Regeneron Pharmaceuticals, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Regeneron is an integrated biopharmaceutical company that discovers, develops, manufactures, and commercializes medicines. The filing covers the three and nine months ended September 30, 2016, compared with the corresponding 2015 periods. Marketed products included EYLEA, Praluent, and ARCALYST. EYLEA remained the primary revenue driver.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenue | $1,220.1 million | $1,137.4 million | $3,633.6 million | $3,005.7 million |
| Operating income | $362.8 million | $392.4 million | $983.7 million | $1,020.8 million |
| Operating margin | 29.7% | 34.5% | 27.1% | 34.0% |
| Net income | $264.8 million | $210.4 million | $642.4 million | $481.1 million |
| Diluted EPS | $2.27 | $1.82 | $5.51 | $4.18 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1,095.5 million | $1,049.0 million |
- Q3 revenue increased 7.3%, while nine-month revenue increased 20.9%. Net product sales increased 16.3% in Q3 and 27.6% for the first nine months, primarily from higher EYLEA volume.
- U.S. EYLEA sales were $853.6 million in Q3 and $2,465.4 million for the first nine months, compared with $734.4 million and $1,930.0 million, respectively, in 2015.
- Bayer collaboration revenue increased to $191.3 million in Q3 and $562.8 million for the first nine months, driven mainly by higher Regeneron profit from EYLEA sales outside the United States.
- Sanofi collaboration revenue declined to $144.4 million in Q3 and $527.5 million for the first nine months, reflecting lower research and development reimbursement and greater commercialization losses, partly offset by immuno-oncology revenue.
- Operating expenses increased 15.1% in Q3 and 33.5% for the first nine months. Research and development expense increased to $543.0 million in Q3 and $1,573.1 million for the first nine months; selling, general, and administrative expense increased to $270.0 million and $851.8 million, respectively.
- Net income benefited from lower effective tax rates of 27.6% in Q3 and 35.0% for the first nine months, compared with 46.5% and 51.8% in the prior-year periods.
- Cash, cash equivalents, and marketable securities totaled $2,186.3 million at September 30, 2016, compared with $1,677.4 million at December 31, 2015. Cash and cash equivalents were $920.4 million, and marketable securities were $1,265.9 million.
- Capital expenditures were $361.5 million for the first nine months, and fourth-quarter 2016 capital expenditures were expected to be approximately $119 million to $149 million.
- The company had no borrowings under its $750.0 million senior unsecured revolving credit facility and was in compliance with its covenants. Only $0.2 million of convertible senior notes remained outstanding at September 30, 2016; those notes matured in October 2016.
Material changes versus the prior comparable period
- Revenue growth was led by U.S. EYLEA, while operating income declined because expense growth, particularly research and development and selling, general, and administrative spending, exceeded revenue growth.
- Cost of goods sold decreased materially because Genentech royalty obligations on EYLEA sales ended in May 2016. Cost of collaboration and contract manufacturing also declined for the same reason.
- Research and development spending included significant upfront payments: $75.0 million to Intellia in the first nine months and $25.0 million to Adicet in Q3.
- Regeneron entered into a global fasinumab collaboration with Teva in September 2016, receiving a $250.0 million non-refundable upfront payment. The payment was recorded as deferred revenue, not current-period revenue.
- Headcount increased to an average of 5,127 in Q3 and 4,786 for the first nine months, compared with 3,966 and 3,535, respectively, in 2015.
- The company paid $242.1 million during the first nine months to reduce outstanding warrants. As of September 30, 1,345,027 warrants remained outstanding and could be settled in cash or shares.
Guidance, outlook, commentary, and risks
- Management stated that existing capital resources, expected EYLEA sales, collaboration reimbursements, and available revolver capacity should fund projected operating needs for the foreseeable future, while also expecting continued increases in research, development, commercialization, and manufacturing expenditures.
- Near-term pipeline milestones included regulatory review of Dupixent, additional Praluent filings and the ODYSSEY OUTCOMES cardiovascular outcomes trial, and continued development of fasinumab, REGN2810, and other candidates.
- After the quarter, the FDA issued a Complete Response Letter for sarilumab due to manufacturing deficiencies at Sanofi’s French fill-and-finish facility. The filing states that the letter did not identify safety or efficacy concerns; approval depends on satisfactory corrective action.
- The FDA placed the fasinumab chronic low back pain Phase 2b study on clinical hold after an adjudicated arthropathy case in a high-dose patient with advanced osteoarthritis. Dosing was stopped, and the companies planned a revised pivotal program excluding patients with advanced osteoarthritis.
- A Phase 2 study of aflibercept combined with rinucumab did not meet its primary endpoint and showed no improvement over aflibercept monotherapy; combination-treatment ocular adverse events were more frequent.
- Material risks include substantial dependence on EYLEA, competition and reimbursement pressure, reliance on Sanofi and Bayer, manufacturing and supply-chain constraints, clinical and regulatory failure, product safety, intellectual-property litigation, customer concentration, and potential loss of market exclusivity.
- Amgen’s patent litigation regarding Praluent remained unresolved in the United States and Europe. Regeneron could not predict the outcome or estimate a potential loss. Separate Cabilly patent litigation was settled, with Regeneron receiving a license covering Praluent and certain antibody products.
- The company early adopted ASU 2016-09, which increased reported tax benefits from stock-based compensation and classified those benefits as operating cash flows prospectively.
Most important facts for investors to verify
- Whether EYLEA volume growth and pricing can offset concentration risk and increasing commercial competition.
- The timing and outcome of the Dupixent, sarilumab, Praluent, and fasinumab regulatory and clinical programs.
- Resolution of sarilumab manufacturing deficiencies and the fasinumab clinical hold.
- The status and potential commercial impact of Amgen’s Praluent patent litigation and other intellectual-property proceedings.
- The sustainability of collaboration funding and profit-sharing arrangements with Sanofi, Bayer, Teva, and other partners.
- Execution and cost of manufacturing expansion in Rensselaer and Limerick, including the company’s stated fourth-quarter capital expenditure range.
- The impact of rising research and development, commercialization, stock compensation, and manufacturing costs on operating margins and cash generation.