REGENERON PHARMACEUTICALS, INC. quarterly report, Q1 FY2016

Regeneron Pharmaceuticals, Inc. — Q1 2016 Form 10-Q Summary

Reporting period: Three months ended March 31, 2016. The interim financial statements are unaudited. Regeneron is an integrated biopharmaceutical company focused on discovering, developing, manufacturing, and commercializing medicines. Its principal marketed products were EYLEA, Praluent, and ARCALYST.

Financial performance and liquidity

Metric	Q1 2016	Q1 2015	Change
Total revenue	$1,200.8 million	$869.6 million	+38.1%
Net product sales	$784.2 million	$544.6 million	+44.0%
Operating income	$329.3 million	$283.6 million	+16.1%
Net income	$165.7 million	$76.0 million	+118.0%
Diluted EPS	$1.45	$0.66	+119.7%
Operating margin	27.4%	32.6%	Down 5.2 points
Net margin	13.8%	8.7%	Up 5.1 points
Net cash from operating activities	$29.3 million	$(101.7) million	Improved by $131.1 million

Revenue drivers: U.S. EYLEA sales increased to $780.9 million from $541.1 million, primarily due to higher volume. ARCALYST sales were $3.3 million versus $3.5 million. Praluent net product sales, recorded by Sanofi, were $13.0 million.
Collaboration revenue: Sanofi revenue increased to $219.7 million from $173.4 million, while Bayer revenue increased to $179.6 million from $123.8 million. Bayer revenue benefited from higher EYLEA sales outside the United States; Q1 2015 included a $15.0 million final EYLEA sales milestone that did not recur.
Expenses: Research and development expense increased to $470.1 million from $343.1 million, and selling, general, and administrative expense increased to $289.7 million from $159.0 million. Total operating expenses rose 48.7%, exceeding revenue growth, reflecting higher headcount, clinical development, manufacturing, and commercialization activity.
Cash and investments: Cash, cash equivalents, and marketable securities totaled approximately $1.404 billion at March 31, 2016, down from approximately $1.677 billion at December 31, 2015. Cash and cash equivalents were $604.2 million, and marketable securities were $800.2 million, including $21.4 million of equity securities.
Capital expenditures: Capital expenditures were $104.1 million, primarily for the Limerick, Ireland facility, Tarrytown facilities, Rensselaer manufacturing facilities, and equipment. Management expected additional capital expenditures of approximately $446 million to $521 million during the last three quarters of 2016.
Debt and liquidity: No borrowings were outstanding under the $750.0 million senior unsecured revolving credit facility, and all covenants were satisfied. Convertible senior notes with $10.6 million principal amount remained outstanding at quarter-end and were scheduled to mature on October 1, 2016.

Material changes versus Q1 2015

EYLEA remained the dominant revenue source; U.S. EYLEA sales represented approximately 65% of total revenue versus 62% in the prior-year quarter.
Operating income increased, but operating margin contracted because research, commercialization, and administrative spending grew faster than revenue.
Net income benefited from higher operating income and a substantially lower effective tax rate of 49.8% versus 72.5% in Q1 2015.
Operating cash flow turned positive despite significant increases in trade, Sanofi, and Bayer receivables and inventories. Receivables increased by $397.4 million during the quarter, partly due to higher EYLEA sales and extended payment terms for certain U.S. customers.
Financing cash flow was negative $190.5 million, primarily because Regeneron paid $242.1 million to reduce outstanding warrants. A total of 764,071 warrants were reduced during the quarter, leaving 1,345,027 warrants outstanding.
Sanofi began sharing pre-launch commercialization expenses related to dupilumab in Q1 2016. Regeneron recorded $99.4 million of its share of antibody commercialization losses in Sanofi collaboration revenue, compared with $22.4 million in Q1 2015.
Regeneron entered into a Bayer collaboration for an Ang2 antibody on March 23, 2016. The agreement included a $50.0 million non-refundable upfront payment, recorded as deferred revenue, and potential development milestones of up to $80.0 million.
MTPC made additional fasinumab collaboration payments of $60.0 million during the quarter, also recorded as deferred revenue.

Guidance, outlook, risks, and unusual items

Management stated that existing capital resources, the revolving credit facility, anticipated EYLEA sales, and collaborator reimbursements should fund projected operating needs for the foreseeable future, while also warning that research, clinical, manufacturing, and commercialization spending will continue to increase.
Key development milestones included continued Phase 3 work for Praluent, sarilumab, dupilumab, REGN2222, and fasinumab; the FDA target action date for the sarilumab BLA was October 30, 2016; and additional Phase 2 or Phase 3 studies were planned for multiple pipeline programs.
Praluent’s ODYSSEY OUTCOMES cardiovascular-outcomes study remained ongoing and blinded after a futility analysis recommended continuation without changes. The filing states that cardiovascular morbidity and mortality benefits had not been established.
Regeneron and Sanofi prevailed on willful-infringement issues in Amgen’s Praluent litigation, but a jury found asserted Amgen patent claims not invalid. A permanent-injunction decision was deferred, and the companies planned to appeal any adverse final judgment. The filing did not provide a clear estimate of possible loss.
Other patent litigation involving Regeneron’s antibody-generation technology remained unresolved. The filing states that the outcome and any potential gain or loss could not be predicted.
Principal business risks include substantial dependence on EYLEA, customer concentration, reimbursement and pricing pressure, competition from Lucentis, Avastin, Repatha, and other products, regulatory approval and clinical-trial uncertainty, manufacturing capacity and compliance, reliance on Sanofi and Bayer, intellectual-property disputes, and potential adverse safety findings.
Regeneron made a $75.0 million upfront payment to Intellia in April 2016 for a CRISPR/Cas collaboration and agreed to purchase up to $50.0 million of Intellia shares subject to specified financing conditions. This occurred after the reporting date.

Facts investors should verify

Whether EYLEA volume growth and reimbursement conditions can offset concentration and competitive risks.
The effect of extended payment terms and rising receivables on future operating cash flow and working-capital needs.
The pace and return on substantial planned capital expenditures and manufacturing expansion.
Praluent commercialization, payer access, sales performance, ODYSSEY OUTCOMES results, and the outcome of Amgen’s patent and injunction proceedings.
Regulatory decisions and clinical results for sarilumab, dupilumab, fasinumab, REGN2222, and other late-stage candidates.
The amount and timing of remaining convertible-note settlements and any additional warrant-reduction transactions.
Whether Sanofi and Bayer continue funding and commercialization support under their collaboration agreements.
The impact of newly issued accounting standards, including the future revenue-recognition, lease, financial-instrument, and stock-compensation standards.