Regeneron Pharmaceuticals, Inc. — 2015 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The filing was signed August 4, 2015. Regeneron is an integrated biopharmaceutical company focused on discovering, developing, manufacturing, and commercializing medicines. Its principal commercial driver was EYLEA, with additional products and a broad antibody pipeline.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $998.6 million | $665.7 million | $1,868.2 million | $1,291.4 million |
| Operating income | $344.9 million | $228.1 million | $628.4 million | $419.7 million |
| Net income | $194.6 million | $96.4 million | $270.7 million | $164.7 million |
| Diluted EPS | $1.69 | $0.85 | $2.35 | $1.46 |
| Operating margin | 34.5% | 34.3% | 33.6% | 32.5% |
| Net margin | 19.5% | 14.5% | 14.5% | 12.7% |
- Net product sales were $657.8 million in Q2 and $1,202.4 million for the first half. U.S. EYLEA sales were $654.6 million in Q2 and $1,195.7 million for the first half, compared with $414.8 million and $773.8 million, respectively, in the comparable 2014 periods. ARCALYST sales were $3.2 million in Q2 and $6.7 million for the first half.
- Collaboration revenue was $329.3 million in Q2 and $626.5 million for the first half, including Sanofi revenue of $195.1 million and $368.5 million and Bayer HealthCare revenue of $134.2 million and $258.1 million, respectively.
- Operating expenses increased to $653.8 million in Q2 and $1,239.8 million for the first half. Research and development expense increased 32.5% in Q2 to $390.3 million and 26.0% for the first half to $733.4 million. Selling, general, and administrative expense increased 80.5% in Q2 to $174.6 million and 66.8% for the first half to $333.6 million.
- Non-cash stock compensation was $94.3 million in Q2 and $198.0 million for the first half, compared with $64.8 million and $140.6 million in the prior-year periods.
- Income tax expense was $133.4 million in Q2 and $333.9 million for the first half. Effective tax rates were 40.7% and 55.2%, respectively, compared with 53.9% and 57.7% in the comparable periods.
- Net cash provided by operating activities was $156.1 million for the first half, down from $389.9 million. The decline primarily reflected a $418.8 million increase in trade, Sanofi, and Bayer receivables, together with higher inventories.
- Capital expenditures were $354.1 million, compared with $135.7 million in the first half of 2014. Net cash used in investing activities was $501.1 million.
- Cash and cash equivalents were $390.6 million at June 30, 2015, compared with $648.7 million at December 31, 2014. Cash, cash equivalents, and marketable securities totaled $1,193.8 million, compared with $1,360.6 million at year-end.
- Marketable securities totaled $803.3 million, including $46.1 million of equity securities. Total assets were $4.527 billion and stockholders’ equity was $3.338 billion.
Debt, liquidity, and capital resources
- Only $33.3 million principal amount of the original $400.0 million convertible senior notes remained outstanding at June 30, 2015. During the first half, Regeneron paid $144.0 million in cash and issued 1,399,069 shares to settle conversions and recorded a $16.9 million loss on extinguishment of debt.
- In March 2015, Regeneron established a $750.0 million senior unsecured five-year revolving credit facility, with an option for up to $250.0 million of additional commitments or term loans. No borrowings were outstanding, and the company was in compliance with all covenants at quarter-end.
- Facility lease obligations increased to $357.7 million from $310.9 million at December 31, 2014, reflecting construction and tenant-improvement activity.
- Management expected second-half 2015 capital expenditures of approximately $320 million to $395 million, primarily for the Limerick, Ireland facility, Tarrytown buildings, and Rensselaer manufacturing expansion.
Material changes versus the prior comparable period
- Revenue increased 50.0% in Q2 and 44.7% for the first half, driven primarily by higher EYLEA volume and increased collaboration revenue.
- Net income increased 102.0% in Q2 and 64.4% for the first half. Diluted EPS increased to $1.69 from $0.85 in Q2 and to $2.35 from $1.46 for the first half.
- U.S. EYLEA sales increased approximately 57.8% in Q2 and 54.4% for the first half. EYLEA sales outside the United States reported by Bayer were $337.8 million in Q2 and $629.6 million for the first half, compared with $246.8 million and $464.9 million.
- Research and development spending rose substantially, particularly for dupilumab and clinical manufacturing. Q2 project costs included $113.0 million for dupilumab, compared with $39.4 million in 2014.
- Cash generation weakened despite higher earnings because of working-capital investment and substantially higher capital expenditures.
- Regeneron amended its ZALTRAP agreement with Sanofi. Sanofi became solely responsible for development and commercialization, and Regeneron no longer had the contingent obligation to reimburse 50% of certain historical ZALTRAP development costs. Regeneron recognized $14.9 million of previously deferred revenue in the first quarter and $23.0 million of related revenue for the first half.
- The company revised prior-period financial statements for stock-option accounting and certain collaboration-related accounting corrections. Management concluded the errors were not material to previously issued financial statements, but revised comparative amounts in this filing.
Guidance, outlook, commentary, and unusual items
- Management stated that existing capital resources, the revolving credit facility, anticipated EYLEA sales, and collaborator reimbursements should fund projected operating needs for the foreseeable future, while cautioning that expenditures are expected to continue increasing.
- In July 2015, after quarter-end, the FDA approved Praluent for adults with heterozygous familial hypercholesterolemia or clinical atherosclerotic cardiovascular disease requiring additional LDL reduction. Regeneron and Sanofi will share U.S. profits and losses equally.
- Also in July 2015, Regeneron and Sanofi entered an immuno-oncology collaboration. Sanofi agreed to make non-refundable upfront payments of $265.0 million under the discovery agreement and $375.0 million under the license and collaboration agreement, subject to the agreements’ terms. Regeneron may spend up to $1.090 billion on discovery and proof-of-concept activities, with up to $825.0 million of reimbursement funding from Sanofi.
- Sanofi elected not to continue co-development of REGN2222 and REGN1033; certain other programs were not opted into. Regeneron may bear greater future development and commercialization costs for programs it pursues independently.
- Fasinumab and REGN1500 were subject to partial FDA clinical holds with specified limitations. Clinical outcomes, regulatory approvals, manufacturing scale-up, reimbursement, and commercialization remain uncertain.
- Reported unusual items included a $16.0 million Q2 loss on extinguishment of debt, $6.4 million of Q2 inventory write-downs and reserves, and a $10.0 million second-quarter development milestone payment to Sanofi related to PDGF antibodies.
- Regeneron and Sanofi faced patent litigation brought by Amgen concerning Praluent, with trial scheduled for March 7, 2016. Regeneron and Sanofi also initiated invalidity and non-infringement proceedings concerning Genentech and City of Hope patents.
Most important facts for investors to verify
- Whether the pace and durability of U.S. and international EYLEA sales support continued profitability, given that U.S. EYLEA represented 64% of total revenue for the first half of 2015.
- The commercial launch, pricing, reimbursement, competitive position, and profit-sharing economics of Praluent following its July 2015 approval.
- Progress and regulatory outcomes for dupilumab, sarilumab, REGN2222, fasinumab, REGN1500, REGN2810, and other pipeline candidates, including the effect of clinical holds and Sanofi opt-outs.
- The outcome and potential commercial impact of Amgen’s Praluent patent litigation and the Genentech/City of Hope patent proceedings.
- Whether capital expenditures, manufacturing expansion, lease obligations, and increasing research and commercialization spending remain consistent with liquidity resources and the stated $320 million to $395 million second-half capital-expenditure outlook.
- The effect of the July 2015 immuno-oncology collaboration on future revenue recognition, reimbursement, development obligations, and profit sharing.
- The company’s dependence on Sanofi, Bayer HealthCare, a limited number of distributors, and Besse Medical, which accounted for 69% of gross product revenue in the first half of 2015.