Regeneron Pharmaceuticals, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Regeneron is a fully integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines for serious diseases. The filing covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. Results were affected by the COVID-19 pandemic, including lower U.S. EYLEA demand and disruption to clinical-trial enrollment.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $1,952.0 million, up 23.7% | $3,780.2 million, up 28.1% |
| Income from operations | $656.4 million; 33.6% margin | $1,356.5 million; 35.9% margin |
| Net income | $897.3 million, versus $193.1 million | $1,521.9 million, versus $654.2 million |
| Diluted EPS | $7.61, versus $1.68 | $13.03, versus $5.69 |
| Net margin | 46.0% | 40.3% |
| Operating cash flow | Not separately provided for the quarter | $1,641.4 million, versus $1,085.3 million |
Revenue comprised $1,226.9 million of net product sales, $269.1 million of Sanofi collaboration revenue, $244.2 million of Bayer collaboration revenue, and $211.8 million of other revenue in the second quarter. Six-month net product sales were $2,463.6 million.
- EYLEA U.S. sales were $1,113.7 million in the quarter, down $46.6 million year over year, primarily from lower volume and higher discounts partly related to COVID-19. Six-month U.S. sales were $2,285.7 million, up $51.3 million.
- Dupixent global sales recorded by Sanofi were $945.0 million in the quarter and $1,800.2 million for six months; Regeneron's share of collaboration profits increased materially.
- Libtayo U.S. sales were $63.3 million in the quarter and $125.0 million for six months.
- Effective April 1, 2020, Regeneron began recording U.S. Praluent sales and assumed sole responsibility for U.S. development and commercialization; Sanofi assumed responsibility outside the United States and will pay a 5% royalty on ex-U.S. net sales through March 2032.
Other income, net, was $272.2 million in the quarter and $246.8 million for six months, driven largely by unrealized gains on equity securities, including a $228.1 million quarterly gain and $171.3 million six-month gain. The effective tax rate was 2.4% for the quarter and 4.1% for six months, versus 14.1% and 15.1%, respectively, in 2019.
At June 30, 2020, cash and cash equivalents were $1,992.2 million and marketable securities totaled $3,739.6 million at fair value. Working capital was $4,157.8 million. A $1.5 billion senior unsecured 364-day bridge facility was outstanding at 2.75% interest and matures in May 2021; the company also had $715.9 million of finance lease liabilities and $750.0 million of revolving-credit availability. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Operating income increased $340.8 million in the quarter and $560.9 million for six months, while operating expenses increased $33.4 million and $268.9 million, respectively.
- Research and development expense declined $163.5 million in the quarter and $65.7 million for six months, mainly because the prior-year period included a $400.0 million Alnylam up-front payment; 2020 included $85.0 million of Intellia-related up-front and other costs.
- Selling, general and administrative expense increased $53.7 million in the quarter and $129.9 million for six months due to higher headcount, litigation accruals, patient-assistance contributions, commercialization costs, and the loss of certain Praluent reimbursements.
- Regeneron paid $5.0 billion to repurchase 9,806,805 shares directly from Sanofi in May 2020, funded with cash, securities sales, and the bridge facility. Sanofi disposed of all but 400,000 shares.
- Six-month financing cash flow was a $2,277.2 million use, primarily reflecting the Sanofi share purchase and other repurchases. The company also repurchased $272.8 million of stock under its public program, leaving $473.1 million authorized.
- Cash provided by investing activities was $1,010.2 million, versus a $1,612.1 million use in the prior-year period, mainly due to increased sales or maturities of marketable securities.
Guidance, outlook, management commentary, risks, and unusual items
- Management expected 2020 capital expenditures of approximately $540 million to $590 million, primarily for manufacturing expansion in New York and Ireland and laboratory expansion.
- Management stated that existing capital resources, expected operating cash flow, collaboration funding, and revolving-credit availability should support anticipated operating needs for the foreseeable future, but intends to refinance the bridge facility before its May 2021 maturity.
- COVID-19 may reduce product demand, disrupt manufacturing and supply chains, delay clinical enrollment and regulatory review, and increase costs. Fully enrolled studies were generally expected to remain on track at the filing date, but resurgent outbreaks could cause further delays.
- Regeneron advanced REGN-COV2 into late-stage trials. A July 2020 government manufacturing agreement could generate up to $450.2 million, while BARDA separately provided funding for COVID-19 and Ebola programs, including up to $344.6 million of additional REGN-EB3 funding.
- Key litigation and investigations include Praluent patent disputes, Dupixent patent litigation, EYLEA pre-filled-syringe proceedings initiated by Novartis, a U.S. Department of Justice civil complaint alleging Anti-Kickback Statute and False Claims Act violations, and multiple other patent proceedings. Accrued loss contingencies were $132.2 million at June 30, 2020.
- The United Kingdom Supreme Court held in June 2020 that Regeneron's '287 and '163 patents were invalid for insufficiency, an adverse intellectual-property development.
- Major ongoing risks include dependence on EYLEA and Dupixent, pricing and reimbursement pressure, biosimilar and competing-product risk, reliance on Sanofi and Bayer, manufacturing capacity and compliance, clinical and regulatory uncertainty, customer concentration, investment volatility, and refinancing risk.
Important facts for investors to verify
- Whether EYLEA U.S. demand and sales recovered after the COVID-19-related second-quarter decline.
- The sustainability of Dupixent-driven collaboration profits and the financial effects of the new Praluent arrangement.
- The composition and sustainability of the large unrealized equity-security gains included in 2020 earnings.
- Progress in refinancing the $1.5 billion bridge facility before May 2021 and the effect of related interest costs.
- Actual 2020 capital expenditures versus the $540 million–$590 million expectation.
- Clinical, regulatory, manufacturing, and government-contract developments for REGN-COV2 and REGN-EB3.
- Outcomes and potential financial exposure from the DOJ complaint, Praluent and Dupixent litigation, the EYLEA pre-filled-syringe proceedings, and other patent disputes.
- Continued dependence on two major customers, which represented 87% of gross product revenue for the six months ended June 30, 2020.