Regeneron Pharmaceuticals, Inc. — 2018 Q2 Form 10-Q Summary
Business context and reporting period
Regeneron is an integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, with comparisons to the corresponding 2017 periods.
Commercial performance remained concentrated in EYLEA, which accounted for 63% of total revenue in the first half of 2018. Regeneron also reported collaboration revenue from Sanofi and Bayer and continued development of cemiplimab, fasinumab, evinacumab, and other candidates.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $1,608.0 million, up 9.4% | $3,119.5 million, up 11.8% |
| Operating income | $622.2 million | $1,189.4 million |
| Operating margin | 38.7% | 38.1% |
| Net income | $551.4 million, up 42.2% | $1,029.4 million, up 61.7% |
| Diluted EPS | $4.82, versus $3.34 | $8.97, versus $5.51 |
| Net margin | 34.3% | 33.0% |
| Operating cash flow | Not separately provided for the quarter | $1,013.3 million, versus $325.3 million |
- U.S. EYLEA sales were $992.0 million in the quarter and $1,976.0 million for the first half, increasing 7.9% and 11.4%, respectively, primarily from higher volume.
- Six-month collaboration revenue was $427.2 million from Sanofi and $510.8 million from Bayer. Bayer revenue increased substantially with higher EYLEA profits outside the United States; Sanofi revenue declined modestly as prior discovery funding ended and reimbursement levels changed.
- Research and development expense was $529.3 million in the quarter and $1,027.9 million year to date. Selling, general, and administrative expense was $364.8 million and $695.6 million, respectively.
- Cash and cash equivalents were $917.9 million at June 30, 2018. Marketable securities totaled $2.810 billion, including $85.6 million of equity securities, resulting in approximately $3.728 billion of cash and marketable securities.
- Working capital was $3.484 billion, compared with $3.200 billion at December 31, 2017. The company had $750.0 million available under its revolving credit facility and no borrowings outstanding under that facility.
- Capital and facility lease obligations were $705.9 million. The obligations principally relate to the Tarrytown facility lease financing.
Material changes versus the prior comparable period
- Revenue increased $137.9 million in the second quarter and $330.4 million in the first half, driven primarily by higher EYLEA sales and Bayer collaboration revenue.
- Net income increased $163.7 million in the quarter and $392.7 million in the first half. The improvement also reflected higher other income and lower effective tax rates.
- The effective tax rate declined to 16.0% from 26.3% in the quarter and to 17.1% from 33.6% for the first half, reflecting the Tax Cuts and Jobs Act and other tax benefits.
- Operating cash flow increased by $688.0 million year to date, while investing cash use increased by $599.8 million. The increase in investing activity primarily reflected purchases of marketable securities and higher capital expenditures.
- Capital expenditures were $191.4 million in the first half, compared with $105.3 million in 2017. Inventory increased to $928.6 million from $726.1 million, including higher deferred costs for products shipped to collaborators but not yet recognized as revenue.
- ASC 606 was adopted on January 1, 2018 using the modified retrospective method. The company recorded a $143.4 million net-of-tax reduction to retained earnings. The new standard changed the timing of certain collaboration and upfront-payment revenue, so reported 2018 collaboration revenue is not fully comparable with 2017.
- ASU 2016-01 caused unrealized gains on equity securities to be recognized in earnings. Regeneron recorded $16.5 million in the quarter and $25.9 million in the first half as other income from such gains.
Guidance, outlook, management commentary, risks, and unusual items
- Management expects approximately $220 million to $260 million of capital expenditures in the second half of 2018, primarily for manufacturing expansion and facility renovations in Rensselaer, Limerick, and Tarrytown.
- Management expects continued substantial research and development spending, commercialization investment in EYLEA, Dupixent, Praluent, and Kevzara, and preparation for potential cemiplimab commercialization.
- Near-term regulatory milestones included FDA decisions for EYLEA label and presentation expansions, Praluent indications, Dupixent asthma, and cemiplimab for advanced cutaneous squamous cell carcinoma, with target dates primarily in 2018.
- Fasinumab development was modified after an independent Data Monitoring Committee recommended discontinuing higher-dose regimens. The company stopped active dosing in a chronic low-back-pain study using higher doses but continued lower-dose osteoarthritis development.
- In the second quarter, Regeneron acquired 121,601 shares from Sanofi for $37.6 million through a credit against Sanofi’s development funding obligation for cemiplimab. The transaction was recorded as treasury stock and was non-cash.
- Material litigation includes patent disputes involving Praluent, Dupixent, EYLEA, and the company’s antibody-generation technology. The company states that it cannot predict outcomes or estimate potential losses for several proceedings.
- Amgen’s Praluent litigation remained active, with a new U.S. jury trial scheduled for February 2019. Related proceedings also continued in Europe, including a German compulsory-license action.
- The company is cooperating with a Department of Justice investigation concerning patient assistance programs and related activities. The filing does not provide a clear estimate of any potential loss or resolution.
- Key business risks include dependence on EYLEA, customer concentration, pricing and reimbursement pressure, biosimilar and therapeutic competition, regulatory and clinical-trial uncertainty, manufacturing capacity and supply-chain constraints, reliance on Sanofi and Bayer, intellectual-property litigation, and potential tax and healthcare-policy changes.
Most important facts for investors to verify
- Whether EYLEA U.S. volume growth and international collaboration profits remain sufficient to offset competitive, pricing, reimbursement, or patent pressures.
- The timing and outcomes of the 2018 regulatory decisions for EYLEA, Dupixent, Praluent, and cemiplimab.
- The financial and commercial implications of the Praluent, Dupixent, EYLEA, and antibody-platform patent proceedings.
- Whether the ASC 606 revenue-recognition changes affect the comparability and sustainability of collaboration revenue and deferred revenue balances.
- Progress and total cost of manufacturing expansion, including the expected $220 million to $260 million of second-half capital expenditures.
- The continued availability and terms of Sanofi and Bayer funding, profit-sharing, commercialization support, and stock-sale arrangements.
- The outcome and duration of the Department of Justice investigation and any related compliance or financial exposure.