Regeneron Pharmaceuticals, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Regeneron is a fully integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines for serious diseases. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the same periods in 2019. Results were affected by COVID-19, the transition of U.S. Praluent commercialization from Sanofi to Regeneron, increased investment in REGN-COV2, and the May 2020 repurchase of shares from Sanofi.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $2,294.0 million | $1,743.7 million | $6,074.2 million | $4,694.1 million |
| Income from operations | $1,053.1 million | $738.5 million | $2,409.6 million | $1,534.1 million |
| Net income | $842.1 million | $669.6 million | $2,364.0 million | $1,323.8 million |
| Diluted EPS | $7.39 | $5.86 | $20.36 | $11.54 |
| Operating margin | 45.9% | 42.4% | 39.7% | 32.7% |
| Net margin | 36.7% | 38.4% | 38.9% | 28.2% |
| Operating cash flow | Not separately provided | Not separately provided | $1,387.1 million | $1,642.6 million |
- Q3 revenue increased $550.3 million, or approximately 32%, while nine-month revenue increased $1,380.1 million, or approximately 29%.
- Net product sales were $1,482.2 million in Q3 and $3,945.8 million for the nine months. Q3 sales included EYLEA of $1,318.3 million, Libtayo of $71.6 million, Praluent of $48.5 million, and REGN-COV2 of $40.2 million.
- Reported Dupixent-related global sales recorded by Sanofi and other collaboration products supported higher Sanofi collaboration revenue, which rose to $353.3 million in Q3 and $869.3 million for the nine months.
- Bayer collaboration revenue was $299.9 million in Q3 and $825.5 million for the nine months.
- Research and development expense rose to $684.6 million in Q3 and $1,990.5 million for the nine months. Nine-month R&D included $85.0 million of Intellia-related up-front and equity investment costs.
- Cash flow from operations declined year over year despite higher net income, principally because of a $1.275 billion increase in Sanofi, trade, and other receivables and a $402.4 million increase in inventories. Payment terms were extended to certain EYLEA customers during the pandemic.
- Capital expenditures were $453.2 million for the nine months. Management expected full-year 2020 capital expenditures of approximately $570 million to $600 million.
- At September 30, 2020, cash and cash equivalents were $1,573.0 million, marketable securities totaled $4,328.0 million, and working capital was $6,759.8 million. The company also had $750.0 million of revolving-credit availability.
- Long-term debt was $1,978.3 million, consisting primarily of $1.25 billion of 1.750% senior notes due 2030 and $750.0 million of 2.800% senior notes due 2050. Finance lease liabilities were $716.5 million.
Material changes versus the prior comparable period
- EYLEA U.S. sales increased 11% in Q3 and 5% for the nine months, reflecting higher volume partly offset by higher rebates and discounts. Demand fell in April because of COVID-19 but improved in subsequent months.
- Reported Dupixent, Libtayo, Praluent, and Kevzara sales and collaboration economics increased substantially. Q3 net product sales recorded by Regeneron for Libtayo rose 50% and U.S. Praluent sales were recorded by Regeneron for the first time under the revised Sanofi arrangement.
- Effective April 1, 2020, Regeneron assumed sole responsibility for U.S. Praluent development and commercialization, while Sanofi assumed responsibility outside the United States and agreed to pay Regeneron a 5% royalty on ex-U.S. net sales through March 2032.
- Sanofi paid or earned a $50.0 million sales-based milestone recognized in Q3 after antibody sales outside the United States exceeded $1.0 billion on a rolling twelve-month basis.
- In May 2020, Regeneron purchased 9,806,805 shares from Sanofi for $5.0 billion. Sanofi otherwise disposed of its Regeneron holdings, retaining 400,000 shares for certain development-funding obligations.
- Regeneron issued $2.0 billion of senior notes in August 2020 and used part of the proceeds to repay its $1.5 billion bridge facility.
- The company repurchased $5.5 billion of common stock during the nine months, including the Sanofi transaction, and had $372.7 million remaining under its separate $1.0 billion repurchase authorization.
- Other revenue increased primarily from BARDA-related COVID-19 and Inmazeb activities, as well as Praluent manufacturing reimbursements and ex-U.S. royalties.
Guidance, outlook, management commentary, risks, and unusual items
- Management stated that existing capital resources, anticipated product sales, collaboration funding, and revolving-credit availability were expected to meet anticipated operating needs for the foreseeable future, although additional financing could become necessary if revenue declines, collaborations terminate, or expenses increase.
- Management identified continued dependence on EYLEA and Dupixent for profitability. EYLEA U.S. net sales represented 59% of total revenue for the nine months ended September 30, 2020.
- Fully enrolled clinical studies were generally expected to remain on track, but COVID-19 continued to affect trial execution, recruitment, regulatory review, supply chains, and milestone timing.
- REGN-COV2 Phase 2/3 outpatient results met primary and key secondary endpoints, and the company submitted a request for an FDA Emergency Use Authorization in October 2020. Enrollment of hospitalized patients requiring high-flow oxygen or mechanical ventilation was placed on hold following an independent monitoring recommendation concerning potential safety and risk-benefit issues.
- BARDA agreements could provide up to $450.2 million for manufacturing, fill/finish, and storage of REGN-COV2. The filing does not indicate that the full amount had been recognized as revenue.
- Fasinumab treatment was discontinued following safety concerns involving arthropathies and joint replacement signals. Garetosmab dosing was paused after reports of fatal serious adverse events in an open-label trial; the relationship to treatment remained under investigation.
- Material legal and regulatory contingencies include Praluent patent litigation, Novartis proceedings concerning EYLEA pre-filled syringes, fasinumab patent litigation, an Allele lawsuit concerning REGN-COV2, and a U.S. Department of Justice civil complaint alleging violations of the Anti-Kickback Statute and False Claims Act. Accrued loss contingencies were $132.2 million at September 30, 2020.
- Two customers accounted for approximately 86% of gross product revenue for the nine months, creating significant customer concentration risk.
- The filing identifies risks from biosimilar competition, reimbursement and drug-pricing reforms, dependence on Sanofi and Bayer, manufacturing capacity constraints, intellectual property disputes, COVID-19 disruptions, and the company’s new debt obligations.
Most important facts for investors to verify
- Whether EYLEA demand and U.S. reimbursement remain resilient following COVID-19 disruptions and amid emerging competition and biosimilar risk.
- The sustainability of Dupixent growth and Sanofi collaboration profit contributions after the revised Praluent arrangements.
- The regulatory outcome, manufacturing scale-up, revenue recognition, and profitability potential for REGN-COV2 and Inmazeb.
- The status and potential financial or commercial impact of Praluent, EYLEA pre-filled syringe, Dupixent, fasinumab, and REGN-COV2 litigation.
- Whether receivables, inventory, and working-capital growth normalize, and whether operating cash flow converts more closely to reported earnings.
- The company’s ability to fund planned capital expenditures, research programs, share repurchases, lease obligations, and $2.0 billion of senior notes while maintaining liquidity.
- Potential liabilities or reputational effects from the Department of Justice proceedings and related shareholder demand.