01—Abstract
Summary
Summary of the 10-K filed February 15, 2013. Cited figures are marked; the original filing is the authoritative source.
Regeneron's FY2012 10-K shows a company that crossed into sustained profitability, driven almost entirely by the U.S. launch of EYLEA (aflibercept) for wet AMD.
Total revenue rose to $1,378.5 milliona in 2012 from $445.8 million in 2011, and net income was $750.3 million, or $6.75 per diluted share. Net product sales reached $858.1 million, of which EYLEA contributed $837.9 million. However, the headline earnings were inflated by a one-time $335.8 million income tax benefit from releasing most of the deferred tax valuation allowance, and by $75 million of substantive milestone payments.
Management explicitly warns that beginning in 2013 the company will record income tax expense near statutory rates, which will significantly reduce reported net income and EPS. Investors should weigh the quality of earnings carefully. Operating income of $457.7 millionb is the more representative measure of 2012 performance, though it still benefited from collaboration reimbursements from Sanofi and Bayer HealthCare.
Cash flow was weak: operating cash flow was negative $74.6 million, as trade receivables from EYLEA rose to $593.2 millionc following extended payment terms offered to customers. Cash, equivalents and marketable securities fell to $587.5 million from $810.6 million, and the company now carries $400 million of 1.875% convertible notes due 2016. Customer concentration is high, with 78% of gross product revenue going to one distributor, Besse Medical.
The pipeline and legal picture is mixed. Key late-stage programs include REGN727 (PCSK9, with the 22,000-patient ODYSSEY Phase 3 program), sarilumab (IL-6R, in Phase 3 for rheumatoid arthritis), and REGN668 (IL-4R). Setbacks include the July 2012 FDA Complete Response Letter for ARCALYST in gout, which was discontinued, the failed VENICE prostate trial for ZALTRAP, and REGN475 (anti-NGF) being placed on clinical hold again.
Ongoing patent litigation with Genentech over the Davis-Smyth patents and related European actions also carries risk. EYLEA's commercial trajectory versus Lucentis and off-label Avastin is the central variable for the investment thesis.
02—Key points
Key Highlights
- Total revenue of $1,378.5 million in 2012, up about 209% from $445.8 million in 2011, with net product sales of $858.1 million (EYLEA U.S. $837.9 million)
- Net income of $750.3 million ($6.75 diluted EPS), but inflated by a one-time $335.8 million income tax benefit from releasing the valuation allowance; operating income was $457.7 million
- Management expects to record income tax expense at near-statutory rates starting in 2013, which will materially reduce reported net income and EPS
- Operating cash flow was negative $74.6 million as EYLEA trade receivables rose to $593.2 million under extended customer payment terms
- Customer concentration risk: 78% of 2012 gross product revenue came from a single distributor, Besse Medical (AmerisourceBergen subsidiary)
- Pipeline catalysts include ODYSSEY Phase 3 program for REGN727 (PCSK9, over 22,000 patients), sarilumab Phase 3 in rheumatoid arthritis, and EYLEA label expansion in DME and BRVO
- Setbacks and risks: ARCALYST gout sBLA received a Complete Response Letter and gout development was discontinued; anti-NGF class placed on clinical hold; ongoing Genentech Davis-Smyth patent litigation
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Regeneron Pharmaceuticals kept $0.54.
- Revenue$1.38B100.0%
- Cost of revenue−$83.9M6.1%
- Gross profit$1.29B93.9%
- Operating costs−$836.8M60.7%
- Operating income$457.7M33.2%
- Interest, other & tax$292.6M21.2%
- Net income$750.3M54.4%
Where FY2012 revenue went
$1.38B- R&D: $625.6M, 45% of revenue
- Operating income: $457.7M, 33% of revenue
- SG&A: $210.8M, 15% of revenue
- Cost of revenue: $83.9M, 6.1% of revenue
Kept 33% as operating income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed February 15, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $1.38B$445.82M | +209.2% |
| Cost of Revenue | $83.93M$4.22M | +1890.7% |
| Gross Profit | $1.29B$441.61M | +193.1% |
| R&D Expenses | $625.55M$529.51M | +18.1% |
| SG&A Expenses | $210.75M$117.26M | +79.7% |
| Operating Expenses | $920.76M$650.98M | +41.4% |
| Operating Income | $457.71M-$205.16M | +323.1% |
| Interest Expense | $45.30M$21.28M | +112.9% |
| Net Income | $750.27M-$221.76M | +438.3% |
| EPS (Basic) | $7.92$-2.45 | +423.3% |
| EPS (Diluted) | $6.75$-2.45 | +375.5% |
| Shares Outstanding (Basic) | 94.69M90.61M | +4.5% |
| Shares Outstanding (Diluted) | 115.38M90.61M | +27.3% |
05—Questions
Frequently Asked Questions
Why did Regeneron report such a large net income in 2012 when it had losses in prior years?
The 2012 net income of $750.3 million was driven by EYLEA sales ramping after its November 2011 launch, $75 million of substantive milestone payments from collaborators, and a $335.8 million income tax benefit. The tax benefit came from releasing substantially all of the valuation allowance on deferred tax assets after the company achieved a cumulative three-year income position. This benefit is non-recurring in nature, so operating income of $457.7 million is a better gauge of underlying 2012 performance.
Will Regeneron's future earnings look like 2012's?
Probably not on a reported basis. Beginning in 2013, the company expects to record income tax expense at an estimated rate approximating statutory rates, which the filing says will significantly reduce net income and EPS relative to 2012. Future results will also depend on EYLEA growth, collaboration reimbursements from Sanofi and Bayer HealthCare, the pace of R&D spending, and the timing of milestone payments, which the company does not forecast.
How dependent is Regeneron on EYLEA?
Very dependent. EYLEA U.S. net sales were $837.9 million in 2012, the large majority of the company's revenue, and the filing describes the company as substantially dependent on that product. EYLEA faces competition from Lucentis and off-label Avastin, and its ex-U.S. sales are handled by Bayer HealthCare, with only $19.0 million recorded in 2012. Regulatory approval is limited to wet AMD and CRVO in the U.S., and any setback in these markets would materially affect results.
Why was operating cash flow negative despite record profits?
Net income included large non-cash items, including the $340.2 million deferred tax benefit. Working capital absorbed cash, mainly because trade accounts receivable for EYLEA increased to $593.2 million from $28.3 million, reflecting extended payment terms offered to customers at launch. The company collected $326.6 million of EYLEA receivables during 2012 and expects collections to increase in 2013. Cash, equivalents and marketable securities declined to $587.5 million, so liquidity should be monitored.
What are the main legal and regulatory risks flagged in the filing?
The most significant is the Genentech patent litigation over the Davis-Smyth patents, including a second case involving ZALTRAP, which could result in damages, licensing requirements, or restrictions on EYLEA outside the U.S. The company also has related patent actions in Germany, the UK, and Italy. On the regulatory side, the anti-NGF class of antibodies, including REGN475, is on FDA clinical hold, and the FDA issued a Complete Response Letter for ARCALYST in gout. Customer concentration and reliance on single-site manufacturing in Rensselaer, New York are also noted as operational risks.
06—Continue