Regeneron Pharmaceuticals, Inc. — Q2 2010 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2010; unaudited interim financial statements. Regeneron is a biopharmaceutical company with one marketed product, ARCALYST, and eight clinical-stage product candidates. Its principal programs are supported by collaborations with sanofi-aventis and Bayer HealthCare.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $115.9 million, versus $90.0 million | $219.4 million, versus $165.0 million |
| Operating loss | $23.7 million, versus $16.3 million | $52.6 million, versus $33.4 million |
| Net loss | $25.5 million, or $0.31 per share, versus $14.9 million, or $0.19 per share | $56.0 million, or $0.69 per share, versus $30.3 million, or $0.38 per share |
| Research and development expense | $124.5 million, versus $94.2 million | $242.0 million, versus $174.5 million |
| Net cash used in operating activities | Not separately provided | $22.6 million, versus $16.0 million |
Revenue mix: Six-month revenue included $153.6 million from sanofi-aventis collaboration activities, $26.7 million from Bayer HealthCare collaboration activities, $20.1 million from technology licensing, $15.0 million from ARCALYST product sales, and $4.0 million from contract research and other activities.
Margins and profitability: The company remained unprofitable. Six-month operating expenses increased to $272.0 million from $198.4 million, substantially exceeding revenue growth. Non-cash stock-based compensation was $17.5 million for the six-month period.
Liquidity: At June 30, 2010, cash, cash equivalents, restricted cash, and marketable securities totaled $380.2 million, compared with $390.0 million at December 31, 2009. Cash and cash equivalents were $112.0 million, while marketable securities totaled $264.8 million. The portfolio was concentrated primarily in U.S. government and government-guaranteed securities.
Debt and obligations: The filing does not report conventional debt. Facility lease obligations totaled $157.8 million, including current and long-term portions, compared with $109.0 million of long-term facility lease obligations at year-end 2009. The company had a $3.4 million letter of credit related to its Tarrytown lease and no established bank credit facility.
Capital expenditures: Six-month capital expenditures were $45.3 million. Management expected approximately $50 million to $70 million of additional 2010 capital expenditures, primarily for manufacturing expansion and Tarrytown facilities.
Material changes versus the prior comparable period
- Total revenue increased 28% in the second quarter and 33% for the first six months, driven primarily by higher sanofi-aventis antibody collaboration reimbursements and increased ARCALYST sales.
- Research and development expense increased 32% in the quarter and 39% year to date. Major drivers included higher antibody clinical and manufacturing activity, increased headcount, and higher VEGF Trap-Eye development costs.
- Net loss widened to $25.5 million in the quarter and $56.0 million year to date, reflecting expense growth that exceeded revenue growth.
- ARCALYST sales increased to $5.2 million from $4.5 million in the quarter and to $15.0 million from $8.4 million year to date. The six-month 2010 amount included $4.8 million of previously deferred sales recognized after the company obtained sufficient return and rebate history.
- Net cash used in investing activities was $131.4 million, compared with $32.8 million of cash provided in the prior-year period, primarily because purchases of marketable securities exceeded sales and maturities.
- Property, plant, and equipment increased to $292.3 million from $259.7 million, and facility lease obligations increased substantially as new facilities were constructed.
- The company extended its Astellas license agreement in July 2010 through June 2023. The amended agreement provides for a $165.0 million upfront payment, a potential $130.0 million payment in 2018, and mid-single-digit royalties on certain future product sales.
Guidance, outlook, commentary, and risks
- Management expected substantial operating losses to continue for at least several years while it advances ARCALYST, VEGF Trap-Eye, aflibercept, and antibody programs.
- Management stated that existing capital resources, expected collaboration funding, and the amended Astellas agreement were expected to support operating needs through at least 2013, subject to changes in revenues, expenses, development plans, or collaboration status.
- Sanofi-aventis was expected to fund up to $160 million annually for antibody discovery activities from 2010 through 2017, subject to specified conditions and a potential reduction beginning in 2014.
- Management expected 65% to 75% of 2010 expenditures, excluding anticipated capital expenditures, to support clinical development; 15% to 25% to support basic research and preclinical activities.
- Key anticipated clinical milestones included 2010 data from the VIEW 1 and VIEW 2 VEGF Trap-Eye trials, additional data from ARCALYST gout studies in early 2011, and aflibercept trial analyses and results beginning in late 2010 and continuing through 2012.
- ARСALYST produced positive results in the PRE-SURGE 1 gout-prevention trial, but the SURGE acute-gout study did not show a statistically significant pain benefit when ARCALYST was added to indomethacin.
- REGN475 showed pain improvements in an osteoarthritis study, but another anti-NGF program had been suspended at the FDA’s request. Regeneron was awaiting FDA feedback and acknowledged potential safety and development risks.
- Principal risks include continued losses and possible need for additional financing; dependence on sanofi-aventis and Bayer HealthCare; clinical trial failure or delay; regulatory and manufacturing risks; product liability; reimbursement and pricing pressure; intellectual-property disputes; marketable-security impairments; and limited commercial infrastructure.
- The company recorded a $0.1 million other-than-temporary impairment charge on a marketable security during the first six months. Future investment-portfolio declines could result in additional material charges.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter. Current legal proceedings were not expected to have a material adverse effect.
Investor verification checklist
- Verify the sustainability and composition of collaboration revenue, particularly the extent to which revenue represents expense reimbursement or amortization of deferred upfront payments rather than product sales.
- Track cash burn, capital expenditures, facility lease obligations, and the timing and conditions of the $165.0 million Astellas upfront payment.
- Assess whether sanofi-aventis and Bayer HealthCare continue funding and development commitments and evaluate the effect of any termination or opt-out rights.
- Monitor clinical and regulatory outcomes for VEGF Trap-Eye, aflibercept, ARCALYST, REGN727, REGN88, and REGN475, including the negative acute-gout result and FDA-related anti-NGF safety concerns.
- Reconcile the reported $15.0 million six-month ARCALYST revenue with the $4.8 million release of previously deferred sales and evaluate underlying recurring demand.
- Review marketable-security credit quality, unrealized losses, and potential future impairment charges.
- Confirm the company’s ability to fund operations through the stated 2013 horizon if collaboration reimbursements, milestone payments, or clinical outcomes differ from assumptions.