Regeneron Pharmaceuticals, Inc. — 2010 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. The interim financial statements are unaudited. Regeneron is a biopharmaceutical company with one marketed product, ARCALYST (rilonacept), and a development pipeline focused on ophthalmology, oncology, inflammatory diseases, cardiovascular risk, pain, and other conditions.
Financial Overview
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $106.0 million | $117.5 million | $325.4 million | $282.5 million |
| Operating loss | $(32.1) million | $(1.3) million | $(84.7) million | $(34.7) million |
| Net loss | $(33.9) million | $(1.0) million | $(89.9) million | $(31.3) million |
| Net loss per share | $(0.41) | $(0.01) | $(1.10) | $(0.39) |
| Operating margin | Approximately (30.3%) | Approximately (1.1%) | Approximately (26.0%) | Approximately (12.3%) |
| Net margin | Approximately (32.0%) | Approximately (0.9%) | Approximately (27.6%) | Approximately (11.1%) |
Research and development expense was $122.0 million in Q3 and $364.0 million for the first nine months, up from $105.4 million and $280.0 million, respectively, in the comparable periods. Selling, general, and administrative expense was $15.7 million in Q3 and $44.6 million for the first nine months. Total operating expenses increased to $138.1 million in Q3 and $410.1 million for the first nine months.
- Revenue composition: Nine-month revenue included $229.2 million from sanofi-aventis collaboration activities, $40.5 million from Bayer HealthCare, $30.1 million from technology licensing, $20.0 million of ARCALYST product sales, and $5.6 million of contract research and other revenue.
- Cash flow: Operating activities provided $138.0 million in the first nine months of 2010, compared with $25.8 million used in the prior-year period. The improvement was driven primarily by a $172.7 million increase in deferred revenue, including the Astellas upfront payment.
- Investing and financing: Investing activities used $80.4 million, including $67.4 million of capital expenditures. Financing activities provided $60.5 million, including $47.5 million of facility-related funding and $13.8 million from stock option exercises.
- Liquidity: Cash, cash equivalents, restricted cash, and marketable securities totaled $520.4 million at September 30, 2010, compared with $390.0 million at December 31, 2009. Cash and cash equivalents were $325.3 million, and marketable securities were $191.7 million.
- Lease obligations: Facility lease obligations totaled $159.0 million, including $158.4 million classified as long term. The filing does not report conventional bank debt or a revolving credit facility.
- Equity: Stockholders’ equity declined to $348.1 million from $396.8 million at year-end 2009, primarily reflecting the year-to-date net loss.
Material Changes Versus Prior Comparable Period
- Q3 revenue declined 9.8%, primarily because Q3 2009 included a $20.0 million Bayer HealthCare substantive milestone payment. Nine-month revenue increased 15.2%, led by higher sanofi-aventis antibody collaboration reimbursements.
- Q3 net loss increased substantially to $33.9 million from $1.0 million, while the nine-month net loss increased to $89.9 million from $31.3 million. The principal driver was higher research and development spending.
- R&D expense increased 15.7% in Q3 and 30.0% for the first nine months. Growth reflected increased payroll, clinical manufacturing, occupancy, research activities, and development of VEGF Trap-Eye and antibody candidates.
- Average headcount rose to 1,317 in Q3 from 998 and to 1,206 for the first nine months from 967, primarily supporting expanded antibody research activities under the sanofi-aventis collaboration.
- ARCALYST sales were essentially unchanged in Q3 at $4.9 million versus $5.0 million, but nine-month recognized sales increased to $20.0 million from $13.4 million. The 2010 amount included $4.8 million of previously deferred sales recognized after the company had sufficient historical data to estimate returns and rebates.
- In July 2010, Astellas extended its VelocImmune license through June 2023 and paid a $165.0 million upfront amount in August. The amount was recorded as deferred revenue and is expected to be recognized ratably over seven years beginning in mid-2011; Astellas also agreed to a potential $130.0 million payment in 2018.
- Property, plant, and equipment increased to $318.5 million from $259.7 million, reflecting manufacturing capacity expansion and Tarrytown facility improvements.
- In October 2010, after quarter-end, Regeneron completed a public offering of approximately 6.3 million common shares and received approximately $174.7 million in net proceeds.
Guidance, Outlook, Risks, and Unusual Items
- Management expects substantial operating losses to continue for at least the next several years as it funds clinical development, research, manufacturing expansion, and potential commercialization activities.
- Management estimated remaining 2010 capital expenditures of approximately $30 million to $50 million and 2011 capital expenditures of approximately $40 million to $70 million, primarily for Rensselaer manufacturing expansion and Tarrytown facilities.
- Management stated that existing capital resources, expected collaboration funding, and proceeds from the October 2010 equity offering should fund operations through at least 2013 under its current operating plan. This outlook is subject to changes in expenses, collaboration funding, clinical outcomes, and commercialization plans.
- Management expected initial data from the VIEW 1 and VIEW 2 VEGF Trap-Eye wet AMD trials and one-year DA VINCI results in the fourth quarter of 2010; data from COPERNICUS and GALILEO were expected in the first half of 2011.
- Initial data from ARCALYST PRE-SURGE 2 and RE-SURGE were expected in early 2011. A Phase 3 trial of ARCALYST for acute gout flares had shown no significant improvement in pain relief.
- Management expected aflibercept oncology results from VITAL in the first half of 2011 and VELOUR in the second half of 2011. The VELOUR independent monitoring committee recommended continuing the study without modifications after an interim review.
- Management expected to initiate or advance programs for REGN727, REGN88, REGN668, REGN910, REGN846, and REGN728. REGN910’s IND filing was expected by the end of 2010, and a Phase 2 program for REGN727 was expected in the first half of 2011.
- Key risks include continued losses, dependence on sanofi-aventis and Bayer HealthCare funding and execution, clinical trial failure or delay, regulatory non-approval, manufacturing capacity and compliance risks, product safety concerns, intellectual property disputes, reimbursement pressure, and the need for future financing.
- REGN475 remained in development despite safety concerns involving another company’s anti-NGF program; Regeneron disclosed that its acute sciatica study suggested the product would not be effective in that setting.
- The company recorded a $0.1 million other-than-temporary impairment charge on a marketable security during the first nine months of 2010. It also changed useful-life estimates for certain equipment, reducing depreciation expense by $1.0 million in Q3 and $3.0 million for the first nine months.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2010, and reported no material change in internal control over financial reporting during the quarter. Current legal proceedings were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Whether late-stage VEGF Trap-Eye and aflibercept trials meet their efficacy and safety endpoints and lead to regulatory filings or approvals.
- The timing, amount, and sustainability of reimbursement and other funding under the sanofi-aventis and Bayer HealthCare collaborations.
- The accounting and future revenue recognition associated with the $165.0 million Astellas upfront payment and other deferred collaboration payments.
- The pace of R&D spending, manufacturing expansion, lease obligations, and remaining capital expenditure requirements.
- Whether ARCALYST can generate meaningful commercial revenue beyond its limited CAPS market, including the outcome of its gout development program.
- Potential safety, regulatory, manufacturing, reimbursement, and intellectual property issues affecting ARCALYST, VEGF Trap-Eye, aflibercept, and the antibody pipeline.
- The dilution and use of proceeds associated with the October 2010 equity offering and the availability of additional financing if collaboration funding or development plans change.