UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

BIOGEN IDEC INC.

(Exact name of registrant as specified in its charter)

Delaware		33-0112644
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

14 Cambridge Center, Cambridge, MA 02142
(617) 679-2000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)

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

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

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

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

The number of shares of the registrant’s Common Stock, $0.0005 par value, outstanding as of November 3, 2006, was 337,126,790 shares.

 

 

BIOGEN IDEC INC.

FORM 10-Q — Quarterly Report

For the Quarterly Period Ended September 30, 2006

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Statements of Operations — Three and nine months ended September 30, 2006 and 2005			3
Consolidated Balance Sheets — September 30, 2006 and December 31, 2005			4
Consolidated Statements of Cash Flows — Nine months ended September 30, 2006 and 2005			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
Item 3. Quantitative and Qualitative Disclosures About Market Risk			56
Item 4. Controls and Procedures			56
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			56
Item 1A. Risk Factors			56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			69
Item 6. Exhibits			69
Signatures			70
Ex-10.1 Letter Agreement regarding employment arrangement of Cecil B. Pickett
Ex-31.1 Section 302 Certification of the C.E.O.
Ex-31.2 Section 302 Certification of the C.F.O.
Ex-32.1 Section 906 Certification of the C.E.O. and C.F.O.

PART I

BIOGEN IDEC INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenues:
Product		$	475,096			$	391,366			$	1,317,696			$	1,187,773
Unconsolidated joint business			203,820				181,597				593,296				526,984
Royalty			21,867				23,117				60,714				71,600
Corporate partner			2,709				131				3,002				3,290
Total revenues			703,492				596,211				1,974,708				1,789,647
Costs and expenses:
Cost of product revenues, excluding amortization of acquired intangible assets			65,742				88,358				209,195				257,083
Cost of royalty revenues			1,050				1,203				3,085				3,179
Research and development			211,033				227,039				518,910				579,357
Selling, general and administrative			168,153				161,410				492,833				475,637
Amortization of acquired intangible assets			60,011				75,990				206,978				228,746
Acquired in-process research and development			—				—				330,520				—
Facility impairments and loss (gain) on sale			175				21,046				(923	)			102,904
Gain on settlement of license agreement			—				—				(34,192	)			—
Total costs and expenses			506,164				575,046				1,726,406				1,646,906
Income from operations			197,328				21,165				248,302				142,741
Other income (expense), net			22,319				11,192				62,790				8,318
Income before income tax expense and cumulative effect of accounting change			219,647				32,357				311,092				151,059
Income tax expense			63,048				5,172				205,916				45,910
Income before cumulative effect of accounting change			156,599				27,185				105,176				105,149
Cumulative effect of accounting change, net of income tax			—				—				3,779				—
Net income		$	156,599			$	27,185			$	108,955			$	105,149
Basic earnings per share:
Income before cumulative effect of accounting change		$	0.46			$	0.08			$	0.31			$	0.31
Cumulative effect of accounting change, net of income tax			—				—				0.01				—
Basic earnings per share		$	0.46			$	0.08			$	0.32			$	0.31
Diluted earnings per share:
Income before cumulative effect of accounting change		$	0.45			$	0.08			$	0.30			$	0.31
Cumulative effect of accounting change, net of income tax			—				—				0.01				—
Diluted earnings per share		$	0.45			$	0.08			$	0.31			$	0.31
Shares used in calculating:
Basic earnings per share			338,021				336,536				339,527				334,819
Diluted earnings per share			344,754				340,859				345,999				346,581

See accompanying notes to the consolidated financial statements.

BIOGEN IDEC INC. AND SUBSIDIARIES

		September 30,				December 31,
		2006				2005
ASSETS
Current assets:
Cash and cash equivalents		$	414,594			$	568,168
Marketable securities			246,425				282,585
Accounts receivable, net			282,519				265,742
Due from unconsolidated joint business			157,319				141,059
Deferred tax assets			44,966				41,242
Inventory			155,119				182,815
Other current assets			74,614				78,054
Assets held for sale			9,601				58,416
Total current assets			1,385,157				1,618,081
Marketable securities			1,372,772				1,204,378
Property and equipment, net			1,246,116				1,174,396
Intangible assets, net			2,795,620				2,975,601
Goodwill			1,153,980				1,130,430
Investments and other assets			232,913				264,061
		$	8,186,558			$	8,366,947
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	62,822			$	99,780
Deferred revenue			6,730				16,928
Taxes payable			139,728				200,193
Accrued expenses and other			285,730				266,135
Total current liabilities			495,010				583,036
Notes payable			45,074				43,444
Long-term deferred tax liability			653,433				762,282
Other long-term liabilities			98,167				72,309
Commitments and contingencies (Notes 7, 10 and 12)
Shareholders’ equity:
Convertible preferred stock, par value $0.001 per share			—				—
Common stock, par value $0.0005 per share			173				173
Additional paid-in capital			8,260,886				8,206,911
Accumulated other comprehensive loss			(17,876	)			(13,910	)
Deferred stock-based compensation			—				(42,894	)
Accumulated deficit			(954,991	)			(1,021,644	)
			7,288,192				7,128,636
Less treasury stock, at cost			393,318				222,760
Total shareholders’ equity			6,894,874				6,905,876
		$	8,186,558			$	8,366,947

See accompanying notes to the consolidated financial statements.

BIOGEN IDEC INC. AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2006				2005
Cash flows from operating activities:
Net income		$	108,955			$	105,149
Adjustments to reconcile net income to net cash flows from operating activities
Depreciation and amortization of fixed and intangible assets			288,653				304,684
Acquisition of in process research and development			330,520				—
Gain on settlement of license agreement			(34,192	)			—
Stock-based compensation			102,059				19,465
Non-cash interest expense and amortization of investment premium			623				26,728
Deferred income taxes			(79,777	)			(132,211	)
Realized loss on sale of marketable securities			2,420				2,983
Write-down of inventory to net realizable value			12,608				65,714
Facility impairments and (gain) loss on sale			(923	)			102,904
Impairment of property, plant and equipment			—				3,067
Impairment of investments and other assets			5,021				32,124
Tax benefit from stock options			(12,293	)			—
Changes in assets and liabilities, net:
Accounts receivable			(18,845	)			11,497
Due from unconsolidated joint business			(16,260	)			(4,092	)
Inventory			(22,973	)			(42,167	)
Other assets			3,527				11,166
Accrued expenses and other current liabilities			(64,871	)			99,188
Deferred revenue			(12,969	)			4,908
Other long-term liabilities			8,180				3,656
Net cash flows provided by operating activities			599,463				614,763
Cash flows from investing activities:
Purchases of marketable securities			(1,597,263	)			(1,122,712	)
Proceeds from sales and maturities of marketable securities			1,468,097				1,536,475
Proceeds from sale of AMEVIVE			59,800				—
Payments for acquisition of Fumapharm, net of cash acquired			(215,468	)			—
Payments for acquisition of Conforma, net of cash acquired			(147,783	)			—
Acquisitions of property, plant and equipment			(133,840	)			(215,950	)
Proceeds from sale of property, plant and equipment			35,942				408,130
Purchases of other investments			(5,580	)			(117,258	)
Net cash flows provided by (used in) investing activities			(536,095	)			488,685
Cash flows from financing activities:
Purchase of treasury stock			(320,268	)			(322,590	)
Issuance of treasury stock for stock-based compensation arrangements			86,838				88,041
Change in cash overdrafts			(11,145	)			(35,439	)
Tax benefit from stock options			12,293				—
Repurchase of senior notes			—				(746,415	)
Loan proceeds from joint venture partner			15,304				—
Net cash flow used in financing activities			(216,978	)			(1,016,403	)
Net increase (decrease) in cash and cash equivalents			(153,610	)			87,045
Effect of exchange rate changes on cash and cash equivalents			36				—
Cash and cash equivalents, beginning of the period			568,168				209,447
Cash and cash equivalents, end of the period		$	414,594			$	296,492
Supplemental cash flow disclosures:
Cash paid during the period for tax liabilities		$	322,764			$	57,112
Cash paid during the period for interest		$	—			$	38,018

See accompanying notes to the consolidated financial statements.

BIOGEN IDEC INC. AND SUBSIDIARIES

1. Business Overview and Summary of Significant Accounting Policies

     Overview

     Biogen Idec is an international biotechnology company that creates new standards of care in oncology, neurology, and immunology. As a global leader in the development, manufacturing, and commercialization of novel therapies, we transform scientific discoveries into advances in human healthcare.

     Basis of Presentation

     In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of our financial position, results of operations, and cash flows. The information included in this quarterly report on Form 10-Q should be read in conjunction with our consolidated financial statements and the accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2005. Our accounting policies are described in the Notes to the Consolidated Financial Statements in our 2005 Annual Report on Form 10-K and updated, as necessary, in this Form 10-Q. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the U.S. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the operating results for the full year or for any other subsequent interim period.

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

     Principles of Consolidation

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

     TYSABRI Status

     TYSABRI^® (natalizumab) was initially approved by the U.S. Food and Drug Administration, or FDA, in November 2004 to treat relapsing forms of multiple sclerosis, or MS, to reduce the frequency of clinical relapses. In February 2005, in consultation with the FDA, we and Elan Corporation plc, or Elan, voluntarily suspended the marketing and commercial distribution of TYSABRI, and we informed physicians that they should suspend dosing of TYSABRI until further notification. In addition, we suspended dosing in clinical studies of TYSABRI in MS, Crohn’s disease, and rheumatoid arthritis, or RA. These decisions were based on reports of cases of progressive multifocal leukoencephalopathy, or PML, a rare brain infection that usually causes death or severe disability, in patients treated with TYSABRI in clinical studies

     In March 2006, we and Elan began an open-label, multi-center safety extension study of TYSABRI monotherapy in the U.S. and internationally. On June 5, 2006, we and Elan announced the FDA’s approval of the supplemental Biologics License Application, or sBLA, for the reintroduction of TYSABRI as a monotherapy treatment for relapsing forms of MS to slow the progression of disability and reduce the frequency of clinical relapses. On June 29, 2006, we and Elan announced that the European Agency for the Evaluation of Medicinal Products, or EMEA, had approved TYSABRI as a similar treatment. In July 2006, we began to ship TYSABRI in both the United States and Europe. During the three months ended September 30, 2006, we recognized revenue of $18.7 million related to TYSABRI, of which $4.7 million related to product shipments during the period. An additional $14.0 million of

revenue was recognized during the period related to shipments made in 2005 and was recognized in accordance with our revenue recognition policy, as discussed below.

     Inventory

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

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

		September 30,				December 31,
		2006				2005
Raw materials		$	43,329			$	44,417
Work in process			92,953				107,987
Finished goods			18,837				30,411
Total inventory		$	155,119			$	182,815

     Capitalization of Inventory Costs

     We capitalize inventory costs associated with our products prior to regulatory approval, when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. We consider numerous attributes in evaluating whether the costs to manufacture a particular product should be capitalized as an asset. We assess the regulatory approval process and where the 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 particular 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 possibly 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 would be required to 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 September 30, 2006, the carrying value of our inventory did not include any costs associated with products that had not yet received regulatory approval.

     TYSABRI

     We manufactured TYSABRI during the first and second quarter of 2005 and completed our scheduled production of TYSABRI during July 2005. Because of the uncertain future commercial availability of TYSABRI at the time, and our inability to predict to the required degree of certainty that TYSABRI inventory would be realized in commercial sales prior to the expiration of its shelf life, we expensed $23.2 million of costs related to the manufacture of TYSABRI in the first quarter of 2005 to cost of product revenues. At the time of production, the inventory was believed to be commercially saleable. During 2005, as we worked with clinical investigators to understand the possible risks of PML, we charged the costs related to the manufacture of TYSABRI to research and development expense. As a result, we expensed $21.5 million related to the manufacture of TYSABRI to research and development expense during 2005. As of December 31, 2005, there was no carrying value of TYSABRI inventory on our consolidated balance sheet.

     In the first quarter of 2006, in light of expectations of the re-introduction of TYSABRI, we began a new manufacturing campaign. On June 5, 2006, the FDA approved the reintroduction of TYSABRI as a monotherapy treatment for relapsing forms of MS to slow the progression of disability and reduce the frequency of clinical relapses. On June 29, 2006, we and Elan announced the EMEA’s approval of TYSABRI as a similar treatment. In July 2006, we began to ship TYSABRI in both the United States and Europe.

     As of September 30, 2006, $31.6 million and $0.3 million of TYSABRI inventory value is included in work in process and finished goods, respectively. In addition, we have product on hand that was expensed due to the uncertainties described above but which is available to fill future orders. The approximate cost of such product, based on its cost of manufacture, was $40.6 million. As we sell TYSABRI we will recognize lower than normal cost of product revenues and, therefore, higher margins, in the near future as we ship the inventory that was written off.

     TYSABRI currently has an approved shelf life of up to 48 months and, based on our sales forecasts for TYSABRI, we expect the carrying value of the TYSABRI inventory to be realized.

     Valuation of 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 subsequent information indicates the actual realizable value is less than that estimated by us, or if there are any further determinations that inventory will not be marketable based on estimates of demand, additional inventory write-downs may be required. This periodic review may lead us to expense costs associated with the manufacture of TYSABRI or other inventory in subsequent periods.

     Our products are subject to strict quality control and monitoring throughout the manufacturing process. Periodically, certain batches or units of product may no longer meet quality specifications or may become unusable based on expiration date. This would require write-downs of commercial inventory that does not meet quality specifications or becomes obsolete. In all cases this product inventory is written-down to its net realizable value.

     We have written-down the following unmarketable inventory, which was charged to cost of product revenues (in thousands):

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
AVONEX®		$	630			$	583			$	4,083			$	10,128
AMEVIVE®			—				9,059				2,433				23,346
ZEVALIN®			110				6,460				3,287				9,040
TYSABRI®			—				—				2,805				23,200
		$	740			$	16,102			$	12,608			$	65,714

     The write-downs for the three and nine months ended September 30, 2006 and 2005, respectively, were the result of the following (in thousands):

		Three months ended September 30,								Nine months ended September 30,
		2006				2005				2006				2005
New components for alternative presentations		$	—			$	—			$	—			$	8,417
Failed quality specifications			384				4,537				11,113				19,796
Excess and/or obsolescence			356				11,565				1,495				14,301
Costs for voluntary suspension of TYSABRI			—				—				—				23,200
		$	740			$	16,102			$	12,608			$	65,714

     Intangible Assets and Goodwill

     In connection with our merger with Biogen, Inc. on November 12, 2003, or the Merger, we recorded intangible assets related to patents, trademarks, and core technology as part of the purchase price. These intangible assets were recorded at fair value, and at September 30, 2006 and December 31, 2005 are net of accumulated amortization and impairments. Intangible assets related to out-licensed patents and core technology are amortized over their estimated useful lives, ranging from 12 to 20 years, based on the greater of straight-line method or economic consumption each period. These amortization costs are included in “Amortization of acquired intangible assets” in the accompanying consolidated statements of income. Intangible assets related to trademarks have indefinite lives, and as a result are not amortized, but are subject to review for impairment. We review our intangible assets for impairment periodically and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

     Goodwill associated with the Merger represents the difference between the purchase price and the fair value of the identifiable tangible and intangible net assets when accounted for by the purchase method of accounting. Goodwill is not amortized, but rather subject to periodic review for impairment. Goodwill is reviewed annually and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might not be recoverable.

     During the three months ended September 30, 2006, we recognized $46.7 million of amortization on core technology intangible assets. The AVONEX component of this amount was computed on the straight-line method as it was determined that, beginning in the three months ended September 30, 2006, the amortization of the intangible asset would be higher on the straight-line method than on the economic consumption method that had been applied previously.

     As of September 30, 2006 and December 31, 2005, intangible assets and goodwill, net of accumulated amortization and impairment charges and adjustments, were as follows (in thousands):

		Estimated		Historical				Accumulated
September 30, 2006:		Life		Cost				Amortization				Net
Out-licensed patents		12 years		$	578,000			$	138,880			$	439,120
Core/developed technology		15 - 20 years			3,000,882				712,254				2,288,628
Trademarks & tradenames		Indefinite			64,000				—				64,000
In-licensed patents		14 years			3,000				411				2,589
Assembled workforce		4 years			1,400				117				1,283
Total				$	3,647,282			$	851,662			$	2,795,620
Goodwill		Indefinite		$	1,153,980			$	—			$	1,153,980

		Estimated		Historical				Accumulated
December 31, 2005:		Life		Cost				Amortization				Adjustments				Net
Out-licensed patents		12 years		$	578,000			$	102,756			$	—			$	475,244
Core/developed technology		15-20 years			2,984,000				542,407				7,993				2,433,600
Trademarks & tradenames		Indefinite			64,000				—				—				64,000
In-licensed patents		14 years			3,000				243				—				2,757
Total				$	3,629,000			$	645,406			$	7,993			$	2,975,601
Goodwill		Indefinite		$	1,151,105			$	—			$	20,675			$	1,130,430

     As discussed in Note 2, Acquisitions and Collaboration Agreements, core/developed technology, goodwill and assembled workforce increased by $26.4 million, $18.5 million, and $1.4 million, respectively, as a result of the acquisition of entities in the second quarter of 2006. During the three months ended June 30, 2006, we recorded an increase to goodwill of $5.4 million to increase reserves for product returns at the time of our merger with Biogen Inc. in 2003. During the third quarter of 2006, in connection with the calculation of the purchase price allocation of Fumapharm, we reduced goodwill by approximately $2.0 million.

     Revenue Recognition

     Product Revenues

     We recognize revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the seller’s price to the buyer is fixed or determinable; collectibility is reasonably assured; and title and the risks and rewards of ownership have transferred to the buyer.

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

     Revenues are recorded net of applicable allowances for returns, patient assistance, trade term discounts, Medicaid rebates, Veteran’s Administration rebates, managed care discounts and other applicable allowances. Included in our consolidated balance sheets at September 30, 2006 and December 31, 2005 are allowances for returns, rebates, discounts and other allowances which totaled $61.7 million and $52.7 million, respectively.

     At September 30, 2006, our allowance for product returns, which is a component of allowances for returns, rebates, discounts, and other allowances, was $15.9 million. At September 30, 2006, total reserves for product returns were approximately 1.2% of total current assets and less than 0.2% of total assets. We prepare our estimates of product returns based primarily on historical experience updated for changes in facts and circumstances, as appropriate.

     During the three months ended June 30, 2006, we recorded an increase in our allowance for expired products of $12.3 million to correct for prior period errors. This increase in the allowance was recorded through an out of period reduction in net product revenue of $6.9 million and an increase in goodwill of $5.4 million. We identified and quantified the errors through an analysis of the historical rate for returns based on volumes of returns and the amount of credit granted to the returning distributors in past periods. At the time of merger with Biogen Inc. in 2003, Biogen Inc. had understated its allowance for expired product by an estimated $5.4 million due to an incorrect methodology applied in calculating its reserve balance. Had we identified this error at the time of the merger, the recorded goodwill would have been approximately $5.4 million higher than has been previously reflected. This methodology was in error because it did not use known information in determining critical assumptions used in the basis of calculation. Our application of this incorrect methodology in the post-merger period resulted in understating this reserve by an additional $6.9 million. In all cases, the correctly calculated rate of return is less than one percent of related gross product revenues. We have determined that, in accordance with APB 28, Interim Financial Reporting paragraph 29, this out of period correction is not material to the current year. Additionally, we have determined that the error at the merger date is not material to any prior period balance sheet amounts and the error in the post-merger period is not material to any prior period reported amounts.

     For the three and nine months ended September 30, 2006 we recorded $58.5 million and $180.4 million, respectively, in our consolidated statement of income related to sales returns and allowances, rebates, discounts and other allowances, compared to $59.1 million and $167.0 million, respectively for the comparable periods in 2005. In the three and nine months ended September 30, 2006, the amount of these allowances was approximately 12.3% and 13.7%, respectively, of product revenue for all our products, compared to 15.1% and 14.1%, respectively, for the comparable periods in 2005. Product returns, which is a component of allowances for returns, rebates, discounts, and other allowances, were $8.7 million and $30.7 million for the three and nine months ended September 30, 2006, and $4.0 million and $20.1 million for the comparable periods in 2005.

     The increase in product returns expense for the three months ended September 30, 2006, as compared to the same period in 2005, is primarily a result of higher returns experience. The increase in expense for product returns for the nine months ended September 30, 2006, as compared to the same period in 2005, is primarily a result of the increases to the reserve discussed above and higher returns experience in the current year. Additionally, in the prior year, the expense included $9.7 million due to the voluntary suspension of TYSABRI. Product returns in the three and nine months ended September 30, 2006 included $3.0 and $9.7 million, respectively, related to product sales made prior to 2006. Of these amounts, $2.3 million was in reserves at December 31, 2005.

     TYSABRI

     During the third quarter of 2006, we began to sell TYSABRI in both the U.S. and Europe. Under the terms of our agreement with Elan, we manufacture TYSABRI. Furthermore, in the U.S., we sell TYSABRI to Elan who distributes it and co-markets it in collaboration with us.

     For sales to Elan in the U.S., we recognize revenue upon Elan’s shipment of the product to the customer. The sales price to Elan in the U.S. is predetermined and is set on a quarterly basis, prospectively, in a manner that approximates an equal sharing of the collaboration gross margin between Elan and us. In addition to the sharing of gross margin, both parties share equally in the collaboration operating costs. Elan’s reimbursement of our operating costs is reflected as a reduction in the reported amounts of the respective line items, generally research and development and selling, general and administrative costs, within our consolidated statement of operations.

     For sales outside of the U.S., we market and distribute TYSABRI and record revenue at the time of product shipment. For these sales, both parties share equally in the net pre-tax profits of the collaboration. Additionally, we reimburse Elan for 100% of the royalty, distribution, selling and other costs Elan incurs on behalf of the collaboration. The equal sharing of the collaboration pre-tax profits and our reimbursement to Elan of their operating costs are reflected in the reported amounts of the respective line items, generally cost of product revenues, excluding amortization of acquired intangible assets and selling, general and administrative costs, within our consolidated statement of operations.

     Prior to the suspension of TYSABRI in 2005, we shipped product to Elan and recognized revenue in accordance with the policy described above. Accordingly, as of March 31, 2005, we deferred $14.0 million in revenue from Elan related to sales of TYSABRI that had not yet been shipped by Elan. This amount was paid by Elan during 2005, and was recognized as revenue during the third quarter of 2006 as the uncertainty about the ultimate disposition of the product was eliminated during the period.

     As of September 30, 2006, Elan owed us $28.0 million, representing reimbursable commercialization and development expenses incurred by us. This amount is included in other current assets on our consolidated balance sheet.

     Revenues from Unconsolidated Joint Business

     Revenues from unconsolidated joint business consist of our share of the pretax copromotion profits generated from our copromotion arrangement with Genentech Inc., or Genentech, reimbursement from Genentech of our RITUXAN-related sales force and development expenses, and royalties from Genentech for sales of RITUXAN^® (rituximab) outside the U.S. by F. Hoffman LaRoche, or Roche, and Zenyaku Kogyo Co. Ltd., or Zenyaku. Under the copromotion arrangement, all U.S. sales of RITUXAN and associated costs and expenses are recognized by Genentech and we record our share of the pretax copromotion profits on a quarterly basis, as defined in our amended and restated collaboration agreement with Genentech. Pretax copromotion profits under the copromotion arrangement are derived by taking U.S. net sales of RITUXAN to third-party customers less cost of sales, third-party royalty expenses, distribution, selling and marketing expenses, and joint development expenses incurred by Genentech and us. We record royalty revenue on sales of RITUXAN outside the U.S. on a cash basis.

     Royalty Revenues

     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 have rights. The license agreements provide for the payment of royalties to us based on sales of the licensed product. 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 we have received (adjusted for any changes in facts and circumstances, as appropriate). We maintain regular communication with our licensees in order to obtain information to develop reasonable estimates. Differences between actual royalty revenues and estimated royalty revenues are reconciled and adjusted for in the period which they become known, typically the following quarter. Historically, adjustments have not been material based on actual amounts received from licensees. There are no future performance obligations on our part under these license agreements. To the extent we do not have sufficient ability to accurately estimate revenue, we record revenue on a cash basis.

     Research and Development Expenses

     Research and development expenses consist of upfront fees and milestones paid to collaborators and expenses incurred in performing research and development activities including salaries and benefits, facilities expenses, overhead expenses, clinical trial and related clinical manufacturing expenses, share-based compensation expense, contract services, and other outside expenses. Research and development expenses are expensed as incurred. We have entered into certain research agreements in which we share expenses with our collaborator. We have entered into other collaborations where we are reimbursed for work performed on behalf of our collaboration partners. We record these costs as research and development expenses. If the arrangement is a cost-sharing arrangement and there is a period during which we receive payments from the collaborator, we record payments by the collaborator for their share of the development effort as a reduction of research and development expense. If the arrangement is a reimbursement of research and development expenses, we record the reimbursement as corporate partner revenue.

     Acquired In-Process Research and Development

     Acquired in-process research and development, or IPR&D, represents the fair value assigned to research and development projects that we acquire which have not been completed at the date of acquisition and which have no

future alternative use. Accordingly, the fair value of such projects is recorded as research and development expense as of the acquisition date.

     The value assigned to acquired IPR&D is determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to present value. The revenue and costs projections used to value IPR&D were, as applicable, reduced based on the probability of developing a new drug. Additionally, the projections considered the relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by us and our competitors. The resulting net cash flows from such projects are based on management’s estimates of cost of sales, operating expenses, and income taxes from such projects. The rates utilized to discount the net cash flows to their present value were based on estimated cost of capital calculations.

     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 other acquired intangible assets may become impaired. We believed that the foregoing assumptions used in the IPR&D analysis were reasonable at the time of the 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.

     Reclassifications

     Certain reclassifications of prior year amounts have been made to conform to current year presentation.

     Share-Based Payments

     Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004) — Share-Based Payment, or SFAS 123(R), which requires compensation cost relating to share-based payment transactions to be recognized in the financial statements using a fair-value measurement method. See Note 6, Share-Based Payments, for a complete discussion on our accounting for share-based payments.

     Assets Held For Sale

     We consider certain real property and certain other miscellaneous assets as held for sale, where they meet the criteria of held for sale under SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

     In April 2006, we sold the worldwide rights and other assets of AMEVIVE for $59.8 million, including $43.7 million of inventory on hand, to Astellas Pharma US, Inc. As of December 31, 2005, our AMEVIVE assets held for sale included $8.0 million, net, related to intangible assets, and $5.4 million, of property, plant and equipment, net, and were reported separately in current assets on the consolidated balance sheet. The pre-tax gain on this sale of approximately $2.8 million was deferred and is being recognized over the period of a related long-term supply contract.

     In February 2006, we sold our clinical manufacturing facility, known as NICO, in Oceanside, California to Genentech. The assets associated with the facility were included in assets held for sale on our consolidated balance sheet as of December 31, 2005. Total consideration was $29.0 million. In the third and fourth quarters of 2005, we recorded impairment charges of $12.9 million and $15.1 million, respectively, for a total charge of $28.0 million to reduce the carrying value of NICO to its net realizable value. No additional loss resulted from completion of the sale.

     In June 2005, we sold our large-scale biologics manufacturing facility in Oceanside, California, known as NIMO, along with approximately 60 acres of real property located in Oceanside, California upon which NIMO is located, together with improvements, related property rights, and certain personal property intangibles and contracts at or related to the real property. Total consideration for the purchase was $408.1 million. For the three and nine months ended September 30, 2005, the loss from this transaction was $7.7 million and $83.3 million, respectively, which consisted primarily of the write-down of NIMO to net selling price, sales and transfer taxes, and other associated transaction costs.

2. Acquisitions and Collaboration Agreements

     During 2006, we acquired two entities, Fumapharm AG, or Fumapharm, and Conforma Therapeutics Corporation, or Conforma. Additionally, we entered into three collaborations: with mondoBIOTECH AG, or mondo, Alnylam Pharmaceuticals, Inc., or Alnylam, and UCB, S.A., or UCB.

     Fumapharm

     On June 15, 2006, we completed the acquisition of 100% of the stock of Fumapharm, a privately held pharmaceutical company based in Switzerland that develops therapeutics derived from fumaric acid esters. As part of the acquisition, we acquired: FUMADERM^®, a commercial product available in Germany for the treatment of psoriasis, and BG-12, a clinical-stage compound being studied for the treatment of MS and psoriasis that was being jointly developed by Fumapharm and us. The purpose of this acquisition was to support our goal of developing innovative therapeutic options for people living with MS.

     As part of the acquisition, we agreed to pay $220.0 million, of which $218.0 million was paid at closing and $2.0 million was retained and will be paid upon satisfaction of customary representations and warranties. We agreed to additional payments of: i) $15.0 million upon achievement of certain regulatory approvals, and ii) up to an additional $300.0 million in the event that annual and cumulative sales targets, as defined, are achieved. The $2.0 million retention amount has been accrued on our consolidated balance sheet as of September 30, 2006.

     The acquisition was funded from our existing cash on hand and has been accounted for as a business combination. Assets and liabilities assumed have been recorded at their fair values as of the date of acquisition. The results of operations for Fumapharm are included from the date of acquisition. We have completed our preliminary purchase price allocation for the acquisition as set out below (in millions):

Purchase Price Allocation
Current assets		$	6.5
IPR&D			207.4
Core technology			16.9
Developed technology			9.5
Goodwill			18.5
Other assets			1.2
Deferred tax liabilities			(2.8	)
Other liabilities			(2.7	)
		$	254.5

Consideration and Gain
Consideration		$	220.0
Gain on settlement of license agreement			34.2
Transaction costs			0.3
		$	254.5

     During the third quarter of 2006, in connection with the calculation of the purchase price allocation, we made adjustments to increase the amounts assigned to inventory and revenue rebates, which are current assets. The net effect of the two adjustments was a reduction in goodwill of approximately $2.0 million. The purchase price allocation is considered preliminary as we are currently evaluating certain executory contracts to determine whether the contracted services will be required. We expect to complete the purchase price allocation during the fourth quarter of 2006.

     The amount allocated to IPR&D projects relates to the development of BG-12. BG-12 recently received positive results from a Phase II study of its efficacy and safety for patients with relapsing-remitting MS. We expect to incur approximately an additional $130 million to complete the project. The estimated revenues from BG-12 are expected to be recognized beginning in 2011. A discount rate of 12% was used to value the project, which we believe to be commensurate with the stage of development and the uncertainties in the economic estimates described above. At the date of acquisition, the development of BG-12 had not yet reached technological feasibility, and the research and development in progress had no alternative future uses. Accordingly, the $207.4 million in IPR&D was expensed in the three months ended June 30, 2006.

     The fair value of intangible assets was based on valuations using an income approach, with estimates and assumptions determined by management. The core technology asset represents a combination of Fumapharm’s processes and procedures related to the design and development of its application products. The developed technology relates to processes and procedures related to products that have reached technological feasibility. Core technology is being amortized over approximately 12 years and the developed technology over approximately 3 years. The excess of purchase price over tangible assets, identifiable intangible assets and assumed liabilities represents goodwill. None of the goodwill or intangible assets acquired is deductible for income tax purposes. As a result, we recorded a deferred tax liability of $2.8 million, based on the tax effect of the amount of the acquired intangible assets other than goodwill with no tax basis.

     In addition to the assets acquired, a gain of $34.2 million was recognized coincident with the acquisition of Fumapharm in accordance with EITF 04-1, Accounting for Preexisting Relationships between the Parties to a Business Combination. The gain related to the settlement of a preexisting license agreement between Fumapharm and us. The license agreement in question had been entered into in October 2003 and required us to make payments to Fumapharm of certain royalty amounts. The market rate for such payments was determined to have increased due, principally, to the increased technical feasibility of BG-12. The gain relates, principally, to the difference between i) the royalty rates at the time the agreement was entered into as compared to ii) the expected higher royalty rates that would result at the time the agreement was effectively settled by virtue of our acquisition of Fumapharm.

     Future contingent consideration payments, if any, will be accounted for as increases to goodwill.

     The historical financial results of the acquisition for the three and nine months ended September 30, 2005 and the six months ended June 30, 2006 were not material for comparative purposes.

     Conforma

     In May 2006, we completed the acquisition of 100% of the stock of Conforma, a privately-held development stage biopharmaceutical company based in California that focused on the design and development of drugs for the treatment of cancer. The goal of this acquisition was to enable us to broaden our therapeutic opportunities in the field of oncology.

     We acquired all of the issued and outstanding shares of the capital stock of Conforma for $150.0 million, paid at closing. Of this amount, $15.0 million has been escrowed by the sellers pending satisfaction of customary representations and warranties made by Conforma. Up to an additional $100.0 million could be payable to the sellers upon the achievement of certain future development milestones. Additionally, $0.5 million in transaction costs were incurred and loans of approximately $2.3 million were made to certain non-officer employees of Conforma which are included in other assets in the accompanying consolidated balance sheet. Such loans are fully collateralized and were made for the purpose of assisting the employees in meeting tax liabilities.

     The acquisition was funded from our existing cash on hand and was accounted for as an asset acquisition as Conforma is a development-stage company. As a result of the acquisition, we obtained the rights to two compounds in Phase I clinical trials: CNF1010, a proprietary form of the geldanamycin derivative 17-AAG; and CNF2024, a totally synthetic, orally bioavailable heat shock protein 90 inhibitor.

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

Purchase Price Allocation
Current assets		$	2.5
Fixed assets			0.8
Deferred tax asset			24.0
Assembled workforce			1.4
IPR&D			123.1
Current liabilities			(1.3	)
		$	150.5

     The amount allocated to IPR&D relates to the development of CNF2024, which is in Phase I clinical trials. We expect to incur approximately an additional $116 million to complete the project. The estimated revenues from CNF2024 are expected to be recognized beginning in 2011. A discount rate of 12% was used to value the project, which we believe to be commensurate with the stage of development and the uncertainties in the economic estimates described above. At the date of acquisition, this compound had not reached technological feasibility and had no alternative future use. Accordingly, the $123.1 million in IPR&D was expensed in the three months ended June 30, 2006.

     Upon acquisition, we recognized a deferred tax asset of $24.0 million relating to US federal and state net operating losses and tax credit carryforwards that we acquired from Conforma. The amount allocated to deferred tax assets does not include certain tax attributes, such as net operating losses and research credits, that may not be realized because they are subject to annual limitations under the Internal Revenue Code due to a cumulative ownership change of more than 50% which occurred in connection with our acquisition of Conforma.

     Future contingent consideration payments, if any, will be expensed to IPR&D.

     In connection with this asset purchase, approximately $1.2 million of severance costs were incurred and are recorded in the consolidated statement of operations. (See Note 14, Severance and Other Restructuring Costs).

     The historical financial results of the acquisition for the three and nine months ended September 30, 2005 and the six months ended June 30, 2006 were not material for comparative purposes.

     Collaboration Agreements

     During the third quarter of 2006, we entered into three collaboration agreements, which resulted in $42.5 million in research and development expense. The three agreements were as follows:

     mondo

     On September 14, 2006, we entered into an exclusive collaboration and license agreement with mondo, a private Swiss biotechnology company, to develop, manufacture and commercialize Aviptadil, a clinical compound for the treatment of pulmonary arterial hypertension, or PAH. In accordance with the agreement, we will be responsible for the global manufacturing, clinical development, regulatory approval and commercialization of Aviptadil. We intend to finalize the development plan for Aviptadil and initiate additional clinical work in 2007.

     Under the terms of the agreement, we agreed to pay mondo a $7.5 million upfront payment and will pay up to $30.0 million in milestones payments for successful development and commercialization of Aviptadil in PAH in the U.S. and Europe, as well as royalty payments on commercial sales. The $7.5 million upfront amount has been recorded as research and development expense in the three and nine months ended September 30, 2006.

     Additionally, we have indicated our intention to make a minority equity investment of $5.0 million in mondo in the event that it undertakes an initial public offering.

     Alnylam

     On September 20, 2006, we entered into a collaboration agreement with Alnylam related to discovery and development of RNAi therapeutics for the potential treatment of PML.

     Under the terms of the collaboration, we and Alnylam will initially conduct investigative research into the potential of using RNAi technology to develop up to three therapeutics to treat PML. Of the therapeutics presented, we will select one development candidate and one back up candidate and will be responsible for the development and commercialization of the selected candidate. We would also have the option to develop and commercialize the backup candidate at our discretion. We will fund all research and development activities.

     We paid Alnylam an upfront payment of $5.0 million and agreed to additional payments of up to $51.3 million in milestone payments, plus royalties in the event of successful development and utilization of any product resulting from the collaboration. The $5.0 million upfront payment has been recorded as research and development expense in the three and nine months ended September 30, 2006.

     UCB

     On September 28, 2006 we entered into a global collaboration with UCB to jointly develop and commercialize CDP323 for the treatment of relapsing-remitting MS and other potential indications. CDP323 is an orally active small molecule alpha-4 integrin inhibitor expected to enter Phase II clinical trials next year.

     Under terms of the agreement, we agreed to pay UCB an upfront payment of $30.0 million and will make development milestone payments to UCB for the first indication of up to $93.0 million, with milestone payments of up to $71.3 million payable for each additional indication. We will also pay UCB up to $75.0 million in commercialization milestones and will contribute significantly to clinical costs for Phase II and Phase III studies. All commercialization costs and profits will be shared equally. The $30.0 million upfront payment has been recorded as research and development expense in the three and nine months ended September 30, 2006.

3. Financial Instruments

     Marketable Securities

          Available-for-sale

     We invest our excess cash balances in short-term and long-term marketable securities, principally corporate notes and U.S. government securities. At September 30, 2006, substantially all of our securities were classified as “available-for-sale.” All available-for-sale securities are recorded at fair market value and unrealized gains and losses are included in accumulated other comprehensive income (loss) in shareholders’ equity, net of related tax effects. Realized gains and losses and declines in value, if any, judged to be other-than-temporary on available-for-securities are reported in other expense. The cost of available-for-sale securities sold is based on the specific identification method.

     The average maturity of our marketable securities as of September 30, 2006 and December 31, 2005, was 19 months and 18 months, respectively. Proceeds from maturities and other sales of marketable securities, which were primarily reinvested, were approximately $1.5 billion and $1.5 billion, respectively. Net realized losses on these sales for the nine months ended September 30, 2006 and 2005, were approximately $2.4 million and $11.8 million, respectively.

          Investments

     As part of our strategic product development efforts, we invest in equity securities of certain biotechnology companies with which we have collaborative agreements. As a matter of policy, we determine on a quarterly basis whether any decline in the fair value of a marketable security is temporary or other-than-temporary. Unrealized gains and losses on marketable securities are included in accumulated other comprehensive income (loss) in shareholders’ equity, net of related tax effects. If a decline in the fair value of a marketable security below our cost basis is determined to be other-than-temporary, such marketable security is written-down to its estimated fair value with a charge to current earnings. The factors that we consider in our assessments include the fair market value of the security, the duration of the security’s decline, and prospects for the company, including favorable clinical trial results, new product initiatives and new collaborative agreements. The value of these investments is reported in investments and other assets on our consolidated balance sheet.

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

						Gross				Gross
		Fair				Unrealized				Unrealized				Amortized
September 30, 2006:		Value				Gains				Losses				Cost
Available-for-sale
Corporate debt securities
Current		$	202,974			$	32			$	(1,116	)		$	204,058
Non-current			708,071				752				(4,607	)			711,926
U.S. Government securities
Current			43,451				6				(552	)			43,997
Non-current			664,701				1,776				(4,461	)			667,386
Total available-for-sale securities		$	1,619,197			$	2,566			$	(10,736	)		$	1,627,367
Other Investments
Other marketable securities, non-current		$	136,950			$	2,236			$	(27,879	)		$	162,593

						Gross				Gross
		Fair				Unrealized				Unrealized				Amortized
December 31, 2005:		Value				Gains				Losses				Cost
Available-for-sale
Corporate debt securities
Current		$	161,375			$	4			$	(1,387	)		$	162,758
Non-current			787,592				208				(7,334	)			794,718
U.S. Government securities
Current			121,210				—				(812	)			122,022
Non-current			416,786				125				(4,893	)			421,554
Total available-for-sale securities		$	1,486,963			$	337			$	(14,426	)		$	1,501,052
Other Investments
Other marketable securities, non-current		$	143,553			$	16,050			$	(7,286	)		$	134,789

     The amortized cost and estimated fair value of securities available-for-sale at September 30, 2006 by contractual maturity are as follows (in thousands):

		Fair				Amortized
		Value				Cost
Due in one year or less		$	246,425			$	248,055
Due after one year			1,372,772				1,379,312
Total available-for-sale securities		$	1,619,197			$	1,627,367

     Unrealized losses on available for sale securities which are not determined to be other-than-temporary losses have not been recognized at September 30, 2006 consist of the following (in thousands):

		Less than 12 Months								12 Months or Greater								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Corporate debt securities		$	149,107			$	(1,116	)		$	389,055			$	(4,607	)		$	538,162			$	(5,723	)
U.S. Government securities			57,449				(552	)			343,390				(4,461	)			400,839				(5,013	)
Total		$	206,556			$	(1,668	)		$	732,445			$	(9,068	)		$	939,001			$	(10,736	)

     Unrealized losses relate to various debt securities, including U.S. Government issues, corporate bonds and asset-backed securities. The unrealized losses on these securities were primarily caused by higher interest rates, and represent 1% of the total fair value of the portfolio. We believe that these unrealized losses are not other-than-temporary, and have the intent and ability to hold these securities with unrealized losses to maturity or recovery.

     In the three and nine months ended September 30, 2006 we recognized charges of $0.6 million and $5.0 million, respectively, for certain unrealized losses on available-for-sale securities that were determined to be other-than-temporary. In the three and nine months ended September 30, 2005 we recognized charges of $4.6 million and $13.8 million, respectively, for certain unrealized losses on available-for-sale securities that were determined to be other-than-temporary.

     Forward Contracts

     We have foreign currency forward contracts to hedge specific forecasted transactions denominated in foreign currencies. All foreign currency forward contracts in effect at September 30, 2006 have durations of three months. These contracts have been designated as cash flow hedges and accordingly, to the extent effective, any unrealized gains or losses on these foreign currency forward contracts are reported in other comprehensive income. Realized gains and losses for the effective portion are recognized with the completion of underlying hedge transaction. To the extent ineffective, hedge transaction gains and losses are reported in earnings.

     The notional settlement amount of the foreign currency forward contracts outstanding at September 30, 2006 was approximately $62.0 million. These contracts had a fair value of $3.6 million, representing an unrealized loss, and were included in other current liabilities at September 30, 2006. The notional settlement amount of the foreign currency forward contracts outstanding at December 31, 2005 was approximately $214.0 million. These contracts had a fair value of $0.9 million, representing an unrealized loss, and were included in other current liabilities at December 31, 2005.

     For the three and nine months ended September 30, 2006, there was $0.0 million and $0.9 million, respectively recognized in earnings as a loss due to hedge ineffectiveness. For the nine months ended September 30, 2005, we recognized $1.0 million of gains in earnings due to hedge ineffectiveness and no significant amounts as a result of the discontinuance of cash flow hedge accounting on a contract because it was no longer probable that the hedge forecasted transaction would occur. We recognized approximately $3.2 million and $6.9 million of losses in product revenue for the settlement of certain effective cash flow hedge instruments for the three and nine months ended September 30, 2006, respectively, as compared to approximately $0.5 million and $1.8 million of losses for the three and nine months ended September 30, 2005, respectively. We recognized no significant amounts in royalty revenue for the settlement of effective cash flow hedge instruments for the three and nine months ended September 30, 2006, as compared to no significant amounts and $0.3 million of losses for the three and nine months ended September 30, 2005, respectively.

     These settlements were recorded in the same period as the related forecasted transactions affecting earnings.

4. Comprehensive Income (Loss)

     Our accumulated other comprehensive income (loss) was as follows (in thousands):

		September				December
		30, 2006				31, 2005
Translation adjustments		$	5,631			$	(9,960	)
Unrealized holding gains and losses on marketable securities and other investments, net of taxes of $12,513 and $1,948, respectively			(21,302	)			(3,376	)
Unrealized gains and losses on derivative instruments, net of taxes of $1,359 and $337, respectively			(2,205	)			(574	)
Total accumulated comprehensive income (loss)		$	(17,876	)		$	(13,910	)

     The activity in comprehensive income for the three and nine months ended September 30, 2006, and 2005, was as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Net income		$	156,599			$	27,185			$	108,955			$	105,149
Translation adjustments			(4,034	)			(2,484	)			15,591				(12,325	)
Unrealized holding gains and losses on investments, net of tax of $4,776, $2,845, $(10,562), $585, respectively			5,799				4,845				(17,926	)			996
Unrealized gains and losses on derivative instruments, net of tax of $1,708, $(98), $(1,022), $6,993, respectively			2,891				(168	)			(1,631	)			11,907
Total comprehensive income		$	161,255			$	29,378			$	104,989			$	105,727

5. Earnings per Share

     We calculate earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings per Share, or SFAS 128, and EITF 03-06, Participating Securities and the Two-Class Method Under SFAS 128, or EITF 03-06. SFAS 128 and EITF 03-06 together require the presentation of “basic” earnings per share and “diluted” earnings per share.

     Basic earnings per share is computed using the two-class method. Under the two-class method, undistributed net income is allocated to common stock and participating securities based on their respective rights to share in dividends. We have determined that our preferred shares meet the definition of participating securities, and have allocated a portion of net income to our preferred shares on a pro rata basis. Net income allocated to preferred shares is excluded from the calculation of basic earnings per share. For basic earnings per share, net income available to holders of common stock is divided by the weighted average number of shares of common stock outstanding. For purposes of calculating diluted earnings per share, net income is adjusted for the after-tax amount of interest associated with convertible debt and net income allocable to preferred shares, and the denominator includes both the weighted average number of shares of common stock outstanding and the potential dilutive shares of common stock from stock options, restricted stock awards, restricted stock units and other convertible securities, to the extent they are dilutive.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Numerator:
Income before cumulative effect of accounting change		$	156,599			$	27,185			$	105,176			$	105,149
Cumulative effect of accounting change			—				—				3,779				—
Net income			156,599				27,185				108,955				105,149
Adjustment for net income allocable to preferred shares			228				40				158				155
Net income used in calculating basic earnings per share			156,371				27,145				108,797				104,994
Adjustment for interest, net of tax			—				—				—				1,467
Net income used in calculating diluted earnings per share		$	156,371			$	27,145			$	108,797			$	106,461
Denominator:
Weighted average number of common shares outstanding			338,021				336,536				339,527				334,819
Effect of dilutive securities:
Convertible promissory notes due 2019			3,048				—				3,048				6,558
Stock options			1,656				2,615				2,085				3,527
Restricted stock awards			877				1,708				772				1,677
Time-vested restricted stock units			453				—				283				—
Performance-based restricted stock units			626				—				211				—
Convertible promissory notes due 2032			73				—				73				—
Dilutive potential common shares			6,733				4,323				6,472				11,762
Shares used in calculating diluted earnings per share			344,754				340,859				345,999				346,581

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Numerator:
Net income allocable to preferred shares		$	228			$	40			$	158			$	155
Adjustment for interest, net of tax			—				446				—				5,752
Total		$	228			$	486			$	158			$	5,907

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Denominator:
Convertible preferred stock			493				493				493				493
Stock options			19,327				22,991				17,646				17,674
Time-vested restricted stock units			1,439				—				44				—
Convertible promissory notes due 2019			—				3,048				—				—
Convertible promissory notes due 2032			—				73				—				3,817
Total			21,259				26,605				18,183				21,984

6. Share-Based Payments

     Fair Value Method Accounting

     Our share-based compensation programs consist of share-based awards granted to employees including stock options, restricted stock awards, and performance and time-vested restricted stock units, (which convert to one common share per unit when vested), as well as our employee stock purchase plan.

     Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R). SFAS 123(R) requires compensation cost relating to share-based payment transactions to be recognized in the financial statements using a fair-value measurement method. Under the fair value method, the estimated fair value of awards is charged against income over the requisite service period, which is generally the vesting period. We selected the modified prospective method as prescribed in SFAS 123(R) and, therefore, prior periods were not restated. Under the modified prospective application, SFAS 123(R) was applied to new awards granted in 2006, as well as to the unvested portion of previously granted share-based awards for which the requisite service had not been rendered as of December 31, 2005. Where awards are made with non-substantive vesting periods (for instance, where a portion of the award vests upon retirement eligibility), we estimate and recognize expense based on the period from the grant date to the date on which the employee is retirement eligible.

     On December 6, 2005, our Board of Directors approved the acceleration of vesting of unvested stock options then outstanding having an exercise price per share of $55.00 or higher, granted under our stock option plans that were held by current employees, including executive officers. Shares of common stock acquired by our executive officers upon the exercise of stock options whose vesting was so accelerated generally are subject to transfer restrictions until such time as the stock options otherwise would have vested. Options held by our non-employee directors were excluded from this vesting acceleration. As a result, the vesting of options granted predominantly from 2001 to 2005 with respect to approximately 4,518,809 shares of our common stock was accelerated.

     The purpose of this acceleration was to eliminate future compensation expense that we would otherwise have recognized in our results of operation upon adoption of SFAS 123(R) in 2006. The approximate future expense eliminated by the acceleration, based on a Black-Scholes calculation, was estimated to be approximately $93.1 million between 2006 and 2009 on a pre-tax basis. The acceleration did not result in any compensation expense being recorded in 2005.

     In the third quarter of 2006, we recorded pre-tax share-based compensation expense of $37.9 million. In the nine months ended September 30, 2006, we recorded pre-tax share-based compensation expense of $102.1 million. The expense for the nine months is net of a cumulative effect pre-tax adjustment of $5.6 million, or $3.8 million after-tax, resulting from the application of an estimated forfeiture rate for prior period unvested restricted stock awards. As a result of adopting SFAS 123(R) on January 1, 2006, our net income before taxes and net income for the three and nine months ended September 30, 2006 is $14.2 million (or $0.04 per share on a basic and diluted basis) and $37.8 million (or $0.11 per share on a basic and diluted basis) lower than if we had continued to account for stock-based employee compensation under APB 25.

     For the three and nine months ended September 30, 2006, share-based compensation expense reduced our results of operations as follows (in thousands except for earnings per share):

		Three months ended September 30, 2006												Nine months ended September 30, 2006
		Effect before												Effect before
		cumulative												cumulative				Cumulative
		effect of				Cumulative effect								effect of				effect
		accounting				of accounting				Effect on net				accounting				of accounting				Effect on net
		change				change				income				change				change				income
Income Before Income Taxes		$	37,881			$	—			$	37,881			$	107,633			$	(5,574	)		$	102,059
Tax effect			12,101				—				12,101				33,991				(1,795	)			32,196
Net income		$	25,780			$	—			$	25,780			$	73,642			$	(3,779	)		$	69,863
Basic earnings per share:		$	0.08			$	—			$	0.08			$	0.22			$	(0.01	)		$	0.21
Diluted earnings per share:		$	0.07			$	—			$	0.07			$	0.21			$	(0.01	)		$	0.20

     Share-based compensation cost for the three and nine months ended September 30, 2006 as follows (in thousands):

		Three months ended September 30, 2006												Nine months ended September 30, 2006
						Restricted Stock												Restricted Stock
		Stock options				and Restricted								Stock options &				and Restricted
		& ESPP				Stock Units				Total				ESPP				Stock Units				Total
Research and development		$	5,268			$	9,379			$	14,647			$	16,636			$	26,799			$	43,435
Selling, general and administrative			7,788				16,144				23,932				24,587				42,042				66,629
Total		$	13,056			$	25,523			$	38,579			$	41,223			$	68,841			$	110,064
Pre-tax cumulative effect catch-up											—												(5,574	)
Pre-tax effect of share-based compensation										$	38,579											$	104,490
Capitalized share-based payment costs											(698	)											(2,431	)
Share-based compensation expense										$	37,881											$	102,059

     For the three and nine months ended September 30, 2006, we capitalized costs of $0.7 million and $2.4 million associated with share-based compensation to inventory and fixed assets. We did not capitalize share based compensation cost in our pro forma footnotes under SFAS 123(R). For the three and nine months ended September 30, 2005, we recorded share-based compensation expense of approximately $2.6 million and $17.3 million, which was primarily related to expenses for restricted stock awards.

     In accordance with SFAS 123(R), windfall tax benefits from stock option exercises of $12.3 million were recorded as cash inflows from financing activities in our consolidated statement of cash flows in the nine months ended September 30, 2006. The total amount of tax benefit realized during the nine months ended September 30, 2006, was $21.0 million. Cash received from the exercise of stock options in the three and nine months ended September 30, 2006 was approximately $9.1 million and $75.4 million.

     At September 30, 2006, unrecognized compensation costs relating to unvested share-based compensation was approximately $135.1 million. We expect to recognize the cost of these unvested awards over a weighted-average period of one year. In accordance with SFAS 123(R), deferred share-based compensation is no longer reflected as a separate component of shareholders’ equity in the consolidated balance sheet. As a result, we reclassified our deferred share-based compensation of $42.9 million at December 31, 2005 to additional paid in capital during the first quarter of 2006.

     Stock Based Compensation Plans

     We have three share-based compensation plans pursuant to which awards are currently being made: (i) our 2006 Non-Employee Directors Equity Plan, or the 2006 Directors Plan; (ii) our 2005 Omnibus Equity Plan, or the 2005 Omnibus Plan; and (iii) our 1995 Employee Stock Purchase Plan, or ESPP. We have four share-based compensation plans pursuant to which outstanding awards have been made, but from which no further awards can or will be made: (i) our 1993 Non-Employee Directors Stock Option Plan, or the 1993 Directors Plan; (ii) our 1998 Stock Option Plan; (iii) the Biogen, Inc. 1985 Non-Qualified Stock Option Plan; and (iv) the Biogen, Inc. 1987 Scientific Board Stock Option Plan. In addition, we have our 2003 Omnibus Equity Plan, or the 2003 Omnibus Plan, pursuant to which outstanding awards have been made. We have not made any awards from the 2003 Omnibus Plan since our stockholders approved the 2005 Omnibus Plan and do not intend to make any awards from the 2003 Omnibus Plan in the future.

     Directors Plan: In May 2006, our stockholders approved the 2006 Directors Plan for share-based awards to our directors. Awards granted from the 2006 Directors Plan may include options, shares of restricted stock, restricted stock units, stock appreciation rights and other awards in such amounts and with such terms and conditions as may be determined by a committee of our Board of Directors, subject to the provisions of the plan. We have reserved a total of 850,000 shares of common stock for issuance under the 2006 Directors Plan. The 2006 Directors Plan provides that awards other than stock options and stock appreciation rights will be counted against the total number of shares reserved under the plan in a 1.5-to-1 ratio.

     Omnibus Plans: In June 2005, our stockholders approved the 2005 Omnibus Plan for share-based awards to our employees. Awards granted from the 2005 Omnibus Plan may include options, shares of restricted stock, restricted stock units, performance shares, shares of phantom stock, stock bonuses, stock appreciation rights and other awards in such amounts and with such terms and conditions as may be determined by a committee of our Board of Directors, subject to the provisions of the plan. Shares of common stock available for issuance under the 2005 Omnibus Plan consist of 15.0 million shares reserved for this purpose, plus shares of common stock that remained available for issuance under the 2003 Omnibus Plan on the date that our stockholders approved the 2005 Omnibus Plan, plus shares that are subject to awards under the 2003 Omnibus Plan which remain unissued upon the cancellation, surrender, exchange or termination of such awards. The 2005 Omnibus Plan provides that awards other than stock options and stock appreciation rights will be counted against the total number of shares available under the plan in a 1.5-to-1 ratio.

     Stock options

     All stock option grants to employees are for a ten-year term and generally vest one-fourth per year over four years on the anniversary of the date of grant, provided the employee remains continuously employed with us. Stock option grants to directors are for ten-year terms and generally vest as follows: (i) grants made on the date of a director’s initial election to our Board of Directors vest one-third per year over three years on the anniversary of the date of grant, and (ii) grants made for service on our Board of Directors vest on the first anniversary of the date of grant, provided in each case that the director continues to serve on our Board of Directors through the vesting date. Options granted under all plans are exercisable at a price per share not less than the fair market value of the underlying common stock on the date of grant. The estimated fair value of options, including the effect of estimated forfeitures, is recognized over the options’ vesting periods. The fair value of the stock option grants awarded in the three and nine months ended September 30, 2006 were estimated as of the date of grant using a Black-Scholes option valuation model that uses the following weighted-average assumptions:

		Three Months Ended				Nine Months Ended
		September 30, 2006				September 30, 2006
Expected dividend yield			0	%			0	%
Expected stock price volatility			34.8	%			34.8	%
Risk-free interest rate			4.70	%			4.38	%
Expected option life in years			4.87				4.87
Per share grant-date fair value		$	13.33			$	16.88

     Expected volatility is based primarily upon implied volatility for our exchange-traded options and other factors, including historical volatility. After assessing all available information on either historical volatility, implied volatility, or both, we have concluded that a combination of both historical and implied volatility provides the best estimate of expected volatility. The expected term of options granted is derived using assumed exercise rates based on historical exercise patterns and represents the period of time that options granted are expected to be outstanding. The risk-free interest rate used is determined by the market yield curve based upon risk-free interest rates established by the Federal Reserve, or non-coupon bonds that have maturities equal to the expected term. The dividend yield of zero is based upon the fact that we have not historically granted cash dividends, and do not expect to issue dividends in the foreseeable future. Stock options granted prior to January 1, 2006 were valued based on the grant date fair value of those awards, using the Black-Scholes option pricing model, as previously calculated for pro-forma disclosures under SFAS 123. For the three and nine months ended September 30, 2006, we recorded $10.8 million and $34.2 million of stock compensation related to stock options.

     A summary of stock option activity is presented in the following table (shares are in thousands):

		All Option Plans
						Weighted
						Average
						Exercise
		Shares				Price
Outstanding at December 31, 2005			31,306			$	45.71
Granted			1,882			$	45.09
Exercised			(2,961	)		$	25.48
Cancelled			(2,995	)		$	53.24
Outstanding at September 30, 2006			27,232			$	47.05

     During the quarter ended September 30, 2006, 19,800 options were granted, 386,463 were exercised and 465,973 were cancelled. The weighted-average grant-date fair values of stock options granted during the three months ended September 30, 2006 and 2005 were $13.33 and $15.50, respectively. The weighted-average grant-date fair values of stock options granted during the nine months ended September 30, 2006 and 2005 were $16.88 and $25.18, respectively. The total intrinsic values of options exercised for the three months ending September 30, 2006 and 2005, were $7.7 million and $16.9 million, respectively. The total intrinsic values of options exercised for the nine months ending September 30, 2006 and 2005, were $61.6 million and $78.3 million, respectively. The weighted average remaining contractual terms for options outstanding and exercisable at September 30, 2006 and 2005 were 6.0 and 6.5 years, respectively.

     Time-Vested Restricted Stock Units

     Time-vested restricted stock units, or “RSUs,” awarded to employees vest one-third per year over three years on the anniversary of the date of grant, provided the employee remains continuously employed with us. Shares of our common stock will be delivered to the employee upon vesting, subject to payment of applicable withholding taxes. Time-vested RSUs awarded to directors vest as follows: (i) awards made on the date of a director’s initial election to our Board of Directors vest one-third per year over three years on the anniversary of the date of award, and (ii) awards made for service on our Board of Directors vest on the first anniversary of the date of award, provided in each case that the director continues to serve on our Board of Directors through the vesting date. Shares of our common stock will be delivered to the director upon vesting. The fair value of all time-vested RSUs is based on the market value of our stock on the date of grant. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period. For the three and nine months ended September 30, 2006, we recorded $9.3 million and $21.3 million of stock compensation charges related to time-vested RSUs.

     A summary of time-vested RSU activity is presented in the following table (shares are in thousands):

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested at December 31, 2005			—			$	—
Granted			2,501			$	44.37
Vested			(5	)		$	44.24
Forfeited			(173	)		$	44.30
Unvested at September 30, 2006			2,323			$	44.38

     During the quarter ended September 30, 2006, 104,636 time-vested RSU’s were granted, 4,500 vested, and 85,259 were forfeited. The weighted-average grant-date fair value of the time-vested RSUs granted during the quarter ended September 30, 2006 was $44.27. The weighted average remaining contractual term for the time-vested RSUs was 1.4 years as of September 30, 2006.

     Performance-Based Restricted Stock Units

     In the first quarter of 2006, our Board of Directors awarded 100,000 RSUs to our CEO, under the 2005 Omnibus Plan, subject to certain 2006 financial performance criteria. If the performance criteria are attained and our CEO is still in active employment in February 2007, up to 100,000 RSUs will vest and convert into shares of our common stock.

     During the third quarter of 2005, we granted 1.18 million performance-based RSUs, to be settled in shares of our common stock, to a group of approximately 200 senior employees excluding our CEO. The grants were made under the 2005 Omnibus Plan. The RSUs will convert into shares of our common stock, subject to attainment of certain performance goals and the employee’s continued employment. On September 14, 2006, 70% of the RSUs for all employees still in active employment, or 758,262 shares, vested as the required performance goals had been determined to have been achieved. A total of 510,859 shares were issued, reflecting the fact that certain shares were withheld for income tax purposes.

     On March 14, 2007, the remaining 30% of the RSUs will vest and convert into shares if the performance goals are attained and the employee is still in active employment. Shares of our common stock will be delivered to the employee upon vesting, subject to payment of applicable withholding taxes.

     In the three and nine months ended September 30, 2006, we recorded compensation charges of approximately $10.1 million and $31.0 million related to performance-based restricted stock units. The fair value of these units was based on the market value of our stock on the date of grant and assumes that the target payout level will be achieved. Compensation cost is adjusted quarterly for subsequent changes in the outcome of performance-related conditions until the vesting date.

     A summary of performance-based RSU activity is presented in the following table (shares are in thousands):

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested at December 31, 2005			1,154			$	40.67
Granted			100			$	44.59
Vested			(758	)		$	40.67
Forfeited			(83	)		$	40.67
Unvested at September 30, 3006			413			$	41.62

     No performance-based RSUs were granted during the three months ended September 30, 2006, 758,262 were vested and 33,175 were forfeited. The weighted average remaining contractual term for the performance-based RSUs was 0.4 years as of September 30, 2006.

     Restricted Stock Awards

     In 2005 and 2004, we awarded restricted common stock to our employees under the 2005 Omnibus Plan and the 2003 Omnibus Plan at no cost to the employees. The restricted stock will vest in full on the third anniversary of the date of award, provided the employee remains continuously employed with us. During the vesting period, the recipient of the restricted stock has full voting rights as a stockholder, even though the restricted stock remains subject to transfer restrictions and will generally be forfeited upon termination of employment by the recipient prior to vesting.

     For the three months ended September 30, 2006, we recorded $6.1 million of stock compensation charges related to restricted stock awards. For the nine months ended September 30, 2006, we recorded $16.5 million of stock compensation charges related to restricted stock awards, prior to a first quarter pre-tax cumulative effect catch-up credit of $5.6 million, or $3.8 million after-tax, resulting from the application of an estimated forfeiture rate for prior period unvested restricted stock awards. The fair value of all time-vested RSAs is based on the market value of our stock on the date of grant. Compensation expense, including the effect of forfeitures, is recognized over the applicable service period.

     A summary of restricted stock award activity is presented in the following table (shares are in thousands):

						Weighted
						Average
						Grant Date
		Shares				Fair Value
Unvested at December 31, 2005			1,440			$	53.87
Granted			—			$	—
Vested			(11	)		$	43.00
Forfeited			(157	)		$	55.82
Unvested at September 30, 2006			1,272			$	53.72

     No restricted common stock was awarded in the three months ended September 30, 2006, 10,715 shares vested and 48,490 shares were forfeited. The weighted average remaining contractual term for the restricted stock was 0.8 years as of September 30, 2006.

     Employee Stock Purchase Plan

     Under the terms of the ESPP, employees can elect to have up to ten percent of their annual compensation (subject to certain dollar limits) withheld to purchase shares of our common stock. The purchase price of the common stock is equal to 85% of the lower of the fair market value of the common stock on the enrollment or purchase date under a look-back provision. During the three and nine months ended September 30, 2006, 0.1 million and 0.4 million shares, respectively, were issued under the ESPP. During the three and nine months ended September 30, 2005, 0.1 million and 0.5 million shares, respectively, were issued under the ESPP. We utilize the Black-Scholes model to calculate the fair value of these discounted purchases. The fair value of the look-back provision plus the 15% discount amount is recognized as compensation expense over the purchase period. In the three and nine months ended September 30, 2006, we recorded compensation charges of approximately $2.2 million and $7.0 million, respectively.

     Pro-forma Disclosure

     The following table illustrates the effect on net income and earnings per share if we were to have applied the fair-value based method to account for all stock-based awards for the three and nine months ended September 30, 2005 (in thousands, except per share amounts).

		Three Months Ended				Nine Months Ended
		September 30, 2005				September 30, 2005
Net income, as reported		$	27,185			$	105,149
Stock-based compensation expense included in net income, net of tax			2,916				13,226
Pro forma stock compensation expense, net of tax			(17,323	)			(59,638	)
Pro forma net income		$	12,778			$	58,737
Reported basic earnings per share:		$	.08			$	.31
Pro forma basic earnings per share:		$	.04			$	.18
Reported diluted earnings per share:		$	.08			$	.31
Pro forma diluted earnings per share:		$	.04			$	.17