REGENERON PHARMACEUTICALS, INC. quarterly report, Q2 FY2016

Regeneron Pharmaceuticals, Inc. — 2016 Q2 Form 10-Q Summary

Business context and reporting period

Regeneron is a fully integrated biopharmaceutical company that discovers, develops, manufactures, and commercializes medicines. The filing covers the quarter and six months ended June 30, 2016; financial statements are unaudited. Marketed products were primarily EYLEA, Praluent, and ARCALYST. EYLEA remained the principal revenue driver, while the company continued investing heavily in its clinical pipeline and manufacturing capacity.

Key financial metrics

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Total revenue	$1,212.6 million	$998.6 million	$2,413.5 million	$1,868.2 million
Net product sales	$834.2 million	$657.8 million	$1,618.4 million	$1,202.4 million
Operating income	$291.6 million	$344.9 million	$620.9 million	$628.4 million
Net income	$196.2 million	$194.6 million	$377.6 million	$270.7 million
Diluted EPS	$1.69	$1.69	$3.24	$2.35
Operating margin	24.0%	34.5%	25.7%	33.6%
Net margin	16.2%	19.5%	15.6%	14.5%
Operating cash flow	Not separately provided	Not separately provided	$444.5 million	$156.1 million

Revenue increased approximately 21% in the quarter and 29% for the first half. Quarterly net income was broadly stable because substantially higher revenue was offset by increased research and development, selling, general and administrative, and commercialization expenses. First-half net income increased approximately 40%, aided by higher revenue, lower interest and debt-conversion expense, and a lower effective tax rate.

Revenue and operating performance

EYLEA: U.S. net product sales were $830.9 million in Q2 and $1,611.8 million in the first half, compared with $654.6 million and $1,195.7 million, respectively, in the prior-year periods. Growth was attributed primarily to higher sales volume.
Other products: ARCALYST sales were $3.3 million in Q2 and $6.6 million in the first half. Praluent sales, recorded by Sanofi, were $24.5 million in Q2 and $37.4 million in the first half.
Collaboration revenue: Sanofi revenue was $163.4 million in Q2 and $383.1 million in the first half. Bayer revenue was $191.9 million and $371.5 million, respectively. Bayer revenue benefited from higher EYLEA profit share outside the United States.
Sanofi collaboration economics: Revenue included increased commercialization-related reimbursement but also a substantially larger Regeneron share of commercialization losses, primarily associated with Praluent and pre-launch activities for sarilumab and dupilumab.
Expenses: Q2 research and development expense rose 43% to $559.9 million; first-half expense rose 40% to $1,030.0 million. Q2 SG&A increased 67% to $292.0 million; first-half SG&A increased 74% to $581.7 million.
Unusual R&D item: Research and other development costs included a $75.0 million up-front payment to Intellia for a CRISPR/Cas collaboration.
Cost of goods sold: Q2 expense declined to $41.2 million from $60.9 million, primarily because Regeneron’s Genentech royalty obligation on EYLEA ended in May 2016. First-half cost of goods sold increased to $120.2 million because of Limerick facility start-up costs and higher EYLEA sales, partly offset by the royalty cessation.
Tax rate: The effective tax rate declined to 32.9% from 40.7% in Q2 and to 39.3% from 55.2% for the first half. The 2016 rate benefited from stock-based compensation tax benefits, the domestic manufacturing deduction, and the federal research tax credit.

Cash flow, liquidity, debt, and capital expenditures

Cash, cash equivalents, and marketable securities totaled approximately $1.635 billion at June 30, 2016, compared with $1.677 billion at December 31, 2015. Cash and cash equivalents were $646.5 million; marketable securities were $988.5 million.
Operating cash flow was $444.5 million in the first half, compared with $156.1 million in the prior-year period. Working-capital uses included increased receivables and inventories.
Investing cash use was $369.7 million, including $242.9 million of capital expenditures. Financing cash use was $237.4 million, including $242.1 million paid to reduce outstanding warrants.
The company had no borrowings under its $750.0 million senior unsecured revolving credit facility and was in compliance with all covenants.
Only $0.2 million principal amount of convertible senior notes remained outstanding at June 30, 2016; the notes mature October 1, 2016 unless converted or repurchased. Approximately 1.345 million warrants remained outstanding.
Management expected approximately $237 million to $287 million of capital expenditures in the second half of 2016, primarily for Limerick, Tarrytown, and Rensselaer facilities.
Management believed existing resources, anticipated EYLEA cash generation, collaboration reimbursements, and available revolver capacity would meet projected operating needs for the foreseeable future, while also expecting continued increases in R&D, commercialization, manufacturing, and clinical-trial spending.

Material changes versus the prior comparable period

Revenue growth was led by higher U.S. EYLEA volume and increased Bayer EYLEA profit share outside the United States.
Profitability was pressured in Q2 by sharply higher R&D and SG&A spending, including workforce expansion, commercialization spending, stock-based compensation, and the Intellia payment.
Sanofi collaboration revenue shifted toward commercialization reimbursements and losses, with Sanofi antibody R&D reimbursement lower than in the prior-year quarter.
The company began recording excess stock-compensation tax benefits in income tax expense and operating cash flow after early adoption of ASU 2016-09.
The company entered a Bayer Ang2 collaboration, received a $50.0 million up-front payment, entered an Intellia CRISPR/Cas collaboration, paid $75.0 million in related R&D expense, and purchased $50.0 million of Intellia shares.
Genentech royalty obligations on EYLEA sales ended in May 2016.
Cash declined modestly despite stronger operating cash flow because of capital expenditures, securities purchases, and warrant-reduction payments.

Guidance, outlook, management commentary, risks, and contingencies

Management did not provide broad revenue or earnings guidance in the filing. It provided second-half 2016 capital expenditure expectations of $237 million to $287 million.
Key near-term development and regulatory milestones included the FDA target action date of October 30, 2016 for sarilumab, the FDA review of a monthly Praluent dosing application with a January 24, 2017 target date, continued dupilumab regulatory activity, and progress in late-stage studies of fasinumab, REGN2810, REGN2222, and EYLEA indications.
The ODYSSEY OUTCOMES cardiovascular-outcomes trial for Praluent remained ongoing and was expected to complete in 2017. The interim futility review recommended continuation without changes, while Regeneron remained blinded to the results.
Regeneron and Sanofi were awaiting the final opinion and judgment in Amgen’s Praluent patent litigation, including a possible permanent injunction. Regeneron disclosed that it could not estimate a potential loss. Amgen also initiated related patent actions in the United Kingdom and Germany after quarter-end.
Other material legal matters included patent litigation involving the company’s antibody-generation technology, proceedings involving Genentech and City of Hope patents, and a shareholder derivative action concerning executive and director compensation. Potential losses were not estimable from the filing.
The company remained substantially dependent on EYLEA: U.S. EYLEA sales represented 67% of total revenue in the first half of 2016. Major risks include product concentration, reimbursement and pricing pressure, competition, regulatory approval and safety outcomes, manufacturing capacity and compliance, intellectual-property disputes, and reliance on Sanofi and Bayer.
Management highlighted substantial ongoing costs for late-stage clinical trials, product launches, manufacturing expansion, royalties, intellectual-property protection, and potential milestone or royalty payments under collaboration agreements.

Important facts for investors to verify

Whether U.S. EYLEA volume growth and Bayer’s international EYLEA profit contribution remain durable amid reimbursement and competitive pressures.
The outcome and timing of Amgen’s Praluent litigation, including any injunction, damages, or impact on commercialization.
FDA and international regulatory decisions for sarilumab, dupilumab, monthly-dose Praluent, and other late-stage candidates.
The eventual cardiovascular-outcomes results for Praluent and their effect on reimbursement and market adoption.
Whether the company’s expanded R&D, commercialization, and manufacturing spending produces sufficient pipeline and product returns to offset margin pressure.
Execution, cost, permitting, and regulatory progress at the Limerick, Tarrytown, and Rensselaer facilities.
Dependence on Sanofi, Bayer, key distributors, and collaborators, including the concentration of gross product revenue through Besse Medical.
Resolution of patent, shareholder, and other legal proceedings for which the filing states that potential losses cannot be estimated.