Regeneron Pharmaceuticals, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Regeneron is an integrated biopharmaceutical company that discovers, develops, manufactures, and commercializes medicines. This unaudited quarterly report covers the three months ended March 31, 2013, with comparison to the three months ended March 31, 2012.
Commercial products were EYLEA and ARCALYST sold by Regeneron in the United States, and ZALTRAP and EYLEA commercialized with Sanofi and Bayer HealthCare, respectively. EYLEA was the principal growth driver.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $439.7 million | $231.8 million | Up 89.7% |
| Net product sales | $318.7 million | $127.9 million | Up 149.2% |
| Sanofi collaboration revenue | $99.3 million | $85.0 million | Up 16.8% |
| Bayer collaboration revenue | $14.9 million | $12.5 million | Up 19.4% |
| Income from operations | $153.1 million | $22.2 million | Up 589.4% |
| Operating margin | 34.8% | 9.6% | Improved |
| Net income | $98.9 million | $11.7 million | Up 748.7% |
| Diluted EPS | $0.90 | $0.11 | Up $0.79 |
| Net margin | 22.5% | 5.0% | Improved |
| Net cash provided by operating activities | $86.2 million | $(87.0) million | Improved by $173.3 million |
EYLEA U.S. net product sales were $313.9 million, compared with $123.5 million in Q1 2012. ARCALYST sales were $4.8 million, compared with $4.4 million. EYLEA sales represented approximately 98.5% of Regeneron's net product sales.
Research and development expense increased to $180.3 million from $138.9 million, while selling, general, and administrative expense increased to $77.3 million from $58.4 million. Cost of goods sold increased to $29.1 million from $12.3 million. Total operating expenses increased to $286.6 million from $209.6 million.
Non-cash compensation expense was $53.0 million, compared with $23.2 million, primarily reflecting the higher fair value of annual employee option grants. Income tax expense was $43.0 million, producing a 30.3% effective tax rate. The rate benefited from a retroactive research tax credit; the company began recording material income tax expense after releasing substantially all of its deferred-tax valuation allowance in Q4 2012.
Liquidity, cash flow, debt, and balance sheet
- Cash, cash equivalents, and marketable securities totaled $662.8 million at March 31, 2013, including $8.5 million of restricted balances, compared with $587.5 million at December 31, 2012.
- Cash and cash equivalents alone were $180.4 million, down from $230.3 million at year-end; marketable securities increased to approximately $474.0 million unrestricted and $8.4 million restricted.
- Trade accounts receivable increased to $703.9 million from $593.2 million, primarily because of extended payment terms and higher EYLEA sales. None was past due, but one customer represented 80% of net trade receivables.
- Operating cash flow was $86.2 million. Investing cash flow was $(147.7) million, reflecting $126.2 million of net marketable-security purchases and $21.2 million of capital expenditures. Financing cash flow was $11.5 million.
- Capital expenditures were $21.2 million in Q1. Management expected approximately $80 million to $100 million of additional capital expenditures during the remainder of 2013, principally for manufacturing expansion, Tarrytown tenant improvements, and equipment.
- The company had $400.0 million principal amount of 1.875% convertible senior notes due October 1, 2016. The carrying value was $302.3 million and estimated fair value was $861.1 million at March 31, 2013. Facility lease obligations totaled $160.5 million, including current and long-term portions.
- Management stated that existing resources, anticipated EYLEA sales, and collaboration reimbursements should meet projected operating needs for the foreseeable future. No short-term credit line or other established banking financing arrangement was in place.
Material changes versus the prior comparable period
- Revenue and profitability expanded sharply, principally because of continued EYLEA commercial growth following its November 2011 launch.
- EYLEA sales increased by $190.4 million, while total collaboration revenue increased by $16.7 million.
- Sanofi collaboration revenue included a $7.8 million share of ZALTRAP commercialization losses, compared with $3.7 million in Q1 2012, partly offset by higher antibody development reimbursements.
- Bayer collaboration revenue began to include Regeneron's $6.4 million net profit from EYLEA sales outside the United States. Bayer reported $64.8 million of ex-U.S. EYLEA sales for the quarter, with Regeneron's share of collaboration profit reduced by reimbursement obligations for Bayer's prior development costs.
- Research and development spending rose by $41.4 million, driven mainly by higher payroll, clinical manufacturing, alirocumab development, dupilumab development, and other antibody programs.
- Average headcount increased to 1,996 from 1,729, primarily to support research, development, manufacturing, and commercialization activities.
- Operating cash flow shifted from $(87.0) million to $86.2 million, although working-capital investment remained substantial due to higher receivables and inventory.
Guidance, outlook, management commentary, risks, and unusual items
- Management expected continued expenditure growth in research and development, EYLEA and ZALTRAP commercialization, and manufacturing capacity. It did not provide a specific revenue or earnings forecast in the filing.
- Near-term development priorities included additional EYLEA indication and geographic studies, continued ZALTRAP regulatory submissions, Phase 3 programs for sarilumab and alirocumab, and planned Phase 2b studies for dupilumab.
- Fasinumab remained on FDA clinical hold, with no ongoing enrolling or treating trials. The filing stated that the future development plan had not been determined.
- In April 2013, Regeneron entered a lease for approximately 297,000 square feet of new Tarrytown laboratory and office space, with an expected 15-year initial term. It also extended an existing approximately 360,000-square-foot lease through June 2029.
- In May 2013, after the quarter-end, Regeneron acquired full rights from Sanofi to PDGF antibody programs and ANG2 ophthalmology programs. Consideration includes $20 million of upfront payments, potential development milestones of up to $45 million, and future royalties.
- Regeneron remained substantially dependent on EYLEA. Key risks included competition from Lucentis and off-label Avastin, reimbursement and pricing pressure, regulatory requirements, safety concerns, manufacturing capacity and supply-chain constraints, and concentration among distributors.
- Genentech patent litigation remained unresolved. The U.S. EYLEA license and settlement required a $60 million lump-sum payment previously made when cumulative sales reached $400 million, plus royalties through May 7, 2016. Other U.S. and European claims continued, and management could not estimate a potential loss.
- The U.K. Court of Appeal found a relevant European patent designation valid for acts before its October 28, 2012 expiration; Regeneron sought permission to appeal, and an adverse decision could require payment of Genentech's recoverable legal costs.
- Sales concentration was material: 77% of total gross product revenue was recorded from sales to Besse Medical, a subsidiary of AmerisourceBergen. The company also relied on Sanofi and Bayer for collaboration funding, development, regulatory, and commercialization activities.
Important facts for investors to verify
- Whether EYLEA sales growth, payer reimbursement, customer collections, and competitive dynamics can sustain profitability given the product concentration.
- The composition, timing, and collectability of the $703.9 million trade receivables balance and the exposure to the largest customer.
- The impact of Sanofi and Bayer reimbursement obligations, collaboration profit-sharing arrangements, and any changes to those collaborations.
- The cash requirements for manufacturing expansion, new Tarrytown facilities, clinical programs, and the $400 million convertible notes due in 2016.
- Developments in Genentech patent litigation, related royalties, legal costs, and any possible effect on EYLEA or ZALTRAP commercialization.
- Regulatory and clinical outcomes for EYLEA additional indications, alirocumab, sarilumab, dupilumab, and fasinumab.
- The effect of the newly recorded income tax expense after release of the deferred-tax valuation allowance.
- The filing text does not provide a clear value for a Q1 2012 income tax expense line in the condensed statements; management explains that tax expense was fully offset by a valuation-allowance reversal.