Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended December 31, 2020 (filed with the SEC on February 8, 2021) for additional discussion of our financial condition and results of operations for the year ended December 31, 2019, as well as our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019.
Overview
Regeneron Pharmaceuticals, Inc. is a fully integrated biotechnology company that discovers, invents, develops, manufactures, and commercializes medicines for 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, hematologic conditions, infectious diseases, and rare diseases.
We currently have nine FDA-approved products that have received marketing approval and over 30 product candidates in clinical development, almost all of which were homegrown in our laboratories. In addition, REGEN-COV has not been approved by the FDA, but has been authorized under an EUA for COVID-19 (see Part I, Item 1. "Business - REGEN-COV - Emergency and Temporary Use Authorizations" for a description of recent revisions to the EUA to exclude its use in geographic regions where infection or exposure is likely due to a variant that is not susceptible to the treatment). Also refer to Part I, Item 1. "Business - Products" and "Business - Programs in Clinical Development" for additional information related to marketed products and product candidates.
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 our marketed products. Our financial results may fluctuate from quarter to quarter and will depend on, among other factors, the net sales of our 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 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 in the 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.
Revenue Recognition - Product Revenue
We recognize revenue from product sales at a point in time when our customer is deemed to have obtained control of the product, which generally occurs upon receipt or acceptance by our customer.
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The amount of revenue we recognize from product sales may vary 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 to which we will be entitled. This estimate is based upon contracts with customers, healthcare providers, payors 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.
Collaborative Arrangements
We have entered into various collaborative arrangements to research, develop, manufacture, and commercialize products and/or product candidates.
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 our collaborator, we must assess, at the inception of the contract, whether each promise represents a separate obligation (i.e., is "distinct"), or whether such promises should be combined as a single unit of account. When we have a combined unit of account which includes a license and providing research and development services to our collaborator, recognition of up-front payments and development milestones earned from our collaborator is deferred (as a liability) and recognized over the development period (i.e., over time). In arrangements where we satisfy our obligation(s) during the development phase over time, we recognize amounts initially deferred 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. We review our estimates each period and make revisions to such estimates as necessary. 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, potentially resulting in material changes to amounts recognized.
When we are entitled to reimbursement of all or a portion of the expenses (e.g., research and development expenses) that we incur under a collaboration, we record those reimbursable amounts in the period in which such costs are incurred.
If our collaborator performs research and development work or commercialization-related activities and share costs, we also recognize, as expense (e.g., research and development expense or selling, general and administrative expense, as applicable) in the period when our collaborator incurs such expenses, the portion of the collaborator's expenses that we are obligated to reimburse. Our collaborators provide us with estimated expenses for the most recent fiscal quarter. The estimates are revised, if necessary, in subsequent periods if actual expenses differ from those estimates.
Under certain of the Company's collaboration agreements, product sales and cost of sales may be recorded by the Company's collaborators as they are deemed to be the principal in the transaction. In arrangements where we:
• supply commercial product to our collaborator, we may be reimbursed for our manufacturing costs as commercial product is shipped to the collaborator; however, recognition of such cost reimbursements may be deferred until the product is sold by our collaborator to third-party customers;
• share in any profits or losses arising from the commercialization of such products, we record our share of the variable consideration, representing net product sales less cost of goods sold and shared commercialization and other expenses, in the period in which such underlying sales occur and costs are incurred by the collaborator; and
• receive royalties and/or sales-based milestone payments from our collaborator, we recognize such amounts in the period earned.
Our collaborators provide us with estimates of product sales and our share of profits or losses, as applicable, for each quarter. The estimates are revised, if necessary, in subsequent periods if our share of actual profits or losses differ from those estimates.
Stock-based Compensation
We recognize stock-based compensation expense for equity 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
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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 quoted U.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 director 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.
We use a Monte Carlo simulation to compute the estimated fair value of performance-based restricted stock units, which are subject to vesting based on the Company's attainment of pre-established market performance goals.
The assumptions used in computing the fair value of equity 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 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 that the position will be sustained upon examination 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 amount 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 inventory to its estimated realizable value.
See Note 6 to our Consolidated Financial Statements for information related to our inventory write-offs and reserves.
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.
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Results of Operations
Net Income
Year Ended December 31,
(In millions, except per share data) 2021 2020 2019
Revenues $ 16,071.7 $ 8,497.1 $ 6,557.6
Operating expenses 7,124.9 4,920.5 4,347.8
Income from operations 8,946.8 3,576.6 2,209.8
Other income (expense) 379.0 233.8 219.3
Income before income taxes 9,325.8 3,810.4 2,429.1
Income tax expense 1,250.5 297.2 313.3
Net income $ 8,075.3 $ 3,513.2 $ 2,115.8
Net income per share - diluted $ 71.97 $ 30.52 $ 18.46
Revenues
Year Ended December 31, $ Change
(In millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Net product sales in the United States:
EYLEA $ 5,792.3 $ 4,947.2 $ 4,644.2 $ 845.1 $ 303.0
Libtayo 306.3 270.7 175.7 35.6 95.0
Praluent 170.0 150.9 * * * *
REGEN-COV 5,828.0 185.7 — 5,642.3 185.7
Evkeeza 18.4 — — 18.4 —
ARCALYST 2.2 ** 13.1 14.5 **
(1.4)
Collaboration revenue:
Sanofi 1,902.2 1,186.4 403.6 715.8 782.8
Bayer 1,409.3 1,186.1 1,145.6 223.2 40.5
Roche 361.8 — — 361.8 —
Other revenue 281.2 557.0 174.0 (275.8) 383.0
Total revenues $ 16,071.7 $ 8,497.1 $ 6,557.6 $ 7,574.6 $ 1,939.5
* Net product sales of Praluent in the United States were recorded by Sanofi prior to April 1, 2020.
** Effective April 1, 2021, Kiniksa records net product sales of ARCALYST in the United States.
Net Product Sales
Net product sales of EYLEA in the United States increased in 2021, compared to 2020, due to higher sales volume (including the adverse impact of the COVID-19 pandemic on U.S. EYLEA demand during the three months ended June 30, 2020), partly offset by an increase in sales-related deductions.
During the years ended December 31, 2021 and 2020, net product sales of REGEN-COV were recorded in connection with our agreements with the U.S. government. As of December 31, 2021, the Company had completed its final deliveries of drug product under its agreements with the U.S. government. Refer to Part I, Item 1. "Business - Agreements Related to COVID-19 - U.S. Government " for further details. The degree to which future sales of our COVID-19 monoclonal antibodies will continue is highly uncertain and will depend on, among other factors, the number of new COVID-19 cases and effectiveness of our product against variants of concern. Refer to Part I, Item 1. "Business - Products - REGEN-COV - Emergency and Temporary Use Authorizations" for additional information.
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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.
(In millions) Rebates, Chargebacks,
and Discounts Distribution-
Related Fees Other Sales-
Related Deductions Total
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
Provisions
762.9 279.9 94.1 1,136.9
Credits/payments (641.0) (249.1) (78.7) (968.8)
Balance as of December 31, 2020 202.2 77.2 44.8 324.2
Provisions
1,047.1 363.6 150.4 1,561.1
Credits/payments (1,034.7) (360.8) (127.6) (1,523.1)
Balance as of December 31, 2021 $ 214.6 $ 80.0 $ 67.6 $ 362.2
Sanofi Collaboration Revenue
Year Ended December 31,
(In millions) 2021 2020 2019
Antibody:
Regeneron's share of profits in connection with commercialization of antibodies $ 1,363.0 $ 785.2 $ 209.3
Sales-based milestones earned 50.0 50.0 —
Reimbursement for manufacturing of commercial supplies (1)
488.8 368.0 216.0
Total Antibody 1,901.8 1,203.2 425.3
Immuno-oncology:
Regeneron's share of losses in connection with commercialization of Libtayo outside the United States
(13.6) (25.7) (21.7)
Reimbursement for manufacturing of commercial supplies (1)
14.0 8.9 —
Total Immuno-oncology 0.4 (16.8) (21.7)
Total Sanofi collaboration revenue $ 1,902.2 $ 1,186.4 $ 403.6
(1) Corresponding costs incurred by us in connection with such production is recorded within Cost of collaboration and contract manufacturing
Antibody
The increase in our share of profits in connection with commercialization of antibodies in 2021, compared to 2020, was driven by higher Dupixent profits.
During each of the years ended December 31, 2021 and 2020, the Company earned $50.0 million sales-based milestones from Sanofi, upon aggregate annual sales of antibodies outside the United States (including Praluent) exceeding $1.5 billion and $1.0 billion, respectively, on a rolling twelve-month basis. We are entitled to receive up to an aggregate of $150.0 million in additional milestone payments from Sanofi, which includes the next sales milestone payment of $50.0 million that would be earned when such sales outside the United States exceed $2.0 billion on a rolling twelve-month basis.
The increase in reimbursements for manufacturing of commercial supplies in 2021, compared to 2020, was primarily due to higher Dupixent sales, as revenue for such cost reimbursements is recognized when the product is sold by Sanofi to third-party customers.
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Regeneron's share of profits in connection with the commercialization of Dupixent, Praluent (through March 31, 2020), and Kevzara is summarized below:
Year Ended December 31,
(In millions) 2021 2020 2019
Dupixent, Praluent, and Kevzara net product sales (1)
$ 6,536.3 $ 4,394.5 $ 2,811.0
Regeneron's share of collaboration profits 1,511.5 871.5 233.0
Reimbursement of development expenses incurred by Sanofi in accordance with Regeneron's payment obligation
(148.5) (86.3) (23.7)
Regeneron's share of profits in connection with commercialization of antibodies $ 1,363.0 $ 785.2 $ 209.3
Regeneron's share of collaboration profits as a percentage of Dupixent, Praluent, and Kevzara net product sales
21% 18% 7%
(1) Global net product sales of Dupixent and Kevzara are recorded by Sanofi. The quarter ended March 31, 2020 was the last quarter for which Sanofi and the Company shared profits and losses in connection with Sanofi's global net sales and the related commercialization of Praluent (see further details below); therefore, the quarter ended March 31, 2020 was the last quarter for which net product sales of Praluent were included in the table above.
As described in Part I, Item 1. "Business - Collaboration, License, and Other Agreements - Sanofi - Antibody", effective April 1, 2020, the Company became solely responsible for the development and commercialization of Praluent in the United States. Under the new agreement, Sanofi is solely responsible for the development and commercialization of Praluent outside of the United States, and pays the Company a 5% royalty on Sanofi’s net product sales of Praluent outside the United States.
Bayer Collaboration Revenue
Year Ended December 31,
(In millions) 2021 2020 2019
Regeneron's net profit in connection with commercialization of EYLEA outside the United States $ 1,349.2 $ 1,107.9 $ 1,091.4
Reimbursement for manufacturing of commercial supplies (1)
60.1 78.2 54.2
Total Bayer collaboration revenue $ 1,409.3 $ 1,186.1 $ 1,145.6
(1) Corresponding costs incurred by us in connection with such production is recorded within Cost of collaboration and contract manufacturing
Bayer records net product sales of EYLEA outside the United States. Regeneron's net profit in connection with commercialization of EYLEA outside the United States is summarized below:
Year Ended December 31,
(In millions) 2021 2020 2019
EYLEA net product sales outside the United States
$ 3,592.4 $ 2,961.5 $ 2,897.4
Regeneron's share of collaboration profit from sales outside the United States
$ 1,408.3 $ 1,165.8 $ 1,148.0
Reimbursement of development expenses incurred by Bayer in accordance with Regeneron's payment obligation
(59.1) (57.9) (56.6)
Regeneron's net profit in connection with commercialization of EYLEA outside the United States
$ 1,349.2 $ 1,107.9 $ 1,091.4
Regeneron's net profit as a percentage of EYLEA net product sales outside the United States
38% 37% 38%
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Roche Collaboration Revenue
As described in Part I, Item 1. "Business - Agreements Related to COVID-19 - Roche", Roche distributes and records net product sales of the casirivimab and imdevimab antibody cocktail outside the United States, and the parties share gross profits from worldwide sales, depending on the amount of manufactured product supplied by each party to the market. Each quarter, a single payment is due from one party to the other to true-up the global gross profits between the parties. If Regeneron is to receive a true-up payment from Roche, such amount will be recorded to Other collaboration revenue. If Regeneron is to make a true-up payment to Roche, such amount will be recorded to Cost of goods sold.
During the year ended December 31, 2021, the Company recorded $361.8 million of true-up payments, within Other collaboration revenue, from Roche in connection with this agreement.
Other Revenue
Other revenue decreased in 2021, compared to 2020, primarily due to lower amounts recognized in connection with our agreement with BARDA related to funding of certain development activities for COVID-19 antibodies, and, to a lesser extent, Inmazeb.
Expenses
Year Ended December 31, $ Change
(In millions, except headcount data) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Research and development (1)
$ 2,908.1 $ 2,735.0 $ 2,450.0 $ 173.1 $ 285.0
Selling, general, and administrative (1)
1,824.9 1,346.0 1,341.9 478.9 4.1
Cost of goods sold (2)
1,773.1 491.9 362.3 1,281.2 129.6
Cost of collaboration and contract manufacturing (3)
664.4 628.0 402.8 36.4 225.2
Other operating (income) expense, net (45.6) (280.4) (209.2) 234.8 (71.2)
Total operating expenses $ 7,124.9 $ 4,920.5 $ 4,347.8 $ 2,204.4 $ 572.7
Average headcount
9,884 8,495 7,773 1,389 722
(1) Includes costs incurred as well as cost reimbursements from collaborators who are not deemed to be our customers
(2) Cost of goods sold primarily includes costs in connection with producing commercial supplies for products that are sold by Regeneron in the United States (i.e., for which we record net product sales), any royalties we are obligated to pay on such sales, and amounts we are obligated to pay to collaborators for their share of gross profits.
(3) Cost of collaboration and contract manufacturing includes costs we incur in connection with producing commercial drug supplies for collaborators and others.
Operating expenses in 2021, 2020, and 2019 included a total of $601.7 million, $432.0 million, and $464.3 million, respectively, of non-cash compensation expense related to equity awards granted under our long-term incentive plans. As of December 31, 2021, unrecognized non-cash compensation expense related to unvested stock options and unvested restricted stock (including performance-based restricted stock units) was $515.9 million and $857.1 million, respectively. We expect to recognize this non-cash compensation expense related to stock options and restricted stock over weighted-average periods of 1.8 years and 3.0 years, respectively.
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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). The table below also includes reimbursements of research and development expenses by collaborators, as when we are entitled to reimbursement of all or a portion of such expenses that we incur under a collaboration, we record those reimbursable amounts in the period in which such costs are incurred.
Year Ended December 31, $ Change
(In millions) 2021 2020 *
2019 *
2021 vs. 2020 2020 vs. 2019
Direct research and development expenses:
REGEN-COV (casirivimab and imdevimab)
$ 309.8 $ 290.7 — $ 19.1 $ 290.7
Dupixent (dupilumab) 146.4 129.7 $ 104.3 16.7 25.4
Libtayo (cemiplimab) 146.2 155.3 160.8 (9.1) (5.5)
EYLEA and aflibercept 8 mg 102.2 72.2 55.4 30.0 16.8
Fasinumab 67.7 167.8 203.4 (100.1) (35.6)
Up-front payments related to license and collaboration agreements
44.0 85.0 430.0 (41.0) (345.0)
Other product candidates in clinical development and other research programs
427.9 494.5 355.7 (66.6) 138.8
Total direct research and development expenses
1,244.2 1,395.2 1,309.6 (151.0) 85.6
Indirect research and development expenses:
Payroll and benefits 981.4 816.6 705.8 164.8 110.8
Lab supplies and other research and development costs
142.0 138.3 119.9 3.7 18.4
Occupancy and other operating costs 414.9 335.7 304.7 79.2 31.0
Total indirect research and development expenses
1,538.3 1,290.6 1,130.4 247.7 160.2
Clinical manufacturing costs
621.7 686.1 596.6 (64.4) 89.5
Reimbursement of research and development expenses by collaborators (496.1) (636.9) (586.6) 140.8 (50.3)
Total research and development expenses
$ 2,908.1 $ 2,735.0 $ 2,450.0 $ 173.1 $ 285.0
* Certain prior year amounts have been reclassified to conform to the current year's presentation
Research and development expenses in 2021 included $34.0 million in aggregate up-front payments in connection with our collaboration agreement with Nykode Therapeutics, in 2020 included $85.0 million in aggregate up-front payments in connection with our collaboration agreement with Intellia, and in 2019 included a $400.0 million up-front payment to Alnylam. Research and development expenses included non-cash compensation expense of $316.6 million and $238.6 million in 2021 and 2020, respectively.
Reimbursement of research and development expenses by collaborators included reimbursements from Roche related to REGEN-COV of $128.1 million and $78.5 million for the years ended December 31, 2021 and 2020, 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
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regulatory requirements, changes in the competitive landscape affecting a product candidate, and other risks and uncertainties described in Part I, Item 1A. "Risk Factors" (including those relating to the disruptions caused by the COVID-19 pandemic). 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 2021, compared to 2020, primarily due to an increase in commercialization-related expenses for (i) EYLEA, including direct-to-consumer advertising, (ii) REGEN-COV, including costs associated with educational campaigns related to COVID-19, and (iii) Libtayo; and higher headcount-related costs. In addition, in 2020, we recorded a reversal of accruals for litigation-related loss contingencies as a result of the October 2020 ruling by the Technical Board of Appeal of the EPO and its impact on certain patent infringement actions in Europe relating to Praluent (see Note 15 to our Consolidated Financial Statements for additional details). Selling, general, and administrative expenses also included $213.3 million and $153.0 million of non-cash compensation expense in 2021 and 2020, respectively.
Cost of Goods Sold
Cost of goods sold increased in 2021, compared to 2020, primarily due to the recognition of manufacturing costs in connection with the product sales of REGEN-COV. During 2021, the Company also recorded a $259.6 million true-up payment owed in connection with global gross profits under our Roche collaboration agreement described above. Additionally, during the fourth quarter of 2021, the Company recorded a $231.7 million charge to write down its REGEN-COV inventory as a result of data that showed REGEN-COV was highly unlikely to be active against the Omicron variant and the FDA revision of the EUA for REGEN-COV, pursuant to which REGEN-COV was no longer authorized for use in any U.S. states, territories, or jurisdictions. Refer to Part I, Item 1. "Business - Products - REGEN-COV - Emergency and Temporary Use Authorizations" for additional information.
Cost of Collaboration and Contract Manufacturing
Cost of collaboration and contract manufacturing increased in 2021, compared to 2020, primarily due to the recognition of manufacturing costs associated with higher sales of Dupixent, partly offset by lower costs in connection with manufacturing ex-U.S. commercial supplies of Praluent for Sanofi and the recognition of process validation costs during 2020 in connection with manufacturing Inmazeb under our BARDA agreement as such costs did not recur during 2021.
Other Operating (Income) Expense
Other operating (income) expense, net, includes recognition of a portion of amounts previously deferred in connection with up-front and development milestone payments, as applicable, received in connection with Sanofi IO, Teva, and MTPC collaborative arrangements. In these arrangements, we satisfy our obligation(s) during the development phase over time, and, as a result, recognize amounts initially deferred over time 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. See the Critical Accounting Policies and Use of Estimates section above for further details.
During 2021, we updated our estimate of the total research and development costs expected to be incurred (which resulted in a change to the estimate of the stage of completion) in connection with the Sanofi IO Collaboration, and, as a result, recorded a cumulative catch-up adjustment of $66.9 million as a reduction to other operating income. During 2020, we updated our estimate of the total research and development costs expected to be incurred (which resulted in changes to the estimate of the stage of completion) in connection with the Sanofi IO, Teva, and MTPC collaboration agreements, and therefore recorded cumulative catch-up adjustments of $99.8 million, net, as an increase to other operating income.
Other Income (Expense)
Other income (expense), net, was $379.0 million in 2021, compared to $233.8 million in 2020. This change was primarily driven by an increase in unrealized gains on equity securities of $190.1 million.
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Income Taxes
Year Ended December 31,
(In millions, except effective tax rate) 2021 2020 2019
Income tax expense
$ 1,250.5 $ 297.2 $ 313.3
Effective tax rate
13.4% 7.8% 12.9%
Our effective tax rate for 2021 was positively impacted, compared to the U.S. federal statutory rate, primarily by income earned in foreign jurisdictions with tax rates lower than the U.S. federal statutory rate and stock-based compensation. Our effective tax rate for 2020 was positively impacted, compared to the U.S. federal statutory rate, primarily by stock-based compensation, and, to a lesser extent, federal tax credits for research activities and income earned in foreign jurisdictions with tax rates lower than the U.S. federal statutory rate.
Liquidity and Capital Resources
Our financial condition is summarized as follows:
As of December 31,
(In millions) 2021 2020 $ Change
Financial assets:
Cash and cash equivalents $ 2,885.6 $ 2,193.7 $ 691.9
Marketable securities - current 2,809.1 1,393.3 1,415.8
Marketable securities - noncurrent 6,838.0 3,135.6 3,702.4
$ 12,532.7 $ 6,722.6 $ 5,810.1
Borrowings:
Long-term debt $ 1,980.0 $ 1,978.5 $ 1.5
Working capital:
Current assets $ 14,014.9 $ 9,779.1 $ 4,235.8
Current liabilities 3,932.5 2,697.4 1,235.1
$ 10,082.4 $ 7,081.7 $ 3,000.7
As of December 31, 2021, 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 Ended December 31, 2021, 2020, and 2019
As of December 31, $ Change
(In millions) 2021 2020 2019 2021 vs. 2020 2020 vs. 2019
Cash flows provided by operating activities $ 7,081.3 $ 2,618.1 $ 2,430.0 $ 4,463.2 $ 188.1
Cash flows used in investing activities $ (5,384.7) $ (70.6) $ (2,027.8) $ (5,314.1) $ 1,957.2
Cash flows used in financing activities $ (1,005.8) $ (1,970.5) $ (252.1) $ 964.7 $ (1,718.4)
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Cash Flows from Operating Activities
2021
As of December 31, 2021, Accounts receivable had increased by $1.927 billion, compared to December 31, 2020, primarily due to REGEN-COV sales in connection with our September 2021 agreement to supply drug product to the U.S. government. Other non-cash items, net, in 2021 included inventory write-offs and reserves totaling $457.1 million, primarily related to REGEN-COV. Accounts payable, accrued expenses, and other liabilities as of December 31, 2021 included a $259.6 million fourth quarter 2021 true-up payment owed in connection with global gross profits under our Roche collaboration agreement.
2020
As of December 31, 2020, Accounts receivable had increased by $1.356 billion, compared to December 31, 2019, partly as a result of extending payment terms to EYLEA customers due to the COVID-19 pandemic. Inventories increased as of December 31, 2020, compared to December 31, 2019, partially as a result of purchasing additional raw materials in anticipation of potential disruptions to our supply chain due to the COVID-19 pandemic.
2019
Deferred taxes as of December 31, 2019 increased by $130.6 million, compared to December 31, 2018, primarily due to the tax treatment of the up-front payment made to Alnylam and non-cash compensation expense. Accounts payable, accrued expenses, and other liabilities as of December 31, 2019 increased compared to December 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.
Cash Flows from Investing Activities
Sales of marketable securities in 2020 included proceeds in connection with funding our stock repurchase from Sanofi (as described below). In 2019, we purchased $400.0 million of Alnylam common stock in connection with entering into the collaboration agreement. Capital expenditures in 2021 included costs associated with the expansion of our manufacturing facilities in Rensselaer, New York (including the ongoing construction of a fill/finish facility and related equipment) and Limerick, Ireland, as well as initial costs incurred in connection with our planned expansion of the Tarrytown, New York campus. We expect to incur capital expenditures of $650 million to $730 million in 2022 primarily in connection with the continued expansion of our manufacturing facilities (including the fill/finish facility) and the expansion of our research, preclinical manufacturing, and support facilities at our Tarrytown, New York campus. We also expect continued significant capital expenditures over the next several years in connection with the planned expansion of our Tarrytown, New York campus.
Cash Flows from Financing Activities
Proceeds from issuances of Common Stock, in connection with exercises of employee stock options, were $1.672 billion during 2021, compared to $2.575 billion during 2020 and $211.8 million during 2019. For additional information related to cash flows from financing activities, see "Share Repurchase Program", "Sanofi Funding of Certain Development Costs", "Secondary Offering and Purchase of Regeneron Common Stock Held by Sanofi", and "Issuance of Senior Notes" sections below.
Credit Facility
In December 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"). 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 beyond December 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 of December 31, 2021.
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 of December 31, 2021.
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Share Repurchase Programs
In November 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 permitted the Company to make 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. As of December 31, 2020, the Company had repurchased the entire $1.0 billion of its Common Stock that it was authorized to repurchase under the program.
In January 2021, our board of directors authorized a share repurchase program to repurchase up to $1.5 billion of our Common Stock. The share repurchase program was approved under terms substantially similar to the November 2019 share repurchase program. As of December 31, 2021, the Company had repurchased the entire $1.5 billion of its Common Stock that it was authorized to repurchase under the program.
In November 2021, our board of directors authorized an additional share repurchase program to repurchase up to $3.0 billion of our Common Stock. The share repurchase program was approved under terms substantially similar to the share repurchase programs above. 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. As of December 31, 2021, $2.845 billion remained available for share repurchases under the November 2021 program.
The table below summarizes the shares of our Common Stock we repurchased under the programs described above and the cost of the shares received, which were recorded as Treasury Stock.
Year Ended December 31,
(In millions) 2021 2020 2019
Number of shares repurchased 3.0 1.6 0.7
Total cost of shares received $ 1,655.0 $ 746.0 $ 254.0
Sanofi Funding of Certain Development Costs
Pursuant to a 2018 agreement, we agreed to allow Sanofi to satisfy in whole or in part its funding obligations with respect to Libtayo development and/or certain activities relating to dupilumab and itepekimab incurred in periods through September 30, 2020 by selling shares of our Common Stock owned by Sanofi. During 2020, Sanofi elected to sell, and we elected to purchase, shares of our Common Stock to satisfy Sanofi's funding obligation related to such activities. Consequently, we recorded the cost of the shares received, or $135.0 million, as Treasury Stock during 2020. In addition, during 2019, Sanofi elected to sell, and we elected to purchase, shares of our Common Stock to satisfy Sanofi's funding obligation. Consequently, we recorded the cost of the shares received, or $102.7 million, as Treasury Stock during 2019.
Secondary Offering and Purchase of Regeneron Common Stock Held by Sanofi
In May 2020, a secondary offering of 13,014,646 shares of our Common Stock (the "Secondary Offering") held by Sanofi was completed. In connection with the Secondary Offering, we also purchased 9,806,805 shares of our Common Stock directly from Sanofi for an aggregate purchase amount of $5.0 billion (the "Stock Purchase").
We funded the Stock Purchase with a combination of cash on hand, proceeds from the sale of marketable securities, and proceeds from loans under a $1.5 billion senior unsecured bridge loan facility (the "Bridge Facility") which was entered into in May 2020. The Bridge Facility was repaid in August 2020 following the issuance and sale of the Company's senior unsecured notes.
Issuance of Senior Notes
In August 2020, we issued and sold $1.250 billion aggregate principal amount of senior unsecured notes due 2030 (the "2030 Notes") and $750 million aggregate principal amount of senior unsecured notes due 2050 (the "2050 Notes" and, together with the 2030 Notes, the "Notes"). Net proceeds from the issuance and sale of the Notes (after deducting underwriting discounts and offering expenses) were used in part to repay in full the Bridge Facility described above, including accrued interest and related fees and expenses in connection therewith.
The 2030 Notes accrue interest at the rate of 1.750% per year and will mature on September 15, 2030. The 2050 Notes accrue interest at the rate of 2.800% per year and will mature on September 15, 2050. Interest on each series of Notes is payable semi-annually in arrears on March 15 and September 15 of each year until their respective maturity dates.
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The Notes may be redeemed at the Company’s option at any time at 100% of the principal amount plus accrued and unpaid interest, and, until a specified period before maturity, a specified make-whole amount. The Notes contain a change-of-control provision that, under certain circumstances, may require the Company to offer to repurchase the Notes at a price equal to 101% of the principal amount plus accrued and unpaid interest.
The Notes also contain certain limitations on the Company’s ability to incur liens and enter into sale and leaseback transactions, as well as customary events of default.
Tarrytown, New York Leases
We lease laboratory and office facilities in Tarrytown, 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. In March 2017, we entered into a Participation Agreement with BA Leasing BSC, LCC, and affiliate of Banc of America Leasing & Capital, LLC ("BAL"), as lessor, and a syndicate of lenders (collectively with BAL, 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. In March 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 ending in March 2022. 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.
In September 2021, we delivered a request to the Lease Participants to potentially exercise the option for a five-year extension of the term of the Lease and the maturity date under the Participation Agreement. In November 2021, the Lease Participants consented to such extension, subject to the satisfaction of certain conditions prior to the expiration of the existing term in March 2022, including the negotiation and execution of satisfactory definitive documentation setting forth the terms and conditions that would apply during such potential extended term. We are negotiating such documentation with the Lease Participants, but there can be no assurance that such extension will become effective.
The agreements governing the Lease financing contain financial and operating covenants. Such financial covenants and certain of the operating covenants are substantially similar to the covenants set forth in our Credit Facility. We were in compliance with all such covenants as of December 31, 2021.
Additional Funding Requirements
The amount required to fund operations will depend on various factors, including the potential regulatory approval and commercialization of our product candidates and the timing thereof and the extent and cost of our research and development programs. We believe that our existing capital resources, borrowing availability under the Credit Facility, funds generated by anticipated product sales, and, as described above under Part I, Item 1. "Business - Collaboration, License, and Other Agreements," 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.
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 trials underway and of additional clinical trials that we decide to initiate, and the various factors that affect the cost of each trial, including the size of trials, 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 other expenses. 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.
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We expect to continue to incur development and manufacturing costs for our COVID-19 monoclonal antibodies in 2022, though the amount of funding that will be required will be subject to clinical data results, quantity of drug supply manufactured, the duration of the COVID-19 pandemic, and other factors, including regulatory outcomes, as described in Part I.
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.
Liabilities for unrecognized tax benefits totaled $410.9 million at December 31, 2021. Due to their nature, there is a high degree of uncertainty regarding the period and amounts of potential future cash settlement with tax authorities. See Note 14 to our Consolidated Financial Statements. In addition, the Tax Cuts and Jobs Act of 2017 requires the capitalization and amortization of research and development expenses effective for years beginning after December 31, 2021, which we expect will have a material impact on our cash flows beginning in 2022.
We enter into collaboration and licensing agreements that may require us to pay (i) amounts contingent upon the occurrence of various future events (e.g., 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. See Note 3 and Note 10 to our Consolidated Financial Statements.
Under our collaboration with Bayer for EYLEA outside the United States and our Antibody and IO Collaborations with Sanofi, we and our collaborator share profits and losses in connection with commercialization of drug products. If the applicable collaboration is profitable, we have contingent contractual obligations to reimburse Bayer and Sanofi for a defined percentage (generally 50%) of agreed-upon development expenses funded by Bayer and Sanofi (i.e., "development balance"). 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 in Japan) otherwise payable to us, unless, in the case of EYLEA, we elect to reimburse these expenses at a faster rate. As of December 31, 2021, our contingent reimbursement obligation to Bayer for EYLEA was approximately $282 million and our contingent reimbursement obligation to Sanofi in connection with the companies' Antibody Collaboration and IO Collaboration was approximately $3.152 billion and $103 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
As of December 31, 2021, the future adoption of recently issued accounting standards is not expected to have a material impact on the Company's financial position or results of operations.