REGENERON PHARMACEUTICALS, INC. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Refer to Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 (filed with theSEC onFebruary 7, 2019 ) for additional discussion of our financial condition and results of operations for the year endedDecember 31, 2017 , as well as our financial condition and results of operations for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 . Overview We are a fully integrated biotechnology company that discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious diseases. Our commercialized medicines and product candidates in development are designed to help patients with eye diseases, allergic and inflammatory diseases, cancer, cardiovascular and metabolic diseases, pain, infectious diseases, and rare diseases. As described in Part I, Item 1. "Business," we currently have seven products that have received marketing approval and 22 product candidates in clinical development, all of which were discovered in our research laboratories. Refer to Part I, Item 1. "Business" for a summary of our clinical programs. Our ability to generate profits and to generate positive cash flow from operations over the next several years depends significantly on the continued success in commercializing EYLEA and Dupixent. We expect to continue to incur substantial expenses related to our research and development activities, a portion of which we expect to be reimbursed by our collaborators. Also, our research and development activities outside our collaborations, the costs of which are not reimbursed, are expected to expand and require additional resources. We also expect to incur substantial costs related to the commercialization of EYLEA, Dupixent, and Libtayo. Our financial results may fluctuate from quarter to quarter and will depend on, among other factors, the net sales of our marketed products; the scope and progress of our research and development efforts; the timing of certain expenses; the continuation of our collaborations, in particular with Sanofi and Bayer, including our share of collaboration profits or losses from sales of commercialized products and the amount of reimbursement of our research and development expenses that we receive from collaborators; and the amount of income tax expense we incur, which is partly dependent on the profits or losses we earn in each of the countries in which we operate. We cannot predict whether or when new products or new indications for marketed products will receive regulatory approval or, if any such approval is received, whether we will be able to successfully commercialize such product(s) and whether or when they may become profitable. Critical Accounting Policies and Use of Estimates A summary of the significant accounting policies that impact us is provided in Note 1 to our Consolidated Financial Statements. The preparation of financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP") requires management to make estimates and assumptions that affect reported amounts and related disclosures in the financial statements. Management considers an accounting estimate to be critical if: • it requires an assumption (or assumptions) regarding a future outcome; and
• changes in the estimate or the use of different assumptions to prepare the
estimate could have a material effect on our results of operations or
financial condition.
Management believes the current assumptions used to estimate amounts reflected
in our Consolidated Financial Statements are appropriate. However, if actual
experience differs from the assumptions used in estimating amounts reflected in
our Consolidated Financial Statements, the resulting changes could have a
material adverse effect on our results of operations, and, in certain
situations, could have a material adverse effect on our liquidity and financial
condition. The critical accounting estimates that impact our Consolidated
Financial Statements are described below.
60--------------------------------------------------------------------------------
Table of Contents
Revenue Recognition
During the first quarter of 2018, we adopted Accounting Standards Codification
("ASC") 606, Revenue from Contracts with Customers. Under the terms of the new
standard, revenue is measured as the amount of consideration we expect to be
entitled to in exchange for transferring promised goods or providing services to
a customer, and is recognized when (or as) we satisfy performance obligations
under the terms of a contract.
Product Revenue
Product sales consist of U.S. net product sales of EYLEA, Libtayo, and ARCALYST.
We record revenue from product sales upon delivery to our distributors and
specialty pharmacies (collectively, our "customers"). Revenue from product sales
is recognized at a point in time when our customer is deemed to have obtained
control of the product, which generally occurs upon receipt by our customer.
The amount of revenue we recognize from product sales varies due to rebates,
chargebacks, and discounts provided under governmental and other programs,
distribution-related fees, and other sales-related deductions. In order to
determine the transaction price, we estimate, utilizing the expected value
method, the amount of variable consideration that we will be entitled to. This
estimate is based upon contracts with customers and government agencies,
statutorily-defined discounts applicable to government-funded programs,
historical experience, estimated payor mix, and other relevant factors.
Calculating these provisions involves estimates and judgments. We review our
estimates of rebates, chargebacks, and other applicable provisions each period
and record any necessary adjustments in the current period's net product sales.
Refer to the "Results of Operations - Revenues - Net Product Sales" section
below for further details regarding our provisions, and credits/payments, for
sales-related deductions.
Collaboration Revenue
We have entered into various agreements related to our activities to research,
develop, manufacture, and commercialize product candidates and utilize our
technology platforms. Depending on the terms of the arrangement, we may defer
the recognition of all or a portion of the consideration received because the
performance obligations are satisfied over time.
Our collaboration agreements may require us to deliver various rights, services,
and/or goods across the entire life cycle of a product or product candidate. In
agreements involving multiple goods or services promised to be transferred to a
customer, we must assess, at the inception of the contract, whether each promise
represents a separate performance obligation (i.e., is "distinct"), or whether
such promises should be combined as a single performance obligation.
At the inception of the contract, the transaction price reflects the amount of
consideration we expect to be entitled to in exchange for transferring promised
goods or services to our customer. We review our estimate of the transaction
price each period and make revisions to such estimates as necessary. In
arrangements where we satisfy performance obligation(s) during the development
phase over time, we recognize collaboration revenue over time typically using an
input method on the basis of our research and development costs incurred
relative to the total expected cost which determines the extent of our progress
toward completion. Due to the variability in the scope of activities and length
of time necessary to develop a drug product, potential delays in development
programs, changes to development plans and budgets as programs progress,
including if we and our collaborators decide to expand or contract our clinical
plans for a drug candidate in various disease indications, and uncertainty in
the ultimate requirements to obtain governmental approval for commercialization,
revisions to our estimates are likely to occur periodically, and could result in
material changes to the amount of revenue recognized each year in the future.
When we are entitled to reimbursement of all or a portion of the research and
development expenses that we incur under a collaboration, we record those
reimbursable amounts proportionately as we recognize our expenses. If the
collaboration is a cost-sharing arrangement in which both we and our
collaborator perform development work and share costs, we also recognize, as
research and development expense in the period when our collaborator incurs
development expenses, a portion of the collaborator's development expenses that
we are obligated to reimburse. Our collaborators provide us with estimated
development expenses for the most recent fiscal quarter. Our collaborators'
estimates are reconciled to their actual expenses for such quarter in the
subsequent fiscal quarter, and our portion of our collaborators' development
expenses that we are obligated to reimburse is adjusted on a prospective basis
accordingly, as necessary.
Under certain of our collaboration agreements, product sales and cost of sales
may be recorded by our collaborators as they are deemed to be the principal in
the transaction. We share in any profits or losses arising from the
commercialization of such products, and record our share of the variable
consideration, representing net product sales less cost of goods sold and shared
commercialization and other expenses, as collaboration revenue in the period in
which such underlying sales occur and costs are incurred by the collaborator.
Our collaborator provides us with our estimated share of the profits or losses
from commercialization of such products for the most recent fiscal quarter. Our
collaborators' estimates of profits or losses for such quarter are reconciled to
actual profits or losses in the subsequent fiscal quarter, and our share of the
profit or loss is adjusted on a prospective basis accordingly, as necessary.
61--------------------------------------------------------------------------------
Table of Contents
In arrangements where the collaborator records product sales, we may be obligated to use commercially reasonable efforts to supply commercial product to our collaborators and may be reimbursed for our manufacturing costs as commercial product is shipped to our collaborators; however, recognition of such cost reimbursements as collaboration revenue is deferred until the product is sold by our collaborators to third-party customers. Stock-based Compensation We recognize stock-based compensation expense for grants under our long-term incentive plans to employees and non-employee members of our board of directors based on the grant-date fair value of those awards. The grant-date fair value of an award is generally recognized as compensation expense over the award's requisite service period. We use the Black-Scholes model to compute the estimated fair value of stock option awards. Using this model, fair value is calculated based on assumptions with respect to (i) expected volatility of our Common Stock price, (ii) the periods of time over which employees and members of our board of directors are expected to hold their options prior to exercise (expected lives), (iii) expected dividend yield on our Common Stock, and (iv) risk-free interest rates, which are based on quotedU.S. Treasury rates for securities with maturities approximating the options' expected lives. Expected volatility has been estimated based on actual movements in our stock price over the most recent historical periods equivalent to the options' expected lives. Expected lives are principally based on our historical exercise experience with previously issued employee and board of directors option grants. The expected dividend yield is zero as we have never paid dividends and do not currently anticipate paying any in the foreseeable future. Stock-based compensation expense also includes an estimate, which is made at the time of grant, of the number of awards that are expected to be forfeited. This estimate is revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The assumptions used in computing the fair value of stock option awards reflect our best estimates but involve uncertainties related to market and other conditions, many of which are outside of our control. Changes in any of these assumptions may materially affect the fair value of stock option awards granted and the amount of stock-based compensation recognized in future periods. Income Taxes We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns, including deferred tax assets and liabilities for expected amounts of global intangible low-taxed income ("GILTI") inclusions. Deferred tax assets and liabilities are determined as the difference between the tax basis of assets and liabilities and their respective financial reporting amounts ("temporary differences") at enacted tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is established for deferred tax assets for which it is more likely than not that some portion or all of the deferred tax assets will not be realized. We periodically re-assess the need for a valuation allowance against our deferred tax assets based on all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, results of recent operations, and our historical earnings experience by taxing jurisdiction. Significant judgment is required in making this assessment. Uncertain tax positions, for which management's assessment is that there is more than a 50% probability of sustaining the position upon challenge by a taxing authority based upon its technical merits, are subjected to certain recognition and measurement criteria. Significant judgment is required in making this assessment, and, therefore, we re-evaluate uncertain tax positions and consider various factors, including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, and changes in facts or circumstances related to a tax position. We adjust the level of the liability to reflect any subsequent changes in the relevant facts and circumstances surrounding the uncertain positions. Inventories We capitalize inventory costs associated with our products prior to regulatory approval when, based on management's judgment, future commercialization is considered probable and the future economic benefit is expected to be realized; otherwise, such costs are expensed. The determination to capitalize inventory costs is based on various factors, including status and expectations of the regulatory approval process, any known safety or efficacy concerns, potential labeling restrictions, and any other impediments to obtaining regulatory approval. We periodically analyze our inventory levels to identify inventory that may expire prior to expected sale or has a cost basis in excess of its estimated realizable value, and write-down such inventories as appropriate. In addition, our products are subject to strict quality control and monitoring which we perform throughout the manufacturing process. If certain batches or units of product no longer meet quality specifications or become obsolete due to expiration, we record a charge to write down such unmarketable inventory to its estimated realizable value. 62
--------------------------------------------------------------------------------
Table of Contents
Contingencies
We accrue, based on management's judgment, for an estimated loss when the potential loss from claims or legal proceedings is considered probable and the amount can be reasonably estimated. As additional information becomes available, or, based on specific events such as the outcome of litigation or settlement of claims, we reassess the potential liability related to pending claims and litigation, and may change our estimates. Results of OperationsNet Income Year Ended December 31, (In millions, except per share data) 2019 2018 2017 Revenues$ 7,863.4 $ 6,710.8 $ 5,872.2 Operating expenses (5,653.6 ) (4,176.4 ) (3,792.6 ) Income from operations 2,209.8 2,534.4 2,079.6 Other income (expense), net 219.3 19.1 (1.1 ) Income before income taxes 2,429.1 2,553.5 2,078.5 Income tax expense (313.3 ) (109.1 ) (880.0 ) Net income$ 2,115.8 $ 2,444.4 $ 1,198.5
Net income per share - diluted
Revenues
Year Ended December 31, $ Change
(In millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Net product sales in the
United States:
EYLEA $ 4,644.2 $ 4,076.7 $ 3,701.9 $ 567.5 $ 374.8
Libtayo 175.7 14.8 - 160.9 14.8
ARCALYST 14.5 14.7 16.6 (0.2 ) (1.9 )
Sanofi and Bayer
collaboration revenue:
Sanofi 1,426.8 1,111.1 877.2 315.7 233.9
Bayer 1,188.8 1,076.7 938.1 112.1 138.6
Other revenue 413.4 416.8 338.4 (3.4 ) 78.4
Total revenues $ 7,863.4 $ 6,710.8 $ 5,872.2 $ 1,152.6 $ 838.6
Net Product Sales
Net product sales of EYLEA in the United States increased in 2019 compared to
2018 due to higher sales volume, partly offset by an increase in sales-related
deductions primarily due to higher rebates and discounts. On September 28, 2018 ,
the FDA approved Libtayo for the treatment of patients with metastatic or
locally advanced CSCC and sales commenced thereafter.
Revenue from product sales is recorded net of applicable provisions for rebates,
chargebacks, and discounts; distribution-related fees; and other sales-related
deductions. The following table summarizes the provisions, and credits/payments,
for sales-related deductions.
63
--------------------------------------------------------------------------------
Table of Contents
Rebates, Chargebacks, and Distribution- Other Sales-
(In millions) Discounts Related Fees Related Deductions Total
Balance as of December 31, 2016 $ 12.7 $ 29.5 $ 3.6 $ 45.8
Provisions 167.8 194.1 46.4 408.3
Credits/payments (150.6 ) (189.5 ) (28.7 ) (368.8 )
Balance as of December 31, 2017 29.9 34.1 21.3 85.3
Provisions 223.4 211.0 44.5 478.9
Credits/payments (212.2 ) (203.1 ) (57.5 ) (472.8 )
Balance as of December 31, 2018 41.1 42.0 8.3 91.4
Provisions 423.2 242.9 61.8 727.9
Credits/payments (384.0 ) (238.5 ) (40.7 ) (663.2 )
Balance as of December 31, 2019 $ 80.3 $ 46.4 $ 29.4 $ 156.1 Sanofi Collaboration Revenue
Year Ended December 31,
(In millions) 2019 2018 2017
Antibody:
Reimbursement of research and development
expenses - Discovery Agreement - - $ 130.0
Reimbursement of research and development
expenses - License and Collaboration Agreement $ 277.7 $ 265.3 378.4
Reimbursement of commercialization-related
expenses(1) 479.9 417.2 368.8
Reimbursement for manufacturing of commercial
supplies(2) 206.7 127.6 35.1
Regeneron's share of profits (losses) in
connection with commercialization of antibodies 209.3 (227.0 ) (442.6 )
Other (1.5 ) (24.1 ) 84.0
Total Antibody 1,172.1 559.0 553.7
Immuno-oncology:
Reimbursement of research and development
expenses - Discovery Agreement 54.1 154.4 138.8
Reimbursement of research and development
expenses - License and Collaboration Agreement 108.9 157.4 101.2
Reimbursement of commercialization-related
expenses(1) 10.3 8.9 7.0
Amounts recognized in connection with up-front
payments received 92.7 243.8 80.0
Other (11.3 ) (12.4 ) (3.5 )
Total Immuno-oncology 254.7 552.1 323.5
Total Sanofi collaboration revenue $ 1,426.8 $
1,111.1
(1) The corresponding commercialization-related costs incurred by us are recorded within Selling, general and administrative expense. (2) The corresponding costs incurred by us in connection with such production is recorded within Cost of collaboration and contract manufacturing.
Antibody
The Company's Discovery and Preclinical Development Agreement ("Antibody
Discovery Agreement") with Sanofi ended on December 31, 2017 without any
extension and, therefore, there was no further funding from Sanofi under the
Antibody Discovery Agreement after 2017.
"Reimbursement of commercialization-related expenses" in the table above
represents reimbursement of internal and external costs incurred by Regeneron in
connection with commercializing Dupixent, Praluent, and Kevzara.
64--------------------------------------------------------------------------------
Table of Contents
Regeneron's share of profits (losses) in connection with the commercialization of Dupixent, Praluent, and Kevzara is summarized below:
Year Ended December 31,
(In millions) 2019 2018 2017
Dupixent, Praluent, and Kevzara net product sales*$ 2,811.0 $ 1,325.4 $ 464.5 Regeneron's share of collaboration profits (losses) 233.0 (227.0 ) (442.6 ) Reimbursement of development expenses incurred by Sanofi in accordance with Regeneron's payment obligation (23.7 ) - - Regeneron's share of profits (losses) in connection with commercialization of antibodies$ 209.3 $ (227.0
)
Regeneron's share of collaboration profits as a percentage of Dupixent, Praluent, and Kevzara net product sales 7 % ** **
* Global net product sales of Dupixent, Praluent, and Kevzara are recorded by Sanofi ** Percentage not meaningful
We and Sanofi share commercial expenses related to Dupixent, Praluent, and Kevzara in accordance with the companies' License and Collaboration Agreement. As such, during the same periods in which we recorded reimbursements from Sanofi related to our commercialization expenses, we also recorded our share of combined profits/losses in connection with the companies' commercialization of Dupixent, Praluent, and Kevzara within Sanofi collaboration revenue. During 2019, Sanofi collaboration revenues in connection with commercialization of antibodies increased, compared to 2018, primarily due to our share of higher Dupixent profits. See Part I, Item 1. "Business - Marketed Products" for a summary of global net product sales recorded by Sanofi in connection with our Antibody License and Collaboration Agreement. InDecember 2019 , we and Sanofi announced our intent to restructure the antibody collaboration for Kevzara and Praluent; completion of the proposed arrangement is expected to be finalized in the first quarter of 2020. Refer to Part I, Item 1. "Business - Collaboration Agreements - Collaborations with Sanofi - Antibody" for further details. Immuno-Oncology Sanofi's reimbursement of immuno-oncology research and development costs under our IO Discovery Agreement decreased in 2019, compared to 2018 and 2017, due to the impact of the Amended IO Discovery Agreement (see Part I, Item 1. "Business - Collaboration Agreements - Collaborations with Sanofi - Immuno-Oncology for further details). In 2018, we also recorded cumulative catch-up adjustments to revenue of$135.0 million (included in "Amounts recognized in connection with up-front payments received" in the Sanofi collaboration revenue table above) arising from changes in the estimate of the stage of completion of the collaborations' immuno-oncology programs, primarily in connection with the Amended IO Discovery Agreement. Bayer Collaboration Revenue Year Ended December 31, (In millions) 2019 2018 2017 Regeneron's net profit in connection with commercialization of EYLEA outside the United States$ 1,091.4 $ 992.3 $ 802.3 Reimbursement of development expenses 23.0 10.8
31.1
Other 74.4 73.6
104.7
Total Bayer collaboration revenue$ 1,188.8 $ 1,076.7
Bayer records net product sales of EYLEA outside
65--------------------------------------------------------------------------------
Table of Contents
Year Ended December 31,
(In millions) 2019 2018 2017
EYLEA net product sales outside the United
States $ 2,897.4 $ 2,668.9 $ 2,226.9
Regeneron's share of collaboration profit from
sales outside the United States $ 1,148.0 $ 1,045.9 $ 856.1
Reimbursement of development expenses incurred
by Bayer in accordance with Regeneron's
payment obligation (56.6 ) (53.6 ) (53.8 )
Regeneron's net profit in connection with
commercialization of EYLEA outside the United
States $ 1,091.4 $ 992.3
Regeneron's net profit as a percentage of
EYLEA net product sales outside the United
States 38 % 37 % 36 %
Other Revenue
Year Ended December 31,
(In millions) 2019 2018 2017
Teva collaboration revenue:
Reimbursement of research and development expenses $ 122.9 $ 129.5 $ 115.1
Other 83.6 115.1 106.4
Total Teva collaboration revenue 206.5 244.6 221.5
Other revenue 206.9 172.2 116.9
Total other revenue $ 413.4 $ 416.8 $ 338.4
In addition to Teva collaboration revenue (which is earned in connection with
the development of fasinumab), "Other revenue" in the table above includes, but
is not limited to:
• recognition of a portion of deferred revenue from up-front and other
payments received from MTPC in connection with our fasinumab
collaboration;
• Sanofi's reimbursement for manufacturing commercial supplies of ZALTRAP
and a percentage of aggregate net sales of ZALTRAP under the terms of the
Amended ZALTRAP Agreement;
• royalties in connection with a
which we receive royalties on worldwide sales of Novartis' Ilaris®
(canakinumab). The royalty rates in the agreement start at 4% and reach
15% when annual sales exceed $1.5 billion , and we are entitled to
royalties until Novartis ceases sale of products subject to royalty;
• recognition of revenue in connection with our agreements with BARDA
related to REGN-EB3 for the treatment of Ebola;
• recognition of revenue in connection with sequencing of samples by the RGC
for its customers.
Other revenue of
66--------------------------------------------------------------------------------
Table of Contents
Expenses
Year Ended December 31, $ Change
(In millions, except
headcount data) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Research and development $ 3,036.6 $ 2,186.1 $ 2,075.1 $ 850.5 $ 111.0
Selling, general, and
administrative 1,834.8 1,556.2 1,320.4 278.6 235.8
Cost of goods sold(1) 362.3 180.0 202.5 182.3 (22.5 )
Cost of collaboration and
contract manufacturing(2) 419.9 254.1 194.6 165.8 59.5
Total operating expenses $ 5,653.6 $ 4,176.4 $ 3,792.6 $ 1,477.2 $ 383.8
Average headcount 7,773 6,906 5,780 867 1,126
(1) Cost of goods sold includes costs in connection with producing commercial supplies for products that are sold
by Regeneron in the United States (i.e., EYLEA, Libtayo, and ARCALYST) and any royalties we are obligated to pay
on such sales, period costs for our Limerick manufacturing facility, and amounts we are obligated to pay to
Sanofi for its share of Libtayo U.S. gross profits.
(2) Cost of collaboration and contract manufacturing primarily includes costs we incur in connection with
producing commercial drug supplies for Sanofi and Bayer.
Operating expenses in 2019, 2018, and 2017 included a total of $464.3 million ,
$427.4 million , and $507.3 million , respectively, of non-cash compensation
expense related to awards granted under our long-term incentive plans. Non-cash
compensation expense in 2019 and 2018 benefited from a revision in our estimate
of the number of stock options that were expected to be forfeited. As of
December 31, 2019 , unrecognized non-cash compensation expense related to
outstanding stock options and unvested restricted stock was $521.9 million and
$274.6 million , respectively. We expect to recognize this non-cash compensation
expense related to stock options and restricted stock over weighted-average
periods of 1.9 years and 3.4 years, respectively.
Research and Development Expenses
The following table summarizes our estimates of direct research and development
expenses by clinical development program and other significant categories of
research and development expenses. Direct research and development expenses are
comprised primarily of costs paid to third parties for clinical and product
development activities, including costs related to preclinical research
activities, clinical trials, and the portion of research and development
expenses incurred by our collaborators that we are obligated to reimburse.
Indirect research and development expenses have not been allocated directly to
each program, and primarily consist of costs to compensate personnel, overhead
and infrastructure costs to maintain our facilities, and other costs related to
activities that benefit multiple projects. Clinical manufacturing costs
primarily consist of costs to manufacture bulk drug product for clinical
development purposes as well as related external drug filling, packaging, and
labeling costs. Clinical manufacturing costs also includes pre-launch commercial
supplies which did not meet the criteria to be capitalized as inventory (see
"Critical Accounting Policies and Use of Estimates - Inventories" above).
67--------------------------------------------------------------------------------
Table of Contents
Year Ended December 31, $ Change
(In millions) 2019 2018* 2017* 2019 vs. 2018 2018 vs. 2017
Direct research and
development expenses:
Fasinumab $ 203.4 $ 174.3 $ 123.0 $ 29.1 $ 51.3
Libtayo (cemiplimab) 160.8 129.4 84.7 31.4 44.7
Dupixent (dupilumab) 104.3 102.9 142.3 1.4 (39.4 )
EYLEA 55.4 28.8 30.7 26.6 (1.9 )
Praluent (alirocumab) 42.6 59.9 80.1 (17.3 ) (20.2 )
Evinacumab 36.1 21.9 14.3 14.2 7.6
Up-front payments related to
license and collaboration
agreements 430.0 - 25.0 430.0 (25.0 )
Other product candidates in
clinical development and other
research programs 277.0 166.2 206.3 110.8 (40.1 )
Total direct research and
development expenses 1,309.6 683.4 706.4 626.2 (23.0 )
Indirect research and
development expenses:
Payroll and benefits 705.8 607.0 579.0 98.8 28.0
Lab supplies and other
research and development costs 119.9 95.4 63.4 24.5 32.0
Occupancy and other operating
costs 304.7 246.3 203.0 58.4 43.3
Total indirect research and
development expenses 1,130.4 948.7 845.4 181.7 103.3
Clinical manufacturing costs 596.6 554.0 523.3
42.6 30.7
Total research and development
expenses $ 3,036.6 $ 2,186.1 $ 2,075.1 * Certain prior year amounts have been reclassified to conform to the current year's presentation.
Research and development expenses in 2019 included a$400.0 million up-front payment to Alnylam (see Part I, Item 1. "Collaboration Agreements - Collaboration with Alnylam" for further information). Research and development expenses included non-cash compensation expense of$250.4 million ,$229.0 million , and$271.9 million in 2019, 2018, and 2017, respectively. There are numerous uncertainties associated with drug development, including uncertainties related to safety and efficacy data from each phase of drug development, uncertainties related to the enrollment and performance of clinical trials, changes in regulatory requirements, changes in the competitive landscape affecting a product candidate, and other risks and uncertainties described in Part I, Item 1A. "Risk Factors." There is also variability in the duration and costs necessary to develop a pharmaceutical product, potential opportunities and/or uncertainties related to future indications to be studied, and the estimated cost and scope of the projects. The lengthy process of seeking FDA and other applicable approvals, and subsequent compliance with applicable statutes and regulations, require the expenditure of substantial resources. Any failure by us to obtain, or delay in obtaining, regulatory approvals could materially adversely affect our business. We are unable to reasonably estimate if our product candidates in clinical development will generate material product revenues and net cash inflows. Selling, General, and Administrative Expenses Selling, general, and administrative expenses increased in 2019, compared to 2018, primarily due to higher headcount and headcount-related costs, an increase in commercialization-related expenses for Dupixent and EYLEA, additional accruals for loss contingencies associated with ongoing litigation, and higher contributions to independent not-for-profit patient assistance organizations. In addition, in the fourth quarter of 2019, we recorded a$35.2 million charge related to employee separation costs, as the Company has eliminated certain commercialization activities and related headcount in connection with the proposed restructuring of the antibody agreement with Sanofi (as described in Part I, Item 1. "Business - Collaboration Agreements - Collaborations with Sanofi - Antibody"). Selling, general, and administrative expenses also included$167.7 million ,$169.2 million , and$208.4 million of non-cash compensation expense in 2019, 2018, and 2017, respectively. 68
--------------------------------------------------------------------------------
Table of Contents
Cost of Goods Sold Cost of goods sold increased in 2019, compared to 2018, primarily due to Libtayo sales inthe United States , including (i) our obligation to pay Sanofi its share of Libtayo U.S.gross profits and (ii) third-party royalties. In addition, Cost of goods sold for the years endedDecember 31, 2019 and 2018 included inventory write-downs and reserves totaling$73.8 million and$12.5 million , respectively. Cost of Collaboration and Contract Manufacturing The increase in Cost of collaboration and contract manufacturing in 2019, compared to 2018, was primarily due to the recognition of manufacturing costs associated with higher sales of Dupixent. Other Income (Expense) Other income (expense), net, was positively impacted in 2019 by the recognition of unrealized gains on equity securities. Other income (expense), net, in 2019, compared to 2018, was also positively impacted by increased interest income earned on available-for-sale debt securities primarily due to higher average investment balances. In the first quarter of 2018, we adopted Accounting Standards Update ("ASU") 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which requires us to measure equity investments at fair value with changes in fair value recognized in net income; previously, such changes in fair value were recognized in Other comprehensive income (loss). Income Taxes Year Ended December 31, (In millions, except effective tax rate) 2019 2018 2017 Income tax expense$ 313.3 $ 109.1 $ 880.0 Effective tax rate 12.9 % 4.3 % 42.3 % Our effective tax rate for 2019 was positively impacted, compared to theU.S. federal statutory rate, primarily by federal tax credits for research activities, stock-based compensation, and the foreign-derived intangible income deduction. Our effective tax rate for 2018 was positively impacted, compared to theU.S. federal statutory rate, primarily by the sale of non-inventory related assets between foreign subsidiaries (for which we recorded a$162.1 million net income tax benefit), and, to a lesser extent, the federal tax credit for research activities, stock-based compensation, income earned in foreign jurisdictions with tax rates lower than theU.S. federal statutory rate, and tax planning in connection with the bill known as the "Tax Cuts and Jobs Act" (the "Act") (as further described below). InDecember 2017 , the Act was signed into law. The Act, which became effective with respect to most of its provisions as ofJanuary 1, 2018 , included a number of provisions that impact us, including reducing theU.S. federal corporate income tax rate from 35% to 21%, changing the taxation of foreign earnings (including taxation of certain global intangible low-taxed income), allowing for a foreign-derived intangible income deduction and immediate expensing of the cost for qualified assets, repealing the deduction for domestic manufacturing, and imposing further limitations on the deductibility of executive compensation. As a result of the Act being signed into law, we recognized a provisional charge of$326.2 million in the fourth quarter of 2017 related to the re-measurement of ourU.S. net deferred tax assets at the lower enacted corporate tax rate. The provisional charge recorded in the fourth quarter of 2017 was an estimate and was subject to further analysis, interpretation, and clarification of the Act. During 2018, we recorded an income tax benefit of$68.0 million as a final adjustment to the provisional amount recorded as ofDecember 31, 2017 . 69
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Our financial condition is summarized as follows:
As of December 31,
(In millions) 2019 2018 $ Change
Financial assets:
Cash and cash equivalents
$ 6,471.1 $ 4,564.9 $ 1,906.2 Working capital: Current assets$ 7,689.1 $ 6,447.6 $ 1,241.5 Current liabilities 2,096.6 1,442.8 653.8$ 5,592.5 $ 5,004.8 $ 587.7 As ofDecember 31, 2019 , we also had borrowing availability of$750.0 million under a revolving credit facility (see further description under "Credit Facility" below). Sources and Uses of Cash for the Years EndedDecember 31, 2019 , 2018, and 2017 Year Ended December 31, $ Change (In millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Cash flows provided by operating activities$ 2,430.0 $ 2,195.1 $ 1,307.1 $ 234.9 $ 888.0 Cash flows used in investing activities$ (2,027.8 ) $ (1,463.0 ) $ (1,005.2 ) $ (564.8 ) $ (457.8 ) Cash flows used in financing activities$ (252.1 ) $ (77.1 ) $
(24.4 )
Cash Flows from Operating Activities 2019 Our net income of$2.116 billion in 2019 was negatively impacted by an up-front payment of$400.0 million made to Alnylam pursuant to our collaboration agreement. Our net income in 2019 was impacted by several non-cash items, including unrealized gains (net) on equity securities and inventory write-downs and reserves (see "Results of Operations" above), as well as the impact of Sanofi satisfying its Libtayo development funding obligation in shares of Regeneron stock (see "Sanofi Funding of Certain Development Costs" below). Deferred taxes as ofDecember 31, 2019 increased by$130.6 million , compared toDecember 31, 2018 , primarily due to the tax treatment of the up-front payment made to Alnylam and non-cash compensation expense. Deferred revenue as ofDecember 31, 2019 increased compared toDecember 31, 2018 partially due to the impact of the receipt of a$461.9 million payment from Sanofi in connection with the termination of the 2015 IO Discovery Agreement (as described in Part I, Item 1. "Collaboration Agreements - Collaborations with Sanofi - Immuno-Oncology"). 2018 Our net income of$2.444 billion in 2018 included the recognition of cumulative catch-up adjustments of$135.0 million within revenue primarily in connection with the termination of the 2015 IO Discovery Agreement and other non-cash items, including$75.8 million in connection with Sanofi satisfying its Libtayo development funding obligation in shares of Regeneron stock and$41.9 million related to unrealized losses (net) on equity securities. Deferred tax assets as ofDecember 31, 2018 increased by$140.0 million , compared toDecember 31, 2017 , primarily due to the impact of the Company's sale of non-inventory related assets between foreign subsidiaries. Cash Flows from Investing Activities In 2019, we purchased$400.0 million of Alnylam common stock in connection with entering into the collaboration agreement. Capital expenditures in 2019 included costs associated with the expanding our manufacturing facilities inRensselaer, New York and Limerick,Ireland , including the initiation of the construction of a fill/finish facility. 70
--------------------------------------------------------------------------------
Table of Contents
We expect to incur capital expenditures of$520 million to$620 million in 2020 primarily in connection with the continued expansion of our manufacturing facilities, including the fill/finish facility and equipment, and laboratory expansion and renovations at ourTarrytown, New York facilities. Cash Flows from Financing Activities During 2019, we paid an aggregate of$275.9 million to purchase shares of our Common Stock. See further descriptions under "Share Repurchase Program" and "Sanofi Funding of Certain Development Costs" below. Credit Facility InDecember 2018 , we entered into an agreement with a syndicate of lenders (the "Credit Agreement") which provides for a$750.0 million senior unsecured five-year revolving credit facility (the "Credit Facility"), and contemporaneously terminated our then-existing credit agreement (the "Prior Credit Agreement"). The Credit Agreement was entered into on terms substantially similar to those of the Prior Credit Agreement. No borrowings were outstanding under the Prior Credit Agreement at the time of its termination. The Credit Agreement includes an option for us to elect to increase the commitments under the Credit Facility and/or to enter into one or more tranches of term loans in the aggregate principal amount of up to$250.0 million , subject to the consent of the lenders providing the additional commitments or term loans, as applicable, and certain other conditions. Proceeds of the loans under the Credit Facility may be used to finance working capital needs, and for general corporate or other lawful purposes, of Regeneron and its subsidiaries. The Credit Agreement also provides a$50.0 million sublimit for letters of credit. The Credit Agreement includes an option for us to elect to extend the maturity date of the Credit Facility beyondDecember 2023 , subject to the consent of the extending lenders and certain other conditions. Amounts borrowed under the Credit Facility may be prepaid, and the commitments under the Credit Facility may be terminated, at any time without premium or penalty. We had no borrowings outstanding under the Credit Facility as ofDecember 31, 2019 . The Credit Agreement contains financial and operating covenants. Financial covenants include a maximum total leverage ratio and a minimum interest expense coverage ratio. We were in compliance with all covenants of the Credit Facility as ofDecember 31, 2019 . Share Repurchase Program InNovember 2019 , our board of directors authorized a share repurchase program to repurchase up to$1.0 billion of our Common Stock. The share repurchase program permits the Company to effect repurchases through a variety of methods, including open-market transactions (including pursuant to a trading plan adopted in accordance with Rule 10b5-1 of the Exchange Act), privately negotiated transactions, accelerated share repurchases, block trades, and other transactions in compliance with Rule 10b-18 of the Exchange Act. Repurchases may be made from time to time at management's discretion, and the timing and amount of any such repurchases will be determined based on share price, market conditions, legal requirements, and other relevant factors. The program has no time limit and can be discontinued at any time. There can be no assurance as to the timing or number of shares of any repurchases in the future. We plan to finance the share repurchase program with available cash. During 2019, we repurchased 722,596 shares of our Common Stock under the program and recorded the cost of the shares received, or$254.0 million , asTreasury Stock. Sanofi Funding of Certain Development Costs As described in Part I, Item 1. "Business - Collaborations - Collaborations with Sanofi," effectiveJanuary 7, 2018 , we have agreed to allow Sanofi to satisfy in whole or in part its funding obligations with respect to Libtayo development and/or Dupilumab/REGN3500 Eligible Investments by selling up to an aggregate of 1,400,000 shares (of which 869,828 shares remain available to be sold as ofDecember 31, 2019 ) of our Common Stock directly or indirectly owned by Sanofi. During 2019, Sanofi elected to sell, and we elected to purchase (by issuing a credit towards the amount owed by Sanofi), 210,733 shares of the Company's Common Stock to satisfy Sanofi's funding obligation related to Libtayo development costs. Consequently, we recorded$73.3 million related to the shares received as Treasury Stock during 2019. In addition, during 2019, Sanofi elected to sell, and we elected to purchase (in cash), 93,286 shares of the Company's Common Stock in connection with Sanofi's funding obligation for Dupilumab/REGN3500 Eligible Investments. Consequently, we recorded the cost of the shares received, or$29.4 million , as Treasury Stock during 2019. 71
--------------------------------------------------------------------------------
Table of Contents
Tarrytown, New York Leases We lease laboratory and office facilities inTarrytown, New York (the "Facility"). In 2016, we entered into a Purchase Agreement with the then lessor, pursuant to which we agreed to purchase the Facility for a purchase price of$720.0 million . InMarch 2017 , we entered into a Participation Agreement withBanc of America Leasing & Capital LLC ("BAL"), as lessor, and a syndicate of lenders (collectively, the "Lease Participants"), which provided for lease financing in connection with the acquisition by BAL of the Facility and our lease of the Facility from BAL. InMarch 2017 , we assigned our right to take title to the Facility under the Purchase Agreement to BAL, and the Lease Participants advanced$720.0 million , which was used by BAL to finance the purchase price for the Facility. Concurrent with entering into the Participation Agreement, we also entered into a lease agreement (the "Lease") for the Facility with BAL for a five-year term. The Lease requires us to pay all maintenance, insurance, taxes, and other costs arising out of the use of the Facility. We are also required to make monthly payments of basic rent during the term of the Lease in an amount equal to a variable rate per annum based on the one-month LIBOR, plus an applicable margin that varies with our debt rating and total leverage ratio. The Participation Agreement and the Lease include an option for us to elect to extend the maturity date of the Participation Agreement and the term of the Lease for an additional five-year period, subject to the consent of all the Lease Participants and certain other conditions. We also have the option prior to the end of the term of the Lease to (a) purchase the Facility by paying an amount equal to the outstanding principal amount of the Lease Participants' advances under the Participation Agreement, all accrued and unpaid interest and yield thereon, and all other outstanding amounts under the Participation Agreement, the Lease, and certain related documents or (b) sell the Facility to a third party on behalf of BAL. The advances under the Participation Agreement mature, and all amounts outstanding thereunder will become due and payable in full at the end of the term of the Lease. The Participation Agreement and the Lease contain financial and operating covenants, which are substantially similar to the covenants set forth in our Credit Facility. We were in compliance with all covenants of the Participation Agreement and the Lease as ofDecember 31, 2019 . Funding Requirements The amount required to fund operations will depend on various factors, including revenues from net product sales, the potential regulatory approval and commercialization of our product candidates and the timing thereof, the status of competitive products, the success of our research and development programs, the potential future need to expand our professional and support staff and facilities, the status of patents and other intellectual property rights (and future litigation related thereto), the delay or failure of a clinical trial of any of our potential drug candidates, and the continuation, extent, and success of our collaborations (in particular those with Sanofi and Bayer). We believe that our existing capital resources, borrowing availability under the Credit Facility, funds generated by anticipated EYLEA and Dupixent net product sales, and, as described above under Part I, Item 1. "Business - Collaborations," funding for reimbursement of research and development costs that we are entitled to receive under our collaboration agreements, will enable us to meet our anticipated operating needs for the foreseeable future. The following table summarizes our contractual obligations as ofDecember 31, 2019 . Payments Due by Period Less than one Greater than 5 (In millions) Total year 1 to 3 years 3 to 5 years years Purchase and other obligations(1)$ 2,384.8 $ 1,485.2 $ 636.7 $ 228.6 $ 34.3 Operating and finance lease obligations(2) 75.6 29.8 37.2 4.3 4.3
Total contractual obligations
673.9
(1) Primarily includes research and development commitments, including those related to clinical trials, and capital expenditures. Our obligation to pay certain of these amounts may increase or be reduced based on relevant future events. (2) Includes rent payments with respect to finance lease obligations in connection with our property leases inTarrytown, New York , as described under "Tarrytown, New York Leases" above and Note 11 to our Consolidated Financial Statements. Amounts in the table above exclude the purchase price we would be obligated to pay if we were to exercise our option to purchase the Facility. Liabilities for unrecognized tax benefits, totaling$210.8 million atDecember 31, 2019 , are not included in the table of contractual obligations above as, due to their nature, there is a high degree of uncertainty regarding the period of potential future cash settlement with taxing authorities. See Note 15 to our Consolidated Financial Statements. We expect continued increases in our expenditures, particularly in connection with our research and development activities (including preclinical and clinical programs). The amount of funding that will be required for our clinical programs depends upon the results of our research and preclinical programs and early-stage clinical trials, regulatory requirements, the duration and results of clinical 72
--------------------------------------------------------------------------------
Table of Contents
trials underway and of additional clinical trials that we decide to initiate, and the various factors that affect the cost of each trial. Under certain collaboration agreements, the amount of funding for reimbursement of research and development costs that we are entitled to receive is capped at a specified amount; therefore, we may elect to independently fund certain research and development costs in excess of such capped amounts. Clinical trial costs are dependent, among other things, on the size and duration of trials (for example, we have several ongoing late-stage clinical trials which are large and for which we expect to incur significant costs), fees charged for services provided by clinical trial investigators and other third parties, the costs for manufacturing the product candidate for use in the trials, and for supplies, laboratory tests, and other expenses. We anticipate continuing to incur substantial commercialization costs for EYLEA, Dupixent, and Libtayo. Commercialization costs over the next few years will depend on, among other things, the market potential for product candidates, whether commercialization costs are shared with a collaborator, and regulatory approval of additional product candidates. We expect that expenses related to the filing, prosecution, defense, and enforcement of patents and other intellectual property will be substantial. We enter into research collaboration and licensing agreements that may require us to pay (i) amounts upon the achievement of various development and commercial milestones, which, in the aggregate, could be significant, and/or (ii) royalties calculated based on a percentage of net product sales. The payment of these amounts, however, is contingent upon the occurrence of various future events, which have a high degree of uncertainty of occurring and for which the specific timing cannot be predicted. Because of these factors, such payments are not included in the table of contractual obligations above. See Note 3 and Note 11 to our Consolidated Financial Statements. Under our Antibody and IO Collaborations with Sanofi and our collaboration with Bayer for EYLEA outsidethe United States , we and our collaborator share profits and losses in connection with commercialization of drug products. Profits or losses under each collaboration are measured by calculating net sales less cost of goods sold and shared commercialization and other expenses. If the applicable collaboration is profitable, we have contingent contractual obligations to reimburse Sanofi and Bayer for a defined percentage (generally 50%) of agreed-upon development expenses funded by Sanofi and Bayer. These reimbursements are deducted each quarter, in accordance with a formula, from our share of the collaboration profits (and, for our EYLEA collaboration with Bayer, inclusive of our percentage on product sales inJapan ) otherwise payable to us, unless, in the case of EYLEA, we elect to reimburse these expenses at a faster rate. As ofDecember 31, 2019 , our contingent reimbursement obligation to Bayer for EYLEA was approximately$270 million and our contingent reimbursement obligation to Sanofi in connection with the companies' Antibody Collaboration and IO Collaboration was approximately$2.990 billion and$75 million , respectively. Therefore, we expect that, for the foreseeable future, a portion of our share of profits from sales under our collaborations with Bayer and Sanofi will be used to reimburse our collaborators for these obligations. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our consolidated financial position or results of operations. Future Impact of Recently Issued Accounting Standards See Note 1 to our Consolidated Financial Statements for a summary of recently issued accounting standards. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk Our earnings and cash flows are subject to fluctuations due to changes in interest rates, principally in connection with our investments in marketable securities, which consist primarily of corporate bonds, direct obligations of theU.S. government and its agencies and other debt securities guaranteed by theU.S. government, and municipal bonds. We do not believe we are materially exposed to changes in interest rates related to our investments, and we do not currently use interest rate derivative instruments to manage exposure to interest rate changes of our investments. We estimate that a 100 basis point, or 1%, unfavorable change in interest rates would have resulted in approximately a$48.6 million and$27.7 million decrease in the fair value of our investment portfolio as ofDecember 31, 2019 and 2018, respectively. 73
--------------------------------------------------------------------------------
Table of Contents
We have exposure to market risk for changes in interest rates, including the interest rate risk relating to ourMarch 2017 variable rateTarrytown, New York lease (as described in Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources -Tarrytown, New York Leases"). Our interest rate exposure is primarily offset by our investments in marketable securities. In addition, we further manage our interest rate exposure related to our variable rate lease through the use of derivative instruments. All of our derivative instruments are utilized for risk management purposes and are not used for trading or speculative purposes. We continue to monitor our interest rate risk and may utilize additional derivative instruments and/or other strategies in the future to further mitigate our interest rate exposure. We have hedged a portion of our floating interest rate exposure using interest rate swap and interest rate cap contracts. We estimate that a 100 basis point, or 1%, unfavorable change in interest rates would not have a material impact on the fair value of our interest rate swap or interest rate cap contracts. Credit Quality Risk We have an investment policy that includes guidelines on acceptable investment securities, minimum credit quality, maturity parameters, and concentration and diversification. Nonetheless, deterioration of the credit quality of an investment security subsequent to purchase may subject us to the risk of not being able to recover the full principal value of the security. In 2019, 2018, and 2017, we did not record any charges for other-than-temporary impairments of our available-for-sale debt securities. We are subject to credit risk associated with the receivables due from our collaborators, including Bayer, Sanofi, and Teva. We are also subject to credit risk in connection with trade accounts receivable from our product sales. These trade accounts receivable are primarily due from several distributors and specialty pharmacies, who are our customers. We have contractual payment terms with each of our customers, and we monitor our customers' financial performance and credit worthiness so that we can properly assess and respond to any changes in their credit profile. During 2019, 2018, and 2017, we did not recognize any charges for write-offs of accounts receivable related to our marketed products. As ofDecember 31, 2019 and 2018, three customers accounted on a combined basis for 97% and 99%, respectively, of our net trade accounts receivables. Foreign Exchange Risk As discussed further above, Bayer markets EYLEA outsidethe United States and Sanofi markets Dupixent, Praluent, and Kevzara worldwide, and we share in profits and losses with these collaborators from commercialization of products (including the receipt of a percentage of EYLEA sales inJapan ). In addition, pursuant to the applicable terms of the agreements with our collaborators, we also share in certain worldwide development expenses incurred by our collaborators. We also incur worldwide development expenses for clinical products we are developing independently, in addition to incurring expenses outside ofthe United States in connection with our international operations. Therefore, significant changes in foreign exchange rates of the countries outsidethe United States where our product is sold, where development expenses are incurred by us or our collaborators, or where we incur operating expenses can impact our operating results and financial condition. As sales outsidethe United States continue to grow, and as we expand our international operations, we will continue to assess potential steps, including foreign currency hedging and other strategies, to mitigate our foreign exchange risk. Market Price Risk We are exposed to price risk on equity securities included in our investment portfolio. Our marketable securities include equity investments in publicly traded stock of companies, including common stock of companies with which we have entered into collaboration arrangements. Changes in the fair value of our equity investments are included in Other income (expense), net on the Consolidated Statements of Income. We recorded$118.3 million of net unrealized gains and$41.9 million of net unrealized losses on equity securities in Other income (expense), net for the years endedDecember 31, 2019 and 2018, respectively. Item 8. Financial Statements and Supplementary Data The financial statements required by this Item are included on pages F-1 through F-44 of this report. The supplementary financial information required by this Item is included at page F-44 of this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. 74
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
