Regeneron Pharmaceuticals, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Regeneron is an integrated biotechnology company developing, manufacturing, and commercializing medicines. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Principal commercial products included EYLEA, Dupixent, Praluent, Kevzara, Libtayo, ARCALYST, and ZALTRAP, with significant collaboration activity involving Sanofi, Bayer, and Teva.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $1,663.5 million | $1,500.7 million | $4,783.0 million | $4,289.8 million |
| Operating income | $626.9 million | $559.9 million | $1,816.3 million | $1,540.8 million |
| Operating margin | 37.7% | 37.3% | 38.0% | 35.9% |
| Net income | $594.7 million | $388.3 million | $1,624.0 million | $1,025.0 million |
| Diluted EPS | $5.17 | $3.32 | $14.14 | $8.84 |
| Net margin | 35.7% | 25.9% | 33.9% | 23.9% |
| Operating cash flow | Not separately provided | Not separately provided | $1,466.3 million | $740.2 million |
Q3 revenue increased 10.9% year over year and nine-month revenue increased 11.5%. U.S. EYLEA sales rose 7.2% in Q3 and 9.9% for the nine months, driven primarily by higher volume. Nine-month revenue also benefited from higher Bayer collaboration revenue, Teva-related revenue, and other revenue.
- Q3 research and development expense was $557.0 million, up 5.1%; nine-month expense was $1,584.8 million, up 2.4%.
- Q3 selling, general, and administrative expense was $369.2 million, up 20.4%; nine-month expense was $1,064.9 million, up 16.9%, reflecting higher headcount, commercialization spending, and patient-assistance contributions.
- Cash, cash equivalents, and restricted cash totaled $1,100.3 million at September 30, 2018, versus $804.6 million at September 30, 2017.
- Cash and marketable securities totaled approximately $4.1 billion at September 30, 2018, up from approximately $2.9 billion at December 31, 2017.
- Working capital was $4.3 billion, compared with $3.2 billion at December 31, 2017.
- Capital expenditures were $297.6 million for the first nine months, versus $165.0 million in 2017. Management expected fourth-quarter 2018 capital expenditures of approximately $62 million to $92 million.
- Capital and facility lease obligations were $707.2 million. No borrowings were outstanding under the $750.0 million revolving credit facility, and the company was in compliance with applicable covenants.
Material changes versus the prior comparable period
- EYLEA U.S. net product sales increased to $1,021.8 million in Q3 from $953.3 million and to $2,997.8 million for nine months from $2,727.1 million.
- Bayer collaboration revenue increased 11.7% in Q3 and 20.9% for nine months, primarily from higher EYLEA sales outside the United States.
- Sanofi collaboration revenue increased modestly in Q3 but was broadly flat for nine months. Sanofi’s antibody discovery funding ended after December 31, 2017, partly offsetting growth in other collaboration activities.
- Teva collaboration revenue increased to $69.1 million in Q3 and $196.6 million for nine months, including recognition associated with a $60.0 million fasinumab development milestone in Q3.
- Net income increased 53.1% in Q3 and 58.4% for nine months. The increase was aided by revenue growth, operating leverage, and substantially lower effective tax rates of 6.5% versus 31.3% in Q3 and 13.5% versus 32.7% for nine months.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption reduced retained earnings and increased deferred revenue by $143.4 million, net of tax, and changed the timing of collaboration revenue recognition. Prior-period amounts were not recast.
Guidance, outlook, commentary, risks, and unusual items
- Management stated that continued profitability and positive cash flow depend significantly on the continued commercial success of EYLEA, while the company expects substantial ongoing research, development, commercialization, and manufacturing expenditures.
- Libtayo was approved by the FDA on September 28, 2018 for advanced cutaneous squamous cell carcinoma. The company and Sanofi agreed to pay an up-front $20.0 million and royalties on worldwide Libtayo sales under a license with Bristol-Myers Squibb and Ono Pharmaceutical.
- In October 2018, after the reporting date, the FDA approved Dupixent for certain asthma patients. The FDA also issued a Complete Response Letter for the EYLEA pre-filled syringe supplement; Regeneron expected to resubmit in the first half of 2019 after providing additional manufacturing and usability information.
- Fasinumab higher-dose regimens were discontinued or modified following an independent Data Monitoring Committee risk-benefit assessment. Lower-dose osteoarthritis studies continued.
- Sanofi funded portions of Libtayo and other development activities by transferring shares to Regeneron. Regeneron recorded $75.8 million of treasury stock for 215,387 shares related to Libtayo and $4.4 million for 10,766 shares related to Dupixent/REGN3500 activities during the first nine months.
- The company entered into a bluebird bio collaboration and purchased 420,000 bluebird shares for $100.0 million; $37.0 million of the purchase price was creditable against future collaboration research funding.
- Material contingencies include patent litigation involving Praluent, Dupixent, EYLEA, and the company’s antibody-generation technology. A new U.S. Praluent trial was scheduled for February 2019, and a Dupixent patent trial was scheduled for July 2019. The company also reported a Department of Justice investigation concerning patient-assistance support and related documents.
- On November 1, 2018, after the quarter end, Regeneron and Bayer agreed to terminate the Ang2 collaboration relating to REGN910-3 following unsuccessful Phase 2 differentiation results.
- Key business risks include dependence on EYLEA, customer concentration, pricing and reimbursement pressure, competition and biosimilars, regulatory and clinical-development uncertainty, manufacturing capacity and supply-chain constraints, collaboration dependence, patent litigation, and potential changes in healthcare and tax policy.
Important facts for investors to verify
- Underlying EYLEA volume, pricing, gross-to-net deductions, and customer concentration; two customers represented 93% of gross product revenue for the nine months.
- The sustainability of unusually low 2018 effective tax rates and any remaining accounting effects from the Tax Cuts and Jobs Act.
- The impact of ASC 606 on collaboration revenue timing, deferred revenue, and comparability with 2017.
- Commercial uptake, economics, and launch costs for Dupixent and newly approved Libtayo.
- Outcomes and potential financial exposure from Praluent, Dupixent, EYLEA, and technology-related patent proceedings, as well as the Department of Justice investigation.
- Manufacturing expansion requirements, capital spending, inventory levels, and the ability to meet demand across EYLEA and the antibody portfolio.
- Remaining Sanofi funding obligations, share-transfer arrangements, collaboration termination provisions, and the effect of the Bayer Ang2 termination.
- The company’s ability to maintain cash generation while funding its expanding clinical pipeline and facility investments.