Business Context and Reporting Period
Regeneron Pharmaceuticals, Inc. filed this Form 10-K for the fiscal year ended December 31, 2016, including unaudited fourth-quarter results. The company is an integrated biopharmaceutical developer, manufacturer, and commercializer. Its principal commercial product was EYLEA, while Praluent and ARCALYST generated additional product sales; sarilumab received its first worldwide approval in Canada in January 2017.
Regeneron operates as one business segment and had approximately 5,400 full-time employees at December 31, 2016. EYLEA remained highly concentrated in the business, representing 68% of total revenue through U.S. net sales.
Financial Performance and Liquidity
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $4,860.4 million | $4,103.7 million | 18.4% increase |
| Net product sales | $3,338.4 million | $2,689.5 million | 24.1% increase |
| Operating income | $1,330.7 million | $1,251.9 million | 6.3% increase |
| Net income | $895.5 million | $636.1 million | 40.8% increase |
| Diluted earnings per share | $7.70 | $5.52 | 39.5% increase |
| Net cash from operations | $1,473.4 million | $1,330.8 million | 10.7% increase |
- Net product sales consisted primarily of U.S. EYLEA sales of $3,323.1 million, up from $2,676.0 million, and ARCALYST sales of $15.3 million, up from $13.5 million.
- Praluent sales recorded by Sanofi totaled $94.4 million in the United States and $21.9 million outside the United States, compared with $9.5 million and $1.0 million, respectively, in 2015.
- Sanofi collaboration revenue declined to $658.7 million from $758.9 million, primarily because of lower development reimbursements and increased commercialization losses. Bayer collaboration revenue increased to $744.3 million from $580.5 million, principally due to higher EYLEA profits outside the United States.
- Research and development expense increased 26.6% to $2,052.3 million, and selling, general, and administrative expense increased 40.5% to $1,177.7 million.
- Approximate operating margin was 27.4%, compared with 30.5% in 2015. Approximate net margin improved to 18.4% from 15.5%, aided in part by a lower effective tax rate of 32.7% versus 48.1%.
- The 2016 tax rate benefited from $144.8 million of excess tax benefits from stock compensation following early adoption of ASU 2016-09.
- Cash, cash equivalents, and marketable securities totaled $1,902.9 million at year-end, including $535.2 million of cash and $1,367.7 million of marketable securities. Working capital was $1,938.7 million.
- Capital expenditures were $511.9 million, primarily for manufacturing and facility expansion. Cash used in investing activities was $1,046.9 million.
- No convertible senior notes or revolving-credit borrowings were outstanding at year-end. The company had $750.0 million of undrawn revolving-credit availability and was in compliance with its covenants.
- Total contractual obligations were $1,593.4 million, excluding potential obligations associated with the planned Tarrytown acquisition financing and contingent collaboration reimbursements.
Material Changes Versus the Prior Comparable Period
- EYLEA U.S. net sales increased 24.2% to $3,323.1 million, while reported total revenue rose 18.4%.
- Profitability improved despite substantial investment in pipeline development and commercialization. Net income increased 40.8%, but operating income grew only 6.3% as R&D and SG&A expanded faster than revenue.
- R&D spending increased by $431.7 million, driven by clinical and manufacturing activity for dupilumab, fasinumab, REGN2810, and other candidates, as well as $100.0 million of upfront payments to Intellia and Adicet.
- Operating cash flow increased to $1,473.4 million, but cash declined by $273.9 million because of $511.9 million of capital expenditures, $643.4 million paid to reduce or terminate warrants, and other financing uses.
- Genentech royalty obligations on EYLEA ended May 7, 2016, contributing to lower cost of goods sold and collaboration manufacturing costs.
- Fasinumab was advanced through collaborations with Mitsubishi Tanabe and Teva, generating $14.4 million and $37.9 million of 2016 revenue, respectively.
- The company entered into new collaborations with Bayer for Ang2, Teva for fasinumab, Intellia for CRISPR/Cas technology, and Adicet for engineered immune-cell therapeutics.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management expected 2017 capital expenditures of approximately $375 million to $450 million, primarily for Limerick, Ireland, Tarrytown, New York, and Rensselaer, New York facilities.
- Management stated that existing capital resources, anticipated EYLEA cash generation, collaboration funding, and available credit were expected to support operating needs for the foreseeable future, but noted that additional financing could be required if revenue declines, expenses rise, or collaborations terminate.
- Regeneron agreed to purchase its Tarrytown facilities for $720.0 million and paid $57.0 million in December 2016. The purchase obligation was not subject to a financing condition, and the contemplated financing was not guaranteed.
- Dupixent received FDA priority review for atopic dermatitis with a March 29, 2017 target action date. Sarilumab received an FDA Complete Response Letter related to deficiencies at Sanofi’s Le Trait fill-and-finish facility; resubmission was expected subject to a successful inspection.
- Fasinumab’s chronic low back pain study was placed on FDA clinical hold. The osteoarthritis program showed efficacy but also dose-dependent adjudicated arthropathies, causing the companies to plan development of lower doses.
- A Phase 2 aflibercept/rinucumab combination study was discontinued because it did not improve visual acuity over EYLEA monotherapy.
- Praluent faced significant patent litigation from Amgen. Subsequent to year-end, a U.S. permanent injunction was granted but stayed pending appeal. The filing states that an adverse outcome could materially affect Praluent’s U.S. commercialization, results, and cash flows.
- The Department of Justice issued a January 2017 subpoena concerning patient-assistance organizations and financial assistance related to Regeneron products. The company was cooperating and could not predict the outcome or duration.
- Key business risks include dependence on EYLEA, customer concentration, pricing and reimbursement pressure, competition, regulatory approval and manufacturing compliance, patent litigation, reliance on Sanofi and Bayer, clinical-trial uncertainty, supply-chain capacity, and potential changes in healthcare or tax policy.
Most Important Facts for Investors to Verify
- Whether EYLEA U.S. volume and pricing remain sufficient to offset increasing competition, reimbursement pressure, and product concentration risk.
- The outcome and commercial impact of the Praluent patent appeal and related foreign proceedings.
- FDA actions and launch timing for Dupixent and sarilumab, including the status of Sanofi’s Le Trait facility.
- Clinical and safety developments for fasinumab, Praluent’s ODYSSEY OUTCOMES trial, REGN2810, REGN2222, and other late-stage candidates.
- Execution and funding of the $720.0 million Tarrytown acquisition and the resulting lease or financing obligations.
- The sustainability of operating cash flow after capital expenditures, warrant settlements, collaboration cost sharing, and manufacturing expansion.
- The extent to which collaboration reimbursements and deferred revenue support reported revenue and whether those sources remain available after Sanofi’s antibody-discovery funding obligations change after 2017.
- Potential liabilities or operational consequences from the Department of Justice investigation, shareholder derivative litigation, and other patent proceedings.