UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

 

 

Commission File Number 0-19311

 

BIOGEN IDEC INC.

(Exact name of registrant as specified in its charter)

 

 

 

133 Boston Post Road, Weston, MA 02493
(781) 464-2000

 

(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

 

 

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

 

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

 

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

 

(Do not check if a smaller reporting company)

 

 

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

 

 

The number of shares of the issuer’s Common Stock, $0.0005 par value, outstanding as of October 25, 2011, was 242,917,349 shares.

 

 

BIOGEN IDEC INC.

FORM 10-Q — Quarterly Report
For the Quarterly Period Ended September 30, 2011

TABLE OF CONTENTS

 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

 

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

 

NOTE REGARDING COMPANY AND PRODUCT REFERENCES

 

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

 

NOTE REGARDING TRADEMARKS

 

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

 

BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(unaudited, in thousands, except per share amounts)

 

 

See accompanying notes to these unaudited condensed consolidated financial statements

BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited, in thousands, except per share amounts)

 

 

See accompanying notes to these unaudited condensed consolidated financial statements

BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

 

 

See accompanying notes to these unaudited condensed consolidated financial statements

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Overview

 

Biogen Idec is a global biotechnology company focused on discovering, developing, manufacturing and marketing therapies for serious diseases with a focus on neurology, immunology and hemophilia. We currently have five marketed products: AVONEX, TYSABRI, RITUXAN, FAMPYRA, and FUMADERM. Our marketed products are used for the treatment of multiple sclerosis (MS), non-Hodgkin’s lymphoma (NHL), rheumatoid arthritis (RA), Crohn’s disease, chronic lymphocytic leukemia (CLL), and psoriasis.

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The information included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2010 Form 10-K and updated, as necessary, in this Form 10-Q. The year-end condensed consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

 

Consolidation

 

Our condensed consolidated financial statements reflect our financial statements, those of our wholly-owned subsidiaries and those of certain variable interest entities in which we are the primary beneficiary. For consolidated entities in which we own less than a 100% interest, 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. All material intercompany balances and transactions have been eliminated in consolidation.

 

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

 

On September 6, 2011, we completed the purchase of the noncontrolling interest in our joint venture investments in Biogen Dompé SRL and Biogen Dompé Switzerland GmbH, our respective sales affiliates in Italy and Switzerland, from our joint venture partners, Dompé Farmaceutici SpA and Dompé International SA, respectively. Prior to this transaction, our consolidated financial statements reflected 100% of the operations of these joint venture investments and we recorded net income (loss) attributable to noncontrolling interests in our consolidated statements of income based on the percentage of ownership interest retained by our joint venture partners as we retained the power to direct the activities which most significantly and directly impacted their economic performance. We have continued to consolidate the operations of these entities

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

following our purchase of the noncontrolling interest; however, as of September 6, 2011, we no longer allocate 50% of the earnings of these affiliates to net income (loss) attributable to noncontrolling interests as Biogen Dompé SRL and Biogen Dompé Switzerland GmbH became wholly-owned subsidiaries of the Company. For additional information related to this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements.

 

Use of Estimates

 

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

 

Subsequent Events

 

On October 26, 2011, we entered into an exclusive, worldwide collaboration and license agreement with Portola Pharmaceuticals, Inc. (Portola) under which both companies will develop and commercialize highly selective, novel oral Syk inhibitors for the treatment of various autoimmune and inflammatory diseases, including RA and systemic lupus erythematosus. The collaboration’s lead molecule, PRT062607, is currently in Phase 1 studies.

 

Under the terms of the agreement, we will provide Portola with an upfront payment of $36.0 million in cash and purchase $9.0 million in Portola equity, with additional payments of up to $508.5 million based on the achievement of certain development and regulatory milestones. We will lead the global development and commercialization efforts for the Syk inhibitor program in major indications such as RA and lupus, while Portola will lead U.S. development and commercialization efforts for select smaller indications as well as discovery efforts for follow-on Syk inhibitors. Portola retains an option to co-promote alongside us in the U.S. in major indications. Worldwide costs and profits will be split by us and Portola 75% and 25%, respectively.

 

Completion of the transaction is subject to customary closing conditions, including antitrust clearance by the U.S. government under the Hart-Scott-Rodino Act.

 

 

Noncontrolling Interest in Joint Ventures

 

On September 6, 2011, we completed the purchase of the noncontrolling interest in our joint venture investments in Biogen Dompé SRL and Biogen Dompé Switzerland GmbH, our respective sales affiliates in Italy and Switzerland, from our joint venture partners, Dompé Farmaceutici SpA and Dompé International SA, respectively. This transaction was funded from our existing cash on hand and has been accounted for as the acquisition of a noncontrolling interest. The purchase price of these shares is comprised of cash payments

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

totaling $152.9 million plus up to $42.5 million in contingent consideration payable upon the achievement of commercial and regulatory milestones. As these amounts reflect payments to acquire a noncontrolling interest, these payments and the accrual of a liability related to the contingent consideration were recorded as a reduction in the noncontrolling interest for these entities with the remainder to additional paid in capital.

 

Upon acquisition, we recorded a liability of $38.8 million representing the acquisition date fair value of the contingent consideration. This amount was estimated through a valuation model that incorporates probability weighted assumptions relating to the achievement of these milestones and thus the likelihood of us making payments. Subsequent changes in the fair value of this obligation will be recognized as adjustments to contingent consideration within our consolidated statements of income. For a more detailed discussion of our valuation of this obligation, please read Note 8, Fair Value Measurements to these condensed consolidated financial statements.

 

In connection with our purchase of the noncontrolling interest in our joint venture investment in Biogen Dompé SRL, we entered into a credit assignment agreement with Dompé Farmaceutici SpA. Under the terms of this agreement, Dompé Farmaceutici SpA purchased all of Biogen Dompé SRL’s outstanding receivables as of June 30, 2011, adjusted for cash received through September 5, 2011, for $104.6 million. We have no retained interests in the receivables and have accounted for this transaction as a sale. The carrying value of these receivables exceeded their fair value, which was determined by management using significant inputs not observable in the market and thus represents a Level 3 fair value measurement, and accordingly we recognized a loss of $1.8 million upon their disposition.

 

In addition, balances outstanding under Biogen Dompé SRL’s credit line from Dompé Farmaceutici SpA, as described in Note 11, Indebtedness to our consolidated financial statements included within our 2010 Form 10-K, were repaid in September 2011.

 

Biogen Idec International Neuroscience GmbH

 

In December 2010, we acquired 100% of the stock of Biogen Idec International Neuroscience GmbH (BIN), formerly Panima Pharmaceuticals AG, an affiliate of Neurimmune AG. The purchase price was comprised of a $32.5 million cash payment plus up to $395.0 million in contingent consideration payable upon the achievement of development milestones. BIN is a business involved in the discovery of antibodies designed to treat neurological disorders. Upon acquisition, we recorded a liability of $81.2 million representing the acquisition date fair value of the contingent consideration. Subsequent changes in the fair value of this obligation are recognized as adjustments to contingent consideration within our consolidated statements of income. For a more detailed discussion of our valuation of this obligation, please read Note 8, Fair Value Measurements to these condensed consolidated financial statements. For additional information related to this transaction, please read Note 2, Acquisitions to our consolidated financial statements included within our 2010 Form 10-K.

 

Biogen Idec Hemophilia Inc.

 

In connection with our acquisition of Biogen Idec Hemophilia Inc. (BIH), formerly Syntonix Pharmaceuticals, Inc. (Syntonix), in January 2007, we agreed to make additional milestone payments associated with the development of long-lasting recombinant Factor IX, a product for the treatment of hemophilia B. In January 2010, we initiated patient enrollment in a registrational trial of Factor IX, which triggered an approximately $40.0 million milestone payment to the former shareholders of Syntonix. We recorded this payment as a charge to acquired in-process research and development within our condensed consolidated statement of income for the nine months ended September 30, 2010, in accordance with the accounting standards applicable to business combinations when we acquired BIH.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

 

In November 2010, we announced a number of strategic, operational, and organizational initiatives designed to provide a framework for the future growth of our business and realign our overall structure to become a more efficient and cost effective organization. As part of this initiative:

 

 

Costs associated with our workforce reduction are primarily related to employee severance and benefits. Facility consolidation costs are primarily comprised of charges associated with closing these facilities, related lease obligations and additional depreciation recognized when the expected useful lives of certain assets have been shortened due to the consolidation and closing of related facilities and the discontinuation of certain research and development programs. We expect that the total restructuring charges associated with these initiatives will not exceed $100.0 million and that substantially all of the remaining charges will be incurred and paid by the end of 2011. We incurred $18.4 million of these charges in the nine months ended September 30, 2011 and $75.2 million of these charges in the fourth quarter of 2010.

 

For the nine months ended September 30, 2011, we recognized restructuring charges totaling $6.1 million, in relation to the consolidation of our facilities, inclusive of amounts related to additional depreciation. Charges recognized in relation to the consolidation of our facilities for the three months ended September 30, 2011 were not significant. For the three and nine months ended September 30, 2011, we recognized net restructuring charges of $1.8 million and $12.3 million, respectively, in relation to our workforce reduction initiatives.

 

The following table summarizes the activity of our restructuring liability:

 

 

 

We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; our price to the customer is fixed or determinable; and collectability is reasonably assured.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

Product Revenues

 

Revenues from product sales are recognized when title and risk of loss have passed to the customer, which is typically upon delivery. However, sales of TYSABRI in the U.S. are recognized on the “sell-through” model, that is, upon shipment of the product by Elan Pharma International, Ltd. (Elan), an affiliate of Elan Corporation, plc, to its third party distributor rather than upon shipment to Elan. Product revenues are recorded net of applicable reserves for discounts and allowances.

 

Reserves for Discounts and Allowances

 

Revenues from product sales are recorded net of applicable allowances for trade term discounts, wholesaler incentives, Medicaid rebates, Veterans Administration (VA) and Public Health Service (PHS) discounts, managed care rebates, product returns and other governmental rebates or applicable allowances. Reserves established for these discounts and allowances are classified as reductions of accounts receivable (if the amount is payable to our direct customer) or a liability (if the amount is payable to a party other than our customer). In addition, we distribute no-charge product to qualifying patients under our patient assistance and patient replacement goods program. This program is administered through one of our distribution partners, which ships product to qualifying patients from its own inventory received from us. Gross revenue and the related reserves are not recorded on product shipped under this program and cost of sales is recorded when the product is shipped.

 

Product revenue reserves are categorized as follows: discounts, contractual adjustments and returns. An analysis of the amount of, and change in, reserves is summarized as follows:

 

 

Our product revenue reserves are based on estimates of the amounts earned or to be claimed on the related sales. Our estimates take into consideration our historical experience, current contractual and statutory requirements, specific known market events and trends, and forecasted customer buying patterns. Actual amounts may ultimately differ from our estimates. If actual results vary, we will need to adjust these estimates, which could have an effect on earnings in the period of adjustment.

 

During the nine months ended September 30, 2011, we reduced our reserves for contractual adjustments by $9.9 million, due to a revision of our previous estimates associated with the impact of healthcare reform in the U.S.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

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

 

 

Unconsolidated Joint Business Revenues

 

We collaborate with Genentech on the development and commercialization of RITUXAN. Revenues from unconsolidated joint business consist of (1) our share of pre-tax co-promotion profits in the U.S.; (2) reimbursement of our selling and development expense in the U.S.; and (3) revenue on sales of RITUXAN in the rest of world, which consists of our share of pre-tax co-promotion profits in Canada and royalty revenue on sales of RITUXAN outside the U.S. and Canada by F. Hoffmann-La Roche Ltd. (Roche) and its sublicensees. Pre-tax co-promotion profits are calculated and paid to us by Genentech in the U.S. and by Roche in Canada. Pre-tax co-promotion profits consist of U.S. and Canadian sales of RITUXAN to third-party customers net of discounts and allowances less the cost to manufacture RITUXAN, third-party royalty expenses, distribution, selling and marketing, and development expenses incurred by Genentech, Roche and us. We record our share of the pre-tax co-promotion profits in Canada and royalty revenues on sales of RITUXAN outside the U.S. on a cash basis. Additionally, our share of the pre-tax co-promotion profits in the U.S. includes estimates supplied by Genentech.

 

Royalty Revenues

 

We receive royalty revenues on sales by our licensees of other products covered under patents that we own. We do not have future performance obligations under these license arrangements. We record these revenues based on estimates of the sales that occurred during the relevant period. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. We maintain regular communication with our licensees in order to assess the reasonableness of our estimates. Differences between actual royalty revenues and estimated royalty revenues are adjusted in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees. If we are ever unable to accurately estimate revenue, then we record revenues on a cash basis.

 

 

Our accounts receivable primarily arise from product sales in the U.S. and Europe and primarily represent amounts due from our wholesale distributors, large pharmaceutical companies, public hospitals and other government entities. The majority of our accounts receivable have standard payment terms which are generally between 30 and 90 days. We monitor the financial performance and credit worthiness of our large customers so that we can properly assess and respond to changes in their credit profile. We provide reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written-off against the reserve. To date, such losses have not exceeded management’s estimates.

 

Concentrations of credit risk with respect to receivables, which are typically unsecured, are limited due to the wide variety of customers and markets using our products, as well as their dispersion across many different

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

geographic areas. We monitor economic conditions, including volatility associated with international economies, and related impacts on the relevant financial markets and our business, especially in light of sovereign credit issues. The credit and economic conditions within Italy, Spain, Portugal and Greece, among other members of the European Union, have deteriorated. These conditions have increased, and may continue to increase, the average length of time that it takes to collect on our accounts receivable outstanding in these countries.

 

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

 

 

 

 

Approximately $65.0 million and $45.0 million of the aggregate balances for these countries were outstanding for more than one year as of September 30, 2011 and December 31, 2010, respectively. Amounts included as a component of investments and other assets within our condensed consolidated balance sheets represent amounts that are expected to be collected beyond one year.

 

In connection with our purchase of the noncontrolling interest in our joint venture investments in Biogen Dompé SRL, we entered into a credit assignment agreement with Dompé Farmaceutici SpA. Under the terms of this agreement, Dompé Farmaceutici SpA purchased all of Biogen Dompé SRL’s outstanding receivables as of June 30, 2011, adjusted for cash received through September 5, 2011, for $104.6 million. We have no retained interests in these receivables and have accounted for this transaction as a sale recognizing a loss of $1.8 million upon their disposition. For additional information related to these transactions, please read Note 2, Acquisitions to these condensed consolidated financial statements. As of September 30, 2011, our accounts receivable balances in Italy totaled $40.2 million, all of which resulted from sales of product subsequent to June 30, 2011.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

 

The components of inventory are summarized as follows:

 

 

 

Intangible Assets

 

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

 

 

 

Total intangible assets was unchanged as of September 30, 2011 compared to December 31, 2010, excluding the impact of amortization and amounts recorded in connection with the licence agreements for FAMPYRA and the JC virus assay described below.

 

For the three and nine months ended September 30, 2011, amortization for acquired intangible assets totaled $49.3 million and $157.7 million, respectively, as compared to $53.5 million and $155.6 million, respectively, in the prior year comparative periods. Amortization for acquired intangible assets is expected to be in the range of approximately $150.0 million to $200.0 million annually through 2016.

 

AVONEX Core Technology Asset

 

Our most significant intangible asset is the core technology related to our AVONEX product. The net book value of this asset as of September 30, 2011 was $1,230.9 million. We believe the economic benefit of our core technology is consumed as revenue is generated from our AVONEX product, which we refer to as the economic consumption amortization model. An analysis of the anticipated lifetime revenue of AVONEX is performed annually during our long range planning cycle each year. This analysis serves as the basis for the calculation of economic consumption for the core technology asset.

 

We completed our most recent long range planning cycle in the third quarter of 2011. This analysis is based upon certain assumptions that we evaluate on a periodic basis, such as the anticipated product sales of

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

AVONEX and expected impact of competitor products and our own pipeline product candidates, as well as the issuance of new patents or the extension of existing patents. Based upon this analysis, amortization of our core acquired intangible asset related to AVONEX is expected to be in the range of approximately $105.0 million to $155.0 million annually through 2016.

 

FAMPYRA

 

On July 20, 2011, the European Commission (EC) granted a conditional marketing authorization for FAMPYRA in the E.U., which triggered a $25.0 million milestone payment, which was paid to Acorda Therapeutics, Inc. (Acorda) in the third quarter of 2011. A conditional marketing authorization is renewable annually and is granted to a medicinal product with a positive benefit/risk assessment that fulfills an unmet medical need when the benefit to public health of immediate availability outweighs the risk inherent in the fact that additional data are still required.

 

Under our 2009 collaboration and license agreement with Acorda, we have commercialization rights for FAMPYRA and have responsibility for regulatory activities and future clinical development of FAMPYRA outside the U.S. and will pay Acorda royalties based on ex-U.S. net sales, and milestones based on new indications and ex-U.S. net sales. These milestones include the $25.0 million payment made for obtaining the conditional marketing authorization for FAMPYRA in the E.U. The next expected milestone would be $15.0 million, due when ex-U.S. net sales reach $100.0 million over four consecutive quarters. We will capitalize these milestones as they become payable as an intangible asset. Amortization will utilize an economic consumption model that will be based on a forecast of all of the probable payments we expect to make as contingent consideration, such as sales-based milestones, for entering into the license agreement. Royalty payments are recognized as a component of cost of goods sold. For additional information related to our collaboration with Acorda, please read Note 19, Collaborations to our consolidated financial statements included within our 2010 Form 10-K.

 

JC Virus Assay

 

In the first quarter of 2011, we licensed rights for the diagnostic and therapeutic application of recombinant virus-like particles, known as VP1 proteins, to detect antibodies of the JC virus (JCV) in serum or blood. Under the terms of this license, we expect to make payments totaling approximately $53.3 million through 2016. These payments include upfront and milestone payments as well as the greater of an annual maintenance fee or usage-based royalty payment. As of September 30, 2011, we recognized an intangible asset in the amount of $19.2 million, reflecting the total of upfront payments made and other time-based milestone payments. We will further capitalize additional payments due under this arrangement as an intangible asset as they become payable. Amortization will utilize an economic consumption model that will be based on a forecast of all of the probable payments we expect to make in relation to the total number of JCV assay tests performed through 2016.

 

Goodwill

 

Our goodwill balance remained unchanged as of September 30, 2011 compared to December 31, 2010. As of September 30, 2011, we had no accumulated impairment losses.

 

 

A majority of our financial assets and liabilities have been classified as Level 2. Our financial assets and liabilities (which include our cash equivalents, derivative contracts, marketable debt securities, and plan assets for deferred compensation) have been initially valued at the transaction price and subsequently valued, at the end of each reporting period, typically utilizing third party pricing services or other market observable data.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

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 reviewing their pricing methods and matrices, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming that the relevant markets are active. After completing our validation procedures, we did not adjust or override any fair value measurements provided by our pricing services as of September 30, 2011 and December 31, 2010.

 

Our strategic investments in publicly traded equity securities are classified as Level 1 assets as their fair values are readily determinable and based on quoted market prices.

 

We also maintain venture capital investments classified as Level 3 whose fair value is initially measured at transaction prices and subsequently valued using the pricing of recent financing or by reviewing the underlying economic fundamentals and liquidation value of the companies. These investments are the only investments for which we used Level 3 inputs to determine the fair value and represented approximately 0.3% of our total assets as of September 30, 2011 and December 31, 2010, respectively. These investments include investments in certain biotechnology oriented venture capital funds which primarily invest in small privately-owned, venture-backed biotechnology companies. The fair value of our investments in these venture capital funds has been estimated using the net asset value of the fund. The investments cannot be redeemed within the funds. Distributions from each fund will be received as the underlying investments of the fund are liquidated. The funds and therefore a majority of the underlying assets of the funds will not be liquidated in the near future. The underlying assets in these funds are initially measured at transaction prices and subsequently valued using the pricing of recent financings or by reviewing the underlying economic fundamentals and liquidation value of the companies that the funds invest in. We apply judgments and estimates when we validate the prices provided by third parties. While we believe the valuation methodologies are appropriate, the use of valuation methodologies is highly judgmental and changes in methodologies can have a material impact on our results of operations. Gains and losses (realized and unrealized) included in earnings for the period are reported in other income (expense), net.

 

The consideration for certain of our acquisitions includes future payments that are contingent upon the occurrence of a particular factor or factors. For acquisitions completed after January 1, 2009, we record a contingent consideration obligation for such contingent consideration payments at its fair value on the acquisition date. We determine the fair value of the contingent consideration obligation based upon probability-weighted assumptions related to the achievement of certain milestone events and thus the likelihood of us making payments. These fair value measurements are based on significant inputs not observable in the market and therefore represent Level 3 measurements. We revalue the acquisition-related contingent consideration obligation on a recurring basis each reporting period. Changes in the fair value of our contingent consideration obligations are recognized as a fair value adjustment of contingent consideration within our consolidated statements of income.

 

Upon completion of our purchase of the noncontrolling interest in our joint venture investments in Biogen Dompé SRL and Biogen Dompé Switzerland GmbH in September 2011, we recorded a contingent consideration obligation of $38.8 million. There has been no significant change in the valuation of this liability from the acquisition date through September 30, 2011, of which $4.0 million was reflected as a component of accrued expenses and other, and $34.8 million was reflected as a component of other long-term liabilities within our condensed consolidated balance sheet. These valuations were determined based upon probability weighted net cash outflow projections of $42.5 million, discounted using a rate of 3.2%, which is the cost of debt financing for market participants.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

In addition, we also recorded a contingent consideration obligation of $81.2 million in the fourth quarter of 2010 related to our acquisition of BIN. As of September 30, 2011, the fair value of this contingent consideration obligation was $87.1 million, of which $5.0 million was reflected as a component of accrued expenses and other, and $82.1 million was reflected as a component of other long-term liabilities within our consolidated balance sheet. These valuations were determined based upon probability weighted net cash outflow projections of $395.0 million, discounted using a rate of 5.3%, which is the cost of debt financing for market participants. The changes in the fair value of this obligation, of $2.5 million and $5.9 million for the three and nine months ended September 30, 2011, respectively, were primarily due to changes in the discount rate and in the expected timing related to the achievement of certain developmental milestones.

 

There were no transfers between fair value measurement levels during the nine months ended September 30, 2011.

 

The tables below present information about our financial assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

 

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

 

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

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

 

The fair and carrying values of our debt instruments, which have fair values based on all Level 2 inputs, are summarized as follows:

 

 

The fair values of Biogen Dompé SRL’s credit line from us and Dompé Farmaceutici SpA and our note payable to Fumedica were estimated using market observable inputs, including current interest and foreign currency exchange rates. The fair value of our Senior Notes was determined through market, observable, and corroborated sources.

 

Balances outstanding under Biogen Dompé SRL’s credit line were repaid in connection with our recent purchase of the noncontrolling interest in our joint venture investment in Biogen Dompé SRL. For additional information related to this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements.

 

 

Marketable Securities, including Strategic Investments

 

The following tables summarize our marketable securities and strategic investments:

 

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

 

In the tables above, as of September 30, 2011 and December 31, 2010, government securities included $214.2 million and $163.5 million, respectively, of Federal Deposit Insurance Corporation (FDIC) guaranteed senior notes issued by financial institutions under the Temporary Liquidity Guarantee Program.

 

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

 

 

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

 

Summary of Contractual Maturities: Available-for-Sale Securities

 

The estimated fair value and amortized cost of securities, excluding strategic investments, available-for-sale by contractual maturity are summarized as follows:

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

 

The average maturity of our marketable securities as of September 30, 2011 and December 31, 2010 was 13 months and 11 months, respectively.

 

Proceeds from Marketable Securities

 

The proceeds from maturities and sales of marketable securities, excluding strategic investments and resulting realized gains and losses, are generally reinvested, and are summarized as follows:

 

 

In the first quarter of 2011, we also recognized within other income (expense), a net gain of $13.8 million on the sale of stock within our strategic investment portfolio.

 

Impairments

 

We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss in accordance with the meaning of other-than-temporary impairment and its application to certain investments.

 

For the three and nine months ended September 30, 2011, we recognized $0.8 million and $7.6 million, respectively, in charges for the impairment of our investments in venture capital funds and investments in privately-held companies. No impairments were recognized in relation to our publicly-held strategic investments.

 

For the three and nine months ended September 30, 2010, we recognized $2.8 million and $19.8 million, respectively, in charges for the impairment of our publicly-held strategic investments, investments in venture capital funds and investments in privately-held companies.

 

 

Foreign Currency Forward Contracts

 

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

 

Foreign currency forward contracts in effect as of September 30, 2011 and December 31, 2010 had durations of 1 to 12 months. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in accumulated other comprehensive income (loss). Realized gains and losses for the effective portion of such contracts are recognized in revenue when the sale of product in the currency being hedged is recognized. To the extent ineffective, hedge transaction gains and losses are reported in other income (expense), net.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

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

 

 

The portion of the fair value of these foreign currency forward contracts that was included in accumulated other comprehensive income (loss) within total equity reflected net gains of $13.5 million and net losses of $11.0 million as of September 30, 2011 and December 31, 2010, respectively. We expect all contracts to be settled over the next 12 months and any amounts in accumulated other comprehensive income (loss) to be reported as an adjustment to revenue. We consider the impact of our and our counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its obligations under the contract. As of September 30, 2011 and December 31, 2010, credit risk did not materially change the fair value of our foreign currency forward contracts.

 

In relation to our foreign currency forward contracts, we recognized in other income (expense), net losses of $2.8 million and $3.2 million due to hedge ineffectiveness for the three and nine months ended September 30, 2011, respectively, as compared to net gains of $1.4 million and $0.9 million, respectively, in the prior year comparable periods.

 

In addition, we recognized in product revenue net losses of $10.8 million and $37.6 million for the settlement of certain effective cash flow hedge instruments for the three and nine months ended September 30, 2011, respectively, as compared to net gains of $20.7 million and $40.6 million, respectively, in the prior year comparable periods. These settlements were recorded in the same period as the related forecasted revenue.

 

Summary of Derivatives Designated as Hedging Instruments

 

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

 

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

 

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

 

 

Other Derivatives

 

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

 

The aggregate notional amount of our outstanding foreign currency contracts was $342.1 million as of September 30, 2011. The fair value of these contracts was a net asset of $6.5 million. Net gains of $6.1 million and $1.8 million related to these contracts were recognized as a component of other income (expense), net, for the three and nine months ended September 30, 2011, respectively, as compared to net losses of $10.1 million and net gains of $3.0 million in the prior year comparative periods.

 

 

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Accumulated depreciation on property, plant and equipment was $749.1 million and $767.2 million as of September 30, 2011 and December 31, 2010, respectively.

 

San Diego Facility

 

On October 1, 2010, we sold the San Diego facility for cash proceeds, net of transaction costs, of approximately $127.0 million. As part of this transaction, we agreed to lease back the San Diego facility for a period of 15 months. We accounted for this transaction as a financing arrangement as we determined that the transaction did not qualify as a sale due to our continuing involvement under the leaseback terms. Accordingly, we recorded an obligation for the proceeds received in October 2010 and the facility assets remained classified as held for use with the carrying value of the facility continued to be reflected as a component of property, plant and equipment, net within our condensed consolidated balance sheets.

 

In the first quarter of 2011, we entered into an agreement to terminate our 15 month lease of the San Diego facility effective August 31, 2011. We have had no continuing involvement or remaining obligation after August 31, 2011 and have accounted for this transaction as a sale of property as of that date. No

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited, continued)

 

significant gain on sale was recognized and we did not recognize any impairment charges related to the San Diego facility.

 

Hillerød, Denmark Facility

 

As of September 30, 2011 and December 31, 2010, the construction in progress balance related to the construction of our large-scale biologic manufacturing facility in Hillerød, Denmark totaled $481.7 million and $440.2 million, respectively. This facility is intended to manufacture large molecule products, including TYSABRI. In connection with our construction of this facility, we capitalized interest costs totaling approximately $7.3 million and $21.7 million for the three and nine months ended September 30, 2011, respectively.

 

New Cambridge Leases

 

In July 2011, we executed leases for two office buildings to be built in Cambridge, Massachusetts. We expect construction to begin in late 2011, with a planned occupancy during the second half of 2013. These buildings, totaling approximately 500,000 square feet, will serve as the future location of our corporate headquarters and commercial operations. These buildings will also provide additional general and administrative and research and development office space. The leases both have 15 year terms and we have options to extend the term of each lease for two additional five-year terms. Future minimum rental commitments under these leases will total approximately $340.0 million over the initial 15 year lease terms. In addition to rent, the leases require us to pay additional amounts for taxes, insurance, maintenance and other operating expenses.

 

In accordance with accounting guidance applicable to entities involved with the construction of an asset that will be leased when the construction is completed, we are considered the owner, for accounting purposes, of these properties during the construction period. Accordingly, we will record an asset along with a corresponding financing obligation on our consolidated balance sheet for the amount of total project costs incurred related to the construction-in-progress for these buildings through completion of the construction period. Upon completion of the buildings, we will assess and determine if the assets and corresponding liabilities should be derecognized. As of September 30, 2011, cost incurred in relation to the construction of these buildings was insignificant.

 

 

Total equity as of September 30, 2011 increased $784.2 million compared to December 31, 2010. This increase was primarily driven by net income attributable to Biogen Idec Inc. of $934.2 million and the increase in additional paid in capital resulting from the issuance of stock under our share based compensation arrangements totaling $299.5 million. These increases were offset by repurchases of our common stock totaling $386.6 million and a $187.3 million reduction in additional paid in capital and noncontrolling interests resulting from our purchase of the noncontrolling interest in the Dompé joint ventures, as described in Note 2, Acquisitions to these condensed consolidated financial statements.

 

Preferred Stock