REGENERON PHARMACEUTICALS, INC. annual report, FY2018

Regeneron Pharmaceuticals, Inc. — 2018 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2018. The filing also provides unaudited fourth-quarter results. Regeneron is a fully integrated biotechnology company operating as one business segment, with seven marketed products and 21 clinical-stage candidates.

Key Financial Metrics

($ millions, except per-share data)	2018	2017	Change
Revenue	$6,710.8	$5,872.2	+14.3%
Net product sales	$4,106.2	$3,718.5	+10.4%
Income from operations	$2,534.4	$2,079.6	+21.9%
Net income	$2,444.4	$1,198.5	+103.9%
Diluted EPS	$21.29	$10.34	+106.0%
Cash flow from operations	$2,195.1	$1,307.1	+68.0%
Capital expenditures	$383.1	$272.6	+40.5%

Revenue mix: U.S. net product sales were $4,106.2 million, Sanofi collaboration revenue was $1,111.1 million, Bayer collaboration revenue was $1,076.7 million, and other revenue was $416.8 million.
Primary commercial driver: U.S. EYLEA sales were $4,076.7 million, representing approximately 61% of total revenue. Libtayo generated $14.8 million of U.S. sales following its September 2018 approval.
Margins: Operating margin was approximately 37.8% versus 35.4% in 2017; net margin was approximately 36.4% versus 20.4%. Comparability was affected by tax items and accounting changes.
Liquidity: Cash, cash equivalents, and marketable securities totaled $4,564.9 million at year-end, including $1,467.7 million of cash and cash equivalents and $3,097.2 million of marketable securities. Working capital was $5,004.8 million.
Debt and obligations: No borrowings were outstanding under the $750.0 million senior unsecured revolving credit facility. Capital and facility lease obligations were $708.5 million, substantially related to the Tarrytown facility. Total contractual obligations were $1,909.3 million, excluding uncertain tax positions and contingent milestone or profit-reimbursement obligations.
Quarterly fourth quarter: Revenue was $1,927.8 million, net income was $820.4 million, and diluted EPS was $7.15. Fourth-quarter results included a $135.0 million cumulative catch-up revenue adjustment related primarily to the amended Sanofi immuno-oncology agreement and a tax benefit associated with an intercompany asset sale.

Material Changes Versus 2017

Revenue increased $838.6 million, driven by higher EYLEA sales, increased Bayer EYLEA collaboration profit, growth in Sanofi collaboration products, and initial Libtayo sales.
U.S. EYLEA sales increased $374.8 million to $4,076.7 million, primarily from higher volume, partly offset by higher rebates, discounts, and payer-related deductions.
Sanofi collaboration revenue increased $233.9 million, including higher immuno-oncology activity and greater collaboration-product sales, partially offset by lower antibody development reimbursements.
Research and development expense rose $111.0 million to $2,186.1 million. Direct program spending increased notably for Libtayo and fasinumab, while Dupixent and Praluent spending declined.
Selling, general, and administrative expense rose $235.8 million to $1,556.2 million, reflecting higher headcount, patient-assistance contributions, and commercialization spending for Dupixent and Libtayo.
Operating cash flow increased $888.0 million, although inventory increased by $387.9 million and deferred revenue declined by $194.5 million.
The effective tax rate fell to 4.3% from 42.3%. The 2017 rate included a $326.2 million charge from the Tax Cuts and Jobs Act; 2018 benefited from a $162.1 million tax benefit related to an intercompany asset sale and a $68.0 million final adjustment to the 2017 provisional tax accounting.
Regeneron adopted ASC 606 using the modified retrospective method, reducing retained earnings and increasing deferred revenue by $143.4 million at January 1, 2018. Reported 2018 revenue was $195.5 million higher than it would have been under the prior revenue standard.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management expects continued substantial spending on research and development, commercialization, manufacturing expansion, and intellectual-property activities. The company projected 2019 capital expenditures of approximately $410 million to $490 million.
Management stated that existing capital resources, expected EYLEA cash generation, collaboration funding, and available credit capacity should support projected operating needs for the foreseeable future, but noted that additional financing could become necessary if revenue declines, collaborations terminate, or expenses rise.
Sanofi amended the immuno-oncology discovery agreement effective December 31, 2018. Sanofi agreed to pay $461.9 million, which was received in the first quarter of 2019, while Regeneron retained or expanded rights to several immuno-oncology programs subject to specified options and royalties.
Fasinumab development continued at lower doses after an independent monitoring committee recommended discontinuing higher-dose regimens because of risk-benefit considerations. Dosing was discontinued in a chronic low-back-pain study using only higher doses.
The FDA issued a Complete Response Letter for the EYLEA pre-filled syringe supplemental application, citing additional manufacturing, supply-process, and usability information. Regeneron planned to resubmit in the first half of 2019.
Material litigation included patent proceedings involving Praluent, Dupixent, EYLEA, and the company’s antibody-generation technology. Outcomes could affect commercialization, royalties, damages, or market access. The filing generally does not provide a clear estimate of potential losses for these matters.
Regeneron recorded contingent reimbursement obligations of approximately $2.786 billion to Sanofi under the antibody collaboration, $58 million under the immuno-oncology collaboration, and $265 million to Bayer under the EYLEA collaboration. These obligations are generally repaid from future collaboration profits.
Business concentration remains significant: two distributors accounted for approximately 92% of gross product revenue, and EYLEA U.S. sales represented approximately 61% of total revenue.
Key risks include EYLEA concentration, competition and biosimilars, payer and pricing pressure, regulatory or clinical setbacks, manufacturing and supply-chain constraints, reliance on Sanofi and Bayer, intellectual-property disputes, data privacy, and potential changes to healthcare reimbursement policy.

Important Facts for Investors to Verify

Validate the sustainability of EYLEA U.S. sales growth and the impact of competing anti-VEGF products, biosimilars, reimbursement changes, and payer mix.
Reconcile reported 2018 revenue and earnings with the effects of ASC 606, the $135.0 million fourth-quarter catch-up adjustment, and the unusually low 4.3% effective tax rate.
Track Dupixent and Libtayo commercial growth, collaboration profit-sharing terms, and the related Sanofi reimbursement and development-cost obligations.
Review the status and potential financial consequences of Praluent, Dupixent, EYLEA, and antibody-platform patent litigation.
Assess whether manufacturing expansion in Rensselaer, New York and Limerick, Ireland is sufficient for commercial demand and the clinical pipeline.
Monitor fasinumab safety and efficacy at lower doses, as well as regulatory progress for EYLEA, Dupixent, Praluent, Libtayo, evinacumab, and other late-stage candidates.
Confirm liquidity after planned capital expenditures, contractual obligations, lease maturities, contingent collaboration reimbursements, and potential tax settlements.