Regeneron Pharmaceuticals, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014. Financial statements are unaudited and presented in thousands, except per-share data. Regeneron is an integrated biopharmaceutical company commercializing EYLEA, ZALTRAP, and ARCALYST, with a pipeline focused on ophthalmology, oncology, hypercholesterolemia, rheumatoid arthritis, asthma, and atopic dermatitis.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $725.8 million | $597.0 million | $2,017.2 million | $1,494.3 million |
| Net product sales | $448.8 million | $367.1 million | $1,229.2 million | $1,019.7 million |
| Income from operations | $182.7 million | $236.8 million | $591.1 million | $548.0 million |
| Net income | $79.7 million | $141.3 million | $237.9 million | $327.6 million |
| Diluted EPS | $0.70 | $1.25 | $2.10 | $2.95 |
| Operating margin | 25.2% | 39.7% | 29.3% | 36.7% |
| Net margin | 11.0% | 23.7% | 11.8% | 21.9% |
| Net cash from operating activities | — | — | $544.9 million | $306.9 million |
Cash and cash equivalents were $646.6 million at September 30, 2014, compared with $535.6 million at December 31, 2013. Marketable securities totaled $849.1 million, resulting in cash, cash equivalents, and marketable securities of approximately $1.496 billion. Capital expenditures were $215.5 million in the first nine months, versus $87.3 million in the prior-year period.
Outstanding convertible senior notes had a carrying value of $288.0 million and an aggregate principal amount of $338.9 million at September 30, 2014. Facility lease obligations totaled $277.4 million, including current and long-term portions. In October 2014, holders surrendered an additional $160.8 million principal amount of convertible notes for conversion, with settlement expected in the fourth quarter.
Material changes versus the prior comparable period
- Revenue increased 21.6% in the third quarter and 35.0% for the first nine months. EYLEA U.S. net product sales rose 22.5% in the quarter to $445.0 million and 21.1% for the first nine months to $1.219 billion.
- Bayer HealthCare collaboration revenue increased to $135.9 million from $88.6 million in the quarter and to $358.5 million from $134.6 million for the first nine months, driven primarily by higher EYLEA sales outside the United States, profit sharing, and milestones.
- Research and development expense increased 50.7% in the quarter to $337.7 million and 55.4% for the first nine months to $919.6 million. Key drivers included expanded alirocumab, sarilumab, dupilumab, and other antibody programs, increased staffing and manufacturing activity, and collaboration cost sharing.
- Selling, general, and administrative expense increased to $149.7 million in the quarter and $361.0 million for the first nine months. The third quarter included a $40.6 million incremental Branded Prescription Drug Fee charge following new IRS regulations.
- Net income declined despite revenue growth because of substantially higher development and commercial expenses, the Branded Prescription Drug Fee, a higher effective tax rate, and the absence of favorable 2013 tax items. The effective tax rate was 54.7% in the quarter and 57.1% for the first nine months, versus 37.4% and 36.4%, respectively.
- Operating cash flow increased to $544.9 million, aided by non-cash compensation of $225.8 million, deferred tax changes, and working-capital movements. Investing cash outflows increased because of higher securities purchases and facility expansion.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected continued increases in research and development, EYLEA commercialization, pre-commercialization, and capital expenditures. Fourth-quarter 2014 capital expenditures were expected to be approximately $85 million to $135 million.
- Management stated that existing capital resources, anticipated EYLEA sales, and collaborator reimbursements were expected to fund projected operating needs for the foreseeable future. The filing does not provide formal revenue or earnings guidance.
- EYLEA remains the principal economic driver: U.S. EYLEA sales represented 60% of total revenue for the first nine months of 2014. Dependence on one product, reimbursement pressure, competition from Lucentis and repackaged Avastin, regulatory changes, and manufacturing capacity are significant risks.
- Alirocumab was expected to proceed toward U.S. and EU regulatory submissions before the end of 2014. Amgen filed patent litigation in October 2014 seeking to restrict the manufacture and sale of alirocumab and seeking damages; the company could not estimate a possible loss.
- The European Patent Office opposition division revoked the '287 patent in September 2014; Regeneron's appeal reinstated the patent pending further proceedings. The company reported that the outcome of the remaining patent matters could not be predicted.
- The company purchased a 50% share of an FDA priority review voucher for $33.8 million in the third quarter, recorded as research and development expense. It also entered into a gene-therapy collaboration with Avalanche and invested a total of $15.0 million in Avalanche equity during 2014.
- Sanofi and Bayer HealthCare collaborations provide substantial funding and revenue but create dependence on partners. The filing disclosed contingent reimbursement obligations to Sanofi for ZALTRAP of approximately $443 million and to Bayer HealthCare for EYLEA of approximately $272 million as of December 31, 2013.
- Several development programs were subject to partial clinical holds, including nesvacumab, REGN1500, and fasinumab. Development of REGN2009 was discontinued, and the sarilumab SARIL-RA-COMPARE study was discontinued because of slower-than-anticipated enrollment.
Important facts for investors to verify
- Whether EYLEA U.S. demand, reimbursement, pricing, and international growth continue to support the company’s cost structure and profitability.
- The timing, regulatory outcomes, competitive position, and patent exposure of alirocumab, including the Amgen litigation.
- The pace and financial impact of R&D spending for alirocumab, sarilumab, dupilumab, and other pipeline programs.
- The effect of the higher effective tax rate, Branded Prescription Drug Fee, and future tax legislation on cash taxes and earnings.
- Fourth-quarter settlement of the additional $160.8 million convertible-note conversion and any resulting cash payments, share issuance, or dilution.
- Capital expenditure requirements and execution of the Limerick, Ireland, Rensselaer, and Tarrytown facility expansions.
- Reliance on Sanofi, Bayer HealthCare, distributors, contract manufacturers, and other third parties, including potential termination or underperformance of collaboration agreements.
- Regulatory, safety, manufacturing, reimbursement, intellectual-property, and clinical-trial developments affecting marketed products and product candidates.