REGENERON PHARMACEUTICALS, INC. quarterly report, Q1 FY2018

Regeneron Pharmaceuticals, Inc. — Q1 2018 Form 10-Q Summary

Business context and reporting period

Regeneron is an integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines. This unaudited Form 10-Q covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.

Commercial activity remained concentrated in EYLEA, with additional products and pipeline programs supported by collaborations with Sanofi, Bayer, and Teva. EYLEA U.S. net sales represented approximately 65% of total revenue in both comparable periods.

Financial performance and liquidity

Metric	Q1 2018	Q1 2017	Change
Total revenue	$1,511.5 million	$1,319.0 million	+$192.5 million, approximately 14.6%
Net product sales	$987.9 million	$858.2 million	+$129.7 million
Income from operations	$567.2 million	$430.5 million	+$136.7 million
Net income	$478.0 million	$248.9 million	+$229.1 million, approximately 92.0%
Diluted EPS	$4.16	$2.16	+$2.00
Net cash from operating activities	$618.7 million	$355.9 million	+$262.8 million
Capital expenditures	$79.4 million	$50.5 million	+$28.9 million

EYLEA U.S. sales increased to $984.0 million from $854.4 million, primarily due to higher volume.
Bayer collaboration revenue increased to $247.9 million from $193.9 million, mainly due to higher Regeneron profit from EYLEA sales outside the United States. Global EYLEA sales reported by Bayer were $624.0 million.
Sanofi collaboration revenue decreased to $189.5 million from $210.4 million, primarily because Sanofi’s antibody discovery funding ended after 2017 and reimbursement levels for Dupixent development declined following U.S. approval. This was partly offset by higher immuno-oncology reimbursement and increased Dupixent-related activity.
Teva collaboration revenue, included in other revenue, increased to $58.6 million from $33.1 million.
Research and development expense declined modestly to $498.6 million from $507.4 million. Direct spending increased for cemiplimab and fasinumab but was offset by lower indirect costs and lower Dupixent-related spending.
Selling, general, and administrative expense increased to $330.8 million from $296.8 million, reflecting higher headcount and commercialization costs, particularly for Dupixent.
Operating margin was approximately 37.5%, compared with 32.6% in Q1 2017. Net margin was approximately 31.6%, compared with 18.9%.
The effective tax rate declined to 18.3% from 42.4%, benefiting from the Tax Cuts and Jobs Act, the foreign-derived intangible income deduction, and research tax credits. The company had recorded a provisional $326.2 million deferred-tax remeasurement charge in Q4 2017.
Cash and cash equivalents were $1.019 billion at March 31, 2018. Current and noncurrent marketable securities totaled approximately $2.427 billion, producing cash and marketable securities of approximately $3.447 billion.
Working capital was $3.279 billion. The company had no borrowings under its $750 million revolving credit facility and was in compliance with applicable covenants.
Capital and facility lease obligations were $704.6 million. The Tarrytown facility financing is payable at the end of the five-year lease term unless extended or otherwise settled under the agreement.

Material changes versus the prior comparable period

Revenue growth was led by EYLEA U.S. volume, higher Bayer EYLEA collaboration profits, and the initial contribution from Dupixent commercialization.
Net income nearly doubled, aided by higher operating income, increased other income, and the lower effective tax rate.
Operating cash flow increased substantially to $618.7 million, while investing outflows increased because of greater purchases of marketable securities and higher capital expenditures.
The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption reduced retained earnings by $143.4 million net of tax and changed the timing of collaboration-revenue recognition. Reported Q1 2018 revenue was $25.7 million higher than it would have been under the prior revenue guidance.
The company adopted ASU 2016-01, resulting in $9.4 million of unrealized equity-security gains being recognized in other income rather than other comprehensive income.
Sanofi’s antibody discovery agreement ended December 31, 2017, eliminating the related $130.0 million annual funding commitment for 2018.
Average headcount increased to 6,401 from 5,505, principally to support manufacturing expansion.

Guidance, outlook, commentary, risks, and unusual items

Management expects continued substantial investment in research and development, commercialization, and manufacturing capacity. Capital expenditures for the last three quarters of 2018 were estimated at approximately $340 million to $400 million, primarily for Rensselaer, Limerick, and Tarrytown facilities.
Management stated that existing capital resources, expected EYLEA revenue, and collaboration funding should meet anticipated operating needs for the foreseeable future, but additional financing could become necessary if revenue declines, collaborations terminate, or expenses rise materially.
Key expected regulatory milestones included FDA decisions for EYLEA dosing, Dupixent asthma, Praluent, and cemiplimab, with target action dates primarily in 2018.
In April 2018, an independent monitoring committee recommended discontinuing higher-dose fasinumab regimens because of the risk-benefit assessment. Lower-dose regimens may continue, but the modification could affect the program and related collaboration accounting.
In March 2018, the company reported positive Phase 3 results for EYLEA in diabetic retinopathy and positive cardiovascular-outcomes results for Praluent. These developments remained subject to regulatory review and commercialization execution.
Sanofi and Regeneron agreed to lower Praluent’s net price in exchange for exclusive formulary placement with Express Scripts, effective July 1, 2018. The effect on revenue and profitability is not quantified in the filing.
Material legal and regulatory exposures include patent litigation concerning Praluent, Dupixent, EYLEA, ZALTRAP, and Regeneron’s antibody technology; a U.S. Department of Justice investigation concerning patient-assistance support; shareholder derivative claims; and related proceedings for which the company generally could not estimate a loss range.
Regeneron remains substantially dependent on EYLEA, Sanofi and Bayer collaborations, third-party manufacturing and fill-finish providers, regulatory approvals, payer coverage, and continued manufacturing capacity expansion.
Customer concentration is significant: Besse Medical and McKesson together accounted for approximately 95% of total gross product revenue in Q1 2018.

Most important facts for investors to verify

Whether EYLEA U.S. volume growth and global collaboration profits can offset increasing competition, pricing pressure, and potential biosimilar or alternative-treatment threats.
The effect of ASC 606 on the timing and comparability of collaboration revenue, deferred revenue, and retained earnings.
The commercial trajectory and profitability contribution of Dupixent, Praluent, and Kevzara, including the impact of payer access and Praluent’s Express Scripts pricing arrangement.
The outcome and timing of patent litigation involving Praluent, Dupixent, EYLEA, and the company’s antibody-generation technology.
The impact of fasinumab’s lower-dose development plan on clinical timelines, regulatory prospects, and remaining collaboration revenue.
Whether planned manufacturing expansion and projected $340 million to $400 million of remaining 2018 capital expenditures remain on schedule and within budget.
The continuing status and potential consequences of the Department of Justice investigation and shareholder derivative litigation.
Future effective tax rates, including finalization of estimates under the Tax Cuts and Jobs Act and the treatment of GILTI.