Business Context and Reporting Period
Regeneron Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. The company is a fully integrated biopharmaceutical business focused on discovering, developing, manufacturing, and commercializing medicines. Its marketed products were EYLEA for wet age-related macular degeneration in the United States and ARCALYST for CAPS.
Results were substantially transformed by the November 2011 launch of EYLEA. Regeneron retained U.S. commercialization rights and collaborated with Bayer HealthCare internationally, while Sanofi funded or shared development activities for ZALTRAP and multiple antibody programs.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2012 | Three Months Ended June 30, 2011 | Six Months Ended June 30, 2012 | Six Months Ended June 30, 2011 |
|---|---|---|---|---|
| Total revenue | $304.4 million | $107.8 million | $536.2 million | $220.0 million |
| Net product sales | $199.5 million | $5.0 million | $327.5 million | $9.5 million |
| EYLEA sales | $194.0 million | Not applicable | $317.5 million | Not applicable |
| Operating income (loss) | $87.5 million | $(60.3) million | $109.7 million | $(101.3) million |
| Net income (loss) | $76.7 million | $(62.5) million | $88.4 million | $(106.0) million |
| Diluted earnings (loss) per share | $0.70 | $(0.69) | $0.81 | $(1.18) |
- Approximate operating margin was 28.7% in the second quarter and 20.5% for the first half of 2012, compared with negative margins in the comparable 2011 periods. Approximate net margin was 25.2% and 16.5%, respectively.
- Sanofi collaboration revenue was $89.0 million in the quarter and $174.0 million in the first half, compared with $84.5 million and $169.8 million in the respective 2011 periods. Bayer collaboration revenue was $9.1 million in the quarter and $21.6 million in the first half.
- Research and development expense increased to $147.4 million in the quarter and $286.2 million in the first half, while selling, general, and administrative expense increased to $47.7 million and $106.1 million, respectively.
- Cost of goods sold increased to $21.8 million in the quarter and $34.1 million in the first half, including inventory write-downs and reserves of $6.5 million and $8.4 million, respectively.
- Interest expense was $11.2 million in the quarter and $22.4 million in the first half, reflecting the October 2011 issuance of $400.0 million of 1.875% convertible senior notes.
- Net cash used in operating activities was $165.4 million for the first half of 2012, compared with $44.6 million used in the prior-year period. The principal driver was a $332.3 million increase in Sanofi and trade accounts receivable, primarily related to extended payment terms for EYLEA customers.
- Net cash used in investing activities was $123.4 million, including $23.9 million of capital expenditures. Net cash used in financing activities was $22.8 million.
- Cash and cash equivalents were $171.9 million at June 30, 2012. Total cash, cash equivalents, and marketable securities, including restricted amounts, were $597.5 million, compared with $810.6 million at December 31, 2011.
- Net trade accounts receivable rose to $349.6 million from $28.3 million at year-end 2011. One customer represented 82% of net trade receivables at June 30, 2012.
- Total liabilities were $862.8 million and stockholders’ equity was $594.7 million at June 30, 2012. Convertible senior notes had a carrying value of $285.5 million; aggregate principal was $400.0 million and maturity was October 1, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue increased 182% in the second quarter and 144% in the first half, primarily because of EYLEA sales following its U.S. launch.
- Regeneron moved from operating and net losses in 2011 to operating and net profitability in both 2012 reporting periods.
- Commercialization of EYLEA increased selling expenses, headcount, customer receivables, cost of goods sold, and sales-related deductions. Average headcount increased to 1,783 in the quarter from 1,497 and to 1,756 in the first half from 1,464.
- Research and development spending increased despite lower Bayer-shared EYLEA development costs, reflecting greater antibody discovery and development activity, including REGN727.
- Deferred revenue declined by $17.7 million from year-end, primarily through recognition of previously received payments under Astellas, Sanofi, and Bayer agreements.
- Marketable securities increased to $425.4 million from $325.2 million, while cash and cash equivalents declined because operating cash flow was negative, securities purchases exceeded sales and maturities, and the company paid $61.4 million for employee tax obligations related to stock option exercises.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that future profitability and positive operating cash flow depend significantly on continued successful commercialization and market penetration of EYLEA. The filing does not provide a specific revenue or earnings forecast.
- Management expected approximately $80 million to $100 million of capital expenditures during the remainder of 2012 and 2013, primarily for manufacturing expansion, tenant improvements, and equipment.
- Management believed existing capital, anticipated EYLEA sales, and collaborator reimbursements would fund operations for the foreseeable future, but noted that additional financing could be required if revenues are delayed or expenses rise.
- Management estimated that 50% to 60% of 2012 funding requirements would support technology development, research, and product-candidate development; 10% to 15% planned commercialization; 15% to 20% capital expenditures; and the remainder general corporate purposes.
- The FDA’s Arthritis Advisory Committee voted against approval of ARCALYST for prevention of gout flares. The recommendation was not binding, but represented a significant regulatory risk.
- ZALTRAP received FDA Priority Review for previously treated metastatic colorectal cancer, with an FDA target decision date of August 4, 2012. The Phase 3 VENICE trial in prostate cancer did not meet its overall-survival criterion.
- EYLEA’s supplemental application for central retinal vein occlusion had an FDA target decision date of September 23, 2012. Bayer received approvals in Australia and Colombia for wet AMD and pursued approvals in other countries.
- Under the Genentech settlement and license agreement, Regeneron expected a $60 million lump-sum payment in the third quarter of 2012 once cumulative U.S. EYLEA sales reached $400 million. It also owes royalties of 4.75% on specified cumulative U.S. sales through $3 billion and 5.5% above that level through May 2016.
- Remaining Genentech patent litigation continued in the United States and Europe. The company could not predict the probability or amount of any loss related to the unresolved matters.
- Key risks include dependence on EYLEA, payer coverage and reimbursement, competition from Lucentis and off-label Avastin, manufacturing capacity and supply-chain execution, regulatory and clinical trial outcomes, intellectual-property litigation, and reliance on Sanofi and Bayer.
- Sales concentration and extended payment terms created significant customer credit and liquidity exposure. A temporary CMS Q-Code was issued for EYLEA reimbursement, while a permanent J-Code was expected in January 2013.
- The company continued to maintain a full valuation allowance against deferred tax assets because of its history of losses; the filing does not indicate material near-term cash income-tax obligations.
Investor Verification Checklist
- Verify the sustainability and quarterly trajectory of EYLEA demand, collections, gross-to-net deductions, pricing, and customer concentration.
- Verify whether EYLEA reimbursement mechanics, including the permanent J-Code, support continued adoption and timely receivable collection.
- Verify the timing and outcomes of regulatory decisions for ZALTRAP, EYLEA in additional indications, and ARCALYST in gout.
- Verify the effect of Genentech royalties, the expected $60 million payment, and unresolved patent litigation on EYLEA and ZALTRAP economics.
- Verify cash conversion, operating cash flow, capital-expenditure requirements, and the company’s ability to fund manufacturing expansion and pipeline programs.
- Verify collaborator funding, profit-sharing, and reimbursement obligations, particularly with Sanofi and Bayer HealthCare.
- Assess competitive pressure from Lucentis, Avastin, other VEGF therapies, and emerging antibody programs.