Biogen Idec 10-K 2010
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number: 0-19311
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files): Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) computed by reference to the price at which the common stock was last sold as of the last business day of the registrants most recently completed second fiscal quarter was $13,005,469,098.
As of February 5, 2010, the registrant had 269,601,262 shares of common stock, $0.0005 par value, outstanding.
Portions of the definitive proxy statement for our 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this report.
BIOGEN IDEC INC.
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2009
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains forward-looking statements that are based on our current beliefs and expectations. These forward-looking statements do not relate strictly to historical or current facts and they may be accompanied by such words as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, target, will and other words and terms of similar meaning. Reference is made in particular to forward-looking statements regarding:
These forward-looking statements are based on our current beliefs and expectations and involve risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. Important factors that could cause actual results to differ from our expectations and could negatively impact our financial position and results of operations are discussed in the Risk Factors section of this report and elsewhere in this report.
Forward-looking statements, like all statements in this report, speak only as of the date of this report, unless another date is indicated. Unless required by law, we do not undertake any obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.
NOTE REGARDING COMPANY AND PRODUCT REFERENCES
Throughout this report, Biogen Idec, we, us and our refer to Biogen Idec Inc. and its consolidated subsidiaries, RITUXAN refers to both RITUXAN (the trade name for rituximab in the U.S., Canada and Japan) and MabThera (the trade name for rituximab outside the U.S., Canada and Japan), and ANGIOMAX refers to both ANGIOMAX (the trade name for bivalirudin in the U.S., Canada and Latin America) and ANGIOX (the trade name for bivalirudin in Europe).
NOTE REGARDING TRADEMARKS
AVONEX®, RITUXAN® and ADENTRI® are registered trademarks, and FUMADERMtm is a trademark of Biogen Idec Inc. or its subsidiaries. TYSABRI® and TOUCH® are registered trademarks of Elan Pharmaceuticals, Inc.;. The following are trademarks of the respective companies listed:
ACTEMRA® Chugai Seiyaku Kabushiki Kaisha; AMPYRATM Acorda Therapeutics, Inc.; ANGIOMAX® and ANGIOX® The Medicines Company; ARZERRATM Glaxo Group Limited; BETASERON® and BETAFERON® Bayer Schering Pharma AG; CAMPATH® Genzyme Corporation; CIMZIA® UCB Pharma, S.A.; COPAXONE® Teva Pharmaceutical Industries Limited; ENBREL® Immunex Corporation; EXTAVIA® Novartis AG; HUMIRA® Abbott Biotechnology Ltd.; ONCOVINTM Eli Lilly and Company; ORENCIA® Bristol-Myers Squibb Company; REBIF® Ares Trading S.A.; REMICADE® Centocor Ortho Biotech Inc.; SIMPONITM Johnson & Johnson; and TREANDA® Cephalon, Inc.
NOTE REGARDING REFERENCES TO THE CODIFICATION
In June 2009, the Financial Accounting Standards Board (FASB), issued the FASB Accounting Standards Codification (Codification). Effective July 1, 2009, the Codification became the single source for all authoritative generally accepted accounting principles (GAAP), recognized by the FASB and is required to be applied to financial statements issued for interim and annual periods ending after September 15, 2009. The Codification does not change GAAP and did not impact our financial position or results of operations; however the Codification does change the way we refer to GAAP within our financial statements.
Biogen Idec is a global biotechnology company that creates new standards of care in therapeutic areas with high unmet medical needs. Our business strategy is focused on discovering and developing first-in-class or best-in-class products that we can deliver to specialty markets globally. Patients worldwide benefit from Biogen Idecs significant products that address medical needs in the areas of neurology, oncology and immunology.
We have four therapeutic products on the market, which are summarized in the table below.
Additional financial information about our product revenues, other revenues and geographic areas in which we operate is set forth in our Consolidated Financial Statements and in Note 20, Segment Information to our Consolidated Financial Statements.
We devote significant resources to research and development programs and external business development opportunities. We intend to focus our research and development efforts on finding novel therapeutics in areas of high unmet medical need within our core and emergent focus areas of neurology, oncology, immunology, cardiopulmonary and hemophilia.
In 2009, 2008 and 2007, our research and development costs totaled $1,283.1 million, $1,072.1 million and $925.2 million, respectively. We incurred charges associated with acquired in-process research and development of $25.0 million and $84.2 million in 2008 and 2007 respectively. No acquired in-process research and development charges were incurred in 2009.
On January 4, 2010, we announced that James C. Mullen will retire as our President and Chief Executive Officer on June 8, 2010, and will retire from our Board of Directors upon the completion of his current term as a director at our 2010 Annual Meeting of Stockholders. We entered into a transition agreement with Mr. Mullen on January 4, 2010, which is filed as an exhibit to this report. Under the transition agreement, we agreed with Mr. Mullen (1) to continue to pay Mr. Mullens current base salary of $1.2 million through June 8, 2010, (2) to pay Mr. Mullen a bonus for 2009 calculated as 125% of his 2009 base salary of $1.2 million multiplied by our corporate multiplier for 2009 determined based on our achievement of goals established at the beginning of 2009, (3) to pay Mr. Mullen a bonus for 2010 calculated as 125% of his prorated base salary, (4) to vest all of Mr. Mullens unvested equity awards on the date of his retirement, (5) to allow Mr. Mullen to exercise his vested stock options until June 8, 2013 or their expiration, whichever is earlier, and (6) that if we make a public announcement of a transaction that constitutes a change in control prior to June 8, 2010, Mr. Mullen will be entitled to a severance payment in the
amount of three times the sum of his annual base salary and target bonus and a related tax payment provided under his employment agreement upon consummation of the transaction. We have initiated a search for Mr. Mullens successor.
We were formed as a California corporation in 1985 and became a Delaware corporation in 1997. Our principal executive offices are located at 14 Cambridge Center, Cambridge, Massachusetts 02142 and our telephone number is (617) 679-2000. Our website address is www.biogenidec.com. We make available free of charge through the Investor Relations section of our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). We include our website address in this report only as an inactive textual reference and do not intend it to be an active link to our website. The contents of our website are not incorporated into this filing.
Our marketed products address the following diseases: multiple sclerosis (MS); non-Hodgkins lymphoma (NHL); rheumatoid arthritis (RA); Crohns disease (CD); and psoriasis. As part of our ongoing development efforts, we are also seeking to expand our marketed products into other diseases, such as Antineutrophil cytoplasmic antibodies (ANCA) associated vasculitis, chronic lymphocytic leukemia (CLL), and ulcerative colitis. The approved indications for, and ongoing development of, our marketed products are summarized in the table below. Drug development involves a high degree of risk, and the status, timing and scope of our clinical trials, drug approvals and applications for approval are subject to change. Important factors that could adversely affect our drug development efforts are discussed in the Risk Factors section of this report.
AVONEX is one of the leading therapeutic products for relapsing forms of MS with over 135,000 patients currently using AVONEX. MS is a progressive neurological disease in which the body loses the ability to transmit messages along nerve cells, leading to a loss of muscle control, paralysis and, in some cases, death. Patients with active relapsing MS experience an uneven pattern of disease progression characterized by periods of stability that are interrupted by flare-ups of the disease after which the patient returns to a new baseline of functioning. AVONEX is a recombinant form of the interferon beta protein produced in the body in response to viral infection. AVONEX has been shown in clinical trials in relapsing MS both to slow the accumulation of disability and to reduce the frequency of flare-ups.
RITUXAN is one of the most prescribed oncology therapeutics in the world with over 2.1 million patient exposures across all indications. RITUXAN is a monoclonal antibody that is used worldwide to treat NHL and RA. NHL is a cancer that affects lymphocytes, which are a type of white blood cell that help to fight infection. RA is a chronic disease that occurs when the immune system mistakenly attacks the bodys joints, resulting in inflammation, pain and joint damage.
We collaborate with the Roche Group, through its wholly-owned member Genentech, Inc., on the development and commercialization of RITUXAN. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
We believe that TYSABRI is one of the most efficacious treatments for MS. TYSABRI is a monoclonal antibody (natalizumab) that was initially approved by the FDA in November 2004 to treat relapsing MS. In February 2005, in consultation with the FDA, we and our collaborator Elan Corporation plc (Elan) voluntarily suspended the marketing and commercial distribution of TYSABRI based on reports of cases of progressive multifocal leukoencephalopathy (PML) in patients treated with TYSABRI in clinical studies. PML is an opportunistic viral infection of the brain that often leads to death or severe disability. In July 2006, TYSABRI was reintroduced in the U.S., and introduced in the European Union, as a monotherapy treatment for relapsing MS. TYSABRI is also approved in the U.S. to treat CD, which is an inflammatory disease of the intestines.
TYSABRI is marketed under risk management or minimization plans as agreed to with local regulatory authorities. In the U.S., TYSABRI was reintroduced with a risk minimization action plan known as the TOUCH Prescribing Program, a rigorous system intended to educate physicians and patients about the risks involved and to assure appropriate use of the product.
We collaborate with Elan on the development and commercialization of TYSABRI. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
FUMADERM is the most prescribed oral systemic treatment for severe psoriasis in Germany. Psoriasis is a skin disease in which cells build up on the skin surface and form scales and red patches.
We receive royalty revenues on sales by our licensees of other products covered under patents that we own. We have also sold or exclusively licensed to third parties rights to certain products previously included within our product line. Royalty or supply agreement revenues received based upon those products are recorded as corporate partner revenue.
Our royalty revenues are dependent upon our licensees sales of licensed products which could vary significantly due to competition, manufacturing difficulties and other factors that are outside our control. In addition, the expiration or invalidation of any underlying patents could reduce or eliminate the royalty revenues derived from such patents. Royalties on sales of ANGIOMAX (bivalirudin) by The Medicines Company (TMC) represent our most significant source of other revenue. TMC markets ANGIOMAX primarily in the U.S. and the European Union for use as an anticoagulant in patients undergoing percutaneous coronary intervention. Please read the subsection entitled Other Revenue Royalty Revenues in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of this report for a description of this royalty arrangement and factors that could adversely effect this portion of our revenues.
In 2009, 2008 and 2007, our royalty revenues totaled $124.4 million, $116.2 million and $102.1 million, respectively, and our corporate partner revenues totaled $5.1 million, $13.4 million and $6.6 million, respectively. Additional financial information about our product revenues, other revenues and geographic areas in which we operate is set forth in our Consolidated Financial Statements and in Note 20, Segment Information to our Consolidated Financial Statements.
Registrational Product Candidates
In addition to the ongoing development of our marketed products, we currently have a number of product candidates in or near registrational stage development. Drug development involves a high degree of risk, and the status, timing and scope of our clinical trials, drug approvals and applications for approval are subject to change. Important factors that could adversely affect our drug development efforts are discussed in the Risk Factors section of this report.
BG-12 is an oral compound that is being tested in relapsing MS. During 2009, we completed patient enrollment in two Phase 3 trials of BG-12 in relapsing MS, known as DEFINE and CONFIRM, with the CONFIRM trial including a glatiramer acetate (COPAXONE) reference comparator arm. Both studies have a two year treatment period with each study involving approximately 1,200 to 1,500 patients worldwide. The FDA has granted BG-12 fast track status, which may result in an expedited review.
Daclizumab is a monoclonal antibody that is being tested in relapsing MS. A Phase 2b trial of daclizumab in MS, known as SELECT, is currently underway. The SELECT trial has a one year treatment period and is expected to involve approximately 600 patients worldwide. The SELECT trial is the first of two registrational trials required by regulatory authorities. We expect to begin patient enrollment in a Phase 3 trial of daclizumab in relapsing MS, known as DECIDE, during the first half of 2010. The DECIDE trial has a two year treatment period and is expected to involve approximately 1,400 patients worldwide. The DECIDE trial is the second registrational trial required by regulatory authorities.
We collaborate with Facet Biotech Corporation (Facet) on the development and commercialization of daclizumab. In January 2010, we agreed with our collaborator, Facet, to assume the manufacture of daclizumab and began the process of transferring from Facet the manufacturing technology necessary for us to manufacture daclizumab. Any delay in completing or implementing such transfer could adversely affect the timing of our daclizumab trials. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
Fampridine is an oral compound that is being developed as a treatment to improve walking ability in people with MS. In December 2009, we filed for approval of fampridine in the European Union and Canada for this indication. Fampridine was approved in the U.S. on January 22, 2010 under the trade name AMPYRA (dalfampridine). AMPYRA is indicated to improve walking in patients with MS. This was demonstrated by an increase in walking speed. Acorda is developing and marketing AMPYRA in the U.S. We collaborate with Acorda on the development and commercialization of fampridine in markets outside the U.S. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
GA101 is a monoclonal antibody that is being tested in CLL. During the second half of 2009, we began patient enrollment in a Phase 3 trial of GA101 in combination with chlorambucil as compared to rituximab plus chlorambucil or chlorambucil alone in patients with previously untreated CLL. The study is designed to have a treatment period of approximately 6 months, with a minimum five year follow-up period, and involve approximately 800 patients worldwide.
We collaborate with the Roche Group, through its wholly-owned member Genentech, on the development and commercialization of GA101. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
Ocrelizumab is a monoclonal antibody that is being tested in RA. We and Genentech initiated four Phase 3 trials evaluating ocrelizumab in RA, known as SCRIPT, FEATURE, STAGE and FILM, and a Phase 2 trial known as CINEMA.
The SCRIPT study will evaluate the efficacy and safety of ocrelizumab, compared with placebo, in patients with active RA who have an inadequate response to at least one anti-TNF-alpha therapy. This study has a one year treatment period and involves approximately 800 patients worldwide.
In January 2010, we and Genentech determined that the FEATURE study, which evaluated a single infusion of ocrelizumab versus placebo (with dual infusions as an active control) in seropositive RA patients with an inadequate response to prior therapies, did not meet its primary efficacy endpoint as a single infusion.
In December 2009, we and Genentech announced that STAGE, which evaluated ocrelizumab in combination with methotrexate, met its primary endpoint of improving signs and symptoms (as measured by criteria, known as the ACR 20 response, established by the American College of Rheumatology) in RA patients who had an inadequate response to methotrexate at both 24 and 48 weeks.
In October 2009, a safety review of ocrelizumab data in RA and lupus nephritis (LN) clinical trials was performed revealing an apparent imbalance in opportunistic infections among ocrelizumab-treated RA and LN patients in these clinical trials. Based upon this review, redosing was stopped in FILM, which evaluated ocrelizumab given in combination with methotrexate to methotrexate naïve RA patients. Redosing was also stopped in the Asia Pacific region for the SCRIPT, FEATURE and STAGE studies.
The CINEMA study will evaluate the efficacy and safety of ocrelizumab in combination with methotrexate compared with infliximab plus methotrexate in patients with active RA who have an inadequate response to certain anti-TNF-alpha therapies. This study has a treatment period of approximately 6 months and involves approximately 300 patients.
We collaborate with the Roche Group, through its wholly-owned member Genentech, on the development and commercialization of ocrelizumab. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
Lixivaptan is an oral compound that is being tested in hyponatremia, an electrolyte disorder that contributes to negative patient outcomes in congestive heart failure and many other chronic diseases. Three Phase 3 trials of lixivaptan in hyponatremia are currently underway. These studies have a 60 day or six month treatment period and involve approximately 100 to 650 patients worldwide.
We collaborate with Cardiokine Biopharma LLC on the development and commercialization of lixivaptan. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
Long-Acting rFactor IX
Long-acting recombinant Factor IX (Factor IX) is a proprietary long-acting Factor IX product that is being tested in hemophilia B, a disorder in which blood clotting is impaired. In January 2010, we began patient enrollment in a Phase 2b/3 trial of Factor IX in hemophilia B, known as B-LONG. This study has a 14 month treatment period and will involve approximately 75 patients. Factor IX has received orphan drug designation for the treatment of hemophilia B from both the FDA and EMA.
We collaborate with Swedish Orphan Biovitrum AB (Biovitrum) on the development and commercialization of Factor IX. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
PEGylated interferon beta-1a
PEGylated interferon beta-1a is designed to prolong the effects and reduce the dosing frequency of interferon beta-1a. During the first half of 2009, we began patient enrollment in a Phase 3 trial of PEGylated interferon beta-1a in relapsing MS, known as ADVANCE. The study is designed to have a two year treatment period and involve approximately 1,200 patients worldwide. The FDA has granted PEGylated interferon beta-1a fast track status, which may result in an expedited review.
Former Registrational Programs
Based upon the October 2009 safety review of ocrelizumab data in RA and LN clinical trials described above, we decided to close the ocrelizumab BELONG study in LN. The SCRIPT study of ocrelizumab in RA described above remains ongoing. We plan to work with regulators to determine the next step for this program.
In October 2009, after a strategic review of our Anti-CD80 MAb (galiximab) and Anti-CD23 MAb (lumiliximab) programs, we decided to stop recruitment in the lumiliximab LUCID trial in CLL and end the galiximab TARGET trial in NHL. Neither decision was a consequence of any safety concerns. We are evaluating our options for these programs.
In December 2009, we determined to close our ADENTRI clinical trial for the treatment of acute decompensated heart failure with renal insufficiency after reviewing preliminary results from the trial.
We intend to continue to commit significant resources to research and development opportunities, focusing on novel therapeutics in areas of high unmet medical need. Highlighted below are several of our development programs that currently are not in registrational trials. Drug development involves a high degree of risk, and the status, timing and scope of our development programs are subject to change. Important factors that could adversely affect our drug development efforts are discussed in the Risk Factors section of this report.
Patents are important to developing and protecting our competitive position. We regularly seek patent protection in the U.S. and in selected countries outside the U.S. for inventions originating from our research and development efforts. In addition, we license rights to various patents and patent applications, generally, in return for the payment of royalties to the patent owner. U.S. patents, as well as most foreign patents, are generally effective for 20 years from the date the earliest (priority) application was filed; however, U.S. patents that issue on applications filed before June 8, 1995 may be effective until 17 years from the issue date, if that is later than the 20 year date. In some cases, the patent term may be extended to recapture a portion of the term lost during FDA regulatory review or because of U.S. Patent and Trademark Office (USPTO) delays in prosecuting the application. The duration of foreign patents varies similarly, in accordance with local law.
We also rely upon unpatented confidential information to remain competitive. We protect such information principally through confidentiality agreements with our employees, consultants, outside scientific collaborators, scientists whose research we sponsor and other advisers. In the case of our employees, these agreements also provide, in compliance with relevant law, that inventions and other intellectual property conceived by such employees during their employment shall be our exclusive property.
Our trademarks, including RITUXAN and AVONEX, are important to us and are generally covered by trademark applications or registrations in the USPTO and the patent offices of other countries. We also use trademarks licensed from third parties, such as the mark TYSABRI which we license from Elan. Trademark protection varies in accordance with local law, and continues in some countries as long as the mark is used and in other countries as long as the mark is registered. Trademark registrations generally are for fixed but renewable terms.
Our patent position and proprietary rights are subject to certain risks and uncertainties. Please read the Risk Factors section of this report for information about certain risks and uncertainties that may affect our patent position and proprietary rights.
Additional information about the patents and other proprietary rights covering our marketed products is set forth below.
AVONEX and Beta Interferon
Our U.S. patent No. 7,588,755, granted in September 2009, claims the use of beta interferon for immunomodulation or treating a viral condition, viral disease, cancers or tumors. This patent, which expires in September 2026, covers the treatment of MS with AVONEX.
We have non-exclusive rights under certain third-party patents and patent applications to manufacture, use and sell AVONEX, including patents owned by the Japanese Foundation for Cancer Research which expire in 2011 and 2013 in the U.S., and a European patent owned by Rentschler Biotechnologie GmbH and which expires in 2012. Additionally, third parties own pending U.S. patent applications related to recombinant interferon-beta. These applications, which fall outside of the GATT amendments to the U.S. patent statute, are not published by the USPTO and, if they mature into granted patents, may be entitled to a term of seventeen years from the grant date. There is at least one pending interference proceeding in the USPTO involving such third party applications, and additional interferences could be declared in the future. We are unable to predict which, if any, such applications will mature into patents with claims relevant to our AVONEX product.
We have several U.S. patents and patent applications, and numerous corresponding foreign counterparts, directed to anti-CD20 antibody technology, including RITUXAN. The principal patents with claims to RITUXAN or its uses expire in the U.S. between 2015 and 2018 and in the rest of the world in 2013, subject to any available patent term extensions. In addition, we and our collaborator, Genentech, have filed numerous patent applications directed to anti-CD20 antibodies and their uses to treat various diseases. These pending patent applications have the potential of issuing as patents in the U.S. and in the rest of world with claims to anti-CD20 antibody molecules for periods beyond that stated above for RITUXAN. In 2008, a European patent of ours claiming the treatment with
anti-CD20 antibodies of certain auto-immune indications, including rheumatoid arthritis, was revoked by the European Patent Office. We are appealing that decision.
Genentech, our collaborator on RITUXAN, has secured an exclusive license to five U.S. patents and counterpart U.S. and foreign patent applications assigned to Xoma Corporation that relate to chimeric antibodies against the CD20 antigen. These patents expire between 2007 and 2014. Genentech has granted us a non-exclusive sublicense to make, have made, use and sell RITUXAN under these patents and patent applications. We, along with Genentech, share the cost of any royalties due to Xoma in our co-promotion territory on sales of RITUXAN.
We and our collaborator, Elan, have patents and patent applications covering TYSABRI in the U.S. and other countries. These patents and patent applications cover TYSABRI and related manufacturing methods, as well as various methods of treatment using the product. In the U.S., the principal patents covering the product and use of the product to treat MS generally expire between 2015 and 2020. Additional U.S. patents and applications covering other indications, including treatment of irritable bowel disease, and methods of manufacturing generally expire between 2012 and 2020. In the rest of world, patents on the product and methods of manufacturing the product generally expire between 2015 and 2020, subject to any supplemental protection (i.e., patent term extension) certificates that may be obtained. In the rest of world, patents and patent applications covering methods of treatment using TYSABRI generally expire between 2012 and 2020.
We focus our sales and marketing efforts on specialist physicians in private practice or at major medical centers. We use customary pharmaceutical company practices to market our products and to educate physicians, such as sales representatives calling on individual physicians, advertisements, professional symposia, direct mail, selling initiatives, public relations and other methods. We provide customer service and other related programs for our products, such as disease and product-specific websites, insurance research services and order, delivery and fulfillment services. We have also established programs in the U.S. which provide qualified uninsured or underinsured patients with marketed products at no or reduced charge. Additional information about our sales, marketing and distribution efforts for our marketed products is set forth below.
We continue to focus our marketing and sales activities on maximizing the potential of AVONEX in the U.S. and the rest of world in the face of increased competition. The principal markets for AVONEX are the U.S., Germany, France, and Italy. In the U.S., Canada, Brazil, Argentina, Australia, Japan and most of the major countries of the European Union, we market and sell AVONEX through our own sales forces and marketing groups and distribute AVONEX principally through wholesale distributors of pharmaceutical products, mail order specialty distributors or shipping service providers. In other countries, we sell AVONEX to distribution partners who are then responsible for most marketing and distribution activities.
In the U.S., we contribute a sales force and other resources to the marketing of RITUXAN, which is managed primarily by the Roche Group through its wholly-owned member and our collaborator Genentech. RITUXAN is generally sold to wholesalers, specialty distributors and directly to hospital pharmacies. Marketing efforts are focused on hematologists, medical oncologists and rheumatologists in private practice, at community hospitals and at major medical centers in the U.S. The Roche Group provides marketing support services for RITUXAN, including customer service, order entry, shipping, billing, insurance verification assistance, managed care sales support, medical information and sales training.
In the rest of world, the Roche Group and its sublicensees market and sell RITUXAN without our participation.
The principal markets for TYSABRI are the U.S., Germany, France and Italy.
In the U.S., we are principally responsible for marketing TYSABRI for MS and Elan is principally responsible for marketing TYSABRI for CD. We and Elan use our respective sales forces and marketing groups for these activities. Elan is responsible for TYSABRI distribution in the U.S. and uses a third party distributor to ship TYSABRI directly to customers.
In the rest of world, we are responsible for TYSABRI marketing and distribution and we use a combination of our own sales force and marketing group and third party service providers.
We have been marketing and distributing FUMADERM directly in Germany since February 2009 and previously used a third party service provider.
Competition in the biotechnology and pharmaceutical industries is intense and comes from many and varied sources, including specialized biotechnology firms and large pharmaceutical companies. Many of our competitors are working to develop products similar to those we are developing or already market and have considerable experience in undertaking clinical trials and in obtaining regulatory approval to market pharmaceutical products. Certain of these companies have substantially greater financial, marketing, research and development and human resources than we do.
We believe that competition and leadership in the industry will be based on managerial and technological superiority and establishing patent and other proprietary positions through research and development. The achievement of a leadership position also depends largely upon our ability to identify and exploit commercially the products resulting from research and the availability of adequate financial resources to fund facilities, equipment, personnel, clinical testing, manufacturing and marketing. Another key aspect of remaining competitive within the industry is recruiting and retaining qualified scientists and technicians. We believe that we have been successful in attracting skilled and experienced scientific personnel.
Competition among products approved for sale may be based, among other things, on patent position, product efficacy, safety, convenience, reliability, availability and price. In addition, early entry of a new pharmaceutical product into the market may have important advantages in gaining product acceptance and market share. Accordingly, the relative speed with which we can develop products, complete the testing and approval process and supply commercial quantities of products will have an important impact on our competitive position.
We may face increased competitive pressures as a result of the emergence of biosimilars. Most of our marketed products, including AVONEX, RITUXAN and TYSABRI, are licensed under the Public Health Service Act as biological products. Unlike small molecule drugs, which are subject to the generic drug provisions (Hatch-Waxman Act) of the U.S. Food, Drug, and Cosmetic Act, currently there is no process in the U.S. for the submission or approval of biological products based upon abbreviated data packages or a showing of sameness to another approved product. There is public dialogue at the FDA and in the Congress, however, regarding the scientific and statutory basis upon which such products, known as biosimilars or follow-on biologics, could be approved and marketed in the U.S. We cannot be certain when, or if, Congress will create a statutory pathway for the approval of biosimilars. In the European Union, the EMA has issued guidelines for approving of biological products through an abbreviated pathway, and several biosimilars have been approved. If a biosimilar version of one of our products were approved, it could reduce our sales of that product.
Additional information about the competition that our marketed products face is set forth below.
AVONEX and TYSABRI both compete primarily with three other products:
Along with us, a number of companies are working to develop products to treat MS that may in the future compete with AVONEX and TYSABRI. For example, an oral formulation of cladribine (developed by Merck Serono) was filed with the EMA and is the subject of discussions with the FDA regarding a refiling for approval as therapy for MS and FTY720 (fingolimod) (developed by Novartis AG) has been filed with the EMA and FDA for approval as an oral therapy for MS. In addition, alemtuzumab (developed by Genzyme Corporation) and laquinimod (developed by Teva Pharmaceutical Industries) are in late-stage development for the treatment of MS.
AVONEX and TYSABRI also face competition from off-label uses of drugs approved for other indications.
RITUXAN competes with several different types of therapies in the oncology market, including:
We are also aware of other anti-CD20 molecules in development that, if successfully developed and registered, may compete with RITUXAN in the oncology market.
RITUXAN competes with several different types of therapies in the RA market, including:
We are also aware of other products in development that, if successfully developed and registered, may compete with RITUXAN in the RA market.
FUMADERM competes with several different types of therapies in the psoriasis market within Germany, including oral systemics such as methotrexate and cyclosporine.
Our current and contemplated activities and the products and processes that will result from such activities are subject to substantial government regulation.
Before new pharmaceutical products may be sold in the U.S. and other countries, clinical trials of the products must be conducted and the results submitted to appropriate regulatory agencies for approval. Clinical trial programs must establish efficacy, determine an appropriate dose and regimen, and define the conditions for safe use. This is a high-risk process that requires stepwise clinical studies in which the candidate product must successfully meet predetermined endpoints. In the U.S., the results of the preclinical and clinical testing of a product are then submitted to the FDA in the form of a Biologics License Application (BLA) or a New Drug Application (NDA). In response to a BLA or NDA, the FDA may grant marketing approval, request additional information or deny the application if it determines the application does not provide an adequate basis for approval. Similar submissions are required by authorities in other jurisdictions who independently assess the product and may reach the same or different conclusions. Our initial focus for obtaining marketing approval outside the U.S. is typically the European Union. There are currently three potential tracks for marketing approval in E.U. countries: mutual recognition, decentralized procedures, and centralized procedures. These review mechanisms may ultimately lead to approval in all countries within the European Union, but each method grants all participating countries some decision-making authority in product approval.
The receipt of regulatory approval often takes a number of years, involves the expenditure of substantial resources and depends on a number of factors, including the severity of the disease in question, the availability of alternative treatments and the risks and benefits demonstrated in clinical trials. On occasion, regulatory authorities may require larger or additional studies, leading to unanticipated delay or expense. Even after initial FDA approval or approvals from other regulatory agencies have been obtained, further clinical trials may be required to provide additional data on safety and effectiveness. Additional trials are required to gain clearance for the use of a product as a treatment for indications other than those initially approved. Furthermore, the FDA and other regulatory agencies require companies to disclose clinical trial results. Failure to disclose such results within applicable time periods could result in penalties, including civil monetary penalties.
In the U.S., the FDA may grant accelerated approval status to products that treat serious or life-threatening illnesses and that provide meaningful therapeutic benefits to patients over existing treatments. Under this pathway, the FDA may approve a product based on surrogate endpoints, or clinical endpoints other than survival or irreversible morbidity, or when the product is shown to be effective but can be safely used only if access to or distribution of the product is restricted. When approval is based on surrogate endpoints or clinical endpoints other than survival or morbidity, the sponsor will be required to conduct additional clinical studies to verify and describe clinical benefit. When accelerated approval requires restricted use or distribution, the sponsor may be required to establish rigorous systems to assure use of the product under safe conditions. These systems are usually referred to as Risk Minimization Action Plans (RiskMAPs) or Risk Evaluation and Mitigation Strategies (REMS). In addition, for all products approved under accelerated approval, sponsors must submit all copies of its promotional materials, including advertisements, to the FDA at least thirty days prior to their initial dissemination. Accelerated approval status does not ensure that FDA will ultimately approve the product. The FDA may also withdraw approval under accelerated approval after a hearing if, for instance, post-marketing studies fail to verify any clinical benefit or it becomes clear that restrictions on the distribution of the product are inadequate to ensure its safe use. TYSABRI was approved in MS under the accelerated approval pathway and, after efficacy was confirmed, was approved under a stringent restricted distribution program. TYSABRI was also approved for Crohns disease under a similar restricted distribution program. We cannot be certain that the FDA will approve any products for their proposed indications whether under accelerated approval or another pathway.
If the FDA or other regulatory agency approves a product or new indication, the agency may require us to conduct additional post-marketing studies. If we fail to conduct the required studies or otherwise fail to comply with the conditions of accelerated approval, the agency may withdraw its approval. In addition, the FDA and EMA can impose financial penalties for failing to comply with certain post-marketing commitments, including RiskMAPs and REMS.
Regulatory authorities track information on side effects and adverse events reported during clinical studies and after marketing approval. Non-compliance with FDA safety reporting requirements may result in civil or criminal penalties. Side effects or adverse events that are reported during clinical trials can delay, impede, or prevent marketing approval. The FDA may conduct post-marketing safety surveillance and may require additional post-approval studies or clinical trials. These requirements may affect our ability to maintain marketing approval of our products or require us to make significant expenditures to obtain or maintain such approvals. In addition, adverse events that are reported after marketing approval can result in changes to the products labeling, additional limitations being placed on the products use and, potentially, withdrawal or suspension of the product from the market.
If we seek to make certain changes to an approved product, such as adding a new indication, making certain manufacturing changes, or changing manufacturers or suppliers of certain ingredients or components, regulatory authorities, including the FDA and EMA, will need to review and approve such changes in advance.
In addition, the FDA regulates all advertising and promotion activities for products under its jurisdiction both before and after approval. A company can make only those claims relating to safety and efficacy that are approved by the FDA. However, physicians may prescribe legally available drugs for uses that are not described in the drugs labeling. Such off-label uses are common across medical specialties, and often reflect a physicians belief that the off-label use is the best treatment for patients. The FDA does not regulate the behavior of physicians in their choice of treatments, but the FDA regulations do impose stringent restrictions on manufacturers communications regarding off-label uses. Failure to comply with applicable FDA requirements may subject a company to adverse publicity, enforcement action by the FDA, corrective advertising, and the full range of civil and criminal penalties available to the FDA.
Good Manufacturing Practices
The FDA, the EMA and other regulatory agencies regulate and inspect equipment, facilities, and processes used in the manufacturing of pharmaceutical and biologic products prior to approving a product. If, after receiving clearance from regulatory agencies, a company makes a material change in manufacturing equipment, location, or process, additional regulatory review and approval may be required. We also must adhere to current Good Manufacturing Practices and product-specific regulations enforced by the FDA following product approval. The FDA, the EMA and other regulatory agencies also conduct periodic visits to re-inspect equipment, facilities, and processes following the initial approval of a product. If, as a result of these inspections, it is determined that our equipment, facilities, or processes do not comply with applicable regulations and conditions of product approval, regulatory agencies may seek civil, criminal, or administrative sanctions or remedies against us, including the suspension of our manufacturing operations.
Good Clinical Practices
The FDA, the EMA and other regulatory agencies promulgate regulations and standards, commonly referred to as current Good Clinical Practices (cGCP), for designing, conducting, monitoring, auditing and reporting the results of clinical trials to ensure that the data and results are accurate and that the trial participants are adequately protected. The FDA, the EMA and other regulatory agencies enforce cGCP through periodic inspections of trial sponsors, principal investigators and trial sites. If our study sites fail to comply with applicable cGCP, the clinical data generated in our clinical trials may be deemed unreliable and relevant regulatory agencies may require us to perform additional clinical trials before approving our marketing applications.
Orphan Drug Act
Under the U.S. Orphan Drug Act, the FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which generally is a disease or condition that affects fewer than 200,000 individuals in the U.S. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan exclusivity, i.e., the FDA may not approve any other applications to market the same drug for the same indication for a period of seven years following marketing approval, except in certain very limited circumstances, such as if the later product is shown to be clinically superior to the orphan product. Legislation similar to the U.S. Orphan Drug Act has been enacted in other countries, including within the European Union.
In the U.S., the federal government regularly considers reforming health care coverage and costs. For example, reforms to Medicare have reduced the reimbursement rates for many of our products. Effective January 1, 2005, Medicare pays physicians and suppliers that furnish our products under a payment methodology using average sales price (ASP) information. Manufacturers, including us, are required to provide ASP information to the Centers for Medicare and Medicaid Services on a quarterly basis. The manufacturer-submitted information is used to compute Medicare payment rates, which are set at ASP plus 6 percent and updated quarterly. There is a mechanism for comparison of such payment rates to widely available market prices, which could cause further decreases in Medicare payment rates, although this mechanism has yet to be utilized. Effective January 1, 2006, Medicare began to use the same payment methodology to determine Medicare rates paid for products furnished by hospital outpatient departments. As of January 1, 2010, the reimbursement rate in the hospital outpatient setting is ASP plus 4 percent. If a manufacturer is found to have made a misrepresentation in the reporting of ASP, the statute provides for civil monetary penalties of up to $10,000 for each misrepresentation and for each day in which the misrepresentation was applied.
Another payment reform is the addition of an expanded prescription drug benefit for all Medicare beneficiaries known as Medicare Part D. This is a voluntary benefit that is provided through private plans under contractual arrangements with the federal government. Like pharmaceutical coverage through private health insurance, Part D plans establish formularies that govern the drugs and biologicals that will be offered and the out- of-pocket obligations for such products. In addition, plans negotiate discounts from drug manufacturers and pass on some of those savings to Medicare beneficiaries.
In the U.S., Congress has considered legislation to reform the healthcare system that likely would have an adverse impact on our revenues, by, among other things, increasing the current Medicaid rebate, adding a subsidy for certain out-of-pocket patient costs under Medicare Part D, and assessing a pharmaceutical manufacturer fee. In addition, the passage in the U.S. of legislation defining a pathway for biosimilar products likely would have an adverse impact on our revenues.
Future legislation or regulatory actions implementing recent or future legislation may have a significant effect on our business. Our ability to successfully commercialize products may depend in part on the extent to which reimbursement for the costs of our products and related treatments will be available in the U.S. and worldwide from government health administration authorities, private health insurers and other organizations. Substantial uncertainty exists as to the reimbursement status of newly approved health care products by third party payors.
We also participate in the Medicaid rebate program. Under the Medicaid rebate program, we pay a rebate for each unit of product reimbursed by Medicaid. The amount of the rebate for each product is set by law as the larger of 15.1% of average manufacturer price (AMP) or the difference between AMP and the best price available from us to any commercial or non-governmental customer. The rebate amount must be adjusted upward where the AMP for a products first full quarter of sales, when adjusted for increases in the Consumer Price Index Urban exceeds the AMP for the current quarter with the upward adjustment equal to the excess amount. The rebate amount is required to be recomputed each quarter based on our report of current AMP and best price for each of our products to the Centers for Medicare and Medicaid Services. The terms of our participation in the program imposes a requirement for us to report revisions to AMP or best price within a period not to exceed 12 quarters from the quarter in which the data was originally due. Any such revisions could have the impact of increasing or decreasing our rebate liability for
prior quarters, depending on the direction of the revision. In addition, if we were found to have knowingly submitted false information to the government, the statute provides for civil monetary penalties in the amount not to exceed $100,000 per item of false information in addition to other penalties available to the government.
The availability of federal funds to pay for our products under the Medicaid and Medicare Part B programs requires that we extend discounts to a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of poor Medicare beneficiaries.
We also make our products available for purchase by authorized users of the Federal Supply Schedule (FSS) of the General Services Administration pursuant to our FSS contract with the Department of Veterans Affairs. Under the Veterans Health Care Act of 1992 (VHC Act) we are required to offer deeply discounted FSS contract pricing to four federal agencies the Department of Veterans Affairs, the Department of Defense, the Coast Guard and the Public Health Service (including the Indian Health Service) for federal funding to be made available for reimbursement of any of our products under the Medicaid program and for our products to be eligible to be purchased by those four federal agencies and certain federal grantees. FSS pricing to those four federal agencies must be equal to or less than the Federal Ceiling Price, which is discounted, at a minimum, 24% from the Non-Federal Average Manufacturer Price for the prior fiscal year. In addition, if we are found to have knowingly submitted false information to the government, the VHC Act provides for civil monetary penalties of up to $100,000 per false item of information in addition to other penalties available to the government. Under the 2008 National Defense Authorization Act, we are required to treat the TRICARE retail pharmacy program, which reimburses military personnel for drug purchases from retail pharmacies, as an element of the Department of Defense for purposes of the procurement of drugs by federal agencies to ensure that the pharmaceuticals paid for by the Department of Defense under the TRICARE retail pharmacy program are subject to the pricing standards of the VHC Act.
We are also subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback laws and false claims laws. Anti-kickback laws make it illegal for a prescription drug manufacturer to solicit, offer, receive, or pay any remuneration in exchange for, or to induce, the referral of business, including the purchase or prescription of a particular drug. Due to the breadth of the statutory provisions and the absence of guidance in the form of regulations and very few court decisions addressing industry practices, it is possible that our practices might be challenged under anti-kickback or similar laws. False claims laws prohibit anyone from knowingly and willingly presenting, or causing to be presented for payment to third party payors (including Medicare and Medicaid) claims for reimbursed drugs or services that are false or fraudulent, claims for items or services not provided as claimed, or claims for medically unnecessary items or services. In addition, several states require that companies implement compliance programs or comply with industry ethics codes, adopt spending limits, and report to state governments any gifts, compensation, and other remuneration provided to physicians. Federal legislation, the Physician Payments Sunshine Act of 2009, also has been proposed that would require disclosure to the federal government of payments to physicians. Our activities relating to the sale and marketing of our products may be subject to scrutiny under these laws. Violations of these laws may be punishable by criminal or civil sanctions, including fines and civil monetary penalties, as well as the possibility of exclusion from federal health care programs (including Medicare and Medicaid). In addition, private individuals may bring similar actions.
Our activities could be subject to challenge for the reasons discussed above and due to the broad scope of these laws and the increasing attention being given to them by law enforcement authorities. Further, there are an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information. Many of these laws contain ambiguities as to what is required to comply with the laws. Given the lack of clarity in laws and their implementation, our reporting actions could be subject to the penalty provisions of the pertinent state authorities.
Foreign Corrupt Practices Act
We are also subject to the U.S. Foreign Corrupt Practices Act (FCPA), which prohibits corporations and individuals from paying, offering to pay, or authorizing the payment of anything of value to any foreign government
official, government staff member, political party, or political candidate in an attempt to obtain or retain business or to otherwise influence a person working in an official capacity. The FCPA also requires public companies to make and keep books and records that accurately and fairly reflect their transactions and to devise and maintain an adequate system of internal accounting controls.
We conduct relevant research at all of our research facilities in the U.S. in compliance with the current U.S. National Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules (NIH Guidelines) and all other applicable federal and state regulations. By local ordinance, we are required to, among other things, comply with the NIH Guidelines in relation to our facilities in Cambridge, Massachusetts, San Diego, California, and Research Triangle Park, North Carolina and are required to operate pursuant to certain permits.
Our present and future business has been and will continue to be subject to various other laws and regulations. Various laws, regulations and recommendations relating to safe working conditions, laboratory practices, the experimental use of animals, and the purchase, storage, movement, import and export and use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research work are or may be applicable to our activities. Certain agreements entered into by us involving exclusive license rights may be subject to national or supranational antitrust regulatory control, the effect of which cannot be predicted. The extent of government regulation, which might result from future legislation or administrative action, cannot accurately be predicted.
We are focused on the manufacture of biologics. The chart below outlines the location of our primary manufacturing locations and products manufactured therein.
In April 2009, the FDA approved our high titer process for the production of TYSABRI. Similar approval was obtained from the EMA in December 2008. The new, higher-yield process is being used to manufacture TYSABRI at our plant in Research Triangle Park, NC.
The Roche Group, through its wholly-owned member Genentech, is responsible for all worldwide manufacturing activities for bulk RITUXAN and has sourced the manufacturing of certain bulk RITUXAN requirements to an independent third party.
We are in the final stages of constructing a large-scale biologics manufacturing facility in Hillerød, Denmark which is intended to manufacture large molecule products. The first phase is complete, which included construction of a labeling and packaging facility, administrative building and laboratory facility, installation of major equipment, and partial completion of a bulk manufacturing facility. The second phase of the project, which we began in January 2007, involves the completion and fit out of the bulk manufacturing facility and construction of a warehouse. The large scale manufacturing facility is scheduled to be ready for commercial production in late 2011. Recent manufacturing improvements have resulted in favorable production yields on TYSABRI, that have reduced our expected capacity requirements. As a result, we are evaluating several alternatives, including whether to delay completion of the facility.
We source all of our fill-finish and the majority of final product storage operations for our products, along with a substantial part of our packaging operations, to a concentrated group of third party contractors. Many of the raw
materials and supplies required for the production of AVONEX, TYSABRI and FUMADERM are available from various suppliers in quantities adequate to meet our needs. However, due to the unique nature of the production of our products, we do have single source providers of several raw materials. We make efforts to qualify new vendors and to develop contingency plans so that production is not impacted by short-term issues associated with single source providers. Each of our third party service providers, suppliers and manufacturers is subject to continuing inspection by the FDA or comparable agencies in other jurisdictions. Any delay, interruption or other issues that arise in the manufacture, fill-finish, packaging, or storage of our products, including as a result of a failure of our facilities or the facilities or operations of third parties to pass any regulatory agency inspection, could significantly impair our ability to sell our products.
Important factors that could adversely affect our manufacturing operations are discussed in the Risk Factors section of this report.
As of December 31, 2009, we had approximately 4,750 employees.
Our Executive Officers
The following is a list of our executive officers, their ages as of February 9, 2010 and their principal positions.
Reference to our or us in the following descriptions include Biogen Idec and IDEC Pharmaceuticals Corporation, and references to the merger mean the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in November 2003.
James C. Mullen is our Chief Executive Officer and President and is a director, and has served in these positions since the merger. Mr. Mullen was formerly Chairman of the Board and Chief Executive Officer of Biogen, Inc. He was named Chairman of the Board of Directors of Biogen, Inc. in July 2002, after being named Chief Executive Officer and President of Biogen, Inc. in June 2000. Mr. Mullen joined Biogen, Inc. in 1989 as Director, Facilities and Engineering. He was named Biogen, Inc.s Vice President, Operations in 1992. From 1996 to 1999, Mr. Mullen served as Vice President, International, with responsibility for building all Biogen, Inc. operations outside North America. From 1984 to 1988, Mr. Mullen held various positions at SmithKline Beckman Corporation (now GlaxoSmithKline plc). Mr. Mullen is a member of the board of directors and executive committee of the Biotechnology Industry Organization (BIO) and is a former chairman of the board of BIO. Mr. Mullen has been a director of PerkinElmer, Inc. since 2004. Mr. Mullen will retire as Chief Executive Officer and President on June 8, 2010 and will retire as a director at our 2010 Annual Meeting of Stockholders.
Susan H. Alexander is our Executive Vice President, General Counsel and Corporate Secretary and has served in these positions since January 2006. Prior to that, Ms. Alexander served as the Senior Vice President, General Counsel and Corporate Secretary of PAREXEL International Corporation since September 2003. From June 2001 to September 2003, Ms. Alexander served as General Counsel of IONA Technologies. Prior to that, Ms. Alexander
served as Counsel at Cabot Corporation from January 1995 to May 2001. Prior to that, Ms. Alexander was a partner at the law firms of Hinckley, Allen & Snyder and Fine & Ambrogne.
Paul J. Clancy is our Executive Vice President, Finance and Chief Financial Officer and has served in that position since August 2007. Mr. Clancy joined Biogen Idec in 2001, and has held several senior executive positions, including Vice President of Business Planning, Portfolio Management and U.S. Marketing, and Senior Vice President of Finance with responsibilities for leading the Treasury, Tax, Investor Relations and Business Planning groups. Prior to joining Biogen Idec, he spent 13 years at PepsiCo, serving in a range of financial and general management positions. He holds a B.S. in finance from Babson College and a M.B.A. from Columbia University.
Robert A. Hamm is our Chief Operating Officer and has served in that position since March 2009. Previously, Mr. Hamm served as Executive Vice President, Pharmaceutical Operations & Technology from October 2007 to March 2009; Senior Vice President, Neurology Strategic Business Unit from January 2006 to October 2007; Senior Vice President, Immunology Business Unit from the merger until January 2006; and in the same capacity with Biogen, Inc. from November 2002 to November 2003. Before that, he served as Senior Vice President Europe, Africa, Canada and Middle East from October 2001 to November 2002. Prior to that, Mr. Hamm served as Vice President Sales and Marketing of Biogen, Inc. from October 2000 to October 2001. Mr. Hamm previously served as Vice President Manufacturing from June 1999 to October 2000, Director, Northern Europe and Distributors from November 1996 until June 1999 and Associate Director, Logistics from April 1994 until November 1996. From 1987 until April 1994, Mr. Hamm held a variety of management positions at Syntex Laboratories Corporation, including Director of Operations and New Product Planning, and Manager of Materials, Logistics and Contract Manufacturing. Mr. Hamm has been a member of the board of managers of Progenitor Cell Therapy, LLC. since 2006 and was a director of Inhibitex, Inc. from 2005 to 2009.
Michael Lytton is our Executive Vice President, Corporate and Business Development, and has served in that position since February 2009. From 2001 to January 2009, he was a General Partner at Oxford Bioscience Partners, a venture capital firm. Prior to that, he was partner, chairman of the Technology Group and a member of the Executive Committee of the law firm Edwards, Angell, Palmer & Dodge LLP. Prior to that, Mr. Lytton was a junior partner and co-chairman of the Biotechnology Practice of the law firm WilmerHale. Mr. Lytton was a member of the supervisory board of GPC Biotech AG from 2001 to 2009.
Michael F. MacLean is our Senior Vice President and Chief Accounting Officer and has served in that position since December 2006. Mr. MacLean joined us in October 2006 as Senior Vice President. Prior to joining us, Mr. MacLean was a managing director of Huron Consulting, where he provided support regarding financial reporting to management and boards of directors of Fortune 500 companies. From June 2002 to October 2005, Mr. MacLean was a partner at KPMG and he was a partner of Arthur Andersen LLP from September 1999 to May 2002.
Craig Eric Schneier, Ph.D. is our Executive Vice President, Human Resources, Public Affairs and Communications and has served in that position since October 2007. Prior to that he was Executive Vice President, Human Resources from November 2003 to October 2007. Dr. Schneier served as Executive Vice President, Human Resources of Biogen, Inc., a position he held from January 2003 until the merger. He joined Biogen, Inc. in 2001 as Senior Vice President, Strategic Organization Design and Effectiveness, after having served as an external consultant to us for eight years. Prior to joining Biogen, Inc., Dr. Schneier was president of his own management consulting firm in Princeton, NJ, where he provided consulting services to over 70 of the Fortune 100 companies, as well as several of the largest European and Asian firms. Dr. Schneier held a tenured professorship at the University of Marylands Smith School of Business and has held teaching positions at the business schools of the University of Michigan, Columbia University, and at the Tuck School of Business, Dartmouth College.
Our current and future revenues depend upon continued sales of our three principal products, AVONEX, RITUXAN and TYSABRI, which represented substantially all of our total revenues during 2009. Although we have developed and continue to develop additional products for commercial introduction, we expect to be substantially dependent on sales from these three products for many years. Any negative developments relating to any of these products, such as safety or efficacy issues, the introduction or greater acceptance of competing products, including biosimilars, or adverse regulatory or legislative developments may reduce our revenues and adversely affect our results of operations.
Market acceptance and sales growth of TYSABRI are important to our success.
TYSABRI is expected to drive additional revenue growth over the next several years. If we are not successful in growing sales of TYSABRI, it would materially and adversely affect our growth and plans for the future.
TYSABRIs sales growth will depend upon its acceptance by the medical community and patients, which cannot be certain given the significant restrictions on use and the significant safety warnings in the label. Since we reintroduced TYSABRI to the market in July 2006, some patients taking TYSABRI have been diagnosed with progressive multifocal leukoencephalopathy (PML), a rare but serious brain infection described in the TYSABRI label. If the incidence of PML were to exceed the rate implied by the TYSABRI label, it could prompt regulatory review and result in significant changes to the label or market withdrawal. The recently revised prescribing information for TYSABRI indicates that the risk of developing PML increases with longer treatment duration, with limited experience beyond 3 years of treatment. This may cause prescribing physicians or patients to suspend treatment with TYSABRI to mitigate the duration risk, which could limit sales. Further increases in incidence rates at various durations of exposure could harm acceptance or limit sales growth. Additional regulatory restrictions on the use of TYSABRI or safety-related label changes, including enhanced risk management programs, whether as a result of additional cases of PML or otherwise, may significantly reduce expected revenues and require significant expense and management time to address the associated legal and regulatory issues.
As a relatively new entrant to a maturing MS market, TYSABRI sales may be more sensitive to additional new competing products. A number of such products are expected to be approved for use in MS beginning in 2010. If these products have a similar or more attractive overall profile in terms of efficacy, convenience and safety, future sales of TYSABRI could be limited, which would reduce our revenues.
Our long-term success depends upon the successful development and commercialization of other product candidates.
Our long-term viability and growth will depend upon the successful development and commercialization of other products from our research and development activities. Product development and commercialization are very expensive and involve a high degree of risk. Only a small number of research and development programs result in the commercialization of a product. Success in preclinical work or early stage clinical trials does not ensure that later stage or larger scale clinical trials will be successful. Even if later stage clinical trials are successful, regulatory authorities may disagree with our view of the data or require additional studies.
Conducting clinical trials is a complex, time-consuming and expensive process. Our ability to complete our clinical trials in a timely fashion depends in large part on a number of key factors including protocol design, regulatory and institutional review board approval, the rate of patient enrollment in clinical trials, and compliance with extensive current good clinical practice requirements. We have opened clinical sites and are enrolling patients in a number of new countries where our experience is more limited, and we are in many cases using the services of third-party clinical trial providers. If we fail to adequately manage the design, execution and regulatory aspects of our large, complex and diverse clinical trials, our studies and ultimately our regulatory approvals may be delayed or we may fail to gain approval for our product candidates altogether.
Our product pipeline includes several small molecule drug candidates. Our small molecule drug discovery platform is not as well developed as our biologics platform, and we will have to make a significant investment of
time and resources to expand our capabilities in this area. Currently, third party manufacturers supply substantially all of our clinical requirements for small molecules. If these manufacturers fail to deliver sufficient quantities of such drug candidates in a timely and cost-effective manner, it could adversely affect our small molecule drug discovery efforts. If we decide to manufacture clinical or commercial supplies of any small molecule drugs in our own facilities, we will need to invest substantial additional funds and recruit qualified personnel to develop our small molecule manufacturing capabilities.
Adverse safety events can negatively affect our business and stock price.
Adverse safety events involving our marketed products may have a negative impact on our commercialization efforts. Later discovery of safety issues with our products that were not known at the time of their approval by the FDA could cause product liability events, additional regulatory scrutiny and requirements for additional labeling, withdrawal of products from the market and the imposition of fines or criminal penalties. Any of these actions could result in, among other things, material write-offs of inventory and impairments of intangible assets, goodwill and fixed assets. In addition, the reporting of adverse safety events involving our products and public rumors about such events could cause our stock price to decline or experience periods of volatility.
The biotechnology and pharmaceutical industry is intensely competitive. We compete in the marketing and sale of our products, the development of new products and processes, the acquisition of rights to new products with commercial potential and the hiring and retention of personnel. We compete with biotechnology and pharmaceutical companies that have a greater number of products on the market and in the product pipeline, greater financial and other resources and other technological or competitive advantages. One or more of our competitors may receive patent protection that dominates, blocks or adversely affects our product development or business, may benefit from significantly greater sales and marketing capabilities, and may develop products that are accepted more widely than ours. The introduction of more efficacious, safer, cheaper, or more convenient alternatives to our products could reduce our revenues and the value of our product development efforts. Potential governmental action in the future could provide a means for competition from developers of follow-on biologics, which could compete on price and differentiation with products that we now or could in the future market.
In addition to competing directly with products that are marketed by substantial pharmaceutical competitors, AVONEX, RITUXAN and TYSABRI also face competition from off-label uses of drugs approved for other indications. Some of our current competitors are also working to develop alternative formulations for delivery of their products, which may in the future compete with ours.
We depend, to a significant extent, on reimbursement from third party payors and a reduction in the extent of reimbursement could reduce our product sales and revenue.
Sales of our products are dependent, in large part, on the availability and extent of reimbursement from government health administration authorities, private health insurers and other organizations. Changes in government regulations or private third-party payors reimbursement policies may reduce reimbursement for our products and adversely affect our future results.
In the U.S., there have been numerous proposals considered at the federal and state levels for comprehensive reforms of health care and its cost, and it is likely that federal and state legislatures and health agencies will continue to focus on health care reform in the future. Congress has considered legislation to reform the U.S. health care system by expanding health insurance coverage, reducing health care costs and making other changes. While health care reform may increase the number of patients who have insurance coverage for our products, it may also include cost containment measures that adversely affect reimbursement for our products. Congress has also considered legislation to change the Medicare reimbursement system for outpatient drugs, increase the amount of rebates that manufacturers pay for coverage of their drugs by Medicaid programs and facilitate the importation of lower-cost prescription drugs that are marketed outside the U.S. Some states are also considering legislation that would control the prices of drugs, and state Medicaid programs are increasingly requesting manufacturers to pay supplemental rebates and requiring prior authorization by the state program for use of any drug for which supplemental rebates are
not being paid. Managed care organizations continue to seek price discounts and, in some cases, to impose restrictions on the coverage of particular drugs. Government efforts to reduce Medicaid expenses may lead to increased use of managed care organizations by Medicaid programs. This may result in managed care organizations influencing prescription decisions for a larger segment of the population and a corresponding constraint on prices and reimbursement for our products.
We encounter similar regulatory and legislative issues in most other countries. In the European Union and some other international markets, the government provides health care at low cost to consumers and regulates pharmaceutical prices, patient eligibility or reimbursement levels to control costs for the government-sponsored health care system. This international system of price regulations may lead to inconsistent prices. Within the European Union and in other countries, the availability of our products in some markets at lower prices undermines our sales in some markets with higher prices. Additionally, certain countries set prices by reference to the prices in other countries where our products are marketed. Thus, our inability to secure adequate prices in a particular country may also impair our ability to obtain acceptable prices in existing and potential new markets. This may create the opportunity for third party cross border trade or influence our decision to sell or not to sell a product, thus affecting our geographic expansion plans.
When a new medical product is approved, the availability of government and private reimbursement for that product is uncertain, as is the amount for which that product will be reimbursed. We cannot predict the availability or amount of reimbursement for our product candidates.
We depend on collaborators for both product and royalty revenue and the clinical development of future collaboration products, which are outside of our full control.
Collaborations between companies on products or programs are a common business practice in the biotechnology industry. Out-licensing typically allows a partner to collect up front payments and future milestone payments, share the costs of clinical development and risk of failure at various points, and access sales and marketing infrastructure and expertise in exchange for certain financial rights to the product or program going to the in-licensing partner. In addition, the obligation of in-licensees to pay royalties or share profits generally terminates upon expiration of the related patents. We have a number of collaborators and partners, and have both in-licensed and out-licensed several products and programs. These collaborations are subject to several risks:
In addition, under our collaboration agreement with Genentech, the successful development and commercialization of the first anti-CD20 product acquired or developed by Genentech will decrease our percentage of the collaborations co-promotion profits.
If we do not successfully execute our growth initiatives through the acquisition, partnering and in-licensing of products, technologies or companies, our future performance could be adversely affected.
We anticipate growing through internal development projects as well as external opportunities, which include the acquisition, partnering and in-licensing of products, technologies and companies or the entry into strategic alliances and collaborations. The availability of high quality opportunities is limited and we are not certain that we will be able to identify candidates that we and our shareholders consider suitable or complete transactions on terms that are acceptable to us and our shareholders. In order to pursue such opportunities, we may require significant
additional financing, which may not be available to us on favorable terms, if at all. Even if we are able to successfully identify and complete acquisitions, we may not be able to integrate them or take full advantage of them and therefore may not realize the benefits that we expect. In addition, third parties may be reluctant to partner with us due to the uncertainty created by the presence on our Board of Directors of two individuals nominated by an activist shareholder and the possibility that activist shareholders may gain additional representation on or control of our Board of Directors. If we are unsuccessful in our external growth program, we may not be able to grow our business significantly and we may incur asset impairment charges as a result of acquisitions that are not successful.
If we fail to comply with the extensive legal and regulatory requirements affecting the health care industry, we could face increased costs, penalties and a loss of business.
Our activities, and the activities of our collaborators and third party providers, are subject to extensive government regulation and oversight both in the U.S. and in foreign jurisdictions. The FDA and comparable agencies in other jurisdictions directly regulate many of our most critical business activities, including the conduct of preclinical and clinical studies, product manufacturing, advertising and promotion, product distribution, adverse event reporting and product risk management. States increasingly have been placing greater restrictions on the marketing practices of health care companies. In addition, pharmaceutical and biotechnology companies have been the target of lawsuits and investigations alleging violations of government regulation, including claims asserting submission of incorrect pricing information, impermissible off-label promotion of pharmaceutical products, payments intended to influence the referral of federal or state health care business, submission of false claims for government reimbursement, antitrust violations, or violations related to environmental matters. Violations of governmental regulation may be punishable by criminal and civil sanctions, including fines and civil monetary penalties and exclusion from participation in government programs, including Medicare and Medicaid. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received from government payors, or pay additional rebates and interest if we are found to have miscalculated the pricing information we have submitted to the government. Whether or not we have complied with the law, an investigation into alleged unlawful conduct could increase our expenses, damage our reputation, divert management time and attention and adversely affect our business.
If we fail to meet the stringent requirements of governmental regulation in the manufacture of our products, we could incur substantial remedial costs and a reduction in sales.
We and our third party providers are generally required to maintain compliance with current Good Manufacturing Practice and are subject to inspections by the FDA or comparable agencies in other jurisdictions to confirm such compliance. In addition, the FDA must approve any significant changes to our suppliers or manufacturing methods. If we or our third party service providers cannot demonstrate ongoing current Good Manufacturing Practice compliance, we may be required to withdraw or recall product and interrupt commercial supply of our products. Any delay, interruption or other issues that arise in the manufacture, fill-finish, packaging, or storage of our products as a result of a failure of our facilities or the facilities or operations of third parties to pass any regulatory agency inspection could significantly impair our ability to develop and commercialize our products. Significant noncompliance could also result in the imposition of monetary penalties or other civil or criminal sanctions. This non-compliance could increase our costs, cause us to lose revenue or market share and damage our reputation.
Changes in laws affecting the health care industry could adversely affect our revenues and profitability.
We and our collaborators and third party providers operate in a highly regulated industry. As a result, governmental actions may adversely affect our business, operations or financial condition, including:
The enactment in the U.S. of health care reform, possible legislation which could ease the entry of competing follow-on biologics in the marketplace, new legislation or implementation of existing statutory provisions on importation of lower-cost competing drugs from other jurisdictions, and legislation on comparative effectiveness research are examples of previously enacted and possible future changes in laws that could adversely affect our business. In addition, the Food and Drug Administration Amendments Act of 2007 included new authorization for the FDA to require post-market safety monitoring, along with an expanded clinical trials registry and clinical trials results database, and expanded authority for the FDA to impose civil monetary penalties on companies that fail to meet certain commitments.
Problems with manufacturing or with inventory planning could result in inventory shortages, product recalls and increased costs.
Biologics manufacturing is extremely susceptible to product loss due to contamination, equipment failure, or vendor or operator error. In addition, we may need to close a manufacturing facility for an extended period of time due to microbial, viral or other contamination. Any of these events could result in shipment delays or product recalls, impairing our ability to supply products in existing markets or expand into new markets. In the past, we have taken inventory write-offs and incurred other charges and expenses for products that failed to meet specifications, and we may incur similar charges in the future.
We rely solely on our manufacturing facility in Research Triangle Park, North Carolina for the production of TYSABRI. Our global bulk supply of TYSABRI depends on the uninterrupted and efficient operation of this facility, which could be adversely affected by equipment failures, labor shortages (whether as a result of pandemic flu outbreak or otherwise), natural disasters, power failures and numerous other factors. If we are unable to meet demand for TYSABRI for any reason, we would need to rely on a limited number of qualified third party contract manufacturers. We cannot be certain that we could reach agreement on reasonable terms, if at all, with those manufacturers or that the FDA would approve our use of such manufacturers on a timely basis, if at all. Moreover, the transition of our manufacturing process to a third party could take a significant amount of time and involve significant expense.
Our investments in properties, including our manufacturing facilities, may not be fully realizable
We own or lease real estate primarily consisting of buildings that contain research laboratories, office space, and biologic manufacturing operations, some of which are located in markets that are experiencing high vacancy rates and decreasing property values. If we decide to consolidate or co-locate certain aspects of our business operations, for strategic or other operational reasons, we may dispose of one or more of our properties.
Due to reduced expectations of product demand, improved yields on production and other factors, we may not fully utilize our manufacturing facilities at normal levels resulting in idle time at facilities or substantial excess manufacturing capacity. We are always evaluating our current manufacturing strategy, and may pursue alternatives that include delaying the completion of our Denmark facility or disposing of manufacturing facilities.
If any of our owned properties are held for sale, or disposed of, we may not realize the full investment in these properties and incur significant impairment charges if the fair value of the properties were determined to be lower than their book value. In addition, if we decide to fully or partially vacate a leased property, we may incur significant cost, including lease termination fees, rent expense in excess of sublease income and impairment of leasehold improvements.
We rely on third parties to provide services in connection with the manufacture of our products and, in some instances, manufacture the product itself.
We rely on Genentech for all RITUXAN manufacturing. Genentech relies on a third party to manufacture certain bulk RITUXAN requirements. If Genentech or any third party upon which it relies does not manufacture or fill-finish RITUXAN in sufficient quantities and on a timely and cost-effective basis, or if Genentech or any third party does not obtain and maintain all required manufacturing approvals, our business could be harmed.
We also source all of our fill-finish and the majority of our final product storage operations, along with a substantial portion of our packaging operations, to a concentrated group of third party contractors. Any third party we use to fill-finish, package or store our products to be sold in the U.S. must be licensed by the FDA. As a result, alternative third party providers may not be readily available on a timely basis. The manufacture of products and product components, fill-finish, packaging and storage of our products require successful coordination among us and multiple third party providers. Our inability to coordinate these efforts, the lack of capacity available at a third party contractor or any other problems with the operations of these third party contractors could require us to delay shipment of saleable products; recall products previously shipped or impair our ability to supply products at all. This could increase our costs, cause us to lose revenue or market share, diminish our profitability or damage our reputation.
Due to the unique manner in which our products are manufactured, we rely on single source providers of several raw materials. We make efforts to qualify new vendors and to develop contingency plans so that production is not impacted by short-term issues associated with single source providers. Nonetheless, our business could be materially impacted by long-term or chronic issues associated with single source providers.
Our effective tax rate may fluctuate and we may incur obligations in tax jurisdictions in excess of accrued amounts.
As a global biotechnology company, we are subject to taxation in numerous countries, states and other jurisdictions. As a result, our effective tax rate is derived from a combination of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places. Our effective tax rate, however, may be different than experienced in the past due to numerous factors, including changes in the mix of our profitability from country to country, the results of audits of our tax filings, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an effect on our business and results of operations.
In addition, our inability to secure or sustain acceptable arrangements with tax authorities and previously enacted or future changes in the tax laws, among other things, may require us to accrue for future tax payments in excess of amounts accrued in our financial statements
The Obama administration announced several proposals to reform U.S. tax rules, including proposals that may reduce or eliminate the deferral of U.S. income tax on our unrepatriated earnings, potentially requiring those earnings to be taxed at the U.S. federal income tax rate, reduce or eliminate our ability to claim foreign tax credits, and eliminate various tax deductions until foreign earnings are repatriated to the U.S. Our future reported financial results may be adversely affected by tax rule changes which restrict or eliminate our ability to claim foreign tax credits or deduct expenses attributable to foreign earnings, or otherwise affect the treatment of our unrepatriated earnings.
The growth of our business depends on our ability to attract and retain qualified personnel and key relationships.
The achievement of our commercial, research and development and external growth objectives depends upon our ability to attract and retain qualified scientific, manufacturing, sales and marketing and executive personnel and develop and maintain relationships with qualified clinical researchers and key distributors. Competition for these people and relationships is intense and comes from a variety of sources, including pharmaceutical and biotechnology companies, universities and non-profit research organizations. It may be more difficult for us to attract and retain these people and relationships due to the uncertainty created by the presence on our Board of Directors of two
individuals nominated by an activist shareholder and the possibility that activist shareholders may gain additional representation on or control of our Board of Directors. Our recruitment and retention efforts may also be adversely affected by the announcement that our Chief Executive Officer will retire from that position in June 2010 and the retirement of our President, Research and Development in October 2009. We are currently conducting searches for successors to our Chief Executive Officer and President, Research and Development.
We are increasing our presence in international markets, which subjects us to many risks, such as:
In addition, our international operations are subject to regulation under U.S. law. For example, the Foreign Corrupt Practices Act prohibits U.S. companies and their representatives from offering, promising, authorizing or making payments to foreign officials for the purpose of obtaining or retaining business abroad. In many countries, the health care professionals we regularly interact with may meet the definition of a foreign official for purposes of the Foreign Corrupt Practices Act. Failure to comply with domestic or foreign laws could result in various adverse consequences, including possible delay in approval or refusal to approve a product, recalls, seizures, withdrawal of an approved product from the market, and the imposition of civil or criminal sanctions.
The presence of directors nominated by an activist shareholder, and the possibility that activist shareholders may gain additional representation on or control of our Board of Directors could cause uncertainty about the direction of our business.
During 2008 and 2009, proxy contests commenced by entities affiliated with Carl Icahn resulted in the 2009 election of two of the Icahn nominees to our Board of Directors. In November 2009, another activist shareholder publicly advocated for certain changes at our company. In January 2010, we received a notice from Icahn Partners and certain of its affiliates nominating three individuals for election to our Board of Directors at the 2010 annual meeting and proposing to amend our bylaws to set the number of directors at twelve. These and other existing or potential shareholders may attempt to gain additional representation on or control of our Board of Directors, the possibility of which may create uncertainty regarding the direction of our business. Perceived uncertainties as to our future direction may result in the loss of potential acquisitions, collaborations or in-licensing opportunities, and may make it more difficult to attract and retain qualified personnel and business partners. In addition, disagreement among our directors about the direction of our business could impair our ability to effectively execute our strategic plan.
Our 2008 and 2009 proxy contests were disruptive to our operations and caused us to incur substantial costs. The SEC has recently proposed to give shareholders the ability to include their director nominees and their proposals relating to a shareholder nomination process in company proxy materials, which would make it easier for activists to nominate directors to our Board of Directors. If the SEC implements its proxy access proposal, we may face an increase in the number of shareholder nominees for election to our Board of Directors. Future proxy contests and the presence of additional activist shareholder nominees on our Board of Directors could interfere with our ability to execute our strategic plan, be costly and time-consuming, disrupt our operations and divert the attention of management and our employees.
If we are unable to adequately protect and enforce our intellectual property rights, our competitors may take advantage of our development efforts or our acquired technology.
We have filed numerous patent applications in the U.S. and various other countries seeking protection of the processes, products and other inventions originating from our research and development. Patents have been issued on many of these applications. We have also obtained rights to various patents and patent applications under licenses with third parties, which provide for the payment of royalties by us. The ultimate degree of patent protection that will be afforded to biotechnology products and processes, including ours, in the U.S. and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts and lawmakers in these countries. Our patents may not afford us substantial protection or commercial benefit. Similarly, our pending patent applications or patent applications licensed from third parties may not ultimately be granted as patents and we may not prevail if patents that have been issued to us are challenged in court. In addition, pending legislation to reform the patent system and court decisions or patent office regulations that place additional restrictions on patent claims or that facilitate patent challenges could also reduce our ability to protect our intellectual property rights. If we cannot prevent others from exploiting our inventions, we will not derive the benefit from them that we currently expect.
We also rely upon unpatented trade secrets and other proprietary information, and we cannot assure that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technology, or that we can meaningfully protect such rights. We require our employees, consultants, outside scientific collaborators, scientists whose research we sponsor and other advisers to execute confidentiality agreements upon the commencement of employment or consulting relationships with us. These agreements may not provide meaningful protection or adequate remedies for our unpatented proprietary information in the event of use or disclosure of such information.
If our products infringe the intellectual property rights of others, we may incur damages and be required to incur the expense of obtaining a license.
A substantial number of patents have already been issued to other biotechnology and pharmaceutical companies. To the extent that valid third party patent rights cover our products or services, we or our strategic collaborators would be required to seek licenses from the holders of these patents in order to manufacture, use or sell these products and services, and payments under them would reduce our profits from these products and services. We are currently unable to predict the extent to which we may wish or be required to acquire rights under such patents and the availability and cost of acquiring such rights, or whether a license to such patents will be available on acceptable terms or at all. There may be patents in the U.S. or in foreign countries or patents issued in the future that are unavailable to license on acceptable terms. Our inability to obtain such licenses may hinder our ability to manufacture and market our products.
Uncertainty over intellectual property in the biotechnology industry has been the source of litigation, which is inherently costly and unpredictable.
We are aware that others, including various universities and companies working in the biotechnology field, have filed patent applications and have been granted patents in the U.S. and in other countries claiming subject matter potentially useful to our business. Some of those patents and patent applications claim only specific products or methods of making such products, while others claim more general processes or techniques useful or now used in the biotechnology industry. There is considerable uncertainty within the biotechnology industry about the validity, scope and enforceability of many issued patents in the U.S. and elsewhere in the world, and, to date, there is no consistent policy regarding the breadth of claims allowed in biotechnology patents. We cannot currently determine the ultimate scope and validity of patents which may be granted to third parties in the future or which patents might be asserted to be infringed by the manufacture, use and sale of our products.
There has been, and we expect that there may continue to be, significant litigation in the industry regarding patents and other intellectual property rights. Litigation and administrative proceedings concerning patents and other intellectual property rights may be protracted, expensive and distracting to management. Competitors may sue us as a way of delaying the introduction of our products. Any litigation, including any interference proceedings to
determine priority of inventions, oppositions to patents in foreign countries or litigation against our partners may be costly and time consuming and could harm our business. We expect that litigation may be necessary in some instances to determine the validity and scope of certain of our proprietary rights. Litigation may be necessary in other instances to determine the validity, scope or non-infringement of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. Ultimately, the outcome of such litigation could adversely affect the validity and scope of our patent or other proprietary rights or hinder our ability to manufacture and market our products.
The administration of drugs in humans, whether in clinical studies or commercially, carries the inherent risk of product liability claims whether or not the drugs are actually the cause of an injury. Our products or product candidates may cause, or may appear to have caused, injury or dangerous drug interactions, and we may not learn about or understand those effects until the product or product candidate has been administered to patients for a prolonged period of time.
We are subject from time to time to lawsuits based on product liability and related claims. We cannot predict with certainty the eventual outcome of any pending or future litigation. We may not be successful in defending ourselves in the litigation and, as a result, our business could be materially harmed. These lawsuits may result in large judgments or settlements against us, any of which could have a negative effect on our financial condition and business if in excess of our insurance coverage. Additionally, lawsuits can be expensive to defend, whether or not they have merit, and the defense of these actions may divert the attention of our management and other resources that would otherwise be engaged in managing our business.
Our quarterly revenues, expenses and net income (loss) have fluctuated in the past and are likely to fluctuate significantly in the future due to the timing of charges and expenses that we may take. In recent periods, for instance, we have recorded charges that include:
Our revenues are also subject to foreign exchange rate fluctuations due to the global nature of our operations. We recognize foreign currency gains or losses arising from our operations in the period in which we incur those gains or losses. Although we have foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies, our efforts to reduce currency exchange losses may not be successful. As a result, currency fluctuations among our reporting currency, the U.S. dollar, and the currencies in which we do business will affect our operating results, often in unpredictable ways. Additionally, our net income may fluctuate due to the impact of charges we may be required to take with respect to foreign currency hedge transactions. In particular, we may incur higher charges from hedge ineffectiveness than we expect or from the termination of a hedge relationship.
These examples are only illustrative and other risks, including those discussed in these Risk Factors, could also cause fluctuations in our reported earnings. In addition, our operating results during any one period do not necessarily suggest the anticipated results of future periods.
Credit and financial market conditions may exacerbate certain risks affecting our business.
Sales of our products are dependent on reimbursement from government health administration authorities, private health insurers, distribution partners and other organizations. As a result of credit and financial market conditions, these organizations may be unable to satisfy their reimbursement obligations or may delay payment. In addition, federal and state health authorities may reduce Medicare and Medicaid reimbursements, and private insurers may increase their scrutiny of claims. A reduction in the availability or extent of reimbursement could reduce our product sales and revenue.
We rely on third parties for several important aspects of our business, including portions of our product manufacturing, royalty revenue, clinical development of future collaboration products, conduct of clinical trials, and raw materials. Such third parties may be unable to satisfy their commitments to us due to tightening of global credit from time to time, which would adversely affect our business.
Our portfolio of marketable securities is significant and subject to market, interest and credit risk that may reduce its value.
We maintain a significant portfolio of marketable securities. Changes in the value of this portfolio could adversely affect our earnings. In particular, the value of our investments may decline due to increases in interest rates, downgrades in the corporate bonds and other securities included in our portfolio, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, declines in the value of collateral underlying the mortgage and asset-backed securities included in our portfolio, and other factors. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost. Although we attempt to mitigate these risks by investing in high quality securities and continuously monitoring our portfolios overall risk profile, the value of our investments may nevertheless decline.
Our level of indebtedness could adversely affect our business and limit our ability to plan for or respond to changes in our business.
As of December 31, 2009, we had $1.1 billion of outstanding indebtedness, and we may incur additional debt in the future. Our level of indebtedness could adversely affect our business by, among other things:
Our business involves environmental risks, which include the cost of compliance and the risk of contamination or injury.
Our business and the business of several of our strategic partners, including Genentech and Elan, involves the controlled use of hazardous materials, chemicals, biologics and radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with state and federal standards, there will always be the risk of accidental contamination or injury. By law, radioactive materials may only be disposed of at state-approved facilities. We currently store radioactive materials from our California laboratory on-site because the approval of a disposal site in California for all California-based companies has been delayed indefinitely. If and when a disposal site is approved, we may incur substantial costs related to the disposal of these materials. If we were to become liable for an accident, or if we were to suffer an extended facility shutdown, we could incur significant costs, damages and penalties that could harm our business. Biologics manufacturing also requires permits from government agencies for water supply and wastewater discharge. If we do not obtain appropriate permits, or permits for sufficient quantities of water and wastewater, we could incur significant costs and limits on our manufacturing volumes that could harm our business.
Several aspects of our corporate governance and our collaboration agreements may discourage a third party from attempting to acquire us.
Several factors might discourage a takeover attempt that could be viewed as beneficial to shareholders who wish to receive a premium for their shares from a potential bidder. For example:
Our principal executive offices are located in Cambridge, Massachusetts. In Cambridge, we own approximately 525,000 square feet of real estate space, consisting of a building that houses a research laboratory, office space and a cogeneration plant which total approximately 280,000 square feet and an approximately 245,000 square foot building that contains research, development and quality laboratories.
We lease a total of approximately 450,000 square feet, which includes a 70,000 square foot biologics manufacturing facility and additional laboratory and office space of 125,000 square feet and 255,000 square feet, respectively. In addition, we lease approximately 36,000 square feet of warehouse space in Somerville, Massachusetts, approximately 105,000 square feet of office space in Wellesley, Massachusetts, and approximately 25,000 square feet of office and laboratory space in Waltham, Massachusetts.
In November 2008, we executed a fifteen year lease on a 356,000 square foot office building in Weston, Massachusetts, which will serve as the future location of our general and administrative offices with a planned occupancy around mid-year 2010.
The expiration dates for our leased sites in Massachusetts range from 2010 to 2025.
In San Diego, California, we own approximately 43 acres of land upon which we have our oncology research and development campus. The campus, which totals approximately 355,000 square feet, primarily consists of five interconnected buildings housing laboratory and office space.
In Research Triangle Park, North Carolina, we own approximately 550,000 square feet of real estate space. This includes a biologics manufacturing facility of approximately 105,000 square feet, a large scale manufacturing plant of approximately 175,000 square feet, a warehouse comprising approximately 60,000 square feet, a large-scale purification facility of approximately 43,000 square feet, as well as approximately 167,000 square feet of laboratory and office space. We manufacture bulk AVONEX, TYSABRI and other products in our pipeline at this facility. In addition, we lease approximately 57,000 square feet of office space in Durham, North Carolina.
We own approximately 60 acres of land in Hillerød, Denmark. We are in the final stages of constructing a large-scale biologics manufacturing facility of approximately 215,000 square feet in Hillerød, Denmark to be used to manufacture large molecule products. An administrative building of approximately 50,000 square feet, label and packaging facility of approximately 65,000 square feet, warehouse, utilities and support space of approximately 135,000 square feet, and laboratory facility of approximately 50,000 square feet are currently in use. Additional information about this facility is set forth in the Business Manufacturing and Raw Materials section of this report.
We lease office and laboratory space in Zug, Switzerland, our international headquarters, the United Kingdom, Germany, France, Denmark, and numerous other countries. The expiration dates for our international leased sites range from 2010 to 2023.
Please refer to Note 19, Litigation to our Consolidated Financial Statements of this report, which is incorporated into this item by reference.
Our common stock trades on The NASDAQ Global Select Market under the symbol BIIB. The following table shows the high and low sales price for our common stock as reported by The NASDAQ Global Select Market for each quarter in the years ended December 31, 2009 and 2008:
As of February 5, 2010, there were approximately 1,097 stockholders of record of our common stock. In addition, as of February 5, 2010, 270 stockholders of record of Biogen, Inc. common stock have yet to exchange their shares of Biogen, Inc. common stock for our common stock as contemplated by the merger of Biogen, Inc. and IDEC Pharmaceuticals Corporation in November 2003.
We have not paid cash dividends since our inception. We do not anticipate paying any cash dividends in the near term.
The following table summarizes our common stock repurchase activity during the fourth quarter of 2009:
The graph below compares the five-year cumulative total stockholder return on our common stock, the S&P 500 Index and the Nasdaq Pharmaceutical Index, assuming the investment of $100.00 on December 31, 2004 with dividends being reinvested. The stock price performance in the graph below is not necessarily indicative of future price performance.
The following financial data should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this report.
BIOGEN IDEC INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
The following discussion should be read in conjunction with our consolidated financial statements and related notes beginning on page F-1 of this report.
Biogen Idec is a global biotechnology company that creates new standards of care in therapeutic areas with high unmet medical needs. Our business strategy is focused on discovering and developing first-in-class or best-in-class products that we can deliver to specialty markets globally. Patients around the world benefit from Biogen Idecs significant products that address medical needs in the areas of neurology, oncology and immunology.
In the near term, we are dependent on continued sales of AVONEX, RITUXAN and TYSABRI to drive our revenue growth. In the longer term, our revenue growth is also dependent on the successful clinical development, regulatory approval and launch of new commercial products.
As part of our ongoing research and development efforts, we have incurred significant expenditures related to conducting clinical studies to develop new pharmaceutical products and explore the utility of our existing products in treating disorders beyond those currently approved in their labels. We continue to focus our research and development efforts within our core and emergent areas of neurology, oncology, immunology, cardiopulmonary and hemophilia.
The following table is a summary of financial results achieved:
As described below under Results of Operations, our operating results for the year ended December 31, 2009, were primarily driven by:
In addition to the strong operating results achieved, we generated $1,074.9 million of net cash flows from operations during 2009, which were primarily driven by increases in our earnings.
Cash and cash equivalents and marketable securities totaled approximately $2,457.8 million as of December 31, 2009.
Results of Operations
Revenues are summarized as follows:
Product revenues are summarized as follows:
Revenues from AVONEX are summarized as follows:
For 2009 compared to 2008, as well as for 2008 compared to 2007, the increase in U.S. AVONEX revenue was due to price increases, offset by decreased patient demand. Decreased commercial demand resulted in a 7.6% and a 6.0% decline in U.S. AVONEX sales volume in 2009 and 2008, respectively, over their prior year comparative periods. In addition, during 2009, we experienced higher participation in our Access Program, which provides free product to eligible patients.
For 2009 compared to 2008, the decrease in rest of world AVONEX revenue was primarily due to the negative impact of foreign exchange rate changes resulting from the strengthening of the U.S. dollar against relevant foreign currencies, primarily the Euro, offset by increased patient demand and price increases in some countries. For 2008 compared to 2007, rest of world sales of AVONEX increased due to increased patient demand, the impact of foreign exchange rate changes and the establishment of additional direct market affiliates. Increased commercial demand
resulted in increases of 6.3% and 8.6% in rest of world AVONEX sales volume in 2009 and 2008, respectively, over their prior year comparative periods.
AVONEX rest of world revenues for 2009, 2008 and 2007 also include losses of $39.5 million, $8.5 million and $13.1 million, respectively, recognized in relation to the settlement of certain cash flow hedge instruments.
Continued growth of AVONEX revenue is primarily dependent on maintaining AVONEXs position as one of the most prescribed MS therapies in the world. We expect to face increasing competition in the MS marketplace in both the U.S. and rest of world from existing and new MS treatments, including oral and other alternative formulations developed by our competitors, the continued growth of TYSABRI and the commercialization of our other pipeline product candidates, which may have a continued negative impact on the unit sales of AVONEX as well as increasing price pressure. We continue to generate data showing AVONEX to be an effective and safe choice for MS patients and physicians.
We collaborate with Elan Pharma International, Ltd (Elan) an affiliate of Elan Corporation, plc, on the development and commercialization of TYSABRI. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
In the U.S., we sell TYSABRI to Elan who sells the product to third party distributors. Our sales price to Elan in the U.S. is set prior to the beginning of each quarterly period to effect an approximate equal sharing of the gross margin on sales in the U.S. between Elan and us. We recognize revenue for sales of TYSABRI in the U.S. upon Elans shipment of the product to the third party distributors. In the rest of world markets, we are responsible for distributing TYSABRI to customers and are primarily responsible for all operating activities. We recognize revenue for sales of TYSABRI in the rest of world at the time of product delivery to our customers.
Revenues from TYSABRI include (1) our share of net U.S. sales of TYSABRI from Elan to third-party customers; (2) revenue on sales of TYSABRI in rest of world markets; (3) amortization of deferred revenue amounts related to Elan milestone payments made to us; and (4) gains or losses recognized in relation to the settlement of foreign currency forward contracts that were entered into to hedge forecasted revenues.
Revenues from TYSABRI are summarized as follows:
For 2009 compared to 2008, as well as for 2008 compared to 2007, the increase in U.S. TYSABRI revenue was due to the continued increase in the number of patients using TYSABRI in the U.S. Increased commercial demand resulted in increases of 16.3% and 88.7% in U.S. TYSABRI sales volume for 2009 and 2008, respectively, over their prior year comparative periods. Net sales of TYSABRI from our collaboration partner, Elan, to third-party customers in the U.S. for each of the years ended December 31, 2009, 2008 and 2007 totaled $508.5 million, $421.6 million and $217.4 million, respectively.
For 2009 compared to 2008, as well as for 2008 compared to 2007, the increase in rest of world TYSABRI revenue was due to the continued increase in the number of patients using TYSABRI in our rest of world markets. Increased commercial demand resulted in increases of 49.0% and 203.8% in U.S. TYSABRI sales volume for 2009 and 2008, respectively, over their prior year comparative periods. The increase in TYSABRI revenues in 2009 was offset by the negative impact of foreign currency exchange rate changes resulting from the strengthening of the U.S. dollar against foreign currencies, primarily the Euro.
TYSABRI rest of world revenues for 2009 also include losses of $10.1 million recognized in relation to the settlement of certain cash flow hedge instruments; no such losses were recognized in 2008 or 2007 as we did not designate hedges against TYSABRI rest of world revenues in those periods.
In 2009 and 2008, we recognized $7.1 million and $1.5 million respectively of product revenue related to the amortization of the Elan milestone payments.
Since we reintroduced TYSABRI to the market in July 2006, some patients taking TYSABRI have been diagnosed with PML, a rare but serious brain infection described in the TYSABRI label. In November 2009, the U.S. prescribing information for TYSABRI was revised to reflect that the risk of PML increases with longer treatment duration, and for patients treated for 24 to 36 months is generally similar to the rates seen in clinical trials. The revised label also reflects that there is limited experience beyond three years of treatment. In January 2010, the EMA recommended updating the TYSABRI label in the E.U. to reflect that the risk of PML increases after two years of therapy. The EMA also recommended that patients have regular MRI scans and be reinformed of the risk of PML after two years of therapy.
We continue to monitor the growth of TYSABRI unit sales, which may be further impacted by the updated prescribing information. We continue to research and develop protocols that may reduce risk and improve outcomes of PML in patients being treated with TYSABRI. We are working to identify patient or viral characteristics which contribute to the risk of developing PML, including the presence of asymptomatic JC virus infection with a serological assay for antibodies against the JC virus. Our efforts to improve management by physicians of PML and to improve patient outcomes have included researching plasma exchange to more rapidly remove TYSABRI from a patient, and drug screening that identified mefloquine as an anti-JC virus drug candidate.
Other Product Revenues
Other product revenues represent revenues derived from FUMADERM, ZEVALIN and AMEVIVE and are summarized as follows:
Unconsolidated Joint Business Revenues
We collaborate with Genentech on the development and commercialization of RITUXAN. Please read Note 17, Collaborations to our Consolidated Financial Statements for a description of this collaboration.
The majority of RITUXAN unit sales are for use in oncology as a treatment for certain types of B-cell NHL. We believe there is opportunity for RITUXAN unit sales growth in the immunology setting, where RITUXAN is used as a treatment for certain types of RA. Additional immunology indications for RITUXAN that we are investigating include ANCA-associated vasculitis.
Revenues from unconsolidated joint business consist of (1) our share of pretax co-promotion profits in the U.S.; (2) reimbursement of our selling and development expense in the U.S.; and (3) revenue on sales of RITUXAN in the rest of world, which consist of our share of pretax co-promotion profits in Canada and royalty revenue on sales of RITUXAN outside the U.S. and Canada by F. Hoffmann-La Roche Ltd. (Roche) and its sublicensees. Pre-tax co-promotion profits are calculated and paid to us by Genentech in the U.S. and by Roche in Canada. Pre-tax co-promotion profits consist of U.S. and Canadian sales of RITUXAN to third-party customers net of discounts and allowances less the cost to manufacture RITUXAN, third-party royalty expenses, distribution, selling and marketing, and joint development expenses incurred by Genentech, Roche and us.
The following table provides a summary of revenues from unconsolidated joint business:
Biogen Idecs Share of Co-Promotion Profits in the U.S.
The following table provides a summary of amounts comprising our share of co-promotion profits in the U.S.:
For 2009 compared to 2008, the increase in U.S. RITUXAN product revenue on sales recorded by Genentech resulted from continued growth for treatment of B-cell NHL and RA, and price increases. For 2008 compared to 2007 the increase in U.S. RITUXAN product revenue was primarily due to increased unit sales in treatments of B-cell NHL, CLL (an unapproved and unpromoted use of RITUXAN) and RA, and price increases. Collaboration costs and expenses for 2009 as compared to 2008 decreased primarily due to higher costs incurred in development of RITUXAN for use in other indications during 2008.
Under our collaboration agreement, our current pretax co-promotion profit-sharing formula, which resets annually, provides for a 30% share of co-promotion profits on the first $50.0 million of co-promotion operating profit with our share increasing to 40% if co-promotion operating profits exceed $50.0 million. In 2009, 2008, and 2007, the 40% threshold was met during the first quarter.
In addition, under our collaboration agreement, we have rights to collaborate with Genentech on the development and commercialization of (1) anti-CD20 products that Genentech acquires or develops, which we refer to as New Anti-CD20 Products, and (2) anti-CD20 products that Genentech licenses from a third party, which we refer to as Third Party Anti-CD20 Products. Our collaboration rights for New Anti-CD20 Products are limited to the U.S. and our collaboration rights for Third Party Anti-CD20 Products are dependent upon Genentechs underlying license rights. There is only one New Anti-CD20 Product, ocrelizumab, and only one Third Party Anti-CD20 Product, GA101.
Our agreement with Genentech also provides that the successful development and commercialization of the first New Anti-CD20 Product will decrease our percentage of co-promotion profits of the collaboration. Please read Note 17, Collaborations to our Consolidated Financial Statements for additional information regarding the pretax co-promotion profit sharing formula for RITUXAN and New Anti-CD20 Products sold by us and Genentech following the approval date of the first New Anti-CD20 Product. We will participate in Third Party Anti-CD20 Products on similar financial terms as for ocrelizumab.
Reimbursement of Selling and Development Expense in the U.S.
As discussed within Note 17, Collaborations to our Consolidated Financial Statements, Genentech incurs the majority of continuing development costs for RITUXAN. Expenses incurred by Genentech in the development of RITUXAN are not recorded as research and development expense, but rather reduce our share of co-promotion profits recorded as a component of unconsolidated joint business revenue.
Selling and development expenses, incurred by us in the U.S. and reimbursed by Genentech, increased in 2009 as compared 2008 due to an increase in sales and marketing expense associated with CLL and legal fees.
The increase in selling and development expenses in 2008 compared to 2007 was primarily due to development costs we incurred related to the development of RITUXAN in RA.
Revenue on Sales of RITUXAN in the Rest of World
We record our royalty revenue and co-promotion profit revenue on sales of RITUXAN in the rest of world on a cash basis. Revenues on sales of RITUXAN in the rest of world decreased in 2009 compared to 2008 primarily due to royalty expirations in certain of these markets and the negative impact of foreign exchange rate changes.
Revenues on sales of RITUXAN in the rest of world increased in 2008 compared to 2007 due to several factors, including increased market penetration in NHL and increased use in RA.
The royalty period for sales in the rest of world 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. Specifically, the royalty periods with respect to sales in France, Spain, Germany and the United Kingdom expired in 2009. The royalty period with respect to sales in Italy will expire in 2010. The royalty periods with respect to sales in other countries will subsequently expire through 2012. As a result of these expirations, we expect royalty revenues derived from sales of RITUXAN in the rest of world to continue to decline in future years.
Our product line previously included ZEVALIN (ibritumomab tiuxetan) which is part of a treatment regimen for certain B-cell NHL, and AMEVIVE (alefacept), a treatment for certain moderate to severe psoriasis. We have sold or exclusively licensed the rights to these products to third parties and continue to receive supply agreement revenues based on those products which are included in corporate partner revenues. We also receive royalties on sales by our licensees of a number of other products under patents that we own.
Other revenues are summarized as follows:
We receive royalties on sales by our licensees of products covered under patents that we own. Sales of licensed products could vary significantly due to competition, manufacturing difficulties and other factors that are not within our control. In addition, the expiration or invalidation of any underlying patents could reduce or eliminate the royalty revenues derived from such patents.
The increase in royalty revenues in 2009 as compared to 2008, as well as in 2008 as compared to 2007, was primarily due to increased sales of ANGIOMAX (bivalirudin) licensed to The Medicines Company (TMC) offset by a decline in royalties from sales of other licensed product and the expiration of certain contracts and license agreements.
Our most significant source of royalty revenue is derived from sales of ANGIOMAX by TMC. TMC sells ANGIOMAX in the U.S., Europe, Canada, and Latin America for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty. Royalty revenues related to the sales of ANGIOMAX are recognized in an amount equal to the level of net sales achieved during a calendar year multiplied by the royalty rate in effect for that tier under our agreement with TMC. The royalty rate increases based upon which tier of total net sales are earned in any calendar year. The increased royalty rate is applied retroactively to the first dollar of net sales achieved during the year. This formula has the effect of increasing the amount of royalty revenue to be recognized in later quarters. Accordingly, an adjustment is recorded in the period in which an increase in royalty rate has been achieved.
Under the terms of our agreement, TMC is obligated to pay us royalties earned, on a country-by-country basis, until the later of (1) twelve years from the date of the first commercial sale of ANGIOMAX in such country and (2) the date upon which the product is no longer covered by a patent in such country. The annual royalty rate is reduced by a specified percentage in any country where the product is no longer covered by a patent and where sales have been reduced to a certain volume-based market share. TMC began selling ANGIOMAX in the U.S. in January 2001. The principal U.S. patent that covers ANGIOMAX expires in March 2010. The FDA has granted TMC an additional period of marketing exclusivity for ANGIOMAX in order to investigate its use in pediatric patients. This period expires in September 2010. In the event that third parties sell products comparable to ANGIOMAX after the period of marketing exclusivity expires, we would expect a significant decrease in royalty revenues due to lower royalty rates and increased competition.
Revenues from product sales are recorded net of applicable allowances for trade term discounts, wholesaler incentives, Medicaid rebates, Veterans Administration (VA) rebates, managed care rebates, product returns, and other applicable allowances. Reserves established for these discounts and allowances are classified as reductions of accounts receivable (if the amount is payable to our customer) or a liability (if the amount is payable to a party other than our customer). For 2009 compared to 2008, as well as 2008 compared to 2007, the increases in total allowances were primarily due to price increases.
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 requirements, 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.
Reserves for product returns are recorded in the period the related revenue is recognized, resulting in a reduction to product sales. The majority of wholesaler returns are due to product expiration. Expired product return reserves are estimated through a comparison of historical return data, as adjusted, to their related sales on a production lot basis. Historical rates of return are determined for each product and are adjusted for known or expected changes in the marketplace specific to each product.
Reserves for discounts, contractual adjustments and returns that reduced gross product revenues were as follows:
Discount reserves include trade term discounts and wholesaler incentives. For 2009 compared to 2008, as well as for 2008 compared to 2007, the increase in discounts was primarily driven by increases in trade term discounts and wholesaler incentives as a result of price increases.
Contractual adjustment reserves relate to Medicaid, VA and managed care rebates and other applicable allowances. For 2009 compared to 2008, as well as for 2008 compared to 2007, contractual adjustments increased primarily due to the impact of higher reserves for managed care (associated with higher level of activity with respect to rebates and price increases in the U.S.) and Medicaid and VA programs (associated with price increases in the U.S.).
Product return reserves are established for returns made by wholesalers. In accordance with contractual terms, wholesalers are permitted to return product for reasons such as damaged or expired product. We also accept returns from our patients for various reasons. For 2009 compared to 2008, return reserves remained relatively unchanged. For 2008 compared to 2007, return reserves decreased primarily due to a decrease in estimated product returns based on historical trends.
A summary of total costs and expenses is as follows:
Components of cost of sales are summarized as follows:
For 2009 compared to 2008, the decrease in cost of sales was primarily due to a decrease in write-downs from unmarketable inventory of $12.9 million, decreased production costs of approximately $10.9 million resulting from the implementation of a new high-titer production process which produces higher yields of TYSABRI and an $8.8 million decrease in royalty payments on sales of licensed product due mainly to the expiration of certain contracts and license agreements. These decreases were offset by a $17.0 million increase in costs associated with higher TYSABRI sales volume. In addition, during 2008 we also incurred a $4.3 million period expense related to the shutdown of our manufacturing facility in Research Triangle Park, North Carolina for the implementation of the high-titer production process upgrades.
For 2008 as compared to 2007, the overall increase in cost of sales was primarily due to higher sales volume offset by decreased write-downs from unmarketable inventory.
Write-downs from Unmarketable Inventory
Our products are subject to strict quality control and monitoring which we perform throughout the manufacturing process. Periodically, certain batches or units of product may no longer meet quality specifications or may expire. The shelf life associated with our products is generally between 3 and 48 months, depending on the product. Obsolescence due to expiration has historically been insignificant.
Amounts written down related to unmarketable inventory are charged to cost of sales, and totaled $16.9 million, $29.8 million and $21.6 million for the years ended December 31, 2009, 2008 and 2007, respectively.
We devote significant resources to research and development programs focusing our efforts on finding novel therapeutics in areas of high unmet medical need within our core and emergent focus areas of neurology, oncology, immunology, cardiopulmonary and hemophilia. Over the past few years, we have incurred significant expenditures related to the development of new product candidates and exploring the utility of our existing products in treating disorders in addition to those currently approved in their labels. Costs associated with later stage clinical trials are, in most cases, more significant than those incurred in earlier stages of our pipeline.
Research and development expenses consist of upfront fees and milestones paid to collaborators and expenses incurred in performing research and development activities, including compensation and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, fees paid to clinical research organizations (CROs) and other outside expenses. Research and development expenses are expensed as incurred. The timing of upfront fees and milestone payments in the future may cause variability in future research and development expense.
For 2009 compared to 2008, research and development expenses increased by $211.0 million, driven primarily by the $110.0 million upfront payment made to Acorda, as well as a net increase of $100.2 million related to the ramp up of clinical trial activity for certain development stage product candidates including lixivaptan, BG-12, humanized anti-CD20 and ADENTRI. In addition, in 2009, we initiated registrational trials in our PEGylated interferon program. The aforementioned increases were offset by a reduction of spending across several programs including baminercept in RA, lumiliximab and volociximab.
For 2008 compared to 2007, research and development expenses increased by $146.9 million, driven by an increase of $56.4 million related to the continued advancement of our pipeline into Phase 3 clinical trials. In 2008, we initiated a registrational trial in our lixivaptan program, a Phase 2 trial in our ADENTRI program, and continued to develop our BG-12, anti-CD80 MAb (galiximab) and anti-CD23 MAb (lumiliximab) programs. In 2008, we had 8 programs in Phase 3 clinical trials as compared to 5 in 2007. We also increased spending in our anti-CD20 programs in both Phase 2 and Phase 3 clinical trials by $46.2 million primarily due to a $31.5 million opt-in payment to participate in the Roche-led GA101 program. The balance of the increase of $44.3 million was due to other research and development investments, primarily in our pre clinical and early stage pipeline programs including HSP90, BIIB014, BART and LINGO programs.
We expect total research and development expense in 2010 to be between 24% and 27% of total revenue.
Milestone and Upfront Payments
Milestone and upfront payments made to our collaboration partners and included within research and development expense are summarized as follows:
For 2009 as compared to 2008, the increase in milestone and upfront payments was primarily the result of the $110.0 million upfront payment made to Acorda.
Selling, general and administrative expenses are primarily comprised of compensation and benefits associated with sales and marketing, finance, legal and other administrative personnel, outside marketing and legal expenses and other general and administrative costs.
For 2009 compared to 2008, the decrease in selling, general and administrative expenses was primarily driven by the positive impact of foreign currency exchange rate changes and a reduction of expenses reimbursed to Elan for their marketing of TYSABRI for Crohns disease in the U.S. These decreases were offset by costs incurred associated with our geographic expansion into new markets.
For 2008 compared to 2007, selling, general and administrative expenses increased primarily due to a $90.0 million increase in sales and marketing, of which $55.3 million related to international sales and marketing activities primarily for AVONEX and TYSABRI and $43.6 million related to an increase in compensation and benefits for general and administrative personnel as well as increases in fees and services.
We expect that selling, general and administrative expenses will increase in 2010 as compared to the total amount incurred in 2009 primarily due to increased sales and marketing activities in support of AVONEX and TYSABRI. In addition, under the transition agreement entered into with James C. Mullen, we will incur approximately $21 million of expense in the first half of 2010 all of which relates to the modification of his existing equity based compensation awards. The substantial portion of this charge is due to the incremental value attributable to the extension of Mr. Mullens stock option awards.
Payments are made to Elan for their share of the rest of world net operating profits to effect an equal sharing of collaboration operating profit. These payments include the reimbursement of our portion of third-party royalties that Elan pays on behalf of the collaboration, relating to sales in the rest of world. These amounts are reflected in the collaboration profit sharing line in our consolidated statements of income. Our collaboration profit sharing expense increases as rest of world sales of TYSABRI increase and is impacted by fluctuations in currency exchange rates.
For 2009 as compared to 2008, as well as for 2008 as compared to 2007, the increases were due to the continued increase in TYSABRI rest of world sales resulting in a higher rest of world net operating profits to be shared with Elan and causing growth in the third-party royalties Elan paid on behalf of the collaboration.
For the years ended December 31, 2009, 2008 and 2007, our collaboration profit sharing expense included $40.0 million, $28.4 million and $9.1 million, respectively, related to the reimbursement of Elans royalty payments.
Our most significant intangible asset is the core technology related to our AVONEX product. Our amortization policy reflects our belief that the economic benefit of our core technology is consumed as revenue is generated from our AVONEX product. We refer to this amortization methodology as the economic consumption model, which involves calculating a ratio of actual current period sales to total anticipated sales for the life of the product and applying this ratio to the carrying amount of the intangible asset. An analysis of the anticipated lifetime revenue of AVONEX is performed at least annually during our long range planning cycle, and this analysis serves as the basis for the calculation of our economic consumption amortization model. Although we believe this process has allowed us to reliably determine the best estimate of the pattern in which we will consume the economic benefits of our core technology intangible asset, the model could result in deferring amortization charges to future periods in certain instances, due to continued sales of the product at a nominal level after patent expiration or otherwise. In order to ensure that amortization charges are not unreasonably deferred to future periods, we compare the amount of amortization determined under the economic consumption model against the minimum amount of amortization recalculated each year under the straight-line method. Amortization is then recorded based upon the higher of the amount of amortization determined under the economic consumption model or the minimum amortization amount determined under the straight-line method.
We completed our most recent long range planning cycle in the third quarter of 2009. This analysis is based upon certain assumptions that we evaluate on a periodic basis, such as the anticipated product sales of AVONEX and expected impact of competitor products and our own pipeline product candidates, as well as the issuance of new patents or the extension of existing patents. Based on this analysis, we have continued to amortize this asset on the economic consumption model for the third and fourth quarters of 2009, and expect to apply the same model for the first two quarters in 2010. The results of our analysis were most significantly impacted by the issuance in September 2009 of a U.S. patent covering the treatment of MS with AVONEX, which resulted in an increase in the total expected lifetime revenue of AVONEX and an extension of the assumed remaining life of our core intangible asset.
As a result of these changes in the total expected lifetime revenues of AVONEX, amortization recorded for the third and fourth quarters of 2009 decreased significantly over their respective prior year comparative periods. Based upon this most recent analysis, amortization of intangible assets, included within our consolidated balance sheet as of December 31, 2009, is expected to be in the range of approximately $160.0 million to $220.0 million for each of the next five years.
For 2008 compared to 2007, the increase in amortization expense was primarily due to the changes in the estimate of the future total expected lifetime revenues of AVONEX that occurred as part of the annual reassessment of amortization expense in the third quarters of 2008 and 2007. The change in the estimate of the future revenue of AVONEX was attributable to the expected impact of competitor products, including the commercialization of our own pipeline product candidates.
Effective January 1, 2009, we adopted a new accounting standard for business combinations, which changes the accounting treatment of acquired IPR&D. For acquisitions occurring prior to January 1, 2009, we measured
acquired IPR&D at fair value and expensed it on the acquisition date, or capitalized it as intangible assets if certain criteria were met. However, effective January 1, 2009, acquired IPR&D will be measured at fair value and capitalized as intangible assets and amortized from the date of completion over its estimated useful life. In addition, the acquired IPR&D will be tested for impairment until completion of the acquired programs.
In 2008, we recorded an IPR&D charge of $25.0 million related to a HSP90-related milestone payment made to the former shareholders of Conforma Therapeutics, Inc. (Conforma) pursuant to the terms of our acquisition of Conforma in 2006.
During the year ended December 31, 2007, we recorded IPR&D charges of $84.2 million. The principal components of this amount are as follows:
Cardiokine and Neurimmune are variable interest entities as defined under the guidance set forth within the Consolidation Topic of the Codification. The consolidation of these entities resulted in IPR&D charges which have been recorded as a component of operating income. However, because the IPR&D charges relate to the fair value of the underlying technology retained by the parent companies of Cardiokine and Neurimmune, these amounts were allocated to the respective noncontrolling interests.
We use discounted cash flow models to determine the fair values associated with acquired technologies. These models require the use of significant estimates and assumptions, which include but are not limited to an estimate of future cash flows from product sales resulting from completed and in-process products and the use of discount and probability rates on a project basis. Refer to Valuation of Acquired Intangible Assets and In-process Research and Development Expenses within Critical Accounting Estimates for additional discussion.
We believe that the discount rates utilized in our valuations are commensurate with the stage of development of these compounds and uncertainties in the economic estimates associated with each development relationship. The IPR&D charge related to our collaboration with Neurimmune was determined based upon an estimate of revenues expected to be recognized beginning in 2018 related to the Beta-Amyloid antibody and a discount rate of 15%. The IPR&D charge related to our collaboration with Cardiokine was determined assuming a discount rate of 11% and an estimate of revenues expected to be recognized beginning in 2012 for lixivaptan. The amount allocated to IPR&D resulting from the acquisition of Syntonix relates to the development of long-acting recombinant Factor IX and long-acting recombinant Factor VIII assuming estimated revenues expected to be recognized beginning in 2012 and 2013, respectively. A discount rate of 13% was used to value these projects.
In addition, in connection with the acquisition of Syntonix in January 2007, we agreed to make additional future consideration payments contingent upon the achievement of certain milestone events. In accordance with our acquisition agreement, we will make a $40.0 million milestone payment to the former shareholders of Syntonix during the first quarter of 2010. This amount will be recorded as a charge to IPR&D in the first quarter of 2010.
Refer to Note 2, Acquisitions and Dispositions and Note 17, Collaborations to our Consolidated Financial Statements for additional discussion.
Components of other income (expense), net, are summarized as follows:
For 2009 as compared to 2008, interest income decreased primarily due to lower yields on cash, cash equivalents, and marketable securities, offset by higher average cash balances.
For 2008 compared to 2007, interest income decreased primarily due to a reduction in cash and cash equivalents due to the funding of our tender offer in July 2007, a net payment of $525.5 million for our term loan facility and lower investment yields.
For 2009 as compared to 2008, interest expense decreased primarily due to decreased average debt balances. In addition in 2009, approximately $5.4 million was recorded as a reduction of interest expense due to the amortization of the deferred gain associated with the termination of an interest rate swap in December 2008. This is further described in Note 8, Derivative Instruments to our Consolidated Financial Statements.
For 2008 compared to 2007, interest expense increased primarily due to an increased average debt balance as well as $8.9 million of expense incurred in 2008 due to the impact of hedge ineffectiveness as discussed in Note 8, Derivative Instruments to our Consolidated Financial Statements.
We capitalized interest costs related to construction in progress totaling approximately $28.5 million, $23.2 million and $10.1 million in 2009, 2008 and 2007, respectively, which were primarily related to the development of our large-scale biologic manufacturing facility in Hillerød, Denmark, which as a result reduced our interest expense by the same amount. We expect the amount of interest capitalized in relation to this facility will decrease in 2010.
In April 2009, we implemented newly issued accounting standards which provided guidance for recognition and presentation of other-than-temporary impairments. The adoption of this guidance did not have a material impact on our financial position or results of operations; however, this standard amended the other-than-temporary impairment model for marketable debt securities. The impairment model for equity securities was not affected. Refer to Note 7, Financial Instruments to our Consolidated Financial Statements for additional information on the adoption of this guidance.
In 2009, we recognized impairment losses of $7.0 million on our publicly-held strategic investments and non-marketable securities and an additional $3.6 million in charges for the other-than-temporary impairment on our marketable debt securities primarily related to mortgage and asset-backed securities.
In 2008, we recognized impairment losses of $18.6 million on our publicly-held strategic investments and non-marketable securities and an additional $41.7 million in impairment on our marketable debt securities primarily related to mortgage, asset-backed and corporate securities.
In 2007 we recognized impairment losses of $18.4 million on our publicly-held strategic investments and non-marketable securities and an additional $7.5 million in impairment on our marketable debt securities primarily related to mortgage and asset-backed securities.
We may incur additional impairment charges on these investments in the future.
Impairment on Property
We own or lease real estate primarily consisting of buildings that contain research laboratories, office space, and biologic manufacturing operations, some of which are located in markets that are experiencing high vacancy rates and decreasing property values. If we decide to consolidate, co-locate or dispose of certain aspects of our business operations, for strategic or other operational reasons, we may dispose of one or more of our properties. Due to reduced expectations of product demand, improved yields on production and other factors, we may not fully utilize our manufacturing facilities at normal levels resulting in idle time at facilities or substantial excess manufacturing capacity. We are always evaluating our current strategy, as well as other alternatives, including whether to delay completion of the Denmark facility. If any of our owned properties are held for sale, or disposed of, we may not realize the full investment in these properties and incur significant impairment charges if the fair value of the properties were determined to be lower than their book value. In addition, if we decide to fully or partially vacate a leased property, we may incur significant cost, including lease termination fees, rent expense in excess of sublease income and impairment of leasehold improvements.
Our effective tax rate fluctuates from year to year due to the nature of our global operations. The factors that most significantly impact our effective tax rate include variability in the allocation of our taxable earnings between multiple jurisdictions, changes in tax laws, acquisitions and licensing transactions.
In 2009, our effective tax rate was impacted by the following significant items:
Our effective tax rate in 2009 was lower than in 2008 due to the net effect of the three items noted above and a higher percentage of our foreign earnings being subject to U.S. income taxation in 2008. The effect of the allocation of earnings was partially offset by certain tax credits and deferred tax assets which will be realized as a result of our 2008 domestic reorganization.
Our effective tax rate in 2008 was higher than 2007 primarily due to a reorganization of our international operations in 2008 and the allocation of our earnings subject to U.S. taxation in each year.
The 2008 domestic and foreign reorganizations to our corporate structure involved the movement of certain personnel, operations and processes among our affiliates. Our effective tax rate will continue to be dependent on the allocation of our profits among jurisdictions and the percentage of our foreign earnings which are subject to taxation in the U.S.
We expect our 2010 effective tax rate to be between 28% and 30%. This rate does not consider the impact of a potential renewal of the federal research and development tax credit.
Financial Condition and Liquidity
Our financial condition is summarized as follows:
For the year end December 31, 2009, certain significant cash flows were as follows:
Significant cash flow activities during 2008 included the net repayment of approximately $525.5 million of indebtedness, $738.9 million used to fund share repurchases, $222.8 used for the net purchases of marketable securities, and $276.0 million used to purchase property, plant and equipment offset by cash generated from operations of $1,562.4 million.
We have financed our operating and capital expenditures principally through cash flows from our operations. We expect to finance our current and planned operating requirements principally through cash from operations, as well as existing cash resources. We believe that existing funds, cash generated from operations and existing sources of, and access to, financing are adequate to satisfy our operating, working capital, strategic alliance and acquisition, milestone payments, capital expenditures and debt service requirements for the foreseeable future. In addition, we plan to opportunistically pursue our stock repurchase program and other business initiatives, including acquisition and licensing activities. We may, from time to time, seek additional funding through a combination of new collaborative agreements, strategic alliances and additional equity and debt financings or from other sources.
Please read the Risk Factors and Quantitative and Qualitative Disclosures About Market Risk sections of this report for items that could negatively impact our cash position and ability to fund future operations.
In October 2009, our Board of Directors authorized the repurchase of up to $1.0 billion of our common stock, with repurchased shares being retired. This repurchase program does not have an expiration date. As of December 31, 2009, approximately 8.8 million shares at a cost of $422.4 million were repurchased under this program, all of which were retired. From January 1, 2010 through February 5, 2010, we repurchased approximately an additional 5.4 million shares under this program at a total cost of approximately $289.4 million, all of which were also retired. Approximately $288.2 million remains available for the repurchase of our common stock under the 2009 program. The remaining shares that may be purchased under this program is subject to price fluctuations of our common stock.
In October 2006, our Board of Directors authorized the repurchase of up to 20.0 million shares of our common stock. This repurchase program was completed during the fourth quarter of 2009. During 2009, approximately 7.2 million shares of our common stock were repurchased for approximately $328.8 million under this program. During 2008, approximately 12.8 million shares of our common stock were repurchased for approximately $738.9 million under this program. We used the 2006 share repurchase program principally for share stabilization.
Cash, Cash Equivalents and Marketable Securities
Until required for use in the business, we invest our cash reserves in bank deposits, certificates of deposit, commercial paper, corporate notes, U.S. and foreign government instruments and other interest bearing marketable debt instruments in accordance with our investment policy. We attempt to mitigate credit risk in our cash reserves and marketable securities by maintaining a well diversified portfolio that limits the amount of investment exposure as to institution, maturity, and investment type. In particular, the value of our investments may be adversely affected by increases in interest rates, downgrades in the corporate bonds included in our portfolio, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, and by other factors which may result in other-than-temporary declines in the value of the investments. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost which could adversely impact our financial position and our overall liquidity.
The increase in cash and marketable securities as of December 31, 2009 as compared to December 31, 2008 is primarily due to an increase in cash from operations and proceeds from the issuance of shares under our share-based compensation programs offset by purchases of property, plant and equipment, share repurchases, payments pursuant to our collaboration agreement with Acorda and other collaboration arrangements, and purchases of strategic investments.
There have been no significant changes in our borrowings since December 31, 2008.
On March 4, 2008, we issued $450.0 million aggregate principal amount of 6.0% Senior Notes due March 1, 2013 and $550.0 million aggregate principal amount of 6.875% Senior Notes due March 1, 2018 for proceeds of $987.0 million, net of issuance costs. The credit rating on these notes at December 31, 2009, was Baa3 with a stable outlook by Moodys Investors Service and BBB+ with a stable outlook by Standard & Poors. Additionally, in connection with the issuance of these notes, we entered into interest rate swaps, which were terminated in December 2008 and are further described in Note 6, Fair Value Measurements to our Consolidated Financial Statements. We used the proceeds of this offering, along with cash and the proceeds from the liquidation of marketable securities, to repay the $1,500.0 million term loan facility we had entered into in July 2007 in connection with the funding of our June 2007 stock repurchase tender offer.
In June 2007, we entered into a five year $400.0 million senior unsecured revolving credit facility, which we may use for future working capital and general corporate purposes. The bankruptcy of Lehman Brothers Holdings Inc. in 2008 resulted in the elimination of their $40.0 million commitment, thereby reducing the availability of the credit facility to $360.0 million. The terms of this revolving credit facility include various covenants, including financial covenants that require us to not exceed a maximum leverage ratio and, under certain circumstances, an interest coverage ratio. As of December 31, 2009, and 2008 there were no borrowings under this credit facility and we were in compliance with applicable covenants.
We define working capital as current assets less current liabilities. The increase in working capital primarily reflects the overall reduction of current liabilities by $208.3 million primarily driven by a $147.4 million reduction in balances attributable to taxes payable. The change in total current assets was negligible as increases in net receivable balances, inventory and other current assets were offset by decreases in cash and marketable and loaned securities.
Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Cash provided by operating activities is primarily driven by our earnings and changes in working capital. We expect cash provided from operating activities will continue to be our primary source of funds to finance operating needs and capital expenditures for the foreseeable future.
Operating cash flow is derived by adjusting net income for:
The decrease in cash provided by operating activities for 2009 as compared to 2008 was primarily driven by change in other liabilities and taxes payable, primarily due to an increase in income tax payments of $373.4 million, primarily resulting from increased earnings and the settlement of various audits in 2009, the $110.0 million upfront payment made to Acorda on July 1, 2009 and the payment of certain accrued expenses and other current liabilities.
The increase in cash from operating activities for 2008 as compared to 2007 was primarily due to higher earnings net of a higher investment in working capital and the proceeds received from the termination of the interest rate swap.
The increase in net cash used in investing activities in 2009 compared to 2008 is primarily due to a decrease in collateral received under our securities lending program offset primarily by a decrease in net purchases of marketable securities and a reduction in purchases of property, plant and equipment. The decline in purchases of property, plant and equipment is primarily attributable to our Hillerød, Denmark manufacturing facility and certain other manufacturing upgrades which are near completion.
The increase in cash used in investing activities in 2008 compared to 2007 is primarily due to an increase in net purchases of marketable securities, offset by cash proceeds from collateral received under securities lending.
In 2009, significant cash flows related to investing activities consisted primarily of net purchases of marketable securities of $229.1 million. Our other primary use of cash in investing activities consisted of the purchases of property, plant and equipment of $165.6 million.
In 2008, significant cash flows related to investing activities consisted of net purchases of marketable securities of $222.8 million and net purchases of property, plant and equipment totaling $276.0 million.
In 2007, net proceeds from sales of marketable securities of $209.0 million were used to partially fund our 2007 tender offer. Purchases of property, plant and equipment totaled $284.1 million in 2007. Payments made for acquisitions and collaborations were $95.8 million in 2007, which primarily related to our acquisition of Syntonix for $42.3 million and our collaboration payments to Cardiokine for $50.0 million and Neurimmune of $2.0 million. The change in balance of collateral received under securities lending is reflected as a use of cash in investing activities offset by a source of cash from financing activities. Additionally, in 2007 we sold our position in a strategic investment for $99.5 million.
The decrease in cash used in financing activities in 2009 compared to 2008 is due, principally, to the repayment of our term loan facility of $1,500.0 million in 2008, offset by the issuance of our notes payable, a decrease in the amount of stock options exercised, and a decrease in obligations under our securities lending program.
The increase in cash used in financing activities in 2008 as compared to 2007 is due principally to a reduction in the net proceeds received from borrowings offset by an overall decrease in the amount of common stock repurchased.
In 2009, we repurchased approximately 16.0 million shares for $751.2 million under our 2009 and 2006 share repurchase programs.
The primary use of cash in 2008 was for the repayment of our term loan facility of $1,500.0 million and the repurchase of our common stock for $738.9 million, offset in part by the net proceeds of $987.0 million from the issuance of long-term debt and proceeds of $178.5 million from the issuance of shares under our share based compensation programs.
In 2007, the primary use of cash related to the repurchase of our common stock for $2,990.5 million by means of a tender offer. This repurchase was partially funded with cash proceeds from a short-term note of $1,500.0 million. Additionally, cash proceeds from the issuance of shares under our share based compensation programs were $489.2 million, which was attributable to the exercise of stock options and participation in our employee stock purchase plan. The change in balance of collateral received under securities lending is reflected as a use of cash in investing activities offset by a source of cash from financing activities.
The following summarizes our contractual obligations (excluding funding commitments, contingent milestone payments and other off-balance sheet arrangements as described below) as of December 31, 2009, and the effects such obligations are expected to have on our liquidity and cash flows in future periods:
The table above excludes tax payments totaling approximately $105.0 million to be made in the first half of 2010 related to the settlement of certain federal and state tax audits in 2009, and also excludes liabilities pertaining to uncertain tax positions as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities. As of December 31, 2009, we have approximately $52.6 million of long-term liabilities associated with uncertain tax positions.
As of December 31, 2009, we have funding commitments of up to approximately $24.8 million as part of our investment in biotechnology oriented venture capital funds.
As of December 31, 2009, we have several ongoing clinical trials. Our most significant clinical trial expenditures are to clinical research organizations (CROs). The contracts with CROs are generally cancellable, with notice, at our option. We have recorded accrued expenses of $31.7 million on our consolidated balance sheet for work done by CROs as of December 31, 2009. We have approximately $460.0 million in cancellable future commitments based on existing CRO contracts as of December 31, 2009 which are not included in the contractual obligations table above as they are cancellable.
Contingent Milestone Payments
Based on our development plans as of December 31, 2009, we have committed to make potential future milestone payments to third parties of up to approximately $1,500.0 million as part of our various collaborations, including licensing and development programs. Payments under these agreements generally become due and payable only upon achievement of certain developmental, regulatory or commercial milestones. Because the achievement of these milestones had not occurred as of December 31, 2009, such contingencies have not been recorded in our financial statements. We anticipate that we may pay approximately $82.0 million of milestone payments in 2010, provided various developmental, regulatory or commercial milestones are achieved.
Amounts related to contingent milestone payments are not included in the contractual obligations table above as they are contingent on the successful achievement of certain development, regulatory approval and commercial milestones. These milestones may not be achieved.
Other Off-Balance Sheet Arrangements
We do not have any significant relationships with entities often referred to as structured finance or special purpose entities which would have been established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. We consolidate entities if we are the primary beneficiary.
Please read Note 19, Litigation to our Consolidated Financial Statements for a discussion of legal matters as of December 31, 2009.
The discussion and analysis of our financial position and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of these consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition and related allowances, marketable
securities, derivatives and hedging activities, inventory, impairments of long-lived assets including intangible assets, impairments of goodwill, income taxes including the valuation allowance for deferred tax assets, valuation of investments, research and development expenses, contingencies and litigation, and share-based payments. We base our estimates on historical experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting estimates affect our more significant estimates and judgments used in the preparation of our consolidated financial statements:
We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of product has occurred or services have been rendered; the sellers price to the buyer is fixed or determinable; and collectibility is reasonably assured.
Revenues from product sales are recognized when title and risk of loss have passed to the customer, which is typically upon delivery. However, sales of TYSABRI in the U.S. are recognized on the sell-through model, that is, upon shipment of the product by Elan to its third party distributor rather than upon shipment to Elan. The timing of distributor orders and shipments can cause variability in earnings.
Revenues are recorded net of applicable reserves for trade term discounts, wholesaler incentives, Medicaid rebates, VA rebates, managed care rebates, product returns and other applicable allowances. 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. The estimates we make with respect to these allowances represent the most significant judgments with regard to revenue recognition.
We receive royalty revenues under license agreements with a number of third parties that sell products based on technology we have developed or to which we own rights. The license agreements provide for the payment of royalties to us based on sales of these licensed products. There are no future performance obligations on our part
under these license agreements. We record these revenues based on estimates of the sales that occurred during the relevant period. The relevant period estimates of sales are based on interim data provided by licensees and analysis of historical royalties that have been paid to us, adjusted for any changes in facts and circumstances, as appropriate. We maintain regular communication with our licensees in order to assess the reasonableness of our estimates. Differences between actual royalty revenues and estimated royalty revenues are adjusted for in the period in which they become known, typically the following quarter. Historically, adjustments have not been material when compared to actual amounts paid by licensees. To the extent we do not have sufficient ability to accurately estimate revenues; we record such revenues on a cash basis.
Revenue Arrangements with Multiple Deliverables
In October 2009 a new accounting standard for the recognition of revenue arrangements with multiple deliverables was issued. This standard provides accounting principles and application guidance on whether multiple deliverables exist, how the arrangement should be separated, and how the consideration should be allocated. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. While we do not expect the adoption of this standard to have a material impact on our financial position and results of operations, this standard may impact us in the event we complete future transactions or modify existing collaborative relationships. Refer to Note 23, New Accounting Pronouncements to our Consolidated Financial Statements for additional discussion of this standard and its impact on us.
Effective January 1, 2009, we adopted a newly issued accounting standard for the accounting and disclosure of an entitys collaborative arrangements. This newly issued standard prescribes that certain transactions between collaborators be recorded in the income statement on either a gross or net basis, depending on the characteristics of the collaboration relationship. In accordance with this guidance, we must also evaluate our collaborative agreements for proper income statement classification based on the nature of the underlying activity. Amounts due from our collaborative partners related to development activities are generally reflected as a reduction of research and development expense because the performance of contract development services is not central to our operations. For collaborations with commercialized products, if we are the principal we record revenue and the corresponding operating costs in their respective line items within our consolidated statements of income. If we are not the principal, we record operating costs as a reduction of revenue. The Revenue Recognition Topic of the Codification describes the principal as the party who is responsible for delivering the product or service to the customer, has latitude to determine price, and has the risks and rewards of providing product or service to the customer, including inventory and credit risk.
As discussed within Note 17, Collaborations to our Consolidated Financial Statements, Genentech incurs the majority of continuing development cost for RITUXAN. Expenses incurred by Genentech in the development of RITUXAN are not recorded as research and development expense, but rather reduce our share of co-promotion profits recorded as a component of unconsolidated joint business revenue.
Clinical Trial Expenses
Clinical trial expenses include expenses associated with CROs. The invoicing from CROs for services rendered can lag several months. We accrue the cost of services rendered in connection with CRO activities based on our estimate of site management, monitoring costs, and project management costs. We maintain regular communication with our CROs to gauge the reasonableness of our estimates. Differences between actual clinical trial expenses and estimated clinical trial expenses recorded have not been material and are adjusted for in the period in which they become known.
Consolidation of Variable Interest Entities
We consolidate variable interest entities in which we are the primary beneficiary. For such consolidated entities where we own less than a 100% interest, we record noncontrolling interest in our statement of income for the current results allocated to the third party equity interests. In determining whether we are the primary beneficiary, we consider a number of factors, including determining the expected losses and residual returns of the technologies being developed pursuant to collaborations and other economic risk and reward of such collaborations.
Discounted cash flow models are typically used in these analyses and these models require the use of significant estimates and assumptions including but not limited to:
These factors affect the way we account for certain collaborations. Future events may result in our consolidation of companies or related entities with which we have a collaborative arrangement. The consolidation of variable interest entities may have a material effect on our financial condition and results of operation in future periods.
Effective January 1, 2010, a new accounting standard will amend previously issued accounting guidance for the consolidation of variable interest entities and will affect how an enterprise determines whether its variable interest or interests give it a controlling financial interest in a variable interest entity. This new standard may affect how we account for the consolidation of common structures, such as joint ventures, equity method investments, collaboration and other agreements and purchase arrangements. Under this revised guidance, the determination about whether an enterprise should consolidate a variable interest entity is required to be evaluated continuously. Refer to Note 23, New Accounting Pronouncements to our Consolidated Financial Statements for additional discussion of this standard and its impact on us.
Inventories are stated at the lower of cost or market with cost determined under the first-in, first-out (FIFO) method. Included in inventory are raw materials used in the production of pre-clinical and clinical products, which are expensed as research and development costs when consumed.
Our policy is to capitalize inventory costs associated with our products prior to regulatory approval, when, based on managements judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. We consider numerous attributes in evaluating whether the costs to manufacture a particular product should be capitalized as an asset. We assess the regulatory approval process and where the particular product stands in relation to that approval process, including any known constraints and impediments to approval, including safety, efficacy and potential labeling restrictions. We evaluate our anticipated research and development initiatives and constraints relating to the product and the indication in which it will be used. We consider our manufacturing environment including our supply chain in determining logistical constraints that could hamper approval or commercialization. We consider the shelf life of the product in relation to the expected timeline for approval and we consider patent related or contract issues that may prevent or cause delay in commercialization. We are sensitive to the significant commitment of capital to scale up production and to launch commercialization strategies. We also base our judgment on the viability of commercialization, trends in the marketplace and market acceptance criteria. Finally, we consider the reimbursement strategies that may prevail with respect to the product and assess the economic benefit that we are likely to realize.
We expense previously capitalized costs related to pre-approval inventory upon a change in such judgment, due to, among other potential factors, a denial or delay of approval by necessary regulatory bodies. As of December 31, 2009 and 2008, the carrying value of our inventory did not include any costs associated with products that had not yet received regulatory approval.
There is a risk inherent in these judgments and any changes we make in these judgments may have a material impact on our results in future periods.
Obsolescence and Unmarketable Inventory
We periodically review our inventories for excess or obsolete inventory and write-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated by us, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Additionally, our products are subject to strict quality control and monitoring which we perform throughout the manufacturing process. In the event that certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, we will record a charge to cost of sales to write-down any obsolete or otherwise unmarketable inventory to its estimated net realizable value. In all cases product inventory is carried at the lower of cost or its estimated net realizable value.
We invest in various types of securities, including:
These investments are accounted for in accordance with accounting standards for certain investments in debt and equity securities.
We monitor the financial performance of our portfolio of investments which are subject to concentration limits set within our investment policy to help mitigate and limit the amount of investment exposure as to institution, maturity and investment type. The objectives of this policy are safety of principal, liquidity and yield.
In accordance with the accounting standard for fair value measurements we have classified our financial assets and liabilities as Level 1, 2 or 3 within the fair value hierarchy. Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs utilize unobservable data points for the asset or liability.
As noted in Note 6, Fair Value Measurements to our Consolidated Financial Statements, a majority of our financial assets and liabilities have been classified as Level 2. These assets and liabilities have been initially valued at the transaction price and subsequently valued utilizing third party pricing services. The pricing services use many observable market inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, bids, offers, current spot rates and other industry and economic events. We validate the prices provided by our third party pricing services by understanding the models used, obtaining market values from other pricing sources, analyzing pricing data in certain instances and confirming those securities trade in active markets.
We also have some investments classified as Level 3 whose fair value is initially measured at transaction prices and subsequently valued using the pricing of recent financing or by reviewing the underlying economic fundamentals and liquidation value of the companies. We apply judgments and estimates when we validate the prices provided by third parties. While we believe the valuation methodologies are appropriate, the use of valuation methodologies is highly judgmental and changes in methodologies can have a material impact on our results of operations.
Impairment of Financial Instruments
In April 2009, we implemented newly issued accounting standards which provide guidance for the recognition, measurement and presentation of other-than-temporary impairments. This newly issued standard amended the other-than-temporary impairment model for debt securities and requires additional disclosures regarding the calculation of credit losses and the factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The impairment model for equity securities was not affected.
Prior to our adoption of these new accounting standards in April 2009, we recognized all other-than-temporary impairment amounts related to our debt securities in earnings as required under the previously effective guidance which required that management assert that it had the ability and intent to hold a debt security until maturity or until we recovered the cost of our investment. Under the new accounting standards, an other-than-temporary impairment must be recognized through earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, expected cash flows to be received must be evaluated to determine if a credit loss has occurred. In the event of a credit loss, only the amount associated with the credit loss is recognized in income. The amount of losses relating to other factors, including those resulting from changes in interest rates, are recorded in accumulated other comprehensive income. The adoption of this guidance did not have a material impact on our financial position or results of operations.
We conduct periodic reviews to identify and evaluate each investment that has an unrealized loss, in accordance with the meaning of other-than-temporary impairment and its application to certain investments, as required under the Investment for Debt and Equity Securities Topic of the Codification. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses on available-for-sale securities that are determined to be temporary, and not related to credit loss, are recorded, net of tax, in accumulated other comprehensive income.
For available-for-sale debt securities with unrealized losses, management performs an analysis to assess whether we intend to sell or whether we would more likely than not be required to sell the security before the expected recovery of the amortized cost basis. Where we intend to sell a security, or may be required to do so, the securitys decline in fair value is deemed to be other-than-temporary and the full amount of the unrealized loss is recorded within earnings as an impairment loss.
Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.
For equity securities, when assessing whether a decline in fair value below our cost basis is other-than-temporary, we consider the fair market value of the security, the duration of the securitys decline, and the financial condition of the issuer. We then consider our intent and ability to hold the equity security for a period of time sufficient to recover our carrying value. Where we have determined that we lack the intent and ability to hold an equity security to its expected recovery, the securitys decline in fair value is deemed to be other-than-temporary and is recorded within earnings as an impairment loss.
Impairment of Long-lived Assets including Goodwill
Long-lived Assets Other than Goodwill
We periodically evaluate whether current facts or circumstances indicate that the carrying value of our long-lived assets to be held and used, including property plant and equipment, as well as intangible assets, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Factors we consider that could indicate a change in circumstances include, but are not limited to:
If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived asset, including its eventual residual value, is compared to the carrying value to determine whether impairment exists. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their estimated fair values.
Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which undiscounted cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the assets residual value, if any. We derive the required undiscounted cash flow estimates from our historical experience and our internal business plans.
We did not recognize an impairment charge related to our long-lived assets, other than goodwill, during 2009, 2008 and 2007.
We assess our goodwill balance within our single reporting unit annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with the Intangibles-Goodwill and Other Topic of the Codification to determine whether any impairment in this asset may exist and, if so, the extent of such impairment. The provisions of this guidance require that we perform a two-step impairment test. In the first step, we compare the fair value of our reporting unit to its carrying value. If the carrying value of the net assets assigned to our reporting unit exceeds the fair value of our reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of our reporting units goodwill. If the carrying value of our reporting units goodwill exceeds its implied fair value, then the company records an impairment loss equal to the difference.
We calculate the fair value of our reporting unit utilizing both an income approach and a market approach. The income approach utilizes a discounted cash flow model with multiple scenarios for future growth. The discount is calculated based on our cost of capital rate. The market approach utilizes revenue and other metrics from similar publicly traded companies. The results of both fair value calculations are then compared to our reporting units carrying value. We completed our required annual impairment test in the fourth quarter of 2009, 2008 and 2007 and determined in each of those periods that the carrying value of goodwill was not impaired. In each year, the fair value of our reporting unit, which includes goodwill, was significantly in excess of the carry value of our reporting unit.
The determination of the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. The estimates and assumptions used in calculating fair value include identifying future cash flows, which requires that we make a number of critical legal, economic, market and business assumptions that reflect our best estimates as of the testing date. We believe the methods we use to determine these underlying assumptions and estimates are reasonable. Our assumptions and estimates may differ significantly from actual results, or circumstances could change that would cause us to conclude that an impairment now exists or that we previously understated the extent of impairment.
We have acquired, and expect to continue to acquire, intangible assets primarily through the acquisition of biotechnology companies. These intangible assets primarily consist of technology associated with human therapeutic products and in-process product candidates. When significant identifiable intangible assets are acquired, we generally engage an independent third-party valuation firm to assist in determining the fair values of these assets as of the acquisition date. Management will determine the fair value of less significant identifiable intangible assets
acquired. Discounted cash flow models are typically used in these valuations, and these models require the use of significant estimates and assumptions including but not limited to:
We believe the fair values assigned to the intangible assets acquired are based upon reasonable estimates and assumptions given available facts and circumstances as of the acquisition dates.
If these projects are not successfully developed, the sales and profitability of the company may be adversely affected in future periods. Additionally, the value of the acquired intangible assets may become impaired. We believe that the foregoing assumptions used in the IPR&D analysis were reasonable at the time of the respective acquisition. No assurance can be given, however, that the underlying assumptions used to estimate expected project sales, development costs or profitability, or the events associated with such projects, will transpire as estimated.
We account for business combinations completed on or after January 1, 2009 in accordance with the revised guidance for accounting for business combinations, which modifies the criteria that must be met to qualify as a business combination and prescribes new accounting requirements, including the accounting treatment associated with acquired IPR&D. Before January 1, 2009 we measured acquired IPR&D at fair value and expensed it on the acquisition date, or capitalized it as intangible assets if certain criteria were met. Effective January 1, 2009, acquired IPR&D is measured at fair value and capitalized as intangible assets and tested for impairment until completion of programs and amortized from the date of completion over its estimated useful life.
We make certain assumptions in order to value and expense our share-based compensation. In connection with valuing stock options and our employee stock purchase plan, we use the Black-Scholes model, which requires us to estimate certain subjective assumptions. The key assumptions we make are: the expected volatility of our stock; the expected term of the award; and the expected forfeiture rate. In connection with our restricted stock programs, we make assumptions principally related to the forfeiture rate. In addition, for our performance-vested restricted stock programs, we estimate the performance factor each period end in order to estimate the actual number of shares that will be earned. For example, performance-vested restricted stock programs are usually based on company performance metrics such as annual revenue and earnings per share. Thus, during the performance period, we estimate our full year revenue and earnings per share and then adjust the performance factor after the completion of the full year.
We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value share-based awards granted in future periods. Such changes may lead to a significant change in the expense we recognize in connection with share-based payments.
New forms of equity awards are expected to be granted to certain employees beginning in 2010: restricted stock units which will vest based on market conditions and performance-vested restricted stock units which will be settled in cash. The market based awards require the use of a binomial model or Monte Carlo simulation for valuation at grant date and include key assumptions such as the expected market price of the companys stock on the vest date and the expected number of vested shares. The cash settled awards will be marked to market at each period end with fluctuations in value reported through earnings. We will apply forfeiture rate assumptions similar to those utilized by us when accounting for our other share-based compensation programs.
In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences
result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, under the applicable financial accounting standards, we are allowed to consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and the effects of tax planning strategies. Our estimates of future taxable income include, among other items, our estimates of future income tax deductions related to the exercise of stock options. In the event that actual results differ from our estimates, we adjust our estimates in future periods and we may need to establish a valuation allowance, which could materially impact our financial position and results of operations.
We account for uncertain tax positions using a more-likely-than-not threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. We evaluate uncertain tax positions on a quarterly basis and adjust the level of the liability to reflect any subsequent changes in the relevant facts surrounding the uncertain positions. Our liabilities for uncertain tax positions can be relieved only if the contingency becomes legally extinguished through either payment to the taxing authority or the expiration of the statute of limitations, the recognition of the benefits associated with the position meet the more-likely-than-not threshold or the liability becomes effectively settled through the examination process. We consider matters to be effectively settled once the taxing authority has completed all of its required or expected examination procedures, including all appeals and administrative reviews; we have no plans to appeal or litigate any aspect of the tax position; and we believe that it is highly unlikely that the taxing authority would examine or re-examine the related tax position. We also accrue for potential interest and penalties, related to unrecognized tax benefits in income tax expense.
We are currently involved in various claims and legal proceedings. On a quarterly basis, we review the status of each significant matter and assess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise our estimates. These revisions in the estimates of the potential liabilities could have a material impact on our consolidated results of operations and financial position.
Please read Note 23, New Accounting Pronouncements to our Consolidated Financial Statements for a discussion of new accounting standards.
We have operations in Canada, Brazil, Argentina, Australia, New Zealand, Japan, China, and India and throughout Europe in connection with the sale of AVONEX and TYSABRI and in Germany in connection with the sale of FUMADERM. We also receive royalty revenues based on worldwide product sales by our licensees and through Genentech on sales of RITUXAN in the rest of world. As a result, our financial position, results of operations and cash flows can be affected by market fluctuations in foreign exchange rates, primarily with respect to the Euro, Danish kroner, Swedish krona, British pound, Japanese yen, Canadian dollar and Swiss franc.
We use foreign currency forward contracts to manage foreign currency risk but do not engage in currency speculation. The majority of our forward contracts are used to hedge certain forecasted revenue transactions
denominated in foreign currencies. We also use forward contracts to mitigate the foreign currency exposure related to certain balance sheet items. We have not elected hedge accounting for the balance sheet related items.
The following quantitative information includes the impact of currency movements on forward contracts used in both programs. As of December 31, 2009 and 2008, a hypothetical adverse 10% movement in foreign exchange rates compared to the U.S. dollar across all maturities (for example, a strengthening of the Euro) would result in a hypothetical decrease in the fair value of forward contracts of approximately $64.4 million and $52.4 million, respectively. Our use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is limited because it does not take into account all foreign currency operating transactions.
Certain of our debt instruments are variable rate instruments and our interest expense associated with these instruments is, therefore, subject to changes in market interest rates. As of December 31, 2009 and 2008, a 100 basis-point adverse movement (increase in LIBOR) wo