Regeneron Pharmaceuticals, Inc. — 2013 Q3 Form 10-Q Summary
Business context and reporting period
Regeneron is a fully integrated biopharmaceutical company that discovers, develops, manufactures, and commercializes medicines. This unaudited Form 10-Q covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The business was increasingly dependent on EYLEA, with U.S. commercialization led by Regeneron and ex-U.S. commercialization conducted with Bayer HealthCare.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $597.0 million | $427.7 million | $1,494.3 million | $963.9 million |
| Net product sales | $367.1 million | $249.2 million | $1,019.8 million | $576.6 million |
| Income from operations | $236.8 million | $202.4 million | $548.0 million | $312.0 million |
| Net income | $141.3 million | $191.5 million | $327.6 million | $279.9 million |
| Diluted EPS | $1.25 | $1.72 | $2.95 | $2.55 |
| Operating margin | 39.7% | 47.3% | 36.7% | 32.4% |
| Net margin | 23.7% | 44.8% | 21.9% | 29.0% |
Margins are calculated from reported figures. Q3 2013 net income included an $84.4 million income tax provision, whereas the comparable 2012 period had no reported income tax expense on pre-tax income because of the then-existing valuation allowance treatment.
- EYLEA U.S. net product sales were $363.1 million in Q3 and $1,006.8 million in the first nine months, versus $244.4 million and $561.9 million, respectively, in 2012.
- Ex-U.S. EYLEA sales reported by Bayer were $124.8 million in Q3 and $288.3 million in the first nine months. Regeneron recorded $31.8 million and $57.2 million of related net profit, after development-cost reimbursements.
- Sanofi collaboration revenue was $134.4 million in Q3 and $319.2 million in the first nine months. Bayer collaboration revenue was $88.6 million and $134.6 million, respectively.
- Research and development expense increased to $224.0 million in Q3 and $591.8 million in the first nine months, driven by expanded clinical development and manufacturing activity.
- Selling, general, and administrative expense increased to $97.6 million in Q3 and $247.3 million in the first nine months, reflecting EYLEA commercialization, the branded prescription drug fee, contributions to a patient-support organization, and higher stock-based compensation.
- Operating expenses included non-cash compensation of $45.8 million in Q3 and $143.2 million in the first nine months, compared with $20.5 million and $63.4 million in the prior-year periods.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $306.9 million for the first nine months of 2013, compared with $167.8 million of cash used in operating activities in the prior-year period.
- Net cash used in investing activities was $245.5 million, including $87.3 million of capital expenditures and net purchases of marketable securities.
- Cash and cash equivalents were $263.2 million at September 30, 2013. Marketable securities totaled approximately $511.9 million, producing total cash, cash equivalents, and marketable securities of approximately $775.2 million.
- Trade accounts receivable increased to $855.8 million from $593.2 million at December 31, 2012, primarily because of EYLEA growth and extended customer payment terms. Sanofi receivables were $137.0 million.
- Carrying value of convertible senior notes was $314.2 million; the notes have $400.0 million aggregate principal amount, bear a 1.875% coupon, and mature October 1, 2016 unless earlier converted or repurchased.
- Total liabilities were $950.2 million and stockholders’ equity was $1,690.2 million at September 30, 2013. Facility lease obligations totaled $168.0 million, including current and long-term portions.
- Management stated that existing capital resources, anticipated EYLEA cash generation, and collaboration reimbursements should fund projected operating needs for the foreseeable future.
Material changes versus the prior comparable period
- Q3 revenue increased 39.6%, while nine-month revenue increased 55.0%, primarily due to EYLEA sales growth and increased Bayer collaboration revenue.
- Q3 net income decreased 26.2% and diluted EPS declined 27.3%, mainly because of higher operating expenses and the transition to a normal income tax provision.
- Nine-month net income increased 17.0% and diluted EPS increased 15.7%, despite substantially higher R&D, SG&A, and tax expense.
- Nine-month EYLEA U.S. sales increased approximately 79.3%; EYLEA represented approximately 67% of total revenue, compared with 58% in the prior-year period.
- Sanofi collaboration revenue was broadly unchanged for the first nine months, but the mix shifted toward antibody development reimbursements. Q3 2012 included a $50.0 million ZALTRAP milestone that did not recur.
- Q3 2013 Bayer revenue included three $15.0 million milestone payments: one for EU approval of EYLEA for macular edema following CRVO and two sales milestones tied to ex-U.S. sales thresholds.
- The company acquired exclusive rights from Sanofi to PDGF and Ang2 ophthalmology antibody programs for two $10.0 million upfront payments and potential future development milestones and royalties.
Guidance, outlook, commentary, risks, and unusual items
- No formal revenue or earnings guidance is provided in the filing. Management expects continued growth in R&D, commercialization, and capital expenditures.
- Management expected approximately $350 million to $450 million of capital expenditures during the fourth quarter of 2013 and 2014, primarily for Rensselaer manufacturing expansion, Tarrytown tenant improvements, equipment, and a potential 400,000-square-foot facility in Limerick, Ireland.
- EYLEA DME Phase 3 studies produced positive results; a supplemental U.S. BLA had been submitted, and Bayer planned an EU filing. Positive BRVO results were reported in October 2013, with a U.S. filing expected within several months.
- Pipeline priorities included sarilumab, alirocumab, dupilumab, nesvacumab, and other antibody candidates. Fasinumab remained on FDA clinical hold, with no ongoing enrolling or treating trials.
- Regeneron is substantially dependent on EYLEA, Sanofi, Bayer HealthCare, third-party payers, and a limited distribution network. Besse Medical accounted for 76% of gross product revenue in the first nine months of 2013.
- Key risks include EYLEA concentration, competition from Lucentis and lower-cost off-label Avastin, reimbursement and pricing pressure, regulatory approval and safety uncertainty, manufacturing capacity and supply-chain execution, and possible termination of collaboration agreements.
- The company commenced patent infringement litigation against Kymab in the United Kingdom concerning genetically altered mice used to produce human antibodies. Management did not expect existing legal proceedings to have a material adverse effect, but outcomes remain uncertain.
- The amended Genentech settlement expanded coverage to worldwide EYLEA sales and requires specified milestone and royalty payments through May 7, 2016. The company also entered into a separate worldwide ZALTRAP license and settlement agreement.
Important facts for investors to verify
- Whether EYLEA U.S. sales growth, pricing, reimbursement, and customer collections remain sustainable, given the high receivables balance and customer concentration.
- The timing and outcome of regulatory filings for EYLEA in DME and BRVO, including any required post-marketing or manufacturing commitments.
- The amount and timing of future Genentech royalties, Sanofi and Bayer development-cost reimbursements, and collaboration profit-sharing obligations.
- Progress, safety, and regulatory status of the major antibody programs, particularly alirocumab, sarilumab, dupilumab, and fasinumab.
- Execution and funding requirements for the planned $350 million to $450 million capital program and potential Limerick facility acquisition.
- The carrying value, conversion or dilution implications, and October 2016 maturity of the convertible senior notes and related warrant transactions.
- Potential effects of competition, payer reimbursement changes, patent litigation, manufacturing constraints, and termination or modification of the Sanofi or Bayer collaborations.