Regeneron Pharmaceuticals, Inc. — Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Regeneron is an integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines. This unaudited quarterly report covers the three months ended March 31, 2020, with comparisons to the three months ended March 31, 2019. The company’s principal commercial products include EYLEA, Dupixent, Libtayo, Praluent, Kevzara, ARCALYST, and ZALTRAP.
The filing retrospectively revised certain 2019 revenue and expense classifications for collaborator reimbursements, up-front payments, and development milestones. These presentation changes did not affect total operating income or net income.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,828.2 million | $1,372.6 million | +$455.6 million, or 33% |
| Income from operations | $700.1 million | $480.0 million | +46% |
| Net income | $624.6 million | $461.1 million | +36% |
| Diluted earnings per share | $5.43 | $3.99 | +36% |
| Operating margin | 38.3% | 35.0% | +330 basis points |
| Net margin | 34.2% | 33.6% | +60 basis points |
| Effective tax rate | 6.6% | 15.6% | Lower tax rate |
Revenue growth was led by U.S. EYLEA sales of $1,172.0 million, up from $1,074.1 million, U.S. Libtayo sales of $61.7 million versus $26.8 million, higher Sanofi collaboration revenue of $246.9 million versus a revised $(18.0) million, and Bayer collaboration revenue of $281.4 million versus $264.0 million. EYLEA represented approximately 64% of total revenue in Q1 2020.
Research and development expense increased 20% to $583.9 million, selling, general, and administrative expense increased 26% to $367.3 million, and cost of collaboration and contract manufacturing increased 37% to $138.5 million. Non-cash compensation expense was $105.8 million, compared with $107.9 million in the prior-year period.
Cash Flow, Liquidity, and Capital Structure
| Metric | March 31, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $2,208.2 million | $1,617.8 million |
| Marketable securities | $5,031.6 million | $4,853.3 million |
| Working capital | $6,588.9 million | $5,592.5 million |
| Total liabilities | $3,624.5 million | $3,715.5 million |
| Finance lease liabilities | $715.2 million | $713.9 million |
| Stockholders’ equity | $12,133.0 million | $11,089.7 million |
- Operating cash flow was $698.0 million, compared with $897.0 million in Q1 2019.
- Investing cash outflow was $443.2 million, including $170.1 million of capital expenditures.
- Financing cash inflow was $335.6 million, primarily reflecting $811.4 million of proceeds from employee stock issuances, partly offset by share repurchases and employee tax-withholding payments.
- Total cash, cash equivalents, and restricted cash increased by $590.4 million to $2,220.7 million.
- The company had $750.0 million of borrowing availability under a revolving credit facility. The filing does not identify material conventional borrowings beyond finance lease liabilities and the disclosed lease financing.
- Capital expenditures are expected to be $510 million to $590 million for full-year 2020, primarily for manufacturing expansion, fill/finish capacity, laboratory expansion, and facility renovations.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, and net income increased substantially, supported by higher EYLEA sales, rapid growth in Libtayo and Dupixent-related collaboration economics, and improved Sanofi collaboration results.
- Sanofi collaboration revenue improved to $246.9 million from a revised $(18.0) million, primarily due to higher Dupixent profits and manufacturing reimbursements.
- Other income and expense shifted from $66.1 million of net income to $31.5 million of net expense, primarily because of unrealized losses on equity securities.
- Operating cash flow declined despite higher net income, largely because of unfavorable changes in receivables, inventories, and other operating liabilities compared with Q1 2019.
- The company repurchased 719,167 shares for $272.8 million under its $1.0 billion authorization and purchased additional shares from Sanofi in connection with Sanofi’s development-funding obligations. $473.1 million remained available under the public repurchase program at March 31, 2020.
- Effective April 1, 2020, Regeneron became solely responsible for U.S. Praluent development and commercialization, while Sanofi became responsible outside the United States and will pay Regeneron a 5% royalty on ex-U.S. net sales through March 31, 2032.
Guidance, Outlook, Risks, and Unusual Items
- Management expects full-year 2020 capital expenditures of $510 million to $590 million. No revenue or earnings guidance is provided in the filing.
- COVID-19 had no material impact on the financial statements through March 31, 2020, but management reported lower overall U.S. EYLEA demand in April and expects continued pressure on new patient starts while social-distancing measures remain in place.
- New clinical studies and patient recruitment have been affected by COVID-19. Management expected approximately one-quarter delays for many new or ongoing studies, with the possibility of longer delays and delayed regulatory milestones.
- Regeneron was advancing REGN-COV2, an investigational antibody cocktail for COVID-19, with clinical studies expected to begin in June 2020. BARDA was obligated to fund 80% of certain COVID-19 research and development costs under an expanded agreement.
- Key commercial concentration risks include dependence on EYLEA and Dupixent, with EYLEA U.S. sales representing approximately 64% of total revenue. Two customers accounted for approximately 90% of gross product revenue.
- Material litigation and contingencies include Praluent patent litigation with Amgen, Dupixent-related patent litigation, patent proceedings involving Regeneron’s antibody-generation technology, and U.S. Department of Justice investigations concerning patient assistance programs and payments to healthcare professionals. Accrued loss contingencies were $117.0 million at March 31, 2020.
- Praluent commercialization had already been discontinued in Germany and Japan due to patent injunctions involving Sanofi. Related U.S. and European proceedings remained subject to appeals or further court action.
- The company held $5.032 billion of marketable securities, including $562.0 million of equity securities, and recorded significant unrealized equity-security losses in Q1 2020, exposing results to market volatility.
- Management stated that existing capital resources, expected product and collaboration cash flows, and available revolver capacity should meet anticipated operating needs for the foreseeable future, while noting that collaboration termination, lower revenue, or higher spending could accelerate cash usage.
Most Important Facts for Investors to Verify
- Whether COVID-19-related reductions in physician visits and new patient starts materially affect EYLEA, Libtayo, and other product demand beyond April 2020.
- The durability of EYLEA growth and the company’s increasing dependence on EYLEA and Dupixent-related economics.
- The financial effect of assuming sole U.S. responsibility for Praluent, including U.S. sales, development costs, litigation exposure, and the offsetting 5% ex-U.S. royalty.
- Progress and delays in clinical programs, particularly COVID-19 programs, Libtayo, Dupixent, evinacumab, fasinumab, and other late-stage candidates.
- Outcomes of Praluent and Dupixent patent litigation, the Kymab antibody-technology proceedings, and the Department of Justice investigations.
- Actual 2020 capital expenditures versus the $510 million to $590 million estimate and the effect on cash generation.
- Changes in the value, liquidity, and realized gains or losses of the company’s substantial marketable-securities portfolio.
- Reconciliation of reported collaboration revenue and profit-sharing estimates with subsequent-quarter true-ups from Sanofi and Bayer.