Regeneron Pharmaceuticals, Inc. — Q3 2011 Form 10-Q Summary
Business context and reporting period
Regeneron is a biopharmaceutical company developing and commercializing medicines for serious medical conditions. The company had one marketed product, ARCALYST for CAPS, while its principal late-stage programs were EYLEA for ophthalmologic diseases, ZALTRAP for oncology, and ARCALYST for prevention of gout flares. The filing covers the unaudited three and nine months ended September 30, 2011, compared with the same periods in 2010.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $102.8 million | $106.0 million | $322.8 million | $325.4 million |
| Operating loss | $(58.5) million | $(32.1) million | $(159.8) million | $(84.7) million |
| Net loss | $(62.4) million | $(33.9) million | $(168.3) million | $(89.9) million |
| Net loss per share | $(0.68) | $(0.41) | $(1.87) | $(1.10) |
| Operating expenses | $161.3 million | $138.1 million | $482.6 million | $410.1 million |
| Research and development | $127.9 million | $122.0 million | $400.5 million | $364.0 million |
| SG&A | $32.9 million | $15.7 million | $80.9 million | $44.6 million |
| Operating margin | Approximately (56.8%) | Approximately (30.3%) | Approximately (49.5%) | Approximately (26.0%) |
Revenue was heavily dependent on collaborations: Sanofi revenue was $79.8 million in Q3 and $249.6 million in the first nine months; Bayer HealthCare revenue was $10.1 million and $33.7 million, respectively. Technology licensing revenue was $5.9 million in Q3 and $18.9 million year to date. ARCALYST sales were $5.5 million in Q3 and $14.9 million year to date.
Cash and cash equivalents were $206.4 million at September 30, 2011. Marketable securities totaled $297.2 million unrestricted and $7.2 million restricted; total cash, cash equivalents, and marketable securities were $511.7 million including restricted amounts. Total assets were $983.0 million and stockholders’ equity was $428.3 million.
Facility lease obligations totaled approximately $160.4 million, including $0.9 million current and $159.5 million long term. The filing also disclosed a subsequent October 2011 issuance of $400 million of 1.875% convertible senior notes due October 1, 2016. Net proceeds were approximately $391.3 million before the cost of the convertible note hedge, with approximately $23.7 million of net proceeds used for the hedge transactions.
For the first nine months, operating activities used $91.4 million of cash, compared with $140.1 million provided in 2010. Investing activities provided $162.4 million, primarily because sales and maturities of marketable securities exceeded purchases. Financing activities provided $22.8 million, including $24.0 million from common-stock issuances. Capital expenditures were $45.9 million.
Material changes versus the prior comparable periods
- Q3 revenue declined 3.0%, while nine-month revenue declined 0.8%; higher Sanofi collaboration revenue was offset by lower Bayer collaboration, licensing, and ARCALYST revenue.
- Q3 net loss increased by $28.5 million, and nine-month net loss increased by $78.4 million, primarily because of higher R&D and SG&A spending.
- R&D increased 4.8% in Q3 and 10.0% for the first nine months, reflecting expanded antibody activities, manufacturing, facilities, and development of EYLEA and other candidates.
- SG&A increased 109% in Q3 and 81% year to date, driven by higher headcount, commercialization preparation for EYLEA, recruitment, legal expenses, and stock-based compensation.
- Non-cash compensation rose to $13.4 million in Q3 and $40.6 million year to date, compared with $8.8 million and $26.3 million in the respective 2010 periods.
- ARCALYST nine-month sales decreased from $20.0 million to $14.9 million. The 2010 amount included $4.8 million of previously deferred sales, making the comparison less representative of current-period sales.
- Average headcount increased to 1,646 in Q3 and 1,525 for the first nine months, compared with 1,317 and 1,206, respectively, in 2010.
- Unrestricted marketable securities declined from $506.8 million at December 31, 2010 to $297.2 million at September 30, 2011, while cash and cash equivalents increased from $112.6 million to $206.4 million.
Guidance, outlook, commentary, and unusual items
- Management expected substantial operating losses to continue for at least the next several years because of ongoing R&D, commercialization preparation, manufacturing expansion, and launch-related costs.
- Management expected approximately $10 million to $20 million of additional capital expenditures during the remainder of 2011, primarily for Tarrytown tenant improvements, Rensselaer manufacturing improvements, and equipment.
- Management estimated that 40% to 50% of 2011 funding requirements would support technology development, research, and preclinical and clinical development; 10% to 15% would support commercialization preparation; and 20% to 25% would support capital expenditures.
- The FDA’s target action date for EYLEA in wet AMD was extended to November 18, 2011 because responses concerning chemistry, manufacturing, and controls were classified as a major amendment. The advisory committee had unanimously recommended approval, but approval was not assured.
- Management planned to submit regulatory applications for EYLEA in CRVO and ZALTRAP in previously treated metastatic colorectal cancer by the end of 2011 and planned to initiate a long-term ARCALYST gout safety study.
- ZALTRAP’s Phase 3 VELOUR trial met its overall-survival endpoint in previously treated metastatic colorectal cancer. The VENICE prostate-cancer trial was continued after an interim review, while the VITAL non-small-cell lung cancer trial did not meet its primary endpoint.
- REGN475 remained on clinical hold because of safety concerns associated with the anti-NGF drug class. Sanofi elected not to continue co-development of REGN846, although it remained obligated to fund the planned proof-of-concept trial.
- Regeneron was engaged in patent litigation with Genentech concerning VEGF Trap. Genentech asserted infringement counterclaims and sought damages, including for alleged willful infringement. Regeneron stated that it could not predict the outcome or estimate any loss.
- Management stated that existing resources, October 2011 note proceeds, and expected collaboration funding should meet operating needs for at least several years, but warned that delays, higher expenses, collaboration termination, or commercialization costs could accelerate cash consumption.
Most important facts for an investor to verify
- Outcome and timing of the FDA review of EYLEA for wet AMD, including any additional CMC requirements or complete response letter.
- Progress and regulatory submissions for EYLEA in CRVO and ZALTRAP in metastatic colorectal cancer.
- Cash burn, the effect of the October 2011 convertible notes, conversion dilution, warrant exposure, and future financing requirements.
- Reliance on Sanofi and Bayer HealthCare for reimbursement, development funding, regulatory execution, and commercialization.
- Status, potential damages, and possible effects of the Genentech patent litigation on EYLEA and ZALTRAP.
- Manufacturing capacity, third-party fill-and-finish arrangements, and ability to supply products if late-stage candidates are approved.
- Clinical and regulatory risks for ARCALYST gout, sarilumab, REGN727, and other pipeline candidates, including the REGN475 clinical hold.
- Competitive and reimbursement conditions for EYLEA, including Lucentis and off-label Avastin in ophthalmology.