REGENERON PHARMACEUTICALS, INC. quarterly report, Q2 FY2017

Regeneron Pharmaceuticals, Inc. — 2Q 2017 Form 10-Q Summary

Reporting period: Quarterly and six-month periods ended June 30, 2017. The financial statements are unaudited. Regeneron is an integrated biotechnology company focused on discovering, developing, manufacturing, and commercializing medicines, led by EYLEA and partnered products with Sanofi, Bayer, Teva, and others.

Financial Performance and Position

Metric	Three months ended June 30	Six months ended June 30
Revenue	$1,470.1 million; up 21.2%	$2,789.1 million; up 15.6%
Operating income	$550.3 million	$980.9 million
Operating margin	37.4%, versus 24.1% in 2016	35.2%, versus 25.7% in 2016
Net income	$387.7 million; up $191.5 million	$636.7 million; up $259.0 million
Diluted EPS	$3.34, versus $1.69	$5.51, versus $3.24
Net margin	26.4%, versus 16.2% in 2016	22.8%, versus 15.6% in 2016

Revenue mix: U.S. net product sales were $924.1 million in the quarter and $1,782.4 million year to date, primarily EYLEA. EYLEA U.S. sales increased 10.7% in the quarter and 10.1% year to date, driven mainly by higher volume.
Collaboration revenue: Sanofi revenue was $222.1 million in the quarter and $432.5 million year to date; Bayer revenue was $210.4 million and $404.3 million, respectively. Other revenue rose to $113.5 million in the quarter, including Teva and MTPC fasinumab milestones.
Expenses: Research and development declined to $510.0 million in the quarter and $1,017.4 million year to date. SG&A increased to $306.9 million and $603.8 million, reflecting commercialization and headcount expansion. Cost of collaboration and contract manufacturing increased materially, including inventory write-offs and reserves of $40.8 million year to date.
Taxes: Effective tax rates were 26.3% for the quarter and 33.6% year to date, below the comparable 2016 rates of 32.9% and 39.3%.
Liquidity: Cash and cash equivalents were $744.3 million at June 30, 2017. Marketable securities totaled $1.588 billion, producing combined cash and marketable securities of approximately $2.332 billion. Working capital was $2.831 billion.
Cash flow: Operating cash flow was $325.3 million in the first half, down from $444.5 million in 2016. Investing cash use was $310.6 million, including $105.3 million of capital expenditures. Financing cash flow was $194.3 million, primarily reflecting lease financing and equity issuance. Ending cash increased $209.1 million from year-end 2016.
Debt and lease obligations: The company had no borrowings under its $750.0 million revolving credit facility. Capital and facility lease obligations totaled $701.2 million, primarily associated with the $720.0 million Tarrytown facility lease financing completed in March 2017. All reported credit and lease covenants were satisfied.

Material Changes Versus the Prior Comparable Period

Revenue growth was led by higher EYLEA volume, stronger Bayer collaboration profit, increased Sanofi collaboration revenue, newly launched Dupixent and Kevzara, and fasinumab collaboration milestones.
Profitability improved substantially despite higher SG&A and commercialization spending. The improvement also benefited from lower R&D spending, the absence of certain Genentech royalties after May 2016, and a lower effective tax rate.
Sanofi-recorded product sales increased, including Dupixent sales of $28.6 million in the quarter and Kevzara sales of $0.8 million. Praluent global sales increased to $46.1 million from $24.5 million.
Research spending shifted toward REGN2810 and fasinumab, while dupilumab and other early-stage program spending declined. Average headcount increased to 5,578 in the quarter from 4,758.
The balance sheet expanded substantially, including higher cash, marketable securities, inventory, property and equipment, and lease obligations.

Guidance, Outlook, Risks, and Unusual Items

Capital spending: Management expected approximately $145 million to $180 million of capital expenditures during the second half of 2017, primarily for Limerick, Tarrytown, and Rensselaer facilities.
Funding outlook: Management expected existing resources, anticipated EYLEA cash generation, collaboration reimbursements, and available credit to fund projected operating needs for the foreseeable future. Sanofi funding of up to $130 million for antibody discovery activities in 2017 was expected to be fully utilized by the end of the third quarter, and the related agreement ends December 31, 2017.
Pipeline and launches: Dupixent and Kevzara received U.S. approvals in 2017, while Dupixent and Kevzara expanded internationally. REGN2810 advanced into late-stage development, and fasinumab entered additional Phase 3 work.
Unusual accounting item: The company recorded a non-cash, out-of-period $30.1 million loss on extinguishment of debt related to the March 2017 Tarrytown lease transaction. Management concluded the correction was not material to prior or current-period financial statements and did not affect cash flows.
Praluent litigation: Amgen patent litigation resulted in a U.S. permanent injunction, but the injunction remained stayed pending appeal. The company could not estimate potential damages or losses. Adverse outcomes could materially affect Praluent commercialization and financial results.
Dupixent litigation: Immunex pursued patent infringement claims seeking damages, including potential enhanced damages, although it was not seeking an injunction at the time of filing. Related patent reviews were also pending.
Other legal and regulatory matters: The company faced patent proceedings involving its antibody-generation technology, shareholder derivative claims, and a Department of Justice investigation into patient assistance and charitable support activities. Outcomes were not estimable.
Major business risks: Results remain highly dependent on EYLEA, which represented 64% of total revenue in the first half of 2017. Additional risks include payer pressure, competition, manufacturing capacity and compliance, clinical trial outcomes, regulatory approvals, reliance on Sanofi and Bayer, customer concentration, intellectual property disputes, and potential loss of collaboration funding.
Subsequent events disclosed in the filing: On July 27, 2017, the Federal Circuit affirmed the district court’s inequitable-conduct ruling involving the '018 patent. On July 31, 2017, Regeneron and Bayer terminated the PDGFR-beta collaboration after discontinuation of rinucumab development; the termination did not affect the EYLEA or nesvacumab collaborations.

Important Facts for Investors to Verify

Whether EYLEA volume growth, pricing, payer mix, and sales deductions support continued revenue and margin performance.
The outcome and timing of the Praluent Federal Circuit appeal, related damages proceedings, and international patent cases.
The commercial trajectory, reimbursement, manufacturing capacity, and profitability of Dupixent and Kevzara.
Whether Sanofi’s antibody-discovery funding ends as scheduled and how Regeneron funds associated research thereafter.
Progress, safety, and regulatory milestones for REGN2810, fasinumab, suptavumab, and other late-stage candidates.
Capital spending requirements and execution at the Tarrytown, Rensselaer, and Limerick manufacturing facilities.
Potential financial exposure from the Department of Justice investigation, Dupixent litigation, shareholder claims, and other patent disputes.
The sustainability of operating cash flow given higher inventories, receivables, commercialization costs, and lease-related obligations.