Regeneron Pharmaceuticals, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Regeneron is an integrated biopharmaceutical company that discovers, develops, manufactures, and commercializes medicines. This unaudited Form 10-Q covers the three months ended March 31, 2017, with comparisons to the three months ended March 31, 2016.
The company’s principal commercial product was EYLEA, while Praluent, Dupixent, Kevzara, ARCALYST, and ZALTRAP contributed to the broader marketed-product portfolio through direct sales or collaboration arrangements. Regeneron reported six approved products and 16 product candidates in clinical development.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1,319.0 million | $1,200.8 million | 9.8% increase |
| Net product sales | $858.2 million | $784.2 million | 9.4% increase |
| Collaboration revenue | $404.3 million | $399.3 million | 1.3% increase |
| Income from operations | $430.5 million | $329.3 million | 30.7% increase |
| Operating margin | 32.6% | 27.4% | Improved |
| Net income | $248.9 million | $181.4 million | 37.2% increase |
| Diluted earnings per share | $2.16 | $1.59 | 35.8% increase |
| Net margin | 18.9% | 15.1% | Improved |
| Cash flow from operations | $355.9 million | $45.0 million | Material increase |
EYLEA U.S. net product sales were $854.4 million, up from $780.9 million. EYLEA represented approximately 65% of total revenue in both periods. U.S. Praluent sales increased to $25.4 million from $9.8 million, and non-U.S. Praluent sales increased to $10.5 million from $3.2 million. ARCALYST sales were $3.8 million versus $3.3 million.
Sanofi collaboration revenue declined to $210.4 million from $219.7 million, primarily because antibody research and development reimbursements decreased as certain Dupixent later-stage studies were completed. This was substantially offset by higher immuno-oncology reimbursements. Bayer collaboration revenue increased to $193.9 million from $179.6 million, driven primarily by higher Regeneron profit from EYLEA sales outside the United States. Other revenue increased to $56.5 million from $17.3 million, including $33.1 million from the Teva fasinumab collaboration.
Research and development expense increased to $507.4 million from $470.1 million, and selling, general, and administrative expense increased to $296.8 million from $289.7 million. Cost of goods sold declined to $61.3 million from $78.9 million, principally because U.S. EYLEA royalties to Genentech ended in May 2016. The effective tax rate was 42.4%, compared with 45.1%.
Cash and cash equivalents were $811.8 million at March 31, 2017, compared with $535.2 million at December 31, 2016. Total marketable securities were $1.463 billion, producing cash and marketable securities of approximately $2.275 billion. Working capital was $2.361 billion.
Operating cash flow was supported by net income, non-cash stock compensation of $133.8 million, and a $187.7 million increase in accounts payable, accrued expenses, and other liabilities. Investing cash flow used $140.1 million, including $50.5 million of capital expenditures and net purchases of marketable securities. Financing cash flow provided $60.8 million.
The company had no borrowings under its $750.0 million senior unsecured revolving credit facility and was in compliance with its covenants. In March 2017, it entered into a five-year, variable-rate lease financing arrangement totaling $720.0 million for its Tarrytown facilities. Capital and facility lease obligations totaled $707.6 million at March 31, 2017, compared with $481.1 million at year-end 2016. Management expected capital expenditures of approximately $250 million to $300 million during the last three quarters of 2017.
Material changes versus the prior comparable period
- Revenue growth was led by higher EYLEA sales, stronger Bayer EYLEA collaboration profits, higher Praluent sales, and new Teva collaboration revenue.
- Operating income and margins improved despite higher research, manufacturing, commercialization, and headcount costs.
- Research and development spending increased, particularly for fasinumab, REGN2810, clinical manufacturing, and indirect personnel and infrastructure costs.
- Operating cash generation improved substantially from the prior-year quarter, when increased receivables significantly consumed cash.
- The company completed a $720.0 million Tarrytown lease financing transaction, materially increasing reported lease obligations but preserving cash and providing facility access.
- Dupixent received FDA approval in March 2017 and launched that month. Kevzara received Health Canada approval, while its U.S. application was resubmitted and accepted for review after prior manufacturing-related deficiencies.
- Development of the Bayer-partnered rinucumab/aflibercept program was discontinued in the first quarter of 2017.
- The company adopted ASU 2016-09; the prior-year quarter was revised to include a $15.6 million income tax benefit in net income and a $0.14 increase in diluted EPS.
Guidance, outlook, commentary, risks, and unusual items
Management expected existing cash, marketable securities, operating cash flow, available credit, EYLEA revenue, and collaboration reimbursements to fund projected operating needs for the foreseeable future. No full-year revenue or earnings guidance was provided in the filing. The company expected continued increases in research and development, commercialization, manufacturing, and capital expenditures.
Key near-term development and regulatory milestones included reporting results from the Praluent ODYSSEY OUTCOMES trial, a targeted FDA action date of May 22, 2017 for Kevzara, additional Dupixent regulatory submissions and clinical results, suptavumab Phase 3 results, further fasinumab studies, and continued development of REGN2810 and other pipeline candidates.
Praluent remained subject to significant patent litigation with Amgen. A U.S. permanent injunction had been granted but was stayed pending appeal, with oral argument scheduled for June 6, 2017. An adverse outcome could restrict U.S. commercialization and materially affect results. Dupixent was also subject to patent litigation initiated by Immunex; the plaintiff sought damages and potential enhanced damages but not an injunction at that time.
The company was cooperating with a Department of Justice investigation concerning patient-assistance organizations and financial assistance related to certain products. The filing stated that the outcome, duration, and potential remedies could not be predicted.
Additional risks included heavy dependence on EYLEA, customer concentration, payer and pricing pressure, competition from competing biologics and biosimilars, regulatory and clinical-development uncertainty, manufacturing capacity and supply-chain constraints, reliance on Sanofi and Bayer, potential loss of collaboration funding after 2017, variable-rate lease exposure, and possible adverse outcomes in intellectual-property proceedings.
Most important facts for investors to verify
- Whether EYLEA U.S. sales growth and market share remain durable and whether payer rebates or sales deductions pressure net pricing.
- The outcome and timing of the Praluent patent appeal and related international proceedings.
- Dupixent launch performance, reimbursement access, and the outcome of Immunex patent litigation.
- Kevzara’s FDA decision and the company’s ability to resolve manufacturing and regulatory requirements.
- Progress and results of the ODYSSEY OUTCOMES, fasinumab, suptavumab, REGN2810, and other pivotal clinical programs.
- The amount and timing of future Sanofi, Bayer, and Teva reimbursements, milestones, profit shares, and any collaboration changes.
- Execution of the Rensselaer, Limerick, and Tarrytown expansion plans and the company’s projected $250 million to $300 million of remaining 2017 capital expenditures.
- Interest-rate exposure and refinancing or purchase obligations associated with the $720.0 million variable-rate Tarrytown lease financing.
- Developments in the Department of Justice investigation and other patent, shareholder, and regulatory matters.