Business Context and Reporting Period
Regeneron Pharmaceuticals, Inc. filed its Form 10-K for the fiscal year ended December 31, 2012. The company is a fully integrated biopharmaceutical business focused on discovering, developing, manufacturing, and commercializing medicines for serious medical conditions. It manages its operations as one segment.
Marketed products were EYLEA for wet AMD and macular edema following CRVO, ZALTRAP for previously treated metastatic colorectal cancer, and ARCALYST for CAPS. EYLEA was the primary commercial growth driver. Regeneron retained U.S. EYLEA rights and collaborated with Bayer HealthCare outside the United States; ZALTRAP was commercialized globally with Sanofi.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $1,378.5 million | $445.8 million | +209% |
| Net product sales | $858.1 million | $44.7 million | +1,820% |
| Collaboration revenue | $493.9 million | $369.7 million | +34% |
| Operating income | $457.7 million | $(205.2) million | Turned profitable |
| Net income | $750.3 million | $(221.8) million | Turned profitable |
| Diluted EPS | $6.75 | $(2.45) | Improved |
| Net cash used in operations | $(74.6) million | $(141.7) million | Improved, but negative |
| Cash, cash equivalents and marketable securities | $587.5 million | $810.6 million | Down $223.0 million |
| Convertible notes, carrying value | $296.5 million | $275.0 million | Increased |
Operating margin was approximately 33.2% and net margin approximately 54.4%; the net margin was materially elevated by the tax benefit described below. Research and development expense rose to $625.6 million from $529.5 million, selling, general, and administrative expense rose to $210.8 million from $117.3 million, and cost of goods sold rose to $84.5 million from $4.2 million. Cost of goods sold included $17.0 million of inventory write-downs and reserves.
U.S. EYLEA net product sales were $837.9 million, compared with $24.8 million in 2011. ARCALYST sales were $20.2 million, compared with $19.9 million. ZALTRAP sales recorded by Sanofi totaled $31.7 million; Regeneron recorded its share of commercialization losses rather than product sales. Bayer HealthCare recorded $19.0 million of EYLEA sales outside the United States in 2012, and Regeneron’s $4.2 million share of profit was fully offset by reimbursement of development costs.
At December 31, 2012, trade accounts receivable increased sharply to $593.2 million from $28.3 million, primarily because of extended payment terms for EYLEA customers. One distributor accounted for 78% of total gross product revenue, and one customer represented 80% of net trade accounts receivable.
Material Changes Versus the Prior Comparable Period
- EYLEA transitioned from an early launch product to the dominant revenue source following strong U.S. adoption and the September 2012 approval for macular edema following CRVO.
- ZALTRAP received FDA approval in August 2012, generated a $50.0 million Sanofi milestone, and began U.S. sales. Regeneron’s share of ZALTRAP commercialization losses increased to $25.6 million from $9.3 million.
- Regeneron received $25.0 million of Bayer HealthCare milestones related to EYLEA marketing and pricing approval in Japan.
- Net income benefited from a $335.8 million income tax benefit, primarily from releasing substantially all of the valuation allowance against deferred tax assets. The company expects to record income tax expense at rates approximating statutory rates beginning in 2013.
- Operating cash flow remained negative despite reported profitability because trade receivables increased by $590.1 million and prepaid expenses and other assets increased by $52.6 million.
- Research and development investment increased, particularly for REGN727, REGN668, other antibody candidates, and clinical manufacturing. Non-cash compensation expense increased to $94.2 million from $56.1 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management stated that existing capital resources, anticipated EYLEA sales, and collaboration funding were expected to support operating needs for the foreseeable future. No specific revenue or earnings guidance was provided. Planned 2013 capital expenditures were approximately $80 million to $100 million, primarily for manufacturing expansion, Tarrytown tenant improvements, and equipment.
- The company expected substantial ongoing research, development, commercialization, and manufacturing expenditures. It could return to losses if EYLEA sales, collaboration funding, or other revenues underperform.
- Management expected 2013 income tax expense to approximate statutory rates, creating a significant comparison headwind versus 2012 net income.
- EYLEA faces competition from Lucentis, lower-cost off-label Avastin, and development-stage therapies. Commercial performance depends on reimbursement, supply, physician adoption, safety, and regulatory approvals for additional indications and countries.
- Regeneron had contingent reimbursement obligations of approximately $415 million to Sanofi for ZALTRAP and $273 million to Bayer HealthCare for EYLEA development costs. Initial collaboration profits are expected to be used to repay these obligations.
- The company had $400.0 million principal amount of 1.875% convertible senior notes due October 1, 2016. The notes were convertible as of December 31, 2012; the initial conversion price was approximately $84.02 per share. Related warrants could create dilution above an approximately $103.41 strike price.
- Genentech patent litigation remained outstanding for matters not covered by the U.S. EYLEA license and partial settlement. Regeneron paid Genentech $60.0 million in 2012 after cumulative U.S. EYLEA sales reached $400.0 million and must pay royalties on specified cumulative sales through May 7, 2016. The filing stated that potential losses from remaining litigation could not be estimated.
- Development of ARCALYST for gout was discontinued after an FDA Complete Response Letter. REGN475 and other anti-NGF agents were on clinical hold, and REGN728 development was discontinued.
- Manufacturing capacity, third-party fill-finish services, single-source suppliers, clinical trial execution, regulatory compliance, intellectual property, customer concentration, and dependence on Sanofi and Bayer HealthCare remained significant risks.
Most Important Facts for Investors to Verify
- Whether EYLEA sales growth, payer reimbursement, customer collections, and channel inventory support sustained revenue and operating cash generation.
- The expected 2013 effective tax rate and the resulting impact of normalization from the $335.8 million 2012 tax benefit.
- Progress and regulatory outcomes for EYLEA additional indications, ZALTRAP expansion, and the antibody pipeline, particularly REGN727 and sarilumab.
- The status, potential financial exposure, and geographic scope of remaining Genentech patent litigation.
- The timing and cost of manufacturing expansion and whether capacity can support commercial demand and clinical programs.
- The balance-sheet impact of the convertible notes, potential share dilution, contractual obligations, and contingent collaborator reimbursement amounts.
- The sustainability of collaboration funding from Sanofi and Bayer HealthCare and the consequences of termination or reduced funding.