Regeneron Pharmaceuticals, Inc. — 2019 Q3 Form 10-Q Summary
Business context and reporting period
Regeneron is an integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines. The filing covers the quarter and nine months ended September 30, 2019; financial statements are unaudited and presented in millions, except per-share data.
Key commercial products include EYLEA, Libtayo, ARCALYST, and products commercialized with Sanofi, including Dupixent, Praluent, Kevzara, and ZALTRAP. EYLEA remained the primary revenue driver, while Libtayo generated its first meaningful product sales following its 2018 U.S. approval.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $2,048.4 | $1,663.5 | $5,693.9 | $4,783.0 |
| Income from operations | $738.5 | $626.9 | $1,534.1 | $1,816.3 |
| Net income | $669.6 | $594.7 | $1,323.8 | $1,624.0 |
| Diluted EPS | $5.86 | $5.17 | $11.54 | $14.14 |
| Operating margin | 36.1% | 37.7% | 26.9% | 38.0% |
- Q3 revenue increased 23%, led by higher EYLEA sales, initial Libtayo sales, and increased Sanofi collaboration revenue. Nine-month revenue increased 19%.
- U.S. EYLEA net product sales were $1,187.7 million in Q3 and $3,422.1 million for the first nine months, increases of 16% and 14%, respectively.
- Libtayo generated $47.6 million of U.S. sales in Q3 and $115.2 million for the first nine months. Global Libtayo sales recorded by Regeneron and Sanofi totaled $51.5 million in Q3 and $119.1 million year to date.
- Sanofi collaboration revenue increased to $404.2 million in Q3 and $999.7 million year to date, including improved antibody collaboration profits primarily from Dupixent.
- Bayer collaboration revenue increased to $302.8 million in Q3 and $868.0 million year to date, reflecting higher EYLEA profits outside the United States.
- Operating expenses rose 26% in Q3 and 40% year to date. Research and development expense included a $400.0 million up-front payment to Alnylam during the second quarter.
- Q3 net income increased 13%, but nine-month net income declined 18% because of the Alnylam payment, higher development and commercialization costs, and unfavorable equity-security valuation effects.
- Net cash provided by operating activities was $1,642.6 million for the first nine months, compared with $1,466.3 million in 2018.
- Investing cash outflow was $1,819.1 million, including $2,834.9 million of securities purchases, the $400.0 million Alnylam equity investment, and $290.6 million of capital expenditures.
- At September 30, cash and cash equivalents were $1,384.8 million, marketable securities were $4,605.7 million, and working capital was $5,343.7 million. The company had $750.0 million of borrowing availability under its revolving credit facility.
- Total finance lease liabilities were $712.7 million. The company reported compliance with applicable lease financing covenants.
Material changes versus the prior comparable period
- Revenue growth was offset by substantial cost escalation, particularly research and development, selling and marketing, manufacturing, and collaboration expenses.
- Research and development expense increased $768.7 million for the first nine months, including the $400.0 million Alnylam up-front payment and increased spending on fasinumab, Libtayo, evinacumab, and other programs.
- Sanofi antibody collaboration results shifted from a $182.6 million loss in the first nine months of 2018 to $105.2 million of revenue in the first nine months of 2019, primarily due to higher Dupixent-related profits.
- The company adopted the new lease standard, ASC 842, on January 1, 2019, recognizing $33.2 million of operating lease right-of-use assets at adoption.
- Sanofi purchased shares from the company in connection with development funding obligations. During the first nine months, Regeneron recorded $73.3 million of treasury stock for shares purchased through credits and $29.4 million for shares purchased for cash.
- In November 2019, after the reporting period, the board authorized a share repurchase program of up to $1.0 billion. No shares had been repurchased under that program as of the filing.
Guidance, outlook, commentary, risks, and unusual items
- Management expected 2019 capital expenditures of approximately $390 million to $420 million, primarily for manufacturing expansion, fill/finish facilities and equipment, and laboratory expansion and renovations.
- Management stated that continued profitability and operating cash flow depend significantly on the ongoing commercial success of EYLEA and Dupixent, continued collaboration funding, and successful execution of the development pipeline.
- The pipeline included 24 clinical-stage product candidates or approved products being studied in additional indications, including programs in oncology, eye disease, inflammatory disease, cardiovascular disease, pain, infectious disease, and rare disease.
- Material legal matters included patent litigation involving Praluent, Dupixent, and Regeneron's antibody-generation technology. The District Court ruled in August 2019 that Amgen's asserted U.S. Praluent patent claims were invalid for lack of enablement, but Amgen appealed. A German injunction concerning Praluent remained subject to appeal.
- The company was cooperating with a Department of Justice investigation concerning patient assistance programs and related activities. In September 2019, the company and a subsidiary received civil investigative demands concerning payments and remuneration to physicians, including consulting, advisory board, speaker, travel, and entertainment payments.
- Key business risks include concentration in EYLEA, dependence on Sanofi and Bayer, pricing and reimbursement pressure, competing biologics and biosimilars, patent challenges, regulatory and clinical-development uncertainty, manufacturing capacity and supply-chain constraints, and potential government investigations.
- Two U.S. distributors accounted for approximately 90% of gross product revenue for the first nine months, creating significant customer-concentration risk.
Most important facts for investors to verify
- Whether EYLEA growth can offset increasing competition, potential biosimilar pressure, reimbursement changes, and high product concentration.
- The sustainability and timing of Dupixent-related collaboration profits and the commercial ramp of Libtayo.
- The recurring versus nonrecurring nature of the $400.0 million Alnylam payment and the resulting effect on reported earnings and research spending.
- Progress, regulatory outcomes, and financing requirements for the clinical pipeline, particularly fasinumab, evinacumab, REGN-EB3, and oncology programs.
- Developments in the Praluent, Dupixent, and European patent proceedings, including possible injunctions, damages, royalties, or licensing requirements.
- Potential liabilities or business restrictions arising from the Department of Justice investigations.
- Whether planned capital expenditures of $390 million to $420 million and the $1.0 billion share repurchase authorization are consistent with future cash needs.
- The timing and terms of the $712.7 million finance lease maturity and the company’s continued access to its $750.0 million revolving credit facility.