How dependent is Regeneron on EYLEA, and what are the main threats to it?

EYLEA is the company's dominant product, with U.S. net sales of $1,408.7 million in 2013 and ex-U.S. sales of $472.1 million through Bayer HealthCare, and it represented 67% of 2013 total revenue from U.S. sales alone. Its main threats are competition from Genentech's Lucentis and low-cost off-label repackaged Avastin, pricing and reimbursement pressure from Medicare, Medicaid and private payers, emerging competitors in wet AMD such as Fovista and Novartis's ESBA1008, and the possibility of importation of lower-priced drugs.

Why did net income decline in 2013 even though revenue and pre-tax income grew?

The 2012 result included a $335.8 million income tax benefit from releasing most of the deferred tax valuation allowance. In 2013 the company began recording a normal tax expense of $289.0 million, so net income fell to $424.4 million even though pre-tax income rose to $713.4 million. Investors should compare pre-tax income or the 2013 tax-normalized trajectory when assessing underlying profitability.

What are the most important near-term pipeline events for investors?

The most significant events include the FDA decision on EYLEA for diabetic macular edema, with a target date of August 18, 2014; EU review of the DME application; the BRVO indication, for which Bayer opted in during January 2014; the ODYSSEY Phase 3 program for alirocumab, a PCSK9 antibody for LDL reduction; and the SARIL-RA Phase 3 program for sarilumab in rheumatoid arthritis. The fasinumab pain program remains on FDA clinical hold.

How is Regeneron funding its research and development, and does Sanofi's support carry risk?

Sanofi funds up to $160 million per year of antibody discovery through 2017 and funds most development costs for antibodies it co-develops, with Regeneron paying 20% of Phase 3 costs after first positive Phase 3 results. Regeneron must reimburse Sanofi for a share of development costs from future profits, with a contingent obligation of about $879 million for antibodies and $446 million for ZALTRAP. Sanofi can terminate the antibody discovery agreement on three months' notice, subject to funding obligations, and the company depends heavily on Sanofi and Bayer HealthCare for commercialization outside the U.S.

Are there governance or ownership considerations that could affect shareholders?

Yes. Holders of the high-vote Class A stock (ten votes per share) held 17.1% of combined voting power at year-end 2013, and the four largest shareholders plus the CEO owned about 42.9% of outstanding shares. Sanofi held roughly 16.2% of common stock and has demand registration rights, with restrictions on sales until at least December 2020. Anti-takeover provisions include a staggered board, a blank-check preferred stock authorization, and standstill agreements with Sanofi and Bayer HealthCare.

REGN 10-K FY2013 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 13, 2014. Cited figures are marked; the original filing is the authoritative source.

Regeneron (REGN) closed 2013 with total revenues of $2,104.7 million^a, up 53% from $1,378.5 million in 2012, and net income of $424.4 million, or $3.81 per diluted share.

That compares with $750.3 million^b ($6.75 per diluted share) in 2012, which was inflated by a $335.8 million tax benefit from releasing most of the deferred tax valuation allowance. 2013 was the first year with a full tax provision: income tax expense was $289.0 million at a 40.5% effective rate, so pre-tax income actually rose to $713.4 million from $414.4 million. The company's growth is driven overwhelmingly by EYLEA, whose U.S. net product sales reached $1,408.7 million (up from $837.9 million), and whose ex-U.S. sales through Bayer HealthCare reached $472.1 million.

EYLEA accounted for 67% of 2013 total revenues in the U.S. alone, so the company remains heavily concentrated in a single product. The balance sheet strengthened considerably. Cash, cash equivalents, and marketable securities totaled $1,083.9 million^c at year-end 2013, up from $587.5 million, and stockholders' equity rose to $1,952.1 million.

Operating cash flow was $583.6 million^d, though receivables are growing quickly: net trade receivables reached $787.1 million because of extended payment terms offered to EYLEA customers, and the company shortened those terms effective January 2014. Operating expenses rose to $1,344.7 million, driven by R&D of $859.9 million and SG&A of $329.4 million, and non-cash stock compensation rose to $198.4 million. The company carries $400 million of 1.875% convertible senior notes due 2016.

Looking forward, the pipeline is broad, with 16 clinical-stage candidates. The most important near-term catalysts include the FDA decision on EYLEA for diabetic macular edema (target date August 18, 2014), the EU filing for DME, the BRVO indication (Bayer opted in January 2014), and Phase 3 readouts for alirocumab (PCSK9) and sarilumab (IL-6R), both partnered with Sanofi. Risks that investors should weigh include competition from Lucentis and off-label Avastin, reimbursement pressure, customer concentration (76% of gross product revenue went to one distributor), an FDA clinical hold on fasinumab, neurocognitive safety questions raised by the FDA for the PCSK9 class, and ongoing patent litigation.

02—Key points

Key Highlights

Total revenue rose 53% to $2,104.7 million in 2013, driven by EYLEA U.S. net product sales of $1,408.7 million (up from $837.9 million) and Bayer HealthCare collaboration revenue of $220.3 million (up from $70.1 million).
Net income fell to $424.4 million ($3.81 diluted EPS) from $750.3 million in 2012, but that prior year included a $335.8 million one-time tax benefit; pre-tax income rose to $713.4 million from $414.4 million.
Income tax expense of $289.0 million (40.5% effective rate) reflects the release of the valuation allowance in Q4 2012; management expects the effective rate to rise further in 2014, partly due to expiration of the federal research tax credit.
Cash, equivalents and marketable securities reached $1,083.9 million at year-end 2013, versus $587.5 million a year earlier, and operating cash flow was $583.6 million.
Heavy concentration risk: EYLEA represented 67% of 2013 total revenue from U.S. sales, and a single distributor (Besse Medical) accounted for 76% of gross U.S. product revenue.
Key 2014 catalysts include the FDA decision on EYLEA for DME (target August 18, 2014), EU DME review, the VIBRANT BRVO indication, and Phase 3 data for alirocumab (ODYSSEY program) and sarilumab (SARIL-RA program).
Receivables are rising quickly: net trade accounts receivable reached $787.1 million at year-end 2013 due to extended EYLEA payment terms, which the company has begun shortening in 2014.

03—One dollar

Follow one dollar

Of each $1.00 of revenue in FY2013, Regeneron Pharmaceuticals kept $0.20.

Revenue$2.10B100.0%100.0%
Cost of revenue−$118.0M5.6%5.6%
Gross profit$1.99B94.4%94.4%
Operating costs−$1.24B59.1%59.1%
Operating income$743.0M35.3%35.3%
Interest, other & tax−$329.3M15.6%15.6%
Net income$413.7M19.7%19.7%

10-KFY2013filed February 13, 2014Computed from this filing’s revenue, gross profit, operating income and net income · right columngrey figure: share of revenue

Where FY2013 revenue went

$2.10B

R&D: $859.9M, 41% of revenue
Net income: $413.7M, 20% of revenue
SG&A: $346.4M, 16% of revenue
Interest, other & tax: $329.3M, 16% of revenue
Cost of revenue: $118.0M, 5.6% of revenue
Other operating costs: $37.3M, 1.8% of revenue

Kept 20% as net income

Full revenue history →

04—Financials

Financial Highlights

10-KFY2013filed February 13, 2014

Revenue$2.10B94.4% Gross Margin Net Income$413.74M19.7% Net Margin EPS (Diluted)$3.72 Total Assets$2.95B Cash & Equivalents$535.61M Free Cash Flow$588.60M

Financial Statements

FY2013 against FY2012

Line item	FY2013FY2012	FY2012	Change
Revenue	$2.10B$1.38B	$1.38B	+52.7%
Cost of Revenue	$118.05M$83.93M	$83.93M	+40.7%
Gross Profit	$1.99B$1.29B	$1.29B	+53.5%
R&D Expenses	$859.95M$625.55M	$625.55M	+37.5%
SG&A Expenses	$346.39M$210.75M	$210.75M	+64.4%
Operating Expenses	$1.36B$920.76M	$920.76M	+47.9%
Operating Income	$743.05M$457.71M	$457.71M	+62.3%
Interest Expense	$46.44M$45.30M	$45.30M	+2.5%
Net Income	$413.74M$750.27M	$750.27M	−44.9%
EPS (Basic)	$4.23$7.92	$7.92	−46.6%
EPS (Diluted)	$3.72$6.75	$6.75	−44.9%
Shares Outstanding (Basic)	97.92M94.69M	94.69M	+3.4%
Shares Outstanding (Diluted)	111.29M115.38M	115.38M	−3.5%

05—Questions

Frequently Asked Questions

How dependent is Regeneron on EYLEA, and what are the main threats to it?
EYLEA is the company's dominant product, with U.S. net sales of $1,408.7 million in 2013 and ex-U.S. sales of $472.1 million through Bayer HealthCare, and it represented 67% of 2013 total revenue from U.S. sales alone. Its main threats are competition from Genentech's Lucentis and low-cost off-label repackaged Avastin, pricing and reimbursement pressure from Medicare, Medicaid and private payers, emerging competitors in wet AMD such as Fovista and Novartis's ESBA1008, and the possibility of importation of lower-priced drugs.
Why did net income decline in 2013 even though revenue and pre-tax income grew?
The 2012 result included a $335.8 million income tax benefit from releasing most of the deferred tax valuation allowance. In 2013 the company began recording a normal tax expense of $289.0 million, so net income fell to $424.4 million even though pre-tax income rose to $713.4 million. Investors should compare pre-tax income or the 2013 tax-normalized trajectory when assessing underlying profitability.
What are the most important near-term pipeline events for investors?
The most significant events include the FDA decision on EYLEA for diabetic macular edema, with a target date of August 18, 2014; EU review of the DME application; the BRVO indication, for which Bayer opted in during January 2014; the ODYSSEY Phase 3 program for alirocumab, a PCSK9 antibody for LDL reduction; and the SARIL-RA Phase 3 program for sarilumab in rheumatoid arthritis. The fasinumab pain program remains on FDA clinical hold.
How is Regeneron funding its research and development, and does Sanofi's support carry risk?
Sanofi funds up to $160 million per year of antibody discovery through 2017 and funds most development costs for antibodies it co-develops, with Regeneron paying 20% of Phase 3 costs after first positive Phase 3 results. Regeneron must reimburse Sanofi for a share of development costs from future profits, with a contingent obligation of about $879 million for antibodies and $446 million for ZALTRAP. Sanofi can terminate the antibody discovery agreement on three months' notice, subject to funding obligations, and the company depends heavily on Sanofi and Bayer HealthCare for commercialization outside the U.S.
Are there governance or ownership considerations that could affect shareholders?
Yes. Holders of the high-vote Class A stock (ten votes per share) held 17.1% of combined voting power at year-end 2013, and the four largest shareholders plus the CEO owned about 42.9% of outstanding shares. Sanofi held roughly 16.2% of common stock and has demand registration rights, with restrictions on sales until at least December 2020. Anti-takeover provisions include a staggered board, a blank-check preferred stock authorization, and standstill agreements with Sanofi and Bayer HealthCare.

06—Continue

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