Attached files
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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(A) - REGENERON PHARMACEUTICALS, INC. | regn-ex_311x09302014x10q.htm |
EX-32 - CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350 - REGENERON PHARMACEUTICALS, INC. | regn-ex_32x09302014x10q.htm |
EXCEL - IDEA: XBRL DOCUMENT - REGENERON PHARMACEUTICALS, INC. | Financial_Report.xls |
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) - REGENERON PHARMACEUTICALS, INC. | regn-ex_312x09302014x10q.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q |
(Mark One) | |||
(X) | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 2014 | |||
OR | |||
( ) | 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 | |
(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 | |
(Address of principal executive offices) | (Zip Code) | |
(914) 847-7000
(Registrant’s telephone number, including area code)
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 |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes | X | No |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | X | Accelerated filer | ||
Non-accelerated filer | (Do not check if a smaller reporting company) | Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes | No | X |
Number of shares outstanding of each of the registrant’s classes of common stock as of October 16, 2014:
Class of Common Stock | Number of Shares | |
Class A Stock, $.001 par value | 1,973,368 | |
Common Stock, $.001 par value | 99,691,909 |
REGENERON PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page Numbers | ||||
"ARCALYST®", "EYLEA®", "ZALTRAP®", "VelocImmune®", "VelociGene®", "VelociMouse®", "VelociMab®", and "VelociSuite®" are trademarks of Regeneron Pharmaceuticals, Inc. Trademarks and trade names of other companies appearing in this report are, to the knowledge of Regeneron Pharmaceuticals, Inc., the property of their respective owners. |
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share data)
September 30, | December 31, | ||||||
2014 | 2013 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 646,554 | $ | 535,608 | |||
Marketable securities | 395,650 | 158,376 | |||||
Accounts receivable - trade, net | 673,915 | 787,071 | |||||
Accounts receivable from Sanofi | 110,720 | 104,707 | |||||
Accounts receivable from Bayer HealthCare | 142,619 | 63,189 | |||||
Inventories | 120,317 | 70,354 | |||||
Deferred tax assets | 49,005 | 44,677 | |||||
Prepaid expenses and other current assets | 61,732 | 32,952 | |||||
Total current assets | 2,200,512 | 1,796,934 | |||||
Marketable securities | 453,443 | 389,891 | |||||
Property, plant, and equipment, at cost, net of accumulated depreciation and amortization | 818,967 | 526,983 | |||||
Deferred tax assets | 263,081 | 231,878 | |||||
Other assets | 3,416 | 5,327 | |||||
Total assets | $ | 3,739,419 | $ | 2,951,013 | |||
LIABILITIES and STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable and accrued expenses | $ | 337,976 | $ | 250,896 | |||
Deferred revenue from Sanofi, current portion | 13,368 | 12,815 | |||||
Deferred revenue - other, current portion | 57,604 | 34,185 | |||||
Facility lease obligations, current portion | 1,252 | 939 | |||||
Total current liabilities | 410,200 | 298,835 | |||||
Deferred revenue from Sanofi | 75,283 | 76,522 | |||||
Deferred revenue - other | 114,339 | 107,677 | |||||
Facility lease obligations | 276,112 | 184,258 | |||||
Convertible senior notes | 287,950 | 320,315 | |||||
Other long-term liabilities | 23,747 | 11,330 | |||||
Total liabilities | 1,187,631 | 998,937 | |||||
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; shares issued and outstanding - 1,973,368 in 2014 and 2,020,481 in 2013 | 2 | 2 | |||||
Common Stock, $.001 par value; 160,000,000 shares authorized; shares issued and outstanding - 100,195,822 in 2014 and 97,666,814 in 2013 | 100 | 97 | |||||
Additional paid-in capital | 2,423,434 | 2,045,857 | |||||
Retained earnings (accumulated deficit) | 145,206 | (92,692 | ) | ||||
Accumulated other comprehensive income (loss) | 26,895 | (1,188 | ) | ||||
Treasury stock, at cost; 521,892 shares in 2014 and none in 2013 | (43,849 | ) | — | ||||
Total stockholders' equity | 2,551,788 | 1,952,076 | |||||
Total liabilities and stockholders' equity | $ | 3,739,419 | $ | 2,951,013 | |||
The accompanying notes are an integral part of the financial statements. |
3
REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Statements of Operations | ||||||||||||||||
Revenues: | ||||||||||||||||
Net product sales | $ | 448,844 | $ | 367,118 | $ | 1,229,244 | $ | 1,019,751 | ||||||||
Sanofi collaboration revenue | 132,925 | 134,359 | 406,028 | 319,161 | ||||||||||||
Bayer HealthCare collaboration revenue | 135,853 | 88,583 | 358,460 | 134,594 | ||||||||||||
Technology licensing and other revenue | 8,166 | 6,967 | 23,496 | 20,827 | ||||||||||||
725,788 | 597,027 | 2,017,228 | 1,494,333 | |||||||||||||
Expenses: | ||||||||||||||||
Research and development | 337,728 | 224,045 | 919,608 | 591,807 | ||||||||||||
Selling, general, and administrative | 149,748 | 97,607 | 361,012 | 247,330 | ||||||||||||
Cost of goods sold | 33,655 | 28,253 | 91,073 | 83,557 | ||||||||||||
Cost of collaboration manufacturing | 21,938 | 10,320 | 54,471 | 23,684 | ||||||||||||
543,069 | 360,225 | 1,426,164 | 946,378 | |||||||||||||
Income from operations | 182,719 | 236,802 | 591,064 | 547,955 | ||||||||||||
Other income (expense): | ||||||||||||||||
Investment and other income | 2,591 | 618 | 5,205 | 2,028 | ||||||||||||
Interest expense | (9,232 | ) | (11,736 | ) | (31,022 | ) | (34,776 | ) | ||||||||
Loss on extinguishment of debt | — | — | (10,787 | ) | — | |||||||||||
(6,641 | ) | (11,118 | ) | (36,604 | ) | (32,748 | ) | |||||||||
Income before income taxes | 176,078 | 225,684 | 554,460 | 515,207 | ||||||||||||
Income tax expense | (96,358 | ) | (84,378 | ) | (316,562 | ) | (187,651 | ) | ||||||||
Net income | $ | 79,720 | $ | 141,306 | $ | 237,898 | $ | 327,556 | ||||||||
Net income per share - basic | $ | 0.79 | $ | 1.44 | $ | 2.37 | $ | 3.36 | ||||||||
Net income per share - diluted | $ | 0.70 | $ | 1.25 | $ | 2.10 | $ | 2.95 | ||||||||
Weighted average shares outstanding - basic | 100,796 | 98,226 | 100,325 | 97,602 | ||||||||||||
Weighted average shares outstanding - diluted | 117,423 | 116,713 | 113,203 | 115,554 | ||||||||||||
Statements of Comprehensive Income | ||||||||||||||||
Net income | $ | 79,720 | $ | 141,306 | $ | 237,898 | $ | 327,556 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Unrealized gain (loss) on marketable securities, net of tax | 22,632 | 578 | 28,083 | (1,685 | ) | |||||||||||
Comprehensive income | $ | 102,352 | $ | 141,884 | $ | 265,981 | $ | 325,871 | ||||||||
The accompanying notes are an integral part of the financial statements. |
4
REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
For the nine months ended September 30, 2014 and 2013
(In thousands)
Class A Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||
Balance, December 31, 2013 | 2,020 | $ | 2 | 97,667 | $ | 97 | $ | 2,045,857 | $ | (92,692 | ) | — | — | $ | (1,188 | ) | $ | 1,952,076 | |||||||||||||||||||
Issuance of Common Stock in connection with exercise of stock options | — | — | 2,460 | 3 | 79,695 | — | — | — | — | 79,698 | |||||||||||||||||||||||||||
Common Stock tendered upon exercise of stock options in connection with employee tax obligations | — | — | (526 | ) | — | (175,866 | ) | — | — | — | — | (175,866 | ) | ||||||||||||||||||||||||
Issuance of Common Stock in connection with conversion of convertible senior notes | — | — | 522 | — | 156,373 | — | — | — | — | 156,373 | |||||||||||||||||||||||||||
Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | — | — | 21 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of restricted Common Stock under Long-Term Incentive Plan | — | — | 5 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Conversion of Class A Stock to Common Stock | (47 | ) | — | 47 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Stock-based compensation charges | — | — | — | — | 229,692 | — | — | — | — | 229,692 | |||||||||||||||||||||||||||
Excess tax benefit from stock-based compensation | — | — | — | — | 343,532 | — | — | — | — | 343,532 | |||||||||||||||||||||||||||
Acquisition of Common Stock in connection with exercise of convertible note hedges | — | — | — | — | 43,849 | — | (522 | ) | $ | (43,849 | ) | — | — | ||||||||||||||||||||||||
Reduction of warrants in connection with conversion of senior notes | — | — | — | — | (143,041 | ) | — | — | — | — | (143,041 | ) | |||||||||||||||||||||||||
Reduction of equity component of convertible senior notes | — | — | — | — | (156,657 | ) | — | — | — | — | (156,657 | ) | |||||||||||||||||||||||||
Net income | — | — | — | — | — | 237,898 | — | — | — | 237,898 | |||||||||||||||||||||||||||
Other comprehensive income, net of tax | — | — | — | — | — | — | — | — | 28,083 | 28,083 | |||||||||||||||||||||||||||
Balance, September 30, 2014 | 1,973 | $ | 2 | 100,196 | $ | 100 | $ | 2,423,434 | $ | 145,206 | (522 | ) | $ | (43,849 | ) | $ | 26,895 | $ | 2,551,788 | ||||||||||||||||||
5
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) - Continued | |||||||||||||||||||||||||||||||||||||
Class A Stock | Common Stock | Additional Paid-in Capital | Retained Earnings (Accumulated Deficit) | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||
Balance, December 31, 2012 | 2,069 | $ | 2 | 95,223 | $ | 95 | $ | 1,763,508 | $ | (517,054 | ) | — | — | $ | (1,166 | ) | $ | 1,245,385 | |||||||||||||||||||
Issuance of Common Stock in connection with exercise of stock options | — | — | 2,641 | 3 | 42,622 | — | — | — | — | 42,625 | |||||||||||||||||||||||||||
Common Stock tendered upon exercise of stock options in connection with employee tax obligations | — | — | (597 | ) | (1 | ) | (166,357 | ) | — | — | — | — | (166,358 | ) | |||||||||||||||||||||||
Issuance of Common Stock in connection with Company 401(k) Savings Plan contribution | — | — | 38 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of restricted Common Stock under Long-Term Incentive Plan | — | — | 6 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Conversion of Class A Stock to Common Stock | (40 | ) | — | 40 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Stock-based compensation charges | — | — | — | — | 144,808 | — | — | — | — | 144,808 | |||||||||||||||||||||||||||
Excess tax benefit from stock-based compensation | — | — | — | — | 97,840 | — | — | — | — | 97,840 | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | 327,556 | — | — | — | 327,556 | |||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | — | — | (1,685 | ) | (1,685 | ) | |||||||||||||||||||||||||
Balance, September 30, 2013 | 2,029 | $ | 2 | 97,351 | $ | 97 | $ | 1,882,421 | $ | (189,498 | ) | — | — | $ | (2,851 | ) | $ | 1,690,171 | |||||||||||||||||||
The accompanying notes are an integral part of the financial statements. |
6
REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 237,898 | $ | 327,556 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 38,551 | 29,912 | ||||||
Non-cash compensation expense | 225,784 | 143,217 | ||||||
Non-cash interest expense | 15,629 | 17,316 | ||||||
Loss on extinguishment of debt | 10,787 | — | ||||||
Other non-cash charges and expenses, net | 12,844 | 15,710 | ||||||
Deferred taxes | (50,466 | ) | 82,890 | |||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in Sanofi, Bayer HealthCare, and trade accounts receivable | 27,713 | (350,809 | ) | |||||
Increase in inventories | (50,917 | ) | (36,742 | ) | ||||
(Increase) decrease in prepaid expenses and other assets | (28,850 | ) | 3,738 | |||||
Increase (decrease) in deferred revenue | 29,395 | (20,815 | ) | |||||
Increase in accounts payable, accrued expenses, and other liabilities | 76,506 | 94,894 | ||||||
Total adjustments | 306,976 | (20,689 | ) | |||||
Net cash provided by operating activities | 544,874 | 306,867 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of marketable securities | (478,436 | ) | (477,312 | ) | ||||
Sales or maturities of marketable securities | 216,478 | 319,152 | ||||||
Capital expenditures | (215,464 | ) | (87,347 | ) | ||||
Net cash used in investing activities | (477,422 | ) | (245,507 | ) | ||||
Cash flows from financing activities: | ||||||||
Payments in connection with facility and capital lease obligations | (810 | ) | (1,625 | ) | ||||
Repayments of convertible senior notes | (61,125 | ) | — | |||||
Payments in connection with reduction of outstanding warrants | (143,041 | ) | — | |||||
Proceeds from issuance of Common Stock | 80,804 | 41,718 | ||||||
Payments in connection with Common Stock tendered for employee tax obligations | (175,866 | ) | (166,358 | ) | ||||
Excess tax benefit from stock-based compensation | 343,532 | 97,840 | ||||||
Net cash provided by (used in) financing activities | 43,494 | (28,425 | ) | |||||
Net increase in cash and cash equivalents | 110,946 | 32,935 | ||||||
Cash and cash equivalents at beginning of period | 535,608 | 230,276 | ||||||
Cash and cash equivalents at end of period | $ | 646,554 | $ | 263,211 | ||||
The accompanying notes are an integral part of the financial statements. |
7
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
1. Interim Financial Statements
The interim Condensed Consolidated Financial Statements of Regeneron Pharmaceuticals, Inc. ("Regeneron" or the "Company") have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and disclosures necessary for a presentation of the Company’s financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of management, these financial statements reflect all normal recurring adjustments and accruals necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for such periods. The results of operations for any interim periods are not necessarily indicative of the results for the full year. The December 31, 2013 Condensed Consolidated Balance Sheet data were derived from audited financial statements, but do not include all disclosures required by accounting principles generally accepted in the United States of America. These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Certain reclassifications have been made to prior period amounts to conform with the current period’s presentation.
2. Product Sales
EYLEA® net product sales in the United States totaled $445.0 million and $363.1 million for the three months ended September 30, 2014 and 2013, respectively, and $1,218.8 million and $1,006.8 million for the nine months ended September 30, 2014 and 2013, respectively. In addition, ARCALYST® net product sales totaled $3.8 million and $4.0 million for the three months ended September 30, 2014 and 2013, respectively, and $10.4 million and $12.9 million for the nine months ended September 30, 2014 and 2013, respectively.
The Company recorded 72% and 75% for the three months ended September 30, 2014 and 2013, respectively, and 75% and 76% for the nine months ended September 30, 2014 and 2013, respectively, of its total gross product revenue from sales to Besse Medical, a subsidiary of AmerisourceBergen Corporation.
Revenue from product sales is recorded net of applicable provisions for rebates and chargebacks under governmental programs, distribution-related fees, prompt pay discounts, and other sales-related deductions. The following table summarizes the provisions, and credits/payments, for these sales-related deductions during the nine months ended September 30, 2014.
Rebates & Chargebacks | Distribution- Related Fees | Other Sales- Related Deductions | Total | ||||||||||||
Balance as of December 31, 2013 | $ | 4,400 | $ | 19,663 | $ | 538 | $ | 24,601 | |||||||
Provision related to current period sales | 23,265 | 53,689 | 1,202 | 78,156 | |||||||||||
Credits/payments | (23,873 | ) | (54,878 | ) | (1,211 | ) | (79,962 | ) | |||||||
Balance as of September 30, 2014 | $ | 3,792 | $ | 18,474 | $ | 529 | $ | 22,795 |
Under the provisions of the Patient Protection and Affordable Care Act ("PPACA") and the Health Care and Education Reconciliation Act of 2010, a non-tax deductible annual fee (the "Branded Prescription Drug Fee") is imposed on pharmaceutical manufacturers that sell branded prescription drugs to specified government programs. The legislation imposed an annual fee on companies for each calendar year beginning in 2011. This fee is allocated to companies based on their prior year market share of total branded prescription drug sales into these government programs. Orphan drugs sales, including ARCALYST, are not subject to the fee. In July 2014, the Internal Revenue Service ("IRS") issued final regulations that provide guidance on the Branded Prescription Drug Fee. The final regulations differ in some respects from the temporary regulations issued by the IRS in 2011, including that a company is liable for the fee based on its branded prescription drug sales in the current year, instead of the liability only being applicable upon the first qualifying branded prescription drug sale of the following fee year under the temporary regulations. As a result of the issuance of these final IRS regulations, the Company will record an estimate of the fee in the same period in which its qualifying branded prescription drug sales occur. Therefore, in the third quarter of 2014, an incremental charge was recorded to (i) recognize a liability for the estimated fee payable based on 2014 sales through the first nine months of 2014, and (ii) expense the remaining prepaid asset recorded under the previous accounting for the estimated fee payable based on 2013
8
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
sales. The impact of the incremental charge in the third quarter was $40.6 million, which was included in selling, general, and administrative expenses.
3. Collaboration Agreements
Sanofi
Sanofi collaboration revenue, as detailed below, consisted primarily of reimbursement for research and development expenses that the Company incurred, partly offset by sharing of pre-launch commercialization expenses in connection with the companies' antibody collaboration. In addition, Sanofi collaboration revenue for the nine months ended September 30, 2013 was reduced by two $10.0 million up-front payments to Sanofi in connection with the Company's acquisition from Sanofi of full exclusive rights to two families of novel antibodies, as described below.
Three months ended September 30, | ||||||||
Sanofi Collaboration Revenue | 2014 | 2013 | ||||||
ZALTRAP: | ||||||||
Regeneron's share of losses in connection with commercialization of ZALTRAP | $ | (1,008 | ) | $ | (6,575 | ) | ||
Reimbursement of Regeneron research and development expenses | 1,261 | 1,316 | ||||||
Other | 756 | 2,625 | ||||||
Total ZALTRAP | 1,009 | (2,634 | ) | |||||
Antibody: | ||||||||
Reimbursement of Regeneron research and development expenses | 140,497 | 133,128 | ||||||
Regeneron's share of commercialization expenses | (12,830 | ) | — | |||||
Other | 4,249 | 3,865 | ||||||
Total Antibody | 131,916 | 136,993 | ||||||
Total Sanofi collaboration revenue | $ | 132,925 | $ | 134,359 |
9
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Nine months ended September 30, | ||||||||
Sanofi Collaboration Revenue | 2014 | 2013 | ||||||
ZALTRAP: | ||||||||
Regeneron's share of losses in connection with commercialization of ZALTRAP | $ | (4,912 | ) | $ | (22,581 | ) | ||
Reimbursement of Regeneron research and development expenses | 3,691 | 5,497 | ||||||
Other | 4,417 | 6,610 | ||||||
Total ZALTRAP | 3,196 | (10,474 | ) | |||||
Antibody: | ||||||||
Reimbursement of Regeneron research and development expenses | 405,212 | 338,027 | ||||||
Regeneron's share of commercialization expenses | (17,125 | ) | — | |||||
Up-front payments to Sanofi for acquisition of rights related to two antibodies | — | (20,000 | ) | |||||
Other | 14,745 | 11,608 | ||||||
Total Antibody | 402,832 | 329,635 | ||||||
Total Sanofi collaboration revenue | $ | 406,028 | $ | 319,161 |
Sanofi commenced sales of ZALTRAP® (ziv-aflibercept) Injection for Intravenous Infusion, in combination with 5-fluorouracil, leucovorin, irinotecan ("FOLFIRI"), for patients with metastatic colorectal cancer that is resistant to or has progressed following an oxaliplatin-containing regimen, in the United States in the third quarter of 2012 and in certain European and other countries in the first quarter of 2013. The Company and Sanofi globally collaborate on the development and commercialization of ZALTRAP. Under the terms of the companies' September 2003 collaboration agreement, as amended, Regeneron and Sanofi share co-promotion rights and profits and losses on sales of ZALTRAP outside of Japan. The Company is entitled to receive a percentage of sales of ZALTRAP in Japan.
Under the Company's antibody collaboration agreement with Sanofi, agreed upon worldwide development expenses incurred by both companies during the term of the agreement are funded by Sanofi, except that following receipt of the first positive Phase 3 trial results for a co-developed drug candidate, which first occurred in the fourth quarter of 2013, subsequent Phase 3 trial-related costs for that drug candidate ("Shared Phase 3 Trial Costs") are shared 80% by Sanofi and 20% by Regeneron. Consequently, during the three and nine months ended September 30, 2014, the Company recognized as additional research and development expense $28.4 million and $81.3 million, respectively, of antibody development expenses that the Company was obligated to reimburse to Sanofi related to alirocumab and sarilumab.
Effective in the second quarter of 2014, the Company and Sanofi began sharing pre-launch commercialization expenses related to alirocumab in accordance with the companies’ antibody collaboration agreement.
In May 2013, the Company acquired from Sanofi full exclusive rights to two families of novel antibodies invented at Regeneron and previously included in the Company's antibody collaboration with Sanofi. The Company acquired full rights to antibodies targeting the platelet derived growth factor (PDGF) family of receptors and ligands in ophthalmology and all other indications and to antibodies targeting the angiopoietin-2 (Ang2) receptor and ligand in ophthalmology. With respect to PDGF antibodies, the Company made a $10.0 million up-front payment to Sanofi in the second quarter of 2013. In addition, with respect to Ang2 antibodies in ophthalmology, the Company made a $10.0 million up-front payment to Sanofi in the second quarter of 2013.
With respect to PDGF antibodies, the Company made two $5.0 million development milestone payments to Sanofi in the first quarter of 2014, which were recorded in the Company's Statements of Operations as research and development expense. The Company is also obligated to pay up to $30.0 million in additional potential development milestones as well as royalties on any future sales of PDGF antibodies.
In July 2014, in connection with the Company’s antibody collaboration with Sanofi, the Company purchased a U.S. Food and Drug Administration ("FDA") priority review voucher from a third party for $67.5 million. The Company and Sanofi equally
10
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
shared the priority review voucher's purchase price, and the Company's share of the cost, or $33.8 million, was recorded as a research and development expense during the third quarter of 2014. The Company subsequently transferred the voucher to Sanofi, which intends to use the priority review voucher in connection with a planned Biologics License Application submission to the FDA for alirocumab.
Bayer HealthCare LLC
The Company and Bayer HealthCare globally collaborate on the development and commercialization of EYLEA outside of the United States. Bayer HealthCare commenced sales of EYLEA outside the United States for the treatment of wet AMD in the fourth quarter of 2012, for the treatment of macular edema secondary to CRVO in the fourth quarter of 2013, and for the treatment of DME in the third quarter of 2014. In addition, in January 2014, the Company entered into a license and collaboration agreement with Bayer HealthCare governing the joint development and commercialization outside the United States of an antibody product candidate to Platelet Derived Growth Factor Receptor Beta (PDGFR-beta).
The collaboration revenue the Company earned from Bayer HealthCare is detailed below:
Three months ended September 30, | ||||||||
Bayer HealthCare Collaboration Revenue | 2014 | 2013 | ||||||
EYLEA: | ||||||||
Regeneron's net profit in connection with commercialization of EYLEA outside the United States | $ | 85,351 | $ | 31,769 | ||||
Sales and substantive development milestones | 30,000 | 45,000 | ||||||
Cost-sharing of Regeneron EYLEA development expenses | 4,394 | 3,739 | ||||||
Other | 12,745 | 8,075 | ||||||
Total EYLEA | 132,490 | 88,583 | ||||||
PDGFR-beta antibody: | ||||||||
Cost-sharing of REGN2176-3 development expenses | 518 | — | ||||||
Other | 2,845 | — | ||||||
Total PDGFR-beta | 3,363 | — | ||||||
Total Bayer HealthCare collaboration revenue | $ | 135,853 | $ | 88,583 |
11
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Nine months ended September 30, | ||||||||
Bayer HealthCare Collaboration Revenue | 2014 | 2013 | ||||||
EYLEA: | ||||||||
Regeneron's net profit in connection with commercialization of EYLEA outside the United States | $ | 213,291 | $ | 57,186 | ||||
Sales and substantive development milestones | 75,000 | 45,000 | ||||||
Cost-sharing of Regeneron EYLEA development expenses | 26,235 | 13,207 | ||||||
Other | 34,490 | 19,201 | ||||||
Total EYLEA | 349,016 | 134,594 | ||||||
PDGFR-beta antibody: | ||||||||
Cost-sharing of REGN2176-3 development expenses | 1,657 | — | ||||||
Other | 7,787 | — | ||||||
Total PDGFR-beta | 9,444 | — | ||||||
Total Bayer HealthCare collaboration revenue | $ | 358,460 | $ | 134,594 |
EYLEA
During the nine months ended September 30, 2014, the Company earned, and recorded as revenue, five $15.0 million sales milestones (two of which were recorded in the third quarter of 2014) from Bayer HealthCare upon total aggregate net sales of EYLEA outside the United States exceeding $500 million, $600 million, $700 million, $800 million, and $900 million, respectively, over a twelve-month period. The Company is eligible to receive one additional $15.0 million sales milestone payment if twelve-month sales of EYLEA outside the United States exceed $1 billion. In addition, in connection with a November 2013 agreement under which Bayer HealthCare obtained rights to use certain of the Company’s EYLEA clinical data for a regulatory filing, the Company became eligible to receive up to $30.0 million in additional sales milestone payments if twelve-month sales of specific commercial supplies of EYLEA outside the United States achieve certain specified levels up to $200 million.
In January 2014, Bayer HealthCare decided to participate in the global development and commercialization of EYLEA outside the United States for the treatment of macular edema following branch retinal vein occlusion ("BRVO"). In connection with this decision, Bayer HealthCare reimbursed Regeneron $15.7 million for a defined share of the EYLEA global development costs that the Company had incurred prior to February 2014 for the BRVO indication, which was recognized as Bayer HealthCare collaboration revenue in the first quarter of 2014 and is included with "Cost-sharing of Regeneron EYLEA development expenses" for the nine months ended September 30, 2014 in the table above. In addition, all future agreed upon global EYLEA development expenses incurred in connection with BRVO are being shared equally, and any future profits or losses on sales of EYLEA outside of the United States for the treatment of macular edema following BRVO will also be shared (for countries other than Japan). The Company is entitled to receive a tiered percentage of EYLEA net sales in Japan.
PDGFR-beta Antibody
In January 2014, the Company also entered into an agreement with Bayer HealthCare governing the joint development and commercialization outside the United States of an antibody product candidate to PDGFR-beta, including in combination with EYLEA, for the treatment of ocular diseases or disorders. REGN2176-3, a combination product candidate comprised of an antibody to PDGFR-beta co-formulated with EYLEA, is being developed under the agreement. Under the agreement, the Company will conduct the initial development of the PDGFR-beta antibody through completion of the first proof-of-concept study, upon which Bayer HealthCare will have a right to opt-in to license and collaborate on further development and commercialization outside the United States.
12
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
In connection with the agreement, Bayer HealthCare made a $25.5 million non-refundable upfront payment to the Company in January 2014, and is obligated to pay 25% of global development costs and 50% of development costs exclusively for the territory outside the United States under the initial development plan. In addition, Bayer HealthCare is obligated to reimburse the Company for 50% of development milestone payments to Sanofi related to the Company's acquisition of rights to antibodies targeting the PDGF family of receptors in May 2013, as described above. In that regard, Bayer HealthCare made two $2.5 million development milestone payments to the Company in the first quarter of 2014 (both of which, for the purpose of revenue recognition, were not considered substantive). Further, in connection with the Company’s initial development of the PDGFR-beta antibody through completion of the first proof-of-concept study, the Company is eligible to receive up to $15.0 million in future development milestone payments from Bayer HealthCare, although certain of these development milestone payments could be reduced by half if Bayer HealthCare does not opt-in to the collaboration.
From inception of the agreement until Bayer HealthCare has the right to opt-in to the collaboration, the Company's sole significant deliverable is research and development services provided in accordance with the agreement. Therefore, the $25.5 million upfront payment was allocated to this deliverable, initially recorded as deferred revenue, and will be recognized as revenue over the related performance period. In addition, the two $2.5 million non-substantive development milestone payments from Bayer HealthCare were also initially recorded as deferred revenue and will be recognized over the same performance period as the upfront payment.
If Bayer HealthCare exercises its right to opt-in to the collaboration, it will obtain exclusive commercialization rights to the product outside the United States, continue to pay for 25% of global development costs and 50% of development costs exclusively for the territory outside the United States, pay a $20.0 million opt-in payment to the Company, pay a $20.0 million development milestone to the Company upon receipt of the first marketing approval in the European Union or Japan, share profits and losses from sales outside the United States equally with the Company, and be responsible for the payment of royalties on sales outside the United States to Sanofi.
Within the United States, the Company has exclusive commercialization rights and will retain all of the profits from sales. If Bayer HealthCare does not opt-in to the collaboration, the Company will have exclusive rights to develop and commercialize PDGFR-beta antibodies (except as a combination product with EYLEA) for use outside the United States.
The Company also has the right to opt-out of the collaboration upon completion of the first proof-of-concept study for the PDGFR-beta antibody. If the Company opts-out of the collaboration and Bayer HealthCare exercises its right to opt-in to the collaboration, Bayer HealthCare will obtain exclusive rights to the PDGFR-beta antibody (except as a combination product with EYLEA) outside of the United States, be responsible for all development costs outside of the United States, be responsible for all royalty and milestone payments to a third party, and will retain all of the profits from sales of the PDGFR-beta antibody outside of the United States.
Unless terminated earlier in accordance with its provisions, the agreement will continue to be in effect until such time as neither party or its respective affiliates or sublicensees is developing or commercializing a PDGFR-beta antibody in the specified field outside of the United States and such discontinuation is acknowledged as permanent by both the Company and Bayer HealthCare in writing.
Avalanche Biotechnologies, Inc.
In May 2014, the Company entered into a research collaboration and license agreement with Avalanche Biotechnologies, Inc. to discover, develop, and commercialize novel gene therapy products for the treatment of ophthalmologic diseases. In connection with the agreement, the Company made a $2.0 million upfront payment and a $6.0 million pre-payment of collaboration research costs, and is obligated to pay potential additional research costs, an aggregate amount of up to $80.0 million per product upon meeting certain potential development and regulatory milestones (for products directed to as many as eight therapeutic targets, or up to an aggregate of $640.0 million), and royalties on any future sales of such products. The Company also purchased an aggregate of $5.0 million of Avalanche preferred stock. Under the agreement, the Company will collaborate with Avalanche to conduct research for the discovery of novel gene therapy vectors. Subsequent to the filing of an Investigational New Drug application ("IND") with the FDA for a product candidate developed under the agreement, Regeneron may exercise its right to obtain exclusive worldwide rights to further research, develop, and commercialize such product candidates directed to the applicable therapeutic target. In addition, Avalanche has the option to share in development costs and profits for products directed toward up to two therapeutic targets of its choice.
13
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
In July 2014, Avalanche commenced an initial public offering ("IPO") of its common stock and thereby triggered the Company's obligation under the research collaboration and license agreement to purchase up to $10.0 million of Avalanche common stock in a concurrent private placement. As part of the concurrent private placement, the Company purchased from Avalanche at the closing of the IPO 588,235 shares of Avalanche common stock for an aggregate purchase price of $10.0 million. In addition, at the closing of the IPO, Avalanche preferred stock, including the Avalanche preferred stock held by the Company, automatically converted on a one-for-one basis into Avalanche common stock.
4. Net Income Per Share
The Company’s basic net income per share amounts have been computed by dividing net income by the weighted average number of shares of Common Stock and Class A Stock outstanding. Net income per share is presented on a combined basis, inclusive of Common Stock and Class A Stock outstanding, as each class of stock has equivalent economic rights. Diluted net income per share includes the potential dilutive effect of other securities as if such securities were converted or exercised during the period, when the effect is dilutive. The calculations of basic and diluted net income per share are as follows:
Three months ended September 30, | ||||||||
2014 | 2013 | |||||||
Net income - basic | $ | 79,720 | $ | 141,306 | ||||
Effective of dilutive securities: | ||||||||
Convertible senior notes - interest expense related to contractual coupon interest rate and amortization of discount and note issuance costs | 2,803 | 4,678 | ||||||
Net income - diluted | $ | 82,523 | $ | 145,984 | ||||
(Shares in thousands) | ||||||||
Weighted average shares - basic | 100,796 | 98,226 | ||||||
Effect of dilutive securities: | ||||||||
Stock options | 9,377 | 10,379 | ||||||
Restricted stock | 430 | 462 | ||||||
Convertible senior notes | 4,033 | 4,761 | ||||||
Warrants | 2,787 | 2,885 | ||||||
Dilutive potential shares | 16,627 | 18,487 | ||||||
Weighted average shares - diluted | 117,423 | 116,713 | ||||||
Net income per share - basic | $ | 0.79 | $ | 1.44 | ||||
Net income per share - diluted | $ | 0.70 | $ | 1.25 |
14
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
Net income - basic | $ | 237,898 | $ | 327,556 | ||||
Effective of dilutive securities: | ||||||||
Convertible senior notes - interest expense related to contractual coupon interest rate and amortization of discount and note issuance costs | — | 13,857 | ||||||
Net income - diluted | $ | 237,898 | $ | 341,413 | ||||
(Shares in thousands) | ||||||||
Weighted average shares - basic | 100,325 | 97,602 | ||||||
Effect of dilutive securities: | ||||||||
Stock options | 9,515 | 10,220 | ||||||
Restricted stock | 413 | 415 | ||||||
Convertible senior notes | — | 4,761 | ||||||
Warrants | 2,950 | 2,556 | ||||||
Dilutive potential shares | 12,878 | 17,952 | ||||||
Weighted average shares - diluted | 113,203 | 115,554 | ||||||
Net income per share - basic | $ | 2.37 | $ | 3.36 | ||||
Net income per share - diluted | $ | 2.10 | $ | 2.95 |
Shares which have been excluded from the September 30, 2014 and 2013 diluted per share amounts because their effect would have been antidilutive include the following:
Three months ended September 30, | ||||||
(Shares in thousands) | 2014 | 2013 | ||||
Stock options | 1,227 | 135 |
Nine months ended September 30, | ||||||
(Shares in thousands) | 2014 | 2013 | ||||
Stock options | 3,741 | 1,265 | ||||
Convertible senior notes | 4,483 | — |
15
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
5. Marketable Securities
Marketable securities at September 30, 2014 and December 31, 2013 consist of both debt securities issued by investment grade institutions as well as equity securities. The Company also held restricted marketable securities as of September 30, 2014, consisting of the Company's investment in Avalanche common shares (see Note 3), which are subject to customary transfer restrictions until January 2015 under a lock-up agreement with the underwriters of Avalanche's IPO.
The following tables summarize the Company's investments in marketable securities at September 30, 2014 and December 31, 2013.
Amortized | Unrealized | Fair | ||||||||||||||
At September 30, 2014 | Cost Basis | Gains | Losses | Value | ||||||||||||
Unrestricted | ||||||||||||||||
U.S. government and government agency obligations | $ | 51,059 | $ | 71 | $ | (1 | ) | $ | 51,129 | |||||||
Corporate bonds | 696,149 | 574 | (1,131 | ) | 695,592 | |||||||||||
Municipal bonds | 42,756 | 94 | (8 | ) | 42,842 | |||||||||||
Equity securities | 1,166 | 3,933 | — | 5,099 | ||||||||||||
791,130 | 4,672 | (1,140 | ) | 794,662 | ||||||||||||
Restricted | ||||||||||||||||
Equity securities | 15,000 | 39,431 | — | 54,431 | ||||||||||||
$ | 806,130 | $ | 44,103 | $ | (1,140 | ) | $ | 849,093 | ||||||||
At December 31, 2013 | ||||||||||||||||
Unrestricted | ||||||||||||||||
U.S. government and government agency obligations | $ | 107,493 | $ | 55 | $ | (27 | ) | $ | 107,521 | |||||||
Corporate bonds | 369,321 | 233 | (361 | ) | 369,193 | |||||||||||
Commercial paper | 23,891 | 53 | — | 23,944 | ||||||||||||
Municipal bonds | 36,935 | 45 | (59 | ) | 36,921 | |||||||||||
International government agency obligations | 2,007 | 1 | — | 2,008 | ||||||||||||
Certificates of deposit | 7,509 | 5 | — | 7,514 | ||||||||||||
Equity securities | 1,166 | — | — | 1,166 | ||||||||||||
$ | 548,322 | $ | 392 | $ | (447 | ) | $ | 548,267 |
The Company classifies its debt security investments based on their contractual maturity dates. The debt securities listed at September 30, 2014 mature at various dates through August 2024. The fair values of debt security investments by contractual maturity as of September 30, 2014 and December 31, 2013 consist of the following:
September 30, 2014 | December 31, 2013 | |||||||
Maturities within one year | $ | 287,739 | $ | 158,376 | ||||
Maturities after one year through five years | 496,700 | 383,410 | ||||||
Maturities after five years through ten years | 5,124 | 4,138 | ||||||
Maturities after ten years | — | 1,177 | ||||||
$ | 789,563 | $ | 547,101 |
16
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
The following table shows the fair value of the Company’s marketable securities that have unrealized losses and that are deemed to be only temporarily impaired, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2014 and December 31, 2013.
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||
At September 30, 2014 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||
U.S. government and government agency obligations | $ | 1,401 | $ | (1 | ) | — | — | $ | 1,401 | $ | (1 | ) | |||||||||
Corporate bonds | 343,835 | (1,131 | ) | — | — | 343,835 | (1,131 | ) | |||||||||||||
Municipal bonds | 10,502 | (8 | ) | — | — | 10,502 | (8 | ) | |||||||||||||
$ | 355,738 | $ | (1,140 | ) | — | — | $ | 355,738 | $ | (1,140 | ) | ||||||||||
At December 31, 2013 | |||||||||||||||||||||
U.S. government and government agency obligations | $ | 49,241 | $ | (27 | ) | — | — | $ | 49,241 | $ | (27 | ) | |||||||||
Corporate bonds | 176,140 | (361 | ) | — | — | 176,140 | (361 | ) | |||||||||||||
Municipal bonds | 14,431 | (59 | ) | — | — | 14,431 | (59 | ) | |||||||||||||
$ | 239,812 | $ | (447 | ) | — | — | $ | 239,812 | $ | (447 | ) |
Realized gains and losses are included as a component of investment income. For both the three and nine months ended September 30, 2014, total realized gains and losses on sales of marketable securities were not material. For both the three and nine months ended September 30, 2013, total realized gains on sales of marketable securities were $0.5 million and $1.0 million, respectively, and there were no realized losses. Changes in the Company's accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013 related to unrealized gains and losses on available-for-sale marketable securities. For the three and nine months ended September 30, 2014 and 2013, amounts reclassified from accumulated other comprehensive income (loss) into investment income in the Company's Statements of Operations were related to realized gains and losses on sales of marketable securities.
17
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
6. Fair Value Measurements
The Company’s assets that are measured at fair value on a recurring basis, at September 30, 2014 and December 31, 2013, consist of the following:
Fair Value Measurements at Reporting Date Using | |||||||||||
At September 30, 2014 | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||
Available-for-sale marketable securities: | |||||||||||
Unrestricted | |||||||||||
U.S. government and government agency obligations | $ | 51,129 | — | $ | 51,129 | ||||||
Corporate bonds | 695,592 | — | 695,592 | ||||||||
Municipal bonds | 42,842 | — | 42,842 | ||||||||
Equity securities | 5,099 | $ | 5,099 | — | |||||||
794,662 | 5,099 | 789,563 | |||||||||
Restricted | |||||||||||
Equity securities | 54,431 | — | 54,431 | ||||||||
$ | 849,093 | $ | 5,099 | $ | 843,994 | ||||||
At December 31, 2013 | |||||||||||
Available-for-sale marketable securities: | |||||||||||
Unrestricted | |||||||||||
U.S. government and government agency obligations | $ | 107,521 | — | $ | 107,521 | ||||||
Corporate bonds | 369,193 | — | 369,193 | ||||||||
Commercial paper | 23,944 | — | 23,944 | ||||||||
Municipal bonds | 36,921 | — | 36,921 | ||||||||
International government agency obligations | 2,008 | — | 2,008 | ||||||||
Certificates of deposit | 7,514 | — | 7,514 | ||||||||
Equity securities | 1,166 | $ | 1,166 | — | |||||||
$ | 548,267 | $ | 1,166 | $ | 547,101 |
Marketable securities included in Level 2 are valued using quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-based valuations in which significant inputs used are observable. The Company considers market liquidity in determining the fair value for these securities. The Company did not record any charges for other-than-temporary impairment of its Level 2 marketable securities during the three and nine months ended September 30, 2014 and 2013.
During the three months ended September 30, 2013, the Company sold a Level 3 marketable security and realized a $0.4 million gain on its sale. There were no other sales, or purchases or maturities of, Level 3 marketable securities and no unrealized gains or losses related to Level 3 marketable securities for the three and nine months ended September 30, 2014 and 2013. There were no transfers of marketable securities between Levels 1, 2, or 3 classifications during the three and nine months ended September 30, 2014 and 2013.
18
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
As of September 30, 2014 and December 31, 2013, the Company had $338.9 million and $400.0 million, respectively, in aggregate principal amount of 1.875% convertible senior notes (the "Notes") that will mature on October 1, 2016 unless earlier converted or repurchased. As described in Note 9, a portion of the Notes was surrendered for conversion during the second quarter of 2014. The fair value of the outstanding Notes was estimated to be $1,433.8 million and $1,327.2 million as of September 30, 2014 and December 31, 2013, respectively, and was determined based on Level 2 inputs, such as market and observable sources.
7. Inventories
Inventories consist of the following:
September 30, | December 31, | ||||||
2014 | 2013 | ||||||
Raw materials | $ | 10,170 | $ | 9,120 | |||
Work-in-process | 70,965 | 35,868 | |||||
Finished goods | 11,368 | 14,352 | |||||
Deferred costs | 27,814 | 11,014 | |||||
$ | 120,317 | $ | 70,354 |
Deferred costs represent the costs of product manufactured and shipped to the Company's collaborators for which recognition of revenue has been deferred. For the three months ended September 30, 2014, cost of goods sold included inventory write-downs and reserves totaling $1.6 million; such amounts were not material for the three months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, cost of goods sold included inventory write-downs and reserves totaling $3.5 million and $4.8 million, respectively.
8. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
September 30, | December 31, | ||||||
2014 | 2013 | ||||||
Accounts payable | $ | 47,342 | $ | 61,936 | |||
Accrued payroll and related costs | 75,159 | 69,429 | |||||
Accrued clinical trial expense | 45,384 | 23,654 | |||||
Accrued sales-related charges, deductions, and royalties | 114,408 | 66,855 | |||||
Other accrued expenses and liabilities | 55,683 | 29,022 | |||||
$ | 337,976 | $ | 250,896 |
9. Convertible Debt
In the second quarter of 2014, $61.1 million principal amount of the Company's $400.0 million aggregate principal amount of Notes were surrendered for conversion. In accordance with the terms of the Notes, the Company elected to settle these conversion obligations through a combination of cash, in an amount equal to the principal amount of the converted Notes, and shares of the Company's Common Stock in respect of any amounts due in excess thereof. Consequently, upon settlement of the Notes during the second quarter of 2014, the Company (i) paid $61.1 million in cash, (ii) issued 521,876 shares of Common Stock, (iii) recognized a $10.8 million loss on the debt extinguishment, and (iv) allocated $156.7 million of the settlement consideration provided to the Note holders to the reacquisition of the equity component of the Notes, and recognized such amount as a reduction of stockholder's equity.
19
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
In connection with the initial offering of the Notes in October 2011, the Company entered into convertible note hedge and warrant transactions with multiple counterparties, which were recorded to additional paid-in capital. As a result of the Note conversions described above, in the second quarter of 2014 the Company exercised a proportionate amount of its convertible note hedges, for which the Company received 521,876 shares of Common Stock, which was equivalent to the number of shares the Company was required to issue to settle the non-cash portion of the related Note conversions. The shares received were recorded as Treasury Stock, at cost, in the Company's Balance Sheet and Statement of Stockholders' Equity.
Also during the second quarter of 2014, the Company entered into agreements to reduce the number of warrants held by each of the warrant holders in proportion to the amount of Notes converted. Pursuant to the agreements, the Company paid an aggregate amount of $143.0 million to the warrant holders to reduce the maximum number of shares of Common Stock issuable upon exercise of the warrants from 4,760,840 to 4,033,324 (subject to adjustment from time to time as provided in the applicable warrant agreements). The remaining warrants expire, and will be exercisable, at various dates during 2017.
In October 2014, the Company received notification that an additional $160.8 million principal amount of the Notes were surrendered for conversion, and settlement is anticipated during the fourth quarter of 2014. The Company elected to settle these conversion obligations through a combination of cash and shares (total payment will be based on the average of the volume-weighted-average prices of the Common Stock during the 40 trading-day cash settlement averaging period specified in the indenture governing the Notes). In connection with these Note conversions, the Company exercised a proportionate amount of its convertible note hedges, for which the Company expects to receive shares of Common Stock equivalent to the number of shares the Company will be required to issue to settle the non-cash portion of the related Note conversions.
10. Income Taxes
The Company is subject to U.S. federal, state, and foreign income taxes. The Company recorded an income tax provision in its Statement of Operations of $96.4 million and $84.4 million for the three months ended September 30, 2014 and 2013, respectively, and $316.6 million and $187.7 million for the nine months ended September 30, 2014 and 2013, respectively. The Company's effective tax rate was 54.7% and 37.4% for the three months ended September 30, 2014 and 2013, respectively, and 57.1% and 36.4% for the nine months ended September 30, 2014 and 2013, respectively. The Company's effective tax rate for the three and nine months ended September 30, 2014 was negatively impacted by losses incurred in foreign jurisdictions with rates lower than the federal statutory rate, the incremental charge related to the non-tax deductible Branded Prescription Drug Fee (see Note 2), and expiration at the end of 2013 of the federal tax credit for increased research activities. In addition, the Company's effective tax rate for the nine months ended September 30, 2014 was negatively impacted by New York State tax legislation enacted in the first quarter of 2014. This tax legislation reduced the New York State income tax rate to zero percent for "qualified manufacturers", including Regeneron, effective in 2014; however, it also resulted in the Company reducing its related deferred tax assets as a discrete item in the first quarter of 2014. As a result, this tax legislation caused a net increase in the Company's effective tax rate of 2.2% for the nine months ended September 30, 2014.
The Company's effective tax rate for the nine months ended September 30, 2013 included, as a discrete item in the first quarter of 2013, the favorable impact of the enactment of The American Taxpayer Relief Act in January 2013. The American Taxpayer Relief Act included a provision to extend the income tax credit for increased research activities retroactively to the tax year ended December 31, 2012, as well as for 2013. As a result, the Company's 2012 research tax credit reduced its effective tax rate for the nine months ended September 30, 2013 by 4.3%.
The Company also recorded an income tax provision in its Statement of Comprehensive Income of $13.5 million and $14.9 million for the three and nine months ended September 30, 2014, respectively, in connection with the Company’s unrealized gains on “available-for-sale” marketable securities. For both the three and nine months ended September 30, 2013, no such income tax provision or benefit was required in connection with the Company’s unrealized gains (losses) on “available-for-sale” marketable securities.
Tax years subsequent to 2010 remain open to examination by federal tax authorities. The Company's 2011 federal income tax return is currently under audit by the IRS. During the second quarter of 2014, New York State tax authorities finalized their audit of the Company's 2009, 2010, and 2011 business corporation franchise tax returns with no adjustments.
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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
11. Statement of Cash Flows
Supplemental disclosure of non-cash investing and financing activities:
Included in accounts payable and accrued expenses at September 30, 2014 and December 31, 2013 were $38.6 million and $16.1 million, respectively, of accrued capital expenditures primarily in connection with renovation of the Company's new Limerick, Ireland facility and expansion and renovations in its Rensselaer, New York manufacturing facilities. Included in accounts payable and accrued expenses at September 30, 2013 and December 31, 2012 were $18.4 million and $8.6 million, respectively, of accrued capital expenditures.
Pursuant to the application of authoritative guidance issued by the Financial Accounting Standards Board ("FASB") to the Company's lease of office and laboratory facilities in Tarrytown, New York, the Company recognized a facility lease obligation of $92.6 million and $7.7 million during the nine months ended September 30, 2014 and 2013, respectively, in connection with capitalizing, on the Company's books, the landlord's costs of constructing new facilities that the Company has leased. In addition, included in property, plant, and equipment at September 30, 2014 and September 30, 2013 were $4.5 million and $1.0 million of capitalized interest for the nine months ended September 30, 2014 and September 30, 2013, respectively, as the related facilities are currently under construction.
12. Legal Matters
From time to time, the Company is a party to legal proceedings in the course of the Company's business. Costs associated with the Company's involvement in legal proceedings are expensed as incurred.
Proceedings Relating to ‘287 Patent and '018 Patent
The Company is a party to patent infringement litigation involving its European Patent No. 1,360,287 (the "'287 Patent") and its U.S. Patent No. 8,502,018 (the "'018 Patent"), both of which concern genetically altered mice capable of producing chimeric antibodies that are part human and part mouse. Chimeric antibody sequences can be used to produce high-affinity fully human monoclonal antibodies. In these proceedings (the "'287 Patent Infringement Litigation" and "'018 Patent Infringement Litigation," respectively), the Company claims infringement of several claims of the '287 Patent and the '018 Patent (as applicable), and seeks, among other types of relief, an injunction and an account of profits in connection with the defendants' infringing acts, which may include, among other things, the making, use, keeping, sale, or offer for sale of genetically engineered mice (or certain cells from which they are derived) that infringe one or more claims of the '287 Patent and the '018 Patent (as applicable). With respect to the '018 Patent Infringement Litigation against Ablexis, LLC, on October 31, 2014, the Company and Ablexis reached a confidential settlement and filed a joint stipulation dismissing the action with prejudice. As the '287 Patent Infringement Litigation and remaining '018 Patent Infringement Litigation proceedings are at an early stage, at this time the Company is not able to predict the outcome of, or an estimate of gain, if any, related to, these proceedings.
Proceedings Relating to PCSK9 Antibody (Alirocumab)
On October 17, 2014 and October 28, 2014, Amgen Inc. filed lawsuits against Regeneron, Sanofi, Aventisub LLC, and Aventis Pharmaceuticals, Inc. in the United States District Court for the District of Delaware seeking an injunction to prevent Regeneron and the other defendants from making, using, offering to sell, or selling within the United States (as well as importing into the United States) alirocumab, the antibody to PCSK9 for LDL cholesterol reduction Regeneron is jointly developing with Sanofi. In the complaints, Amgen asserts U.S. Patent Nos. 8,563,698, 8,829,165, and 8,859,741 and U.S. Patent Nos. 8,871,913 and 8,871,914, respectively. Amgen also seeks a judgment of patent infringement of the asserted patents, monetary damages (together with interest), costs and expenses of the lawsuits, and attorneys’ fees. This matter has not yet progressed sufficiently through discovery and/or development of important factual information and legal issues to enable the Company to estimate a range of possible loss, if any.
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REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
13. Recently Issued Accounting Standards
In May 2014, the FASB issued a new standard related to revenue recognition, Revenue from Contracts with Customers, which will replace existing revenue recognition guidance. The new standard requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. To achieve that core principle, an entity must identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies the performance obligation. The new standard will be effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is not permitted. The standard allows for two transition methods - retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial adoption. The Company has not yet determined its method of transition and is evaluating the impact that this guidance will have on the Company's financial statements.
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |