REGENERON PHARMACEUTICALS, INC. quarterly report, Q3 FY2015

Regeneron Pharmaceuticals, Inc. — Q3 2015 Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. The interim financial statements are unaudited. Regeneron is an integrated biopharmaceutical company focused on discovering, developing, manufacturing, and commercializing medicines. EYLEA remained the principal revenue driver.

Financial performance and position

Metric	Q3 2015	Q3 2014	9M 2015	9M 2014
Total revenue	$1,137.4 million	$725.8 million	$3,005.7 million	$2,017.2 million
Net product sales	$737.6 million	$448.8 million	$1,940.0 million	$1,229.2 million
Operating income	$392.4 million	$188.5 million	$1,020.8 million	$608.1 million
Net income	$210.4 million	$83.4 million	$481.1 million	$248.0 million
Diluted EPS	$1.82	$0.73	$4.18	$2.19
Operating margin	34.5%	26.0%	34.0%	30.1%
Net margin	18.5%	11.5%	16.0%	12.3%

Q3 revenue increased approximately 57% year over year; nine-month revenue increased approximately 49%. Q3 net income increased approximately 152%; nine-month net income increased approximately 94%.
U.S. EYLEA sales were $734.4 million in Q3 and $1,930.0 million for the first nine months, versus $445.0 million and $1,218.8 million, respectively, in the comparable 2014 periods. Growth was primarily volume-driven.
Q3 collaboration revenue was $382.3 million, including $224.7 million from Sanofi and $157.6 million from Bayer HealthCare. Nine-month collaboration revenue was $1,008.9 million.
Sanofi revenue included $38.6 million in Q3 from the new immuno-oncology collaboration, including recognition of deferred revenue from the $640.0 million aggregate upfront payments. The remaining $620.0 million was deferred at September 30, 2015.
Research and development expense increased to $425.9 million in Q3 and $1,159.4 million for nine months, driven by expanded clinical, manufacturing, and personnel activity, particularly for dupilumab, sarilumab, fasinumab, and other programs.
Selling, general, and administrative expense increased to $210.0 million in Q3 and $543.6 million for nine months, primarily due to higher headcount, stock-based compensation, and Praluent commercialization costs.
Stock-based compensation expense was $102.6 million in Q3 and $300.7 million for nine months, compared with $68.1 million and $208.7 million, respectively, in 2014.
Effective tax rates were 46.5% in Q3 and 51.8% for nine months, compared with 54.1% and 56.6% in the comparable 2014 periods.

Cash flow, liquidity, and debt

Cash, cash equivalents, and marketable securities totaled approximately $1.577 billion at September 30, 2015, compared with $1.361 billion at December 31, 2014. Cash and cash equivalents were $654.6 million.
Operating cash flow was $1,049.0 million for the first nine months, compared with $554.3 million in 2014. The increase included higher net income, non-cash compensation, and $624.1 million of increased deferred revenue, primarily from Sanofi upfront payments.
Investing cash outflow was $784.3 million, including $500.2 million of capital expenditures and net purchases of marketable securities of approximately $284.1 million.
Capital expenditures supported the Limerick, Ireland facility, Tarrytown buildings, Rensselaer manufacturing expansion, and the $73.0 million acquisition of adjacent Tarrytown land. Management expected additional fourth-quarter 2015 capital expenditures of approximately $125 million to $175 million.
Financing cash outflow was $258.8 million, including $146.0 million of convertible-note repayments and $523.5 million paid to reduce outstanding warrants.
Only $33.1 million principal amount of the original $400.0 million 1.875% convertible senior notes remained outstanding at September 30, 2015. An additional $20.5 million principal amount had been surrendered for conversion, with settlement expected in Q4 2015.
Regeneron entered into a $750.0 million senior unsecured five-year revolving credit facility in March 2015. No borrowings were outstanding, and the company was in compliance with the facility covenants at September 30, 2015.

Material changes, outlook, and unusual items

In July 2015, the FDA approved Praluent in the United States, and the European Commission granted marketing authorization in September. U.S. Praluent sales recorded by Sanofi were $4.0 million in Q3. The cardiovascular benefit of Praluent had not yet been established; the ODYSSEY OUTCOMES trial was ongoing.
In July 2015, Regeneron and Sanofi entered into a global immuno-oncology collaboration. Sanofi paid $640.0 million in non-refundable upfront consideration; Regeneron expects to incur up to $1.090 billion of discovery costs, with reimbursement of up to $825.0 million, subject to annual limits. The companies will co-develop REGN2810 and share related economics under specified terms.
In September 2015, Regeneron entered into an agreement with Mitsubishi Tanabe Pharma for fasinumab rights in certain Asian territories. The agreement included a $10.0 million upfront payment and potential development and other contingent payments of up to $215.0 million, plus potential sales-based payments.
The amended ZALTRAP agreement made Sanofi solely responsible for development and commercialization. Regeneron recognized $14.9 million of previously deferred revenue in Q1 2015 and recorded $32.0 million of technology licensing and other revenue for nine months. The company also no longer had the prior contingent obligation to reimburse Sanofi for 50% of certain ZALTRAP development costs.
Fasinumab was subject to an FDA partial clinical hold limiting osteoarthritis trial duration to 16 weeks. Evinacumab’s partial clinical hold was lifted during Q3. Sanofi had elected not to continue co-development of REGN2222 and REGN1033 and had not opted into certain other programs.
Previously issued financial statements were revised for non-cash stock-option accounting corrections and other accounting corrections. Management concluded the prior errors were not material to previously issued quarterly or annual financial statements, but revised comparative amounts because the cumulative 2015 effect was expected to be material.
Material contingencies included patent litigation involving Praluent, including Amgen’s claims seeking damages and injunctive relief, and litigation involving Genentech and City of Hope patents. The company could not estimate the potential loss, if any.
Management stated that available capital, the revolving credit facility, anticipated EYLEA sales, and collaborator reimbursements should fund projected operating needs for the foreseeable future, while warning that spending would continue to increase for research, commercialization, manufacturing, and capital projects.

Key investor verification points

Verify the sustainability of EYLEA growth and the company’s concentration in EYLEA; U.S. EYLEA represented 64% of total revenue for the first nine months of 2015.
Assess Praluent launch performance, payer coverage, competitive pressure from Repatha and other LDL-lowering therapies, and results of the ODYSSEY OUTCOMES cardiovascular trial.
Review the accounting and cash-flow impact of Sanofi’s $640.0 million immuno-oncology upfront payment and the related future performance obligations.
Monitor R&D spending, manufacturing expansion, and the expected $125 million to $175 million of Q4 2015 capital expenditures.
Evaluate remaining convertible-note settlements, warrant reductions, potential dilution, and the terms and covenant requirements of the unused revolving credit facility.
Track the Amgen Praluent litigation, Genentech and City of Hope patent litigation, and other intellectual-property proceedings; the filing does not provide a reliable estimate of potential losses.
Review customer concentration: approximately 67% of gross product revenue for the first nine months of 2015 came from Besse Medical, a subsidiary of AmerisourceBergen.
Consider clinical, regulatory, reimbursement, manufacturing, collaboration-termination, supply-chain, and biosimilar-competition risks described in the filing.