Regeneron Pharmaceuticals, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Regeneron is a fully integrated biotechnology company that discovers, develops, manufactures, and commercializes medicines. The filing covers the fiscal year ended December 31, 2017; the source also provides unaudited fourth-quarter results. The company operated as one reportable segment and had six marketed products: EYLEA, Dupixent, Praluent, Kevzara, ARCALYST, and ZALTRAP.
- EYLEA remained the principal commercial driver, representing approximately 63% of total 2017 revenue through U.S. net sales.
- Regeneron had 15 product candidates in clinical development and approximately 6,200 full-time employees at year-end.
- Commercialization and development relied substantially on Bayer, Sanofi, Teva, and other collaborators.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $5,872.2 million | $4,860.4 million | 20.8% increase |
| Net product sales | $3,718.5 million | $3,338.4 million | 11.4% increase |
| Operating income | $2,079.6 million | $1,330.7 million | 56.3% increase |
| Net income | $1,198.5 million | $895.5 million | 33.8% increase |
| Diluted earnings per share | $10.34 | $7.70 | 34.3% increase |
| Cash flow from operations | $1,307.1 million | $1,473.4 million | 11.3% decrease |
| Capital expenditures | $272.6 million | $511.9 million | 46.7% decrease |
- Approximate operating margin was 35.4%, compared with 27.4% in 2016; approximate net margin was 20.4%, compared with 18.4%.
- U.S. EYLEA net sales were $3,701.9 million, up from $3,323.1 million. Global EYLEA sales recorded by Regeneron and Bayer totaled $5,928.8 million, up 14.1%.
- Sanofi collaboration revenue increased to $877.2 million from $658.7 million, while Bayer collaboration revenue increased to $938.1 million from $744.3 million.
- Sanofi-recorded global sales included $256.5 million for newly launched Dupixent, $194.7 million for Praluent, and $13.3 million for newly launched Kevzara.
- Research and development expense was $2,075.1 million, up modestly from $2,052.3 million. Selling, general, and administrative expense increased to $1,320.4 million from $1,177.7 million.
- Cash, cash equivalents, and marketable securities totaled $2,896.1 million at year-end, including $812.7 million of cash and cash equivalents. Working capital was $3,199.5 million.
- There were no borrowings under the $750.0 million revolving credit facility. Capital and facility lease obligations totaled $703.5 million, primarily related to the Tarrytown lease financing.
- Operating cash flow declined despite higher net income, principally due to increases in receivables and inventory and a reduction in deferred revenue.
Material changes versus the prior comparable period
- Revenue growth was led by higher EYLEA volume, increased international EYLEA collaboration profit, and initial sales of Dupixent and Kevzara.
- Profitability improved substantially as revenue grew faster than operating expenses. However, 2017 operating results benefited from collaboration revenue, milestones, and other recognition of deferred revenue.
- The company recorded a $326.2 million fourth-quarter tax charge to remeasure U.S. deferred tax assets following enactment of the Tax Cuts and Jobs Act. The effective tax rate rose to 42.3% from 32.7%.
- The company recorded a $30.1 million loss on debt extinguishment related to the Tarrytown lease transaction.
- Cost of collaboration and contract manufacturing increased to $194.6 million from $105.1 million, including $57.2 million of inventory write-offs and reserves, primarily for product that no longer met quality specifications.
- Sanofi’s Antibody Discovery Agreement ended on December 31, 2017 without extension. Regeneron will no longer receive funding under that agreement and must fund its antibody discovery and certain preclinical activities independently.
- Capital spending fell in 2017, but the company expected 2018 capital expenditures of $420 million to $500 million for manufacturing, laboratory, and facility expansion.
Guidance, outlook, commentary, risks, and unusual items
- Management expected existing capital resources, anticipated EYLEA sales, collaboration funding, and available credit to fund operations for the foreseeable future, while warning that additional financing could become necessary if revenue falls short, expenses rise, or collaborations terminate.
- 2018 priorities included regulatory decisions and filings for EYLEA extended dosing, Dupixent asthma, Praluent apheresis use, cemiplimab in advanced cutaneous squamous cell carcinoma, and further development of the clinical pipeline.
- Cemiplimab produced positive Phase 2 results in advanced cutaneous squamous cell carcinoma, and a rolling BLA submission was underway. Dupixent produced positive Phase 3 asthma results and an asthma supplemental BLA was submitted.
- Suptavumab development was discontinued after a Phase 3 study failed its primary endpoint. Nesvacumab combination studies with EYLEA did not provide sufficient differentiation for Phase 3 development.
- Material litigation remained unresolved, including Amgen patent litigation involving Praluent and Immunex patent litigation involving Dupixent. The filing states that potential losses could not be estimated.
- Praluent’s U.S. permanent injunction was stayed and later vacated, but new trials and related proceedings remained possible. Litigation also continued in Europe and other jurisdictions.
- The company was subject to a Department of Justice investigation concerning patient-assistance organizations and related financial support; the outcome and duration could not be predicted.
- Key operating risks include dependence on EYLEA, customer concentration, reimbursement and pricing pressure, competition and biosimilars, regulatory approval uncertainty, manufacturing capacity and single-source suppliers, collaborator dependence, intellectual-property disputes, data privacy, and adverse clinical or safety results.
- Three customers accounted for approximately 99% of gross product revenue and net trade receivables, creating significant customer and credit concentration.
- Regeneron had contingent reimbursement obligations of approximately $2.56 billion to Sanofi under the antibody collaboration and approximately $251 million to Bayer under the EYLEA collaboration, generally payable from future collaboration profits.
Most important facts for an investor to verify
- Whether EYLEA U.S. sales growth and market share remain sufficient to offset the company’s dependence on one product.
- The commercial trajectory, payer access, and profitability of Dupixent and Kevzara following their 2017 launches.
- Results and regulatory consequences of the Praluent cardiovascular outcomes study and the pending Praluent and Dupixent patent proceedings.
- Whether cemiplimab, fasinumab, evinacumab, and additional Dupixent indications achieve clinical and regulatory milestones.
- The effect of the ended Sanofi discovery funding arrangement on future research and development cash requirements.
- Manufacturing execution at the Rensselaer and Limerick facilities, including remediation of quality-related inventory write-offs and capacity expansion.
- Future cash needs, 2018 capital spending, Tarrytown lease obligations, and the company’s ability to maintain profitability and positive operating cash flow.
- Final tax effects of the Tax Cuts and Jobs Act and any subsequent changes to the provisional $326.2 million deferred-tax remeasurement charge.