REGENERON PHARMACEUTICALS, INC. annual report, FY2013

Regeneron Pharmaceuticals, Inc. — FY2013 Form 10-K Summary

Business context and reporting period

Regeneron is a fully integrated biopharmaceutical company focused on discovering, developing, manufacturing, and commercializing medicines for serious medical conditions. The filing covers the fiscal year ended December 31, 2013. The company reported one operating segment and three marketed products: EYLEA, ZALTRAP, and ARCALYST.

EYLEA was the primary commercial driver, with U.S. rights retained by Regeneron and ex-U.S. development and commercialization conducted with Bayer HealthCare. ZALTRAP is developed and commercialized globally with Sanofi, while ARCALYST is marketed in the United States for CAPS.

Financial performance and key metrics

Metric	2013	2012	Change
Total revenue	$2,104.7 million	$1,378.5 million	Up 52.7%
Net product sales	$1,425.8 million	$858.1 million	Up 66.2%
Collaboration revenue	$650.4 million	$493.9 million	Up 31.7%
Operating income	$760.0 million	$457.7 million	Up 66.1%
Operating margin	36.1%	33.2%	Improved
Net income	$424.4 million	$750.3 million	Down 43.4%
Diluted EPS	$3.81	$6.75	Down 43.6%
Net margin	20.2%	54.4%	Declined
Operating cash flow	$583.6 million	$(74.6) million	Improved materially

• EYLEA U.S. net product sales increased to $1,408.7 million from $837.9 million, primarily due to higher volume.
• EYLEA ex-U.S. sales recorded by Bayer were $472.1 million, compared with $19.0 million in 2012. Regeneron recognized $101.5 million of net profit from ex-U.S. EYLEA commercialization after reimbursement of Bayer development costs.
• ARCALYST sales declined to $17.1 million from $20.2 million. ZALTRAP sales recorded by Sanofi increased to $70.2 million from $31.7 million, but Regeneron recorded a $30.8 million share of commercialization losses.
• Research and development expense increased 37.5% to $859.9 million, while selling, general, and administrative expense increased 56.2% to $329.4 million.
• Operating results included $198.4 million of non-cash stock-based compensation, compared with $94.2 million in 2012.
• Income tax expense was $289.0 million, based on a 40.5% effective tax rate. The prior year included a $335.8 million tax benefit from releasing substantially all of the valuation allowance on deferred tax assets.

Liquidity, cash flow, debt, and commitments

• Cash, cash equivalents, and marketable securities totaled $1,083.9 million at December 31, 2013, compared with $587.5 million at year-end 2012.
• Cash and cash equivalents were $535.6 million, and marketable securities were $548.3 million.
• Net trade accounts receivable increased to $787.1 million, reflecting extended payment terms for EYLEA customers. The filing states that these receivables were not past due. Payment terms for certain customers were shortened beginning in January 2014.
• Capital expenditures were $156.3 million in 2013, compared with $49.3 million in 2012. Management expected 2014 capital expenditures of approximately $350 million to $425 million, primarily for manufacturing expansion, Tarrytown facilities, the proposed Limerick facility, and equipment.
• The company had $400.0 million principal amount of 1.875% convertible senior notes due October 1, 2016. The carrying value was $320.3 million at year-end, and the notes were convertible as of December 31, 2013.
• Facility lease obligations totaled $185.2 million, and total contractual obligations were $1.303 billion, including convertible notes, operating leases, purchase obligations, and other long-term liabilities.
• Management stated that existing capital resources, anticipated EYLEA sales, and collaboration funding were expected to meet operating needs for the foreseeable future, while noting that additional financing could become necessary if revenue declines, expenses rise, or collaborations terminate.

Material changes versus the prior comparable period

• Revenue growth was driven by the continued U.S. launch expansion of EYLEA and the first substantial contribution from ex-U.S. EYLEA sales.
• Pre-tax income increased to $713.4 million from $414.4 million, but net income decreased because 2012 benefited from the large deferred-tax valuation allowance release.
• Operating cash flow changed from an outflow of $74.6 million to an inflow of $583.6 million as EYLEA collections increased, although receivables and inventories also expanded.
• Research and development spending rose substantially, particularly for alirocumab, dupilumab, sarilumab, clinical manufacturing, and clinical trials. Beginning in 2013, Regeneron also funded 20% of certain Phase 3 costs for co-developed Sanofi programs.
• Regeneron acquired full rights from Sanofi to PDGF-targeting antibodies and Ang2 antibodies for ophthalmology, making two $10.0 million upfront payments during 2013 and assuming additional potential milestone and royalty obligations.
• The company amended its Genentech license and settlement arrangements to cover worldwide EYLEA sales and expanded its manufacturing and laboratory footprint through Rensselaer construction and new Tarrytown leases.

Guidance, outlook, management commentary, risks, and unusual items

• Regeneron expected continued growth in research and development, commercialization, and manufacturing expenditures. Management identified EYLEA commercialization as critical to sustaining profitability and positive operating cash flow.
• The company expected its effective tax rate to increase in 2014 because of geographic profit mix and expiration of the federal research tax credit, absent legislative extension.
• Positive Phase 3 results supported the supplemental U.S. BLA filing for EYLEA in diabetic macular edema; the FDA decision target date was August 18, 2014. EYLEA also had positive results in BRVO and myopic CNV, with additional regulatory submissions planned.
• Sarilumab reported positive Phase 3 rheumatoid arthritis results, alirocumab reported positive Phase 3 LDL-C results, and dupilumab produced positive Phase 2 results in atopic dermatitis and asthma. These candidates remained subject to clinical, regulatory, safety, reimbursement, and competitive uncertainties.
• Fasinumab remained on FDA clinical hold with no active enrolling or treating trials. Development of REGN846 was discontinued in the second quarter of 2013.
• Key risks include dependence on EYLEA, intense competition from Lucentis and off-label Avastin, reimbursement and pricing pressure, manufacturing and supply constraints, reliance on Sanofi and Bayer, clinical and regulatory failure, intellectual-property disputes, customer concentration, and potential product liability.
• One distributor, Besse Medical, represented 76% of total gross product revenue in 2013. One customer represented 75% of net trade accounts receivable at year-end.
• The company recorded a $2.9 million other-than-temporary impairment on an equity security and $9.1 million of inventory write-downs and reserves in 2013.
• Regeneron was involved in European patent litigation concerning its genetically altered mouse technology against Kymab and Novo Nordisk. The filing states that the proceedings were at an early stage and that their outcome could not be predicted.
• The company reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2013.

Important facts for investors to verify

• Whether EYLEA growth, pricing, reimbursement, and market share remain sufficient to offset substantial dependence on one product.
• The outcome and timing of FDA and foreign regulatory decisions for EYLEA in DME, BRVO, and other indications.
• Progress, safety findings, regulatory submissions, and commercial economics for alirocumab, sarilumab, dupilumab, and other pipeline programs.
• Actual 2014 capital expenditures versus the $350 million to $425 million expectation and the timing and cost of manufacturing expansion.
• Changes in the company’s effective tax rate after use of tax attributes and expiration of the research tax credit.
• Collection of the elevated EYLEA receivable balance and the effect of shortened customer payment terms.
• Contingent reimbursement obligations of approximately $446 million to Sanofi for ZALTRAP and $276 million to Bayer for ex-U.S. EYLEA.
• Potential dilution, refinancing, or cash settlement associated with the $400.0 million convertible notes and related warrants.
• Developments in the '287 patent litigation and any other intellectual-property claims affecting the VelociSuite technology or marketed products.