Regeneron Pharmaceuticals, Inc. — Q3 2012 Form 10-Q Summary
Business context and reporting period
Regeneron is a fully integrated biopharmaceutical company developing, manufacturing, and commercializing medicines. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The principal commercial drivers were the U.S. launch of EYLEA and the August 2012 U.S. approval and launch of ZALTRAP with Sanofi.
- Marketed products: EYLEA for wet AMD and, beginning September 2012, macular edema following CRVO; ARCALYST for CAPS; and ZALTRAP for previously treated metastatic colorectal cancer.
- EYLEA generated $244.4 million of third-quarter and $561.9 million of nine-month net product sales.
- The company had 12 product candidates in clinical development, with significant programs involving Sanofi and Bayer HealthCare.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $427.7 million | $102.8 million | $963.9 million | $322.8 million |
| Operating income (loss) | $202.4 million | $(58.5) million | $312.0 million | $(159.8) million |
| Net income (loss) | $191.5 million | $(62.4) million | $279.9 million | $(168.3) million |
| Diluted EPS | $1.72 | $(0.68) | $2.55 | $(1.87) |
| Operating margin | 47.3% | Not meaningful | 32.4% | Not meaningful |
| Net margin | 44.8% | Not meaningful | 29.0% | Not meaningful |
Revenue growth was led by EYLEA product sales and collaboration milestones. Q3 revenue included a $50.0 million Sanofi milestone upon ZALTRAP approval and a $15.0 million Bayer milestone upon Japanese approval of EYLEA. Sanofi collaboration revenue was $145.0 million in Q3 and $319.0 million for nine months; Bayer collaboration revenue was $26.7 million and $48.3 million, respectively.
- Q3 research and development expense increased 24% to $158.3 million; nine-month R&D expense increased 11% to $444.5 million.
- Q3 selling, general, and administrative expense increased to $46.9 million from $32.9 million; nine-month expense increased to $153.0 million from $80.9 million, primarily reflecting EYLEA commercialization and higher headcount.
- Q3 cost of goods sold was $20.1 million versus $0.5 million; nine-month cost of goods sold was $54.3 million versus $1.2 million. Nine-month cost of goods sold included $8.6 million of inventory write-downs and reserves.
- Q3 interest expense was $11.4 million and nine-month interest expense was $33.8 million, substantially higher because of the convertible senior notes issued in October 2011.
- Income tax expense relating to 2012 pretax income was fully offset by a reversal of part of the deferred-tax valuation allowance. The company continued to maintain a full valuation allowance against its deferred tax assets.
Liquidity, cash flow, and debt
- Cash, cash equivalents, and marketable securities totaled $583.3 million at September 30, 2012, including $8.2 million of restricted amounts, versus $810.6 million at December 31, 2011.
- Cash and cash equivalents declined to $119.0 million from $483.6 million at year-end 2011, while marketable securities increased to $464.2 million from $325.2 million.
- Operating cash flow was negative $167.8 million for the first nine months, compared with negative $91.4 million in the prior-year period. The primary use was a $498.2 million increase in Sanofi and trade receivables, principally from EYLEA sales and extended customer payment terms.
- Investing cash flow was negative $172.2 million, including $137.5 million of net purchases of marketable securities and $34.2 million of capital expenditures.
- Financing cash flow was negative $24.6 million, including $48.4 million of stock-option exercise proceeds and $71.5 million of employee tax-withholding share payments.
- The company had $400.0 million principal amount of 1.875% convertible senior notes due October 1, 2016; the carrying amount was $291.0 million and estimated fair value was $763.9 million.
- Management expected approximately $80 million to $100 million of capital expenditures during the remainder of 2012 and 2013, primarily for manufacturing expansion, facility improvements, and equipment.
Material changes versus the prior comparable period
- EYLEA transformed the company from a loss-making business into a profitable one: nine-month revenue increased approximately 199%, and nine-month net income improved by $448.2 million compared with 2011.
- EYLEA represented nearly all product-sales growth, while ARCALYST sales declined modestly to $4.8 million in Q3 and $14.7 million for nine months. Management did not expect future ARCALYST CAPS sales to be significant.
- ZALTRAP sales recorded by Sanofi began in August 2012 and totaled $8.3 million in Q3. Regeneron recorded a $7.4 million share of the collaboration’s commercialization loss in Q3 and a $19.5 million share for nine months.
- The company’s trade receivables increased to $506.7 million from $28.3 million at year-end, creating a substantial working-capital drag and customer-concentration exposure.
- Headcount increased to 1,863 in Q3 from 1,646 in the prior-year quarter, principally to support EYLEA commercialization and antibody R&D. Nine-month non-cash compensation rose to $63.4 million from $40.6 million.
- In July 2012, the FDA issued a Complete Response Letter for ARCALYST in gout; Regeneron discontinued development for that indication.
- The company paid Genentech a $60.0 million lump sum after cumulative U.S. EYLEA sales reached $400.0 million and remains subject to royalties on specified cumulative EYLEA sales.
Guidance, outlook, commentary, and risks
The filing provides no formal full-year revenue or earnings guidance. Management stated that future results would depend heavily on continued EYLEA commercialization and market penetration, while expenses would continue to rise for R&D, commercialization, manufacturing capacity, and international preparation.
- Management believed existing capital, anticipated EYLEA sales, and collaborator reimbursements would fund operating needs for the foreseeable future, but acknowledged potential requirements for additional financing if revenue or collaborations underperform.
- Near-term development priorities included additional EYLEA indications and international launches, the ZALTRAP regulatory program, the large Phase 3 ODYSSEY program for REGN727, and continued sarilumab and other antibody studies.
- Key commercial risks include competition from Lucentis and off-label Avastin, reimbursement and pricing pressure, the pending EYLEA J-Code at the time of filing, customer concentration, and the ability to supply increasing demand.
- Major contingencies include Genentech patent litigation in the United States and Europe. Management could not predict the probability or amount of any potential loss on the remaining matters.
- Additional risks include clinical and regulatory failure, product safety issues, manufacturing and supply-chain constraints, dependence on Sanofi and Bayer, potential collaboration termination, and the company’s history of cumulative losses.
- Interest-rate risk was primarily associated with marketable securities; management estimated that a 100-basis-point unfavorable rate change would reduce portfolio fair value by approximately $5.3 million.
Important facts for investors to verify
- Whether EYLEA sales growth, customer collections, reimbursement, and market share remain strong enough to convert reported profitability into sustainable positive operating cash flow.
- The effect of the $506.7 million trade-receivable balance, extended payment terms, and the concentration of 83% of net trade receivables with one customer.
- The timing and economics of international EYLEA launches, Bayer reimbursement obligations, and potential milestone or royalty receipts.
- The commercialization trajectory and profitability of ZALTRAP after its initial launch, including the obligation to reimburse Sanofi for development costs.
- Remaining Genentech patent litigation, applicable EYLEA royalties, and any effect on non-U.S. EYLEA or ZALTRAP activities.
- Manufacturing capacity expansion, product supply, inventory write-downs, and the planned $80 million to $100 million of capital expenditures.
- Whether continued profitability will support reversal of the remaining deferred-tax valuation allowance and create future tax benefits.