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EX-32 - CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350 - REGENERON PHARMACEUTICALS, INC. | regn-ex_32x09302018x10q.htm |
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULE 13A-14(A) - REGENERON PHARMACEUTICALS, INC. | regn-ex_312x09302018x10q.htm |
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULE 13A-14(A) - REGENERON PHARMACEUTICALS, INC. | regn-ex_311x09302018x10q.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q |
(Mark One) | |||
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 2018 | |||
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 incorporation or organization) | (I.R.S. Employer Identification No.) | |
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 | ý | No | ¨ |
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). | Yes | ý | No | ¨ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | Smaller reporting company | ¨ | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | ¨ | No | ý |
The number of shares outstanding of each of the registrant’s classes of common stock as of October 19, 2018:
Class of Common Stock | Number of Shares | |
Class A Stock, $.001 par value | 1,911,354 | |
Common Stock, $.001 par value | 106,323,210 |
REGENERON PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Page Numbers | ||||
"ARCALYST®", "EYLEA®", "Regeneron®", "Regeneron Genetics Center®", "VelociGene®", "VelociMab®", "VelocImmune®", "VelociMouse®", "VelociSuite®", and "ZALTRAP®" 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. |
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, | ||||||
2018 | 2017 | ||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 1,087,843 | $ | 812,733 | |||
Marketable securities | 1,104,309 | 596,847 | |||||
Accounts receivable - trade, net | 1,665,737 | 1,538,642 | |||||
Accounts receivable from Sanofi | 269,271 | 193,684 | |||||
Accounts receivable from Bayer | 267,937 | 242,014 | |||||
Inventories | 1,039,679 | 726,138 | |||||
Prepaid expenses and other current assets | 284,807 | 224,972 | |||||
Total current assets | 5,719,583 | 4,335,030 | |||||
Marketable securities | 1,873,569 | 1,486,494 | |||||
Property, plant, and equipment, net | 2,524,446 | 2,358,605 | |||||
Deferred tax assets | 562,818 | 506,291 | |||||
Other noncurrent assets | 125,197 | 77,866 | |||||
Total assets | $ | 10,805,613 | $ | 8,764,286 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 172,361 | $ | 178,183 | |||
Accrued expenses and other current liabilities | 781,924 | 637,162 | |||||
Deferred revenue from Sanofi | 246,812 | 177,746 | |||||
Deferred revenue - other | 216,133 | 142,392 | |||||
Total current liabilities | 1,417,230 | 1,135,483 | |||||
Capital and facility lease obligations | 707,203 | 703,453 | |||||
Deferred revenue from Sanofi | 421,196 | 379,936 | |||||
Deferred revenue - other | 197,651 | 249,263 | |||||
Other noncurrent liabilities | 194,033 | 152,073 | |||||
Total liabilities | 2,937,313 | 2,620,208 | |||||
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 - 1,911,354 in 2018 and 2017 | 2 | 2 | |||||
Common Stock, $.001 par value; 320,000,000 shares authorized; shares issued - 110,288,595 in 2018 and 109,477,222 in 2017 | 110 | 110 | |||||
Additional paid-in capital | 3,841,174 | 3,512,833 | |||||
Retained earnings | 4,433,904 | 2,946,733 | |||||
Accumulated other comprehensive (loss) income | (10,519 | ) | 640 | ||||
Treasury Stock, at cost; 3,990,021 shares in 2018 and 3,763,868 shares in 2017 | (396,371 | ) | (316,240 | ) | |||
Total stockholders' equity | 7,868,300 | 6,144,078 | |||||
Total liabilities and stockholders' equity | $ | 10,805,613 | $ | 8,764,286 | |||
The accompanying notes are an integral part of the financial statements. |
2
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, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Statements of Operations | ||||||||||||||||
Revenues: | ||||||||||||||||
Net product sales | $ | 1,025,488 | $ | 957,367 | $ | 3,009,779 | $ | 2,739,745 | ||||||||
Sanofi collaboration revenue | 256,265 | 245,175 | 683,508 | 677,670 | ||||||||||||
Bayer collaboration revenue | 264,373 | 236,625 | 775,164 | 640,919 | ||||||||||||
Other revenue | 117,370 | 61,506 | 314,552 | 231,446 | ||||||||||||
1,663,496 | 1,500,673 | 4,783,003 | 4,289,780 | |||||||||||||
Expenses: | ||||||||||||||||
Research and development | 556,972 | 529,749 | 1,584,847 | 1,547,159 | ||||||||||||
Selling, general, and administrative | 369,232 | 306,766 | 1,064,886 | 910,520 | ||||||||||||
Cost of goods sold | 30,817 | 46,388 | 136,010 | 149,774 | ||||||||||||
Cost of collaboration and contract manufacturing | 79,552 | 57,844 | 180,918 | 141,547 | ||||||||||||
1,036,573 | 940,747 | 2,966,661 | 2,749,000 | |||||||||||||
Income from operations | 626,923 | 559,926 | 1,816,342 | 1,540,780 | ||||||||||||
Other income (expense): | ||||||||||||||||
Other income (expense), net | 16,432 | 11,861 | 81,842 | 2,048 | ||||||||||||
Interest expense | (7,494 | ) | (6,182 | ) | (20,851 | ) | (19,084 | ) | ||||||||
8,938 | 5,679 | 60,991 | (17,036 | ) | ||||||||||||
Income before income taxes | 635,861 | 565,605 | 1,877,333 | 1,523,744 | ||||||||||||
Income tax expense | (41,206 | ) | (177,288 | ) | (253,286 | ) | (498,752 | ) | ||||||||
Net income | $ | 594,655 | $ | 388,317 | $ | 1,624,047 | $ | 1,024,992 | ||||||||
Net income per share - basic | $ | 5.50 | $ | 3.64 | $ | 15.06 | $ | 9.66 | ||||||||
Net income per share - diluted | $ | 5.17 | $ | 3.32 | $ | 14.14 | $ | 8.84 | ||||||||
Weighted average shares outstanding - basic | 108,033 | 106,706 | 107,828 | 106,108 | ||||||||||||
Weighted average shares outstanding - diluted | 115,088 | 117,028 | 114,843 | 115,994 | ||||||||||||
Statements of Comprehensive Income | ||||||||||||||||
Net income | $ | 594,655 | $ | 388,317 | $ | 1,624,047 | $ | 1,024,992 | ||||||||
Other comprehensive income (loss), net of tax: | ||||||||||||||||
Unrealized gain (loss) on marketable securities | 752 | 21,485 | (6,954 | ) | 36,645 | |||||||||||
Unrealized gain on cash flow hedges | 341 | 2 | 2,388 | 30 | ||||||||||||
Comprehensive income | $ | 595,748 | $ | 409,804 | $ | 1,619,481 | $ | 1,061,667 | ||||||||
The accompanying notes are an integral part of the financial statements. |
3
REGENERON PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2018 | 2017 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,624,047 | $ | 1,024,992 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 105,441 | 110,960 | ||||||
Non-cash compensation expense | 300,652 | 380,144 | ||||||
Other non-cash items, net | (82,694 | ) | 44,016 | |||||
Deferred taxes | (33,521 | ) | (108,242 | ) | ||||
Changes in assets and liabilities: | ||||||||
Increase in Sanofi, Bayer, and trade accounts receivable | (228,605 | ) | (359,829 | ) | ||||
Increase in inventories | (281,624 | ) | (235,645 | ) | ||||
Increase in prepaid expenses and other assets | (87,817 | ) | (28,209 | ) | ||||
Decrease in deferred revenue | (29,462 | ) | (59,116 | ) | ||||
Increase (decrease) in accounts payable, accrued expenses, and other liabilities | 179,852 | (28,908 | ) | |||||
Total adjustments | (157,778 | ) | (284,829 | ) | ||||
Net cash provided by operating activities | 1,466,269 | 740,163 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of marketable and other securities | (1,533,558 | ) | (883,748 | ) | ||||
Sales or maturities of marketable securities | 644,103 | 379,275 | ||||||
Capital expenditures | (297,638 | ) | (164,963 | ) | ||||
Other | (10,000 | ) | — | |||||
Net cash used in investing activities | (1,197,093 | ) | (669,436 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds in connection with capital and facility lease obligations | — | 57,000 | ||||||
Payments in connection with capital and facility lease obligations | — | (19,925 | ) | |||||
Proceeds from issuance of Common Stock | 87,408 | 226,892 | ||||||
Payments in connection with Common Stock tendered for employee tax obligations | (77,096 | ) | (77,832 | ) | ||||
Repurchases of Common Stock | (4,378 | ) | — | |||||
Net cash provided by financing activities | 5,934 | 186,135 | ||||||
Net increase in cash, cash equivalents, and restricted cash | 275,110 | 256,862 | ||||||
Cash, cash equivalents, and restricted cash at beginning of period | 825,233 | 547,703 | ||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 1,100,343 | $ | 804,565 | ||||
The accompanying notes are an integral part of the financial statements. |
4
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. and its subsidiaries ("Regeneron," "Company," "we," "us," and "our") 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 period are not necessarily indicative of the results for the full year. The December 31, 2017 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, 2017.
Certain reclassifications have been made to prior period amounts to conform with the current period's presentation.
We adopted Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, as of January 1, 2018. The Company adopted the standard using the modified retrospective method, and thus recognized a cumulative-effect adjustment to reduce Retained earnings and increase Deferred revenue on January 1, 2018 by $143.4 million, net of tax. Prior period amounts have not been adjusted in connection with the adoption of this standard.
The new standard did not have an impact on the recognition of revenue from product sales (see Note 2). However, the new standard has resulted in certain changes to the timing of revenue recognition related to our collaboration agreements (see Note 3). As a result of adopting ASC 606, non-refundable upfront payments, which were previously recognized ratably over the performance period, and substantive development milestones, which were previously recognized in the period when the milestone was achieved, will be recognized over the remaining performance period based on the Company's progress towards satisfying its identified performance obligation.
The following tables summarize the impacts of adopting ASC 606 on the Company's condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 compared with the guidance that was in effect before the change.
September 30, 2018 | ||||||||||||
Balance Sheet Data | As Reported | Adjustments | Balance Without Adoption of ASC 606 | |||||||||
Inventories | $ | 1,039,679 | $ | 17,518 | $ | 1,057,197 | ||||||
Deferred tax assets | $ | 562,818 | $ | (15,027 | ) | $ | 547,791 | |||||
Total assets | $ | 10,805,613 | $ | 2,491 | $ | 10,808,104 | ||||||
Accrued expenses and other current liabilities | $ | 781,924 | $ | (1,175 | ) | $ | 780,749 | |||||
Deferred revenue from Sanofi (current) | $ | 246,812 | $ | (60,406 | ) | $ | 186,406 | |||||
Deferred revenue - other (current) | $ | 216,133 | $ | (78,611 | ) | $ | 137,522 | |||||
Total current liabilities | $ | 1,417,230 | $ | (140,192 | ) | $ | 1,277,038 | |||||
Deferred revenue from Sanofi (noncurrent) | $ | 421,196 | $ | (28,078 | ) | $ | 393,118 | |||||
Deferred revenue - other (noncurrent) | $ | 197,651 | $ | 32,952 | $ | 230,603 | ||||||
Total liabilities | $ | 2,937,313 | $ | (135,318 | ) | $ | 2,801,995 | |||||
Retained earnings | $ | 4,433,904 | $ | 137,809 | $ | 4,571,713 | ||||||
Total stockholders' equity | $ | 7,868,300 | $ | 137,809 | $ | 8,006,109 | ||||||
Total liabilities and stockholders' equity | $ | 10,805,613 | $ | 2,491 | $ | 10,808,104 |
5
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Three Months Ended September 30, 2018 | Nine Months Ended September 30, 2018 | |||||||||||||||||||||||
Consolidated Statement of Operations Data | As Reported | Adjustments | Balance Without Adoption of ASC 606 | As Reported | Adjustments | Balance Without Adoption of ASC 606 | ||||||||||||||||||
Sanofi collaboration revenue | $ | 256,265 | $ | 12,172 | $ | 268,437 | $ | 683,508 | $ | (5,159 | ) | $ | 678,349 | |||||||||||
Other revenue | $ | 117,370 | $ | 24,574 | $ | 141,944 | $ | 314,552 | $ | (22,615 | ) | $ | 291,937 | |||||||||||
Total revenues | $ | 1,663,496 | $ | 36,746 | $ | 1,700,242 | $ | 4,783,003 | $ | (27,774 | ) | $ | 4,755,229 | |||||||||||
Cost of collaboration and contract manufacturing | $ | 79,552 | $ | (17,518 | ) | $ | 62,034 | $ | 180,918 | $ | (17,518 | ) | $ | 163,400 | ||||||||||
Income from operations | $ | 626,923 | $ | 54,264 | $ | 681,187 | $ | 1,816,342 | $ | (10,256 | ) | $ | 1,806,086 | |||||||||||
Income before income taxes | $ | 635,861 | $ | 54,264 | $ | 690,125 | $ | 1,877,333 | $ | (10,256 | ) | $ | 1,867,077 | |||||||||||
Income tax expense | $ | (41,206 | ) | $ | (2,663 | ) | $ | (43,869 | ) | $ | (253,286 | ) | $ | 4,630 | $ | (248,656 | ) | |||||||
Net income | $ | 594,655 | $ | 51,601 | $ | 646,256 | $ | 1,624,047 | $ | (5,626 | ) | $ | 1,618,421 |
The Company also adopted Accounting Standards Update ("ASU") 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, as of January 1, 2018. The amendments require companies to measure equity investments at fair value with changes in fair value recognized in net income. We have elected to measure certain equity investments we hold that do not have readily determinable fair values at cost minus impairment, if any, and adjust for observable price changes in orderly transactions for identical or similar investments of the same issuer. Upon adoption, the Company recognized a cumulative-effect adjustment, related to unrealized gains on equity securities, to reduce Accumulated other comprehensive income and increase Retained earnings on January 1, 2018 by $6.6 million. See Note 5 and Note 6.
2. Product Sales
Net product sales consist of the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Net Product Sales in the United States | 2018 | 2017 | 2018 | 2017 | ||||||||||||
EYLEA® | $ | 1,021,782 | $ | 953,279 | $ | 2,997,829 | $ | 2,727,132 | ||||||||
ARCALYST® | 3,706 | 4,088 | 11,950 | 12,613 | ||||||||||||
$ | 1,025,488 | $ | 957,367 | $ | 3,009,779 | $ | 2,739,745 |
The Company had product sales to certain customers that accounted for more than 10% of total gross product revenue for each of the three and nine months ended September 30, 2018 and 2017. Sales to each of these customers as a percentage of the Company's total gross product revenue are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||
Besse Medical, a subsidiary of AmerisourceBergen Corporation | 57 | % | 51 | % | 56 | % | 51 | % | ||||
McKesson Corporation | 36 | % | 29 | % | 37 | % | 29 | % | ||||
Curascript SD Specialty Distribution, a subsidiary of Express Scripts | ** | 19 | % | ** | 19 | % | ||||||
** Sales to Curascript SD Specialty Distribution represented less than 10% of total gross product revenue during the period. |
6
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Revenue from product sales is recognized at a point in time when our customer is deemed to have obtained control of the product, which generally occurs upon receipt by our distributors and specialty pharmacies. The Company's written contracts with its customers stipulate product is shipped freight on board destination (FOB destination).
The amount of revenue we recognize varies due to rebates, chargebacks, and discounts provided under governmental and other programs, distribution-related fees, and other sales-related deductions. In order to determine the transaction price, we estimate, utilizing the expected value method, the amount of variable consideration that we will be entitled to. This estimate is based upon contracts with customers and government agencies, statutorily-defined discounts applicable to government-funded programs, historical experience, estimated payer mix, and other relevant factors.
The following table summarizes the provisions, and credits/payments, for these sales-related deductions during the nine months ended September 30, 2018 and 2017.
Rebates, Chargebacks, and Discounts | Distribution- Related Fees | Other Sales- Related Deductions | Total | ||||||||||||
Balance as of December 31, 2017 | $ | 29,840 | $ | 34,142 | $ | 21,320 | $ | 85,302 | |||||||
Provisions | 159,060 | 155,523 | 29,730 | 344,313 | |||||||||||
Credits/payments | (145,813 | ) | (150,956 | ) | (35,756 | ) | (332,525 | ) | |||||||
Balance as of September 30, 2018 | $ | 43,087 | $ | 38,709 | $ | 15,294 | $ | 97,090 | |||||||
Balance as of December 31, 2016 | $ | 12,712 | $ | 29,465 | $ | 3,674 | $ | 45,851 | |||||||
Provisions | 121,599 | 140,860 | 33,518 | 295,977 | |||||||||||
Credits/payments | (108,811 | ) | (136,272 | ) | (21,444 | ) | (266,527 | ) | |||||||
Balance as of September 30, 2017 | $ | 25,500 | $ | 34,053 | $ | 15,748 | $ | 75,301 |
Accruals for chargebacks and discounts are recorded as a direct reduction to accounts receivable. Accruals for rebates, distribution-related fees, and other sales-related deductions are recorded within accrued liabilities.
3. Collaboration Agreements
We have entered into various agreements related to our activities to research, develop, manufacture, and commercialize product candidates and utilize our technology platforms. The Company earns collaboration revenue in connection with collaboration agreements to utilize our technology platforms and develop and/or commercialize product candidates. As described in Note 1, during the first quarter of 2018, we adopted ASC 606. Under the terms of the new standard, revenue is measured as the amount of consideration we expect to be entitled to in exchange for transferring promised goods or providing services to a customer, and is recognized when (or as) we satisfy performance obligations under the terms of a contract. Depending on the terms of the arrangement, we may defer the recognition of all or a portion of the consideration received because the performance obligations are satisfied over time.
Our collaboration agreements may require us to deliver various rights, services, and/or goods across the entire life cycle of a product or product candidate. In agreements involving multiple goods or services promised to be transferred to a customer, we must assess, at the inception of the contract, whether each promise represents a separate performance obligation (i.e., is "distinct"), or whether such promises should be combined as a single performance obligation.
The terms of these agreements typically include consideration to be provided to the Company in the form of non-refundable up-front payments, development milestones, payments for development activities, as well as payments for commercialization activities, sales milestones, and sharing of profits or losses arising from the commercialization of products.
At the inception of the contract, the transaction price reflects the amount of consideration we expect to be entitled to in exchange for transferring promised goods or services to our customer. We review our estimate of the transaction price each period, and make revisions to such estimates as necessary. In arrangements where we satisfy performance obligation(s) during the development phase over time, we recognize collaboration revenue over time typically using an input method on the basis of our research and development costs incurred relative to the total expected cost which determines the extent of our progress toward completion.
7
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Under the Company's collaboration agreements, product sales and cost of sales for products which are currently approved are recorded by the Company's collaborators as they are deemed to be the principal in the transaction. The Company shares in any profits or losses arising from the commercialization of such products, and records its share of the variable consideration, representing net product sales less cost of goods sold and shared commercialization and other expenses, as collaboration revenue in the period in which such underlying sales occur and costs are incurred by the collaborator.
In arrangements where the collaborator records product sales, the Company may be obligated to use commercially reasonable efforts to supply commercial bulk product to its collaborators, and may be reimbursed for its manufacturing costs as commercial product is shipped to its collaborators; however, recognition of such cost reimbursements as collaboration revenue is deferred until the product is sold by the Company's collaborators to third-party customers. In addition, we may also be reimbursed for a portion of costs incurred for other commercial-related activities, which are recorded as collaboration revenue in the period in which such costs are incurred.
a. Sanofi
The collaboration revenue we earned from Sanofi is detailed below:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Sanofi Collaboration Revenue | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Antibody: | ||||||||||||||||
Reimbursement of Regeneron research and development expenses | $ | 76,150 | $ | 128,539 | $ | 201,026 | $ | 421,056 | ||||||||
Reimbursement of Regeneron commercialization-related expenses | 103,666 | 90,339 | 292,756 | 251,002 | ||||||||||||
Regeneron's share of losses in connection with commercialization of antibodies | (38,924 | ) | (98,315 | ) | (182,595 | ) | (328,998 | ) | ||||||||
Other | 33,166 | 41,848 | 82,150 | 84,338 | ||||||||||||
Total Antibody | 174,058 | 162,411 | 393,337 | 427,398 | ||||||||||||
Immuno-oncology: | ||||||||||||||||
Reimbursement of Regeneron research and development expenses | 74,797 | 61,649 | 225,675 | 188,408 | ||||||||||||
Reimbursement of Regeneron commercialization-related expenses | 3,236 | 1,115 | 6,507 | 1,864 | ||||||||||||
Other | 4,174 | 20,000 | 57,989 | 60,000 | ||||||||||||
Total Immuno-oncology | 82,207 | 82,764 | 290,171 | 250,272 | ||||||||||||
$ | 256,265 | $ | 245,175 | $ | 683,508 | $ | 677,670 |
8
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Antibodies
In November 2007, the Company entered into a global, strategic collaboration with Sanofi to discover, develop, and commercialize fully human monoclonal antibodies (the "Antibody Collaboration"). The Antibody Collaboration was governed by the companies' Discovery and Preclinical Development Agreement ("Antibody Discovery Agreement") and a License and Collaboration Agreement (each as amended). Pursuant to the Antibody Discovery Agreement, Sanofi agreed to fund up to $130.0 million of the Company's research activities in 2017. The Company's Antibody Discovery Agreement with Sanofi ended on December 31, 2017 without any extension and, therefore, funding from Sanofi under the Antibody Discovery Agreement ceased after 2017. Under the License and Collaboration Agreement, following receipt of the first positive Phase 3 trial results for a co-developed drug candidate, 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 months ended September 30, 2018 and 2017, the Company recognized as research and development expense $13.4 million and $22.6 million, respectively, and during the nine months ended September 30, 2018 and 2017, the Company recognized as research and development expense $37.2 million and $68.2 million, respectively, its share of antibody development expenses that Sanofi incurred related to Praluent® (alirocumab), Kevzara® (sarilumab), and Dupixent® (dupilumab). All other agreed-upon worldwide development expenses incurred by both companies are funded by Sanofi.
Effective January 7, 2018, the Company and Sanofi entered into a letter agreement (the "Letter Agreement") in connection with, among other matters, the allocation of additional funds to certain activities relating to dupilumab and REGN3500 (collectively, the "Dupilumab/REGN3500 Eligible Investments"). Refer to the "Immuno-Oncology" section below for further details regarding the Letter Agreement. During the third quarter of 2018, Sanofi elected to sell, and we elected to purchase (in cash), 10,766 shares of the Company's Common Stock in connection with Sanofi's funding obligation for Dupilumab/REGN3500 Eligible Investments. Consequently, we recorded the cost of the shares received, or $4.4 million, as Treasury Stock during the third quarter of 2018.
In March 2017, the U.S. Food and Drug Administration ("FDA") approved Dupixent for the treatment of adult patients with moderate-to-severe atopic dermatitis, and in September 2017, the European Commission granted marketing authorization for Dupixent for use in adults with moderate-to-severe atopic dermatitis who are candidates for systemic therapy. In October 2018, the FDA also approved Dupixent as an add-on maintenance therapy in patients with moderate-to-severe asthma aged 12 years and older with an eosinophilic phenotype or with oral corticosteroid-dependent asthma. In May 2017, the FDA approved Kevzara for the treatment of adult patients with moderately to severely active rheumatoid arthritis, and in June 2017, the European Commission granted marketing authorization for Kevzara for the treatment of rheumatoid arthritis in adult patients.
Sanofi leads commercialization activities for products developed under the Antibody Collaboration, subject to the Company's right to co-promote such products. In addition to profit and loss sharing, the Company is entitled to receive up to $250.0 million in sales milestone payments, with milestone payments commencing only if and after aggregate annual sales outside the United States exceed $1.0 billion on a rolling twelve-month basis. The amount of variable consideration related to such share of profits and losses and sales milestones is deemed to be constrained as of September 30, 2018, and therefore has not been included in the transaction price.
The Company's significant promised goods and services consist of providing research and development services, including the manufacturing of clinical supplies, and providing commercial-related services, including the manufacturing of commercial supplies. As it relates to the Antibody Collaboration, "Reimbursement of Regeneron commercialization-related expenses" in the table above represents reimbursement of internal and external costs in connection with commercializing Praluent, Kevzara, and Dupixent. As we recognize Sanofi antibody collaboration revenue in an amount equal to the amount we have the right to invoice and such amount corresponds directly with the value to Sanofi of our performance to date, we do not disclose the value of the transaction price allocated to our remaining unsatisfied performance obligations.
The following table summarizes accounts receivable and deferred revenue information in connection with the Company's Antibody Collaboration with Sanofi:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Accounts receivable | $ | 187,704 | $ | 121,001 | ||||
Deferred revenue | $ | 199,523 | $ | 117,682 |
9
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Significant changes in deferred revenue balances are as follows:
Nine Months Ended September 30, 2018 | ||||
Increase due to shipments of commercial supplies to Sanofi | $ | 178,608 | ||
Revenue recognized that was included in deferred revenue at the beginning of the period | $ | (96,767 | ) |
Immuno-Oncology
In July 2015, the Company and Sanofi entered into a collaboration to discover, develop, and commercialize antibody-based cancer treatments in the field of immuno-oncology (the "IO Collaboration"). The IO Collaboration is governed by an Immuno-oncology Discovery and Development Agreement ("IO Discovery Agreement"), and an Immuno-oncology License and Collaboration Agreement ("IO License and Collaboration Agreement"). In connection with the IO Discovery Agreement, Sanofi made a $265.0 million non-refundable up-front payment to the Company. The term of the IO Discovery Agreement will continue through the later of five years from the effective date of the IO Collaboration or the date our budget for IO Discovery activities, which has been agreed to with Sanofi, is exhausted, subject to Sanofi's option to extend it for up to an additional three years for the continued development (and funding) of selected ongoing programs.
In connection with the IO License and Collaboration Agreement, Sanofi made a $375.0 million non-refundable up-front payment to the Company. Under the terms of the IO License and Collaboration Agreement, the parties are co-developing Libtayo® (cemiplimab), an antibody targeting the receptor known as programmed cell death protein 1 (PD-1). The parties share equally, on an ongoing basis, development expenses for Libtayo up to a total of $1.640 billion, an increase of $990.0 million over the budget set forth in the original IO License and Collaboration Agreement. Pursuant to the Letter Agreement, the Libtayo development budget has been increased and the Company has agreed to allow Sanofi to satisfy in whole or in part its funding obligations with respect to Libtayo development and Dupilumab/REGN3500 Eligible Investments by selling up to an aggregate of 1,400,000 shares of our Common Stock directly or indirectly owned by Sanofi through September 30, 2020. If Sanofi desires to sell shares of our Common Stock during the term of the Letter Agreement to satisfy a portion or all of its funding obligations for the Libtayo development and/or Dupilumab/REGN3500 Eligible Investments, we may elect to purchase, in whole or in part, such shares from Sanofi. If we do not elect to purchase such shares, Sanofi may sell the applicable number of shares (subject to certain daily and quarterly limits) in one or more open-market transactions. During the second and third quarters of 2018, Sanofi elected to sell, and we elected to purchase (by issuing a credit towards the amount owed by Sanofi), 121,601 and 93,786 shares, respectively, of the Company's Common Stock to satisfy Sanofi's funding obligation related to Libtayo development costs. Consequently, we recorded the cost of the shares received, or $37.6 million and $38.1 million as Treasury Stock during the second and third quarters of 2018, respectively.
The Company has principal control over the development of Libtayo and leads commercialization activities in the United States, while Sanofi will lead commercialization activities outside of the United States and the parties will equally share profits from worldwide sales. On September 28, 2018, the FDA approved Libtayo for the treatment of patients with metastatic or locally advanced CSCC, and Sanofi has exercised its option to co-promote Libtayo in the United States. The Company will be entitled to a milestone payment of $375.0 million in the event that global sales of certain licensed products targeting PD-1 (including Libtayo), together with sales of any other products licensed under the IO License and Collaboration Agreement and sold for use in combination with any of such licensed products targeting PD-1, equal or exceed $2.0 billion in any consecutive twelve-month period. The amount of variable consideration related to such milestone is deemed to be constrained as of September 30, 2018, and therefore has not been included in the transaction price.
In August 2018, we and Sanofi entered into a license agreement with Bristol-Myers Squibb Company, E. R. Squibb & Sons, L.L.C., and Ono Pharmaceutical Co., Ltd. to obtain a license under certain patents owned and/or exclusively licensed by one or more of those parties that includes the right to develop and sell Libtayo. Under the agreement, we and Sanofi became obligated to make an up-front payment of $20.0 million and pay royalties of 8.0% on worldwide sales of Libtayo through December 31, 2023, and royalties of 2.5% from January 1, 2024 through December 31, 2026. The up-front payment and royalties are shared equally by us and Sanofi.
10
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
At the inception of the IO Collaboration, the Company's significant promised goods and services consisted of a license to certain rights and intellectual property and providing research and development services, including the manufacturing of clinical supplies. The Company concluded that the license was not distinct, primarily as a result of (i) Sanofi being unable to benefit from the license on its own or together with other resources that are readily available as the license provides access to Regeneron's complex and specialized know-how and (ii) the research and development services, including manufacturing in support of such services, were expected to significantly modify the initial license. Therefore, the promised goods and services were considered a single performance obligation. Consequently, the $640.0 million in aggregate up-front payments made by Sanofi during 2015 in connection with the execution of the IO Collaboration has been recorded as deferred revenue and has been included in the transaction price at the inception of the contract. "Other" Sanofi immuno-oncology revenue in the Sanofi Collaboration Revenue table above primarily includes recognition of deferred revenue from the $640.0 million of up-front payments.
As it relates to the IO Collaboration, "Reimbursement of Regeneron commercialization-related expenses" in the table above represents reimbursement of costs by Sanofi in connection with the commercialization of Libtayo outside of the United States.
The following table summarizes accounts receivable and deferred revenue information in connection with the Company's IO Collaboration with Sanofi:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Accounts receivable | $ | 75,627 | $ | 59,274 | ||||
Deferred revenue | $ | 468,484 | $ | 440,000 |
Significant changes in deferred revenue balances are as follows:
Nine Months Ended September 30, 2018 | ||||
Increase as a result of cumulative-effect adjustment arising from the adoption of ASC 606 | $ | 93,643 | ||
Revenue recognized that was included in deferred revenue at the beginning of the period | $ | (65,159 | ) |
The aggregate amount of the transaction price under the IO Collaboration allocated to the Company's performance obligation that was unsatisfied (or partially unsatisfied) as of September 30, 2018 was $1,562.9 million. This amount is expected to be recognized as revenue over the remaining period the Company is obligated to satisfy its performance obligation in connection with performing development activities.
b. Bayer
EYLEA outside the United States
Revenue earned in connection with our Bayer EYLEA collaboration is as follows (note that the table excludes amounts in connection with our Bayer Ang2 antibody and PDGFR-beta antibody collaboration agreements, which are described below):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
Bayer EYLEA Collaboration Revenue | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Regeneron's net profit in connection with commercialization of EYLEA outside the United States | $ | 243,152 | $ | 205,367 | $ | 721,522 | $ | 571,126 | ||||||||
Reimbursement of Regeneron EYLEA development expenses | 1,676 | 6,053 | 8,811 | 10,833 | ||||||||||||
Other | 20,764 | 15,714 | 45,321 | 36,910 | ||||||||||||
$ | 265,592 | $ | 227,134 | $ | 775,654 | $ | 618,869 |
11
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Under the terms of the license and collaboration agreement with Bayer for the global development and commercialization outside the United States of EYLEA, Bayer markets EYLEA outside the United States, where, for countries other than Japan, the companies share equally in profits and losses from sales of EYLEA. In Japan, the Company is entitled to receive a tiered percentage of between 33.5% and 40.0% of EYLEA net sales. In addition, the Company and Bayer share the funding of agreed-upon EYLEA development costs.
The following table summarizes accounts receivable and deferred revenue information in connection with the Company's EYLEA collaboration with Bayer:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Accounts receivable | $ | 269,155 | $ | 241,153 | ||||
Deferred revenue | $ | 85,504 | $ | 68,734 |
Significant changes in deferred revenue balances are as follows:
Nine Months Ended September 30, 2018 | ||||
Increase due to shipments of commercial supplies to Bayer | $ | 47,958 | ||
Revenue recognized that was included in deferred revenue at the beginning of the period | $ | (31,188 | ) |
Ang2 antibody and PDGFR-beta antibody outside the United States
In 2016, the Company entered into an agreement with Bayer governing the joint development and commercialization outside the United States of an antibody product candidate to angiopoietin-2 (Ang2), REGN910-3, for the treatment of ocular diseases or disorders. In connection with the agreement, Bayer made a non-refundable up-front payment and paid a portion of our global development costs and development costs exclusively for the territory outside the United States. In the fourth quarter of 2017, the Company reported that results from two Phase 2 studies of REGN910-3 did not provide sufficient differentiation to warrant Phase 3 development. Therefore, during the fourth quarter of 2017, the Company accelerated and recognized the remaining amount of deferred revenue from the $50.0 million up-front payment (which was initially recorded as deferred revenue) received from Bayer as the Company deemed its performance obligation to be satisfied. On November 1, 2018, the Company and Bayer agreed to terminate this collaboration agreement.
In 2014, the Company entered into a license and collaboration agreement with Bayer governing the joint development and commercialization outside the United States of an antibody product candidate to Platelet Derived Growth Factor Receptor Beta (PDGFR-beta), REGN2176-3. Effective in the first quarter of 2017, the Company discontinued clinical development of REGN2176-3, and on July 31, 2017, the Company and Bayer agreed to terminate this collaboration agreement.
12
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
c. Teva
In September 2016, the Company and Teva entered into a collaboration agreement (the "Teva Collaboration Agreement") to develop and commercialize fasinumab globally, excluding certain Asian countries that are subject to our collaboration agreement with Mitsubishi Tanabe Pharma Corporation. In connection with the Teva Collaboration Agreement, Teva made a $250.0 million non-refundable up-front payment in September 2016. The Company leads global development activities, and the parties share development costs equally, on an ongoing basis, under a global development plan. The Company is also responsible for the manufacture and supply of fasinumab globally.
During the second and fourth quarters of 2017, the Company earned, and recognized as substantive milestones, development milestones of $25.0 million and $35.0 million, respectively, from Teva upon initiation of two Phase 3 trials. During the third quarter of 2018, the Company achieved a development milestone of $60.0 million. The Company is entitled to receive up to an aggregate of $340.0 million in additional development milestones and up to an aggregate of $1,890.0 million in contingent payments upon achievement of specified annual net sales amounts; the amount of variable consideration related to such milestones is deemed to be constrained as of September 30, 2018, and therefore has not been included in the transaction price.
At the inception of the Teva Collaboration Agreement, the Company's significant promised goods and services consisted of a license to certain rights and intellectual property and providing research and development services, including the manufacturing of clinical supplies. The Company concluded that the license was not distinct, primarily as a result of (i) Teva being unable to benefit from the license on its own or together with other resources that are readily available as the license providing access to Regeneron's complex and specialized know-how and (ii) the research and development services, including manufacturing in support of such services, were expected to significantly modify the initial license. Therefore, the promised goods and services were considered a single performance obligation. Consequently, the $250.0 million up-front payment and development milestones received or receivable from Teva, as described above, have been recorded as deferred revenue and have been included in the transaction price.
The Company recognized $69.2 million and $40.2 million of revenue for the three months ended September 30, 2018 and 2017, respectively, and $196.6 million and $141.0 million of revenue for the nine months ended September 30, 2018 and 2017, respectively, in connection with the Teva Collaboration Agreement.
The following tables summarize accounts receivable and deferred revenue information in connection with the Teva Collaboration Agreement:
September 30, | December 31, | |||||||
2018 | 2017 | |||||||
Accounts receivable (recorded within Prepaid expenses and other current assets) | $ | 87,985 | $ | 71,297 | ||||
Deferred revenue | $ | 213,660 | $ | 197,357 |
Significant changes in deferred revenue balances are as follows:
Nine Months Ended September 30, 2018 | ||||
Increase as a result of cumulative-effect adjustment arising from the adoption of ASC 606 | $ | 48,216 | ||
Increase due to amounts invoiced, excluding amounts recognized as revenue during the period | $ | 33,774 | ||
Revenue recognized that was included in deferred revenue at the beginning of the period | $ | (67,771 | ) |
The aggregate amount of the transaction price under the Teva Collaboration Agreement allocated to the Company's performance obligation that was unsatisfied (or partially unsatisfied) as of September 30, 2018 was $520.1 million. This amount is expected to
13
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
be recognized as revenue over the remaining period the Company is obligated to satisfy its performance obligation in connection with performing development activities.
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, | Nine Months Ended September 30, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income - basic and diluted | $ | 594,655 | $ | 388,317 | $ | 1,624,047 | $ | 1,024,992 | ||||||||
(Shares in thousands) | ||||||||||||||||
Weighted average shares - basic | 108,033 | 106,706 | 107,828 | 106,108 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Stock options | 7,027 | 9,809 | 6,999 | 9,386 | ||||||||||||
Restricted stock | 28 | 513 | 16 | 500 | ||||||||||||
Dilutive potential shares | 7,055 | 10,322 | 7,015 | 9,886 | ||||||||||||
Weighted average shares - diluted | 115,088 | 117,028 | 114,843 | 115,994 | ||||||||||||
Net income per share - basic | $ | 5.50 | $ | 3.64 | $ | 15.06 | $ | 9.66 | ||||||||
Net income per share - diluted | $ | 5.17 | $ | 3.32 | $ | 14.14 | $ | 8.84 |
Shares which have been excluded from diluted per share amounts because their effect would have been antidilutive include the following:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
(Shares in thousands) | 2018 | 2017 | 2018 | 2017 | ||||||||
Stock options | 14,446 | 4,515 | 14,821 | 8,892 | ||||||||
Restricted stock | — | — | 57 | — |
14
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 as of September 30, 2018 and December 31, 2017 consist of both available-for-sale debt securities of investment grade issuers (see below and Note 6) as well as equity securities of publicly traded companies (see Note 6).
The following tables summarize the Company's investments in available-for-sale debt securities:
Amortized | Unrealized | Fair | ||||||||||||||
As of September 30, 2018 | Cost Basis | Gains | Losses | Value | ||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Corporate bonds | $ | 2,562,051 | $ | 2,316 | $ | (18,124 | ) | $ | 2,546,243 | |||||||
U.S. government and government agency obligations | 112,046 | 25 | (1,523 | ) | 110,548 | |||||||||||
Municipal bonds | 2,068 | — | (5 | ) | 2,063 | |||||||||||
Commercial paper | 109,412 | 1 | — | 109,413 | ||||||||||||
Certificates of deposit | 65,940 | — | — | 65,940 | ||||||||||||
$ | 2,851,517 | $ | 2,342 | $ | (19,652 | ) | $ | 2,834,207 | ||||||||
As of December 31, 2017 | ||||||||||||||||
Available-for-sale debt securities: | ||||||||||||||||
Corporate bonds | $ | 1,717,976 | $ | 2,176 | $ | (7,672 | ) | $ | 1,712,480 | |||||||
U.S. government and government agency obligations | 186,699 | 34 | (1,241 | ) | 185,492 | |||||||||||
Municipal bonds | 4,600 | — | (13 | ) | 4,587 | |||||||||||
Commercial paper | 106,973 | — | — | 106,973 | ||||||||||||
Certificates of deposit | 11,024 | — | — | 11,024 | ||||||||||||
$ | 2,027,272 | $ | 2,210 | $ | (8,926 | ) | $ | 2,020,556 |
The Company classifies its investments in available-for-sale debt securities based on their contractual maturity dates. The available-for-sale debt securities listed as of September 30, 2018 mature at various dates through March 2023. The fair values of available-for-sale debt security investments by contractual maturity consist of the following:
September 30, 2018 | December 31, 2017 | |||||||
Maturities within one year | $ | 1,104,309 | $ | 593,783 | ||||
Maturities after one year through five years | 1,729,898 | 1,426,773 | ||||||
$ | 2,834,207 | $ | 2,020,556 |
15
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 available-for-sale debt 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.
Less than 12 Months | 12 Months or Greater | Total | |||||||||||||||||||||
As of September 30, 2018 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||
Corporate bonds | $ | 1,417,464 | $ | (10,946 | ) | $ | 406,594 | $ | (7,178 | ) | $ | 1,824,058 | $ | (18,124 | ) | ||||||||
U.S. government and government agency obligations | 7,826 | (202 | ) | 95,690 | (1,321 | ) | 103,516 | (1,523 | ) | ||||||||||||||
Municipal bonds | — | — | 998 | (5 | ) | 998 | (5 | ) | |||||||||||||||
$ | 1,425,290 | $ | (11,148 | ) | $ | 503,282 | $ | (8,504 | ) | $ | 1,928,572 | $ | (19,652 | ) | |||||||||
As of December 31, 2017 | |||||||||||||||||||||||
Corporate bonds | $ | 930,970 | $ | (4,924 | ) | $ | 256,750 | $ | (2,748 | ) | $ | 1,187,720 | $ | (7,672 | ) | ||||||||
U.S. government and government agency obligations | 110,532 | (409 | ) | 67,921 | (832 | ) | 178,453 | (1,241 | ) | ||||||||||||||
Municipal bonds | 2,582 | (10 | ) | 2,005 | (3 | ) | 4,587 | (13 | ) | ||||||||||||||
$ | 1,044,084 | $ | (5,343 | ) | $ | 326,676 | $ | (3,583 | ) | $ | 1,370,760 | $ | (8,926 | ) |
Realized gains and losses on sales of marketable securities were not material for the three and nine months ended September 30, 2018. There were no realized losses on sales of marketable securities, and realized gains were not material, for the three and nine months ended September 30, 2017.
With respect to marketable securities, for the three and nine months ended September 30, 2018 and 2017, amounts reclassified from Accumulated other comprehensive (loss) income into Other income (expense), net were related to realized gains and losses on sales. The Company adopted ASU 2016-01 (see Note 1) during the first quarter of 2018; as a result, there were $4.9 million of net unrealized losses and $21.0 million of net unrealized gains on equity securities recognized in Other income (expense), net for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2017, there were $27.7 million and $38.9 million, respectively, of net unrealized gains on equity securities that were recorded in Other comprehensive (loss) income.
16
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 consist of the following:
Fair Value Measurements at Reporting Date Using | |||||||||||
As of September 30, 2018 | Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||
Available-for-sale debt securities: | |||||||||||
Corporate bonds | $ | 2,546,243 | — | $ | 2,546,243 | ||||||
U.S. government and government agency obligations | 110,548 | — | 110,548 | ||||||||
Municipal bonds | 2,063 | — | 2,063 | ||||||||
Commercial paper | 109,413 | — | 109,413 | ||||||||
Certificates of deposit | 65,940 | — | 65,940 | ||||||||
Equity securities (unrestricted) | 90,445 | $ | 90,445 | — | |||||||
Equity securities (restricted) | 53,226 | — | 53,226 | ||||||||
$ | 2,977,878 | $ | 90,445 | $ | 2,887,433 | ||||||
As of December 31, 2017 | |||||||||||
Available-for-sale debt securities: | |||||||||||
Corporate bonds | $ | 1,712,480 | — | $ | 1,712,480 | ||||||
U.S. government and government agency obligations | 185,492 | — | 185,492 | ||||||||
Municipal bonds | 4,587 | — | 4,587 | ||||||||
Commercial paper | 106,973 | — | 106,973 | ||||||||
Certificates of deposit | 11,024 | — | 11,024 | ||||||||
Equity securities (unrestricted) | 62,785 | $ | 62,785 | — | |||||||
$ | 2,083,341 | $ | 62,785 | $ | 2,020,556 |
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, 2018 and 2017.
The Company held restricted equity securities as of September 30, 2018, consisting of the Company's investment in bluebird bio., Inc. common stock, which are subject to transfer restrictions until August 2020.
The fair value of interest rate swap and interest rate cap contracts, which were recorded within Other noncurrent assets, was not material as of September 30, 2018 and December 31, 2017 (see Note 8). The fair value of these contracts was determined based on Level 2 inputs, using significant inputs that are observable either directly or indirectly, including London Interbank Offered Rate ("LIBOR") and interest rate swap rates.
As of September 30, 2018 and December 31, 2017, the Company had $45.5 million and $37.5 million, respectively, in equity investments that do not have a readily determinable fair value. These investments are recorded at cost within Other noncurrent assets.
17
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
7. Inventories
Inventories consist of the following:
September 30, | December 31, | ||||||
2018 | 2017 | ||||||
Raw materials | $ | 216,671 | $ | 190,045 | |||
Work-in-process | 435,671 | 302,042 | |||||
Finished goods | 28,397 | 21,791 | |||||
Deferred costs | 358,940 | 212,260 | |||||
$ | 1,039,679 | $ | 726,138 |
Deferred costs represent the costs of product manufactured and shipped to the Company's collaborators for which recognition of revenue has been deferred.
8. Derivative Instruments and Hedging Activities
The Company is exposed to market fluctuations in interest rates, including those in connection with its March 2017 lease of laboratory and office facilities in Tarrytown, New York. Commencing in the second quarter of 2017, the Company entered into interest rate swap and interest rate cap agreements to manage a portion of such interest rate risk; no new agreements of this nature were entered into during the nine months ended September 30, 2018. All of the Company's derivative instruments are utilized for risk management purposes, and are not used for trading or speculative purposes.
The Company's derivative instruments are designated as cash flow hedges for accounting purposes. Since the specific terms of the derivative instruments match those of the item being hedged, the derivative instruments are deemed to be highly effective in offsetting the changes in cash flows of the hedged item. As such, changes in the fair value of these derivatives are recorded in accumulated other comprehensive income (loss) until the underlying transaction affects earnings, and are then reclassified to earnings in the same account as the hedged transaction. The Company would record any gain or loss related to the ineffectiveness directly to earnings.
The Company assesses, both at inception and on an ongoing basis, whether derivatives used continue to be highly effective in offsetting changes in cash flows of the hedged items. The Company does not exclude any portion of the cash flow hedge contracts from the assessment of hedge effectiveness. If and when a derivative is no longer expected to be highly effective, hedge accounting would be discontinued.
The following table summarizes the notional amounts of the Company's outstanding interest rate swap and cap agreements:
September 30, | December 31, | ||||||
2018 | 2017 | ||||||
Interest rate swap contracts | $ | 75,000 | $ | 75,000 | |||
Interest rate cap contracts | $ | 75,000 | $ | 75,000 |
As it relates to cash flow hedges, for the three and nine months ended September 30, 2018 and 2017, amounts of gains and losses recognized in Other comprehensive income (loss), and amounts reclassified from Accumulated other comprehensive (loss) income into Interest expense were not material. As of September 30, 2018, the amounts expected to be reclassified out of Accumulated other comprehensive income into Interest expense over the next 12 months are not expected to be material. There was no ineffective portion of the derivative instruments for the three and nine months ended September 30, 2018 and 2017.
18
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
9. Income Taxes
The Company is subject to U.S. federal, state, and foreign income taxes. The Company's effective tax rate was 6.5% and 31.3% for the three months ended September 30, 2018 and 2017, respectively, and 13.5% and 32.7% for the nine months ended September 30, 2018 and 2017, respectively. On December 22, 2017, the bill known as the "Tax Cuts and Jobs Act" (the "Act") was signed into law. The Act, which became effective with respect to most of its provisions as of January 1, 2018, significantly revised U.S. corporate income tax laws by, among other things, reducing the U.S. federal corporate income tax rate from 35% to 21%, changing the taxation of foreign earnings (including taxation of certain global intangible low-taxed income ("GILTI")), allowing for a foreign-derived intangible income deduction and immediate expensing for qualified assets, repealing the deduction for domestic manufacturing, and imposing further limitations on the deductibility of executive compensation. As a result of the Act being signed into law, we recognized a provisional charge of $326.2 million in the fourth quarter of 2017 related to the re-measurement of the Company's U.S. net deferred tax assets at the lower enacted corporate tax rate. The provisional charge recorded in the fourth quarter of 2017 is an estimate, and the measurement of deferred tax assets is subject to further analysis, such as developing interpretations and clarifications of the provisions of the Act. During the third quarter of 2018, we recorded an income tax benefit of $11.9 million as an adjustment to the provisional amount recorded as of December 31, 2017. Additional changes to this estimate may occur during the fourth quarter of 2018. In addition, we have not yet elected an accounting method regarding whether to record deferred tax assets and liabilities for expected amounts of GILTI inclusions or whether to treat such amounts as a period cost.
The Company's effective tax rate for the three and nine months ended September 30, 2018 was positively impacted, compared to the U.S. federal statutory rate, primarily by the tax benefit associated with tax planning in connection with the Act, the federal tax credit for research activities, and, to a lesser extent, stock-based compensation and income earned in foreign jurisdictions with tax rates lower than the U.S. federal statutory rate. The Company's effective tax rate for the three and nine months ended September 30, 2017 was positively impacted, compared to the U.S. federal statutory rate, by the tax benefit associated with stock-based compensation, the domestic manufacturing deduction, and the federal tax credit for research activities, offset by losses incurred in foreign jurisdictions with rates lower than the U.S. federal statutory rate and the non-tax deductible Branded Prescription Drug Fee.
Income tax provisions recorded in the Statement of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017 were not material.
10. Statement of Cash Flows
The Company adopted ASU 2016-18, Statement of Cash Flows - Restricted Cash, during the first quarter of 2018, and the standard has been retrospectively applied to all periods presented. The following provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheet to the total of the same such amounts shown in the Condensed Consolidated Statement of Cash Flows:
September 30, | September 30, | |||||||
2018 | 2017 | |||||||
Cash and cash equivalents | $ | 1,087,843 | $ | 792,065 | ||||
Restricted cash included in Other noncurrent assets | 12,500 | 12,500 | ||||||
Total cash, cash equivalents, and restricted cash shown in the Condensed Consolidated Statement of Cash Flows | $ | 1,100,343 | $ | 804,565 |
Restricted cash consists of amounts held by financial institutions pursuant to contractual arrangements.
19
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Supplemental disclosure of non-cash investing and financing activities
Included in accounts payable, accrued expenses, and other liabilities as of September 30, 2018 and December 31, 2017 were $40.5 million and $41.8 million, respectively, of accrued capital expenditures. Included in accounts payable, accrued expenses, and other liabilities as of September 30, 2017 and December 31, 2016 were $24.5 million and $28.2 million, respectively, of accrued capital expenditures.
As described in Note 3, during the nine months ended September 30, 2018, we purchased (by issuing a credit towards the amount owed by Sanofi) 215,387 shares of our Common Stock from Sanofi to satisfy Sanofi's funding obligation related to Libtayo development costs, and recorded the cost of the shares received, or $75.8 million, as Treasury Stock.
The Company recognized an additional capital lease obligation of $201.2 million in connection with the Company's lease of additional premises at its Tarrytown, New York facility during the nine months ended September 30, 2017.
11. 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. The outcome of any such proceedings, regardless of the merits, is inherently uncertain. The Company recognizes accruals for loss contingencies associated with such proceedings when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. Unless otherwise noted below, the Company is unable to predict the outcome, or estimate a range of possible loss or possible gain, of the respective proceedings. If the Company were unable to prevail in any such proceedings, its consolidated financial position, results of operations, and future cash flows may be materially impacted.
Proceedings Relating to '287 Patent, '163 Patent, and '018 Patent
The Company is a party to patent infringement litigation initiated by the Company involving its European Patent No. 1,360,287 (the "'287 Patent"), its European Patent No. 2,264,163 (the "'163 Patent"), and its U.S. Patent No. 8,502,018 (the "'018 Patent"). Each of these patents concerns genetically engineered 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 Company claims infringement of several claims of the '287 Patent, the '163 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, the '163 Patent, and the '018 Patent (as applicable).
On September 25, 2013, the Company commenced patent infringement litigation against Kymab Ltd in the English High Court of Justice, Chancery Division, Patents Court, in London, asserting the '287 Patent and '163 Patent. A trial to adjudicate the claims of infringement and counterclaims of invalidity of the '287 Patent and the '163 Patent was held from November 16, 2015 through December 8, 2015. On February 1, 2016, the court issued a final judgment, finding that the asserted claims of the '287 and '163 Patents are novel, not obvious, and infringed by Kymab's genetically engineered mice. However, the court invalidated the '287 and '163 Patents on the ground of insufficiency. The hearing for the Company's appeal and Kymab's cross-appeal was held on October 17–20, 2017. On March 28, 2018, the Court of Appeal (Civil Division of England and Wales) reversed the English High Court's decision and held that the '287 Patent and '163 Patent are both valid and infringed by Kymab. On June 5, 2018, the Court of Appeal issued a final order, which enjoins Kymab from infringing the '287 Patent and '163 Patent (subject to certain exceptions) and requires Kymab to destroy or deliver to a third party all products and antibodies and cells engineered to produce antibodies which infringe the '287 Patent and '163 Patent (subject to certain exceptions). The provisions of the final order are stayed pending final determination of Kymab's application for permission to appeal to the Supreme Court of the United Kingdom and, if permission is granted, Kymab's appeal. The Company has also been awarded a portion of the legal fees incurred by it in connection with the proceedings in the English High Court of Justice and the Court of Appeal described above.
On March 11, 2014, the Company commenced '287 Patent infringement litigation and '018 Patent infringement litigation against Merus N.V., a company based in Utrecht, The Netherlands, in the District Court of The Hague (currently stayed by agreement of the parties) and the United States District Court for the Southern District of New York, respectively. On November 21, 2014, the United States District Court for the Southern District of New York issued its Opinion and Order on Claim Construction in the '018 Patent infringement litigation, in which it held the '018 Patent invalid and not infringed. On November 2, 2015, the United States District Court for the Southern District of New York issued an opinion and order finding that the '018 Patent was procured by inequitable conduct, thus rendering it unenforceable. On July 27, 2017, the United States Court of Appeals for the Federal Circuit
20
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
(the "Federal Circuit") affirmed the District Court's decision regarding inequitable conduct without deciding the issues of validity and infringement; and, on December 26, 2017, the Federal Circuit denied the Company's petition for panel rehearing and rehearing en banc. On October 1, 2018, the United States Supreme Court denied the Company's petition for a writ of certiorari.
On July 8 and July 13, 2016, notices of opposition against the '163 Patent were filed in the European Patent Office (the "EPO") by Merus N.V. and Kymab and Novo Nordisk A/S, respectively. The notices assert, as applicable, lack of novelty, lack of inventive step, and insufficiency. The Company's response to the oppositions was filed on December 30, 2016. Following an oral hearing before the Opposition Division of the EPO on February 5–7, 2018, the Opposition Division upheld the '163 Patent without amendments. Kymab, Merus, and Novo Nordisk each filed a notice of appeal of the Opposition Division's decision on February 9, 2018, May 25, 2018, and June 26, 2018, respectively.
With respect to the '018 Patent infringement litigation against Merus N.V., on June 25, 2018, the United States District Court for the Southern District of New York granted Merus's motion for attorneys' fees and costs in the amount of $10.5 million, plus pre- and post-judgment interest. On July 25, 2018, the Company filed a notice of appeal with the Federal Circuit. If the Company is ultimately required to pay such amounts, this payment is not expected to have a material impact on the Company's financial statements.
Proceedings Relating to Praluent (alirocumab) Injection
As described in greater detail below, the Company is currently a party to patent infringement actions initiated by Amgen Inc. against the Company and Sanofi (and/or the Company's and Sanofi's respective affiliated entities) in a number of jurisdictions relating to Praluent, which the Company is jointly developing and commercializing with Sanofi.
In the United States, Amgen has asserted a number of U.S. patents, which were subsequently narrowed to U.S. Patent Nos. 8,829,165 (the "'165 Patent") and 8,859,741 (the "'741 Patent"), and seeks a permanent injunction to prevent the Company and the Sanofi defendants from commercial manufacturing, using, offering to sell, or selling within the United States (as well as importing into the United States) (collectively, "Commercializing") Praluent. 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. A jury trial in this litigation was held in the United States District Court for the District of Delaware (the "District Court") from March 8 to March 16, 2016. During the course of the trial, the District Court ruled as a matter of law in favor of Amgen that the asserted patent claims were not obvious, and in favor of the Company and the Sanofi defendants that there was no willful infringement of the asserted patent claims by the Company or the Sanofi defendants. On March 16, 2016, the jury returned a verdict in favor of Amgen, finding that the asserted claims of the '165 and '741 Patents were not invalid based on either a lack of written description or a lack of enablement. On January 3, 2017, the District Court issued a final opinion and judgment, denying the Company and the Sanofi defendants' motions for new trial and judgment as a matter of law. The District Court also denied as moot Amgen's motion to strike the Company and the Sanofi defendants' request to obtain a judgment as a matter of law, which allowed the Federal Circuit to address the Company and the Sanofi defendants' patent invalidity arguments on appeal. On January 12, 2017, the Company and the Sanofi defendants filed a notice of appeal with the Federal Circuit. On April 19, 2017, the District Court granted Amgen's motion to amend the judgment on an accounting of supplemental damages and enhancement of such damages if deemed appropriate, but deferred the order until after the Federal Circuit issued a decision on the appeal. Oral argument on the appeal was held on June 6, 2017. On October 5, 2017, the Federal Circuit reversed in part the District Court's decision, remanded for a new trial on the issues of written description and enablement, and, as discussed below, vacated the District Court's permanent injunction. In addition, it affirmed the District Court's ruling that Amgen's patents were not obvious. The Federal Circuit further concluded the Company and the Sanofi defendants were not entitled to judgment as a matter of law on the issues of written description and enablement on this record. On February 23, 2018, the Federal Circuit denied Amgen's petition for rehearing en banc, and on March 2, 2018 the Federal Circuit issued a mandate to transfer jurisdiction of the case back to the District Court. On July 23, 2018, Amgen filed a petition for a writ of certiorari with the United States Supreme Court. Oral argument on the parties' motions for summary judgment and the Company and the Sanofi defendants' motion for judgment on the pleadings regarding Amgen's willful infringement claim is scheduled for January 3, 2019. A new jury trial is currently scheduled to begin on February 19, 2019.
On January 5, 2017, the District Court granted a permanent injunction prohibiting Regeneron and the Sanofi defendants from Commercializing Praluent in the United States but subsequently delayed its imposition until February 21, 2017. The Federal Circuit stayed the injunction pending appeal on February 8, 2017 and vacated it on October 5, 2017.
On July 25, 2016, Amgen filed a lawsuit against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi-Synthelabo Limited, Aventis Pharma Limited, Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the English High Court of Justice, Chancery Division, Patents Court, in London, seeking a declaration of infringement of Amgen's European Patent No. 2,215,124
21
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
(the "'124 Patent"), which pertains to PCSK9 monoclonal antibodies, by Praluent. The lawsuit also seeks a permanent injunction, damages, an accounting of profits, and costs and interest. On February 8, 2017, the court temporarily stayed this litigation on terms mutually agreed by the parties.
Also on July 25, 2016, Amgen filed a lawsuit for infringement of the '124 Patent against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi Winthrop Industrie S.A., and Sanofi-Aventis Deutschland GmbH in the Regional Court of Düsseldorf, Germany (the "Düsseldorf Regional Court"), seeking a permanent injunction, an accounting of marketing activities, a recall of Praluent and its removal from distribution channels, and damages. On November 14, 2017, the Düsseldorf Regional Court issued a decision staying the infringement proceedings until a decision of the Opposition Division of the EPO concerning the pending opposition filed by the Company, Sanofi, and several other opponents against the '124 Patent (as discussed below). Following Amgen's request to reopen the proceedings in light of the issuance of the Preliminary Opinion (as defined below), the Düsseldorf Regional Court held an oral hearing on September 11, 2018 and ruled that the infringement proceedings continue to be stayed. The Düsseldorf Regional Court has also scheduled December 11, 2018 as the date for issuing a decision on Amgen's request for an injunction.
On July 12, 2018, Sanofi-Aventis Deutschland GmbH, Sanofi-Aventis Groupe S.A., and Sanofi Winthrop Industrie S.A. filed an action in the Federal Patents Court (the "FPC") in Munich, Germany, seeking a compulsory license from Amgen based on the '124 Patent for the continued commercializing of Praluent in Germany. This compulsory license action included a request for a provisional compulsory license. The FPC held an oral hearing on September 6, 2018 in the provisional compulsory license proceedings and denied Sanofi's request for the provisional compulsory license. The compulsory license proceedings are continuing.
On September 26, 2016, Amgen filed a lawsuit for infringement of the '124 Patent in the Tribunal de grande instance in Paris, France against Regeneron, Sanofi-Aventis Groupe S.A., Sanofi Winthrop Industrie, and Sanofi Chimie (subsequently added as a defendant). Amgen is seeking the prohibition of allegedly infringing activities with a €10,000 penalty per drug unit of Praluent produced in violation of the court order sought by Amgen; an appointment of an expert for the assessment of damages; disclosure of technical (including supply-chain) and accounting information to the expert and the court; provisional damages of €10.0 million (which would be awarded on an interim basis pending final determination); reimbursement of costs; publication of the ruling in three newspapers; and provisional enforcement of the decision to be issued, which would ensure enforcement of the decision (including any provisional damages) pending appeal. Amgen is not seeking a preliminary injunction in this proceeding at this time. On April 10, 2017, the Company and the Sanofi parties filed briefs seeking invalidation of certain of the claims of the '124 Patent, and Amgen filed a response on July 28, 2017. Oral hearing on this infringement lawsuit is currently scheduled for February 12, 2019.
The '124 Patent is also subject to opposition proceedings in the EPO seeking to invalidate certain of its claims, which were initiated by Sanofi on February 24, 2016 and, separately, by the Company, Sanofi, and several other opponents on November 24, 2016. On December 13, 2017, the Opposition Division of the EPO issued a preliminary, non-binding opinion (the "Preliminary Opinion") regarding the validity of the '124 Patent, indicating that it currently considers the claims of a new request filed by Amgen in response to the opposition to satisfy the requirements for patentability. The Preliminary Opinion was accompanied by a summons to oral hearing to be held on November 28–30, 2018.
On May 19, 2017, Amgen filed a lawsuit for infringement of Amgen's Japanese Patent Nos. 5,906,333 (the "'333 Patent") and 5,705,288 (the "'288 Patent") in the Tokyo District Court Civil Division against Sanofi K.K. Amgen's complaint alleges that manufacturing, selling or otherwise transferring, and offering to sell or otherwise transfer Praluent (alirocumab) in Japan (as well as importing Praluent (alirocumab) into Japan) infringe the '333 and '288 Patents. The complaint further seeks a permanent injunction, disposal of product, and court costs. The Company has not been named as a defendant in this litigation.
Proceedings Relating to Dupixent (dupilumab) Injection
On March 20, 2017, the Company, Sanofi-Aventis U.S. LLC, and Genzyme Corporation filed a lawsuit against Amgen and Immunex Corporation, a wholly owned subsidiary of Amgen, in the United States District Court for the District of Massachusetts seeking a declaratory judgment that the Company's and the other plaintiffs' Commercializing of Dupixent does not directly or indirectly infringe U.S. Patent No. 8,679,487 (the "'487 Patent") owned by Immunex Corporation relating to antibodies that bind the human interleukin-4 receptor. On May 1, 2017, the Company and the other plaintiffs filed a notice of voluntary dismissal of this action without prejudice.
On March 23, 2017, the Company, Sanofi-Aventis U.S. LLC, and Genzyme Corporation initiated an inter partes review ("IPR") in the United States Patent and Trademark Office ("USPTO") seeking a declaration of invalidity of the '487 Patent. On July 28 and 31, 2017, the same parties filed two additional IPR petitions in the USPTO seeking declarations of invalidity of the '487 Patent
22
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
based on different grounds (the "Additional IPR Petitions"). On October 4, 2017, the Patent Trial and Appeal Board ("PTAB") of the USPTO issued a decision on the first IPR petition and declined to institute an IPR proceeding to review the validity of the '487 Patent. On February 15, 2018, the PTAB issued two decisions instituting the Company's and Sanofi's Additional IPR Petitions on all claims of the '487 Patent for which review had been requested. Oral hearing on the Additional IPR Petitions has been scheduled for November 14, 2018.
On April 5, 2017, Immunex Corporation filed a lawsuit against the Company, Sanofi, Sanofi-Aventis U.S. LLC, Genzyme Corporation, and Aventisub LLC in the United States District Court for the Central District of California seeking a judgment of patent infringement of the '487 Patent and a declaratory judgment of infringement of the '487 Patent, in each case by the Company's and the other defendants' Commercializing of Dupixent; monetary damages (together with interest); an order of willful infringement of the '487 Patent, which would allow the court in its discretion to award damages up to three times the amount assessed; costs and expenses of the lawsuit; and attorneys' fees. Immunex is not seeking an injunction in this proceeding at this time. On June 21, 2017, the court denied a motion to dismiss Immunex's complaint previously filed by the Company and the Sanofi parties. On June 28, 2017, the Company and the Sanofi parties filed an answer to Immunex's complaint and counterclaims against Immunex and Amgen (which was amended on October 31, 2017 to, among other things, add an inequitable conduct allegation), and Immunex and Amgen filed an answer to the counterclaims on July 28, 2017. A combined hearing on the construction of certain disputed claim terms of the '487 Patent and the Company and the Sanofi parties' motion for summary judgment on the issue of indefiniteness of the '487 Patent claims was held on July 12, 2018. On August 24, 2018, the court issued an order denying this motion and construed the disputed claim terms as proposed by Amgen. A jury trial has been scheduled to start on July 23, 2019.
On September 30, 2016, Sanofi initiated a revocation proceeding in the United Kingdom to invalidate the U.K. counterpart of European Patent No. 2,292,665 (the "'665 Patent"), another patent owned by Immunex relating to antibodies that bind the human interleukin-4 receptor. At the joint request of the parties to the revocation proceeding, the U.K. Patents Court ordered on January 30, 2017 that the revocation action be stayed pending the final determination of the currently pending EPO opposition proceedings initiated by the Company and Sanofi in relation to the '665 Patent. The oral hearing before the EPO on the oppositions occurred on November 20, 2017, at which the claims of the '665 Patent were found invalid and the patent was revoked. A final written decision of revocation of the '665 Patent was issued by the EPO on January 4, 2018. Immunex filed a notice of appeal of the EPO's decision on January 31, 2018. On September 20, 2017 and September 21, 2017, respectively, the Company and Sanofi initiated opposition proceedings in the EPO against Immunex's European Patent No. 2,990,420 (the "'420 Patent"), a divisional patent of the '665 Patent (i.e., a patent that shares the same priority date, disclosure, and patent term of the parent '665 Patent but contains claims to a different invention). An oral hearing before the EPO on the '420 Patent opposition proceedings has been scheduled for February 14–15, 2019. The original patent term of the Immunex patents is set to expire in 2021.
Proceedings Relating to EYLEA (aflibercept) Injection and ZALTRAP® (ziv-aflibercept) Injection for Intravenous Infusion
On March 19, 2018, Novartis Vaccines and Diagnostics, Inc., Novartis Pharma AG, and Grifols Worldwide Operations Limited (collectively, the "Novartis Parties") filed a lawsuit against the Company in the United States District Court for the Southern District of New York, seeking a judgment of patent infringement of U.S. Patent No. 5,688,688 (the "'688 Patent") by the Company's manufacture of aflibercept (the active ingredient used in both EYLEA and ZALTRAP); monetary damages (together with interest) for a limited period prior to the '688 Patent expiration; an order of willful infringement of the '688 Patent (dismissed on October 24, 2018); costs and expenses of the lawsuit; and attorneys' fees. The '688 Patent expired on November 18, 2014. The Novartis Parties are not seeking an injunction in these proceedings.
23
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Proceedings Relating to Shareholder Derivative Claims
On December 30, 2015, an alleged shareholder filed a shareholder derivative complaint in the New York Supreme Court, naming the then current and certain former non-employee members of the Company's board of directors, the Chairman of the board of directors, the Company's Chief Executive Officer, and the Company's Chief Scientific Officer as defendants and Regeneron as a nominal defendant. The complaint asserts that the individual defendants breached their fiduciary duties and were unjustly enriched when they approved and/or received allegedly excessive compensation in 2013 and 2014. The complaint seeks damages in favor of the Company for the alleged breaches of fiduciary duties and unjust enrichment; changes to Regeneron's corporate governance and internal procedures; invalidation of the Regeneron Pharmaceuticals, Inc. 2014 Long-Term Incentive Plan with respect to the individual defendants' compensation and a shareholder vote regarding the individual defendants' equity compensation; equitable relief, including an equitable accounting with disgorgement; and award of the costs of the action, including attorneys' fees. On June 28, 2017, the court dismissed the plaintiff's claims with respect to certain compensation awarded in 2013 but denied the defendants' motion to dismiss the other claims set forth in the complaint. On November 8, 2017, another alleged shareholder filed a second shareholder derivative complaint in the New York Supreme Court, naming the then current and certain former non-employee members of the Company's board of directors, the Chairman of the board of directors, the Company's Chief Executive Officer, the Company's Chief Scientific Officer, and Regeneron as defendants. The complaint asserts that the individual defendants breached their fiduciary duties and were unjustly enriched when they approved and/or received allegedly excessive compensation in 2014, 2015, and 2016. The complaint seeks damages in favor of Regeneron for the alleged breaches of fiduciary duties and unjust enrichment; changes to Regeneron's corporate governance and internal procedures; invalidation of Regeneron's 2014 Long-Term Incentive Plan with respect to the individual defendants' compensation and the imposition of meaningful limits on the amount of equity payable to the individual defendants; a shareholder vote regarding the individual defendants' equity compensation; equitable relief, including an equitable accounting with disgorgement; and award of the costs of the action, including attorneys' fees. On December 4, 2017, the plaintiff in the second action moved to consolidate both actions, to be appointed lead plaintiff, and to have its counsel be appointed lead counsel in the proposed consolidated action. The court heard oral argument on March 7, 2018 and denied the motion. The parties in both the first derivative action and the second derivative action agreed to a schedule for document discovery and the filing of defendants' appeal of the court's June 28, 2017 decision, as well as a stay of all non-document discovery pending a decision on defendants' appeal. On March 19, 2018, the defendants appealed the court's June 28, 2017 decision to the Appellate Division of the Supreme Court, First Department. On April 19, 2018, the Appellate Division granted the second plaintiff's motion to intervene in this appeal. On October 9, 2018, the parties to both derivative actions filed with the court a stipulation of compromise and settlement of both derivative actions. The stipulation requires Regeneron to, among other things, impose specified limitations on certain director compensation for the five years starting in December 2018, implement certain corporate governance measures, and pay the agreed-upon amount of attorneys' fees and expenses. On October 10, 2018, the court entered an order scheduling a hearing for final approval of the settlement to be held on December 3, 2018 and providing for notice to Regeneron shareholders. The settlement remains subject to court approval; if approved, both derivative actions will be dismissed with prejudice. By agreement of the parties, the defendants' appeal of the court's June 28, 2017 decision has been adjourned to the Appellate Division's February 2019 term pending final approval of the settlement. Pursuant to the Company's By-Laws and the New York Business Corporation Law, expenses in connection with the foregoing are being advanced by the Company for the individual defendants.
On or about December 15, 2015, the Company received a shareholder litigation demand upon the Company's board of directors made by a purported Regeneron shareholder. On or about November 3, 2017, the Company received a second shareholder litigation demand upon the Company's board of directors made by another purported Regeneron shareholder, which was substantially similar to the December 15, 2015 shareholder litigation demand. The demands asserted that the then current and certain former non-employee members of the board of directors and the Chairman of the board of directors excessively compensated themselves in 2013 and 2014. The demands requested that the board of directors investigate and bring legal action against these directors for breach of fiduciary duty, unjust enrichment, and corporate waste, and implement internal controls and systems designed to prohibit and prevent similar actions in the future. On December 20, 2017, the parties to the shareholder derivative action filed on December 30, 2015 entered into a stipulation with the second demanding shareholder. The stipulation provides that the purported shareholder will intervene as a plaintiff in the action, and that the purported shareholder's litigation demand will be withdrawn and deemed null and void. The stipulation was approved by the court on January 18, 2018. The first shareholder litigation demand has also since been withdrawn.
24
REGENERON PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unless otherwise noted, dollars in thousands, except per share data)
Department of Justice Investigation
In January 2017, the Company received a subpoena from the U.S. Attorney's Office for the District of Massachusetts requesting documents relating to its support of 501(c)(3) organizations that provide financial assistance to patients; documents concerning its provision of financial assistance to patients with respect to products sold or developed by Regeneron (including EYLEA, Praluent, ARCALYST, and ZALTRAP); and certain other related documents and communications. The Company is cooperating with this investigation.
12. Recently Issued Accounting Standards
In February 2016, the FASB issued ASU 2016-02, Leases. The new standard requires a lessee to recognize on its balance sheet (for both finance and operating leases) a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. We plan to adopt this new standard on January 1, 2019 (the "effective date") and use the effective date as our date of initial application. As such, we will not adjust prior period amounts. Furthermore, we expect to elect the practical expedients upon transition, which permit companies to not reassess lease identification, classification, and initial direct costs under the new standard for leases that commenced prior to the effective date. We are currently evaluating the impact that this guidance will have on our financial statements, including related disclosures. The new standard will result in the Company recording additional assets and corresponding liabilities related to operating leases; however, we do not expect the standard to have a material impact to our Consolidated Balance Sheets. The ultimate impact that the new standard will have will depend on the total amount of the Company's lease commitments as of the adoption date. We are in process of implementing a new lease accounting software system and updating our internal controls and processes.
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties relating to future events and the future performance of Regeneron Pharmaceuticals, Inc. (where applicable, together with its subsidiaries, "Regeneron," "Company," "we," "us," and "our"), and actual events or results may differ materially from these forward-looking statements. Words such as "anticipate," "expect," "intend," "plan," "believe," "seek," "estimate," variations of such words, and similar expressions are intended to identify such forward-looking statements, although not all forward-looking statements contain these identifying words. These statements concern, and these risks and uncertainties include, among others, the nature, timing, and possible success and therapeutic applications of our products, product candidates, and research and clinical programs now underway or planned, including without limitation EYLEA® (aflibercept) Injection, Dupixent® (dupilumab) Injection, Praluent® (alirocumab) Injection, Kevzara® (sarilumab) Injection, Libtayo® (cemiplimab) Injection, fasinumab, and evinacumab; the likelihood and timing of achieving any of our anticipated clinical development milestones; unforeseen safety issues resulting from the administration of products and product candidates in patients, including serious complications or side effects in connection with the use of our product candidates in clinical trials; the likelihood and timing of possible regulatory approval and commercial launch of our late-stage product candidates and new indications for marketed products, including without limitation EYLEA, Dupixent, Praluent, Kevzara, Libtayo, fasinumab, and evinacumab; the extent to which the results from the research and development programs conducted by us or our collaborators may be replicated in other studies and lead to therapeutic applications; ongoing regulatory obligations and oversight impacting our marketed products (such as EYLEA, Dupixent, Praluent, Kevzara, and Libtayo), research and clinical programs, and business, including those relating to patient privacy; determinations by regulatory and administrative governmental authorities which may delay or restrict our ability to continue to develop or commercialize our products and product candidates; competing drugs and product candidates that may be superior to our products and product candidates; uncertainty of market acceptance and commercial success of our products and product candidates; our ability to manufacture and manage supply chains for multiple products and product candidates; the ability of our collaborators, suppliers, or other third parties to perform filling, finishing, packaging, labeling, distribution, and other steps related to our products and product candidates; coverage and reimbursement determinations by third-party payers, including Medicare and Medicaid; unanticipated expenses; the costs of developing, producing, and selling products; our ability to meet any of our financial projections or guidance, including without limitation capital expenditures, and changes to the assumptions underlying those projections or guidance; the potential for any license or collaboration agreement, including our agreements with Sanofi, Bayer, and Teva Pharmaceutical Industries Ltd. (or their respective affiliated companies, as applicable), to be cancelled or terminated without any further product success; and risks associated with intellectual property of other parties and pending or future litigation relating thereto, including without limitation the patent litigation proceedings relating to EYLEA, Dupixent, and Praluent described
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further in Note 11 to our Condensed Consolidated Financial Statements included in this report. These statements are made based on management's current beliefs and judgment, and the reader is cautioned not to rely on any such statements. In evaluating such statements, shareholders and potential investors should specifically consider the various factors identified under Part II, Item 1A. "Risk Factors," which could cause actual events and results to differ materially from those indicated by such forward-looking statements. We do not undertake any obligation to update publicly any forward-looking statement, whether as a result of new information, future events, or otherwise.
Overview
Regeneron Pharmaceuticals, Inc. is a fully integrated biotechnology company that discovers, invents, develops, manufactures, and commercializes medicines for the treatment of serious diseases. Our commercialized medicines and product candidates in development are designed to help patients with eye diseases, allergic and inflammatory diseases, cancer, cardiovascular and metabolic diseases, neuromuscular diseases, infectious diseases, and rare diseases.
Selected financial information is summarized as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
(In millions, except per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
Revenues | $ | 1,663.5 | $ | 1,500.7 | $ | 4,783.0 | $ | 4,289.8 | ||||||||
Net income | $ | 594.7 | $ | 388.3 | $ | 1,624.0 | $ | 1,025.0 | ||||||||
Net income per share - diluted | $ | 5.17 | $ | 3.32 | $ | 14.14 | $ | 8.84 |
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We currently have seven products that have received marketing approval:
Product | Disease Area(1) | Territory | ||||||||
U.S. | EU | Japan | Certain other countries outside the U.S. | |||||||
EYLEA (aflibercept) Injection(2) | | Neovascular age-related macular degeneration (wet AMD) | a | a | a | a | ||||
| Diabetic macular edema (DME) | a | a | a | a | |||||
| Macular edema following retinal vein occlusion (RVO), which includes macular edema following central retinal vein occlusion (CRVO) and macular edema following branch retinal vein occlusion (BRVO) | a | a | a | a | |||||
| Myopic choroidal neovascularization (mCNV) | a | a | a | ||||||
| Diabetic retinopathy in patients with DME | a | ||||||||
Dupixent (dupilumab) Injection(3) | | Atopic dermatitis (in adults) | a | a | a | a | ||||
| Asthma (in adults and adolescents) | a | ||||||||
Praluent (alirocumab) Injection(3) | | Heterozygous familial hypercholesterolemia (HeFH) or clinical atherosclerotic cardiovascular disease (ASCVD) (in adults) | a | a | a | a | ||||
Kevzara (sarilumab) Solution for Subcutaneous Injection(3) | | Rheumatoid arthritis (RA) (in adults) | a | a | a | a | ||||
Libtayo (cemiplimab) Injection(3)(5) | | Metastatic or locally advanced cutaneous squamous cell carcinoma (CSCC) | a | |||||||
ARCALYST® (rilonacept) Injection for Subcutaneous Use | | Cryopyrin-Associated Periodic Syndromes (CAPS), including Familial Cold Auto-inflammatory Syndrome (FCAS) and Muckle-Wells Syndrome (MWS) | a | |||||||
ZALTRAP® (ziv-aflibercept) Injection for Intravenous Infusion(4) | | Metastatic colorectal cancer (mCRC) | a | a | a | |||||
(1) Refer to label information in each territory for specific indication | ||||||||||