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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from__________________ to___________________
Commission File Number 0-19034
REGENERON PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
New York 13-3444607
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(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
777 Old Saw Mill River Road, Tarrytown, New York 10591-6707
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(Address of principal executive offices) (Zip code)
(914) 347-7000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered pursuant to Section 12(g)
of the Act:
Common Stock - par value $.001 per share
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(Title of Class)
Preferred Share Purchase Rights expiring October 18, 2006
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
---
At March 11, 1997, the aggregate market value of voting stock held by
non-affiliates of the Registrant totaled approximately $194,810,771, based on
the last sale price as reported by The Nasdaq Stock Market.
Indicate the number of shares outstanding of each of Registrant's classes of
common stock as of March 11, 1997:
Class of Common Stock Number of Shares
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Class A Stock, $.001 par value 4,355,994
Common Stock, $.001 par value 21,342,449
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's definitive proxy statement to be filed in connection with
solicitation of proxies for its Annual Meeting of Shareholders to be held on
June 27, 1997 is incorporated by reference into Part III of this Form 10-K.
Exhibit index is located on pages 32 to 34 of this filing.
PART I
Item 1. Business
General
Regeneron Pharmaceuticals, Inc. ("Regeneron" or the "Company") is a leader
in the application of molecular and cell biology to discover novel potential
therapeutics for human medical conditions and is seeking to develop and
commercialize these discoveries. The Company is applying its technological
expertise in protein growth factors, their receptors, and their mechanisms of
action to the discovery and development of drugs. The Company is pursuing
research programs in the following areas: (i) neurotrophic factors, including
brain-derived neurotrophic factor ("BDNF"), neurotrophin-3 ("NT-3"), and
AXOKINE(TM), for the treatment of neurological and retinal diseases and
conditions, (ii) the Angiopoietins, a new family of ligands (and their
receptors, called the TIE family of receptors) that appears to regulate blood
vessel formation, or angiogenesis, and may have a role in the production and
proliferation of blood cells (a process called hemopoiesis), (iii) muscle
atrophy, based on a receptor of the tyrosine kinase type that is specifically
expressed in skeletal muscle (called MuSK) and a protein ligand (agrin) for this
receptor, (iv) Noggin, a naturally occurring protein, for potential use in
treating abnormal bone formation and related diseases and conditions, and (v)
protein antagonists for cytokines such as interleukin-6 ("IL-6") as potential
treatment for inflammatory diseases, allergic disorders, and cancer.
During 1996, Amgen Inc. ("Amgen"), on behalf of Amgen-Regeneron Partners (a
general partnership equally owned by Regeneron and Amgen), completed the
treatment phase of a Phase III clinical trial designed to determine the safety
and efficacy of BDNF delivered subcutaneously for the treatment of amyotrophic
lateral sclerosis ("ALS," commonly known as Lou Gehrig's disease). BDNF failed
to achieve its primary end points in that trial. See "Recent Development,"
below. In addition, in 1996, Amgen, on behalf of Amgen-Regeneron Partners,
continued to conduct a Phase I/II clinical trial of NT-3 for the treatment of
peripheral neuropathy caused by diabetes. Amgen also continued to conduct a
Phase I/II clinical trial of BDNF in Europe for the treatment of neuropathy
caused by diabetes and a Phase I/II trial for the treatment of Guillain-Barre
syndrome, and started a Phase I clinical trial in the United States and Europe
of BDNF delivered intrathecally for the treatment of ALS. The Company continued
in 1996 to develop and manufacture BDNF for use by Sumitomo Pharmaceuticals
Company, Ltd. ("Sumitomo Pharmaceuticals") in Japan and continued preclinical
research programs in the areas of angiogenesis, hematopoiesis, inflammatory and
muscle disease, abnormal bone formation and related disorders, and cancer (among
other programs). The Company is also engaged in a variety of research and
preclinical development activities relating to other neurotrophic and growth
factors, second generation neurotrophic factors (including chimeras), and other
novel potential therapeutics.
In April 1996, Amgen purchased from the Company three million shares of
Common Stock for $48.0 million. The purchase price also included five-year
warrants to purchase an additional 700,000 shares of Common Stock at an exercise
price of $16.00 per share.
In June 1996, the Company entered into a worldwide exclusive joint
development agreement with Medtronic, Inc. ("Medtronic") to collaborate on
research and development of a family of therapeutics for central nervous system
diseases and disorders using experimental Regeneron compounds and Medtronic
delivery systems. The initial target of the Medtronic collaboration will be the
development of Regeneron's second
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generation neurotrophic factor, AXOKINE(TM) for the potential treatment of
Huntington's disease, using Medtronic's implantable pump or other delivery
system to infuse or otherwise directly deliver AXOKINE into the brain. In
addition, Medtronic purchased from the Company 460,500 shares of Common Stock
for $10.0 million. The purchase price included five-year warrants to purchase an
additional 107,400 shares of Common Stock at an exercise price of $21.72 per
share.
In August 1996, the Company entered into a collaboration agreement with
Pharmacopeia, Inc. ("Pharmacopeia"), a leader in the use of combinatorial
chemistry to discover potential small molecule, orally active pharmaceutical
product candidates, pursuant to which Regeneron and Pharmacopeia will conduct
research and development in a broad field of potential compounds and uses (the
"Pharmacopeia Agreement"). The Company also continued its research collaboration
with Glaxo-Wellcome plc ("Glaxo"), to pursue the discovery and development of
small molecule compounds that could potentially act as mimics, agonists, or
antagonists of neurotrophins (the "Glaxo Agreement").
In December 1996, the Company entered into a collaboration agreement with
Procter & Gamble Pharmaceuticals, Inc. ("Procter & Gamble") seeking to
discover and develop protein and small molecule compounds useful to treat
skeletal muscle disease and injury (the "Procter & Gamble Agreement"). Procter &
Gamble agreed to purchase $10.0 million of Regeneron Common Stock. Procter &
Gamble paid the $10.0 million to Regeneron in December 1996. In March 1997, the
price per share was set at $12.50 based on a 27 percent premium over an average
market price and Regeneron issued 800,000 shares of restricted Common Stock to
Procter & Gamble. In addition, Procter & Gamble will make a minimum of three and
up to five $3.75 million annual payments to Regeneron to support collaborative
muscle research.
The Company has not received revenue from the sale of any commercial
product and has incurred losses in each year since inception of operations in
1988. As of December 31, 1996, the Company had an accumulated deficit of $157.0
million. To date, the Company has received revenues as compensation for research
and development efforts performed by Regeneron from its licensees and
collaborators, for contract manufacturing from Merck & Co., Inc. ("Merck"), and
investment income. There can be no assurance that such revenue will continue or
to what extent, if any, the Company's expenses incurred in connection with its
work on BDNF or NT-3 or other programs will be reimbursed by its licensees or
collaborators. In the absence of revenues from commercial product sales or other
sources (the amount, timing, nature, or source of which can not be predicted),
the Company's losses will continue as the Company conducts its research and
development activities. The Company's activities may expand over time and may
require additional resources, and the Company's operating losses may be
substantial over at least the next several years. The Company's losses may
fluctuate from quarter to quarter and will depend, among other factors, on the
timing of certain expenses and on the progress of the Company's research and
development efforts. There can be no assurance that the Company will ever have
an approved product or achieve significant revenues or profitable operations. To
date, Regeneron has not received any revenues from the commercial sale of
products and does not expect to receive any such revenues for at least several
years.
The Company has incurred negative cash flow from operations in each year
since its inception. The Company expects that the funding requirements for its
activities will remain substantial and could increase significantly if, among
other things, its development or clinical trial programs are successful or its
research is expanded. In addition, the Company is required to provide capital
from time to time to fund and remain
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equal partners with Amgen in Amgen-Regeneron Partners. The Company's aggregate
capital contribution to Amgen-Regeneron Partners from the partnership's
inception in June 1993 through December 31, 1996 was $42.6 million. The Company
expects that its capital contributions in 1997 will total approximately $3.0
million to $5.0 million. These contributions could increase or decrease,
depending upon (among other things) the results of preclinical and clinical
studies of BDNF and NT-3. Capital contributions beyond 1997 are also anticipated
to be significant. In addition, the amount needed to fund the Company's
operations will also depend on other factors, including the potential future
need to expand the Company's professional and support staff and facilities to
support new areas of research and development, competitive products, the success
of the Company's research and development programs, the status of patent and
other intellectual property right developments, and the extent and success of
any collaborative research arrangements. The Company believes that its existing
capital resources will enable it to meet operating needs into 1999. No assurance
can be given that there will be no change in projected revenues or expenses that
would lead to the Company's capital being consumed significantly before such
time.
Most drug research and development programs fail. A small minority of all
research and development programs ultimately result in commercially successful
drugs; it is not possible to predict whether any program will succeed until it
actually produces a drug that is commercially marketed for a significant period
of time. The Company is attempting to develop drugs for human therapeutic use
and no assurance can be made that any of the Company's research and development
activities will be successful or that any of the Company's current or future
potential product candidates will be commercialized.
Recent Development
In January 1997, Amgen and Regeneron announced that the Phase III clinical
trial of BDNF delivered subcutaneously did not demonstrate clinical efficacy in
patients with ALS, that no further subsequent subcutaneous development of BDNF
for ALS was planned, and that the trial confirmed the safety and tolerability of
BDNF seen in earlier trials. The failure of the Phase III trial to achieve its
primary end points had a materially adverse effect on the price of the Company's
Common Stock (which declined more than 50% immediately after the announcement of
the results of the trial). After the Phase III clinical trial results were
announced, the Company retained independent experts in the fields of neurology
and gastroenterology, as well as independent statisticians, to conduct further
examination of the data. This review by the Company and the outside panels
indicated 1) that a subset of ALS patients in the trial may have received a
benefit from BDNF treatment and 2) that BDNF appeared to have an effect on the
gastrointestinal system and might have a therapeutic role in treating
constipating conditions, among other disorders. The panels recommended, among
other things, that additional clinical and preclinical investigations of
subcutaneous BDNF for ALS and BDNF for gastrointestinal conditions should be
undertaken. The Company is reviewing these recommendations and the Phase III
data and is discussing with Amgen and Sumitomo Pharmaceuticals whether to
undertake these or other investigations of BDNF. Further development of BDNF in
the United States must be undertaken in accordance with the terms of the
Company's collaboration agreement with Amgen. Although Sumitomo Pharmaceuticals
had planned a Phase I safety assessment of BDNF early in 1997, they are
currently reviewing their BDNF development plan in light of the recently
available information.
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The Company's Programs
Neurotrophic Factors
General. Neurodegenerative diseases are presently incurable conditions in
which there is a progressive loss of neurons that are crucial for functions such
as learning and memory, sensation (e.g., vision), control of movement, muscle
strength, and coordination. Neurodegenerative disorders are generally of unknown
cause. Symptoms often consist of progressive loss of memory, muscle control, or
sensation. Most of these diseases cause progressive functional diseases and may
cause permanent discomfort or disability. Regeneron's therapeutic strategy is to
use specific, naturally occurring proteins found in the human body --
neurotrophic factors -- to prevent degeneration or to promote regeneration of
specific populations of neurons.
Part of Regeneron's research and development programs are directed first at
identifying neurotrophic proteins that have the capacity to arrest nerve
degeneration or restore nerve function. These proteins are then synthesized
principally by means of recombinant DNA technology. Preclinical studies of
certain of Regeneron's product candidates, including BDNF, NT-3, and AXOKINE,
suggest that these substances or their derivatives have potential therapeutic
value for a variety of neurological diseases and nerve injury or trauma.
Finally, the Company and Glaxo are conducting research to attempt to find small
molecules that might act to promote or affect neurotrophin activity that could
have a pharmaceutical role and that might be able to cross the blood-brain
barrier.
BDNF. Brain-derived neurotrophic factor is a naturally occurring human
protein. Several biological properties of BDNF have been discovered. These
include the capacity of very small amounts of this protein to promote the
survival and differentiation of certain sensory neurons, motor neurons, nerve
cells of the retina, and several clinically important neurons in the brain.
Preclinical studies suggest the potential clinical application of BDNF to a
variety of conditions in addition to ALS where motor neuron dysfunction is
present. These conditions could include motor neuron dysfunction that occurs in
Guillain-Barre syndrome, childhood spinal muscle atrophies, post-polio syndrome,
diabetic neuropathy, nerve trauma, and hereditary neuropathies. Amgen-Regeneron
Partners is continuing to conduct preclinical studies designed to support the
potential application of BDNF to certain of these conditions.
During 1995 and 1996, Amgen conducted, on behalf of Amgen-Regeneron
Partners, a Phase III BDNF clinical trial to treat ALS. This study involved
1,135 patients, with each patient scheduled to receive subcutaneous treatment
for nine months. ALS is a disease that attacks motor neurons, those nerve cells
that cause muscles to contract. Degeneration of these neurons causes muscle
weakness, leading to death due to respiratory insufficiency. ALS afflicts adults
primarily between the ages of 40 and 70 years old; average survival is three to
five years following diagnosis. It is estimated that approximately 25,000 people
in the United States have ALS. In January 1997, the Company and Amgen announced
that the Phase III study failed to demonstrate clinical efficacy. The data
generated during the Phase III study are being analyzed by Regeneron which is in
discussions with Amgen and Sumitomo regarding what, if any, additional clinical
trials should be conducted with BDNF delivered subcutaneously for ALS or other
diseases or conditions (see "Recent Development"). Amgen and Amgen-Regeneron
Partners are conducting several early stage BDNF clinical trials for ALS
(delivered intrathecally), and peripheral neuropathy.
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The Company and Amgen are conducting a Phase I trial of BDNF for ALS using
intrathecal delivery. While intrathecal delivery may be more successful in
delivering BDNF to certain motor neurons, it is not known whether intrathecal
delivery will prove any more successful in demonstrating safety and utility in
patients with ALS than the subcutaneous delivery used in the Phase III clinical
trial that failed to achieve its primary end points. In addition, the potential
success of any current or future BDNF clinical trial for the treatment of ALS
will be dependent upon, among other things, certain factors that could undermine
the significance of the data collected from such patients. Patients who take
Rilutek, an orally administered drug marketed by Rhone-Poulenc Rorer for the
treatment of ALS, might enroll in a BDNF trial. Other medications for the
treatment of ALS are available on an experimental basis and may be approved for
marketing in the future. The clinical effects of taking BDNF in combination with
other drugs is unknown and therefore unanticipated effects could complicate a
BDNF clinical trial or render the data collected difficult to analyze or
interpret. The design of any BDNF clinical trial will attempt to take into
account the inclusion of patients who may be taking other medications, including
Rilutek. However, if a clinical study is compromised through the inclusion of
patients who were taking Rilutek or other medications, with or without the
consent or knowledge of the trial sponsor, the results of the study may be
undermined and additional clinical studies may be required, causing a delay in,
and increasing the costs of, the development of BDNF, which would have a
material adverse effect on the Company. If additional studies of BDNF for ALS
are undertaken, the time and expense required for such trials could be material
to the Company and the outcome will be uncertain. If subsequent trials are
conducted and such trials fail to demonstrate that BDNF is safe and effective in
the treatment of ALS, that failure could have a materially adverse effect on the
Company, the price of the Company's Common Stock, and the Company's ability to
raise additional capital.
NT-3. Neurotrophin-3 was the third member of the neurotrophin family
identified. Preclinical data suggest that NT-3 may be developed as a potential
therapeutic agent in the treatment of peripheral neuropathies, trauma to
peripheral nerves and spinal cord, and potentially other neurological disorders.
The therapeutic utility of certain drugs (in particular certain anticancer
agents such as cisplatin, taxol, and vincristine) is limited by the induction of
peripheral neuropathy. In animal models, NT-3 has been shown to reverse the
neuron damage caused by the cancer chemotherapeutic agent cisplatin.
In the first clinical study measuring the safety and toxicity of NT-3,
conducted by Amgen on behalf of Amgen-Regeneron Partners, NT-3 was administered
by daily subcutaneous injection for seven days, over a wide range of doses, to a
limited number of normal human volunteers. A further clinical study of NT-3 as a
potential treatment for peripheral neuropathies caused by diabetes was started
during the first quarter of 1996 and continued into 1997. An additional trial
for peripheral neuropathies is planned to start in 1997; the decision whether
and when to start that clinical trial will now await Amgen-Regeneron Partners'
review of the data from the diabetic neuropathy clinical trial. Amgen and
Regeneron are developing NT-3 in the United States under a license from Takeda
Chemical Industries, Ltd. ("Takeda").
AXOKINE(TM). AXOKINE is Regeneron's second-generation neurotrophic factor,
discovered based on the Company's work with ciliary neurotrophic factor
("CNTF"). Preclinical data indicate that AXOKINE may be useful as a potential
therapeutic agent in the treatment of motor neuron disease, Huntington's and
other central nervous system degenerative diseases, and retinal degeneration
(including macular degeneration and retinitis pigmentosa). Preclinical data also
indicate that AXOKINE could have therapeutic and pharmacokinetic properties
superior to CNTF. Regeneron in
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collaboration with Medtronic is developing AXOKINE for delivery via infusion or
injection to the central nervous system. Regeneron is also developing AXOKINE
for retinal degeneration and injury as well as other indications.
Over the last few years, Regeneron has leveraged the proprietary
technologies and approaches it initially developed for the discovery and
characterization of neurotrophic factors to new growth factor-related areas. As
a result, the Company has substantially expanded its drug discovery and drug
development strategies, and is no longer primarily focused on neurological
diseases. Promising new areas, described below, include programs in angiogenesis
and the regulation of blood vessel growth, prevention of muscle atrophy, the
regulation of bone growth, and cytokines and the regulation of immune function.
Strategies involve both the discovery and development of recombinant
protein-based therapeutics and the discovery and development of small molecule
drugs.
Angiogenesis and Hemopoiesis
A plentiful blood supply is required to nourish every tissue and organ of
the body. Diseases such as diabetes and atherosclerosis wreck their havoc, in
part, by damaging the blood vessels (arteries, veins, and capillaries). The
decreased blood flow that results from such diseases can result in non-healing
skin ulcers and gangrene, painful limbs that cannot tolerate exercise, loss of
vision, and heart attacks. Building new blood vessels is a process known as
angiogenesis. Angiogenesis is required for normal growth and development and may
be limiting in tissue repair or ischemic states. Thus, new blood vessels are
required for tissue repair, and enhancement of blood vessel growth may aid in
improving circulation to ischemic limbs and heart tissue suffering from
atherosclerotic disease, in healing of skin ulcers or other chronic wounds, and
in establishing tissue grafts. Angiogenesis is also aberrantly involved in many
disease processes. Abnormal blood vessel growth is required for the growth and
metastasis of tumors, can lead to blindness when it occurs in and obscures the
retina, and seems to accompany an assortment of inflammatory processes.
Depending on the clinical situation, positively or negatively regulating blood
vessel growth could have important therapeutic benefits.
Regeneron and others have identified a new family of receptors in the
tyrosine kinase class that appear critical for normal blood vessel formation and
perhaps abnormal vascularization as well. Through its ligand discovery program,
Regeneron has cloned and received patents for a new family of naturally
occurring protein ligands, collectively termed the "Angiopoietins," specific to
these blood vessel receptors. The Angiopoietins include naturally occurring
positive and negative regulators of angiogenesis, as described in significant
scientific manuscripts published within the last year. The Angiopoietin program
is in the early stage of discovery research, currently focusing on defining
potential clinical applications of this family of receptors and their ligands
and their applicability to either enhance or block blood vessel growth. Another
factor long known to act specifically on blood vessels, vascular endothelial
growth factor ("VEGF"), is undergoing extensive characterization for its
clinical potential at other companies and at many academic institutions and may
be competitive or synergistic to Regeneron's ligands.
The receptors for the Angiopoietins are also expressed on early hemopoietic
stem cells. Thus, these factors may also be important in regulating blood cell
formation by the process known as hemopoiesis. Other hemopoietic growth factors
have proven useful in generating different types of blood cells in clinical
settings -- such as cancer chemotherapy -- when deficits of red blood cells,
white blood cells, and platelets can occur. These actions of the Angiopoietins
are also being examined.
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Muscle Atrophy and Related Disorders
Muscle atrophy occurs in many neuromuscular diseases and also when muscle
is unused, as often occurs during prolonged hospital stays and during
convalescence. Currently, physicians have few options to prescribe for patients
with muscle atrophy or other muscle conditions which afflict millions of
patients globally. Thus, a factor that might have beneficial effects on skeletal
muscle could have significant clinical benefit. The Company has identified a
receptor of the tyrosine kinase type termed MuSK that is specifically expressed
in skeletal muscle. This receptor is dramatically increased upon muscle injury
or disuse. A naturally occurring protein ligand for this receptor, termed agrin,
has also been identified at Regeneron. The muscle program is currently focused
on conducting in vivo and in vitro experiments with the objective of
demonstrating and further understanding the role of the muscle-specific receptor
and the activities of its ligand. Recent studies have revealed that this
receptor/ligand pair is absolutely required for the normal formation of the
connection between nerves and muscle. This work by Regeneron scientists gained
attention and formed the basis of the recent collaborative venture between the
Company and Procter & Gamble. This collaboration will explore the potential of
agrin and MuSK in muscle disease and also attempt to identify new orally active,
small-molecule drug candidates in this therapeutic arena by leveraging the
molecular expertise of the Company with the complementary expertise in chemical
libraries and high-throughput screening of Procter & Gamble.
Abnormal Bone Growth and Related Disorders
In collaboration with scientists at the University of California (San
Francisco), the Company has discovered human proteins that are natural
inhibitors of the proteins that regulate bone formation, known as the bone
morphogenic proteins ("BMPs"). The first such natural regulator, termed
"Noggin," is the most potent antagonist of BMP function yet described. In
addition to their apparent roles in normal bone formation, the BMPs also appear
to be involved in disease situations in which they promote abnormal bone growth.
One particularly devastating example is provided by the very rare disease known
as Fibrodysplasia Ossificans Progressiva ("FOP"), in which patients grow an
abnormal "second skeleton" that essentially locks them in place, preventing any
movement. As reported in the New England Journal of Medicine, BMPs appear to
play a causative role in this disease. Since Noggin is a potent blocker of the
BMPs implicated in FOP, it offers hope as a therapeutic agent in this
devastating disease. In addition, there are other less devastating but far more
common situations in which BMPs may be causing pathological bone growth and in
which Noggin or other negative regulators may be therapeutically useful. This
includes hip replacement surgery where abnormal bone growth can ruin the
surgical outcome.
In addition, the Company is working to discover and develop antagonists of
Noggin, which may in some settings allow for promotion of BMP function, but only
where the BMP is normally being blocked by Noggin, to promote bone growth.
The Company's research concerning regulators of bone growth includes
molecular and cellular research to improve or modify the Company's existing
regulators, process development efforts to produce experimental quantities of
these agents, and early stage in vivo and in vitro studies to further understand
and demonstrate the efficacy of the agents. The Company is also attempting to
discover more such regulators.
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Cytokine Agonists and Antagonists
Regeneron's widely-cited research on the CNTF class of neurotrophic factors
led to the discovery that CNTF, although it is a neurotrophic factor, belongs to
the "superfamily" of factors referred to as cytokines. This superfamily includes
factors such as erythropoietin, thrombopoietin, granulocyte-colony stimulating
factor, and the interleukins ("ILs"). Research at Regeneron has led to
proprietary insights into the receptors and signal transduction mechanisms used
by the entire cytokine superfamily and to novel approaches to develop both
agonists and antagonists for a variety of cytokines. Regeneron's scientists have
created protein-based antagonists for IL-1, IL-4, and IL-6 that are more potent
than previously described antagonists, allowing lower levels of these
antagonists to be used; moreover, these antagonists are comprised entirely of
natural human-derived sequences, and thus would not be expected to induce an
immune reaction in humans (although no assurance can be given since none have
yet been tested in humans). These cytokine antagonists are termed ligand traps.
Because pathological levels of IL-1, IL-4, and IL-6 seem to contribute to a
variety of disease states, these ligand traps have the potential to be important
therapeutic agents. Antagonists for IL-4 may be therapeutically useful in an
assortment of allergy and asthma-related disease situations in which IL-4 is
thought to play a contributory role and in a variety of vaccination settings in
which blocking IL-4 may help elicit more of the desired type of immune response
to the vaccine. Both IL-1 and IL-6 are referred to as pro-inflammatory cytokines
and have been implicated in the pathophysiology of a wide variety of human
disease conditions ranging from inflammatory disorders, such as rheumatoid
arthritis and sepsis, to cachexia (wasting). IL-6, in particular, is also
implicated in the pathology and progression of multiple myeloma, certain solid
tumors, AIDS, lymphomas (both AIDS-related and non-AIDS-related), osteoporosis,
and other conditions.
The Company's research regarding protein-based cytokine antagonists
currently includes molecular and cellular research to improve or modify the
Company's ligand trap technology, process development efforts to produce
experimental quantities of the ligand traps, and early stage in vivo and in
vitro studies to further understand and demonstrate the efficacy of the ligand
traps. The Company is also developing similar high-affinity antagonists to other
cytokines.
The Company has also entered into a substantial collaborative effort with
Pharmacopeia to use the Company's proprietary technology and insights concerning
cytokine receptors and their signaling, together with the proprietary
combinatorial- chemistry based small molecule libraries and high-throughput
screening technology provided by Pharmacopeia, for the discovery of small
molecule agonists and antagonists of a variety of members of the cytokine
superfamily. The objective of these collaborative efforts is to discover small
molecule mimics of protein therapeutics such as erythropoietin or
granulocyte-colony stimulating factor, as well as to discover small molecule
antagonists of interleukins such as IL-1, IL-4, and IL-6.
Other Programs
Orphan Receptor and Growth Factor Research. The therapeutic utility of many
growth factors depends, in part, on the exquisite specificity of their actions.
This specificity is determined largely by the limited distribution of receptors
for these factors on the target cells of interest. Using proprietary technology
initially developed for the discovery and characterization of neurotrophic
factors and their receptors, the Company has discovered new receptors and their
associated factors that act on particular cell
8
populations of potentially important clinical interest. These cell populations
include not only additional subsets of neurons but non-neuronal cells, such as
the endothelial cells that constitute blood vessels and skeletal muscle cells.
The Company's technology involves molecular biological as well as
"bioinformatics" approaches to identify and clone protein molecules that appear
to be receptors expressed on clinically relevant target cells for unknown
protein factors (hence their designation "orphan receptors"). The Company has
also obtained licenses and established collaborations for additional orphan
receptors, including licenses from the Salk Institute for Biological Studies.
The Company's technology includes approaches that allow for the identification
and molecular cloning of protein factors that bind to the orphan receptors.
Furthermore, the Company's technology allows for the development of derivatives
of the receptors and their factors, which can allow for modified agonistic or
antagonistic properties that may prove to be therapeutically useful.
Other Research and Development. Regeneron has assembled scientists with a
variety of complementary skills and experience and operates its own facilities
to conduct a broad-based research, preclinical, and clinical development
program. Substantially all of the Company's operating expenditures to date have
related to the discovery and development of drug product candidates and the
purchase and renovation of facilities and equipment to produce product
candidates. One focus of the Company's research is factors that control the
survival, optimal function, and regeneration of neurons. Specific areas of this
research have included neuronal cell culture, animal models for human
neurological disorders, molecular cloning and gene regulation, monoclonal
antibodies, protein purification and analysis, and high-level expression of
recombinant proteins. As Regeneron's scientific efforts lead to potentially
promising new directions, both outside of recombinant protein therapies (into
orally active, small molecule pharmaceuticals) and outside of treatments for
neurological and neurodegenerative conditions (into, for example, potential
programs in cancer, inflammation, and muscle disease), the Company will require
additional internal expertise or external collaborations in areas in which it
currently does not have substantial resources and personnel.
Research Collaboration and Licensing Agreements
To augment its research programs, Regeneron has entered into a variety of
collaborative research agreements and sponsored research agreements with
researchers and universities. Under these agreements, the Company typically
receives certain proprietary rights to inventions or discoveries that arise as a
result of the research. In addition, the Company has entered into significant
collaborative agreements with Amgen to develop, manufacture, and market BDNF and
NT-3, with Glaxo to discover and develop small molecule-based treatments for
neurodegenerative diseases, with Sumitomo Pharmaceuticals to develop BDNF for
commercialization in Japan, with Procter & Gamble to discover, develop, and
market protein and small molecule-based therapies for skeletal muscle diseases
and injuries, with Pharmacopeia to discover, develop, and market small
molecule-based pharmaceuticals, and with Medtronic to develop and market AXOKINE
delivered via infusion directly to the central nervous system.
Agreement With Amgen Inc. In August 1990, Regeneron and Amgen entered into
a collaboration agreement (the "Amgen Agreement") and Amgen agreed to provide
$25.0 million of product development funding for BDNF and NT-3 payable in five
annual installments. The final such payment was made by Amgen in the second
quarter of 1995. In conjunction with entering into the Amgen Agreement, Amgen
made a $15.0 million equity investment in the Company. From inception of the
Amgen Agreement through December 31, 1996, the Company received contract
research and development payments
9
totaling $39.6 million directly from Amgen or from Amgen-Regeneron Partners.
Amgen has also agreed to pay to the Company a total of $13.0 million of research
progress payments, $1.0 million of which was paid on the signing of the Amgen
Agreement, $1.0 million of which was paid in July 1993 on the filing by Amgen of
the IND application for BDNF, and $1.0 million of which was paid in September
1994 on the filing by Amgen of the IND application for NT-3. The remaining $10.0
million, which is divided equally between BDNF and NT-3, will be paid upon the
achievement of certain further milestones in respect of each compound. There
can be no assurance that any additional research progress payments will be made.
Under the Amgen Agreement, following preclinical development, Amgen and the
Company will attempt to develop and, if such effort is successful,
commercialize, market, and distribute BDNF and NT-3 drug products in the United
States through Amgen- Regeneron Partners. Amgen-Regeneron Partners is governed
by a six member Joint Management Committee composed of three members each from
Regeneron and Amgen. The Joint Management Committee determines annually, in
advance, the capital requirements for Amgen-Regeneron Partners and approves a
budget and product plan for each product under development. To maintain an equal
interest in Amgen-Regeneron Partners, Amgen and Regeneron are obligated to make
equal capital contributions to the partnership (such capital contributions
exclude Amgen's product development funding obligation described above). Such
capital contributions may be substantial. Amgen has the duty to direct and
conduct clinical trials of BDNF and NT-3 in the United States in accordance with
an annual product plan and budget that is approved by the Joint Management
Committee. Amgen is also responsible for the preparation of protocols with
respect to such trials. Amgen has the primary responsibility to develop
manufacturing processes for, and to manufacture, BDNF and NT-3 on behalf of
Amgen-Regeneron Partners. Assuming equal capital contributions to
Amgen-Regeneron Partners, Regeneron and Amgen share any profits or losses of
Amgen-Regeneron Partners equally.
The development and commercialization of BDNF and NT-3 outside of the
United States, Japan, China, and certain other Pacific Rim countries will be
conducted solely by Amgen through a license from the Company and, with respect
to NT-3, from Takeda (under a license agreement between Amgen/Regeneron,
Genentech and Takeda). In return, the Company will receive royalty payments
based on Amgen's net sales of any products in the licensed territory. In the
licensed territory, Amgen is solely responsible for funding clinical development
and related costs of the licensed products, as well as costs of their commercial
exploitation, and will have sole discretion with respect to all such
development, manufacturing, and marketing of the products and sole
responsibility for filing applications for regulatory approvals.
At the time it entered into the Amgen Agreement, Amgen agreed that until
the earlier of August 2010 or termination of the Amgen Agreement, it will not
take any steps or assist any third party to take steps to acquire control of the
Company, whether by acquisition of capital stock, proxy contest, tender offer,
merger, sale of assets, or voting agreements, except under certain
circumstances.
Agreement With Glaxo-Wellcome plc. In July 1993, the Company and Glaxo
agreed to conduct collaborative research with the objective of identifying
neurotrophin- related small molecules that could be useful for the treatment of
neurological and psychiatric diseases, including central nervous system diseases
such as Alzheimer's disease and Parkinson's disease, neuropsychiatric diseases
and conditions such as pain, depression, and eye diseases. This research is
directed by a joint management committee comprised of three Glaxo and three
Regeneron appointees. The collaborative research focuses on utilizing a
molecular understanding of the mechanism of action of the
10
neurotrophin family of neurotrophic factors as a basis for discovery of lead
compounds. In addition, the identification of genes involved in synapse
formation and the control of neuronal cell death in model systems will be
analyzed to identify lead compounds for drug development. If such lead compounds
are identified, Glaxo will have the authority to determine whether to conduct
exploratory development. Following exploratory preclinical and initial clinical
development, which will be funded by Glaxo, further clinical development will be
conducted under the direction of Glaxo and will be jointly funded by Glaxo and
the Company. Glaxo has also agreed to pay the Company certain milestone
payments, none of which have been paid. If Glaxo determines not to conduct
exploratory development and in certain other circumstances, Regeneron has
certain rights to obtain such compounds for its own development and
commercialization.
Under the Glaxo Agreement, if the Company contributes equally with Glaxo to
the costs of the development effort described above, the Company will be
entitled to require that any resulting products be commercialized by one or more
joint ventures formed by Glaxo and Regeneron. The Company will have the right to
contribute up to 50% of the capital of each such joint venture. Glaxo will be
responsible for the manufacture and supply of products to each such joint
venture entity pursuant to an agreed upon transfer price formula and other terms
and conditions. Glaxo and Regeneron will receive payments from each such joint
venture based on their respective capital contributions and will receive equal
royalty payments based on net sales.
In connection with the Glaxo Agreement, Glaxo purchased 500,000 shares of
Common Stock for $10.0 million. Glaxo also obtained certain piggyback
registration rights (exercisable after the collaboration terminates) and agreed
that until the earlier of July 1998 or the termination of the collaboration
agreement it will not take any steps or assist any third party to take steps to
acquire control of the Company, whether by acquisition of capital stock, proxy
contest, tender offer, merger, sale of assets, or voting agreements, except
under certain circumstances.
Agreement With Sumitomo Pharmaceuticals Company, Ltd. In June 1994, the
Company and Sumitomo Pharmaceuticals entered into an agreement for the research,
development, and commercialization of BDNF in Japan. Under the terms of the
agreement, Sumitomo Pharmaceuticals will pay up to $40.0 million to Regeneron,
including up to $25.0 million in research payments (of which Regeneron has
received $22.0 million as of December 31, 1996) and up to $15.0 million in
progress payments payable upon achievement of certain development milestones. No
progress payments have been made to date. In addition, Sumitomo Pharmaceuticals
agreed to reimburse Regeneron for its activities in developing manufacturing
processes for BDNF and supplying BDNF and other research materials to Sumitomo
Pharmaceuticals. Such manufacturing revenue totaled $8.5 million in 1996, $7.0
million in 1995, and $3.1 million in 1994. The agreement may be terminated by
Sumitomo Pharmaceuticals at its discretion; such termination would result in the
reversion to Regeneron of all rights to BDNF in Japan.
Agreement With Sumitomo Chemical Company, Limited. In connection with a
$4.4 million equity investment made by Sumitomo Chemical in March 1989, the
Company granted Sumitomo Chemical a limited right of first negotiation to
license up to three of the product candidates the Company decides to
commercialize in Japan on financial and commercial terms as may be offered by
the Company. The Company's collaborative agreement with Sumitomo
Pharmaceuticals, an affiliate of Sumitomo Chemical, to develop BDNF in Japan,
described above, is the first of such license agreements. In connection with its
equity investment, Sumitomo Chemical paid the Company an additional $5.6
million, representing a deposit for reimbursable costs and
11
expenses in product research and development. All available technology
development contract revenue was recognized by the end of 1992. The Company is
obligated periodically to inform and, if requested, to meet with Sumitomo
Chemical management about its progress in research and development.
Agreement with Medtronic, Inc. In June 1996, the Company entered into a
worldwide exclusive joint development agreement with Medtronic to collaborate on
the research and development of a family of therapeutics for central nervous
system diseases and disorders using experimental Regeneron compounds and
Medtronic delivery systems. The initial target of the Medtronic collaboration
will be the development of AXOKINE for the potential treatment of Huntington's
disease, using Medtronic's implantable pump or other delivery system to infuse
or otherwise directly deliver AXOKINE into the central nervous system. Under the
agreement, the Company will pay Medtronic defined royalties based on sales of
AXOKINE delivered to the central nervous system using a Medtronic delivery
device. In addition, Medtronic purchased from the Company 460,500 shares of
Common Stock for $10.0 million. The purchase price included five-year warrants
to purchase an additional 107,400 shares of Common Stock at an exercise price of
$21.72 per share. Medtronic also obtained certain piggyback registration rights
and agreed that until the later of the termination of the collaboration
agreement or five years from the date of the agreement, it will not take any
steps or assist any third party to take steps to acquire control of the Company,
whether by acquisition of capital stock, proxy contest, tender offer, merger,
sale of assets, or voting agreements, except under certain circumstances.
Agreement With Pharmacopeia, Inc. In October 1996, Regeneron and
Pharmacopeia entered into an agreement to collaborate exclusively in a series of
research programs the objective of which is to discover novel small molecule,
orally active therapeutics that are agonists, antagonists, or mimics of a broad
range of cytokines and growth factors. Subject to the ability of either or both
parties to opt-out of such efforts, any potential product candidate that may
emerge from this joint research will be jointly developed by Regeneron and
Pharmacopeia, with each party sharing equally in the costs of such efforts and
in any profits that may derived from such potential products. The Pharmacopeia
Agreement provided for no financial payments by either party, subject to the
mutual obligation to use reasonable efforts to discover lead compounds for
future development.
Agreement with Procter & Gamble Pharmaceuticals, Inc. In December 1996,
Procter & Gamble and Regeneron entered into an exclusive worldwide agreement to
discover and develop therapeutics for muscle diseases and disorders. Procter &
Gamble agreed to purchase shares of Regeneron Common Stock for $10.0 million and
make a minimum of three and up to five $3.75 million annual payments to
Regeneron to support collaborative muscle research. Procter & Gamble paid the
$10.0 million to Regeneron in December 1996. In March 1997, the price per share
was set at $12.50 based on a 27 percent premium over an average market price and
Regeneron issued 800,000 shares of restricted Common Stock to Procter & Gamble.
In addition, Procter & Gamble agreed to conduct muscle disease and disorder
research at its research facilities, and contribute the results of that effort
to the collaboration. Profits will be shared equally from any products jointly
developed and marketed. Procter & Gamble may terminate its research payment
obligation after three years, subject to reversion of certain rights to
Regeneron. Regeneron contributed its muscle technologies and intellectual
property, including its MuSK receptor and related technology, to the
collaboration. In addition to the potential development of protein-based
therapeutics, the collaboration will seek to
12
discover and develop small molecule, orally active therapeutics useful in the
treatment of muscle diseases and conditions.
Procter & Gamble also obtained certain piggyback registration rights
(exercisable after the collaboration terminates) and agreed that until the
earlier of December 2001 or the termination of the collaboration agreement it
will not take any steps or assist any third party to take steps to acquire
control of the Company, whether by acquisition of capital stock, proxy contest,
tender offer, merger, sale of assets, or voting agreements, except under certain
circumstances.
Other Agreements. The Company also has agreements with individual
researchers and universities to conduct sponsored research and development
programs. The goal of such agreements is to extend the Company's capabilities
and to acquire proprietary rights to the results of sponsored research. The
Company is a party to a number of sponsored research agreements which include
grants to the Company of exclusive licenses to certain discoveries and
technologies developed at, among other places, the Max Planck Institute
(covering the field of neurotrophic factors, including work done at the Max
Planck Institute on BDNF, NT-3, and other substances), and the University of
California at San Francisco (covering the use of neurotrophic factors and other
recombinant proteins to treat degenerative conditions of the eye).
In addition to these sponsored research agreements, the Company
(individually or in partnership with Amgen pursuant to the Amgen Agreement)
provides resource material and information that relate to its product candidates
and research programs to over 400 investigators at private and public
institutions throughout the world. Regeneron supplies materials and know-how to
these investigators on a confidential basis in exchange for access to additional
research and ownership of certain proprietary rights resulting from the work of
the investigators.
There can be no assurance that any of these agreements will result in work
that will have commercial potential or other useful benefit to the Company, or,
that if any such work has useful benefit to the Company, the Company will be
able to protect its proprietary position adequately to realize any possible
commercial benefit.
Manufacturing
The Company completed construction of its first manufacturing facility in
1992 in Tarrytown, New York. This facility, which was designed to comply with
FDA current good manufacturing practices ("GMP"), is intended to produce
preclinical and clinical supplies of compounds. Depending on the dosage of its
drugs, the facility could also produce either bulk compounds or the final dosage
form of certain product candidates.
In 1993, the Company purchased its Rensselaer, New York manufacturing
facility, which is being used to produce BDNF for use by Sumitomo
Pharmaceuticals and will be used to produce vaccine intermediate material for
Merck. The Company may use the facility to produce other product candidates and
materials in the future.
Among the conditions for regulatory marketing approval of a drug is the
requirement that the prospective manufacturer's quality control and
manufacturing procedures conform to the GMP regulations of the health authority.
In complying with standards set forth in these regulations, manufacturers must
continue to expend time, money, and effort in the area of production and quality
control to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, are also subject
13
to inspections by or under the authority
of the FDA and by other federal, state, and local agencies.
Competition
There is substantial competition in the biotechnology industry. Many of the
Company's competitors have substantially greater research, preclinical and
clinical product development, manufacturing capabilities, and financial,
marketing, and human resources than Regeneron. Smaller companies may also prove
to be significant competitors, particularly as a result of acquiring or
discovering patentable inventions or as a result of collaborative arrangements
with large pharmaceutical companies or their acquisition by large pharmaceutical
companies. The Company's agreements with larger, better established
pharmaceutical companies are intended to secure for the Company the benefits of
such a collaboration with a more experienced pharmaceutical firm. Technological
development and discoveries may require the Company to change its research and
development efforts to develop effective therapeutics. Competitors with greater
resources than the Company may have financial and technological flexibility to
respond to such needed changes that the Company does not have.
Even if BDNF or NT-3 is shown to be safe and effective to treat ALS,
peripheral neuropathy, or other neurological conditions, other companies have
developed or are developing drugs for the treatment of the same or similar
conditions. For example, the FDA has approved the application of Rhone-Poulenc
Rorer to market riluzole (under the tradename Rilutek), an orally administered
drug, to treat ALS in the United States, and Rhone-Poulenc Rorer has filed
applications for, and gained approval in, other countries. More broadly,
Regeneron is engaged in an intensely competitive field. Amgen and the Company
are direct competitors in the field of neurotrophic factors and possibly other
fields. Other potential competitors include Genentech, Inc. ("Genentech") which
is developing NGF to treat peripheral neuropathies, is a co-licensee under the
Amgen/Regeneron NT-3 license with Takeda, and may be developing other
neurotrophic factors, and Cephalon, Inc. ("Cephalon"), which is developing, in
collaboration with Chiron Corporation, insulin-like growth factor ("IGF-1", also
known as Myotrophin(TM)) and other compounds for the treatment of ALS,
peripheral neuropathies, and other conditions. Amgen, Genentech, Cephalon, and
others have filed patent applications, obtained issued patents relating to
neurotrophic factors, or have announced that they are actively pursuing
preclinical or clinical development programs in the area of neurotrophic
factors. Cephalon has announced that, based on the results of its Phase III
clinical studies with IGF-1 to treat ALS, it has filed or intends to file
applications for approval to market IGF-1 to treat ALS in the United States and
other countries. Amgen and Genentech have separately also announced research and
development of glial cell-line derived neurotrophic factor ("GDNF") for the
treatment of ALS, Parkinson's disease, and other conditions. Other companies
have developed or are developing drugs based on technology other than
neurotrophic factors for the treatment of diseases and injuries relating to the
nervous system (including ALS). The Company is also aware that several
pharmaceutical companies are conducting clinical trials in ALS with drugs which,
like riluzole, are orally administered.
If a competitor announces a successful clinical study involving a product
that may be competitive with one of the Company's product candidates or an
approval by a regulatory agency of the marketing of a competitive product, such
announcement may have a material adverse effect on the operations or future
prospects of the Company or the price of its Common Stock.
14
A number of corporate and academic competitors are involved in the
discovery and development of novel therapeutics using tyrosine kinase receptors,
orphan receptors, and compounds that are the focus of other research programs
now being conducted by the Company. These competitors include Amgen, Genentech,
and others. Many firms are engaged in research and development in the areas of
cytokines, interleukins, angiogenesis, and muscle conditions. Every
pharmaceutical and many biotechnology companies are engaged in attempting to
discover and develop small-molecule based therapeutics, similar in at least
certain respects to Regeneron's programs with Glaxo, Pharmacopeia, and Procter &
Gamble. In these and related areas, intellectual property rights have been
sought and certain rights have been granted to competitors and potential
competitors of the Company, and the Company may be at a substantial competitive
disadvantage in such areas as a result of, among other things, the Company's
lack of experience, trained personnel, and expertise.
The Company also competes with academic institutions, governmental
agencies, and other public or private research organizations which continue to
conduct research, seek patent protection, and establish collaborative
arrangements for the development and marketing of products that would provide
royalties for use of their technology. These institutions are becoming more
active in seeking patent protection and licensing arrangements to collect
royalties for use of the technology that they have developed. Products developed
in such a manner may compete directly with any products developed by the
Company. The Company also competes with others in acquiring technology from such
institutions, agencies, and organizations.
The relative speed with which Regeneron can develop safe and effective
product candidates, complete clinical testing and approval processes, and supply
commercial quantities of the product to the market will have an important impact
on the Company's competitive position. Competition among product candidates
approved for sale may be based on efficacy, safety, reliability, availability,
price, patent position, and other factors.
Patents, Trademarks, and Trade Secrets
The Company's success depends, in part, on its ability to obtain patents,
maintain trade secret protection, and operate without infringing on the
proprietary rights of third parties. The Company's policy is to file patent
applications to protect technology, inventions, and improvements that are
considered important to the development of its business. The Company has been
granted a number of U.S. patents and is the exclusive or nonexclusive licensee
of a number of additional U.S. patents and patent applications. The Company also
relies upon trade secrets, know-how, and continuing technological innovation to
develop and maintain its competitive position. The Company or its licensers or
collaborators have filed patent applications on products and processes relating
to neurotrophic factors and other technologies and inventions in the United
States and in certain foreign countries. The Company intends to file additional
patent applications, when appropriate, relating to improvements in its
technologies and other specific products and processes. The Company plans to
aggressively prosecute, enforce, and defend its patents and other proprietary
technology.
The patent positions of biotechnology firms, including the Company, are
generally uncertain and involve complex legal and factual questions. No
predictions can be made regarding the breadth, validity, or enforceability of
claims allowed in these types of patents. The Company does not know whether any
of its pending applications will result in the issuance of any patents or if any
currently issued patents or any patents
15
issued in the future will provide significant proprietary protection or will be
circumvented or invalidated or will infringe on the rights of others.
Competitors have filed applications for, or have been issued, patents and
may obtain additional patents and proprietary rights related to products or
processes competitive with those of the Company. Accordingly, there can be no
assurance that the Company's patent applications will result in patents being
issued in addition to those described above or that, if issued, the patents will
afford protection against competitors with similar technology; nor can there be
any assurance that others will not obtain patents that the Company will need to
license or circumvent. The Company is aware that one patent has issued in the
United States and patent applications in certain foreign countries were filed by
Amgen and others for the production of neurotrophic factor proteins, and that a
U.S. patent has issued to Genentech on processes relating to NGF. The Company is
further aware that patent applications have been filed in the United States and
certain foreign countries by Takeda, Amgen, and, the Company believes,
Genentech, on products and processes relating to NT-3. The Company has received
a co-exclusive license to NT- 3 as a result of a worldwide licensing agreement
between Amgen/Regeneron, Takeda, and Genentech. In November 1994, Genentech was
issued a U.S. patent relating to the nucleic acids encoding NT-4/5 and methods
for its recombinant production. Other patent filings by these companies or
others may be competitive with the Company's patent claims or may cause, if
valid and issued in the United States or a foreign jurisdiction, substantial
commercial difficulties or additional expenses or delays to the Company's
operations or commercial activities or may require the Company to cease certain
development or commercial activities altogether. The Company cannot predict
whether its or its competitors' patent applications will result in valid patents
being issued.
The Company is currently involved in two interference proceedings in the
United States Patent and Trademark Office between Regeneron's patent
applications and patents issued to Synergen, Inc. ("Synergen") relating to CNTF.
Amgen acquired all outstanding shares of Synergen in 1994. The Company incurred
$1.1 million for legal expenses relating to the interference proceedings through
December 31, 1996. Since April 1995, the Company has not incurred substantial
expenses in connection with these proceedings. Although the patent interference
proceedings have not involved substantive discovery or other adversarial
activities to date, future patent interference proceedings could result in
substantial legal fees and other costs. The final result of the proceedings
cannot be reasonably predicted.
Government Regulation
Regulation by government authorities in the United States and foreign
countries is a significant factor in the research, development, manufacture, and
marketing of the Company's product candidates. All of the Company's product
candidates will require regulatory approval before they can be commercialized.
In particular, human therapeutic products are subject to rigorous preclinical
and clinical trials and other premarket approval requirements by the FDA and
foreign authorities. Many aspects of the structure and substance of the FDA and
foreign pharmaceutical regulatory practice have been reformed during recent
years, and continued reform is under consideration in a number of forums. The
ultimate outcome and impact of such reforms and potential reforms cannot be
reasonably predicted.
Clinical trials are conducted in accordance with certain standards under
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated. Each protocol must be
submitted to the FDA.
16
The phases of clinical studies may overlap. The designation of a clinical trial
as being of a particular phase is not necessarily indicative that such a trial
will be sufficient to satisfy the parameters of a particular phase, and a
clinical trial may contain elements of more than one phase notwithstanding the
designation of the trial as being of a particular phase. No assurance can be
given that the results of preclinical studies or early stage clinical trials
will predict long-term safety or efficacy of the Company's compounds when they
are tested or used more broadly in humans. Various federal and state statutes
and regulations also govern or influence the research, manufacture, safety,
labeling, storage, recordkeeping, marketing, transport, or other aspects of such
products. The lengthy process of seeking these approvals and the compliance with
applicable statutes and regulations require the expenditure of substantial
resources. Any failure by the Company or its collaborators or licensees to
obtain, or any delay in obtaining, regulatory approvals could adversely affect
the marketing of any products developed by the Company and its ability to
receive product or royalty revenue.
In addition to the foregoing, the Company's present and future business
will be subject to regulation under the United States Atomic Energy Act, the
Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response,
Compensation and Liability Act, the National Environmental Policy Act, the Toxic
Substances Control Act, and the Resource Conservation and Recovery Act, national
restrictions, and other present and potential future local, state, federal, and
foreign regulations.
Employees
As of December 31, 1996, the Company had 243 full-time employees, 48 of
whom hold a Ph.D. and/or M.D. degree. Of the full-time employees, 198 are
engaged in or directly support research and development. The Company believes
that it has been highly successful in attracting skilled and experienced
personnel; however, competition for such personnel is intense. None of the
Company's personnel are covered by collective bargaining agreements, and
management considers its relations with its employees to be good.
Item 2. Properties
Regeneron conducts the Company's research, development, manufacturing, and
administrative activities at its own facilities. The Company currently leases
approximately 121,000 square feet of office, laboratory, and manufacturing space
in Tarrytown, New York. The current monthly base rental charge is $224,825, with
increases based upon increases in taxes and operating expenses. The lease for
this facility expires on June 30, 1998, subject to an option to renew the lease
for two additional five-year periods. The Company owns the Rensselaer facility,
consisting of two buildings totaling approximately 104,000 square feet of
research, manufacturing, office, and warehouse space.
As the Company's activities expand, additional space may be required. In
the future, the Company may locate, lease, operate, or purchase additional
facilities in which to conduct expanded research and development activities and
manufacturing and commercial operations.
17
Item 3. Legal Proceedings
Other than the patent interference proceedings which were declared by the
United States Patent and Trademark Office, the Company is not engaged in any
litigation or formal legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Listed below are the executive officers of the Company as of March 11,
1997. There are no family relationships between any of the executive officers
and there is no arrangement or understanding between any executive officer and
any other person pursuant to which the executive officer was selected. At the
annual meeting of the Board of Directors, which follows the Annual Meeting of
Shareholders, executive officers are elected by the Board to hold office for one
year and until their respective successors are elected and qualified, or until
their earlier resignation or removal.
Information with regard to the directors of the Company, including that of
the following executive officers who are directors, is incorporated by reference
to Regeneron Pharmaceuticals, Inc. Proxy Statement to be filed in connection
with solicitation of proxies for its Annual Meeting of Shareholders to be held
on June 27, 1997.
Name Age Position
- ---- --- --------
Leonard S. Schleifer, M.D., Ph.D. 44 Chief Executive Officer, President,
and founder of the Company
Murray A. Goldberg 52 Vice President, Finance &
Administration, Chief Financial
Officer, and Treasurer
Paul Lubetkin 46 Vice President, General Counsel,
and Secretary
Ronald M. Lindsay, Ph.D. 49 Vice President, Neurobiology
George D. Yancopoulos, M.D., Ph.D. 37 Vice President, Discovery
Jesse M. Cedarbaum, M.D. 44 Vice President, Clinical Affairs
Randall G. Rupp, Ph.D. 49 Vice President, Manufacturing and
Process Science
Gail M. Kempler, Ph.D. 42 Vice President, Intellectual
Property and Associate General
Counsel
Beverly C. Dubs 42 Controller and Assistant Treasurer
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of Regeneron is quoted on The Nasdaq Stock Market under
the symbol "REGN". The Company's Class A Common Stock, par value $.001 per
share, is not publicly quoted or traded.
The following table sets forth, for the periods indicated, the range of
high and low bid quotations for the Common Stock as reported by The Nasdaq Stock
Market. The bid prices reflect inter-dealer quotations without retail mark-ups,
mark-downs, or commissions and do not necessarily represent actual transactions.
High Low
---- ---
1995
First Quarter ........................... $ 7.00 $3.00
Second Quarter .......................... 10.00 5.50
Third Quarter ........................... 16.375 8.75
Fourth Quarter .......................... 15.625 8.625
1996
First Quarter ............................ 16.625 11.375
Second Quarter ........................... 19.75 11.75
Third Quarter ............................ 20.50 13.25
Fourth Quarter ........................... 24.50 14.875
As of March 11, 1997, there were approximately 947 holders of record of the
Company's Common Stock and 91 holders of record of the Company's Class A Common
Stock. The closing bid price on that date was $8.75.
The Company has never paid cash dividends on its common shares and does not
intend to pay cash dividends in the foreseeable future. In addition, under the
terms of certain debt and equipment lease financing agreements, the Company is
not permitted to declare or pay dividends to its shareholders.
19
Item 6. Selected Financial Data
The selected financial data set forth below for the years ended
December 31, 1996, 1995, and 1994 and at December 31, 1996 and 1995 are derived
from and should be read in conjunction with the audited financial statements of
the Company, including the notes thereto, included elsewhere in this report.
The selected financial data for the years ended December 31, 1993 and 1992 and
at December 31, 1994, 1993 and 1992 are derived from audited financial
statements of the Company not included in this report.
The Company has never paid cash dividends on its common shares and
does not anticipate paying any in the foreseeable future. In addition, under
the terms of certain debt agreements, the Company is not permitted to declare
or pay dividends to its shareholders.
Year Ended December 31,
--------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ---------------------
Statement of Operations Data
Revenues
Contract research and development $17,302,473 $23,247,002 $19,606,292
Investment income 4,360,065 2,997,180 2,585,465
Contract manufacturing 2,451,424 1,140,321
Research progress payments 1,000,000
Technology development contract
------------------ ------------------ -------------------
24,113,962 27,384,503 23,191,757
------------------ ------------------ -------------------
Expenses
Research and development 28,268,798 23,310,088 30,874,437
Loss in Amgen-Regeneron Partners 14,250,239 13,804,777 9,794,237
General and administrative 5,879,975 5,764,397 7,529,136
Depreciation and amortization 6,083,845 5,885,699 4,245,686
Contract manufacturing 1,115,259 72,059
Interest 939,624 1,204,757 1,403,001
Other 850,000
-------------------------------------- -------------------
56,537,740 50,891,777 53,846,497
-------------------------------------- -------------------
Net loss ($32,423,778) ($23,507,274) ($30,654,740)
================== ================== ===================
Net loss per share ($1.33) ($1.19) ($1.62)
================== ================== ===================
Weighted average number of Common and
Class A shares outstanding 24,463,516 19,768,446 18,866,993
================== ================== ===================
At December 31,
--------------------------------------------------------------
1996 1995 1994
------------------ ------------------ ---------------------
Balance Sheet Data
Cash, cash equivalents
and marketable securities $97,027,766 $59,622,010 $60,215,256
Working capital 72,960,217 36,254,422 34,040,342
Total assets 137,581,854 93,811,345 94,235,806
Capital lease obligations and note payable,
long-term portion 5,148,097 5,977,866 9,249,471
Stockholders' equity 106,930,999 67,856,449 67,070,567
Year Ended December 31,
-----------------------------------------
1993 1992
------------------ --------------------
Statement of Operations Data
Revenues
Contract research and development $6,092,319 $5,000,000
Investment income 3,463,902 4,982,668
Contract manufacturing
Research progress payments 1,000,000
Technology development contract 1,553,601
------------------ ------------------
10,556,221 11,536,269
------------------ ------------------
Expenses
Research and development 36,755,883 23,809,313
Loss in Amgen-Regeneron Partners 3,511,346
General and administrative 6,025,921 3,993,504
Depreciation and amortization 3,101,055 2,109,958
Contract manufacturing
Interest 1,045,953 736,183
Other
------------------ ------------------
50,440,158 30,648,958
------------------ ------------------
Net loss ($39,883,937) ($19,112,689)
================== ==================
Net loss per share ($2.41) ($1.24)
================== ==================
Weighted average number of Common and
Class A shares outstanding 16,569,288 15,352,798
================== ==================
At December 31,
----------------------------------------
1993 1992
------------------- ------------------
Balance Sheet Data
Cash, cash equivalents
and marketable securities $88,281,194 $83,344,257
Working capital 78,738,906 80,108,844
Total assets 117,579,418 97,879,953
Capital lease obligations and note payable,
long-term portion 5,911,876 5,818,291
Stockholders' equity 98,388,159 87,153,427
20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Overview. The discussion below contains forward-looking statements
that involve risks and uncertainties relating to the future financial
performance of Regeneron Pharmaceuticals, Inc. ("Regeneron" or the
"Company") and actual events or results may differ materially. These statements
concern, among other things, the possible therapeutic applications of the
Company's product candidates and research programs, the timing and nature of
the Company's clinical and research programs now underway or planned, a variety
of items described herein and in the footnotes to the Company's financial
statements (including the useful life of assets, the anticipated length of
agreements, and other matters), and the future uses of capital and financial
needs of the Company. These statements are made by the Company based on
management's current beliefs and judgment. In evaluating such statements,
stockholders and investors should specifically consider the various factors
identified under the caption "Factors That May Affect Future Operating Results"
which could cause actual results to differ materially from those indicated by
such forward-looking statements.
Regeneron is a New York corporation founded in 1988. It is a leader in
the application of molecular and cell biology to discover novel potential
therapies for human medical conditions. The Company is applying its
technological expertise in protein growth factors, their receptors, and their
mechanisms of action to the discovery and development of neurotrophic factors
for the potential treatment of neurodegenerative disease, peripheral neuropathy,
and nerve injury. More recently, Regeneron has used its technological expertise
to attempt to identify treatments for diseases and conditions outside of the
nervous system, such as inflammatory and muscle disease, angiogenesis,
hematopoiesis, and cancer. In addition to conducting research and development
during 1993 through 1996, highlights of Regeneron's operations included:
o During 1993, the Company completed Phase II clinical trials and commenced
Phase III clinical trials in the United States of ciliary neurotrophic
factor ("CNTF") to treat amyotrophic lateral sclerosis ("ALS," commonly
known as Lou Gehrig's disease). In addition, in accordance with its
collaboration agreement with Amgen Inc. ("Amgen"), Amgen initiated clinical
trials of brain-derived neurotrophic factor ("BDNF"), on behalf of
Amgen-Regeneron Partners, for the treatment of ALS. The Company also added
and renovated laboratory and administrative space, including the Rensselaer
facility. In 1993, the Company raised a total of approximately $51.0
million, primarily from the sale of Common Stock to Glaxo-Wellcome plc
("Glaxo") and in a public offering.
o During 1994, the Company discontinued its Phase III clinical study of CNTF
to treat ALS and implemented a strategy to concentrate on its most
promising product candidates and its discovery research efforts and to seek
additional corporate partnerships and licensing agreements. Regeneron also
reduced its workforce by approximately 25%, to approximately 200 employees,
and incurred a charge of approximately $0.4 million in connection with
costs associated with the reduction in force.
o During 1995, Amgen, on behalf of Amgen-Regeneron Partners, began a Phase
III clinical trial of BDNF for the treatment of ALS designed to determine
the safety and efficacy of BDNF to treat ALS. Amgen and Regeneron also
analyzed results from the Phase I clinical trial and planned a further
clinical trial of neurotrophin-3 ("NT-3") for peripheral neuropathy. The
Company continued to develop and manufacture BDNF for use by Sumitomo
Pharmaceuticals Company, Ltd. ("Sumitomo Pharmaceuticals") in Japan.
During the second quarter of 1995, the Company announced preclinical
research discoveries by Regeneron scientists in the areas of cancer,
muscle disease, and angiogenesis. In the third quarter of 1995, the
Company entered into a long-term manufacturing agreement with Merck &
Co., Inc. (the "Merck Agreement") under which the Company will produce at
its Rensselaer, New York facility an intermediate for an existing Merck
pediatric vaccine. In the fourth quarter of 1995, the Company raised
$22.3 million in net proceeds from a public offering of Common Stock. The
Company settled a securities class action lawsuit against the Company and
two individuals. As part of the settlement, the Company issued 153,017
shares of Common Stock in January 1996.
21
o During 1996, Amgen, on behalf of Amgen-Regeneron Partners, completed the
treatment phase of the Phase III clinical trial designed to determine the
safety and efficacy of BDNF delivered subcutaneously for the treatment of
ALS. In addition, Amgen, on behalf of Amgen-Regeneron Partners, continued
to conduct a Phase I/II clinical trial of NT-3 for the treatment of
peripheral neuropathy caused by diabetes. Amgen also continued to conduct a
Phase I/II clinical trial of BDNF in Europe for the treatment of neuropathy
caused by diabetes and started a Phase I clinical trial of BDNF delivered
intrathecally for the treatment of ALS. The Company continued to develop
and manufacture BDNF for use by Sumitomo Pharmaceuticals in Japan and
continued preclinical research programs in the areas of inflammatory and
muscle disease, angiogenesis, hematopoiesis, and cancer. In April 1996,
Amgen purchased from the Company three million shares of Common Stock for
$48.0 million. The purchase price also included five-year warrants to
purchase an additional 700,000 shares of Common Stock at an exercise
price of $16.00 per share. In June 1996, the Company entered into a
worldwide exclusive joint development agreement with Medtronic Inc.
("Medtronic") to collaborate on research and development of a family of
therapeutics for central nervous system diseases and disorders using
experimental Regeneron compounds and Medtronic delivery systems. The
initial target of the Medtronic collaboration will be the development of
AXOKINE(Trademark) for the potential treatment of Huntington's disease,
using Medtronic's implantable pump to infuse AXOKINE into the central
nervous system. Medtronic purchased from the Company 460,500 shares of
Common Stock for $10.0 million; the purchase price included five-year
warrants to purchase an additional 107,400 shares of Common Stock at an
exercise price of $21.72 per share. In October 1996, Regeneron entered into
a research collaboration with Pharmacopeia, Inc. ("Pharmacopeia") to
discover and develop small molecule drugs that mimic or antagonize growth
factors or cytokines. In December 1996, the Company entered into an
exclusive worldwide agreement with Procter & Gamble Pharmaceuticals, Inc.
("Procter & Gamble") to discover and develop therapeutics for muscle
diseases and disorders. Procter & Gamble agreed to purchase shares of
Common Stock for $10.0 million and make a minimum of three and up to five
$3.75 million annual payments to the Company to support collaborative
muscle research. Procter & Gamble paid the $10.0 million to Regeneron in
December 1996. In March 1997, the price per share was set at $12.50 based
on a 27 percent premium over an average market price and Regeneron issued
800,000 shares of restricted Common Stock to Procter & Gamble.
In January 1997, Amgen and Regeneron announced that the Phase III
clinical trial of BDNF delivered subcutaneously did not demonstrate clinical
efficacy in patients with ALS, that no further subsequent subcutaneous
development of BDNF for ALS was planned, and that the trial confirmed the safety
and tolerability of BDNF seen in earlier trials. The failure of the Phase III
trial to achieve its primary end points had a materially adverse effect on the
price of the Company's Common Stock (which declined more than 50% immediately
after the announcement of the results of the trial). After the Phase III
clinical trial results were announced, the Company retained independent experts
in the fields of neurology and gastroenterology, as well as independent
statisticians, to conduct further examination of the data. This review by the
Company and the outside panels indicated 1) that a subset of ALS patients in the
trial may have received a benefit from BDNF treatment and 2) that BDNF appeared
to have an effect on the gastrointestinal system and might have a therapeutic
role in treating constipating conditions, among other disorders. The panels
recommended, among other things, that additional clinical and preclinical
investigations of subcutaneous BDNF for ALS and BDNF for gastrointestinal
conditions should be undertaken. The Company is reviewing these recommendations
and the Phase III data and is discussing with Amgen and Sumitomo Pharmaceuticals
whether
22
to undertake these or other investigations of BDNF. Further development of BDNF
in the United States must be undertaken in accordance with the terms of the
Company's collaboration agreement with Amgen. Although Sumitomo Pharmaceuticals
had planned a Phase I safety assessment of BDNF early in 1997, they are
currently reviewing their BDNF development plan in light of the recently
available information.
The results of the Company's and its collaborators' past activities in
connection with the research and development of BDNF and NT-3 do not necessarily
predict the results or success of future activities including, but not limited
to, any additional preclinical or clinical studies of BDNF or NT-3. The Company
can not predict whether, when, or under what conditions BDNF or NT-3 will be
shown to be safe or effective to treat any human condition or be approved for
marketing by any regulatory agency. The delay or failure of current or future
studies to demonstrate the safety or efficacy of BDNF or NT-3 to treat human
conditions or to be approved for marketing would have a material adverse impact
on the Company.
The Company and Amgen are conducting a Phase I trial of BDNF for ALS
using intrathecal delivery. While intrathecal delivery may be more successful in
delivering BDNF to certain motor neurons (the nerve cells that degenerate in
ALS), it is not known whether intrathecal delivery will prove any more
successful in demonstrating safety and utility in patients with ALS than the
subcutaneous delivery used in the Phase III clinical trial that failed to
achieve its primary end points. In addition, the potential success of any
current or future BDNF clinical trial for the treatment of ALS will be
dependent upon, among other things, certain factors that could undermine the
significance of the data collected from such patients. For example, patients
who take Rilutek(Trademark), an orally administered drug marketed by
Rhone-Poulenc Rorer for the treatment of ALS, might enroll in a BDNF trial.
Also, other medications for the treatment of ALS are available on an
experimental basis and may be approved for marketing in the future. The
clinical effects of taking BDNF in combination with other drugs is unknown and
therefore unanticipated effects could complicate a BDNF clinical trial or
render the data collected difficult to analyze or interpret. The design of any
BDNF clinical trial will attempt to take into account the inclusion of patients
who may be taking other medications, including Rilutek. However, if a clinical
study is compromised through the inclusion of patients who were taking Rilutek
or other medications, with or without the consent or knowledge of the trial
sponsor, the results of the study may be undermined and additional clinical
studies may be required, causing a delay in, and increasing the costs of, the
development of BDNF, which would have a material adverse effect on the Company.
If additional studies of BDNF for ALS are undertaken, the time and expense
required for such trials could be material to the Company and the outcome will
be uncertain. If subsequent trials are conducted and such trials fail to
demonstrate that BDNF is safe and effective in the treatment of ALS, that
failure could have a materially adverse effect on the Company, the price of
the Company's Common Stock, and the Company's ability to raise additional
capital.
No assurance can be given that extended administration of NT-3 will be
safe or effective. The Phase I study of NT-3 in normal human volunteers that
concluded in 1995 was a short term (seven day) treatment study. The 1996 study
involves substantially longer treatment (six months or longer). In the Phase I
study, two out of the seventy-six patients developed significant abnormalities
in blood tests of their liver function. These laboratory abnormalities reversed
after cessation of treatment and were not associated with any other evidence of
liver dysfunction. Similar abnormalities have not been observed in preclinical
toxicology studies with NT-3. However, if such abnormalities were to occur in a
number of patients in subsequent trials, including the 1996 study, this result
could delay or preclude the further development of NT-3. The treatment of
23
peripheral neuropathy associated with cancer chemotherapy or diabetes may
present additional clinical trial risks in light of the complex and not wholly
understood mechanisms of action that lead to the neuropathies, the presence of
many other drugs to treat the underlying conditions, the potential difficulty of
achieving significant clinical endpoints, and other factors. No assurance can be
given that these or any other studies of NT-3 will be successful or that NT-3
will be commercialized.
To date, Regeneron has not received any revenues from the commercial
sale of products and may not receive any such revenues for several years. Before
such revenues can be realized, the Company (or its collaborators) must overcome
a number of hurdles which include successfully completing its research and
development efforts and obtaining regulatory approval from the United States
Food and Drug Administration ("FDA") or regulatory authorities in other
countries. In addition, the biotechnology and pharmaceutical industries are
rapidly evolving and highly competitive, and new developments may render the
Company's products and technologies noncompetitive and obsolete.
In the absence of revenues from commercial product sales or other
sources (the amount, timing, nature, or source of which can not be predicted),
the Company's losses will continue as the Company conducts its research and
development activities. The Company's activities may expand over time and may
require additional resources, and the Company's operating losses may be
substantial over at least the next several years. The Company's losses may
fluctuate from quarter to quarter and will depend, among other factors, on the
timing of certain expenses and on the progress of the Company's research and
development efforts.
Results of Operations
Years Ended December 31, 1996 and 1995. The Company's total revenue
decreased to $24.1 million in 1996 from $27.4 in 1995. Contract research and
development revenue decreased to $17.3 million in 1996 from $23.2 million in
1995. Contract research and development revenue earned from Sumitomo
Pharmaceuticals decreased to $11.5 million in 1996 from $15.4 million in 1995.
Of the 1996 Sumitomo Pharmaceuticals revenue, $3.0 million was for contract
research and $8.5 million was reimbursement for developing manufacturing
processes for BDNF and supplying BDNF. Of the 1995 Sumitomo Pharmaceuticals
revenue, $8.4 million was for contract research (including $5.4 million related
to a non-recurring contract research payment), and $7.0 million was
reimbursement for developing manufacturing processes for BDNF and supplying
BDNF. Contract research and development revenue earned from Amgen and
Amgen-Regeneron Partners decreased to $5.8 million in 1996 from $7.8 million
1995. This reflects a decision by the partnership to focus more spending in 1996
on clinical trials and precommercial activities conducted by Amgen and less
spending on preclinical research conducted by Regeneron. During 1995, the
Company entered into the Merck Agreement. Contract manufacturing revenue in 1996
and 1995 related to this agreement aggregated $2.4 million and $1.1 million,
respectively. Investment income for 1996 increased to $4.4 million from $3.0
million in 1995, primarily due to increased levels of interest-bearing
investments resulting from the sale by the Company of equity securities in a
public offering in November 1995 and in private placements to Amgen, Medtronic,
and Procter & Gamble in April, June, and December 1996, respectively.
The Company's total operating expenses increased to $56.5 million in
1996 from $50.9 million in 1995. Research and development expense increased to
$28.3 million in 1996 from $23.3 million in 1995, primarily due to costs related
to the Company's
24
preclinical research programs, as well as the costs of increased activity in the
Company's Rensselaer, New York manufacturing facility related to the Company's
agreement with Sumitomo Pharmaceuticals. Loss in Amgen-Regeneron Partners
increased to $14.3 million in 1996 from $13.8 million in 1995, primarily due to
increased costs related to clinical trials and other activities conducted by
Amgen on behalf of the partnership. Research and development expenses, including
the loss in Amgen-Regeneron Partners, were approximately 75% of total operating
expenses in 1996, compared to 73% in 1995.
General and administrative expense increased to $5.9 million in 1996
from $5.8 million in 1995 as expenses remained consistent year-to-year. Interest
expense decreased to $0.9 million in 1996 from $1.2 million in 1995, resulting
from the expiration of capital leases during 1995 and 1996. Contract
manufacturing of $1.1 million in 1996 were direct expenses related to contract
manufacturing for Merck. Other expenses of $0.9 million in 1995 related to
recognition of the Company's contribution to the settlement of shareholder
class action litigation.
The Company's net loss in 1996 was $32.4 million, or $1.33 per share,
compared to a net loss of $23.5 million, or $1.19 per share, in 1995.
Years Ended December 31, 1995 and 1994. The Company's total revenue
increased to $27.4 million in 1995 from $23.2 million in 1994. Contract research
and development revenue increased to $23.2 million in 1995 from $19.6 million in
1994. Contract research and development revenue earned from Sumitomo
Pharmaceuticals increased to $15.4 million in 1995 from $10.7 million in 1994.
Of the 1995 Sumitomo Pharmaceuticals revenue, $8.4 million was for contract
research and $7.0 million was reimbursement for developing manufacturing
processes for BDNF and supplying BDNF. Of the 1994 Sumitomo Pharmaceuticals
revenue, $7.6 million was for contract research (including $5.4 million related
to a non-recurring contract research payment), and $3.1 million was
reimbursement for developing manufacturing processes for BDNF and supplying
BDNF. Contract research and development revenue earned from Amgen and
Amgen-Regeneron Partners decreased to $7.8 million in 1995 from $8.9 million in
1994. This decrease was the result of the Company providing less research
support to the partnership. During 1994, the Company received a $1.0 million
research milestone payment from Amgen upon the filing of an IND for NT-3, as
provided for in the Amgen Agreement. In 1995, the Company entered into a
long-term manufacturing agreement with Merck, and contract manufacturing revenue
related to this agreement totaled $1.1 million. Investment income in 1995,
increased to $3.0 million from $2.6 million in 1994, primarily due to capital
losses of $0.3 million in 1994, a rise in interest rates in 1995, and interest
earned on the net proceeds of the Company's November 1995 public offering,
offset by reduced levels of interest-bearing investments in the first ten months
of the year as the Company expended funds during 1995 for capital assets,
research and development, and other operating expenses.
The Company's total operating expenses decreased to $50.9 million in
1995 from $53.8 million in 1994. Research and development expense decreased to
$23.3 million in 1995 from $30.9 million in 1994. The Company's research and
development expenses decreased primarily due to discontinuance of the Company's
clinical study of CNTF in June 1994, when that study failed to demonstrate the
safety and efficacy of CNTF to treat ALS. This decrease was partially offset by
additional expenses related to the Company's collaboration with Sumitomo
Pharmaceuticals. Loss in Amgen-Regeneron Partners increased to $13.8 million in
1995 from $9.8 million in 1994, primarily due to increased costs related to the
initiation in the third quarter of 1995 of the Phase III BDNF clinical trial
conducted by Amgen on behalf of Amgen-Regeneron Partners. Research and
25
development expenses, including the loss in Amgen-Regeneron Partners, were
approximately 73% of total operating expenses in 1995, compared to 76% in 1994.
General and administrative expense decreased to $5.8 million in 1995
from $7.5 million in 1994, primarily because the 1995 period reflected lower
costs associated with the Company's reduced staff and because the 1994 period
included a charge of approximately $0.4 million for costs associated with a 25%
reduction in workforce following the discontinuance of the Company's clinical
study of CNTF. Depreciation and amortization expense increased to $5.9 million
in 1995 from $4.2 million in 1994, reflecting depreciation of the Rensselaer
facility, which became fully operational in July 1994, equipment and leasehold
improvements placed in service during 1995, and increased patent amortization
expense. Interest expense decreased to $1.2 million in 1995 from $1.4 million in
1994. Other expenses related to recognition in the third quarter of
1995 of a $0.9 million expense as the Company's contribution to the settlement
of shareholder class action litigation.
The Company's net loss in 1995 was $23.5 million, or $1.19 per share,
compared to a net loss of $30.7 million, or $1.62 per share, in 1994.
Liquidity and Capital Resources
Since its inception in 1988, the Company has financed its operations
primarily through private placements and public offerings of its equity
securities, revenue earned under the several agreements between the Company and
each of Amgen, Sumitomo Chemical Company, Ltd., Sumitomo Pharmaceuticals, Merck,
Medtronic, and Procter & Gamble and investment income. In connection with the
Company's agreement to collaborate with Sumitomo Pharmaceuticals in the research
and development of BDNF in Japan, Sumitomo Pharmaceuticals paid the Company
$22.0 million and agreed to pay the Company an additional $3.0 million in 1998.
Sumitomo Pharmaceuticals has the option to cancel the 1998 payment; however, if
such a cancellation were to occur, Sumitomo Pharmaceutical's rights to develop
and commercialize BDNF in Japan would revert to the Company. In addition, the
Company is being reimbursed in connection with supplying Sumitomo
Pharmaceuticals with BDNF for preclinical use.
Under the Amgen Agreement, Amgen was required to make defined payments
through June 1995 to the Company for research and development efforts in the
United States in connection with BDNF and NT-3. The Amgen Agreement provided
that after Amgen determined that IND applications should be filed for BDNF and
NT-3, Amgen-Regeneron Partners would thereafter conduct the
development and commercialization of these product candidates on behalf of
Amgen-Regeneron Partners. Amgen-Regeneron Partners began operations in June
1993 with respect to BDNF and in January 1994 with respect to NT-3. Amgen's
required payments for BDNF and NT-3 were made directly to Regeneron prior to
the determination by Amgen that the preparation of an IND for each compound
should commence and thereafter to Amgen-Regeneron Partners. The Company's
further activities relating to BDNF and NT-3, as agreed upon by Amgen and
Regeneron, are being reimbursed by Amgen-Regeneron Partners, and the Company
recognizes such reimbursement as revenue. The funding of Amgen-Regeneron
Partners is through capital contributions from Amgen and Regeneron, who must
make equal payments in order to maintain equal ownership and equal sharing of
any profits or losses from the partnership. The Company has made capital
contributions totaling approximately $42.6 million to Amgen-Regeneron Partners
from the partnership's inception in June 1993 through December 31, 1996. The
Company expects that its capital contributions in 1997 will total approximately
$3.0 million to $5.0 million. These contributions could increase or
26
decrease, depending upon the cost of Amgen-Regeneron Partners conducting
additional BDNF and NT-3 preclinical and clinical studies and the outcomes of
those and other ongoing studies. Capital contributions beyond 1997 are also
anticipated to be significant.
In September 1995, the Company entered into the Merck Agreement.
Depending on the volume of the intermediate supplied to Merck, total capital and
product payments from Merck to Regeneron could total $40.0 million or more over
the term of the agreement, which is expected to extend to 2003. This agreement
may be terminated at any time by Merck upon the payment by Merck of a
termination fee.
From its inception in January 1988 through December 31, 1996,
exclusive of construction in progress, the Company invested approximately $47.4
million in property, plant and equipment, including $16.8 million to acquire and
renovate the Rensselaer facility and $6.1 million of new construction that is in
progress related to the modification of the facility in connection with the
Merck Agreement. In connection with the purchase and renovation of the
Rensselaer facility, the Company obtained financing of $2.0 million from the New
York State Urban Development Corporation, of which $1.8 million is outstanding.
Under the terms of such financing the Company is not permitted to declare or pay
dividends to its stockholders.
During 1996, the Company entered into a series of new leasing
agreements (the "New Lease Line") which provides up to $4.0 million to finance
equipment acquisitions and certain building improvements, as defined,
(collectively, the "Equipment"). The Company may utilize the New Lease Line in
increments ("leases"). Lease terms are for four years after which the Company is
required to purchase the Equipment at defined amounts. Certain of the leases
will be renewed for eight months at defined monthly payments after which the
Company will own the Equipment. At December 1996, the Company had available
approximately $1.1 million of the New Lease Line.
The Company expects that expenses related to the filing, prosecution,
defense and enforcement of patent and other intellectual property claims will
continue to be substantial as a result of patent filings and prosecutions in the
United States and foreign countries. The Company is currently involved in two
interference proceedings in the Patent and Trademark Office between Regeneron's
patent applications and patents relating to CNTF issued to Synergen, Inc. Amgen
acquired all outstanding shares of Synergen in 1994.
As of December 31, 1996, the Company had no established banking
arrangements through which it could obtain short-term financing or a line of
credit. Additional funds may be raised through, among other things, the issuance
of additional securities, other financing arrangements, and future collaboration
agreements. No assurance can be given that additional financing will be
available or, if available, that it will be available on acceptable terms.
At December 31, 1996, the Company had $97.0 million in cash, cash
equivalents, and marketable securities. The Company expects to incur ongoing
funding requirements for capital contributions to Amgen-Regeneron Partners to
support the continued development and clinical trials of BDNF and NT-3. The
Company also expects to incur substantial funding requirements for, among other
things, its research and development activities (including preclinical and
clinical testing), validation of its manufacturing facilities, and the
acquisition of equipment, and may incur substantial funding requirements for
expenses related to the patent interference proceedings and other patent
matters. The amount needed to fund operations will also depend on other factors,
including the status of competitive products, the success of the Company's
research and
27
development programs, the status of patents and other intellectual property
rights developments, and the extent and success of any collaborative research
programs. The Company expects to incur additional capital expenditures in
connection with the renovation and validation of its Rensselaer facility
pursuant to its manufacturing agreement with Merck. However, the Company also
expects that such expenditures will be substantially reimbursed by Merck,
subject to certain conditions. The Company believes that its existing capital
resources will enable it to meet operating needs into 1999. No assurance can be
given that there will be no change in projected revenues or expenses that would
lead to the Company's capital being consumed at a faster rate than currently
expected. In order to continue to attempt to assure Regeneron's financial
condition and maximize its technological developments for the long-term benefit
of shareholders, the Company from time to time seeks additional corporate
partners and explores other opportunities to obtain research and development
funding. No assurance can be given that such partners or funding will be
available or, if available, will be on terms favorable or acceptable to the
Company.
Factors That May Affect Future Operating Results
Regeneron cautions stockholders and investors that the following
important factors, among others, in some cases have affected, and in the future
could affect, Regeneron's actual results and could cause Regeneron's actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, Regeneron. The statements under this
caption are intended to serve as cautionary statements within the meaning of the
Private Securities Litigation Reform Act of 1995. The following information is
not intended to limit in any way the characterization of other statements or
information under other captions as cautionary statements for such purpose:
o Delay, difficulty, or failure in obtaining regulatory approval (including
approval of its facilities for production) for the Company's products
(including vaccine intermediate for Merck), including delays or
difficulties in development because of insufficient proof of safety or
efficacy.
o Delay, difficulty, or failure of the Company's preclinical drug research
and development programs to produce product candidates that are
scientifically or commercially appropriate for further development by the
Company or others.
o Increased and irregular costs of development, regulatory approval,
manufacture, sales, and marketing associated with the introduction of
products in the late stage of development.
o Cancellation or termination of material collaborative or licensing
agreements could result in loss of research or other funding and have other
material adverse effects on the Company and its operations. A change of
control of one or more of the Company's material collaborators or licensees
could also have a material adverse effect on the Company.
o Competitive or market factors may cause use of the Company's products to be
limited or otherwise fail to achieve broad acceptance.
28
o The ability to obtain, maintain, and prosecute intellectual property
rights, and the cost of acquiring in-process technology and other
intellectual property rights, either by license, collaboration, or purchase
of another entity.
o Difficulties or high costs of obtaining adequate financing to meet the
Company's obligations under its collaboration and licensing agreements or
to fund 50 percent of the cost of developing product candidates in order to
retain 50 percent of the commercialization rights.
o Amount and rate of growth in Regeneron's selling, general, and
administrative expenses, and the impact of unusual or infrequent charges
resulting from Regeneron's ongoing evaluation of its business strategies
and organizational structure.
o Failure of corporate partners to commercialize successfully the Company's
products or to retain and expand the markets served by the commercial
collaborations; conflicts of interest, priorities, and commercial
strategies which may arise between the Company and such corporate partners.
o Difficulties in launching or marketing the Company's products by the
Company or its licensees, especially when such products are novel products
based on biotechnology, and unpredictability of customer acceptance of such
products.
o Inability to maintain or initiate third party arrangements which generate
revenues, in the form of license fees, research and development support,
royalties, and other payments, in return for rights to technology or
products under development by the Company.
o Delays or difficulties in developing and acquiring production technology
and technical and managerial personnel to manufacture novel biotechnology
products in commercial quantities at reasonable costs and in compliance
with applicable quality assurance and environmental regulations and
governmental permitting requirements.
o Difficulties in obtaining key raw materials and supplies for the
manufacture of the Company's product candidates.
o The costs and other effects of legal and administrative cases and
proceedings (whether civil, such as product-related or environmental, or
criminal); settlements and investigations; developments or assertions by or
against Regeneron relating to intellectual property rights and licenses;
the issuance and use of patents and proprietary technology by Regeneron and
its competitors, including the possible negative effect on the Company's
ability to develop, manufacture, and sell its products in circumstances
where it is unable to obtain licenses to patents which may be required for
such products.
o Underutilization of the Company's existing or new manufacturing facilities
or of any facility expansions, resulting in inefficiencies and higher
costs; start-up costs, inefficiencies, delays, and increased depreciation
costs in connection with the start of production in new plants and
expansions.
29
o Health care reform, including reductions or changes in reimbursement
available for prescription medications or other reforms.
o The ability to attract and retain key personnel. As Regeneron's scientific
efforts lead to potentially promising new directions, both outside of
recombinant protein therapies (into orally active, small molecule
pharmaceuticals) and outside of treatments for neurological and
neurodegenerative conditions (into, for example, potential programs in
cancer, inflammation, muscle disease, angiogenesis, and hematopoiesis), the
Company will require additional internal expertise or external
collaborations in areas in which it currently does not have substantial
resources and personnel.
Impact of the Adoption of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 will
require the Company to replace the current presentation of "primary" per share
data with "basic" and "diluted" per share data. Currently, outstanding common
stock equivalents are antidilutive and therefore management estimates that the
future adoption of SFAS 128 currently will not have a material impact on the
Company's per share data. SFAS 128 will be adopted by the Company for periods
ending after December 15, 1997.
30
Item 8. Financial Statements and Supplementary Data
The financial statements of the Company required by this item are
included herein as exhibits and listed under Item 14.(A)1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Officers of the Registrant
Information with respect to directors and executive officers is
incorporated by reference to the material captioned "Election of Directors,"
"Executive Officers of the Registrant," and "Compliance with Section 16(b) of
the Securities Exchange Act of 1934" in the Regeneron Pharmaceuticals, Inc.
Proxy Statement to be filed in connection with solicitation of proxies for its
Annual Meeting of Shareholders to be held on June 27, 1997.
Item 11. Executive Compensation
The information called for by this item is incorporated by reference
to the material captioned "Executive Compensation" and "Election of Directors"
in the Regeneron Pharmaceuticals, Inc. Proxy Statement to be filed in connection
with solicitation of proxies for its Annual Meeting of Shareholders to be held
on June 27, 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated by reference
to the material captioned "Security Ownership of Management" and "Security
Ownership of Certain Beneficial Owners" in the Regeneron Pharmaceuticals, Inc.
Proxy Statement to be filed in connection with solicitation of proxies for its
Annual Meeting of Shareholders to be held on June 27, 1997.
Item 13. Certain Relationships and Related Transactions
The information called for by this item is incorporated by reference
to the material captioned "Certain Relationships and Related Transactions" in
the Regeneron Pharmaceuticals, Inc. Proxy Statement to be filed in connection
with solicitation of proxies for its Annual Meeting of Shareholders to be held
on June 27, 1997.
31
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(A) 1. Financial Statements
The financials statements filed as part of this report are listed on
the Index to Financial Statements on page F-1.
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
3. Exhibits
Exhibit
Number Description
------- -----------
3.1 (a) - Restated Certificate of Incorporation of Regeneron
Pharmaceuticals, Inc. as at June 21, 1991.
3.2 - By-Laws of the Company, currently in effect (amended as of
January 22, 1995).
10.1 (b) * - Technology Development Agreement, dated as of March 20, 1989,
between the Company and Sumitomo Chemical Company, Limited.
10.2 (b) * - Neurotrophic Factor Agreement (License Agreement), dated as of
May 10, 1988, between the Company and Max Planck Institute fur
Psychiatrie.
10.3 (b) * - Sponsored Research and License Agreement, dated as of June 17,
1988, between the Company and Erziehungsdirektion of the
Canton Zurich.
10.4 (b) * - Collaboration Agreement, dated August 31, 1990, between the
Company and Amgen Inc.
10.5 (b) - 1990 Amended and Restated Long-Term Incentive Plan.
10.6 (a) * - Neurotrophic Factor Agreement, dated as of May 21, 1991,
between the Company and Finn Hallbook, Carlos Fernando Ibanez
Molinar, and Hakan Persson.
10.7 (c) * - License Agreement dated as of November 19, 1991, between the
Company and the University of Iowa Research Foundation.
10.8 (c) * - License Agreement dated as of January 15, 1992, between the
Company and Hakan Persson.
10.9 (c) * - License Agreement dated as of January 24, 1992, between the
Company and Rorer Biotechnology, Inc.
10.10(d) * - Collaborative Development Agreement dated as of September 23,
1992, between the Company and American Cyanamid Company.
10.11(d) * - License Agreement dated as of October 7, 1992, between the
Company and The Regents of the University of California.
10.12(e) * - Collaboration Agreement dated as of July 22, 1993 between the
Company and Glaxo Group Limited.
10.13(e) - Stock Purchase Agreement dated as of July 22, 1993 between the
Company and Glaxo Group Limited.
10.14(e) - Contract to Sell Real Estate dated as of July 21, 1993 between
the Company and National Council for Community Development
Inc.
10.15(e) - Renovation License Agreement dated as of July 22, 1993 between
the Company, National Council for Community Development and
Sterling Winthrop, Inc.
10.16(f) - Employment Agreement, dated as of September 14, 1993 between
the Company and Dr. Leonard S. Schleifer.
10.17(g)* - Research and Development Agreement dated as of June 2, 1994
between the Company and Sumitomo Pharmaceuticals Company, Ltd.
10.18(h)* - Manufacturing Agreement dated as of September 18, 1995
between the Company and Merck & Co., Inc.
10.19(i) - Stock and Warrant Purchase Agreement dated as of April 15,
1996, between the Company and Amgen Inc.
32
10.20 (i) - Warrant Agreement dated as of April 15, 1996, between the
Company and Amgen Inc.
10.21 (i) - Registration Rights Agreement dated as of April 15, 1996,
between the Company and Amgen Inc.
10.22 (i) - Stock and Warrant Purchase Agreement dated as of June 27, 1996,
between the Company and Medtronic, Inc.
10.23 (i) - Warrant Agreement dated as of June 27, 1996, between the
Company and Medtronic, Inc.
10.24 (i) - Registration Rights Agreement dated as of June 27, 1996,
between the Company and Medtronic, Inc.
10.25 (i) - Assignment and Assumption Agreement dated as of June 27, 1996,
between the Company and Medtronic, Inc.
10.26 (j) - Certificate of Amendment of the Restated Certificate of
Incorporation of Regeneron Pharmaceuticals, Inc., as at
October 18, 1996.
10.27 (k) - Rights Agreement, dated as of September 20, 1996, between
Regeneron Pharmaceuticals, Inc. and ChaseMellon Shareholder
Services L.L.C., as Rights Agent, including the form of Rights
Certificate as Exhibit B thereto.
10.28 (j) - Letter of Resignation of James W. Fordyce, Director, dated
October 1, 1996.
10.29 - Stock Purchase Agreement dated as of December 11, 1996, between
the Company and Procter & Gamble Pharmaceuticals, Inc.
10.30 - Registration Rights Agreement dated as of December 11, 1996,
between the Company and Procter & Gamble Pharmaceuticals, Inc.
10.31 * - Collaboration Agreement dated as of December 11, 1996, between
the Company and Procter & Gamble Pharmaceuticals, Inc.
11 - Statement of Computation of Loss per Share.
23.1 - Consent of Coopers & Lybrand L.L.P.
23.2 - Consent of Ernst & Young LLP, Independent Auditors
24 - Power of Attorney
27 - Financial Statement Data
- --------------------------------------------------------------------------------
(a) Incorporated by reference from the Form 10-Q of Regeneron
Pharmaceuticals, Inc. for the quarter ended June 30,1991, filed August
13, 1991.
(b) Incorporated by reference from the Company's registration statement on
Form S-1 (file number 33-39043).
(c) Incorporated by reference from the Form 10-K for Regeneron
Pharmaceuticals, Inc. for the fiscal year ended December 31, 1991,
filed March 30, 1992.
(d) Incorporated by reference from the Form 10-K for Regeneron
Pharmaceuticals, Inc. for the fiscal year ended December 31, 1992,
filed March 30, 1993.
(e) Incorporated by reference from the Form 10-Q of Regeneron
Pharmaceuticals, Inc. for the quarter ended June 30,1993, filed July
22, 1993.
(f) Incorporated by reference from the Form 10-Q of Regeneron
Pharmaceuticals, Inc. for the quarter ended September 30,1993, filed
November 12, 1993.
(g) Incorporated by reference from the Form 10-Q for Regeneron
Pharmaceuticals, Inc. for the quarter ended September 30, 1994, filed
November 14, 1994.
(h) Incorporated by reference from the Form 10-Q for Regeneron
Pharmaceuticals, Inc. for the quarter ended September 30, 1995, filed
November 14, 1995.
(i) Incorporated by reference from the Form 10-Q for Regeneron
Pharmaceuticals, Inc. for the quarter ended June 30, 1996, filed
August 14, 1996.
(j) Incorporated by reference from the Form 10-Q for Regeneron
Pharmaceuticals, Inc. for the quarter ended September 30, 1996, filed
November 5, 1996.
33
(k) Incorporated by reference from the Form 8-A for Regeneron
Pharmaceuticals, Inc. filed October 15, 1996.
* Portions of this document have been omitted and filed separately with
the Commission pursuant to requests for confidential treatment
pursuant to Rule 24b-2.
(B) Reports on Form 8-K
No report on Form 8-K was filed by the Registrant during the year ended
December 31, 1996.
34
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: New York, New York
March 26, 1997
REGENERON PHARMACEUTICALS, INC.
By:/s/ LEONARD S. SCHLEIFER
-----------------------------------------
Leonard S. Schleifer, M.D., Ph.D.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following person on behalf of the
registrant in the capacities indicated on March 26, 1997.
Signature Title
--------- -----
/s/ LEONARD S. SCHLEIFER, President, Chief Executive Officer,
- ------------------------------------ and Director
Leonard S. Schleifer, M.D., Ph.D.
/s/ MURRAY A. GOLDBERG Vice President, Finance &
- ------------------------------------ Administration, Chief Financial
Murray A. Goldberg Officer, and Treasurer (Principal
Financial Officer)
/s/ BEVERLY C. DUBS Controller and Assistant Treasurer
- ------------------------------------ (Chief Accounting Officer)
Beverly C. Dubs
* Chairman of the Board
- ------------------------------------
P. Roy Vagelos, M.D.
* Director
- ------------------------------------
Charles A. Baker
* Director
- ------------------------------------
Michael S. Brown, M.D.
* Director
- ------------------------------------
Alfred G. Gilman, M.D., Ph.D.
* Director
- ------------------------------------
Joseph L. Goldstein, M.D.
* Director
- ------------------------------------
Fred A. Middleton
* Director
- ------------------------------------
Eric M. Shooter, Ph.D.
* Director
- ------------------------------------
George L. Sing
*By /s/ PAUL LUBETKIN
- ------------------------------------
Paul Lubetkin
(Attorney-in-Fact)
35
REGENERON PHARMACEUTICALS, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Regeneron Pharmaceuticals, Inc. Numbers
-------
Report of Independent Accountants F-2
Balance Sheets at December 31, 1996 and 1995 F-3
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-4
Statements of Stockholders' Equity for the years
ended December 31, 1996, 1995 and 1994 F-5
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-6
Notes to Financial Statements F-7 to F-18
Amgen-Regeneron Partners
Report of Ernst & Young LLP, Independent Auditors F-20
Balance Sheets at December 31, 1996 and 1995 F-21
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-22
Statements of Changes in Partners' Capital for
the years ended December 31, 1996, 1995 and 1994 F-23
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-24
Notes to Financial Statements F-25 to F-27
================================================================================
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Regeneron Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of REGENERON
PHARMACEUTICALS, INC. (the "Company") as of December 31, 1996, and 1995, and the
related statements of operations, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Amgen-Regeneron
Partners (the "Partnership"), an entity which is fifty percent owned by the
Company, as of December 31, 1996 and 1995 or for each of the three years in the
period ended December 31, 1996. The Company's investment in the Partnership is
accounted for in accordance with the equity method of accounting and constitutes
one percent of the Company's total assets at December 31, 1996 and 1995,
respectively. For the years ended December 31, 1996, 1995 and 1994 the Company
recorded its pro rata share of the Partnership's net loss of approximately $14.3
million, $13.8 million, and $9.8 million, respectively. The Partnership's
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for the Partnership, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 1996
and 1995, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
February 14, 1997,
except for the second
paragraph of Note8(e)
for which the date is
March 19, 1997
================================================================================
F-2
REGENERON PHARMACEUTICALS, INC.
BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
ASSETS ------------ -----------
Current assets
Cash and cash equivalents $34,475,060 $32,736,026
Marketable securities 45,587,404 13,417,634
Receivable due from Sumitomo Pharmaceuticals Company, Ltd. 2,072,455 1,749,062
Receivable due from Merck & Co., Inc. 1,816,056 271,630
Receivable due from Amgen-Regeneron Partners 446,269 668,990
Prepaid expenses and other current assets 611,435 359,111
---------------- ---------------
Total current assets 85,008,679 49,202,453
Marketable securities 16,965,302 13,468,350
Investment in Amgen-Regeneron Partners 1,205,299 1,273,538
Property, plant and equipment, at cost, net of accumulated depreciation
and amortization 34,297,843 27,870,720
Other assets 104,731 1,996,284
---------------- ---------------
Total assets $137,581,854 $93,811,345
================ ===============
LIABILITIES and STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $4,357,145 $6,289,832
Capital lease obligations, current portion 3,505,221 3,408,090
Note payable, current portion 77,684 83,444
Deferred revenue, current portion 4,108,412 3,166,665
---------------- ---------------
Total current liabilities 12,048,462 12,948,031
Capital lease obligations 3,400,015 4,152,100
Note payable 1,748,082 1,825,766
Other liabilities 183,426 103,374
Deferred revenue 13,270,870 6,925,625
Commitments and contingencies (Notes 7, 8, and 9)
Stockholders' equity
Preferred stock, $.01 par value; 30,000,000 shares authorized; issued and outstanding - none
Class A Stock, convertible, $.001 par value; 40,000,000 shares authorized;
4,355,994 shares issued and outstanding in 1996
5,403,923 shares issued and 5,386,850 outstanding in 1995 4,356 5,404
Common Stock, $.001 par value; 60,000,000 shares authorized;
21,319,896 shares issued and outstanding in 1996
16,465,429 shares issued and outstanding in 1995 21,320 16,465
Additional paid-in capital 264,742,236 193,594,141
Unearned compensation (1,080,000) (1,440,000)
Accumulated deficit (157,029,112) (124,605,334)
Net unrealized gain on marketable securities 272,199 285,940
---------------- ---------------
106,930,999 67,856,616
Less, Class A Stock held in treasury, at cost: none in 1996; 17,073 shares in 1995 - (167)
---------------- ---------------
Total stockholders' equity 106,930,999 67,856,449
---------------- ---------------
Total liabilities and stockholders' equity $137,581,854 $93,811,345
================ ===============
The accompanying notes are an integral part of the financial statements.
F-3
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1995, and 1994
1996 1995 1994
-------------------- -------------------- ---------------------
Revenues
Contract research and development $17,302,473 $23,247,002 $19,606,292
Investment income 4,360,065 2,997,180 2,585,465
Contract manufacturing 2,451,424 1,140,321
Research progress payments 1,000,000
-------------------- -------------------- --------------------
24,113,962 27,384,503 23,191,757
-------------------- -------------------- --------------------
Expenses
Research and development 28,268,798 23,310,088 30,874,437
Loss in Amgen-Regeneron Partners 14,250,239 13,804,777 9,794,237
General and administrative 5,879,975 5,764,397 7,529,136
Depreciation and amortization 6,083,845 5,885,699 4,245,686
Contract manufacturing 1,115,259 72,059
Interest 939,624 1,204,757 1,403,001
Other 850,000
-------------------- -------------------- --------------------
56,537,740 50,891,777 53,846,497
-------------------- -------------------- --------------------
Net loss ($32,423,778) ($23,507,274) ($30,654,740)
==================== ==================== ====================
Net loss per share ($1.33) ($1.19) ($1.62)
==================== ==================== ====================
Weighted average number of Common
and Class A shares outstanding 24,463,516 19,768,466 18,866,993
==================== ==================== ====================
The accompanying notes are an integral part of the financial statements.
F-4
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1995, and 1994
Class A Stock Common Stock Additional
-------------------------------- --------------------------- Paid-in
Shares Amount Shares Amount Capital
-------------- --------------- -------------- ------------ -------------
Balance, December 31, 1993 6,559,017 $6,559 $12,312,035 $12,312 $168,812,770
Issuance of Common Stock in connection
with services rendered 25,000 25 99,975
Conversion of Class A Stock to
Common Stock (933,052) (933) 933,052 933
Net loss, 1994
Change in net unrealized gain (loss)
on marketable securities
--------- --------- ------------- ---------- -------------
Balance, December 31, 1994 5,625,965 5,626 13,270,087 13,270 168,912,745
Issuance of Common Stock for cash of
$300,000 and services to be rendered 600,000 600 2,099,400
Amortization of unearned compensation
Issuance of Common Stock in a public
offering at $10.50 per share 2,300,000 2,300 24,147,700
Cost associated with issuance of
equity securities (1,895,961)
Issuance of Common Stock in connection
with exercise of stock options 73,300 73 330,257
Conversion of Class A Stock to
Common Stock (222,042) (222) 222,042 222
Purchase of treasury stock
Net loss, 1995
Change in net unrealized gain (loss)
on marketable securities
--------- --------- ------------- ---------- -------------
Balance, December 31, 1995 5,403,923 5,404 16,465,429 16,465 193,594,141
Issuance of Common Stock for settlement of
an obligation 153,017 153 1,999,847
Amortization of unearned compensation
Issuance of equity securities in private placements 3,460,500 3,461 57,996,539
Amounts received in connection with the Stock
Purchase Agreement with Procter & Gamble 10,000,000
Cost associated with issuance of
equity securities (205,025)
Issuance of Common Stock in connection
with exercise of stock options 210,094 210 1,356,884
Conversion of Class A Stock to
Common Stock (1,030,856) (1,031) 1,030,856 1,031
Retirement of treasury stock (17,073) (17) (150)
Net loss, 1996
Change in net unrealized gain (loss)
on marketable securities
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 4,355,994 $4,356 21,319,896 $21,320 $264,742,236
===========================================================================================================================
Net Unrealized
Gain (Loss) on
Unearned Accumulated Marketable
Compensation Deficit Securities
-------------- ---------------------- -----------------
Balance, December 31, 1993 ($70,443,320)
Issuance of Common Stock in connection
with services rendered
Conversion of Class A Stock to
Common Stock
Net loss, 1994 (30,654,740)
Change in net unrealized gain (loss)
on marketable securities ($762,852)
------------- ------------- -------------
Balance, December 31, 1994 (101,098,060) (762,852)
Issuance of Common Stock for cash of
$300,000 and services to be rendered ($1,800,000)
Amortization of unearned compensation 360,000
Issuance of Common Stock in a public
offering at $10.50 per share
Cost associated with issuance of
equity securities
Issuance of Common Stock in connection
with exercise of stock options
Conversion of Class A Stock to
Common Stock
Purchase of treasury stock
Net loss, 1995 (23,507,274)
Change in net unrealized gain (loss)
on marketable securities 1,048,792
------------- ------------- -------------
Balance, December 31, 1995 (1,440,000) (124,605,334) 285,940
Issuance of Common Stock for settlement of
an obligation
Amortization of unearned compensation 360,000
Issuance of equity securities in private placements
Amounts received in connection with the Stock
Purchase Agreement with Procter & Gamble
Cost associated with issuance of
equity securities
Issuance of Common Stock in connection
with exercise of stock options
Conversion of Class A Stock to
Common Stock
Retirement of treasury stock
Net loss, 1996 (32,423,778)
Change in net unrealized gain (loss)
on marketable securities (13,741)
--------------------------------------------------------------------------------------
Balance, December 31, 1996 ($1,080,000) ($157,029,112) $272,199
======================================================================================
Class A Stock
Held in Treasury Total
--------------------------- Stockholders'
Shares Amount Equity
-------------- ----------- --------------------
Balance, December 31, 1993 16,559 ($162) $98,388,159
Issuance of Common Stock in connection
with services rendered 100,000
Conversion of Class A Stock to
Common Stock
Net loss, 1994 (30,654,740)
Change in net unrealized gain (loss)
on marketable securities (762,852)
------------- -------- -------------
Balance, December 31, 1994 16,559 (162) 67,070,567
Issuance of Common Stock for cash of
$300,000 and services to be rendered 300,000
Amortization of unearned compensation 360,000
Issuance of Common Stock in a public
offering at $10.50 per share 24,150,000
Cost associated with issuance of
equity securities (1,895,961)
Issuance of Common Stock in connection
with exercise of stock options 330,330
Conversion of Class A Stock to
Common Stock
Purchase of treasury stock 514 (5) (5)
Net loss, 1995 (23,507,274)
Change in net unrealized gain (loss)
on marketable securities 1,048,792
------------- -------- -------------
Balance, December 31, 1995 17,073 (167) 67,856,449
Issuance of Common Stock for settlement of
an obligation 2,000,000
Amortization of unearned compensation 360,000
Issuance of equity securities in private placement 58,000,000
Amounts received in connection with the Stock
Purchase Agreement with Procter & Gamble 10,000,000
Cost associated with issuance of
equity securities (205,025)
Issuance of Common Stock in connection
with exercise of stock options 1,357,094
Conversion of Class A Stock to
Common Stock
Retirement of treasury stock (17,073) (167)
Net loss, 1996 (32,423,778)
Change in net unrealized gain (loss)
on marketable securities (13,741)
--------------------------------------------------
Balance, December 31, 1996 -- -- $ 106,930,999
==================================================
The accompanying notes are an integral part of the financial statements.
===============================================================================
F-5
REGENERON PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995, and 1994
Increase (Decrease) in Cash and Cash Equivalents
1996 1995
---- ----
Cash flows from operating activities
Net loss ($32,423,778) ($23,507,274)
---------------------- ----------------------
Adjustments to reconcile net loss to net cash
used in operating activities
Share of net loss of Amgen-Regeneron Partners 14,250,239 13,804,777
Depreciation and amortization 6,083,845 5,905,791
Amortization of lease incentive (50,300)
Loss on sales of marketable securities
Stock issued in consideration for services rendered 360,000 360,000
Changes in assets and liabilities
Decrease (increase) in amounts due from Amgen-Regeneron Partners 222,721 324,664
Increase in amounts due from Sumitomo Pharmaceuticals Co., Ltd. (323,393) (1,749,062)
Increase in amounts due from Merck & Co., Inc. (1,544,426) (271,630)
Increase in investment in Amgen-Regeneron Partners (14,182,000) (13,422,000)
Decrease in prepaid expenses and other assets 356,353 26,182
Increase in deferred revenue 7,286,992 842,288
Decrease in accounts payable, accrued expenses,
and other liabilities (368,427) (502,203)
---------------------- ----------------------
Total adjustments 12,141,904 5,268,507
---------------------- ----------------------
Net cash used in operating activities (20,281,874) (18,238,767)
---------------------- ----------------------
Cash flows from investing activities
Purchase of marketable securities (74,606,782) (28,084,233)
Sale of marketable securities 38,926,319 38,816,383
Capital expenditures (8,622,133) (3,342,040)
---------------------- ----------------------
Net cash (used in) provided by investing activities (44,302,596) 7,390,110
---------------------- ----------------------
Cash flows from financing activities
Net proceeds from the issuance of equity securities 69,963,916 23,222,522
Proceeds from note payable
Principal payments on note payable (83,444) (90,790)
Capital lease payments (3,556,968) (3,192,958)
Purchase of treasury stock (5)
---------------------- ----------------------
Net cash provided by (used in) financing activities 66,323,504 19,938,769
---------------------- ----------------------
Net increase in cash and cash equivalents 1,739,034 9,090,112
---------------------- ----------------------
Cash and cash equivalents at beginning of year 32,736,026 23,645,914
---------------------- ----------------------
Cash and cash equivalents at end of year $34,475,060 $32,736,026
====================== ======================
Supplemental disclosure of cash flow information
Cash paid for interest $859,572 $1,101,383
====================== ======================
1994
----
Cash flows from operating activities
Net loss ($30,654,740)
----------------------
Adjustments to reconcile net loss to net cash
used in operating activities
Share of net loss of Amgen-Regeneron Partners 9,794,237
Depreciation and amortization 4,245,686
Amortization of lease incentive (150,888)
Loss on sales of marketable securities 315,384
Stock issued in consideration for services rendered 100,000
Changes in assets and liabilities
Decrease (increase) in amounts due from Amgen-Regeneron Partners (429,863)
Increase in amounts due from Sumitomo Pharmaceuticals Co., Ltd.
Increase in amounts due from Merck & Co., Inc.
Increase in investment in Amgen-Regeneron Partners (11,218,345)
Decrease in prepaid expenses and other assets 1,330,298
Increase in deferred revenue 8,416,669
Decrease in accounts payable, accrued expenses,
and other liabilities (2,267,256)
----------------------
Total adjustments 10,135,922
----------------------
Net cash used in operating activities (20,518,818)
----------------------
Cash flows from investing activities
Purchase of marketable securities (22,526,927)
Sale of marketable securities 61,341,406
Capital expenditures (6,948,027)
----------------------
Net cash (used in) provided by investing activities 31,866,452
----------------------
Cash flows from financing activities
Net proceeds from the issuance of equity securities
Proceeds from note payable 2,000,000
Principal payments on note payable
Capital lease payments (2,234,735)
Purchase of treasury stock
----------------------
Net cash provided by (used in) financing activities (234,735)
----------------------
Net increase in cash and cash equivalents 11,112,899
----------------------
Cash and cash equivalents at beginning of year 12,533,015
----------------------
Cash and cash equivalents at end of year $23,645,914
======================
Supplemental disclosure of cash flow information
Cash paid for interest $1,403,001
======================
The accompanying notes are an integral part of the financial statements.
================================================================================
F-6
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
for the years ended December 31, 1996, 1995, and 1994
1. Organization and Business
Regeneron Pharmaceuticals, Inc. (the "Company") was incorporated in
January 1988 in the State of New York. The Company is engaged in research and
development programs to discover and commercialize therapeutics to treat human
disorders and conditions. The Company's facilities are located in New York. The
Company's business is subject to certain risks including, but not limited to
uncertainities relating to conducting pharmaceutical research, obtaining
regulatory approvals, commercializing products, and obtaining and enforcing
patents.
2. Summary of Significant Accounting Policies
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the assets.
Expenditures for maintenance and repairs which do not materially extend the
useful lives of the assets are charged to expense as incurred. The cost and
accumulated depreciation or amortization of assets retired or sold are removed
from the respective accounts, and any gain or loss is recognized in operations.
The estimated useful lives of property, plant, and equipment are as follows:
Building and improvements 30 years
Leasehold improvements Life of lease
Laboratory and computer equipment 3-5 years
Furniture and fixtures 5 years
Cash and Cash Equivalents
For purposes of the statement of cash flows and the balance sheet, the
Company considers all highly liquid debt instruments with a maturity of three
months or less when purchased to be cash equivalents. The carrying amount
reported in the balance sheet for cash and cash equivalents approximates its
fair value.
Revenue Recognition
Revenue from contract research and development and contract
manufacturing is recognized as the related services are performed by the
Company, provided the collection of the resulting receivable is probable. In
situations where the Company receives payments in advance of the performance of
services, such amounts are deferred and recognized as revenue as the related
services are performed.
Net Loss Per Share
Net loss per share is computed on the basis of the net loss for the
period divided by the weighted average number of shares of Common Stock and
Class A Stock outstanding during the period. The net loss per share for all
periods presented excludes the number of shares issuable upon exercise of
outstanding stock options and warrants since such inclusion would be
anti-dilutive.
Income Taxes
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires that the Company recognize deferred tax
liabilities and assets for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on the basis of 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.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash, cash equivalents, marketable
securities, and receivables from Amgen-Regeneron Partners, Sumitomo
Pharmaceuticals Company, Ltd., and Merck & Co., Inc. The Company generally
invests its excess cash in obligations of the U.S. government and its agencies,
bank deposits, and investment grade debt securities issued by corporations,
governments, and financial institutions. The Company has established guidelines
that relate to credit quality, diversification, and maturity and that limit
exposure to any one issue of securities.
F-7
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Risks and Uncertainties
The Company has had no product sales and there is no assurance that the
Company's research and development efforts will be successful, that the Company
will ever have commercially approved products, or that the Company will achieve
significant sales of any such products. The Company has incurred net losses and
negative cash flows from operations since its inception, and revenues to date
have been limited to payments for research from four collaborators and for
contract manufacturing from one pharmaceutical company and investment income
(see Notes 8 and 9). In addition, the Company operates in an environment of
rapid change in technology and is dependent upon the services of its employees,
consultants, and collaborators.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-based Employee Compensation
The accompanying financial position and results of operations of the
Company have been prepared in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25"). Under APB No. 25, generally, no
compensation expense is recognized in the accompanying financial statements in
connection with the awarding of stock option grants to employees provided that,
as of the grant date, all terms associated with the award are fixed and the
quoted market price of the Company's stock, as of the grant date, is equal to or
less than the amount an employee must pay to acquire the stock as defined.
Disclosures required by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123"), including pro
forma operating results had the Company prepared its financial statements in
accordance with the fair value based method of accounting for stock-based
compensation, have been included in Note 10.
Impact of the Adoption of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Financial Accounting Standard No. 128. "Earnings Per Share" ("SFAS 128"). SFAS
128 will require the Company to replace the current presentation of "primary"
per share data with "basic" and "diluted" per share data. Currently, outstanding
common stock equivalents are antidilutive and therefore management estimates
that the future adoption of SFAS 128 currently will not have a material impact
on the Company's per share data. SFAS 128 will be adopted by the Company for
periods ending after December 15, 1997.
Statement of Cash Flows
Supplemental disclosure of noncash investing and financing activities:
Capital lease obligations of approximately $2.9 million, $0.4 million,
and $5.1 million were incurred when the Company acquired new equipment in 1996,
1995, and 1994, respectively.
During January 1995, the Company issued 600,000 restricted shares of
Common Stock ("Restricted Shares"), in consideration for $0.3 million and
services to be rendered, in connection with an agreement with the Chairman of
the Board of Directors. The difference between the fair market value of the
Common Stock on the date the agreement was signed and the purchase price of the
Restricted Shares was $1.8 million which the Company is recognizing as
compensation expense on a pro rata basis over five years as the restriction on
the Restricted Shares lapses.
During 1994, the Company issued 25,000 shares of Common Stock to a
financial advisor as compensation for services rendered to the Company. The fair
market value of such shares at the date of issuance was $0.1 million.
Included in accounts payable and accrued expenses at December 31, 1996
and 1995 were approximately $0.8 million and $1.1 million of capital
expenditures. Included in accounts payable and accrued expenses at December 31,
1995 were $0.3 million of costs incurred in connection with the Company's sale
of Common Stock.
Reclassifications
Certain reclassifications have been made to the financial statements
for 1995 and 1994 in order to conform with the current year's presentation.
3. Marketable Securities
The Company considers its marketable securities to be
"available-for-sale," as defined by Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"), and, accordingly, unrealized holding gains and losses are excluded
from operations and reported as a net amount in a separate component of
stockholders' equity.
F-8
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The following tables summarize the amortized cost basis of marketable
securities, the aggregate fair value of marketable securities, and gross
unrealized holding gains and losses at December 31, 1996 and 1995:
Unrealized
Holding
Amortized Fair -------
At December 31, 1996 Cost Basis Value Gains (Losses) Net
- -------------------- ---------- ----- ----- -------- ---
Maturities within one year
Corporate debt securities $7,120,080 $7,145,700 $28,363 $(2,743) $25,620
U.S. Government securities 38,205,193 38,441,704 257,096 (20,585) 236,511
---------- ---------- ---------- ---------- ----------
45,325,273 45,587,404 285,459 (23,328) 262,131
---------- ---------- ---------- ---------- ----------
Maturities between one and three years
Corporate debt securities 10,982,405 10,994,489 16,411 (4,327) 12,084
U.S. Government securities 5,972,829 5,970,813 26,253 (28,269) (2,016)
---------- ---------- ---------- ---------- ----------
16,955,234 16,965,302 42,664 (32,596) 10,068
---------- ---------- ---------- ---------- ----------
$62,280,507 $62,552,706 $328,123 $(55,924) $272,199
========== ========== ========== ========== ==========
At December 31, 1995
Maturities within one year
Corporate debt securities $6,190,186 $6,244,035 $53,849 $ -- $53,849
U.S. Government securities 7,059,037 7,173,599 139,016 (24,454) 114,562
---------- ---------- ---------- ---------- ----------
13,249,223 13,417,634 192,865 (24,454) 168,411
---------- ---------- ---------- ---------- ----------
Maturities between one and three years
Corporate debt securities 6,028,051 6,141,731 113,680 --- 113,680
U.S. Government securities 7,322,770 7,326,619 13,767 (9,918) 3,849
---------- ---------- ---------- ---------- ----------
13,350,821 13,468,350 127,447 (9,918) 117,529
---------- ---------- ---------- ---------- ----------
$26,600,044 $26,885,984 $320,312 ($34,372) 285,940
========== ========== ========== ========== ==========
The aggregate net unrealized gain has been included as an increase to
stockholders' equity at December 31, 1996 and 1995.
Realized gains and losses are included as a component of investment
income. For the years ended December 31, 1996, 1995 and 1994, gross realized
gains and losses were not significant. In computing realized gains and losses,
the Company computes the cost of its investments on a specific identification
basis. Such cost includes the direct costs to acquire the securities, adjusted
for the amortization of any discount or premium. The fair value of marketable
securities has been estimated based on quoted market prices.
4. Property, Plant, and Equipment
Property, plant, and equipment as of December 31, 1996 and 1995 consist
of the following:
1996 1995
---- ----
Land $ 474,501 $ 474,501
Building and improvements 22,573,914 16,300,026
Leasehold improvements 6,165,487 6,147,652
Construction in progress 6,131,873 3,885,730
Laboratory equipment 17,248,902 14,931,715
Furniture, fixtures, and computer equipment 906,948 533,929
------------ ------------
53,501,625 42,273,553
Less, accumulated depreciation and amortization (19,203,782) (14,402,833)
------------ ------------
$34,297,843 $27,870,720
============ ============
Depreciation and amortization expense on property, plant, and equipment
amounted to approximately $4.8 million, $4.6 million, and $3.9 million for the
years ended December 31, 1996, 1995, and 1994, respectively.
F-9
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of December 31, 1996 and 1995
consist of the following:
1996 1995
---- ----
Accounts payable $ 2,178,308 $ 3,240,050
Accrued payroll and related costs 1,047,812 1,054,626
Accrued clinical trial expense 319,500 350,000
Accrued litigation settlement -- -- 850,000
Accrued expenses, other 389,062 299,412
Deferred compensation 422,463 495,744
----------- -----------
$ 4,357,145 $ 6,289,832
=========== ===========
6. Stockholders' Equity
The Company's Amended Certificate of Incorporation (the "Amendments")
provides for the issuance of up to 40 million shares of Class A Stock, par value
$0.001 per share, and 60 million shares of Common Stock, par value $0.001 per
share. Each share of Class A Stock is convertible, at any time, at the option of
the holder into shares of Common Stock on a share-for-share basis and holders of
Class A Stock have rights and privileges identical to Common Stockholders except
that Class A Stockholders are entitled to ten votes per share while Common
Stockholders are entitled to one vote per share. Class A Stock may only be
transferred to specified Permitted Transferees, as defined. The Amendments also
provide for the Company's Board of Directors (the "Board") to issue preferred
stock, par value $.01 per share, authorized 30 million shares, in series, with
rights, privileges, and qualifications of each series determined by the Board.
During January 1995, the Company entered into an agreement with the
Chairman of the Board. As partial consideration for services to be rendered, the
agreement provided for the Company to sell the Chairman 600,000 restricted
shares of Common Stock ("Restricted Shares"), in consideration for $0.3 million,
and to grant 285,000 stock options. The Restricted Shares are nontransferable
with such restriction lapsing ratably over a five year period. In accordance
with generally accepted accounting principles, the Company is recognizing
compensation expense for the difference between the fair market value of the
Common Stock on the date the agreement was signed and the purchase price of the
Restricted Shares on a pro rata basis over five years as the restriction on the
Restricted Shares lapses. The unamortized balance of unearned compensation at
December 31, 1996 (approximately $1.1 million) has been included as a reduction
to stockholders' equity. For the years ended December 31, 1996 and 1995, the
Company recognized compensation expense of approximately $0.4 million in each
year. The stock options, which have been issued under the Company's Amended and
Restated 1990 Long-Term Incentive Plan, entitle the holder to purchase an equal
number of shares of Common Stock at a per share price of $3.50, the fair market
value of the Common Stock on the date of grant. The options vest over a five
year period.
During April 1996, Amgen Inc. purchased from the Company 3 million
shares of Common Stock and 700,000 warrants for $48.0 million. The warrants have
an exercise price of $16 per share, are fully exercisable, expire on April 15,
2001, and are subject to anti-dilution provisions, and other defined
adjustments.
During June 1996, Medtronic, Inc. purchased from the Company 460,500
shares of Common Stock and 107,400 warrants for $10.0 million. The warrants have
an exercise price of $21.72 per share, are fully exercisable, expire on June 26,
2001, and are subject to anti-dilution provisions and other defined adjustments.
During September 1996, the Company announced that it adopted a
Shareholder Rights Plan in which Rights were distributed as a dividend at the
rate of one Right for each share of Common Stock and Class A Stock
(collectively, "Stock") held by shareholders of record as of the close of
business on October 18, 1996. Each Right initially entitles the registered
holder to buy a unit ("Unit") consisting of one-one thousandth of a share of
Series A Junior Participating Preferred Stock ("A Preferred Stock") at a
purchase price of $120 per Unit (the "Purchase Price"). Initially the Rights
were attached to all Stock certificates representing shares then outstanding,
and no separate Rights certificate were distributed. The Rights will separate
from the Stock and a "distribution date" will occur upon the earlier of (i) ten
days after a public announcement that a person or group of affiliated or
associated persons, excluding certain defined persons, (an "Acquiring Person")
has acquired, or has obtained the right to acquire, beneficial ownership of 20%
or more of the outstanding shares of Stock or (ii) ten business days following
the commencement of a tender offer or exchange offer that would result in a
person or group beneficially owning
F-10
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
20% or more of such outstanding shares of Stock. The Rights are not exercisable
unless a distribution date occurs and will expire at the close of business on
October 18, 2006 unless earlier redeemed by the Company, subject to certain
defined restrictions, for $.01 per Right. In the event that an Acquiring Person
becomes the beneficial owner of 20% or more of the then outstanding shares of
Stock (unless such acquisition is made pursuant to a tender or exchange offer
for all outstanding shares of the Company, at a price determined by a majority
of the independent directors of the Company who are not representatives,
nominees, affiliates, associates of an Acquiring Person to be fair and otherwise
in the best interest of the Company and its shareholders after receiving advice
from one or more investment banking firms), each Right will entitle the holder
to purchase, at the Right's then current exercise price, common shares (or, in
certain circumstances, cash, property or other securities of the Company) having
a value twice the Right's Exercise Price. The Right's Exercise Price is the
Purchase Price times the number of shares of Common Stock associated with each
Right (initially, one). Upon the occurrence of any such events, the Rights held
by an Acquiring Person become null and void. In certain circumstances, a Right
entitles the holder to receive, upon exercise, shares of common stock of an
acquiring company having a value equal to two times the Right's Exercise Price.
As a result of the Shareholder Rights Plan, the Company's Board
designated 100,000 shares of preferred stock as A Preferred Stock. The A
Preferred Stock has certain preferences, as defined.
In November 1996, the Company's Board authorized the retirement of
17,073 shares of Class A Stock which had been held as treasury shares. The
retired shares will have the status of authorized but unissued stock and will
retain the classification of Class A Stock.
7. Commitments and Contingencies
a. Operating Leases
The Company leases laboratory and office space under an operating lease
agreement, expiring June 30, 1998, with renewal options for two additional
five-year periods. The lease, as amended, provides for base rent plus additional
rental charges based upon increases in taxes and operating expenses, as defined.
The Company leases certain laboratory and office equipment under
operating leases which expire at various times through 1998. Operating leases
entered into with one lessor contain a negative covenant agreement which
requires, among other things, that the Company maintain certain levels of
minimum cash, net worth, and other financial ratios, as defined.
At December 31, 1996, the future minimum noncancelable lease
commitments under operating leases are as follows:
Laboratory and
December 31, Office Space Equipment Total
------------ ------------ --------- -----
1997 $2,697,894 $456,401 $3,154,295
1998 1,348,947 72,575 1,421,522
--------- --------- ---------
$4,046,841 $528,976 $4,575,817
========= ========= =========
Rent expense under operating leases was:
Laboratory and
Year Ending December 31, Office Space Equipment Total
------------------------ ------------ --------- -----
1996 $2,738,226 $669,300 $3,407,526
1995 2,715,294 921,269 3,636,563
1994 2,648,819 1,091,806 3,740,625
b. Capital Leases
The Company leases equipment under noncancelable capital leases. Lease
terms range from four to five years after which the Company is required to
purchase the equipment at amounts defined by the agreements, or the leases will
automatically be extended for one additional year at defined monthly payments.
The leases, as amended, have various financial covenants which include minimum
levels of liquid assets, as defined, of $30 million and tangible net worth, as
defined, of $35 million.
F-11
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
During 1996, the Company entered into a series of new leasing
agreements (the "New Lease Line") which provides up to $4.0 million to finance
equipment acquisitions and certain building improvements, as defined,
(collectively, the "Equipment"). The Company may utilize the New Lease Line in
increments ("leases"). Lease terms are for four years after which the Company is
required to purchase the Equipment at defined amounts. Certain of the leases
will be renewed for eight months at defined monthly payments after which the
Company will own the Equipment. At December 1996, the Company had available
approximately $1.1 million of the New Lease Line.
As of December 31, 1996, minimum rental payments under all capital
leases, including payments to acquire leased equipment, are as follows:
Minimum
Year Ending December 31, Rental Payments
------------------------ ---------------
1997 $ 4,390,977
1998 1,843,022
1999 871,363
2000 748,732
2001 78,561
----------
7,932,655
Less, amounts representing interest (1,027,419)
----------
Present value of net minimum capital lease payments $6,905,236
==========
Leased equipment and building improvements in property, plant, and
equipment was approximately $17.5 million and $14.6 million at December 31, 1996
and 1995, respectively; related accumulated depreciation was approximately $12.0
million and $8.8 million for the same respective periods.
c. Note Payable
During November 1994, the Company borrowed $2.0 million from the New
York State Urban Development Corporation ("NYS UDC"). The terms of the note
provide for monthly payments of principal and interest through December 2014.
Outstanding borrowings accrue interest at an effective interest rate of
approximately 6.3%. The note is collateralized by a first mortgage on the
Company's land, building, and improvements in Rensselaer, New York (book value
at December 31, 1996 was approximately $30.6 million). The note also has various
financial covenants which include a minimum ratio of current assets over current
liabilities, as defined, and a minimum level of tangible net worth, as defined,
of $35.0 million. In addition, the Company is not permitted to declare or pay
dividends to its stockholders. The provisions of the note call for the Company
to meet certain defined levels of employment; otherwise, the interest rate on
outstanding borrowings will increase to 2.0% above the prime rate (as defined)
until the defined levels of employment are attained. As of January 1, 1997, the
Company did not meet the defined levels of employment and, accordingly, the
interest rate charged on outstanding borrowings will increase to 2.0% above the
prime rate effective March 1, 1997. The estimated fair value of the Company's
note payable to the NYS UDC at December 31, 1996 was approximately $2.0 million.
The fair value was estimated based on the current rate offered to the Company
for debt with similar terms.
Principal payments under the note during each of the next five years,
and thereafter, are as follows:
1997 $77,684
1998 73,298
1999 70,128
2000 68,064
2001 67,042
Thereafter 1,469,550
----------
$1,825,766
==========
d. Research Collaboration and Licensing Agreements
As part of the Company's research and development efforts, the Company
enters into research collaboration and licensing agreements ("Agreements") with
related and unrelated scientific collaborators, universities, or consultants
(collectively, the "Scientists"). These Agreements contain varying terms and
provisions which include fees to be paid by the Company and services to be
provided by, or rights to certain proprietary technology developed by, the
Scientists. Some of the Agreements contain provisions which require the Company
to pay royalties to the Scientists, as defined, in the event the Company sells
or licenses any proprietary products developed under the respective Agreements.
F-12
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Certain Agreements, where the Company is required to pay fees, provide
for the Company, upon 30 to 90-day written notice, to terminate such Agreements.
During the three years ended December 31, 1996, the Company incurred expenses
related to these Agreements of approximately $0.5 million, $0.5 million, and
$0.6 million, respectively.
e. Deferred Compensation
The Company has entered into compensation agreements with certain
employees and outside consultants. These agreements require the Company to make
certain payments in the future, as defined by the respective agreements. The
Company provides for such expenditures over the employment/service period. Such
accrual amounted to approximately $0.4 million and $0.5 million at December 31,
1996 and 1995, respectively.
8. Collaboration Agreements
a. Amgen Inc.
In August 1990, the Company entered into a collaboration agreement (the
"Amgen Agreement") with Amgen Inc. ("Amgen") to develop and attempt to
commercialize two proprietary products (BDNF and NT-3, individually the
"Product," collectively the "Products"). The Amgen Agreement, among other
things, provides for Amgen to fund defined amounts ("Minimum Annual Funding") of
development costs of the Products and for Amgen and the Company to form a
partnership ("Amgen-Regeneron Partners" or the "Partnership") to complete the
development and to commercialize the Products after a defined level of
development has occurred. In June 1993, the Partnership commenced operations,
with Amgen and the Company holding equal ownership interests (subject to
adjustment for any future inequities in capital contributions, as defined). The
Partnership is the exclusive distributor of Products in the United States, and
Amgen has received a license from the Company to market the Products outside the
United States and outside Japan and certain Pacific Rim countries. The Company
accounts for its investment in the Partnership in accordance with the equity
method of accounting. Since the Partnership's inception, the Company has
contributed capital to the Partnership of approximately $42.6 million. In 1996,
1995, and 1994, the Company recognized its share of the Partnership net loss in
the amounts of approximately $14.3 million, $13.8 million, and $9.8 million,
respectively, which represents 50% of the total Partnership net loss, after
first allocating certain defined amounts to Amgen ($2.5 million and $5.0 million
for 1995 and 1994, respectively), as defined in the Partnership agreement. As of
December 31, 1996, the Company continues to be an equal partner in the
Partnership.
Payments from Amgen, with respect to its Minimum Annual Funding
obligation, and the Partnership, in connection with services provided to the
Partnership, are recognized as contract research and development revenue as
earned. Such revenue for the years ended December 31, 1996, 1995 and 1994
totaled approximately $5.8 million, $7.8 million, and $8.9 million,
respectively. Contract research and development payments received in advance are
deferred and recognized as revenue when the related services are performed. In
addition, the Amgen Agreement contains a provision whereby the Company will
receive defined amounts ("Research Progress Payments") from Amgen when each
Product reaches certain levels of development. The Company received Research
Progress Payments of $1.0 million in 1994 and 1993 when the respective Products
commenced clinical trials.
Selected financial data of the Partnership as of December 31, 1996 and
1995 and for the years ended December 31, 1996, 1995 and 1994, are as follows:
Balance Sheet Data
1996 1995
---- ----
Cash $14,640,000 $17,498,000
Accounts payable and accrued expenses
due to partners (1) 12,230,000 14,952,000
Partners' capital accounts
Amgen 1,205,000 1,273,000
The Company 1,205,000 1,273,000
(1) Includes approximately $0.5 million and $0.6 million due the Company at
December 31, 1996 and 1995, respectively.
F-13
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Statement of Operations Data
1996 1995 1994
---- ---- ----
Total revenue $750,000 $387,000 ---
Total expenses (2) 29,250,000 30,497,000 $24,588,000
----------- ---------- -----------
Net loss $28,500,000 $30,110,000 $24,588,000
=========== =========== ===========
(2) Includes approximately $5.8 million, $7.0 million, and $8.9 million
related to services provided by the Company for the years ended December 31,
1996, 1995, and 1994, respectively.
In 1990, Amgen purchased 767,656 shares of Series D convertible
preferred stock for $15.0 million. Such shares converted into 788,766 shares of
Class A Stock in April 1991 at the time of the Company's initial public
offering. In addition, in 1996, Amgen Inc. purchased from the Company 3 million
shares of Common Stock and 700,000 warrants for $48.0 million. The warrants have
an exercise price of $16 per share, are fully exercisable, expire on April 15,
2001, and are subject to anti-dilution provisions, as defined.
b. Sumitomo Pharmaceuticals Company, Ltd.
In June 1994, the Company entered into a research and development
agreement with Sumitomo Pharmaceuticals Company, Ltd. ("Sumitomo
Pharmaceuticals") to collaborate in the research and development of BDNF in
Japan. Sumitomo Pharmaceuticals paid the Company $13.0 million in June 1994 and
agreed to pay $3.0 million annually on each January 1 from 1995 to 1998
(inclusive) for research payments. Only the 1998 annual payment remains to be
paid. If Sumitomo Pharmaceuticals cancels the 1998 payment, the rights granted
by the Company to Sumitomo Pharmaceuticals to develop and commercialize BDNF in
Japan will revert to the Company. The research payments from Sumitomo
Pharmaceuticals are recognized as contract research and development revenue over
a twelve month period. The Company recognized contract research and development
revenue with respect to research payments of approximately $3.0 million, $8.4
million, and $7.6 million in 1996, 1995 and 1994, respectively. Research
payments from Sumitomo Pharmaceuticals that are received in advance are deferred
and recognized as revenue when the related services are performed. At December
31, 1996 and 1995, there were $3.0 million of such amounts. In addition,
Sumitomo Pharmaceuticals reimburses the Company for its activities in developing
manufacturing processes for BDNF and supplying BDNF and other research materials
to Sumitomo Pharmaceuticals ("manufacturing payments"). Such manufacturing
payments, which are included in contract research and development revenue,
totaled approximately $8.5 million, $7.0 million, and $3.1 million in 1996,
1995, and 1994, respectively.
In addition, during 1989, Sumitomo Chemical Company, Limited, an
affiliate of Sumitomo Pharmaceuticals, entered into a stock purchase agreement
whereby it purchased, for $4.4 million, 885,062 shares of Class C Preferred
Stock. Such shares converted into 909,401 shares of Class A Stock in April 1991
at the time of the Company's initial public offering.
c. Glaxo-Wellcome plc
During July 1993, the Company entered into a collaborative research
agreement with Glaxo-Wellcome plc ("Glaxo"). Products that are developed by the
joint efforts of Glaxo and the Company will be commercialized by one or more
equally owned joint ventures. Glaxo also purchased 500,000 shares of the
Company's Common Stock at a price of $20 per share.
d. Medtronic, Inc.
During June 1996, the Company and Medtronic, Inc. ("Medtronic") entered
into a worldwide exclusive joint development agreement (the "Medtronic
Agreement") to collaborate on research and development of therapeutics for
central nervous system diseases and disorders using experimental Regeneron
compounds and Medtronic delivery systems. The Medtronic Agreement, among other
things, provides for the Company and Medtronic to fund development costs and
supply amounts of drug and delivery systems, respectively. In addition,
Medtronic is required to make payments to Regeneron if certain clinical
milestones are achieved and the Company is required to pay royalties to
Medtronic based upon net sales of any drug developed under the collaboration.
The Medtronic Agreement may be terminated by written agreement of both parties,
by either party if certain regulatory approvals have not been obtained within
specified time periods, or by either party under certain other conditions.
In addition, during June, 1996, Medtronic, Inc. purchased from the
Company 460,500 shares of Common Stock and 107,400 warrants for $10.0 million.
The warrants have an exercise price of $21.72 per share, are fully exercisable,
expire on June 26, 2001, and are subject to anti-dilution provisions and other
defined adjustments.
F-14
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
e. Procter & Gamble Pharmaceuticals, Inc.
During December 1996, the Company entered into a collaboration
agreement with Procter & Gamble Pharmaceuticals, Inc. ("Procter & Gamble")
to jointly discover and develop therapeutics ("compound") for muscle diseases
and disorders. As part of the agreement, Procter & Gamble agreed to provide,
for a minimum of three years, minimum annual research funding to the Company
of $3.75 million. At December 31, 1996, deferred revenue-current portion
included $0.9 million of prepaid research funding. Procter & Gamble has the
option to fund additional amounts and has the right to terminate the agreement
after three years. In the event that a compound is discovered and developed to
certain defined levels (but not before the third anniversary of the agreement),
Procter & Gamble and the Company have agreed to negotiate, in good faith, an
agreement whereby they would jointly complete the development of and
commercialize the compound.
In addition, during December 1996, the Company and Procter & Gamble
entered into a Stock Purchase Agreement whereby Procter & Gamble agreed to
purchase $10.0 million of the Company's Common Stock. Procter & Gamble paid
$10.0 million in December 1996 and in March 1997 received 800,000 shares of
restricted Common Stock based on a 27% premium over an average market price over
a period of time.
9. Manufacturing Agreement
During September 1995, the Company entered into a long-term
manufacturing agreement with Merck & Co., Inc. (the "Merck Agreement") to
produce an intermediate (the "Intermediate") for a Merck pediatric vaccine at
the Company's Rensselaer, New York facility. The Company has agreed to modify
portions of its facility for manufacture of the Intermediate and to assist Merck
in securing regulatory approval for such manufacture in the Company's facility.
Once the facility is able to produce Intermediate, the Merck Agreement calls for
the Company to manufacture Intermediate for Merck for six years (the "Production
Period"), with certain minimum order quantities each year. The Merck Agreement
is expected to extend into 2003 and may be terminated at any time by Merck upon
the payment by Merck of a termination fee.
Merck has agreed to reimburse the Company for the capital costs to
modify the facility ("Capital Costs") and for the cost of Company activities
performed on behalf of Merck prior to the Production Period ("Internal Costs").
Merck has also agreed to pay an annual facility fee (the "Facility Fee") of $1.0
million beginning March 1995, subject to annual adjustment for inflation. During
the Production Period, Merck has agreed to reimburse the Company for certain
manufacturing costs and pay the Company a variable fee based on the quantity of
Intermediate supplied to Merck. These payments are recognized as contract
manufacturing revenue as follows: (i) payments for Internal Costs are recognized
as the activities are performed, (ii) the Facility Fee is recognized over the
period to which it relates, (iii) payments for Capital Costs are being deferred
and will be recognized over the Production Period, and (iv) payments related to
the manufacture of Intermediate during the Production Period will be recognized
as Intermediate is accepted by Merck.
For the years ended December 31, 1996 and 1995, contract manufacturing
revenue includes approximately $1.0 million and $0.8 million of Facility Fee,
respectively, and $1.4 million and $0.3 million of Internal Costs, respectively.
At December 31, 1996, deferred revenue-current portion included $0.2 million of
Facility Fee and deferred revenue-long-term portion included $13.3 million of
Capital Costs. At December 31, 1995, deferred revenue-current portion included
$0.2 million of Facility Fee and deferred revenue-long-term portion included
$6.9 million of Capital Costs.
10. Incentive and Stock Purchase Plans
a. Long-Term Incentive Plan
During 1990, the Company established the Regeneron Pharmaceuticals,
Inc. 1990 Long-Term Incentive Plan ("Incentive Plan"). The Incentive Plan, as
amended, provides for a maximum of 3,900,000 shares of Common Stock for awards.
Salaried employees who are officers or who are employed in an executive,
administrative, or professional capacity, and nonemployees, including
consultants and members of the Scientific Advisory Board or Board of Directors,
may receive awards as determined by a committee of independent directors
("Committee"). Awards generally vest on a pro rata basis over a three or five
year period and have a term of ten years. The awards under the Incentive Plan
include: (a) Restricted Share Rights, (b) Incentive Stock Rights, (c) Stock
Options, (d) Stock Appreciation Rights, and (e) Performance Unit Rights.
Restricted Share Rights ("RSR") are awards in which participants in the
Incentive Plan are awarded the right to purchase shares of Common Stock at a
price determined by the Committee. Such shares are nontransferable for a period
determined by the Committee ("vesting period") and, should employment terminate
as defined by the Incentive Plan, the ownership of the shares will be
transferred to the Company in consideration of amounts paid to acquire such
shares. The holder of the RSR has the right to vote and receive dividends during
the vesting period.
F-15
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Incentive Stock Rights ("ISR") are awards in which participants are
awarded by the Committee the right to receive shares of Common Stock, at no cost
to the participant, in consideration of services performed subject to a vesting
period as determined by the Committee. Holders of ISRs have the right to receive
cash payments from the Company at the same time and in the same amounts as the
holders of Common Stock.
Stock Options are awards in which participants receive the right to
purchase shares of Common Stock at prices determined by the Committee. The
options vest to the employees over a period of time determined by the Committee.
Stock Appreciation Rights ("SAR") may be issued by the Committee in
connection with stock options and allow the option holder to receive Common
Stock (or cash if the Board of Directors elects to do so) equal in value to the
difference between the fair market value of the Common Stock at the exercise
date and the stock option price. Should a participant exercise a SAR, an
equivalent number of stock options will be canceled. SARs have a vesting period
similar to that of stock options.
Performance Unit Rights are awards which the Committee may issue alone
or grant in conjunction with related stock options. Such awards entitle the
holder to receive common stock, cash, or a combination of both at no cost to the
participant upon specific performance objectives being achieved and other
conditions being met, as defined by the Incentive Plan.
The Incentive Plan contains provision for immediate vesting of awards
upon a change in control of the Company, as defined.
The Company may incur charges to operations in connection with these
awards.
Transactions involving stock option awards during 1994, 1995, and 1996
are summarized in the table below. Option exercise prices were equal to the
market price of the Company's common stock on the date of grant. The total
number of options exercisable at December 31, 1994, 1995, and 1996 was 340,428,
635,233, and 943,118, respectively. As of December 31, 1996, shares available
for future grants amounted to 683,149.
Number
of Range of Weighted-Average
Shares Exercise Prices Exercise Price
------ --------------- --------------
Stock options outstanding at December 31, 1993 1,072,993 $8.25 to $21.50 $13.27
1994: Stock options granted (1) 1,952,770 $3.63 to $16.38 $5.90
Stock options canceled (1) (1,016,090) $4.00 to $21.50 $12.79
-----------
Stock options outstanding at December 31, 2,009,673 $3.63 to $18.00 $6.36
1994
1995: Stock options granted 852,744 $3.00 to $16.38 $5.26
Stock options canceled (117,340) $3.00 to $12.38 $4.48
Stock options exercised (73,300) $4.00 to $12.00 $4.22
-----------
Stock options outstanding at December 31, 2,671,777 $3.00 to $18.00 $6.15
1995
1996: Stock options granted 658,827 $12.00 to $23.06 $13.14
Stock options canceled (198,643) $3.00 to $15.50 $11.17
Stock options exercised (210,094) $3.00 to $18.00 $6.46
-----------
Stock options outstanding at December 31, 2,921,867 $3.00 to $23.06 $7.36
1996 ===========
(1) On July 18, 1994, the Company repriced certain stock options granted under
the Company's Incentive Plan. A total of 691,080 stock options were
repriced (the "repriced options"). Certain Company employees who had
previously been granted stock options under the Incentive Plan received new
grants which canceled their prior grants and awarded the same number of
options on the same vesting schedule that governed their original grants at
an exercise price of $4.00 per share (the fair market value on the date of
grant). The Company's Vice Presidents received new grants which canceled
their prior grants and awarded 40% of the number of options previously
granted on the same vesting schedule that governed their original grants
and 40% of the number of options previously granted on a five-year vesting
schedule commencing July 18, 1994, at an exercise price of $4.00 per share
for all such newly granted options. The following stock option grantees did
not receive repriced options: the members of the Board of Directors
(including the President and Chief Executive Officer), employees who were
included in the reduction in workforce, and nonemployee service providers
(including but not limited to outside consultants and members of the
Scientific Advisory Board). The repricing program was determined, in
accordance with the terms of the Incentive Plan, by the Committee.
F-16
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The following table summarizes stock option information as of December 31, 1996:
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------------
Weighted-Average
Range of Number Remaining Weighted-Average Number Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$3.00 to $4.25 1,503,050 7.6 $4.01 526,123 $4.07
$4.38 to $10.25 545,960 7.8 $6.71 130,392 $7.00
$10.38 to $15.50 775,075 7.9 $13.00 246,281 $13.29
$15.56 to $23.06 97,782 7.8 $17.73 40,322 $17.80
------ ------
$3.00 to $23.06 2,921,867 7.7 $7.36 943,118 $7.47
========= =======
The following table summarizes the pro forma operating results of the
Company had compensation costs for the Incentive Plan been determined in
accordance with the fair value based method of accounting for stock based
compensation as prescribed by SFAS No. 123. Since option grants awarded during
1996 and 1995 vest over several years and additional awards are expected to be
issued in the future, the pro forma results shown below are not likely to be
representative of the effects on future years of the application of the fair
value based method.
1996 1995
---- ----
Pro forma net loss ($35,368,272) ($24,700,788)
============= =============
Pro forma net loss per share ($1.40) ($1.22)
======= =======
For the purpose of the above pro forma calculation, the fair value of
each option granted from the Incentive Plan during 1996 and 1995 was estimated
on the date of grant using the Black-Scholes option pricing model. The
weighted-average fair value of the options granted during 1996 and 1995 was
$13.14 and $5.26, respectively. The following assumptions were used in computing
the fair value of option grants during 1996 and 1995: expected volatility of
85%, expected lives of 3 years after vesting, and zero dividend yield for both
1996 and 1995; risk-free interest rates of 5.46%-6.92% in 1996 and 5.53%-7.15%
in 1995.
b. Executive Stock Purchase Plan
In 1989, the Company adopted an Executive Stock Purchase Plan (the
"Plan") under which 1,027,500 shares of Class A Stock were reserved for
restricted stock awards. The Plan provides for the compensation committee of the
Board of Directors to award employees, directors, consultants, and other
individuals ("Plan participants") who render service to the Company the right to
purchase Class A Stock at a price set by the compensation committee. The Plan
provides for the vesting of shares as determined by the compensation committee
and, should the Company's relationship with a Plan participant terminate before
all shares are vested, unvested shares will be repurchased by the Company at a
price per share equal to the original amount paid by the Plan participant.
During 1989 and 1990, a total of 983,254 shares were issued and as of December
31, 1996, there were 44,246 shares available for future grants under the Plan.
11. Employee Savings Plan
The Company, during 1993, adopted the provisions of the Regeneron
Pharmaceuticals, Inc. 401(k) Savings Plan (the "Savings Plan"). The terms of the
Savings Plan provide for employees who have met defined service requirements to
participate in the Savings Plan by electing to contribute to the Savings Plan a
percentage of their compensation to be set aside to pay their future retirement
benefits, as defined. The Savings Plan provides for the Company to make
discretionary contributions, as defined. To date, the Company has made no
contributions to the Savings Plan.
F-17
REGENERON PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
12. Income Taxes
There is no provision (benefit) for federal or state income taxes,
since the Company has incurred operating losses since inception and has
established a valuation allowance equal to the total deferred tax asset.
The tax effect of temporary differences, net operating loss
carry-forwards, and research and experimental tax credit carry-forwards as of
December 31, 1996 and 1995 was as follows:
1996 1995
---- ----
Deferred tax assets
Net operating loss carry-forward $53,390,000 $46,286,000
Fixed assets 2,261,000 1,493,000
Deferred revenue 7,957,000 2,867,000
Research and experimental tax credit
carry-forward 4,501,000 3,849,000
Other 1,265,000 621,000
Valuation allowance (69,374,000) (55,116,000)
------------ ------------
-- --
============ ============
As of December 31, 1996, the Company had available for tax purposes
unused net operating loss carry-forwards of approximately $129.0 million which
will expire in various years from 2003 to 2011. The Company's research and
experimental tax credit carry-forwards expire in various years from 2003 to
2011.
13. Litigation
In 1995, the Company settled a securities class action lawsuit against
the Company and two individuals. As part of the settlement, the Company issued
153,017 shares of the Company's Common Stock in January 1996. The total cost to
the Company of the settlement, before legal expenses and after reimbursement
from the Company's insurance providers, was approximately $0.9 million.
F-18
AMGEN-REGENERON PARTNERS
FINANCIAL STATEMENTS
Year ended December 31, 1996
with
Report of Independent Auditors
F-19
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Partners
Amgen-Regeneron Partners
We have audited the accompanying balance sheets of Amgen-Regeneron Partners, a
Delaware general partnership, as of December 31, 1996 and 1995, and the
related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of
Amgen-Regeneron Partners at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Los Angeles, California
February 5, 1997
F-20
AMGEN-REGENERON PARTNERS
BALANCE SHEETS
December 31, 1996 and 1995
(In thousands)
1996 1995
------- -------
ASSETS
Total current assets - cash and cash equivalents........................... $14,640 $17,498
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Total current liabilities - accounts payable and accrued expenses
due to partners $12,230 $14,952
------- -------
Partners' capital:
Capital Accounts A:
Amgen ......................................................... 1,205 1,273
Regeneron......................................................... 1,205 1,273
Capital Account B - Amgen............................................. - -
------- -------
Total partners' capital...................................... 2,410 2,546
------- -------
Total liabilities and partners' capital.................. $14,640 $17,498
======= =======
See accompanying notes.
F-21
AMGEN-REGENERON PARTNERS
STATEMENTS OF OPERATIONS
Years ended December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
-------- -------- --------
Revenues:
Interest income...................................... $ 750 $ 387 $ -
-------- -------- --------
Total revenues................................... 750 387 -
-------- -------- --------
Expenses:
Research and development performed
by partners...................................... 29,069 30,363 24,484
General and administrative........................... 181 134 104
-------- -------- --------
Total expenses................................... 29,250 30,497 24,588
-------- -------- --------
Net loss.................................................. $ (28,500) $ (30,110) $ (24,588)
======== ======== ========
See accompanying notes.
F-22
AMGEN-REGENERON PARTNERS
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
Years ended December 31, 1996, 1995 and 1994
(In thousands)
Amgen Capital Regeneron Capital
------------------------- -----------------
Account A Account B Account A
--------- --------- ----------
Balance at December 31, 1993................. $ 232 $ - $ 232
Capital contributions........................ 11,218 5,000 11,218
Net loss (9,794) (5,000) (9,794)
--------- --------- ----------
Balance at December 31, 1994................. 1,656 - 1,656
Capital contributions........................ 13,422 2,500 13,422
Net loss (13,805) (2,500) (13,805)
--------- --------- ----------
Balance at December 31, 1995................. 1,273 - 1,273
Capital contributions........................ 14,182 - 14,182
Net loss (14,250) - (14,250)
--------- --------- ----------
Balance at December 31, 1996................. $ 1,205 $ - $ 1,205
========= ========= ==========
See accompanying notes.
F-23
AMGEN-REGENERON PARTNERS
STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
(In thousands)
1996 1995 1994
--------- -------- --------
Cash flows from operating activities:
Net loss $(28,500) $(30,110) $(24,588)
(Decrease) increase in accounts payable and ...........
accrued expenses (2,722) 7,895 4,158
--------- -------- --------
Net cash used in operating activities......... (31,222) (22,215) (20,430)
Cash flows from financing activities - capital contributions
28,364 29,344 27,436
--------- -------- --------
(Decrease) increase in cash and cash equivalents............ (2,858) 7,129 7,006
Cash and cash equivalents at beginning of period............ 17,498 10,369 3,363
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 14,640 $ 17,498 $ 10,369
========= ======== ========
See accompanying notes.
F-24
AMGEN-REGENERON PARTNERS
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
1. Summary of significant accounting policies
Business and organization
Amgen-Regeneron Partners (the "Partnership"), a general partnership, was
formed on June 21, 1991, under the laws of the State of Delaware between Amgen
Inc. ("Amgen") and Regeneron Pharmaceuticals, Inc. ("Regeneron"). The
Partnership was formed to develop and commercialize in the United States BDNF
and NT-3 ("Products") for human pharmaceutical use, in conformity with a
Collaboration Agreement (Note 3).
Under the Collaboration Agreement, Amgen will be primarily responsible for
the manufacture and commercialization of the Products in the United States, if
successfully developed by the Partnership. Amgen's costs in connection with such
activities will be reimbursed at agreed to rates. Unless terminated earlier, the
Partnership will continue in effect, with respect to each Product, until the
later of the expiration of the last United States patent of each Product, or
fifteen years from the date on which each Product was approved for sale in the
United States.
A Joint Management Committee (the "Committee") is responsible for the
overall management of the business and affairs of the Partnership as well as
activities performed under the Collaboration Agreement. Each partner has
appointed three representatives to the Committee. One additional representative
may be appointed by a partner if the balance of their Capital Account A becomes
more than twice the amount of the balance of the other partner's Capital Account
A (Note 2).
Cash equivalents
The Partnership considers only those investments which are highly liquid,
readily convertible to cash and which mature within three months of the date of
purchase as cash equivalents. At December 31, 1996 and 1995, cash and cash
equivalents consisted of a single interest bearing money market account.
Research and development
Research and development costs are expensed as incurred.
Income taxes
The Partnership's financial statements do not include a provision (credit)
for income taxes. Income taxes, if any, are the liability of the individual
partners.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-25
AMGEN-REGENERON PARTNERS
NOTES TO FINANCIAL STATEMENTS (Continued)
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
2. Capital contributions, allocation of profits and losses and cash
distributions
Capital contributions are recorded in the Capital Account A of each
partner, except for contributions related to the product development funding
obligation, discussed below. Capital Account A contributions are generally made
quarterly in advance based upon capital calls made by the Committee pursuant to
projected cash requirements of the Partnership. Cash distributions and profits
or losses, except for that portion due to expenses related to the product
development funding obligation, are allocated to each partner in proportion to
their respective Capital Account A contributions.
Pursuant to Amgen's product development funding obligation to Regeneron
under the Collaboration Agreement (Note 3), Amgen made stated quarterly cash
contributions to the Partnership which were credited to Amgen's Capital Account
B. Such funds were then used to satisfy the Partnership's obligation to
Regeneron for performing specified research and development activities on behalf
of the Partnership. The expenses related to such activities were allocated to
Amgen's Capital Account B.
3. Collaboration Agreement
In August 1990, Amgen and Regeneron entered into a Collaboration Agreement
to develop and commercialize BDNF and NT-3, compounds for which Regeneron
possesses substantial scientific, technical and proprietary information. Each
party has agreed to perform research and development on the Products under
product development programs approved by the Committee. Upon Amgen's
notification in writing to Regeneron that the preparation of an Investigational
New Drug Application for each Product should commence, the licenses granted by
the partners to the Partnership for the underlying technologies, discussed
below, became effective on a Product-by-Product basis. Also, upon such
notification, further research and development of the Products under the
licenses became the obligation of the Partnership. These licenses grant the
Partnership an exclusive, royalty-free right to develop, make, have made, use,
and sell, and distribute each Product for human pharmaceutical use in the United
States. The Partnership has, in turn, granted to Amgen and Regeneron exclusive,
royalty-free sublicenses for the underlying technologies to the extent necessary
to fulfill their obligations under the Collaboration Agreement. These
sublicenses became effective at the same time the related licenses granted the
Partnership became effective.
Pursuant to the terms of the Collaboration Agreement, Amgen and Regeneron
conduct certain research and development activities on behalf of the
Partnership, including contracting with third parties to conduct clinical
trials. Amgen also provides on behalf of the Partnership certain quantities of
materials, primarily for clinical testing. Amgen and Regeneron are paid for such
services and materials at amounts approved by the Committee. During the years
ended December 31, 1996, 1995 and 1994, the Partnership incurred expenses
(including accrued expenses) of $23,191,000, $23,392,000 and $15,604,000
respectively, from Amgen and $5,878,000,
F-26
AMGEN-REGENERON PARTNERS
NOTES TO FINANCIAL STATEMENTS (Continued)
$4,471,000 and $3,880,000 respectively, from Regeneron for such services and
materials. These amounts are included in research and development expense in the
accompanying statements of operations. In addition, certain other costs
associated with the development of the Products have been incurred by the
partners but not charged to the Partnership or reflected in the accompanying
financial statements. At December 31, 1996, accounts payable and accrued
expenses due to partners was composed of $7,307,000 of accounts payable and
$4,451,000 of accrued clinical costs due to Amgen and $472,000 of accounts
payable due to Regeneron. At December 31, 1995, accounts payable and accrued
expenses due to partners was composed of $7,944,000 of accounts payable and
$6,364,000 of accrued clinical costs due to Amgen and $644,000 of accounts
payable due to Regeneron.
The Collaboration Agreement obligated Amgen to fund a portion of the
product development costs incurred by Regeneron at specified rates. This funding
obligation of $2,500,000 per year for each Product terminated in August 1995.
Payments were due quarterly in advance. The related amounts for each Product
were paid by Amgen directly to Regeneron until the licenses with respect to the
Products became effective. Thereafter, Amgen contributed such amounts to the
Partnership, and the Partnership remitted the amounts to Regeneron in
consideration of certain research and development activities performed by
Regeneron on behalf of the Partnership. Research and development expense for the
years ended December 31, 1995 and 1994 included $2,500,000 and $5,000,000
respectively, of costs incurred under this funding obligation.
4. Subsequent event (unaudited)
On January 10, 1997, Amgen and Regeneron announced the Phase 3 clinical
trial of BDNF did not demonstrate clinical efficacy in patients with amyotrophic
lateral sclerosis (ALS), commonly known as Lou Gehrig's Disease and that no
further development of subcutaneous delivery for ALS is planned. The trial was
designed to evaluate the effects of subcutaneous delivery of BDNF for ALS. A
small, early-stage clinical trial investigating intrathecal administration of
BDNF for ALS, sponsored by Amgen on behalf of the Partnership, is in progress
and will continue.
F-27