Regeneron Pharmaceuticals, Inc. — Q2 2019 Form 10-Q Summary
Business context and reporting period
Regeneron is an integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines. The filing covers the three and six months ended June 30, 2019, with comparisons to the corresponding 2018 periods. Key commercial products include EYLEA, Libtayo, ARCALYST, and products commercialized with Sanofi and Bayer, including Dupixent, Praluent, Kevzara, and EYLEA outside the United States.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1,933.7 million | $1,608.0 million | $3,645.5 million | $3,119.5 million |
| Operating income | $315.6 million | $622.2 million | $795.6 million | $1,189.4 million |
| Net income | $193.1 million | $551.4 million | $654.2 million | $1,029.4 million |
| Diluted EPS | $1.68 | $4.82 | $5.69 | $8.97 |
| Operating margin | 16.3% | 38.7% | 21.8% | 38.1% |
| Net margin | 10.0% | 34.3% | 18.0% | 33.0% |
- Q2 revenue increased 20.3% year over year; first-half revenue increased 16.9%.
- Q2 net product sales were $1,205.3 million, including U.S. EYLEA sales of $1,160.3 million and Libtayo sales of $40.8 million. First-half net product sales were $2,309.7 million.
- Sanofi collaboration revenue increased to $349.1 million in Q2 and $595.5 million for the first half, primarily reflecting higher antibody collaboration activity and improved collaboration profit sharing.
- Bayer collaboration revenue increased to $289.0 million in Q2 and $565.2 million for the first half, including $269.0 million and $518.3 million, respectively, of Regeneron's net profit from EYLEA commercialization outside the United States.
- Research and development expense increased to $1,048.3 million in Q2 and $1,690.1 million for the first half. The increase included a $400.0 million upfront payment to Alnylam recorded in R&D expense.
- Q2 selling, general, and administrative expense was $417.3 million; cost of goods sold was $67.0 million; and collaboration and contract manufacturing costs were $85.5 million.
- Other expense, net, was $82.9 million in Q2 and $9.1 million for the first half, primarily reflecting unrealized losses on equity securities. The company recorded $116.9 million of net unrealized equity-security losses in Q2.
- Effective tax rates were 14.1% in Q2 and 15.1% for the first half, compared with 16.0% and 17.1%, respectively, in the prior-year periods.
Cash flow, liquidity, debt, and capital resources
- Operating cash flow was $1,085.3 million for the first half of 2019, compared with $1,013.4 million in the prior-year period.
- Investing cash flow was negative $1,612.1 million, driven by $2,189.1 million of purchases of marketable securities, including the $400.0 million purchase of Alnylam shares, and $168.9 million of capital expenditures.
- Financing cash flow was positive $104.6 million, including $155.1 million of common-stock issuance proceeds, $40.5 million of employee tax-related share withholding payments, and $10.0 million of share repurchases.
- Cash, cash equivalents, and restricted cash declined to $1,058.0 million at June 30, 2019 from $1,480.2 million at December 31, 2018. Cash and cash equivalents were $1,045.5 million.
- Marketable securities totaled $4,508.8 million, including $4,094.8 million of available-for-sale debt securities and $414.0 million of equity securities. Total financial assets consisting of cash and marketable securities were $5,554.3 million.
- Working capital was $4,937.9 million, compared with $5,004.8 million at year-end 2018.
- Finance lease liabilities were $711.3 million. The company also had $750.0 million of borrowing availability under a revolving credit facility and was in compliance with applicable financial and operating covenants.
- Management expected 2019 capital expenditures of $380 million to $420 million, primarily for manufacturing, fill/finish, laboratory, and facility expansion.
Material changes versus the prior comparable period
- Revenue growth was offset by substantially higher operating expenses, reducing Q2 operating income by 49.3% and first-half operating income by 33.1%.
- R&D expense nearly doubled in Q2, principally because of the $400.0 million Alnylam upfront payment, increased clinical and research activity, higher headcount, and expanded manufacturing-related development costs.
- Net income declined 65.0% in Q2 and 36.4% for the first half; diluted EPS declined 65.1% and 36.6%, respectively.
- EYLEA U.S. sales increased $168.3 million in Q2 and $258.4 million for the first half. Libtayo generated its first material product sales following its September 2018 U.S. approval.
- Sanofi collaboration revenue improved materially, including a shift in Regeneron's antibody commercialization profit share from a $68.8 million loss in Q2 2018 to $38.8 million of profit in Q2 2019.
- Investing activity increased significantly because of the Alnylam equity purchase and substantially greater purchases of marketable securities.
- Deferred revenue from Sanofi increased, including receipt of a $461.9 million payment under the amended immuno-oncology discovery agreement. The transaction price allocated to unsatisfied immuno-oncology performance obligations was $1,251.1 million at June 30, 2019.
- Regeneron adopted the new lease standard, ASC 842, on January 1, 2019 and recognized $33.2 million of operating-lease right-of-use assets. Prior periods were not adjusted.
Guidance, outlook, management commentary, risks, and unusual items
- Management stated that continued profitability and positive operating cash flow depend significantly on continued success in commercializing EYLEA. U.S. EYLEA sales represented 61% of total revenue for the first half of 2019.
- Management expected substantial continuing investment in R&D, commercialization, manufacturing capacity, and clinical programs. The filing does not provide revenue or earnings guidance.
- Selected near-term development and regulatory milestones included FDA action on the EYLEA pre-filled syringe, additional Dupixent indications and devices, Libtayo studies in lung and other cancers, and Phase 3 or later-stage data for fasinumab and evinacumab.
- Material litigation includes patent disputes involving Praluent, Dupixent, EYLEA, and Regeneron's antibody-generation technology. In July 2019, a German court found that Praluent infringed an Amgen patent and granted an injunction; Regeneron and Sanofi appealed, and the request for a provisional stay was later denied. The filing states that an accrual was recorded for certain Praluent-related contingencies and that the ultimate resolution was not expected to have a material impact on the financial statements, but adverse outcomes could affect commercialization.
- The Department of Justice investigation into patient-assistance support and related activities remained pending; the company was cooperating with the investigation and could not predict its outcome.
- Key operating risks include dependence on EYLEA, competition and potential biosimilars, payer and drug-pricing pressure, regulatory approval and safety risks, manufacturing and supply constraints, reliance on Sanofi and Bayer, customer concentration, investment-market volatility, and potential legal or intellectual-property liabilities.
- Two customers accounted for 89% of total gross product revenue for the first half of 2019, creating significant customer-concentration risk.
- In April 2019, Regeneron entered into a strategic collaboration with Alnylam, paid $400.0 million upfront, and purchased $400.0 million of Alnylam common stock. The arrangement may require additional program funding and future milestone or royalty payments.
Most important facts for investors to verify
- Whether EYLEA sales growth and increasing Libtayo and collaboration revenues can offset elevated R&D, commercialization, and manufacturing spending.
- The recurring versus nonrecurring nature of the $400.0 million Alnylam upfront payment and the effect of investment-market gains or losses on reported earnings.
- U.S. and international EYLEA trends, competitive pressure from alternative therapies and biosimilars, and the extent of dependence on EYLEA.
- The status and potential commercial impact of Praluent, Dupixent, EYLEA, and antibody-platform patent litigation, including injunctions, appeals, damages, and licensing requirements.
- The status and financial implications of the Department of Justice investigation.
- Sanofi and Bayer collaboration terms, profit-sharing estimates, deferred revenue recognition, collaborator performance, and potential termination rights.
- Progress, safety, regulatory outcomes, and funding requirements for the clinical pipeline, particularly fasinumab, evinacumab, Libtayo, Dupixent, and Alnylam programs.
- Manufacturing expansion, projected 2019 capital expenditures, supply capacity, and compliance with regulatory manufacturing requirements.