Regeneron Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; filed August 6, 2013. Financial statements are unaudited. Regeneron is an integrated biopharmaceutical company that discovers, develops, manufactures, and commercializes medicines. Its marketed products were EYLEA, ZALTRAP, and ARCALYST.
Financial Performance and Position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $457.6 million, versus $304.4 million | $897.3 million, versus $536.2 million |
| Net product sales | $333.9 million, versus $199.5 million | $652.6 million, versus $327.5 million |
| Operating income | $158.1 million, versus $87.5 million | $311.2 million, versus $109.7 million |
| Net income | $87.4 million, versus $76.7 million | $186.3 million, versus $88.4 million |
| Diluted earnings per share | $0.79, versus $0.70 | $1.69, versus $0.81 |
| Cash flow from operations | Not separately provided | $214.4 million, versus $(165.4) million |
Revenue increased approximately 50% in the second quarter and 67% in the first half. Operating margins were approximately 34.5% in the quarter and 34.7% for the first half; net margins were approximately 19.1% and 20.8%, respectively. The filing does not present these margins as reported measures; they are calculated from reported revenue and income.
- EYLEA: U.S. net product sales were $329.8 million in the second quarter and $643.7 million in the first half, compared with $194.0 million and $317.5 million, respectively, in the comparable 2012 periods. Bayer recorded $95.6 million of ex-U.S. EYLEA sales in the second quarter and $160.4 million in the first half.
- Collaboration revenue: Sanofi revenue was $85.5 million in the quarter and $184.8 million in the first half. Bayer HealthCare revenue was $31.1 million and $46.0 million, respectively.
- Expenses: Research and development expense rose to $187.5 million in the quarter and $367.8 million in the first half. Selling, general, and administrative expense was $72.5 million and $149.7 million, respectively. Non-cash compensation expense was $44.4 million in the quarter and $97.5 million in the first half.
- Taxes: Income tax expense was $60.3 million in the quarter and $103.3 million in the first half. Effective tax rates were 40.8% and 35.7%, respectively. The 2012 research tax credit reduced the first-half 2013 effective rate by approximately 6 percentage points.
- Liquidity: Cash and cash equivalents were $381.7 million at June 30, 2013. Marketable securities totaled $329.2 million, producing cash, cash equivalents, and marketable securities of approximately $710.8 million. Trade accounts receivable were $767.9 million, reflecting extended customer payment terms for EYLEA.
- Debt: The company had $400.0 million principal amount of 1.875% convertible senior notes due October 1, 2016. The carrying amount was $308.1 million; estimated fair value was $1.12 billion. Facility lease obligations totaled $165.2 million.
- Capital expenditures: First-half capital expenditures were $55.7 million, compared with $23.9 million in 2012. Management expected approximately $225 million to $300 million of capital expenditures during the remainder of 2013 and 2014.
Material Changes Versus Prior Comparable Period
- EYLEA-driven growth substantially increased product sales, total revenue, operating income, and operating cash flow.
- First-half operating cash flow improved by $379.8 million, from an outflow of $165.4 million to an inflow of $214.4 million.
- Research and development expense increased 28% in the first half, primarily reflecting higher staffing, clinical trial activity, and manufacturing for alirocumab, dupilumab, and other antibody candidates.
- Average headcount increased to 2,039 in the first half from 1,756 in the prior-year period.
- ARCALYST sales declined to $4.1 million in the quarter and $8.9 million in the first half, from $5.5 million and $9.9 million, respectively.
- Sanofi collaboration revenue increased modestly in the first half, but included $20.0 million of payments to Sanofi for rights to PDGF and ophthalmology Ang2 antibody programs. Regeneron also assumed additional potential milestone and royalty obligations.
- Bayer collaboration revenue more than doubled in the first half as ex-U.S. EYLEA commercialization began contributing profit-sharing revenue.
- The company began recording income tax expense after releasing substantially all of its deferred-tax valuation allowance in the fourth quarter of 2012.
Guidance, Outlook, Risks, and Unusual Items
- Management expected existing capital resources, anticipated EYLEA sales, and collaboration funding to support operating needs for the foreseeable future, but noted that additional financing could become necessary if revenue is delayed or expenses increase.
- Management expected continued substantial spending on research and development, EYLEA and ZALTRAP commercialization, manufacturing expansion, facilities, and clinical programs. The filing states that reliable total development-cost estimates and future product-cash-flow estimates are not available.
- Positive EYLEA Phase 3 DME results announced in August 2013 led management to expect a U.S. marketing application in 2013, approximately one year earlier than previously anticipated. These developments occurred after June 30, 2013 and should not be treated as June-quarter results.
- Fasinumab remained on FDA clinical hold, with no ongoing enrolling or treating trials. Development of REGN846 was discontinued during the second quarter.
- In May 2013, Regeneron settled Genentech patent litigation and obtained worldwide licenses covering EYLEA and ZALTRAP-related activities. EYLEA royalties remain payable through May 7, 2016; ZALTRAP payments include a $19 million milestone upon specified sales and tiered royalties.
- Regeneron entered into a long-term lease for approximately 297,000 square feet of new Tarrytown laboratory and office space. A $4.7 million facility lease obligation was recognized at June 30, 2013, and additional facility commitments are expected.
- Key risks include substantial dependence on EYLEA, competition from Lucentis and off-label Avastin, reimbursement and pricing pressure, regulatory and clinical-development uncertainty, manufacturing capacity and supply-chain constraints, reliance on Sanofi and Bayer, intellectual-property claims, customer concentration, and the possibility that profitability may not be sustained.
- Besse Medical, a subsidiary of AmerisourceBergen, represented 76% of gross product revenue in the quarter and 77% in the first half, creating material customer-concentration and receivables risk.
Investor Verification Checklist
- Verify the sustainability and geographic mix of EYLEA sales, including U.S. demand, ex-U.S. Bayer sales, pricing, reimbursement, and customer concentration.
- Assess the effect of Genentech royalties, milestone obligations, and collaboration reimbursement obligations on future EYLEA and ZALTRAP profitability.
- Review the conversion, dilution, and potential cash-settlement effects of the $400 million convertible notes, related note hedges, and warrants.
- Track research and development spending, clinical results, regulatory submissions, and the status of fasinumab and other pipeline programs.
- Evaluate manufacturing expansion, supply-chain capacity, the Tarrytown lease, the proposed Limerick facility acquisition, and projected capital expenditures.
- Monitor deferred tax asset utilization, effective tax rates, and the outcome of federal and New York tax examinations.
- Review the impact of competition, reimbursement changes, biosimilar policy, product safety findings, and ongoing regulatory obligations.
- Confirm that the August 2013 clinical and regulatory updates are separated from the financial results for the period ended June 30, 2013.