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)

 

 

 

 

14 Cambridge Center, Cambridge, MA 02142

(617) 679-2000

(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large Accelerated Filer þ     Accelerated Filer o     Non-Accelerated Filer o

 

 

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 registrant’s Common Stock, $0.0005 par value, outstanding as of April 25, 2007, was 342,161,653 shares.

 

 

BIOGEN IDEC INC.

FORM 10-Q — Quarterly Report
For the Quarterly Period Ended March 31, 2007

TABLE OF CONTENTS

 

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

 

 

See accompanying notes to the consolidated financial statements.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

 

See accompanying notes to the consolidated financial statements.

(In thousands)

(Unaudited)

 

 

Non-cash financing transaction:

See Note 13 “Notes Payable” for a discussion of non-cash financing transactions that occurred during the period.

 

See accompanying notes to the consolidated financial statements.

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Overview

 

Biogen Idec Inc. is an international biotechnology company that creates new standards of care in oncology, neurology, immunology and other specialty areas of unmet medical need. We currently have five products: AVONEX^®, RITUXAN^®, TYSABRI^®, FUMADERM^®, and ZEVALIN^®.

 

Basis of Presentation

 

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of our financial position, results of operations, and cash flows. 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, 2006. Our accounting policies are described in the Notes to the Consolidated Financial Statements in our 2006 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data presented for comparative purposes was derived from audited financial statements, but this Form 10-Q does not contain all disclosures required by accounting principles generally accepted in the U.S. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

 

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual amounts and results could differ from those estimates.

 

Principles of Consolidation

 

The consolidated financial statements reflect our financial statements and those of our wholly-owned subsidiaries and of our joint ventures in Italy and Switzerland, in which we are the primary beneficiary. We also consolidate a limited partnership investment in which we are the majority investor. All material intercompany balances and transactions have been eliminated in consolidation.

 

Inventory

 

Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out, or FIFO, method. Included in inventory are raw materials used in the production of pre-clinical and clinical products, which are charged to research and development expense when consumed.

 

The components of inventory are as follows (in thousands):

 

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Included in product we have on hand is TYSABRI inventory that was written-off in 2005, due to uncertainties surrounding the TYSABRI suspension, but which is available to fill future orders. The approximate value of this product, based on its cost of manufacture, is $18.1 million.

 

Valuation of Inventory

 

During the three months ended March 31, 2007 and 2006, we wrote-down $6.7 million and $3.3 million, respectively, in unmarketable inventory, which was charged to cost of sales.

 

Revenue Recognition

 

Product Revenues

 

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; the seller’s price to the buyer is fixed or determinable; collectibility is reasonably assured; and title and the risks and rewards of ownership have transferred to the buyer.

 

Except for revenues from sales of TYSABRI in the U.S., revenues from product sales are recognized when product is shipped and title and risk of loss has passed to the customer, typically upon delivery. Sales of TYSABRI in the U.S. are recognized on the “sell-through” model, that is, upon shipment of the product by our collaboration partner, Elan, to the customer. The timing of distributor orders and shipments for all sales can cause variability in earnings.

 

Revenues are recorded net of applicable allowances for returns, trade term discounts, wholesaler incentives, Medicaid rebates, Veteran’s Administration rebates, managed care discounts and other applicable allowances.

 

Reserves for Discounts and Allowances

 

We establish reserves for discounts (which include trade term discounts and wholesaler incentives), contractual adjustments (which include Medicaid rebates, Veteran’s Administration, or VA, rebates and managed care) and returns (which include returns made by wholesalers). Such reserves are classified as reductions of accounts receivable (if the amount is payable to a customer) or a liability (if the amount is payable to a party other than a customer).

 

During the three months ended March 31, 2007, we changed the manner in which we administer our patient assistance and patient replacement goods programs. Prior to January 1, 2007, AVONEX product shipped to administer these programs was invoiced and recorded as gross product revenue. In addition, an offsetting provision for discount and returns was reflected for expected credit requests from the distributor that administers these programs on our behalf. On January 1, 2007, we established a consignment model. Under the new arrangement, no gross revenue is recorded for product shipped to satisfy these programs.

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

An analysis of the amount of, and change in, reserves is as follows (in millions):

 

 

The total reserves above were included in the consolidated balance sheet as follows (in millions):

 

 

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

 

Accounting for Uncertainty In Income Taxes

 

Effective January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of each tax position taken or expected to be taken in a tax return. As a result of the adoption of FIN 48, we recognized a reduction in the liability for unrecognized tax benefits of $14.2 million, which was recorded as a $1.8 million reduction to the January 1, 2007 balance of our accumulated deficit, a $9.1 million reduction in goodwill and a $3.3 million increase in our deferred tax liability.

 

In connection with the adoption of FIN 48, we reclassified approximately $113 million in reserves for uncertain tax positions from current taxes payable to long-term liabilities.

 

See Note 8, Income Taxes, for a discussion of our accounting for uncertain tax positions.

 

 

In January 2007, we acquired 100% of the stock of Syntonix Pharmaceuticals, Inc., or Syntonix, a privately held biopharmaceutical company based in Waltham, Massachusetts. Syntonix focuses on discovering and developing long-acting therapeutic products to improve treatment regimens for chronic diseases, and is engaged in multiple pre-clinical programs in hemophilia. The purchase price was $44.4 million, including transaction costs, and is subject to increase to as much as $124.4 million if certain development milestones with respect to Syntonix’s lead product, FIX:Fc, a proprietary long-acting factor IX product for the treatment

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of hemophilia B, are achieved. The purpose of the acquisition was to enhance our pipeline and to expand into additional specialized markets.

 

The acquisition was funded from our existing cash on hand and was accounted for as an asset acquisition as Syntonix is a development-stage company. As a result of the acquisition we obtained the rights to the in-process technology of the Fc-fusion technology platform. Syntonix has two programs in development using the Fc-fusion platform, FIX:Fc and FVIII:Fc. Syntonix’s lead product, FIX:Fc, is a proprietary long-acting factor IX product for the treatment of hemophilia B. Syntonix is expected to file an investigational new drug application with the Food and Drug Administration, or FDA, for FIX:Fc in 2007. FVIII:Fc is a long-acting Factor VIII product for the treatment of hemophilia A and is approximately two years from filing of the investigational new drug application with the FDA.

 

The results of operations of Syntonix are included in our consolidated results of operations from the date of acquisition. We have completed our purchase price allocation for the acquisition as set out below (in millions):

 

 

The purchase price included $2.0 million in loan forgiveness and $0.7 million in transaction fees. In addition, $0.3 million of severance charges were accrued in the three months ended March 31, 2007, as a result of the acquisition.

 

The amount allocated to in-process research and development, or IPR&D, relates to the development of FIX:Fc and FVIII:Fc, which are in a development stage. We expect to incur an additional $43.3 million to complete FIX:Fc and an additional $67.1 million to complete FVIII:Fc. The estimated revenues from FIX:Fc and FVIII:Fc are expected to be recognized beginning in 2012 and 2014, respectively. A discount rate of 13% was used to value these projects which we believe to be commensurate with the stage of development and the uncertainties in the economic estimates described above. At the date of acquisition, these compounds had not reached technological feasibility and had no alternative future use. Accordingly, $18.4 million in IPR&D was expensed upon acquisition.

 

Upon acquisition, we recognized a deferred tax asset of $27.8 million relating, principally, to U.S. federal net operating loss carryforwards that we obtained with the acquisition of Syntonix. The deferred tax asset included approximately $12.8 million of net operating loss and research credit carryovers that will be utilized prior to applicable expiration dates, as well as approximately $15.3 million of other deferred tax assets primarily related to start-up and research expenditures that have been capitalized for tax purposes and will be amortized over the next several years.

 

Future contingent consideration payments, if ultimately payable, will be expensed as research and development.

 

The total revenue, operating income (loss) and net income (loss) impacts of the acquisition for the three months ended March 31, 2007 and 2006 were not material.

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

As of March 31, 2007 and December 31, 2006, intangible assets and goodwill, net of accumulated amortization, impairment charges and adjustments, are as follows (in thousands):

 

 

 

During the three months ended March 31, 2007, goodwill decreased by $19.1 million as a result of certain tax adjustments. Approximately $9.1 million of the adjustments related to the adoption of FIN 48. (See Note 8 for discussion on income taxes). Assembled workforce increased by $0.7 million as a result of the acquisition of Syntonix.

 

Amortization expense was $59.9 million and $70.7 million for the three months ended March 31, 2007 and 2006, respectively.

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Marketable Securities, including Strategic Investments

 

The following is a summary of marketable securities (in thousands):

 

 

 

Proceeds from maturities and other sales of marketable securities during the three months ended March 31, 2007 and 2006, which were primarily reinvested, were approximately $0.8 billion and $0.4 billion, respectively. Realized losses on these sales for the three months ended March 31, 2007 and 2006, were approximately $0.4 million and $1.0 million, respectively. Realized gains on these sales for the three months ended March 31, 2007 and 2006, were approximately $0.5 million and $0.2 million, respectively.

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The amortized cost and estimated fair value of securities available-for-sale at March 31, 2007 by contractual maturity are as follows (in thousands):

 

 

The average maturity of our marketable securities as of March 31, 2007 and December 31, 2006, was 16 months and 18 months, respectively.

 

In the three months ended March 31, 2007 we recognized $2.5 million in charges for the impairment of available-for-sale securities that were determined to be other-than-temporary following a decline in value. In the three months ended March 31, 2006 we recognized no charges for the impairment of available-for-sale securities. Unrealized losses on available-for-sale securities at March 31, 2007 consist of the following (in thousands):

 

 

Unrealized losses relate to various debt securities, including U.S. Government issues, corporate bonds and asset-backed securities. The unrealized losses on these securities were primarily caused by a rise in interest rates subsequent to purchase. We believe that these unrealized losses are temporary, and we have the intent and ability to hold these securities to recovery, which may be at maturity.

 

Non-Marketable Securities

 

We hold other investments in equity securities of certain privately held biotechnology companies or biotechnology oriented venture capital funds. The carrying value of these strategic investments at March 31, 2007, and December 31, 2006, was $44.8 million and $32.6 million, respectively.

 

In the three months ended March 31, 2007 and 2006, we recorded $0.4 million and $2.1 million, respectively, in charges for the impairment of investments that were determined to be other-than-temporary.

 

Forward Contracts

 

We have foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies. All foreign currency forward contracts in effect at March 31, 2007 have durations of three to nine 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 other comprehensive income. Realized gains and losses for the effective portion are recognized with the completion

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of the underlying hedge transaction. To the extent ineffective, hedge transaction gains and losses are reported in other income (expense).

 

The notional settlement amount of the foreign currency forward contracts outstanding at March 31, 2007 was approximately $227.4 million. These contracts had an aggregate fair value of $2.1 million, representing an unrealized loss, and were included in other current liabilities at March 31, 2007. The notional settlement amount of the foreign currency forward contracts outstanding at December 31, 2006 was approximately $293.2 million. These contracts had an aggregate fair value of $0.2 million, representing an unrealized loss, and were included in other current liabilities at December 31, 2006.

 

For the three months ended March 31, 2007, there was $0.6 million recognized in earnings as a loss due to hedge ineffectiveness. For the three months ended March 31, 2006, we recognized $0.7 million of losses in earnings due to hedge ineffectiveness. Minimal amounts were recognized in product revenue for the settlement of certain effective cash flow hedge instruments for the three months ended March 31, 2007, as compared to approximately $0.9 million of losses for the three months ended March 31, 2006. These settlements were recorded in the same period as the related forecasted transactions affecting earnings.

 

 

The activity in comprehensive income, net of income taxes, was as follows (in thousands):

 

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Basic and diluted earnings per share are calculated as follows (in thousands):

 

 

The following amounts were not included in the calculation of net income per share because their effects were anti-dilutive (in thousands):

 

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

For the three months ended March 31, 2007 and 2006, share-based compensation expense reduced our results of operations as follows (in thousands, except for earnings per share):

 

 

Share-based compensation expense and cost for the three months ended March 31, 2007 and 2006 is as follows (in thousands):

 

 

For the three months ended March 31, 2006, the expense is net of a cumulative pre-tax adjustment of $5.6 million resulting from the application of an estimated forfeiture rate for prior period unvested restricted stock awards.

 

Stock options

 

During the three months ended March 31, 2007 and 2006, we made our annual awards of stock options. Approximately one million stock options were awarded as part of the annual award in February 2007 and bore an exercise price of $49.31 per share. Approximately 0.9 million stock options were awarded as part of the annual grant in February 2006 and bore an exercise price of $44.24 per share.

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The fair value of the stock option grants awarded in the three months ended March 31, 2007 and 2006 were estimated as of the date of grant using a Black-Scholes option valuation model that uses the following weighted-average assumptions:

 

 

For the three months ended March 31, 2007 and 2006, we recorded $8.4 million and $10.7 million, respectively, of stock compensation charges related to stock options.

 

Time-Vested Restricted Stock Units

 

During the three months ended March 31, 2007 and 2006, we made our annual awards of time-vested restricted stock units, or RSUs. Approximately 2.3 million RSUs were awarded as part of the annual grant in February 2007 at a grant date fair value of $49.31 per share. Approximately 2.2 million RSUs were awarded as part of the annual grant in February 2006 at a grant date fair value of $44.24 per share.

 

For the three months ended March 31, 2007 and 2006, we recorded $16.0 million and $3.7 million, respectively, of stock compensation charges related to time-vested RSUs.

 

Performance-Based Restricted Stock Units

 

On March 14, 2007, 258,000 performance-based RSUs vested and were converted into shares of common stock. The shares had been earned by employees pursuant to the terms of the awards granted in September 2005. The amounts that vested represented 83% of the remaining 30% of the total shares issued under the program that had not already vested in September 2006.

 

In addition, in February 2007, 100,000 performance-based RSU’s, granted to our CEO in February 2006, vested and were converted into shares of common stock.

 

In June 2006, we committed to grant 120,000 performance-based RSUs to an executive. These RSUs will be issued at a rate of 30,000 per year for four years. The first tranche of 30,000 RSUs was granted in January 2007. This tranche, and subsequent tranches, are subject to performance conditions established at the time of issuance. The total grant of 120,000 RSUs is being recognized as compensation expense over the requisite service period as if it were multiple awards, in accordance with FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans.

 

In the three months ended March 31, 2007 and 2006, we recorded compensation charges of approximately $1.7 million and $10.1 million, respectively, related to performance-based restricted stock units.

 

Restricted Stock Awards

 

For the three months ended March 31, 2007 and 2006, we recorded $3.7 million and $2.4 million, respectively, of stock compensation charges related to restricted stock awards.

 

Employee Stock Purchase Plan

 

During the three months ended March 31, 2007, 0.2 million shares were issued under the employee stock purchase plan, or ESPP. During the three months ended March 31, 2006, 0.1 million shares were issued under

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

the ESPP. In the three months ended March 31, 2007 and 2006, we recorded compensation charges of approximately $0.8 million and $2.7 million, respectively.

 

 

Tax Rate

 

Our effective tax rate was 35.3% on pre-tax income for the three months ended March 31, 2007, compared to 37.8% for the comparable period in 2006.

 

A reconciliation of the U.S. federal statutory tax rate to the effective tax rate for the three months ended March 31, 2007 and 2006, respectively, is as follows:

 

 

Contingency

 

On September 12, 2006, we received a Notice of Assessment from the Massachusetts Department of Revenue for $38.9 million, including penalties and interest, with respect to the 2001, 2002 and 2003 tax years. We believe that we have meritorious defenses to the proposed adjustment and will vigorously oppose the assessment. We believe that the assessment does not impact the level of our liabilities for income tax contingencies. However, there is a possibility that we may not prevail in all of our assertions. If this is resolved unfavorably in the future, it could have a material impact on our future effective tax rate and our results of operations in the period in which the resolution occurs.

 

Adoption of FASB Interpretation No. 48

 

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48, on January 1, 2007. As a result of the adoption of FIN 48, we recognized a reduction in the liability for unrecognized tax benefits of $14.2 million, which was recorded as a $1.8 million reduction to the January 1, 2007 balance of our accumulated deficit, a $9.1 million reduction in goodwill and a $3.3 million increase in our deferred tax liability.

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):

 

 

Included in the balance at March 31, 2007 and January 1, 2007, are $114.1 million and $98.2 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 any future periods.

 

We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. During the three months ended March 31, 2007 and 2006, we recognized approximately $6.2 million and $3.4 million in interest. We accrued approximately $26.5 million and $20.3 million for the payment of interest at March 31, 2007 and January 1, 2007, respectively.

 

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for years before 2001. The Internal Revenue Service (IRS) commenced an examination of our U.S. income tax returns for 2003 and 2004 in 2006. We expect the IRS to complete its examination by December 31, 2007. The final outcome of the examination is not yet determinable; however, we do not expect that any adjustments as a result of the examination would have a material effect on our financial position.

 

In connection with the adoption of FIN 48, we reclassified approximately $113 million in reserves for uncertain tax positions from current taxes payable to long-term liabilities.

 

 

Total other income (expense), net, consists of the following (in thousands):

 

 

For the three months ended March 31, 2007, the principal components of other expense, net, were minority interest expense ($2.1 million), legal settlements ($1.4 million), and net realized losses on sales of marketable securities ($2.3 million). For the three months ended March 31, 2006, the principal components of other expense, net, were impairment charges on certain marketable securities ($2.1 million), legal settlements ($1.5 million), and our minority interest in joint ventures ($2.0 million) offset by hedging gains ($1.8 million).

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Revenues from unconsolidated joint business arrangements consist of the following (in thousands):

 

 

Our royalty revenue on sales of RITUXAN outside the U.S. is based on Roche’s and Zenyaku’s net sales to third-party customers and is recorded on a cash basis.

 

Under our collaboration agreement, we will receive lower royalty percentage of revenue from Genentech on sales by Roche and Zenyaku of any new anti-CD20 products, as compared to royalty percentage of revenue received on sales of RITUXAN. The royalty period with respect to all products is 11 years from the first commercial sale of such product on a country-by-country basis. For the majority of European countries, the first commercial sale of RITUXAN occurred in the second half of 1998.

 

 

On March 2, 2005, we, along with William H. Rastetter, our former Executive Chairman, and James C. Mullen, our Chief Executive Officer, were named as defendants in a purported class action lawsuit, captioned Brown v. Biogen Idec Inc., et al. (“Brown”), filed in the U.S. District Court for the District of Massachusetts (the “Court”). The complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The action is purportedly brought on behalf of all purchasers of our publicly-traded securities between February 18, 2004 and February 25, 2005. The plaintiff alleges that the defendants made materially false and misleading statements regarding potentially serious side effects of TYSABRI in order to gain accelerated approval from the FDA for the product’s distribution and sale. The plaintiff alleges that these materially false and misleading statements harmed the purported class by artificially inflating our stock price during the purported class period and that company insiders benefited personally from the inflated price by selling our stock. The plaintiff seeks unspecified damages, as well as interest, costs and attorneys’ fees. Substantially similar actions, captioned Grill v. Biogen Idec Inc., et al. and Lobel v. Biogen Idec Inc., et al., were filed on March 10, 2005 and April 21, 2005, respectively, in the same court by other purported class representatives. Those actions have been consolidated with the Brown case. On October 13, 2006, the plaintiffs filed an amended consolidated complaint which, among other amendments to the allegations, adds as defendants Peter N. Kellogg, our Chief Financial Officer, William R. Rohn, our former Chief Operating Officer, Burt A. Adelman, our Executive Vice President, Portfolio Strategy, and Thomas J. Bucknum, our former General Counsel. On November 15, 2006, we and all the other defendants who had been served as of that date filed a motion to dismiss the amended consolidated complaint. A hearing on the Motion to Dismiss was held on March 12, 2007. We believe that the actions are without merit and intend to contest them vigorously. At this early stage of litigation, we cannot make any estimate of a potential loss or range of loss.

 

On June 9, 2005, we, along with numerous other companies, received a request for information from the U.S. Senate Committee on Finance regarding our practices relating to educational and other grants. On January 9, 2006, we, along with numerous other companies, received a further request for information from the Committee. We filed a timely response to the request on March 6, 2006 and have cooperated fully with the Committee’s information requests. The Committee issued a report in April 2007 and stated that it may

 

BIOGEN IDEC INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

request more information. We are unable to predict the outcome of this review or the timing of its resolution at this time.

 

On October 4, 2004, Genentech, Inc. received a subpoena from the U.S. Department of Justice requesting documents related to the promotion of RITUXAN. We market RITUXAN in the U.S. in collaboration with Genentech. Genentech has disclosed that it is cooperating with the associated investigation which they disclosed that they have been advised is both civil and criminal in nature. Genentech has reported further that the government has called and is expected to call former and current Genentech employees to appear before a grand jury in connection with this investigation. We are cooperating with the U.S. Department of Justice in its investigation of Genentech. The potential outcome of this matter and its impact on us cannot be determined at this time.

 

Along with several other major pharmaceutical and biotechnology companies, Biogen, Inc. (now Biogen Idec MA, Inc., one of our wholly-owned subsidiaries) or, in certain cases, Biogen Idec Inc., was named as a defendant in lawsuits filed by the City of New York and numerous Counties of the State of New York. All of the cases — except for cases filed by the County of Erie, County of Nassau, County of Oswego and County of Schenectady — are the subject of a Consolidated Complaint (“Consolidated Complaint”), which was filed on June 15, 2005, in the U.S. District Court for the District of Massachusetts in Multi-District Litigation No. 1456 (“the MDL proceedings”). The County of Nassau filed a second amended complaint on January 6, 2006, also in the MDL proceedings. The County of Erie, County of Oswego and County of Schenectady cases have been removed and transferred to the MDL proceedings, and are currently subject to motions to remand these cases to state court.

 

All of the complaints in these cases allege that the defendants (i) fraudulently reported the Average Wholesale Price for certain drugs for which Medicaid provides reimbursement (“Covered Drugs”); (ii) marketed and promoted the sale of Covered Drugs to providers based on the providers’ ability to collect inflated payments from the government and Medicaid beneficiaries that exceeded payments possible for competing drugs; (iii) provided financial incentives to providers to over-prescribe Covered Drugs or to prescribe Covered Drugs in place of competing drugs; and (iv) overcharged Medicaid for illegally inflated Covered Drugs reimbursements. Among other things, the complaints allege violations of New York state law and advance common law claims for unfair trade practices, fraud, and unjust enrichment. In addition, the Consolidated Complaint and County of Nassau complaint allege that the defendants failed to accurately report the “best price” on the Covered Drugs to the Secretary of Health and Human Services pursuant to rebate agreements, and excluded from their reporting certain discounts and other rebates that would have reduced the “best price.” The County of Nassau complaint also alleged a violation of the federal Racketeer Influenced and Corrupt Organizations Act (RICO) statute.

 

On April 2, 2007, the defendants’ joint motion to dismiss the Consolidated Complaint and the County of Nassau complaint was granted in part, but certain claims against us remained. Our individual motion to dismiss these complaints remains pending. On September 7, 2006, a New York State court granted in part and denied in part our motion to dismiss the County of Erie complaint. We subsequently answered the complaints filed by the Counties of Erie, Oswego and Schenectady. We intend to defend ourselves vigorously against all of the allegations and claims in these lawsuits. At this stage of the litigation, we cannot make any estimate of a potential loss or range of loss.

 

Along with several other major pharmaceutical and biotechnology companies, we were also named as a defendant in a lawsuit filed by the Attorney General of Arizona. The lawsuit was filed in the Superior Court of the State of Arizona and transferred to the MDL proceedings. The complaint, as amended on March 13, 2007, is brought on behalf of Arizona consumers and other payors for drugs, and alleges that the defendants violated the state consumer fraud statute by fraudulently reporting the Average Wholesale Price for certain drugs covered by various private and public insurance mechanisms and by marketing these drugs to providers based on the providers’ ability to collect inflated payments from third-party payors. Motions to dismiss the complaint have not yet been filed and briefed. We intend to defend ourselves vigorously against all of the

 

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allegations and claims in this lawsuit. At this stage of the litigation, we cannot make any estimate of a potential loss or range of loss.

 

On January 6, 2006, we were served with a lawsuit, captioned United States of America ex rel. Paul P. McDermott v. Genentech, Inc. and Biogen Idec, Inc., filed in the United States District Court of the District of Maine (“Court”). The lawsuit was filed under seal on July 29, 2005 by a former employee of our co-defendant Genentech pursuant to the False Claims Act, 31 U.S.C. section 3729 et. seq. On December 20, 2005, the U.S. government elected not to intervene, and the complaint was subsequently unsealed and served. On April 4, 2006, the plaintiff filed his first amended complaint alleging, among other things, that we directly solicited physicians and their staff members to illegally market off-label uses of RITUXAN for treating rheumatoid arthritis, provided illegal kickbacks to physicians to promote off-label uses, trained our employees in methods of avoiding the detection of these off-label sales and marketing activities, formed a network of employees whose assigned duties involved off-label promotion of RITUXAN, intended and caused the off-label promotion of RITUXAN to result in the submission of false claims to the government, and conspired with Genentech to defraud the government. The plaintiff seeks entry of judgment on behalf of the United States of America against the defendants, an award to the plaintiff as relator, and all costs, expenses, attorneys’ fees, interest and other appropriate relief. On May 4, 2006, we filed a motion to dismiss the first amended complaint on the grounds that the Court lacks subject matter jurisdiction, the complaint fails to state a claim and the claims were not pleaded with particularity. On December 14, 2006, the Magistrate Judge recommended that the Court dismiss the case based on our and Genentech’s Motion to Dismiss. The Plaintiff filed objections to this recommendation and the matter awaits decision by the District Court Judge. At this stage of the litigation, we cannot make any estimate of a potential loss or range of loss.

 

On June 17, 2006, we filed a Demand for Arbitration against Genentech, Inc. with the American Arbitration Association (“AAA”). In the Demand for Arbitration, we alleged that Genentech breached the parties’ Amended and Restated Collaboration Agreement dated June 19, 2003 (the “Collaboration Agreement”), by failing to honor our contractual right to participate in strategic decisions affecting the parties’ joint development and commercialization of certain pharmaceutical products, including humanized anti-CD20 antibodies. The original Demand for Arbitration we filed focused primarily on Genentech’s unilateral development of an anti-CD20 product known as a second generation anti-CD20 molecule to treat Neuromyelitis Optica (“NMO”), a relatively rare disorder of the central nervous system. Genentech filed an Answering Statement in response to our Demand in which Genentech denied that it had breached the Collaboration Agreement and alleged that we had breached the Collaboration Agreement. Genentech also asserted for the first time that the November 2003 transaction in which Idec acquired Biogen and became Biogen Idec was a change of control of our company under the Collaboration Agreement, a position with which we disagree strongly. It is our position that the Biogen Idec merger did not constitute a change of control under the Collaboration Agreement and that, even if it did, Genentech’s rights under the change of control provision, which must be asserted within ninety (90) days of the change of control event, have long since expired. We intend to vigorously assert that position if Genentech persists in making this claim. On December 5, 2006, we filed an Amended Demand for Arbitration with the AAA to make clear that the parties’ dispute also includes a disagreement over Genentech’s unilateral development of another collaboration product — a third generation anti-CD20 molecule to treat certain oncology indications. A three-member arbitration panel has been selected to decide this matter. The arbitration is in a very early stage and we cannot make a determination as to the likely outcome.

 

On August 10, 2004, Classen Immunotherapies, Inc. filed suit against us, GlaxoSmithKline, Chiron Corporation, Merck & Co., Inc., and Kaiser-Permanente, Inc. in the U.S. District Court for the District of Maryland contending that we induced infringement of U.S. Patent Nos, 6,420,139, 6,638,739, 5,728,383, and 5,723,283, all of which are directed to various methods of immunization or determination of immunization schedules. All Counts asserted against us by Classen were dismissed by the Court upon various motions filed by the Parties. In early December 2006, Classen filed its initial appeal brief with the United States Court of

 

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Appeals for the Federal Circuit. In that brief, Classen argues for the first time that we have no reporting duties and no activities related to FDA reporting regarding Hepatitis B vaccines and hence can have no claim to a safe harbor protection under Section 271(e)1. Classen asserts, however, that we are inducing infringement by having users consider risk prior to choosing an immunization schedule. We have opposed the appeal on the basis that Classen has waived this argument by not raising it in the district court and, moreover, that the argument lacks merit because we cannot induce infringement if there has been no actual infringement. We are unable, however, to predict the outcome of this appeal.

 

On January, 30, 2007, the Estate of Thaddeus Leoniak commenced a civil lawsuit in the Court of Common Pleas, Philadelphia County, Pennsylvania, against us, the Fox Chase Cancer Center and three physicians. The Complaint alleges that Thaddeus Leoniak died as a result of taking the drug ZEVALIN, and seeks to hold us strictly liable for placing an allegedly “unreasonably dangerous” product in the stream of commerce without proper warnings. The Complaint also seeks to hold us liable for alleged negligence in the design, manufacture, advertising, marketing, promoting, distributing, supplying and selling of ZEVALIN. The lawsuit seeks damages for pecuniary losses suffered by the decedent’s survivors and for compensatory damages for decedent’s pain and suffering, loss of earnings and deprivation of normal activities, all in an amount “in excess of $50,000.” On January 31, 2007, the Plaintiff’s counsel demanded $7.0 million to settle the lawsuit. We believe that we have good and valid defenses to the Complaint and intend to vigorously defend the case. At this stage of the litigation, we cannot make any estimate of a potential loss, if any.

 

In addition, we are 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.

 

 

We operate in one business segment, which is the business of development, manufacturing and commercialization of novel therapeutics for human health care and, therefore, our chief operating decision-maker manages our operations as a single operating segment.

 

 

Notes payable consists of the following (in thousands):

 

 

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In January 2007, we issued 2.8 million shares of common stock for $70.5 million in face value and $36.6 million in carrying value of our 2019 subordinated notes that the holders had elected to convert into common stock.

 

On May 1, 2007, we paid $6.6 million to note holders of the 2032 senior notes that had exercised their right to put the notes back to us. These notes had a face value of $10.1 million.

 

 

On February 15, 2007, FASB Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, or SFAS 159, was issued. SFAS 159 permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 will be effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact this standard would have on our financial statements.

 

On September 6, 2006, FASB Statement No. 157 Fair Value Measurement, or SFAS 157, was issued. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, or GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The Statement will be effective for financial statements for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We are currently evaluating the impact this standard would have on our financial statements.

 

 

In connection with the relocation from leased facilities to our research and corporate campus in San Diego, California, we entered into a lease assignment, in January 2005, with Tanox West, Inc., or Tanox, for a manufacturing facility in San Diego for which we have outstanding lease obligations through September 2008. Under the lease assignment, Tanox was assigned all of our rights, title, and interest in the amended lease and assumed all of the terms, covenants, conditions and obligations required to be kept, performed and fulfilled under the amended lease, including the making of all payments under the amended lease. However, if Tanox were to fail to perform under the lease assignment we would be responsible for all obligations under the amended lease through September 2008. At March 31, 2007, our estimate of the maximum potential of future payments under the amended lease through September 2008 is $7.3 million. Under the lease assignment, Tanox has agreed to indemnify and hold us harmless from and against any and all claims, proceedings and demands and all costs, expenses and liabilities arising out of their performance or failure to perform under the lease assignment.

 

Results of Operations

 

Revenues (in thousands)

 

 

Product Revenues (in thousands)