REGENERON PHARMACEUTICALS, INC. quarterly report, Q3 FY2017

Business Context and Reporting Period

Regeneron Pharmaceuticals, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. Regeneron is an integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines. Its principal commercial product is EYLEA, with additional products marketed in collaboration with Sanofi and Bayer.

The filing reports six approved products: EYLEA, Dupixent, Praluent, Kevzara, ARCALYST, and ZALTRAP. EYLEA remained the primary revenue driver, while Dupixent and Kevzara were in early commercial launches.

Key Financial Metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Total revenue	$1,500.7 million	$1,220.1 million	$4,289.8 million	$3,633.6 million
Operating income	$559.9 million	$362.8 million	$1,540.8 million	$983.7 million
Net income	$388.3 million	$264.8 million	$1,025.0 million	$642.4 million
Diluted earnings per share	$3.32	$2.27	$8.84	$5.51
Operating margin	37.3%	29.7%	35.9%	27.1%
Net margin	25.9%	21.7%	23.9%	17.7%

Q3 revenue increased 23.0%; nine-month revenue increased 18.1% year over year.
U.S. EYLEA sales were $953.3 million in Q3 and $2,727.1 million for the first nine months, up from $853.6 million and $2,465.4 million, respectively.
Collaboration revenue increased to $245.2 million from Sanofi and $236.6 million from Bayer in Q3. Nine-month collaboration revenue was $677.7 million from Sanofi and $640.9 million from Bayer.
Research and development expense was $529.7 million in Q3 and $1,547.2 million for nine months, down from the comparable 2016 periods despite higher spending on cemiplimab and fasinumab.
Selling, general, and administrative expense increased to $306.8 million in Q3 and $910.5 million for nine months, primarily reflecting commercialization and staffing costs for Dupixent and Kevzara.
Cost of collaboration and contract manufacturing increased materially, partly due to Limerick facility validation costs and $50.6 million of inventory write-offs and reserves during the first nine months.
The effective tax rate was 31.3% in Q3 and 32.7% for nine months, compared with 27.6% and 35.0% in the prior-year periods.

Cash Flow, Liquidity, and Debt

Net cash provided by operating activities was $740.2 million for the first nine months of 2017, down from $1,095.5 million in 2016. The decrease reflected higher accounts receivable and inventory balances and lower deferred revenue activity.
Net cash used in investing activities was $669.4 million, including $165.0 million of capital expenditures and net purchases of marketable securities.
Cash and cash equivalents were $792.1 million at September 30, 2017, compared with $535.2 million at December 31, 2016.
Marketable securities totaled $1.914 billion, including $88.0 million of equity securities. Total cash, cash equivalents, and marketable securities were approximately $2.706 billion.
Working capital was $2.997 billion, compared with $1.939 billion at year-end 2016.
Regeneron had no borrowings under its $750.0 million senior unsecured revolving credit facility and was in compliance with its covenants.
The March 2017 Tarrytown lease financing created $720.0 million of capital and facility lease obligations. These obligations bear interest at a variable rate based on LIBOR and mature at the end of the five-year lease term unless extended or otherwise resolved under the agreement.
The company entered into $75.0 million of interest-rate swaps and $75.0 million of interest-rate caps to manage exposure from the variable-rate lease financing.

Material Changes Versus the Prior Comparable Period

Revenue growth was led by higher U.S. EYLEA volume, stronger Bayer EYLEA collaboration profit, and increased Sanofi collaboration revenue associated with Dupixent, Kevzara, immuno-oncology activities, and other items.
Sanofi-recorded global sales included $88.9 million of Dupixent sales and $3.0 million of Kevzara sales in Q3; neither product had comparable 2016 sales.
Profitability improved substantially because revenue growth exceeded the increase in operating expenses. Operating income increased 54.3% in Q3 and 56.6% for the first nine months.
Operating cash flow declined despite higher net income, primarily because of working-capital investments in receivables and inventory and lower deferred revenue increases.
Capital expenditures declined from $361.5 million to $165.0 million for the first nine months as major portions of the Limerick facility build-out were completed.
Non-cash compensation remained significant at $380.1 million for the first nine months, although it declined from $405.3 million in 2016.
The company recognized a $30.1 million loss on extinguishment of debt related to the Tarrytown lease transaction.
The Sanofi Antibody Discovery Agreement will end on December 31, 2017 without extension. Sanofi funding for discovery activities under that agreement will cease after 2017, increasing Regeneron's expected funding requirements.

Guidance, Outlook, Commentary, and Unusual Items

Management expected approximately $100 million to $120 million of capital expenditures in the fourth quarter of 2017.
Management stated that existing capital resources, expected EYLEA cash generation, collaboration reimbursements, and available borrowing capacity should fund projected operating needs for the foreseeable future, while warning that research, development, manufacturing, and commercialization spending will continue to increase.
Near-term development priorities included additional EYLEA regulatory submissions, Dupixent asthma and eosinophilic esophagitis programs, Praluent cardiovascular outcomes data, cemiplimab filings and clinical studies, fasinumab Phase 3 development, and additional studies for evinacumab and other pipeline candidates.
Suptavumab failed to meet the primary endpoint in a Phase 3 RSV study and further development was discontinued.
Fasinumab chronic low back pain development remained affected by an FDA clinical hold, while osteoarthritis Phase 3 studies continued.
The Federal Circuit vacated the U.S. permanent injunction against Praluent commercialization, reversed part of the lower court decision, and remanded written-description and enablement issues for a new trial. The court affirmed that Amgen's patents were not obvious.
Immunex patent litigation concerning Dupixent remained pending, with a jury trial scheduled for March 2019. The Patent Trial and Appeal Board declined to institute the first requested inter partes review, while two additional petitions remained pending.
The company was cooperating with a Department of Justice investigation concerning patient assistance programs and related documents. The filing states that the outcome and duration could not be predicted.
Product sales were highly concentrated: three customers accounted for 99% of gross product revenue in Q3. EYLEA U.S. sales represented 64% of total revenue for the first nine months.

Most Important Facts for Investors to Verify

Whether EYLEA U.S. volume growth, pricing, payer mix, rebates, and competitive pressure remain sufficient to offset the company’s dependence on one product.
The sustainability and profitability of the Dupixent and Kevzara launches, including Sanofi-reported sales, reimbursement, commercialization costs, and profit-sharing effects.
The effect of the end of Sanofi’s Antibody Discovery Agreement funding after 2017 on research spending and cash requirements.
The outcome and potential financial or commercial consequences of the Praluent and Dupixent patent proceedings, as well as other intellectual-property litigation.
Progress, safety, and regulatory outcomes for cemiplimab, fasinumab, Praluent, Dupixent, EYLEA expansion indications, and other late-stage candidates.
The impact of the $720.0 million variable-rate Tarrytown lease obligation, including refinancing, extension, purchase, or sale alternatives at maturity.
Whether inventory write-offs, manufacturing validation costs, and capacity expansion requirements continue to pressure margins and cash flow.
Results of the Department of Justice investigation and any related reserves, penalties, remediation costs, or changes to patient assistance practices.