10-Q 1 biib-2012930x10q.htm 10-Q BIIB-2012.9.30-10Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19311
BIOGEN IDEC INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
33-0112644
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
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  ¨
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  ¨
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:
Large accelerated filer þ
 
Accelerated filer ¨
Non-accelerated filer ¨
 
Smaller reporting company  ¨
(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  ¨    No  þ
The number of shares of the issuer’s Common Stock, $0.0005 par value, outstanding as of October 19, 2012, was 236,596,922 shares.
 





BIOGEN IDEC INC.
FORM 10-Q — Quarterly Report
For the Quarterly Period Ended September 30, 2012
TABLE OF CONTENTS
 
 
 
Page
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
PART II — OTHER INFORMATION
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 


2


NOTE REGARDING FORWARD-LOOKING STATEMENTS
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,” “could,” “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:
the anticipated amount, timing and accounting of product revenues, joint business revenues, deferred revenues, milestone and other payments under licensing, collaboration or acquisition agreements, tax positions and contingencies, doubtful accounts, cost of sales, research and development costs and other expenses, amortization of intangible assets, and foreign currency forward contracts;
the anticipated launch of BG-12;
our plans to develop further risk stratification protocols for TYSABRI and the impact of such protocols;
anticipated clinical trial readout of, regulatory filings for, and commercial launch of our long-lasting blood clotting factor candidates;
additional planned regulatory filings for and launches of FAMPYRA and the outcome of pricing negotiations for FAMPYRA;
the timing, outcome and impact of proceedings related to: patents and other intellectual property rights; tax audits, assessments and settlements; product liability and other legal proceedings;
loss to be incurred in connection with Genentech's ongoing arbitration with Hoechst;
the deferral of TYSABRI revenue in Italy;
the costs and timing of the development and commercialization of our pipeline products;
the timing and impact of measures worldwide designed to reduce healthcare costs;
the impact of the deterioration of the credit and economic conditions in certain countries in Europe and our collection of accounts receivable in such countries;
fair value estimates in connection with our acquisitions of Stromedix and other entities;
our ability to finance our operations and business initiatives and obtain funding for such activities;
the impact of accounting standards;
repayment of outstanding debt;
the timing and expected financial impact of vacating our facility in Weston, Massachusetts and relocating our corporate headquarters; and
the drivers for growing our business, including our plans to pursue business development and research opportunities, and competitive conditions.
These forward-looking statements involve risks and uncertainties, including those that are described in the “Risk Factors” section of this report and elsewhere within this report that could cause actual results to differ materially from those reflected in such statements. 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).

3


NOTE REGARDING TRADEMARKS
AVONEX®, AVONEX PEN® and RITUXAN® are registered trademarks of Biogen Idec. FUMADERMTM is a trademark 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® — Glaxo Group Limited; BENLYSTA® — Human Genome Sciences, Inc.; BETASERON® — Bayer Schering Pharma AG; EXTAVIA® — Novartis AG; FAMPYRA® — Acorda Therapeutics, Inc.; and REBIF® — Ares Trading S.A.

4



PART I FINANCIAL INFORMATION

BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in thousands, except per share amounts)
 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Revenues:
 
 
 
 
 
 
 
Product
$
1,039,110

 
$
975,757

 
$
3,091,398

 
$
2,839,562

Unconsolidated joint business
287,792

 
266,471

 
856,975

 
739,054

Other
58,652

 
67,706

 
150,147

 
143,308

Total revenues
1,385,554

 
1,309,934

 
4,098,520

 
3,721,924

Cost and expenses:
 
 
 
 
 
 
 
Cost of sales, excluding amortization of acquired intangible assets
139,358

 
123,527

 
411,666

 
327,143

Research and development
304,217

 
301,391

 
989,738

 
880,668

Selling, general and administrative
299,631

 
261,398

 
901,488

 
772,217

Collaboration profit sharing
75,545

 
81,475

 
239,951

 
244,319

Amortization of acquired intangible assets
53,013

 
49,347

 
151,256

 
157,699

Fair value adjustment of contingent consideration
9,456

 
2,500

 
23,573

 
5,900

Restructuring charge
803

 
1,803

 
2,225

 
18,390

Total cost and expenses
882,023

 
821,441

 
2,719,897

 
2,406,336

Gain on sale of rights
31,719

 

 
31,719

 

Income from operations
535,250

 
488,493

 
1,410,342

 
1,315,588

Other income (expense), net
(4,548
)
 
(7,727
)
 
13,546

 
(9,504
)
Income before income tax expense and equity in loss of investee, net of tax
530,702

 
480,766

 
1,423,888

 
1,306,084

Income tax expense
131,044

 
127,104

 
334,213

 
339,608

Equity in loss of investee, net of tax
1,258

 

 
1,769

 

Net income
398,400

 
353,662

 
1,087,906

 
966,476

Net income attributable to noncontrolling interests, net of tax

 
1,836

 

 
32,286

Net income attributable to Biogen Idec Inc.
$
398,400

 
$
351,826

 
$
1,087,906

 
$
934,190

Net income per share:
 
 
 
 
 
 
 
Basic earnings per share attributable to Biogen Idec Inc.
$
1.68

 
$
1.45

 
$
4.56

 
$
3.85

Diluted earnings per share attributable to Biogen Idec Inc.
$
1.67

 
$
1.43

 
$
4.53

 
$
3.81

Weighted-average shares used in calculating:
 
 
 
 
 
 
 
Basic earnings per share attributable to Biogen Idec Inc.
236,474

 
242,883

 
238,331

 
242,266

Diluted earnings per share attributable to Biogen Idec Inc.
238,125

 
245,366

 
240,137

 
245,140

See accompanying notes to these unaudited condensed consolidated financial statements.


5


BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)
 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Net income
$
398,400

 
$
353,662

 
$
1,087,906

 
$
966,476

Other comprehensive income:
 
 
 
 
 
 
 
Unrealized gains (losses) on securities available for sale, net of tax of $883 and $794 for the three months ended September 30, 2012 and 2011, respectively; and $1,958 and $7,101 for the nine months ended September 30, 2012 and 2011, respectively
1,503

 
(1,353
)
 
3,331

 
(12,092
)
Unrealized gains (losses) on foreign currency forward contracts, net of tax of $3,140 and $3,848 for the three months ended September 30, 2012 and 2011, respectively; and $3,118 and $2,634 for the nine months ended September 30, 2012 and 2011, respectively
(27,354
)
 
32,921

 
(27,457
)
 
21,870

Unrealized gains (losses) on pension benefit obligation
198

 
(11
)
 
590

 
5

Currency translation adjustment
25,093

 
(50,505
)
 
(980
)
 
24,279

Total other comprehensive income, net of tax
(560
)
 
(18,948
)
 
(24,516
)
 
34,062

Comprehensive income
397,840

 
334,714

 
1,063,390

 
1,000,538

Comprehensive income attributable to noncontrolling interests, net of tax

 
1,030

 
65

 
37,167

Comprehensive income attributable to Biogen Idec Inc.
$
397,840

 
$
333,684

 
$
1,063,325

 
$
963,371


See accompanying notes to these unaudited condensed consolidated financial statements.


6


BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except per share amounts)
 
 
As of September 30,
2012
 
As of December 31,
2011
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
451,723

 
$
514,542

Marketable securities
1,154,071

 
1,176,115

Accounts receivable, net
661,519

 
584,603

Due from unconsolidated joint business
268,965

 
228,724

Inventory
392,936

 
326,843

Other current assets
126,174

 
144,600

Total current assets
3,055,388

 
2,975,427

Marketable securities
1,741,534

 
1,416,737

Property, plant and equipment, net
1,676,583

 
1,571,387

Intangible assets, net
1,681,232

 
1,608,191

Goodwill
1,204,740

 
1,146,314

Investments and other assets
271,144

 
331,548

Total assets
$
9,630,621

 
$
9,049,604

LIABILITIES AND EQUITY
Current liabilities:
 
 
 
Current portion of notes payable and line of credit
$
453,209

 
$
3,292

Taxes payable
44,252

 
45,939

Accounts payable
157,424

 
186,448

Accrued expenses and other
866,208

 
677,210

Total current liabilities
1,521,093

 
912,889

Notes payable, line of credit and other financing arrangements
658,442

 
1,060,808

Long-term deferred tax liability
249,577

 
248,644

Other long-term liabilities
539,569

 
400,276

Total liabilities
2,968,681

 
2,622,617

Commitments and contingencies


 


Equity:
 
 
 
Biogen Idec Inc. shareholders’ equity
 
 
 
Preferred stock, par value $0.001 per share

 

Common stock, par value $0.0005 per share
127

 
128

Additional paid-in capital
3,819,063

 
4,185,048

Accumulated other comprehensive income (loss)
(51,115
)
 
(26,535
)
Retained earnings
4,194,551

 
3,106,761

Treasury stock, at cost
(1,303,074
)
 
(839,903
)
Total Biogen Idec Inc. shareholders’ equity
6,659,552

 
6,425,499

Noncontrolling interests
2,388

 
1,488

Total equity
6,661,940

 
6,426,987

Total liabilities and equity
$
9,630,621

 
$
9,049,604

See accompanying notes to these unaudited condensed consolidated financial statements.


7


BIOGEN IDEC INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
For the Nine Months
Ended September 30,
 
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
1,087,906

 
$
966,476

Adjustments to reconcile net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
268,772

 
270,212

Share-based compensation
88,378

 
86,625

Deferred income taxes
(86,858
)
 
115,698

Other
6,043

 
(15,493
)
Changes in operating assets and liabilities, net:
 
 
 
Accounts receivable
18,486

 
(17,334
)
Inventory
(82,423
)
 
(35,767
)
Accrued expenses and other current liabilities
104,075

 
(56,737
)
Other changes in operating assets and liabilities, net
(32,389
)
 
(59,913
)
Net cash flows provided by operating activities
1,371,990

 
1,253,767

Cash flows from investing activities:
 
 
 
Proceeds from sales and maturities of marketable securities
1,913,381

 
1,476,052

Purchases of marketable securities
(2,192,343
)
 
(2,590,971
)
Acquisitions of business, net of cash acquired
(72,401
)
 

Purchases of property, plant and equipment
(185,511
)
 
(137,578
)
Other
(38,014
)
 
(8,265
)
Net cash flows used in investing activities
(574,888
)
 
(1,260,762
)
Cash flows from financing activities:
 
 
 
Purchase of treasury stock
(963,171
)
 
(386,575
)
Proceeds from issuance of stock for share-based compensation arrangements
58,278

 
299,466

Other
42,939

 
(89,944
)
Net cash flows used in financing activities
(861,954
)
 
(177,053
)
Net decrease in cash and cash equivalents
(64,852
)
 
(184,048
)
Effect of exchange rate changes on cash and cash equivalents
2,033

 
(410
)
Cash and cash equivalents, beginning of the period
514,542

 
759,598

Cash and cash equivalents, end of the period
$
451,723

 
$
575,140


See accompanying notes to these unaudited condensed consolidated financial statements.


8

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


 
1.
Business
Overview
Biogen Idec is a global biotechnology company focused on discovering, developing, manufacturing and marketing therapies for the treatment of multiple sclerosis and other autoimmune disorders, neurodegenerative diseases and hemophilia. We also collaborate on the development and commercialization of RITUXAN and anti-CD20 product candidates for the treatment of non-Hodgkin's lymphoma and other conditions.
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, 2011 (2011 Form 10-K). Our accounting policies are described in the “Notes to Consolidated Financial Statements” in our 2011 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, 2012 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period. Certain prior-year amounts may be reclassified to conform to the current year’s presentation.
Consolidation
Our condensed consolidated financial statements reflect our financial statements, those of our wholly-owned subsidiaries and those of certain variable interest entities where we are the primary beneficiary. For consolidated entities where we own or are exposed to less than 100% of the economics, we record net income (loss) attributable to noncontrolling interests in our condensed 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 are eliminated in consolidation.
In determining whether we are the primary beneficiary of an entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. These considerations impact the way we account for our existing collaborative relationships and other arrangements. We continuously assess whether we are the primary beneficiary of a variable interest entity as changes to existing relationships or future transactions may result in us consolidating or deconsolidating our partner(s) to collaborations and other arrangements.
Equity Method of Accounting
In circumstances where we have the ability to exercise significant influence over the operating and financial policies of a company in which we have an investment, we utilize the equity method of accounting for recording investment activity. In assessing whether we exercise significant influence, we consider the nature and magnitude of our investment, the voting and protective rights we hold, any participation in the governance of the other company, and other relevant factors such as the presence of a collaboration or other business relationship. Under the equity method of accounting, we will record within our results of operations our share of income or loss of the other company.
 Use of Estimates
The preparation of our condensed consolidated financial statements requires us 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 collectability of our accounts receivable, the valuation of contingent consideration, the valuation of acquired intangible assets including in-process research and development, inventory, impairment and amortization of long-lived assets including intangible assets and acquired in-process research and development (IPR&D),

9

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

impairments of goodwill, share-based compensation, income taxes including the valuation allowance for deferred tax assets, the 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.
 
2.
Acquisitions
Stromedix, Inc.
On March 8, 2012, we completed our acquisition of all the outstanding stock of Stromedix, Inc., a privately held company located in Cambridge, Massachusetts. Stromedix was a business involved in the discovery of antibodies designed to treat fibrosis disorders. Stromedix’ lead candidate, STX-100, was in Phase 2a of development in patients with idiopathic pulmonary fibrosis (IPF). The purchase price included a $75.0 million cash payment and up to a maximum of $487.5 million in contingent consideration in the form of development and approval milestones, of which $275.0 million relates directly to the development and approval of STX-100 for the treatment of IPF. The acquisition was funded from our existing cash on hand and has been accounted for as the acquisition of a business. In addition to acquiring the outstanding stock of the entity and obtaining the rights to STX-100, we obtained the services of key employees and the rights to a second antibody and an antibody conjugate, which are both in preclinical development.
Upon acquisition, we recorded a liability of $122.2 million representing the fair value of the contingent consideration. This amount was estimated through a valuation model that incorporates industry based probability adjusted assumptions relating to the achievement of these milestones and the likelihood of us making payments. This fair value measurement is based upon significant inputs not observable in the market and therefore represents a Level 3 measurement. Subsequent changes in the fair value of this obligation will be recognized as adjustments to contingent consideration and reflected within our condensed consolidated statements of income. For additional information related to our fair value of this obligation, please read Note 8, Fair Value Measurements to these condensed consolidated financial statements.

The purchase price consists of the following:
(In millions)
 
Cash portion of consideration
$
75.0

Fair value of pre-existing equity ownership
10.2

Contingent consideration
122.2

Total purchase price
$
207.4

The following table summarizes the estimated fair values of the separately identifiable assets acquired and liabilities assumed as of March 8, 2012:
(In millions)
 
In-process research and development
$
219.2

Goodwill
51.6

Deferred tax assets
14.4

Deferred tax liability
(77.9
)
Other, net
0.1

Total purchase price
$
207.4

Our estimate of the fair value of the specifically identifiable assets acquired and liabilities assumed as of the date of acquisition is subject to completing our analysis of certain tax matters, such as filing Stromedix’ final tax return and determining the extent to which we will be able utilize Stromedix’ net operating losses. The final determination of these amounts will be completed as soon as possible as additional information becomes available but no later than one year from the acquisition date. Although the final determination may result in differences from our estimates, we do not expect those differences to be material to our financial condition or results of operations.
We estimated the fair value of the IPR&D programs acquired through a probability adjusted cash flow analysis utilizing a discount rate of 20%. Substantially all of the fair value is attributed to the primary indication of the lead candidate, STX-100, which is expected to be completed no earlier than fiscal 2020 at a remaining cost as of the acquisition date of approximately

10

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

$290.0 million. The fair value associated with STX-100 for the treatment of IPF was $202.6 million. These fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 fair value measurements.
The goodwill recognized is largely related to establishing a deferred tax liability for the IPR&D intangible assets which have no tax basis and, therefore, are not tax deductible.
Pro forma results of operations would not be materially different as a result of the acquisition of Stromedix and therefore are not presented. After the acquisition date, our results of operations include the results of Stromedix.
Prior to the acquisition of Stromedix, we had an equity interest equal to approximately 5% of the company’s total capital stock (on an “as converted” basis) pursuant to a license agreement we entered into with Stromedix in 2007 for the development of the STX-100 product candidate. Based on the fair market value of this equity interest derived from the purchase price, we recognized a gain of approximately $9.0 million in the first quarter of 2012, which was recorded as a component of other income (expense), net within our condensed consolidated statement of income.

 
3.
Gain on Sale of Rights
During the third quarter of 2012, we sold our royalty and other rights related to sales of BENLYSTA (belimumab) to a DRI Capital managed fund (DRI). We were entitled to these rights pursuant to a license agreement with Human Genome Sciences, Inc. and GlaxoSmithKline plc (collectively the "Licensees"). Under the terms of the BENLYSTA sale agreement, we will receive payments from DRI equal to a multiple of royalties payable by the Licensees for the period covering October 2011 to September 2014. DRI will retain all the royalty payments from sales of BENLYSTA, with certain exceptions, including a one-time contingency payment that could be paid to us if the cumulative royalties exceed an agreed amount.
Under the terms of this sale, DRI will have no recourse to us for the Licensees' performance with respect to sales of BENLYSTA, even in the event of Licensees' insolvency, nonperformance or inability to comply with terms of the license agreement. We do not have any continuing involvement with DRI or the Licensees with respect to sales of BENLYSTA, and have concluded that the sale of the rights represents the culmination of an earnings process.
The initial payments received during the third quarter of 2012, which covered the royalty period from October 1, 2011 to June 30, 2012, totaled $31.7 million, which was recorded as a gain on sale of rights within our condensed consolidated statements of income. The remaining payments, which are contingent upon BENLYSTA sales over the period ending September 2014, will be recognized as the payments become due.
 
4.
Accounts Receivable
Our accounts receivable primarily arise from product sales in the U.S. and Europe and mainly represent amounts due from our wholesale distributors, public hospitals and other government entities. Concentrations of credit risk with respect to our accounts receivable, 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 geographic areas. The majority of our accounts receivable have standard payment terms which generally require payment within 30 to 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 operate in certain countries where weakness in economic conditions has resulted in extended collection periods. We continue to monitor these economic conditions and assess the impacts of such changes in the relevant financial markets on our business, especially in light of sovereign credit developments. 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, our historical write-offs of accounts receivable have not been significant.
The credit and economic conditions within Italy, Spain, Portugal and Greece, among other members of the European Union, remain uncertain. Deteriorating credit and economic conditions have generally led to an increase in the average length of time that it takes to collect our accounts receivable in some of these countries has increased and may further increase. In some regions in these countries where our collections have slowed and a significant portion of these receivables are routinely being collected over periods in excess of one year, we have discounted our receivables and reduced related revenues based on the period of time that we estimate those amounts will be paid, to the extent such period exceeds one year, using the country’s market-based borrowing rate for such period. The related receivables are classified at the time of sale as long-term assets. We accrete interest income on these receivables, which is recognized as a component of other income (expense), net within our condensed consolidated statements of income.

11

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

Our net accounts receivable balances from product sales in selected European countries are summarized as follows:
 
As of September 30, 2012
(In millions)
Current
Balance Included
within Accounts
Receivable, net
 
Non-Current
Balance Included
within Investments
and Other Assets
 
Total
Spain
$
73.5

 
$

 
$
73.5

Italy
$
94.6

 
$
13.8

 
$
108.4

Portugal
$
19.6

 
$
7.2

 
$
26.8

Greece
$
2.4

 
$

 
$
2.4

 
 
As of December 31, 2011
(In millions)
Current
Balance Included
within Accounts
Receivable, net
 
Non-Current
Balance Included
within Investments
and Other Assets
 
Total
Spain
$
68.5

 
$
65.5

 
$
134.0

Italy
$
19.4

 
$
48.7

 
$
68.1

Portugal
$
20.6

 
$
12.3

 
$
32.9

Greece
$
4.0

 
$

 
$
4.0

Approximately $3.9 million and $56.0 million of the aggregated balances for these countries were overdue more than one year as of September 30, 2012 and December 31, 2011, respectively.
 
During the third quarter of 2012, as part of a new program to resolve outstanding amounts long overdue, the Portuguese government paid us approximately $21.2 million, contributing to a decrease in our accounts receivable in Portugal. Similarly, in June 2012, the Spanish government paid us approximately $112.0 million, contributing to a significant decrease in our accounts receivables in Spain.
The increase in accounts receivable related to sales in Italy is driven, in part, by the credit assignment agreement we completed in the third quarter of 2011. As of December 31, 2011, our accounts receivable balances in Italy totaled $68.1 million, all of which resulted from sales of product subsequent to June 30, 2011. As discussed in Note 2, Acquisitions to our consolidated financial statements included within our 2011 Form 10-K, in connection with our purchase of the noncontrolling interest in our joint venture investments in Biogen Dompé SRL, which occurred during the third quarter of 2011, 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. We retained no interests in these receivables and accounted for this transaction as a sale.
In the fourth quarter of 2011, Biogen Idec SRL received a notice from the Italian National Medicines Agency (AIFA) stating that sales of TYSABRI for the period from February 2009 through February 2011 exceeded by EUR30.7 million a reimbursement limit established pursuant to a Price Determination Resolution (Price Resolution) granted by AIFA in February 2007. In December 2011, we filed an appeal against AIFA in administrative court seeking a ruling that the reimbursement limit does not apply and that the position of AIFA is unenforceable. Since being notified that AIFA believes a reimbursement limit is in effect, we have deferred $46.6 million and $13.8 million of revenue in Italy during the first nine months of 2012 and fourth quarter of 2011, respectively. We expect to continue to defer a portion of our revenues on future sales of TYSABRI in Italy until this matter is resolved. For additional information, please read Note 20, Litigation to these condensed consolidated financial statements.
 

12

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

5.
Reserves for Discounts and Allowances
An analysis of the amount of, and change in, reserves is summarized as follows:
(In millions)
Discounts
 
Contractual
Adjustments
 
Returns
 
Total
Balance, as of December 31, 2011
$
12.6

 
$
119.3

 
$
23.7

 
$
155.6

Current provisions relating to sales in current year
84.4

 
353.4

 
17.3

 
455.1

Adjustments relating to prior years
(0.2
)
 
(5.3
)
 
(0.3
)
 
(5.8
)
Payments/returns relating to sales in current year
(70.8
)
 
(217.4
)
 
(3.3
)
 
(291.5
)
Payments/returns relating to sales in prior years
(11.0
)
 
(83.2
)
 
(10.0
)
 
(104.2
)
Balance, as of September 30, 2012
$
15.0

 
$
166.8

 
$
27.4

 
$
209.2

The total reserves above, included in our condensed consolidated balance sheets, are summarized as follows:
(In millions)
As of September 30,
2012
 
As of December 31,
2011
Reduction of accounts receivable
$
49.0

 
$
40.6

Component of accrued expenses and other
160.2

 
115.0

Total reserves
$
209.2

 
$
155.6

 
6.
Inventory
The components of inventory are summarized as follows:
(In millions)
As of
September 30,
2012
 
As of
December 31,
2011
Raw materials
$
101.9

 
$
83.8

Work in process
183.6

 
169.4

Finished goods
107.4

 
73.6

Total inventory
$
392.9

 
$
326.8

As of September 30, 2012, the carrying value of our inventory includes $13.8 million associated with various programs which have been capitalized in advance of regulatory approval.
 

13

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

7.
Intangible Assets and Goodwill
In connection with our acquisition of Stromedix in March 2012, we acquired IPR&D programs with an estimated fair value of $219.2 million and recorded $51.6 million of goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. For a more detailed description of this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements.
Intangible Assets
Intangible assets, net of accumulated amortization, impairment charges and adjustments, are summarized as follows:
 
 
 
As of September 30, 2012
 
As of December 31, 2011
(In millions)
Estimated
Life
 
Cost
 
Accumulated
Amortization
 
Net
 
Cost
 
Accumulated
Amortization
 
Net
Out-licensed patents
13-23 years
 
$
578.0

 
$
(413.6
)
 
$
164.4

 
$
578.0

 
$
(391.3
)
 
$
186.7

Core developed 
technology
15-23 years
 
3,005.3

 
(1,924.1
)
 
1,081.2

 
3,005.3

 
(1,801.1
)
 
1,204.2

In-process research and development
Up to 15 years upon
commercialization
 
330.1

 

 
330.1

 
110.9

 

 
110.9

Trademarks and 
tradenames
Indefinite
 
64.0

 

 
64.0

 
64.0

 

 
64.0

In-licensed rights 
and patents
6-16 years
 
52.4

 
(10.9
)
 
41.5

 
47.2

 
(4.8
)
 
42.4

Assembled workforce
4 years
 
2.1

 
(2.1
)
 

 
2.1

 
(2.1
)
 

Total intangible assets
 
 
$
4,031.9

 
$
(2,350.7
)
 
$
1,681.2

 
$
3,807.5

 
$
(2,199.3
)
 
$
1,608.2

For the three and nine months ended September 30, 2012, amortization of acquired intangible assets totaled $53.0 million and $151.3 million, respectively, as compared to $49.3 million and $157.7 million, respectively, in the prior year comparative periods. Amortization of acquired intangible assets is expected to be in the range of approximately $100.0 million to $200.0 million annually through 2017.
Core Developed Technology
Core developed technology primarily relates to our AVONEX product which was recorded in connection with the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in 2003. Our most recent long range planning cycle was completed in the third quarter of 2012, which reflected a small decrease in the expected lifetime revenue of AVONEX resulting in an increase in amortization expense.
In-process Research and Development (IPR&D)
In-process research and development represents the fair value assigned to research and development assets that we acquire that have not been completed at the date of acquisition. In connection with our acquisition of Stromedix in March 2012, we acquired IPR&D programs with an estimated fair value of $219.2 million. For a more detailed description of this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements.
In-licensed Rights and Patents
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 $57.0 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, 2012 and December 31, 2011, we have recognized an intangible asset totaling $24.5 million and $19.2 million, respectively, reflecting the total amount of upfront payments made and other time-based milestone payments. We will capitalize any additional payments due under this arrangement as an intangible asset when they become due. Amortization expense is recorded using an economic consumption model based on the number of JCV antibody assay tests performed each period compared to an estimate of the total tests we expect to perform multiplied by payments made to date and payments we expect to make through 2016.

14

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

 Goodwill
The following table provides a roll forward of the changes in our goodwill balance:
(In millions)
As of
September 30,
2012
 
As of
December 31,
2011
Goodwill, beginning of period
$
1,146.3

 
$
1,146.3

Goodwill acquired during the period
51.6

 

Other
6.8

 

Goodwill, end of period
$
1,204.7

 
$
1,146.3

During the three months ended September 30, 2012, we corrected goodwill by $6.8 million to establish a deferred tax liability that existed at the time of the merger of Biogen, Inc and IDEC Pharmaceuticals Corporation in 2003. As of September 30, 2012, we had no accumulated impairment losses related to goodwill.
 
8.
Fair Value Measurements
The tables below present information about our assets and liabilities that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine each fair value:
(In millions)
As of
September 30,
2012
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
309.0

 
$

 
$
309.0

 
$

Marketable debt securities:
 
 
 
 
 
 
 
Corporate debt securities
914.7

 

 
914.7

 

Government securities
1,539.9

 

 
1,539.9

 

Mortgage and other asset backed securities
441.0

 

 
441.0

 

Marketable equity securities
1.2

 
1.2

 

 

Venture capital investments
25.2

 

 

 
25.2

Derivative contracts
6.9

 

 
6.9

 

Plan assets for deferred compensation
13.9

 

 
13.9

 

Total
$
3,251.8

 
$
1.2

 
$
3,225.4

 
$
25.2

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
5.2

 
$

 
$
5.2

 
$

Contingent consideration obligations
290.3

 

 

 
290.3

Total
$
295.5

 
$

 
$
5.2

 
$
290.3



15

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

(In millions)
As of
December 31,
2011
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
399.8

 
$

 
$
399.8

 
$

Marketable debt securities:
 
 
 
 
 
 
 
Corporate debt securities
602.6

 

 
602.6

 

Government securities
1,716.5

 

 
1,716.5

 

Mortgage and other asset backed securities
273.8

 

 
273.8

 

Marketable equity securities
0.1

 
0.1

 

 

Venture capital investments
23.5

 

 

 
23.5

Derivative contracts
39.5

 

 
39.5

 

Plan assets for deferred compensation
11.6

 

 
11.6

 

Total
$
3,067.4

 
$
0.1

 
$
3,043.8

 
$
23.5

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
0.5

 
$

 
$
0.5

 
$

Contingent consideration obligations
151.0

 

 

 
151.0

Total
$
151.5

 
$

 
$
0.5

 
$
151.0

The fair value of Level 2 instruments classified as cash equivalents and marketable debt securities were determined through financial models of third party pricing services. For a description of our validation procedures related to prices provided by third party pricing services, refer to Note 1, Summary of Significant Accounting Policies: Fair Value Measurements, to our consolidated financial statements included within our 2011 Form 10-K.
Marketable Equity Securities and Venture Capital Investments
Our marketable equity securities represent investments in publicly traded equity securities. Our venture capital investments include investments in certain venture capital funds, accounted for at fair value, which primarily invest in small privately-owned, venture-backed biotechnology companies. These venture capital investments represented approximately 0.3% of total assets as of September 30, 2012 and December 31, 2011, respectively.
The following table provides a roll forward of the fair value of our venture capital investments, which are all Level 3 assets:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Fair value, beginning of period
$
25.4

 
$
20.6

 
$
23.5

 
$
20.8

Unrealized gains included in earnings
1.4

 
1.8

 
4.9

 
2.5

Unrealized losses included in earnings
(1.6
)
 
(0.2
)
 
(3.6
)
 
(1.5
)
Purchases

 
0.9

 
0.4

 
1.3

Fair value, end of period
$
25.2

 
$
23.1

 
$
25.2

 
$
23.1

 Debt Instruments
The fair and carrying values of our debt instruments, which are all Level 2 liabilities, are summarized as follows:
 
As of September 30, 2012
 
As of December 31, 2011
(In millions)
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Notes payable to Fumedica
$
18.9

 
$
17.2

 
$
22.4

 
$
19.7

6.0% Senior Notes due March 1, 2013
459.6

 
450.0

 
474.1

 
449.9

6.875% Senior Notes due March 1, 2018
666.4

 
587.9

 
663.9

 
592.3

Total
$
1,144.9

 
$
1,055.1

 
$
1,160.4

 
$
1,061.9


16

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

We utilized Level 2 inputs to determine the fair value of our notes payable to Fumedica and our Senior Notes. The fair value of our notes payable to Fumedica was 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.
Contingent Consideration Obligations
The following table provides a roll forward of the fair values of our contingent consideration obligations, which are all Level 3 liabilities:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Fair value, beginning of period
$
280.9

 
$
84.6

 
$
151.0

 
$
81.2

Additions

 
38.8

 
122.2

 
38.8

Changes in fair value
9.4

 
2.5

 
23.6

 
5.9

Payments

 

 
(6.5
)
 

Fair value, end of period
$
290.3

 
$
125.9

 
$
290.3

 
$
125.9

As of September 30, 2012 and December 31, 2011, approximately $269.0 million and $140.3 million, respectively, of the fair value of our total contingent consideration obligations were reflected as components of other long-term liabilities within our condensed consolidated balance sheets with the remaining balances reflected as a component of accrued expenses and other.
In connection with our acquisition of Stromedix in March 2012, we recorded a liability of $122.2 million representing the fair value of the contingent consideration. This valuation was based on probability weighted net cash outflow projections of $487.5 million, discounted using a rate of 4.4%, which is a measure of the credit risk associated with settling the liability.
The consideration for our acquisitions often includes future payments that are contingent upon the occurrence of a particular event. For acquisitions completed after January 1, 2009, we record a contingent consideration obligation for such contingent payments at fair value on the acquisition date. We estimate the fair value of contingent consideration obligations through valuation models that incorporate probability adjusted assumptions related to the achievement of the milestones and thus likelihood of making related payments. We revalue these contingent consideration obligations each reporting period. Changes in the fair value of our contingent consideration obligations are recognized within our condensed consolidated statements of income. Changes in the fair value of the contingent consideration obligations can result from changes to one or multiple inputs, including adjustments to the discount rates and periods utilized, changes in the amount or timing of expected expenditures associated with product development, changes in the amount or timing of cash flows and reserves associated with products upon commercialization, changes in the assumed achievement or timing of any development milestones, changes in the probability of certain clinical events and changes in the assumed probability associated with regulatory approval.
Discount rates in our valuation models represent a measure of the credit risk associated with settling the liability. The value of our contingent obligations as of September 30, 2012 was based upon discount rates ranging from 2.5% to 3.7%. The period over which we discount our contingent obligations is based on the current development stage of the product candidates, our specific development plan for that product candidate adjusted for the probability of completing the development step, and when the contingent payments would be triggered. In determining the probability of success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense we record in any given period.
Acquired IPR&D
In connection with our acquisition of Stromedix, we allocated $219.2 million of the total purchase price to acquired IPR&D, which was capitalized as an intangible asset. The amount allocated to acquired IPR&D was based on significant inputs not observable in the market and thus represented a Level 3 fair value measurement. These assets are tested for impairment annually until commercialization, after which time the IPR&D is amortized over its estimated useful life. For a more detailed description of this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements.

17

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

There has been no impairment of our assets measured at fair value during the three and nine months ended September 30, 2012. In addition, there were no changes in valuation techniques or inputs utilized or transfers between fair value measurement levels during the three and nine months ended September 30, 2012. For additional information related to the valuation techniques and inputs utilized in valuation of our financial assets and liabilities, please read Note 1, Summary of Significant Accounting Policies to our consolidated financial statements included within our 2011 Form 10-K.
 
9.
Financial Instruments
Marketable Securities
The following tables summarize our marketable debt and equity securities:
As of September 30, 2012 (In millions)
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Amortized
Cost
Available-for-sale:
 
 
 
 
 
 
 
Corporate debt securities
 
 
 
 
 
 
 
Current
$
302.8

 
$
0.4

 
$
(0.1
)
 
$
302.5

Non-current
611.9

 
3.3

 
(0.2
)
 
608.8

Government securities
 
 
 
 
 
 
 
Current
845.6

 
0.4

 

 
845.2

Non-current
694.3

 
0.9

 

 
693.4

Mortgage and other asset backed securities
 
 
 
 
 
 
 
Current
5.7

 

 

 
5.7

Non-current
435.3

 
1.6

 
(1.1
)
 
434.8

Total marketable debt securities
$
2,895.6

 
$
6.6

 
$
(1.4
)
 
$
2,890.4

Marketable equity securities, non-current
$
1.2

 
$

 
$

 
$
1.2

 
As of December 31, 2011 (In millions)
Fair
Value
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Amortized
Cost
Available-for-sale:
 
 
 
 
 
 
 
Corporate debt securities
 
 
 
 
 
 
 
Current
$
155.0

 
$
0.2

 
$
(0.1
)
 
$
154.9

Non-current
447.6

 
1.2

 
(1.5
)
 
447.9

Government securities
 
 
 
 
 
 
 
Current
1,021.0

 
0.4

 

 
1,020.6

Non-current
695.5

 
0.9

 
(0.2
)
 
694.8

Mortgage and other asset backed securities
 
 
 
 
 
 
 
Current
0.1

 

 

 
0.1

Non-current
273.7

 
0.5

 
(1.3
)
 
274.5

Total marketable debt securities
$
2,592.9

 
$
3.2

 
$
(3.1
)
 
$
2,592.8

Marketable equity securities, non-current
$
0.1

 
$

 
$
(0.1
)
 
$
0.2

In the tables above, as of September 30, 2012 and December 31, 2011, government securities included $89.1 million and $214.0 million, respectively, of Federal Deposit Insurance Corporation (FDIC) guaranteed senior notes issued by financial institutions under the Temporary Liquidity Guarantee Programs, which will all mature prior to December 31, 2012.
 

18

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

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:
(In millions)
As of
September 30,
2012
 
As of
December 31,
2011
Commercial paper
$
16.3

 
$

Repurchase agreements
108.7

 
8.8

Short-term debt securities
184.0

 
391.0

Total
$
309.0

 
$
399.8

The carrying values of our commercial paper, including accrued interest, repurchase agreements and short-term debt securities approximate fair value.
Summary of Contractual Maturities: Available-for-Sale Securities
The estimated fair value and amortized cost of our marketable debt securities available-for-sale by contractual maturity are summarized as follows:
 
As of September 30, 2012
 
As of December 31, 2011
(In millions)
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
Due in one year or less
$
1,154.0

 
$
1,153.4

 
$
1,176.1

 
$
1,175.6

Due after one year through five years
1,529.8

 
1,525.5

 
1,251.6

 
1,251.4

Due after five years
211.8

 
211.5

 
165.2

 
165.8

Total available-for-sale securities
$
2,895.6

 
$
2,890.4

 
$
2,592.9

 
$
2,592.8

The average maturity of our marketable securities as of September 30, 2012 and December 31, 2011 was 13 months and 14 months, respectively.
Proceeds from Marketable Debt Securities
The proceeds from maturities and sales of marketable debt securities and resulting realized gains and losses are summarized as follows:
 
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Proceeds from maturities and sales
$
491.3

 
$
306.2

 
$
1,913.4

 
$
1,476.1

Realized gains
$
0.4

 
$
0.3

 
$
1.7

 
$
3.4

Realized losses
$
(0.8
)
 
$
(0.4
)
 
$
(2.7
)
 
$
(1.7
)
Proceeds were generally reinvested. Realized losses for the three and nine months ended September 30, 2012 and 2011 primarily relate to sales of agency mortgage-backed securities.
 
Strategic Investments
As of September 30, 2012 and December 31, 2011, our strategic investment portfolio was comprised of investments totaling $60.7 million and $62.8 million, respectively, which are included in investments and other assets in our accompanying condensed consolidated balance sheets. Our strategic investment portfolio includes investments in marketable equity securities of certain biotechnology companies and our investments in venture capital funds accounted for at fair value which totaled $26.4 million and $23.6 million as of September 30, 2012 and December 31, 2011, respectively. Our strategic investment portfolio also includes other equity investments in privately-held companies and additional investments in venture capital funds accounted for under the cost method. The carrying value of these investments totaled $34.3 million and $39.2 million, as of September 30, 2012 and December 31, 2011, respectively.
During the three and nine months ended September 30, 2012, we realized net losses, impairments and changes to fair value recorded through income of $1.8 million and net gains of $11.7 million, respectively, on our strategic investment

19

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

portfolio as compared to net gains, impairments and changes to fair value of $1.1 million and $8.7 million, respectively, in the prior year comparative periods. The gains recognized during the nine months ended September 30, 2012, include a gain of $9.0 million recognized upon our acquisition of Stromedix as we previously held an equity interest. For a more detailed description of this transaction, please read Note 2, Acquisitions to these condensed consolidated financial statements. The gains recognized during the nine months ended September 30, 2011 include a gain of $13.8 million on the sale of one of our marketable equity investments.
Impairments
For the three and nine months ended September 30, 2012, we recognized $3.5 million and $4.8 million, respectively, as impairment charges of our publicly-held strategic investments, investments in venture capital funds accounted for under the cost method and investments in privately-held companies.
For the three and nine months ended September 30, 2011, we recognized $0.8 million and $7.6 million, respectively, as impairment charges of our investments in privately-held companies and our investments in venture capital funds accounted for under the cost method. No impairments were recognized in relation to our publicly-held strategic investments.
 
10.
Derivative Instruments
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 therefore subject to changes in foreign currency exchange rates. In order to mitigate these changes we use foreign currency forward contracts to lock in exchange rates associated with a portion of our forecasted international revenues.
Foreign currency forward contracts in effect as of September 30, 2012 and December 31, 2011 had durations of 1 to 15 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.
 
The notional value of foreign currency forward contracts that were entered into to hedge forecasted revenues is summarized as follows:
 
Notional Amount
Foreign Currency: (in millions)
As of
September 30,
2012
 
As of
December 31,
2011
Euro
$
593.6

 
$
496.4

Canadian dollar
6.3

 
22.9

Swedish krona
3.2

 
13.0

Total foreign currency forward contracts
$
603.1

 
$
532.3

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 gains of $5.9 million and $36.5 million as of September 30, 2012 and December 31, 2011, respectively. We expect all contracts to be settled over the next 15 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 contractual obligations. As of September 30, 2012 and December 31, 2011, respectively, credit risk did not materially change the fair value of our foreign currency forward contracts.
In relation to our foreign currency forward contracts, due to hedge ineffectiveness we recognized in other income (expense) net gains of $0.8 million and $4.0 million for the three and nine months ended September 30, 2012, respectively, as compared to net losses of $2.8 million and $3.2 million, respectively, in the prior year comparative periods.
In addition, we recognized in product revenue net gains of $12.0 million and $31.0 million for the settlement of certain effective cash flow hedge instruments for the three and nine months ended September 30, 2012, respectively, as compared to

20

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

net losses of $10.8 million and $37.6 million, respectively, in the prior year comparative periods. These settlements were recorded in the same period as the related forecasted revenues.
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:
(In millions)
Balance Sheet Location
Fair Value As of September 30, 2012
Foreign Currency Contracts:
 
 
Asset derivatives
Other current assets
$
6.4

Liability derivatives
Accrued expenses and other
$
(0.5
)
 
 
 
(In millions)
Balance Sheet Location
Fair Value As of December 31, 2011
Foreign Currency Contracts:
 
 
Asset derivatives
Other current assets
$
32.6

Liability derivatives
Accrued expenses and other
$


The following table summarizes the effect of derivatives designated as hedging instruments on our condensed consolidated statements of income:
(In millions)
Amount
Recognized in
Accumulated
Other
Comprehensive
Income (Loss)
on Derivative
Gain/(Loss)
 (Effective Portion)
 
Income
Statement
Location
 (Effective Portion)
 
Amount
Reclassified from
Accumulated
Other
Comprehensive
Income (Loss)
into Income
Gain/(Loss)
 (Effective Portion)
 
Income
Statement Location
(Ineffective Portion)
 
Amount of
Gain/(Loss)
Recorded
(Ineffective Portion)
For the Three Months Ended
 
 
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
Other income
 
 
Foreign currency contracts
$
5.9

 
Revenue
 
$
12.0

 
(expense)
 
$
0.8

September 30, 2011
 
 
 
 
 
 
Other income
 
 
Foreign currency contracts
$
13.5

 
Revenue
 
$
(10.8
)
 
(expense)
 
$
(2.8
)
For the Nine Months Ended
 
 
 
 
 
 
 
 
 
September 30, 2012
 
 
 
 
 
 
Other income
 
 
Foreign currency contracts
$
5.9

 
Revenue
 
$
31.0

 
(expense)
 
$
4.0

September 30, 2011
 
 
 
 
 
 
Other income
 
 
Foreign currency contracts
$
13.5

 
Revenue
 
$
(37.6
)
 
(expense)
 
$
(3.2
)
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 these other outstanding foreign currency contracts was $297.3 million as of September 30, 2012. The fair value of these contracts was a net liability of $4.3 million. A net loss of $5.7 million and a net gain of $5.6 million related to these contracts were recognized as a component of other income (expense), net, for the three and nine months ended September 30, 2012, respectively, as compared to net gains of $6.1 million and $1.8 million in the prior year comparative periods.
 

21

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

11.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. Components of property, plant and equipment, net are summarized as follows:
(In millions)
As of
September 30,
2012
 
As of
December 31,
2011
Land
$
54.0

 
$
51.9

Buildings
839.7

 
597.9

Leasehold improvements
105.8

 
102.7

Machinery and equipment
824.3

 
570.1

Computer software and hardware
465.9

 
439.7

Furniture and fixtures
43.1

 
37.6

Construction in progress
242.1

 
553.6

Total cost
2,574.9

 
2,353.5

Less: accumulated depreciation
(898.3
)
 
(782.1
)
Total property, plant and equipment, net
$
1,676.6

 
$
1,571.4

For the three and nine months ended September 30, 2012, we capitalized interest costs related to construction in progress totaling approximately $6.6 million and $23.4 million, respectively, as compared to $8.4 million and $24.3 million, respectively, in the prior year comparative periods. Capitalized interest costs are primarily related to the development of our large-scale biologics manufacturing facility in Hillerød, Denmark.
Hillerød, Denmark Facility
As of September 1, 2012, our large-scale biologics manufacturing facility in Hillerød, Denmark was ready for its intended use as we began the process of manufacturing products for use in clinical trials. As a result, we transferred $454.4 million from construction in progress to various fixed asset accounts, all within the category of property, plant and equipment. We ceased capitalizing a majority of the interest expense and began recording depreciation on the various assets during the third quarter of 2012. The average estimated useful life for the facility and its assets is 20 years. The facility is currently not licensed to produce commercial product, a process we expect to be completed in the next twelve months.
Cambridge Leases
In July 2011, we executed leases for two office buildings to be built in Cambridge, Massachusetts with a planned occupancy during the second half of 2013. Construction of these facilities began in late 2011. These buildings will serve as the future location of our corporate headquarters and commercial operations as well as provide additional general and administrative and research and development office space. 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 record an asset along with a corresponding financing obligation on our condensed consolidated balance sheet for the amount of total project costs incurred related to the construction in progress for these buildings. Upon completion of the buildings, we will assess and determine if the assets and corresponding liabilities should be derecognized. As of September 30, 2012 and December 31, 2011, cost incurred by the developer in relation to the construction of these buildings totaled approximately $56.6 million and $2.2 million, respectively.
As a result of our decision to relocate our corporate headquarters and centralize our campus in Cambridge, Massachusetts, we expect to vacate our Weston, Massachusetts facility in the second half of 2013 upon completion of the new buildings. Based upon our most recent estimates, we expect to incur a charge of approximately $35.0 million upon vacating the Weston facility. This amount represents our remaining Weston lease obligation, net of sublease income expected to be received.
 

22



12.
Indebtedness
Revolving Credit Facility
In June 2012 our $360.0 million senior unsecured revolving credit facility expired and was not renewed. No borrowings were made under this credit facility.
 
13.
Equity
Total equity as of September 30, 2012 increased $235.0 million compared to December 31, 2011. This increase was primarily driven by net income attributable to Biogen Idec Inc. of $1,087.9 million and the increase in additional paid-in capital resulting from our share based compensation arrangements totaling $134.0 million offset by repurchases of our common stock totaling $963.2 million.
Share Repurchases
In February 2011, our Board of Directors authorized the repurchase of up to 20.0 million shares of common stock. This authorization does not have an expiration date. During the nine months ended September 30, 2012, approximately 7.7 million shares were repurchased at a cost of $963.2 million. Of those shares, 0.4 million were repurchased and retired during the three months ended September 30, 2012 at a cost of $53.2 million.
Approximately 6.3 million shares of our common stock remain available for repurchase under the 2011 authorization.
 
We repurchased approximately 5.0 million shares at a cost of approximately $386.6 million under the 2011 authorization during the nine months ended September 30, 2011.
Noncontrolling Interests
The following table reconciles equity attributable to noncontrolling interests:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Noncontrolling interests, beginning of period
$
2.4

 
$
79.1

 
$
1.5

 
$
52.9

Net income (loss) attributable to noncontrolling interests, net of tax

 
1.9

 

 
32.3

Currency translation adjustment

 
(0.8
)
 
0.1

 
4.9

Deconsolidation of noncontrolling interest

 

 
(0.5
)
 

Distributions to noncontrolling interests

 
(14.1
)
 
1.3

 
(24.0
)
Acquisition of noncontrolling interests

 
(61.7
)
 

 
(61.7
)
Noncontrolling interests, end of period
$
2.4

 
$
4.4

 
$
2.4

 
$
4.4

 

23

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

14.
Earnings per Share

Basic and diluted earnings per share are calculated as follows:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Numerator:
 
 
 
 
 
 
 
Net income attributable to Biogen Idec Inc.
$
398.4

 
$
351.8

 
$
1,087.9

 
$
934.2

Adjustment for net income allocable to preferred stock

 

 

 
(0.6
)
Net income used in calculating basic and diluted earnings per share
$
398.4

 
$
351.8

 
$
1,087.9

 
$
933.6

Denominator:
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
236.5

 
242.9

 
238.3

 
242.3

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options and employee stock purchase plan
0.4

 
0.7

 
0.5

 
1.1

Time-vested restricted stock units
0.9

 
1.6

 
1.0

 
1.5

Market stock units
0.3

 
0.2

 
0.3

 
0.2

Dilutive potential common shares
1.6

 
2.5

 
1.8

 
2.8

Shares used in calculating diluted earnings per share
238.1

 
245.4

 
240.1

 
245.1

Amounts excluded from the calculation of net income per diluted share because their effects were anti-dilutive were insignificant.
 
15.
Share-based Payments
Share-based Compensation Expense
The following table summarizes share-based compensation expense included within our condensed consolidated statements of income:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Research and development
$
18.0

 
$
14.2

 
$
55.8

 
$
46.4

Selling, general and administrative
27.7

 
22.4

 
81.5

 
65.2

Restructuring charges

 

 

 
(0.6
)
Subtotal
45.7

 
36.6

 
137.3

 
111.0

Capitalized share-based compensation costs
(1.5
)
 
(1.3
)
 
(4.0
)
 
(3.3
)
Share-based compensation expense included in total cost and expenses
44.2

 
35.3

 
133.3

 
107.7

Income tax effect
(13.0
)
 
(10.0
)
 
(40.1
)
 
(33.0
)
Share-based compensation expense included in net income attributable to Biogen Idec Inc.
$
31.2

 
$
25.3

 
$
93.2

 
$
74.7


24

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

The following table summarizes share-based compensation expense associated with each of our share-based compensation programs:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Stock options
$
0.7

 
$
1.8

 
$
1.6

 
$
4.5

Market stock units
5.6

 
3.5

 
17.2

 
11.2

Time-vested restricted stock units
21.4

 
22.0

 
69.5

 
68.2

Performance-vested restricted stock units settled in shares

 
0.2

 
0.1

 
0.9

Cash settled performance shares
16.4

 
6.2

 
45.1

 
21.7

Employee stock purchase plan
1.6

 
2.9

 
3.8

 
4.5

Subtotal
45.7

 
36.6

 
137.3

 
111.0

Capitalized share-based compensation costs
(1.5
)
 
(1.3
)
 
(4.0
)
 
(3.3
)
Share-based compensation expense included in total cost and expenses
$
44.2

 
$
35.3

 
$
133.3

 
$
107.7


 
Grants Under Share-based Compensation Plans
The following table summarizes our equity grants to employees, officers and directors under our current stock plans:
 
For the Nine Months
Ended September 30,
 
2012
 
2011
Market stock units(a)
312,000

 
393,000

Cash settled performance shares(b)
327,000

 
490,000

Time-vested restricted stock units(c)
902,000

 
1,352,000

Performance-vested restricted stock units(d)

 
1,000

 
(a)
Market stock units (MSUs) granted during the nine months ended September 30, 2012 include approximately 39,000 and 41,000 MSUs issued in 2012 based upon the attainment of performance criteria set for 2011 and 2010, respectively, in relation to shares granted in those years. The remainder of MSUs granted during the nine months ended September 30, 2012 include awards granted in conjunction with our annual awards made in February 2012 and MSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant.
MSUs granted during the nine months ended September 30, 2011, include approximately 26,000 MSUs issued in 2011 based upon the attainment of performance criteria set for 2010 in relation to shares granted in 2010. The remainder of MSUs granted during the nine months ended September 30, 2011 include awards granted in conjunction with our annual awards made in February 2011 and MSUs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant.
 
(b)
Cash settled performance shares (CSPSs) granted during the nine months ended September 30, 2012 include approximately 68,000 CSPSs issued in 2012 based upon the attainment of performance criteria set for 2011 in relation to shares granted in 2011. The remainder of CSPSs granted during the nine months ended September 30, 2012 include awards granted in conjunction with our annual awards made in February 2012 and CSPSs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant.
CSPSs granted during the nine months ended September 30, 2011, include approximately 95,000 CSPSs issued in 2011 based upon the attainment of performance criteria set for 2010 in relation to shares granted in 2010. The remainder of CSPSs granted during the nine months ended September 30, 2011 include awards granted in conjunction with our annual awards made in February 2011 and CSPSs granted in conjunction with the hiring of employees. These grants reflect the target number of shares eligible to be earned at the time of grant.
 
(c)
Time-vested restricted stock units (RSUs) granted during the nine months ended September 30, 2012 primarily represent RSUs granted in conjunction with our annual awards made in February 2012 and awards made in conjunction with the hiring of new employees.

25

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

RSUs granted during the nine months ended September 30, 2012 also include approximately 24,000 RSUs granted to our Board of Directors.

RSUs granted during the nine months ended September 30, 2011 primarily represent RSUs granted in conjunction with our annual awards made in February 2011 and awards made in conjunction with the hiring of new employees. RSUs granted during the nine months ended September 30, 2011 also include approximately 35,000 RSUs granted to our Board of Directors.
 
(d)
Performance-vested restricted stock units (PVRSUs) granted during the nine months ended September 30, 2011 represent shares earned for performance criteria set for 2010 in relation to shares granted in 2010. No PVRSUs were granted during the nine months ended September 30, 2012.
No stock options were granted during the nine months ended September 30, 2012 and 2011. In addition, for the nine months ended September 30, 2012, approximately 225,000 shares were issued under our employee stock purchase plan (ESPP) compared to approximately 382,000 shares issued in the prior year comparative period.

 
16.
Income Taxes

For the three and nine months ended September 30, 2012, our effective tax rate was 24.7% and 23.5%, respectively, compared to 26.4% and 26.0%, respectively, in the prior year comparative period.
Reconciliation between the U.S. federal statutory tax rate and our effective tax rate is summarized as follows:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
 
2012
 
2011
 
2012
 
2011
Statutory rate
35.0
 %
 
35.0
 %
 
35.0
 %
 
35.0
 %
State taxes
0.8

 
1.3

 
0.8

 
1.4

Taxes on foreign earnings
(7.1
)
 
(3.8
)
 
(7.6
)
 
(5.4
)
Credits and net operating loss utilization
(3.4
)
 
(5.1
)
 
(3.7
)
 
(3.8
)
Purchased intangible assets
1.3

 
1.1

 
1.2

 
1.3

Permanent items
(2.1
)
 
(1.2
)
 
(2.7
)
 
(1.2
)
Contingent consideration
0.7

 

 
0.5

 

Other
(0.5
)
 
(0.9
)
 

 
(1.3
)
Effective tax rate
24.7
 %
 
26.4
 %
 
23.5
 %
 
26.0
 %
For the three and nine months ended September 30, 2012, the reduction in our income tax rate compared to the same periods in 2011 was primarily a result of a benefit from higher orphan drug credits as a result of the Factor VIII, STX-100 and dexpramipexole and other orphan credit eligible clinical trials, the cessation of certain intercompany royalties owed by a foreign wholly owned subsidiary of ours to a U.S. wholly owned subsidiary on the international sales of one of our products and higher deductions related to our manufacturing operations.
Accounting for Uncertainty in Income Taxes
We and our subsidiaries are routinely examined by various taxing authorities. We file income tax returns in the U.S. federal jurisdiction, various U.S. states, and foreign jurisdictions. With few exceptions including the proposed disallowance we discuss below, we are no longer subject to U.S. federal tax examination for years before 2010 or state, local, or non-U.S. income tax examinations for years before 2004. During the three and nine months ended September 30, 2012, we adjusted our unrecognized tax benefits to reflect new information arising during our on-going federal and state audit examinations including the filing of amended federal income tax returns to claim certain deductions. These amended returns had the effect of increasing our unrecognized tax benefit by approximately $37.0 million.
In October 2011, in conjunction with our examination, the IRS proposed a disallowance of approximately $130 million in deductions for tax years 2007, 2008 and 2009 related to payments for services provided by our wholly owned Danish subsidiary located in Hillerød, Denmark. We believe that these items represent valid deductible business expenses and will vigorously defend our position.

26

BIOGEN IDEC INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, continued)

We do not anticipate any significant changes in our positions in the next twelve months other than expected settlements, which have been classified as current liabilities within the accompanying balance sheet.
 
Contingencies
On June 8, 2010, we received Notices of Assessment from the Massachusetts Department of Revenue (DOR) against Biogen Idec MA Inc. (BIMA), one of our wholly-owned subsidiaries, for $103.5 million of corporate excise tax, including associated interest and penalties, related to our 2004, 2005 and 2006 tax filings. We filed an abatement application with the DOR, which was denied, and we filed a petition appealing the denial with the Massachusetts Appellate Tax Board (Massachusetts ATB) on February 3, 2011, and a hearing has been scheduled for April 2013. For all periods under dispute, we believe that positions taken in our tax filings are valid and we are contesting the assessments vigorously.
The audits of our tax filings for 2007 and 2008 are not completed. As these filings were prepared in a manner consistent with prior filings, we may receive an assessment for those years as well. Due to tax law changes effective January 1, 2009, the computation and deductions at issue in previous tax filings are not part of our subsequent tax filings in Massachusetts.
We believe that these assessments do not impact the amount of liabilities for income tax contingencies. However, there is a possibility that we may not prevail in defending all of our assertions with the DOR. If these matters are resolved unfavorably in the future, the resolution could have a material adverse impact on our effective tax rate and our results of operations.
 
17.
Other Consolidated Financial Statement Detail
Other Income (Expense), Net
Components of other income (expense), net, are summarized as follows:
 
For the Three Months
Ended September 30,
 
For the Nine Months
Ended September 30,
(In millions)
2012
 
2011
 
2012
 
2011
Interest income
$
5.9

 
$
5.3

 
$
22.6

 
$
13.3

Interest expense
(8.7
)
 
(7.9
)
 
(23.1
)
 
(25.5
)
Impairments of investments
(3.5
)
 
(0.8
)
 
(4.8
)
 
(7.6
)
Gain (loss) on investments, net
1.3

 
(0.1
)
 
15.6

 
15.4

Foreign exchange gains (losses), net
0.1

 
(4.8
)
 
0.2

 
(5.8
)
Other, net
0.4

 
0.6

 
3.1

 
0.7

Total other income (expense), net
$
(4.5
)
 
$
(7.7
)
 
$
13.5

 
$
(9.5
)
Accrued Expenses and Other
Accrued expenses and other consists of the following:
(In millions)
As of
September 30,
2012
 
As of
December 31,
2011
Employee compensation and benefits
$