REGN

Regeneron Pharmaceuticals, Inc. - 10-Q Summary (Q2 2009)

Business Context and Reporting Period

This report covers the quarterly period ended June 30, 2009. Regeneron is a biopharmaceutical company focused on discovering, developing, and commercializing pharmaceutical products. Its primary marketed product is ARCALYST (rilonacept) for Cryopyrin-Associated Periodic Syndromes (CAPS). The company relies heavily on strategic collaborations with sanofi-aventis (for aflibercept and monoclonal antibodies) and Bayer HealthCare (for VEGF Trap-Eye) to fund development and share commercialization risks.

Key Financial Metrics

Note: Financial data for 2008 has been revised due to accounting changes (see Material Changes section).

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 48% in Q2 2009 compared to Q2 2008. This was driven by a 57% increase in contract research and development revenue from sanofi-aventis (due to increased expense reimbursements and recognition of deferred revenue) and higher ARCALYST product sales ($4.5M vs $1.6M).
• Expense Increases: Operating expenses rose 32% year-over-year, primarily due to a 41% increase in R&D expenses. This reflects expanded clinical trials for VEGF Trap-Eye, ARCALYST (gout), and monoclonal antibodies, as well as increased headcount (966 in Q2 2009 vs 771 in Q2 2008).
• Accounting Revision (EITF 97-10): The company revised previously issued financial statements to capitalize landlord construction costs for new Tarrytown facilities as a non-cash transaction, offset by a facility lease obligation. This increased Property, Plant, and Equipment and Total Liabilities but had no impact on net cash flows or operating revenues.
• Investment Income: Investment income decreased significantly ($1.3M in Q2 2009 vs $4.5M in Q2 2008) due to lower yields and lower balances of marketable securities.

Guidance, Outlook, and Risks

• Clinical Progress:
  • ARCALYST: Phase 3 trials for gout are enrolling. Initial data expected in 2010. EMEA issued a positive opinion for CAPS marketing authorization in July 2009.
  • Aflibercept (Oncology): Four Phase 3 trials are >60% enrolled. Initial data expected in 2010.
  • VEGF Trap-Eye: Phase 3 trials in wet AMD (VIEW 1 & 2) and CRVO are ongoing. A $20M milestone payment was received from Bayer in July 2009 for CRVO trial initiation.
• Liquidity: The company holds $466.4M in cash, cash equivalents, and marketable securities. Management believes existing resources will fund operations through at least 2012.
• Risks:
  • Development Risk: High uncertainty regarding the success of late-stage clinical trials (aflibercept, VEGF Trap-Eye, ARCALYST in gout).
  • Collaboration Dependence: Significant reliance on sanofi-aventis and Bayer for funding and commercialization. Termination of these agreements would materially harm the business.
  • Competition: Strong competition in oncology (Avastin), eye disease (Lucentis, Avastin off-label), and inflammatory diseases (Novartis IL-1 antibody).
  • Market Risk: Exposure to credit quality deterioration in the investment portfolio, though the company is shifting toward higher-quality U.S. government securities.

Investor Verification Checklist

• Collaboration Terms: Verify the specific reimbursement rates and milestone triggers in the sanofi-aventis and Bayer agreements, as these drive a significant portion of revenue.
• Clinical Trial Enrollment: Monitor enrollment rates for the four aflibercept Phase 3 trials and the VEGF Trap-Eye VIEW trials, as delays could push data readouts beyond 2010.
• ARCALYST Commercialization: Assess the actual uptake of ARCALYST in the rare CAPS market and the potential market size for the new gout indication.
• Capital Expenditures: Track the $50-$60M expected capital expenditures for 2009 related to the Tarrytown facility expansion and Rensselaer manufacturing upgrades.
• Accounting Adjustments: Confirm the long-term impact of the EITF 97-10 lease accounting revision on future depreciation and lease obligations.