeutics for the potential treatment of neurological diseases. Under this agreement, Ionis performs research on a set of neurological targets identified within the agreement.
Ionis is eligible to receive milestone payments, license fees and royalty payments for all product candidates developed through this collaboration, with the specific amount dependent upon the modality of the product candidate advanced by us under the terms of the agreement.
For non-ALS antisense product candidates, Ionis is responsible for global development through the completion of a Phase 2 trial and we provide advice on the clinical trial design and regulatory strategy. For ALS antisense product candidates, we are responsible for global development, clinical trial design and regulatory strategy. We have an option to license a product candidate until completion of the Phase 2 trial. If we exercise our option, we will pay Ionis up to a $70.0 million license fee and assume global development, regulatory and commercialization responsibilities. Ionis could receive additional milestone payments upon the achievement of certain regulatory milestones of up to $130.0 million, plus additional amounts related to the cost of clinical trials conducted by Ionis under the collaboration, and royalties on future sales if we successfully develop the product candidate after option exercise.
In December 2018 we exercised our option with Ionis and obtained a worldwide, exclusive, royalty-bearing license to develop and commercialize BIIB067 (tofersen), an investigational treatment for ALS with superoxide dismutase 1 (SOD1) mutations. In connection with the option exercise, we made a payment of $35.0 million to Ionis, which was recorded as research and development in our consolidated statements of income. Future payments may include potential post-licensing milestone payments of up to $55.0 million and royalties in the low- to mid-teen percentages on potential annual worldwide net sales. We are solely responsible for the costs and expenses related to the development, manufacturing and commercialization of tofersen following the option exercise.
During the years ending December 31, 2020, 2019 and 2018, we incurred milestones of $28.0 million, $20.0 million and $18.0 million, respectively, related to the advancement of programs under this agreement, which were recorded as research and development expense in our consolidated statements of income.
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Eisai Co., Ltd.
BAN2401 Collaboration
We have a collaboration agreement with Eisai to jointly develop and commercialize BAN2401, a monoclonal antibody that targets amyloid beta aggregates, and elenbecestat, the oral BACE (base amyloid cleaving enzyme) inhibitor, two Eisai product candidates for the potential treatment of Alzheimer's disease (the BAN2401 Collaboration). In September 2019 we and Eisai discontinued the global Phase 3 studies of elenbecestat in early Alzheimer's disease.
Eisai serves as the global operational and regulatory lead for BAN2401 and all costs, including research, development, sales and marketing expenses, are shared equally between us and Eisai. If BAN2401 receives marketing approval, we and Eisai will co-promote BAN2401 and share profits equally. In addition, the BAN2401 Collaboration provides both parties with certain rights and obligations in the event of a change in control of either party.
The BAN2401 Collaboration also provided Eisai with an option to jointly develop and commercialize aducanumab (Aducanumab Option) and an option to jointly develop and commercialize one of our anti-tau monoclonal antibodies (Anti-Tau Option). In October 2017 Eisai exercised its Aducanumab Option and we entered into a new collaboration agreement for the joint development and commercialization of aducanumab (the Aducanumab Collaboration Agreement).
Eisai may exercise the Anti-Tau Option after completion of the Phase 1 clinical trial of such anti-tau monoclonal antibody. If Eisai exercises its Anti-Tau Option, we will receive an upfront payment from Eisai and will be entitled to additional development and commercial milestone payments. Eisai has not yet exercised its Anti-Tau Option.
A summary of development and sales and marketing expenses related to the BAN2401 Collaboration is as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Total development expense incurred by the collaboration related to the advancement of BAN2401 and elenbecestat | $ | 219.3 | $ | 348.7 | $ | 232.0 | ||||||||||||||
| Biogen's share of BAN2401 and elenbecestat development expense reflected in research and development expense in our consolidated statements of income | 109.6 | 174.3 | 116.0 | |||||||||||||||||
| Total sales and marketing expense incurred by the collaboration | 9.8 | 32.4 | 10.7 | |||||||||||||||||
| Biogen's share of BAN2401 and elenbecestat sales and marketing expense reflected in selling, general and administrative expense in our consolidated statements of income | 4.9 | 16.2 | 5.4 |
Aducanumab Collaboration Agreement
Under the Aducanumab Collaboration Agreement, we and Eisai will co-promote aducanumab with a region-based profit split and we lead the ongoing development of aducanumab.
In March 2019, based on a pre-specified futility analysis, we discontinued the global Phase 3 trials, EMERGE and ENGAGE, designed to evaluate the efficacy and safety of aducanumab in patients with early Alzheimer's disease. A new analysis of a larger dataset from these trials, conducted in scientific collaboration with the FDA, showed that the Phase 3 EMERGE study met its pre-specified primary and secondary endpoints. In the first quarter of 2019, as a result of the decision to discontinue the Phase 3 EMERGE and ENGAGE trials following the futility analysis, we accrued and subsequently paid approximately $45.0 million related to the termination of various clinical trials and research and development contracts net of the expected 45.0% Eisai reimbursement of development costs incurred under the Aducanumab Collaboration Agreement. In October 2019 we and Eisai announced that we plan to pursue regulatory approval for aducanumab in the U.S. In July 2020 we completed the submission of a BLA for the approval of aducanumab to the FDA.
For the period through March 31, 2018, we were responsible for 100.0% of development costs incurred by the collaboration for the advancement of aducanumab (aducanumab development expense). For the period April 1, 2018 through December 31, 2018, Eisai reimbursed us for 15.0% of aducanumab development expense incurred and beginning January 1, 2019, is reimbursing us for 45.0% of aducanumab development expense incurred.
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For the year ended December 31, 2020, we recognized net profit-sharing income of $33.8 million to reflect Eisai's 45.0% share of the $75.0 million milestone expense related to the submission of the BLA for the approval of aducanumab to the FDA.
Upon commercialization, both companies will co-promote aducanumab with a region-based profit split. We will receive a 55.0% share of the potential profits (losses) in the U.S., a 68.5% share of the potential profits (losses) in the European Union (E.U.) and a 20.0% share of the potential profits (losses) in Japan and Asia, excluding China and South Korea. The two companies will continue to share equally in the potential profits (losses) in rest of world markets. Sales and marketing expense incurred before commercialization are shared in proportion to the same region-based profit split that will be utilized to co-promote aducanumab.
A summary of development, sales and marketing and milestone expense related to the Aducanumab Collaboration Agreement is as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Total aducanumab development expense | $ | 152.0 | $ | 179.4 | $ | 264.8 | ||||||||||||||
| Biogen's share of aducanumab development expense reflected in research and development expense in our consolidated statements of income | 83.6 | 98.7 | 234.6 | |||||||||||||||||
| Total aducanumab sales and marketing expense incurred by the collaboration | 353.0 | 27.4 | 50.6 | |||||||||||||||||
| Biogen's share of aducanumab sales and marketing expense reflected in selling, general and administrative expense in our consolidated statements of income | 193.7 | 15.1 | 27.3 | |||||||||||||||||
| Total aducanumab collaboration third party milestone expense | 75.0 | — | — | |||||||||||||||||
| Eisai's share of aducanumab milestone expense reflected in collaboration profit sharing in our consolidated statements of income | 33.8 | — | — |
In addition, we and Eisai co-promote AVONEX, TYSABRI and TECFIDERA in Japan in certain settings and Eisai distributes AVONEX, TYSABRI, TECFIDERA and PLEGRIDY in India and other Asia-Pacific markets, excluding China.
UCB Pharma S.A.
We have a collaboration agreement with UCB Pharma S.A. (UCB) to jointly develop and commercialize dapirolizumab pegol, an anti-CD40L pegylated Fab, for the potential treatment of systemic lupus erythematosus and other future agreed indications. Either we or UCB may propose development of dapirolizumab pegol in additional indications. If the parties do not agree to add an indication as an agreed indication to the collaboration, we or UCB may, at the sole expense of the applicable party, pursue development in such excluded indication(s), subject to an opt-in right of the non-pursuing party after proof of clinical activity.
All costs incurred for agreed indications, including research, development, sales and marketing expenses, are shared equally between us and UCB. Upon marketing approval, we and UCB will co-promote dapirolizumab pegol and share profits equally. A summary of development expense related to the UCB collaboration agreement is as follows:
| For the Years Ended December 31, | ||||||||||||||||||||
| (In millions) | 2020 | 2019 | 2018 | |||||||||||||||||
| Total UCB development expense | $ | 58.3 | $ | 31.9 | $ | 29.7 | ||||||||||||||
| Biogen's share of UCB development expense reflected in research and development expense in our consolidated statements of income | 29.2 | 16.0 | 14.9 |
Alkermes
In November 2017 we entered into an exclusive license and collaboration agreement with Alkermes Pharma Ireland Limited, a subsidiary of Alkermes plc (Alkermes), for VUMERITY, a novel fumarate for the treatment of RMS. In October 2019 the FDA approved VUMERITY in the U.S. for the treatment of RMS. In November 2019 VUMERITY became commercially available in the U.S.
Under this agreement, we received an exclusive, worldwide license to develop and commercialize VUMERITY and we pay Alkermes a royalty of 15.0% on worldwide net commercial sales of VUMERITY. Royalties payable on net commercial sales of VUMERITY are subject, under certain circumstances, to tiered minimum annual payment requirements for a period of five years following FDA approval.
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Alkermes is eligible to receive royalties in the high-single digits to sub-teen double digits of annual net commercial sales upon successful development and commercialization of new product candidates, other than VUMERITY, developed under the exclusive license from Alkermes.
During the fourth quarter of 2019, following the FDA's approval of VUMERITY, we paid Alkermes $155.0 million in milestone payments, which were recorded in intangible assets in our consolidated balance sheets and will be amortized over the useful life of the product. For the years ended December 31, 2020, 2019 and 2018, we recorded $32.4 million, $53.5 million and $68.7 million, respectively, in research and development expense in our consolidated statements of income related to this collaboration.
Alkermes currently supplies VUMERITY to us pursuant to a supply agreement. In October 2019 we entered into a new supply agreement and amended our license and collaboration agreement with Alkermes. We have elected to initiate a technology transfer and, following a transition period, to manufacture VUMERITY or have VUMERITY manufactured by a third party we have engaged in exchange for paying an increased royalty rate to Alkermes on any portion of future worldwide net commercial sales of VUMERITY that is manufactured by us or our designee.
Bristol-Myers Squibb Company
In June 2017 we completed an exclusive license agreement with Bristol-Myers Squibb Company (BMS) for the development and potential commercialization of BIIB092 (gosuranemab), an antibody targeting tau, the protein that forms the deposits, or tangles, in the brain associated with Alzheimer's disease.
Under this agreement, we received worldwide rights to gosuranemab and are responsible for the full development and potential commercialization of gosuranemab in Alzheimer's disease and progressive supranuclear palsy (PSP).
In December 2019 we announced that the Phase 2 PASSPORT study investigating gosuranemab in individuals with PSP did not meet its primary endpoint. Based on these results, we discontinued development of gosuranemab in PSP and other primary tauopathies. We will continue our ongoing Phase 2 TANGO study of gosuranemab for mild cognitive impairment due to Alzheimer's disease or mild Alzheimer's disease, given differences in disease pathology.
Upon entering into this agreement, we made an upfront payment of $300.0 million to BMS and assumed all remaining obligations to the former shareholders of iPierian, Inc. (iPierian) related to BMS’s acquisition of iPierian in 2014. We may pay BMS up to $360.0 million in additional milestone payments, and potential royalties, and we may pay the former shareholders of iPierian up to $370.0 million in remaining milestone payments as well as potential royalties on net commercial sales.
For the years ended December 31, 2020, 2019 and 2018, we recorded $62.4 million, $144.0 million and $97.0 million, respectively, in research and development expense in our consolidated statements of income related to this agreement.
Acorda Therapeutics, Inc.
In June 2009 we entered into a collaboration and license agreement with Acorda Therapeutics, Inc. (Acorda) to develop and commercialize products containing fampridine, such as FAMPYRA, in markets outside the U.S. We are responsible for all regulatory activities and the future clinical development of related products in those markets.
Under this agreement, we pay tiered royalties based on the level of ex-U.S. net sales and we may pay potential milestone payments based on the successful achievement of certain regulatory and commercial milestones, which would be capitalized as intangible assets upon achievement of the milestones and amortized utilizing an economic consumption model. The next expected milestone of $15.0 million, due if ex-U.S. net sales reach $100.0 million over a period of four consecutive quarters, was recognized during the third quarter of 2020 and capitalized within intangible assets, net in our consolidated balance sheet. Royalty payments are recognized in cost of sales within our consolidated statements of income.
In connection with the collaboration and license agreement, we also entered into a supply agreement with Acorda for the commercial supply of FAMPYRA. This agreement is a sublicense arrangement of an existing agreement between Acorda and Alkermes Inc., who acquired Elan Drug Technologies, the original party to the license with Acorda.
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For the years ending December 31, 2020, 2019 and 2018, total cost of sales related to royalties and commercial supply of FAMPYRA reflected in our consolidated statements of income were $44.5 million, $42.0 million and $36.5 million, respectively.
Sage Therapeutics, Inc.
In November 2020 we entered into a global collaboration and license agreement with Sage to jointly develop and commercialize zuranolone (SAGE-217) for the potential treatment of major depressive disorder, postpartum depression and other psychiatric disorders and SAGE-324 for the potential treatment of essential tremor and other neurological disorders.
In connection of the closing of this transaction in December 2020 we purchased $650.0 million of Sage common stock, or approximately 6.2 million shares at approximately $104.14 per share, which are subject to transfer restrictions. We recorded an asset in investments and other assets in our consolidated balance sheets to reflect the initial fair value of the Sage common stock acquired and a charge of approximately $209.0 million to research and development expense in our consolidated statements of income to reflect the premium paid for the Sage common stock. We also made an upfront payment of $875.0 million that was recorded as research and development expense.
We may also pay Sage development and commercial milestone payments that could total up to approximately $1.6 billion if all the specified milestones set forth in this agreement are achieved. Both companies will share equal responsibility and costs for development as well as profits and losses for commercialization in the U.S. Outside of the U.S., we are responsible for development and commercialization, excluding Japan, Taiwan and South Korea, with respect to zuranolone and will pay Sage potential tiered royalties in the high teens to low twenties.
Denali Therapeutics Inc.
In August 2020 we entered into a collaboration and license agreement with Denali to co-develop and co-commercialize Denali's small molecule inhibitors of leucine-rich repeat kinase 2 (LRRK2) for Parkinson's disease. In addition to the LRRK2 program, we also have an exclusive option to license two preclinical programs from Denali’s Transport Vehicle platform, including its Antibody Transport Vehicle (ATV): ATV enabled anti-amyloid beta program and a second program utilizing its Transport Vehicle technology. Further, we have a right of first negotiation on two additional Transport Vehicle-enabled therapeutics, should Denali decide to seek a collaboration for such programs.
As part of this collaboration we purchased approximately $465.0 million of Denali common stock in September 2020, or approximately 13 million shares at approximately $34.94 per share, which are subject to transfer restrictions. We recorded an asset in investments and other assets in our consolidated balance sheets to reflect the initial fair value of the Denali common stock acquired and a charge of approximately $41.3 million to research and development expense in our consolidated statements of income to reflect the premium paid for the Denali common stock. We also made an upfront payment of $560.0 million that was recorded as research and development expense.
We may also pay Denali development and commercial milestone payments that could total up to approximately $1.1 billion if the milestones related to the LRRK2 program are achieved. Under this agreement, both companies share responsibility and costs for global development based on specified percentages and we are responsible for commercialization and will pay Denali potential tiered royalties.
For the year ended December 31, 2020, we recorded $8.8 million in research and development expense in our consolidated statements of income related to this collaboration.
Sangamo Therapeutics, Inc.
In February 2020 we entered into a collaboration and license agreement with Sangamo to develop and commercialize ST-501 for tauopathies, including Alzheimer's disease; ST-502 for synucleinopathies, including Parkinson’s disease; a third neuromuscular disease target; and up to nine additional neurological disease targets to be identified and selected within a five-year period. The companies are leveraging Sangamo’s proprietary zinc finger protein technology delivered via adeno-associated virus to modulate the expression of key genes involved in neurological diseases.
In connection with the closing of this transaction in April 2020 we purchased $225.0 million of Sangamo common stock, or approximately 24 million shares at approximately $9.21 per share, which are subject to transfer restrictions. We recorded an asset in investments and other assets in our consolidated balance sheets to reflect the initial fair value of the Sangamo common stock acquired and a charge of approximately $83.0 million to research
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and development expense in our consolidated statements of income to reflect the premium paid for the Sangamo common stock. We also made an upfront payment of $125.0 million that was recorded as research and development expense.
We may also pay Sangamo research, development, regulatory and commercial milestone payments that could total up to approximately $2.4 billion if we select all of the targets allowed under this agreement and all the specified milestones set forth in this agreement are achieved. Of this amount, up to $80.0 million relates to the selection of targets, $1.9 billion relates to the achievement of specified research, clinical development, regulatory and first commercial sale milestones and $380.0 million relates to the achievement of specified sales-based milestones if annual worldwide net sales of licensed products reach specified levels. In addition, we will pay Sangamo tiered royalties on potential net commercial sales of any products developed under this collaboration in the high single digit to double digit sub-teen percentages.
For the year ended December 31, 2020, we recorded $6.4 million in research and development expense in our consolidated statements of income related to this collaboration.
Other Research and Discovery Arrangements
These arrangements may include the potential for future milestone payments based on the achievement of certain clinical and commercial development payable over a period of several years.
Other
For the years ended December 31, 2020, 2019 and 2018, we recorded $92.1 million, $77.0 million and $48.6 million, respectively, as research and development expense in our consolidated statements of income related to other research and discovery related arrangements.
Samsung Bioepis Co., Ltd.
Joint Venture Agreement
In February 2012 we entered into a joint venture agreement with Samsung BioLogics establishing an entity, Samsung Bioepis, to develop, manufacture and market biosimilar products. Samsung BioLogics contributed 280.5 billion South Korean won (approximately $250.0 million) for an 85.0% ownership interest in Samsung Bioepis and we contributed 49.5 billion South Korean won (approximately $45.0 million) for the remaining 15.0% ownership interest. In June 2018 we exercised our option under our joint venture agreement to increase our ownership percentage in Samsung Bioepis from approximately 5.0%, which reflected the effect of previous equity financings in which we did not participate, to approximately 49.9%. The share purchase transaction was completed in November 2018 and, upon closing, we paid 759.5 billion South Korean won ($676.6 million) to Samsung BioLogics. As of December 31, 2020, our ownership percentage remained at approximately 49.9%.
We recognize our share of the results of operations related to our investment in Samsung Bioepis under the equity method of accounting one quarter in arrears when the results of the entity become available, which is reflected as equity in income (loss) of investee, net of tax in our consolidated statements of income. During 2015, as our share of losses exceeded the carrying value of our initial investment, we suspended recognizing additional losses. In the first quarter of 2019 we restarted recognizing our share of Samsung Bioepis' income (losses), and we began recognizing amortization on certain basis differences resulting from our November 2018 investment.
Upon investment, the equity method of accounting requires us to identify and allocate differences between the fair value of our investment and the carrying value of our interest in the underlying net assets of the investee. These basis differences are amortized over their economic life. The total basis difference was approximately $675.0 million and relates to inventory, developed technology, IPR&D and deferred tax balances. The basis differences related to inventory were amortized, net of tax, over their estimated useful lives of 1.5 years, and the basis differences related to developed technology and IPR&D for marketed products will be amortized, net of tax, over their estimated useful lives of 15 years.
The former chief executive officer (the incumbent chairman of the board) and the chief financial officer of our joint venture partner, Samsung BioLogics, is currently subject to ongoing criminal proceedings that we continue to monitor. While these proceedings could impact the operations of Samsung Bioepis and its business, we have assessed the value of our investment in Samsung Bioepis and continue to believe that the fair value of the investment is in excess of its net book value.
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For the year ended December 31, 2020, we recognized net income on our investment of $5.3 million, reflecting our share of income totaling $45.3 million offset by amortization of basis differences totaling $40.0 million.
For the year ended December 31, 2019, we recognized net losses on our investment of $79.4 million, reflecting our share of losses totaling $1.2 million and amortization of basis differences totaling $78.2 million.
As of December 31, 2020 and 2019, the carrying value of our investment in Samsung Bioepis totaled 673.8 billion South Korean won ($620.2 million) and 670.8 billion South Korean won ($580.2 million), respectively, which is classified as a component of investments and other assets within our consolidated balance sheets.
2019 Transaction
In December 2019 we completed a transaction with Samsung Bioepis and secured the exclusive rights to commercialize two potential ophthalmology biosimilar products, SB11, a proposed ranibizumab biosimilar referencing LUCENTIS, and SB15, a proposed aflibercept biosimilar referencing EYLEA, in major markets worldwide, including the U.S., Canada, Europe, Japan and Australia. Samsung Bioepis will be responsible for development and will supply both products to us.
In connection with this transaction, we made an upfront payment of $100.0 million to Samsung Bioepis in January 2020, of which $63.0 million was recorded as research and development expense in 2019 and $37.0 million was recorded as an intangible asset in 2019. Additionally, during the third quarter of 2020, we paid Samsung Bioepis a $15.0 million development milestone, which was included in research and development expense in our consolidated statements of income. We may pay Samsung Bioepis up to $195.0 million in additional development, regulatory and sales-based milestones.
We also acquired an option to extend the term of our 2013 commercial agreement for BENEPALI, IMRALDI and FLIXABI by an additional five years, subject to payment of an option exercise fee of $60.0 million, and obtained an option to acquire exclusive rights to commercialize these products in China.
2013 Commercial Agreement
In December 2013 we entered into an agreement with Samsung Bioepis to commercialize, over a 10-year term, 3 anti-tumor necrosis factor (TNF) biosimilar product candidates in Europe and in the case of BENEPALI, Japan. As discussed above, we have an option to extend this agreement by an additional five years. Under this agreement, we have made upfront and clinical development milestone payments totaling $46.0 million, which were recorded as research and development expense in our consolidated statements of income as the programs they relate to had not achieved regulatory approval. We also agreed to make additional milestone payments of $25.0 million upon regulatory approval in the E.U. for each of the three anti-TNF biosimilar product candidates. IMRALDI, an adalimumab biosimilar referencing HUMIRA, FLIXABI, an infliximab biosimilar referencing REMICADE, and BENEPALI, an etanercept biosimilar referencing ENBREL, received regulatory approval in the E.U. in August 2017, May 2016 and January 2016, respectively, and we capitalized the related milestone payments totaling $75.0 million as intangible assets, net in our consolidated balance sheets.
In April 2018 we and Samsung Bioepis announced an agreement with AbbVie Inc. (AbbVie) related to the commercialization of IMRALDI. Under the terms of the agreement, AbbVie granted us and Samsung Bioepis patent licenses for the use and sale of IMRALDI in Europe, on a country-by-country basis, and we make royalty payments to AbbVie on behalf of Samsung Bioepis. We began to recognize revenues on sales of IMRALDI to third parties in Europe in the fourth quarter of 2018.
We reflect revenues on sales of BENEPALI, IMRALDI and FLIXABI to third parties in product revenues, net in our consolidated statements of income and record the related cost of revenues and sales and marketing expenses in our consolidated statements of income to their respective line items when these costs are incurred. Royalty payments to AbbVie on sales of IMRALDI are recognized in cost of sales within our consolidated statements of income.
We share 50% of the profit or loss related to our commercial agreement with Samsung Bioepis, which is recognized in collaboration profit (loss) sharing in our consolidated statements of income. For the years ended December 31, 2020, 2019 and 2018, we recognized a net profit-sharing expense of $266.5 million, $241.6 million and $187.4 million, respectively, to reflect Samsung Bioepis' 50% sharing of the net collaboration profits.
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Other Services
Simultaneous with the formation of Samsung Bioepis, we also entered into a technical development services agreement, a manufacturing agreement and a license agreement with Samsung Bioepis.
Under the technical development services agreement, we provided Samsung Bioepis technical development and technology transfer services, which included, but were not limited to, cell culture development, purification process development, formulation development and analytical development.
Under the manufacturing agreement, we manufacture clinical and commercial quantities of bulk drug substance of biosimilar products for Samsung Bioepis pursuant to contractual terms.
Following the divestiture of our Hillerød, Denmark manufacturing operations in August 2019, FUJIFILM assumed responsibility for the manufacture of clinical and commercial quantities of bulk drug substance of biosimilar products for Samsung Bioepis. We no longer recognize revenues for the manufacturing completed after the divestiture date under the manufacturing agreements with Samsung Bioepis. For additional information on the divestiture of our Hillerød, Denmark manufacturing operations, please read Note 3, Divestitures, to these consolidated financial statements.
Under the license agreement, we granted Samsung Bioepis an exclusive license to use, develop, manufacture and commercialize biosimilar products created by Samsung Bioepis using Biogen product-specific technology. In exchange, we receive single digit royalties on biosimilar products developed and commercialized by Samsung Bioepis.
For the years ended December 31, 2020, 2019 and 2018, we recognized $20.9 million, $106.2 million and $96.4 million, respectively, in revenues under the license, technical development services and manufacturing agreements, which is reflected in revenues from collaborative and other relationships, as a component of other revenues in our consolidated statements of income.
Amounts receivable from Samsung Bioepis related to the agreements discussed above were $5.1 million and $85.0 million as of December 31, 2020 and 2019, respectively. Amounts payable to Samsung Bioepis as of December 31, 2020, were $99.0 million. Amounts payable to Samsung Bioepis as of December 31, 2019, consisted of the $100.0 million upfront payment related to the transaction we completed in December 2019, as discussed above.
19. Investments in Variable Interest Entities
Consolidated Variable Interest Entities
Our consolidated financial statements include the financial results of variable interest entities in which we are the primary beneficiary. The following are our significant variable interest entities.
Neurimmune SubOne AG
We have a collaboration and license agreement with Neurimmune SubOne AG (Neurimmune) for the development and commercialization of antibodies for the potential treatment of Alzheimer's disease, including aducanumab (as amended, the Neurimmune Agreement). We are responsible for the development, manufacturing and commercialization of all collaboration products. The Neurimmune Agreement is effective for the longer of the duration of certain patents relating to a licensed product or 12 years from the first commercial sale of a licensed product.
We consolidate the results of Neurimmune as we determined that we are the primary beneficiary of Neurimmune because we have the power through the collaboration to direct the activities that most significantly impact the entity’s economic performance and we are required to fund 100.0% of the research and development costs incurred in support of the collaboration.
In October 2017 we amended the terms of the Neurimmune Agreement and made a $150.0 million payment to Neurimmune in exchange for a 15.0% reduction in the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including royalties payable on potential commercial sales of aducanumab. In May 2018 we made an additional $50.0 million payment to Neurimmune to further reduce the previously negotiated royalty rates payable on products developed under the Neurimmune Agreement, including
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royalties payable on potential commercial sales of aducanumab, by an additional 5.0%. Our royalty rates payable on products developed under the Neurimmune Agreement, including royalty rates payable on potential commercial sales of aducanumab, now range from the high single digits to sub-teens. As we consolidate the results of Neurimmune, we treated these payments as distributions and recognized them as charges to noncontrolling interests in the fourth quarter of 2017 and the second quarter of 2018, as applicable.
Under the terms of the Neurimmune Agreement, we were required to pay Neurimmune a milestone payment of $75.0 million upon the regulatory filing with the FDA for the approval of aducanumab. During the second quarter of 2020, we paid Neurimmune $75.0 million upon the completed submission of the BLA for the approval of aducanumab to the FDA, which was recognized as a charge to noncontrolling interests for the year ended December 31, 2020. In addition, for the year ended December 31, 2020, we recognized net profit-sharing income of $33.8 million to reflect Eisai's 45.0% share of the $75.0 million milestone expense.
Additionally, if aducanumab receives regulatory approval in the jurisdictions where we have submitted filings, we may pay up to approximately $200.0 million in milestones to Neurimmune in 2021, which includes $100.0 million if launched in the U.S., $50.0 million if launched in three or more countries within the E.U. and $50.0 million if launched in Japan. Milestones payable to Neurimmune are shared expenses under the Aducanumab Collaboration Agreement with Eisai.
Research and development costs for which we reimburse Neurimmune are reflected in research and development expense in our consolidated statements of income. During the years ending December 31, 2020, 2019 and 2018, amounts reimbursed were immaterial.
The assets and liabilities of Neurimmune are not significant to our consolidated financial position or results of operations as it is a research and development organization. We have provided no financing to Neurimmune other than contractually required amounts.
Under the Aducanumab Collaboration Agreement, Eisai had an option to share in the benefit and cost associated with the royalty reductions discussed above; however, Eisai did not elect to share in the benefit and cost with respect to either the October 2017 or May 2018 royalty reductions, which will impact the amount of profits (losses) on potential commercial sales of aducanumab to be shared with Eisai.
For additional information on our collaboration arrangements with Eisai, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Unconsolidated Variable Interest Entities
We have relationships with various variable interest entities that we do not consolidate as we lack the power to direct the activities that significantly impact the economic success of these entities. These relationships include investments in certain biotechnology companies and research collaboration agreements.
As of December 31, 2020 and 2019, the carrying value of our investments in certain biotechnology companies representing potential unconsolidated variable interest entities totaled $12.8 million and $22.7 million, respectively. Our maximum exposure to loss related to these variable interest entities is limited to the carrying value of our investments.
We have also entered into research collaboration agreements with certain variable interest entities where we are required to fund certain development activities. These development activities are included in research and development expense in our consolidated statements of income as they are incurred. We have provided no financing to these variable interest entities other than previously contractually required amounts.
20. Litigation
We are currently involved in various claims and legal proceedings, including the matters described below. For information as to our accounting policies relating to claims and legal proceedings, including use of estimates and contingencies, please read Note 1, Summary of Significant Accounting Policies, to these consolidated financial statements.
With respect to some loss contingencies, an estimate of the possible loss or range of loss cannot be made until management has further information, including, for example, (i) which claims, if any, will survive dispositive
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motion practice; (ii) information to be obtained through discovery; (iii) information as to the parties' damages claims and supporting evidence; (iv) the parties’ legal theories; and (v) the parties' settlement positions.
The claims and legal proceedings in which we are involved also include challenges to the scope, validity or enforceability of the patents relating to our products, pipeline or processes and challenges to the scope, validity or enforceability of the patents held by others. These include claims by third parties that we infringe their patents. An adverse outcome in any of these proceedings could result in one or more of the following and have a material impact on our business or consolidated results of operations and financial position: (i) loss of patent protection; (ii) inability to continue to engage in certain activities; and (iii) payment of significant damages, royalties, penalties and/or license fees to third parties.
Loss Contingencies
Aducanumab Securities Litigation
We and certain current and former officers are named as defendants in an action filed by a shareholder on November 13, 2020, in the U.S. District Court for the Central District of California and an action filed by a shareholder on January 5, 2021, in the U.S. District Court for the District of Massachusetts. Both actions allege violations of federal securities laws under 15 U.S.C §78j(b) and §78t(a) and 17 C.F.R. §240.10b-5 and are seeking a declaration of the action as a class action and an award of damages, interest and attorneys' fees. An estimate of the possible loss or range of loss cannot be made at this time. No trial date has been set.
IMRALDI Patent Litigation
In September 2018 Fresenius Kabi Deutschland GmbH (Fresenius Kabi) commenced proceedings for damages and injunctive relief against Biogen France SAS in the Tribunal de Grande Instance de Paris, alleging that IMRALDI, the adalimumab biosimilar product of Samsung Bioepis UK Limited that Biogen has commercialized in Europe, infringes the French counterpart of European Patent No. 3 148 510 (the '510 Patent), which was issued in June 2018 and expires in May 2035. No hearing has been scheduled.
In October 2018 Fresenius Kabi commenced preliminary injunction proceedings against Biogen (Denmark) Manufacturing ApS and Biogen Denmark A/S in Denmark's Maritime and Commercial High Court alleging infringement of Danish Utility Models. In June 2019 the Danish court denied Fresenius Kabi's request for a preliminary injunction. Fresenius Kabi has appealed that decision and was permitted to add a claim of infringement of the Danish counterpart of the ‘510 patent, and the appeal is pending. In July 2020 the Danish Patent Board of Appeal revoked the Danish Utility Models that were the subject of Fresenius Kabi’s October 2018 request for a preliminary injunction and Fresenius Kabi has appealed those revocations to Denmark’s Maritime and Commercial High Court. No hearing has been scheduled in that appeal.
In June 2020 Fresenius Kabi commenced preliminary injunction proceedings against Biogen (Denmark) Manufacturing ApS and Biogen (Denmark) A/S in Denmark’s Maritime and Commercial High Court alleging infringement of another Danish Utility Model. A hearing has been scheduled for May 2021.
In November 2018 Fresenius Kabi commenced infringement proceedings for damages and injunctive relief against Biogen GmbH in the Düsseldorf Regional Court relating to the German counterpart of the ‘510 Patent. A hearing has been set for August 2021.
In July 2019 Gedeon Richter PLC (Gedeon Richter) commenced proceedings against Biogen GmbH in the Düsseldorf Regional Court alleging infringement of the German counterpart of European Patent No. 3 212 667 (the '667 Patent), which was issued in September 2018 and expires in October 2035, and seeking damages and injunctive relief. A hearing has been set for November 2021.
An estimate of the possible loss or range of loss in the IMRALDI patent litigation described above cannot be made at this time.
Qui Tam Litigation
In July 2015 a qui tam action filed by Michael Bawduniak on behalf of the U.S. and certain states was unsealed by the U.S. District Court for the District of Massachusetts. The action alleges sales and promotional activities in violation of the federal False Claims Act and state law counterparts and seeks single and treble damages, civil penalties, interest, attorneys’ fees and costs. No trial date has been set. The U.S. has not made an intervention decision. An estimate of the possible loss or range of loss cannot be made at this time.
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Dispute with Former Convergence Shareholders
In November and December 2019 Shareholder Representative Services LLC, on behalf of the former shareholders of Convergence, sent us correspondence asserting claims of $200.0 million for alleged breach of the contract under which we acquired Convergence. We dispute the claims.
Dispute with Jacobs Switzerland GmbH
Jacobs Switzerland GmbH, the general contractor for the construction of our large-scale biologics manufacturing facility in Solothurn, Switzerland, claimed additional payments were due for construction costs. We have reached an agreement in principle to resolve the claim.
Other Matters
Petition for Inter Partes Review
In July 2018 Mylan Pharmaceuticals, Inc. (Mylan) filed a petition that was granted by the U.S. Patent Trial and Appeal Board (PTAB) for inter partes review of our U.S. Patent No. 8,399,514 (the '514 Patent). The '514 Patent includes claims covering treatment of MS with 480 mg of dimethyl fumarate per day as provided for in our TECFIDERA label. In February 2020 the PTAB issued a final written decision upholding the patentability of the ‘514 Patent and in April 2020 Mylan filed an appeal in the U.S. Court of Appeals for the Federal Circuit (the Federal Circuit), which is pending.
Hatch-Waxman Act Litigation relating to TECFIDERA Orange-Book Listed Patents
In 2017 to 2020, we filed patent infringement proceedings relating to TECFIDERA Orange-Book listed patents pursuant to the Drug Price Competition and Patent Term Restoration Act of 1984, commonly known as the Hatch-Waxman Act (the Delaware Actions), against Accord Healthcare Inc., Alkem Laboratories Ltd., Amneal Pharmaceuticals LLC, Cipla Limited, Graviti Pharmaceuticals Pvt. Ltd., Hetero USA, Inc., Lupin Atlantis Holdings SA, Macleods Pharmaceuticals, Ltd., MSN Laboratories Pvt. Ltd., Pharmathen S.A., Prinston Pharmaceutical Inc., Sandoz Inc., Shilpa Medicare Limited, Slayback Pharma LLC, Sun Pharmaceutical Industries, Ltd., Sun Pharmaceutical Industries, Inc., Sun Pharma Global FZE, Torrent Pharmaceuticals Ltd., TWi Pharmaceuticals, Inc., Windlas Healthcare Pvt. Ltd. and Zydus Pharmaceuticals (USA) Inc. (collectively, the Delaware Defendants) in the U.S. District Court for the District of Delaware (the Delaware Court) and against Mylan in the U.S. District Court for the Northern District of West Virginia (the West Virginia Court).
On June 22, 2020, the West Virginia Court entered judgment for Mylan that the asserted claims of the ‘514 Patent are invalid for lack of written description. We appealed the judgment to the Federal Circuit and the appeal is pending.
The Delaware Court entered judgment for the Delaware Defendants on the grounds that the judgment of the West Virginia Court applies to the Delaware Actions under principles of collateral estoppel. We have appealed the judgments and the appeal is pending.
European Patent Office Oppositions
In 2016 the European Patent Office (EPO) revoked our European Patent No. 2 137 537, which covers the treatment of MS with 480 mg of dimethyl fumarate as provided for in our TECFIDERA label. We have appealed to the Technical Boards of Appeal of the EPO and a hearing date has been set for January 2022.
In March 2018 the EPO revoked Forward Pharma's European Patent No. 2 801 355, which expires in October 2025. Forward Pharma has filed an appeal to the Technical Boards of Appeal of the EPO and a hearing has been set for September 2021.
TYSABRI Patent Revocation Matters
In November 2017 Bioeq GMBH, affiliated with the Polpharma Group, brought an action in the Polish Patent Office seeking to revoke Polish Patent No. 215263 (the Polish '263 Patent), which corresponds to our European Patent No. 1 485 127 (the E.U. '127 Patent) and covers administration of natalizumab (TYSABRI) to treat MS. The Polish '263 Patent expires in February 2023. A hearing was held in January 2021 and a decision is pending. In August 2020 a related entity, Polpharma Biologics S.A., also brought an action seeking to revoke the Polish ‘263 Patent. No hearing has been set in this matter.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Swiss Pharma International AG, also affiliated with the Polpharma Group, filed actions in the District Court of the Hague, Netherlands (January 2016), the German Patents Court (March 2016) and the Commercial Court of Rome (November 2017) seeking to invalidate the Dutch, German and Italian counterparts, respectively, of the E.U. '127 Patent, which also cover administration of natalizumab (TYSABRI) to treat MS and expire in February 2023. The Dutch and German counterparts were ruled invalid. The decision in the Dutch action was affirmed on appeal and the German appeal has been withdrawn. No hearing has been set in the Italian action.
Annulment Proceedings in General Court of the European Union relating to TECFIDERA
Pharmaceutical Works Polpharma SA (Polpharma) and Mylan Ireland Ltd. (Mylan Ireland) have each filed applications in the General Court of the European Union (Polpharma in October 2018 and Mylan Ireland in November 2020) seeking to annul decisions of the European Medicines Agency (EMA) refusing to validate Polpharma’s and Mylan Ireland’s respective applications to market a generic version of TECFIDERA. The EMA’s refusals were on the grounds that TECFIDERA benefits from regulatory data protection. Biogen and the European Commission were granted leave to intervene in support of the EMA in the case brought by Polpharma. That case was heard in July 2020 and we are awaiting a decision. We intend to seek leave to intervene in support of the EMA in the case brought by Mylan Ireland. No hearing has been set in that matter.
Product Liability and Other Legal Proceedings
We are also involved in product liability claims and other legal proceedings generally incidental to our normal business activities. While the outcome of any of these proceedings cannot be accurately predicted, we do not believe the ultimate resolution of any of these existing matters would have a material adverse effect on our business or financial condition.
21. Commitments and Contingencies
Royalty Payments
TYSABRI
In 2013 we acquired from Elan full ownership of all remaining rights to TYSABRI that we did not already own or control. Under the acquisition agreement, we are obligated to make contingent payments to Elan of 18.0% on annual worldwide net commercial sales up to $2.0 billion and 25.0% on annual worldwide net commercial 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 2016 we exercised our option to develop and commercialize SPINRAZA from Ionis. Under our agreement with Ionis, we make royalty payments to Ionis on annual worldwide net commercial sales of SPINRAZA using a tiered royalty rate between 11.0% and 15.0%, 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 18, Collaborative and Other Relationships, to these consolidated financial statements.
VUMERITY
In October 2019 the FDA approved VUMERITY for the treatment of RMS. Under our agreement with Alkermes, we make royalty payments to Alkermes on worldwide net commercial sales of VUMERITY using a royalty rate of 15.0%, which are recorded as cost of sales in our consolidated statements of income. Royalties payable on net commercial sales of VUMERITY are subject, under certain circumstances, to tiered minimum annual payment requirements for a period of five years following FDA approval. For additional information on our collaboration arrangement with Alkermes, please read Note 18, Collaborative and Other Relationships, to these consolidated financial statements.
Contingent Consideration related to Business Combinations
In connection with our acquisition of Convergence, we agreed to make additional payments based upon the achievement of certain milestone events.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As the acquisition of Convergence occurred after January 1, 2009, we recognized the contingent consideration liabilities associated with this transaction at their fair value on the acquisition date and revalue the remaining obligations each reporting period. We may pay up to approximately $400.0 million in remaining milestones related to these acquisitions.
Fumapharm AG
In 2006 we acquired Fumapharm AG. As part of this acquisition we acquired the Fumapharm Products. We were required to make 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 were due. During the first quarter of 2019 we paid the final $300.0 million contingent payment as we achieved the $20.0 billion cumulative sales levels related to the Fumapharm Products in the fourth quarter of 2018.
Contingent Development, Regulatory and Commercial Milestone Payments
Based on our development plans as of December 31, 2020, we could trigger potential future milestone payments to third parties of up to approximately $10.2 billion, including approximately $1.9 billion in development milestones, approximately $1.3 billion in regulatory milestones and approximately $7.0 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, 2020, 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 or commercial milestones.
If certain clinical and commercial milestones are met, we may pay up to $86.2 million in milestones in 2021 under our current agreements. Additionally, if aducanumab receives regulatory approval in the jurisdictions where we have submitted filings, we may pay up to $200.0 million in milestones to Neurimmune in 2021, which includes $100.0 million if launched in the U.S., $50.0 million if launched in three or more countries within the E.U. and $50.0 million if launched in Japan. Milestones payable to Neurimmune are shared expenses under the Aducanumab Collaboration Agreement with Eisai.
During the second quarter of 2020 we paid Neurimmune $75.0 million upon the completed submission of the BLA for the approval of aducanumab to the FDA, which was recognized as a charge to noncontrolling interests for the year ended December 31, 2020.
Other Funding Commitments
As of December 31, 2020, we have several ongoing clinical studies in various clinical trial stages. Our most significant clinical trial expenditures are to CROs. The contracts with CROs are generally cancellable, with notice, at our option. We recorded accrued expenses of approximately $21.7 million in our consolidated balance sheet for expenditures incurred by CROs as of December 31, 2020. We have approximately $593.0 million in cancellable future commitments based on existing CRO contracts as of December 31, 2020.
As part of the sale of our Hillerød, Denmark manufacturing operations to FUJIFILM, we provided FUJIFILM with certain minimum batch production commitment guarantees. There is a risk that the minimum contractual batch production commitments will not be met. Based upon current estimates we do not expect to incur an adverse commitment obligation associated with such guarantees. We developed this estimate using a probability-weighted estimate of future manufacturing activity and may further adjust this estimate based upon changes in business conditions, which may result in the increase or reduction of this adverse commitment obligation in subsequent periods.
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, 2020, we have approximately $79.6 million of liabilities associated with uncertain tax positions.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2020 and 2019, we have accrued income tax liabilities of $697.0 million, respectively, under the Transition Toll Tax. Of the amounts accrued as of December 31, 2020, $62.0 million is expected to be paid within one year. The Transition Toll Tax will be paid over an eight--year period, which started in 2018, and does not accrue interest. For additional information on the Transition Toll Tax, please read Note 16, Income Taxes, to these consolidated financial statements.
Solothurn, Switzerland Manufacturing Facility
In order to support our future growth and drug development pipeline, we are building a large-scale biologics manufacturing facility in Solothurn, Switzerland. We expect this facility to be partially operational during the first half of 2021. As of December 31, 2020, we had contractual commitments of approximately $9.3 million related to the construction of this facility.
22. Guarantees
As of December 31, 2020 and 2019, we did not have significant liabilities recorded for guarantees.
We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with business partners, contractors, clinical sites and customers. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unlimited. However, to date we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. As a result, the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2020 and 2019.
23. Employee Benefit Plans
We sponsor various retirement and pension plans. Our estimates of liabilities and expenses for these plans incorporate a number of assumptions, including expected rates of return on plan assets and interest rates used to discount future benefits.
401(k) Savings Plan
We maintain a 401(k) Savings Plan, which is available to substantially all regular employees in the U.S. over the age of 21. Participants may make voluntary contributions. We make matching contributions according to the 401(k) Savings Plan’s matching formula. All matching contributions and participant contributions vest immediately. The 401(k) Savings Plan also holds certain transition contributions on behalf of participants who previously participated in the Biogen, Inc. Retirement Plan. The expense related to our 401(k) Savings Plan primarily consists of our matching contributions.
Expense related to our 401(k) Savings Plan totaled $44.3 million, $44.8 million and $42.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Deferred Compensation Plan
We maintain a non-qualified deferred compensation plan, known as the Supplemental Savings Plan (SSP), which allows a select group of management employees in the U.S. to defer a portion of their compensation. The SSP also provides certain credits to highly compensated U.S. employees that are paid by the company. These credits are known as the Restoration Match. The deferred compensation amounts are accrued when earned. Such deferred compensation is distributable in cash in accordance with the rules of the SSP. Deferred compensation amounts under such plan as of December 31, 2020 and 2019, totaled approximately $120.0 million and $114.6 million, respectively, and are included in other long-term liabilities in our consolidated balance sheets. The SSP also holds certain transition contributions on behalf of participants who previously participated in the Biogen, Inc. Retirement Plan. The Restoration Match and participant contributions vest immediately. Distributions to participants can be either in one lump sum payment or annual installments as elected by the participants.
Pension Plans
Our retiree benefit plans include defined benefit plans for employees in our affiliates in Switzerland and Germany as well as other insignificant defined benefit plans in certain other countries where we maintain an operating presence.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Our Swiss plan is a government-mandated retirement fund that provides employees with a minimum investment return. The minimum investment return is determined annually by the Swiss government and was 1.00% in 2020, 2019 and 2018. Under the Swiss plan, both we and certain of our employees with annual earnings in excess of government determined amounts are required to make contributions into a fund managed by an independent investment fiduciary. Employer contributions must be in an amount at least equal to the employee’s contribution. Minimum employee contributions are based on the respective employee’s age, salary and gender. As of December 31, 2020 and 2019, the Swiss plan had an unfunded net pension obligation of $75.7 million and $42.9 million, respectively, and plan assets that totaled $170.0 million and $127.1 million, respectively. In 2020, 2019 and 2018 we recognized expense totaling $15.5 million, $14.7 million and $14.8 million, respectively, related to our Swiss plan, of which $2.6 million, $1.2 million and $1.3 million, respectively, was included in other income (expense), net.
The obligations under the German plans are unfunded and totaled $75.5 million and $59.6 million as of December 31, 2020 and 2019, respectively. Net periodic pension cost related to the German plans totaled $6.2 million, $5.1 million and $5.3 million for the years ended December 31, 2020, 2019 and 2018, respectively, of which $2.0 million, $1.4 million and $1.5 million, respectively, was included in other income (expense), net.
24. Segment Information
We operate as one operating segment, focused on discovering, developing and delivering worldwide innovative therapies for people living with serious neurological and neurodegenerative diseases as well as related therapeutic adjacencies. Our Chief Executive Officer (CEO), as the chief operating decision-maker, manages and allocates resources to the operations of our company on a total company basis. Our research and development organization is responsible for the research and discovery of new product candidates and supports development and registration efforts for potential future products. Our pharmaceutical, operations and technology organization manages the development of the manufacturing processes, clinical trial supply, commercial product supply, distribution, buildings and facilities. Our commercial organization is responsible for U.S. and international development of our commercial products. The company is also supported by corporate staff functions. Managing and allocating resources on a total company basis enables our CEO to assess the overall level of resources available and how to best deploy these resources across functions, therapeutic areas and research and development projects that are in line with our long-term company-wide strategic goals. Consistent with this decision-making process, our CEO uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period financial results, allocating resources and setting incentive targets.
Enterprise-wide disclosures about product revenues, other revenues and long-lived assets by geographic area are presented below. Revenues are primarily attributed to individual countries based on location of the customer or licensee.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic Information
The following tables contain certain financial information by geographic area:
| December 31, 2020 | ||||||||||||||||||||||||||||||||
| (In millions) | U.S. | Europe | Asia | Other | Total | |||||||||||||||||||||||||||
| Product revenues from external customers | $ | 5,900.1 | $ | 3,656.4 | $ | 596.7 | $ | 539.0 | $ | 10,692.2 | ||||||||||||||||||||||
| Revenues from anti-CD20 therapeutic programs | 1,897.4 | 0.1 | — | 80.3 | 1,977.8 | |||||||||||||||||||||||||||
| Other revenues from external customers | 733.6 | 8.1 | 32.9 | — | 774.6 | |||||||||||||||||||||||||||
| Long-lived assets | 1,496.3 | 2,321.4 | 16.2 | 10.9 | 3,844.8 | |||||||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||||||||
| (In millions) | U.S. | Europe | Asia | Other | Total | |||||||||||||||||||||||||||
| Product revenues from external customers | $ | 6,713.8 | $ | 3,794.5 | $ | 320.3 | $ | 551.2 | $ | 11,379.8 | ||||||||||||||||||||||
| Revenues from anti-CD20 therapeutic programs | 2,211.9 | 0.2 | — | 78.3 | 2,290.4 | |||||||||||||||||||||||||||
| Other revenues from external customers | 585.8 | 9.7 | 112.2 | — | 707.7 | |||||||||||||||||||||||||||
| Long-lived assets | 1,493.2 | 2,162.9 | 6.2 | 12.0 | 3,674.3 | |||||||||||||||||||||||||||
| December 31, 2018 | ||||||||||||||||||||||||||||||||
| (In millions) | U.S. | Europe | Asia | Other | Total | |||||||||||||||||||||||||||
| Product revenues from external customers | $ | 6,800.5 | $ | 3,370.3 | $ | 281.2 | $ | 434.8 | $ | 10,886.8 | ||||||||||||||||||||||
| Revenues from anti-CD20 therapeutic programs | 1,903.4 | 0.2 | — | 76.6 | 1,980.2 | |||||||||||||||||||||||||||
| Other revenues from external customers | 457.0 | 32.7 | 96.2 | — | 585.9 | |||||||||||||||||||||||||||
| Long-lived assets | 1,152.7 | 2,442.8 | 3.9 | 1.8 | 3,601.2 |
Other
As of December 31, 2020, 2019 and 2018, approximately $2,180.6 million, $2,028.8 million and $1,748.5 million, respectively, of our long-lived assets were related to the construction of our large-scale biologics manufacturing facility in Solothurn, Switzerland.
In August 2019 we completed the sale of all of the outstanding shares of our subsidiary that owned our biologics manufacturing operations in Hillerød, Denmark to FUJIFILM. As of December 31, 2018, approximately $646.5 million of our long-lived assets were related to our manufacturing facility in Hillerød, Denmark.
For additional information on our large-scale biologics manufacturing facility in Solothurn, Switzerland, please read Note 10, Property, Plant and Equipment, to these consolidated financial statements. For additional information on the divestiture of our Hillerød, Denmark manufacturing operations, please read Note 3, Divestitures, to these consolidated financial statements.
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BIOGEN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
25. Quarterly Financial Data (Unaudited)
| (In millions, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | ||||||||||||||||||||||||
| 2020 | |||||||||||||||||||||||||||||
| Product revenues, net | $ | 2,904.6 | $ | 2,795.7 | $ | 2,690.3 | $ | 2,301.6 | $ | 10,692.2 | |||||||||||||||||||
| Revenues from anti-CD20 therapeutic programs | $ | 520.4 | $ | 478.3 | $ | 560.1 | $ | 419.0 | $ | 1,977.8 | |||||||||||||||||||
| Other revenues | $ | 109.3 | $ | 407.6 | $ | 125.7 | $ | 132.0 | $ | 774.6 | |||||||||||||||||||
| Total revenues | $ | 3,534.3 | $ | 3,681.6 | $ | 3,376.1 | $ | 2,852.6 | $ | 13,444.6 | |||||||||||||||||||
| Gross profit (1) | $ | 3,080.0 | $ | 3,270.5 | $ | 2,927.0 | $ | 2,361.9 | $ | 11,639.4 | |||||||||||||||||||
| Net income | $ | 1,392.6 | $ | 1,606.5 | $ | 703.9 | $ | 357.6 | $ | 4,060.5 | |||||||||||||||||||
| Net income attributable to Biogen Inc. | $ | 1,399.1 | $ | 1,542.1 | $ | 701.5 | $ | 357.9 | $ | 4,000.6 | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | $ | 8.10 | $ | 9.60 | $ | 4.47 | $ | 2.33 | $ | 24.86 | |||||||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | $ | 8.08 | $ | 9.59 | $ | 4.46 | $ | 2.32 | $ | 24.80 | |||||||||||||||||||
| Weighted-average shares used in calculating: | |||||||||||||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | 172.8 | 160.6 | 156.9 | 153.7 | 160.9 | ||||||||||||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | 173.1 | 160.9 | 157.2 | 154.0 | 161.3 |
| (In millions, except per share amounts) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | Total Year | ||||||||||||||||||||||||
| 2019 | |||||||||||||||||||||||||||||
| Product revenues, net | $ | 2,680.0 | $ | 2,880.3 | $ | 2,894.7 | $ | 2,924.8 | $ | 11,379.8 | |||||||||||||||||||
| Revenues from anti-CD20 therapeutic programs | $ | 517.4 | $ | 576.4 | $ | 595.8 | $ | 600.8 | $ | 2,290.4 | |||||||||||||||||||
| Other revenues | $ | 292.4 | $ | 160.0 | $ | 109.6 | $ | 145.7 | $ | 707.7 | |||||||||||||||||||
| Total revenues | $ | 3,489.8 | $ | 3,616.7 | $ | 3,600.1 | $ | 3,671.3 | $ | 14,377.9 | |||||||||||||||||||
| Gross profit (1) | $ | 2,887.8 | $ | 3,140.4 | $ | 3,170.1 | $ | 3,224.2 | $ | 12,422.5 | |||||||||||||||||||
| Net income | $ | 1,408.8 | $ | 1,494.1 | $ | 1,545.9 | $ | 1,439.7 | $ | 5,888.5 | |||||||||||||||||||
| Net income attributable to Biogen Inc. | $ | 1,408.8 | $ | 1,494.1 | $ | 1,545.9 | $ | 1,439.7 | $ | 5,888.5 | |||||||||||||||||||
| Net income per share: | |||||||||||||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | $ | 7.17 | $ | 7.85 | $ | 8.40 | $ | 8.10 | $ | 31.47 | |||||||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | $ | 7.15 | $ | 7.85 | $ | 8.39 | $ | 8.08 | $ | 31.42 | |||||||||||||||||||
| Weighted-average shares used in calculating: | |||||||||||||||||||||||||||||
| Basic earnings per share attributable to Biogen Inc. | 196.6 | 190.3 | 184.0 | 177.8 | 187.1 | ||||||||||||||||||||||||
| Diluted earnings per share attributable to Biogen Inc. | 197.0 | 190.4 | 184.2 | 178.2 | 187.4 |
(1) Gross profit is calculated as total revenues less cost of sales, excluding amortization and impairment of acquired intangible assets.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Biogen Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Biogen Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Changes in Accounting Principles
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for income taxes for intra-entity transfers of assets other than inventory in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
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with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserves for Medicaid and Managed Care Rebates
As described in Notes 1 and 4 to the consolidated financial statements, the Company recognized revenue from product sales net of reserves, including Medicaid and managed care rebates. Within Accrued expenses and other, total contractual adjustments amounted to $1,093.0 million as of December 31, 2020. This balance primarily includes provisions for Medicaid and managed care rebates in the US. Medicaid rebates relate to the Company’s estimated obligations to states under established reimbursement arrangements. The Company’s liability for Medicaid rebates consists of estimates for claims that a state will make for the current quarter, claims for prior quarters that have been estimated for which an invoice has not been received, invoices received for claims from the prior quarters that have not been paid and an estimate of potential claims that will be made for inventory that exists in the distribution channel at period end. Managed care rebates represent the Company’s estimated obligations to third parties, primarily pharmacy benefit managers. Rebate accruals are recorded in the same period the related revenue is recognized, resulting in a reduction of product revenue and the establishment of a liability which is included in accrued expenses and other current liabilities. These rebates result from performance-based goals, formulary position and price increase limit allowances (price protection). The calculation of the accrual for these rebates is based on an estimate of the customer’s buying coverage patterns and the resulting applicable contractual rebate rate(s) to be earned over a contractual period. As disclosed by management, the Medicaid and managed care estimates reflect historical experience, current contractual and statutory requirements, specific known market events and trends, industry data and forecasted customer buying and payment patterns.
The principal considerations for our determination that performing procedures relating to reserves for Medicaid and managed care rebates is a critical audit matter are the significant judgment by management due to the significant measurement uncertainty involved in developing these reserves, as the reserves are based on assumptions developed using historical experience, current contractual requirements, specific known market events and payment patterns, which in turn led to a high degree of auditor judgment, subjectivity and effort in applying procedures related to these assumptions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the reserves for Medicaid and managed care rebates, including controls over the assumptions used to estimate these rebate reserves. These procedures also included, among others, (i) developing an independent estimate of the rebate reserves by utilizing third-party data related to product demand, data related to price changes, the terms of the specific rebate programs, the historical trend of actual rebate claims paid and consideration of contractual requirement changes and market events; (ii) comparing the independent estimate to management’s estimate, and (iii) testing rebate claims paid by the Company, including evaluating the claims for consistency with the contractual terms of the Company’s rebate agreements.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 3, 2021
We have served as the Company's auditor since 2003.
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